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University of Connecticut & UConn Health Joint Audit & Compliance Committee Meeting

February 3, 2016 9:00 am – 9:45 am - Executive Session 9:45 am – 11:00 pm - Public Session

AGENDA Topic Proposed

Action Tab

Executive Session to discuss: • C.G.S. 1-200(6)[E] – Preliminary drafts or notes that the public agency has determined that the public’s

interest in withholding such documents clearly outweighs the public interest in disclosure. [1-210(b)(1)]

• C.G.S. 1-200(6)[E] – Records or the information contained therein pertaining to strategy and negotiations with respect to pending claims regarding Recovery Audit Contractor (RAC) Audits [1-210(b)(4)]

• C.G.S 1-200(6)(E) – Records, reports and statements privileged by the attorney-client relationship.[1-210(b)(10)]

• C.G.S. 1-200(6)[C] – Records of standards, procedures, processes, software and codes not otherwiseavailable to the public, the disclosure of which would compromise the security and integrity of aninformation technology system. [1-210(b)(20)]

Approval None

Opportunity for Public Comments None

Minutes of the December 1, 2015, JACC Meeting Approval 1

Storrs & UConn Health Significant Compliance Activities • Minors Protection Update• ICD-10

Update 2

Storrs & UConn Health Significant Audit Activities • Status of Audit Assignments• Audit Follow-up Activity• Status of Corrective Actions – Health Information / Record of Care Management

Update 3

Charter Review • Executive Risk Management Compliance Committee – Storrs

Update 4

External Engagements • Audited Financial Statements - University of Connecticut Health Center John Dempsey Hospital

(JDH), UConn Medical Group (UMG) and Finance Corporation, FY15 – Marcum• UConn 2000 Construction Program, Audit Timeline - RMS (Formerly McGladrey)

Presentation 5

Auditor of Public Accounts • University of Connecticut and the University of Connecticut Health Center Audited Financial Statements for

the year ended June 30, 2015• Auditors of Public Accounts – University of Connecticut Health Center for the Fiscal Years Ended June 30,

2013 and 2014https://www.cga.ct.gov/apa/reports/University%20of%20Connecticut%20Health%20Center_20151230_FY2013,2014.pdf

Presentation 6

Informational/Educational Items • Compliance Newsletters – Storrs• Current Issues in Compliance Newsletters – Storrs & UConn Health

Information Only

7

Conclusion of Full Meeting

Information Session with OACE and External Auditors

The next meeting of the JACC will be held on Tuesday, May 17, 2016 at 10:00 am Rome Commons Ballroom, Storrs

https://www.cga.ct.gov/apa/reports/University%20of%20Connecticut%20Health%20Center_20151230_FY2013,2014.pdf

https://www.cga.ct.gov/apa/reports/University%20of%20Connecticut%20Health%20Center_20151230_FY2013,2014.pdf

TAB 1

University of Connecticut &

UConn Health

Joint Audit & Compliance Committee Meeting


Meeting Minutes from December 1, 2015

Attendees

Trustees / Directors Present:

F. Archambault, S. Cantor, R. Carbray, T. Kruger, and D. Nayden

Staff Present: N. Adams, A. Agwunobi, C. Andrews, C. Bianchi, J. Blumenthal, W. Byerly, J. Carroll, C. Chiaputti, C. Cieplinski, P. DeMeo, E. Dumas, C. Eaton, K. Fearney, D. Galloway, D. Gnodtke, C. Gray, E. Hanyckyj, M. Jednak, S. Jordan, R. Krinsky, M. Larson, A. Marsh, I. Mauriello, M. Mundrane, T. Murphy, B. O’Connor, M. O’Connor, R. Orr, G. Pack, B. Patel, J. Petrizzo, L. Pittman, J. Pufahl, C. Renshaw, S. Reis, R. Rubin, S. Russolino, J. Sullivan, K. Violette, N. Wallach, T. Walters, S. Wetstone, and E. Zincavage

State Auditors: J. Carroll and N. Freitas

BKD: M. McKinley

The meeting of the Joint Audit and Compliance Committee (JACC) was called to order at 10:01 a.m. by Trustee Nayden.

ON A MOTION made by Trustee Nayden and seconded by Director Archambault, THE JACC VOTED to go into executive session to discuss:

• C.G.S. 1-200(6)[E] –Preliminary drafts or notes that the University has determined the public’s interest in withholding such documents clearly outweighs the public’s interest in disclosure. [1-210(b)(1)]

• C.G.S. 1-200(6)[E] - Records or the information contained therein pertaining to strategy and negotiations with respect to pending claims regarding Recovery Audit Contractor (RAC) Audits. [1-210(b)(4)]

• C.G.S. 1-200(6)[C] – Records of standards, procedures, processes, software, and codes not otherwise available to the public, the disclosure of which would compromise the security and of integrity of an information technology system. [1-210(b)(20)]

Executive Session was attended by the following: Joint Audit & Compliance Committee Members: F. Archambault, S. Cantor, R. Carbray, T. Kruger and D. Nayden; OACE Staff members: N. Adams, C. Chiaputti, P. DeMeo, K. Fearney, D. Galloway, C. Gray, R. Krinsky, A. Marsh, I. Mauriello, G. Pack, K. Violette, and E. Zincavage; Senior Staff: A. Agwunobi, S. Jordan, S. Reis, and R. Rubin; General Counsel: R. Orr; Asst. Attorney General: J. Blumenthal; Portions of Executive Session were also attended by: C. Andrews, J. Carroll, C. Cieplinski, M. Mundrane, T. Murphy, L. Pittman, and J. Pufahl.

The Executive Session ended at 10:43 a.m. and the JACC returned to open session at 10:45 a.m.

There were no public comments.

Tab 1 – Minutes of the Meeting

ON A MOTION made by Trustee Nayden and seconded by Trustee Carbray the minutes of the September 17, 2015, JACC meeting were approved.


Meeting Minutes from December 1, 2015 TAB 2 – Storrs & UConn Health Significant Compliance Activities

K. Fearney and I. Mauriello provided an update on significant compliance activities. Chief B. O’Connor and Fire Lieutenant C. Renshaw presented the committee with an overview of the revised Storrs Emergency Preparedness Plan. C. Chiaputti updated the committee indicating that implementation of ICD-10 at UConn Health is going smoothly and a full update will be provided at the next JACC meeting in February 2016.

TAB 3 – Significant Audit Activities C. Chiaputti provided the JACC with an update on the status of audit assignments (Storrs and UConn Health). OACE completed four audits and had twenty audits ongoing during this reporting period. OACE completed one special project. The JACC accepted three audits, as follows: • Dental Record Management,

• axiUm Dental System, and

• Foundation Receipts and Disbursements – FY15.

The committee was also provided with the status of OACE’s audit recommendation follow-up activities.

Tab 4 – Charter Review

D. Galloway presented the Joint Audit and Compliance Committee and the Office of Audit, Compliance and Ethics Charters for review. The committee agreed to keep these documents in draft until further refinement is considered.

ON A MOTION made by Trustee Nayden and seconded by Director Archambault the UConn Health Executive Risk Management Compliance Committee Charter was approved.

Tab 5 – External Engagements

M. McKinley presented the report of the Annual Agreed Upon Procedures to the Statements of Revenues and Expenses of the UConn Athletic Program conducted by BKD.

Tab 6 – Informational / Educational Items

The JACC 2016 calendar was shared.

• Wednesday, February 3, 2016, 10:00 a.m. – 12:00 p.m. at the Rome Commons Ballroom, Storrs,

• Tuesday, May 17, 2016, 10:00 a.m. – 12:00 p.m. at the Rome Commons Ballroom, Storrs,

• Wednesday, September 21, 2016, 10:00 a.m. – 12:00 p.m. at the Rome Commons Ballroom, Storrs, and

• Wednesday, December 14, 2016, 10:00 a.m. – 12:00 p.m. at the Rome Commons Ballroom, Storrs.


Meeting Minutes from December 1, 2015 Tab 7 – Informational / Educational Items

The committee was provided with the following:

• Compliance Newsletters – Storrs and UConn Health,

• Current Issues in Compliance Newsletters – Storrs and UConn Health, and

• Article from the 2014 URIMA Journal – Six Lessons Learned Managing the Risk of Minors on Campus.

There being no further business, ON A MOTION made by Trustee Nayden and seconded by Trustee Cantor, the meeting was adjourned at 11:29 a.m.

Respectfully submitted,

Angela Marsh Angela Marsh

TAB 2


UConn Health


University of Connecticut & University of Connecticut Health Center Joint Audit & Compliance Committee Meeting

February 3, 2016

SIGNIFICANT COMPLIANCE ACTIVITIES

STORRS

2016 Compliance Training – content finalized and in-person trainings have been scheduled for the Spring semester. Topics to be covered include: University Code of Conduct, State Code of Ethics, Data Privacy and Security, Campus Safety and reporting obligations, ADA and Protection of Minors.

Higher Education Opportunity Act - In order to receive Title IV funding, the University is subject to requirements set forth by the Higher Education Opportunities Act (HEOA). The Office of Audit, Compliance & Ethics is partnering with the Office of Student Financial Aid Services to monitor and support HEOA compliance efforts across the University.

Breach Notification - Consumer notifications related to the School of Engineering breach have begun. OACE is working with AllClear ID on this notification effort.

FOI Update – see charts

University of Connecticut & University of Connecticut Health Center Joint Audit & Compliance Committee Meeting

February 3, 2016

SIGNIFICANT COMPLIANCE ACTIVITIES

UConn Health

• Overpayment refunds – There are no new overpayment refunds to report since the December 2015 JACC meeting.

• 2015 Annual Compliance and HIPAA training – The deadline for training completion was

January 21, 2016. Final statistics will be reported verbally at the meeting.

• Department of Health & Human Services, Office of Inspector General Work Plan – Work Plan items of key importance to UConn Health have been sent to stakeholders with responsibility for oversight of the identified risk areas. Responses from stakeholders will include a risk evaluation of the specific Work Plan item as well as an assessment of the internal controls in place to assure compliance.

• HITECH Breach reports for year 2015: The Office for Civil Rights (OCR) requires entities covered under the HIPAA Privacy and Security Rules to report each calendar year any breaches of less than 500 patients where patient information has been compromised. For year end 2015 UConn Health will report 1 privacy breach involving 20 patients.

• Key Compliance Programs: OACE is working with the UConn Health administration to develop formal documented compliance programs for a variety of key compliance areas including Fitness-for-Duty Privacy, Violence in the Workplace, Violence Against Healthcare Workers, Drug-Free Schools, Drug-Free Workplace, Stark and HIPAA.

Storrs

100

152

210

235224

239

302

270

405

0

50

100

150

200

250

300

350

400

2007 2008 2009 2010 2011 2012 2013 2014 2015

FOI Requests (Calendar Years 2007-2015)

UConn Health Center (Central FOI + CMHC Only)

35

32

28

49

43

33

53

0

10

20

30

40

50

60

2009 2010 2011 2012 2013 2014 2015

FOI Requests (Fiscal Years 2009-2015)

UConn Health Center

Storrs

0

10

20

30

40

50

60

70

Types of FOI Requests (2015)

TAB 3


UConn Health



February 3, 2016

Status of Assignments

Audit Project

Storrs or UConn

Health (UH)

Planning

Fieldwork

Pre-draft

Draft Reporting

Final Draft

Report Issued

FY15 CT Stem Cell Regenerative Medicine Research Fund Storrs & UH X* Research Laboratory Safety UH X Student Health Services – Business and Healthcare Operations Review

Storrs X

Student Health Services Clinical Systems Storrs X Bioscience CT Initiative , Phase II – New Hospital UH X NCAA Rules Compliance Program – Extra Benefits and Camps and Clinics

Storrs X

Firewall Security Audit Storrs X Leave Time Benefits UH X Leave Time Benefits Storrs X FY16 Division I Football Certification Storrs X 2nd Change Order Monitoring Review - (on hold) Storrs X Cash Receipts / Cash Handling Storrs X Grants – Cash Management UH X Emergency Preparedness UH X Payment Card Industry Data Security Standard (PCI DSS) Storrs & UH X FY15 Annual Faculty Consulting Storrs & UH X Innovation Partnership Building (IPB) Storrs X Human Subject Incentive Payments Storrs X Transportation & Parking Services Storrs X Correctional Managed Health Care – Pharmacy UH X Research Data Security Storrs X Space Management Process Storrs X Clinical Contracts UH X

TOTAL AUDITS (23) (02) (10) (01) (10)

Special Projects/Consulting

Storrs or UConn

Health (UH)

Planning

Field Work

Review Pre-draft

Project Final

Radiology UH X SHS Pharmacy Storrs X Construction Storrs/UH X

TOTAL SPECIAL PROJECTS/CONSULTING (03) (01) (00) (02) (00)

* Report issued final on 12/15/15

# o

f C

orr

ecti

ve A

ctio

ns

Imp

lem

ente

d

Functional Area

0

5

10

15

20

25

30

35

40

45

50

55

60

Aca

dem

ic R

eno

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on

s

Bu

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Bu

rsar

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Envi

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Info

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Pay

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Sch

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Storrs and Regional Campuses Storrs and UConn Health UConn Health

Corrective Actions Implemented by Department

Num

ber

of

Open

Ov

erd

ue

Item

s

Audit Name

0

5

10

15

20

25

30

35

40

45

50

55

60

07

-18

Sto

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Dis

aste

r R

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an

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s C

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07

-51

UIT

S A

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07

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HIP

AA

Sec

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ty S

torr

s

09

-22

CLA

S IT

09

-44

Lib

rary

Cen

tral

Ser

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s

10

-11

UC

HC

Hu

man

Su

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Res

earc

h

11

-05

Peo

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soft

- S

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Ad

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11

-09

Pu

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ard

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11

-20

Gra

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Exp

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& C

ost

Tra

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12

-01

UC

HC

Ban

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12

-04

CT

Hea

lth

Info

rmat

ion

Net

wo

rk (

CH

IN)

12

-32

Dia

gno

stic

Imag

ing

12

-38

Sta

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rd B

usi

nes

s O

per

atio

ns

and

IT

12

-42

Un

iver

sity

Ser

ver

Ph

ysic

al S

ecu

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12

-45

Dai

ly C

amp

us

12

-49

UC

on

n H

ealt

h A

sset

Man

agem

ent

12

-50

Lib

rary

Bu

sin

ess

Pro

cess

13

-01

Em

erge

ncy

Pre

par

edn

ess

13

-07

Exp

ort

Co

ntr

ols

13

-12

Am

eric

an D

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Act

(A

DA

)

13

-13

Use

r A

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d A

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t A

dm

inis

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ion

13

-21

a Tu

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n F

ees

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ou

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Rec

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ble

an

d F

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Aid

13

-21

b S

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Ad

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n S

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ms

- Je

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bar

13

-22

Lab

Saf

ety

13

-31

b J

DH

Ph

arm

acy

Ch

arge

Cap

ture

13

-33

Inte

rnat

ion

al F

acu

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and

Stu

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ts

13

-38

Med

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e En

rollm

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- P

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Dat

a

13

-39

Kro

no

's S

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m

13

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Cle

ry A

ct C

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14

-05

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ter,

Sch

oo

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Bu

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ess

14

-06

Law

Sch

oo

l Fo

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14

-09

Fed

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Gra

nts

- C

ost

Sh

arin

g

14

-11

Ser

ver

Imp

lem

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n a

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Sec

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ty

14

-12

Hu

sky

On

e C

ard

Off

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14

-14

Ad

van

ced

Ben

efic

iary

No

tice

s

14

-17

Ave

ry P

oin

t In

form

atio

n T

ech

no

logy

14

-18

UH

Cas

h H

and

ling

14

-21

HIM

Pat

ien

t R

eco

rd M

anag

emen

t

14

-24

UH

Med

ical

Dev

ice

Secu

rity

Au

dit

14

-33

Mar

chin

g an

d P

ep B

and

s

15

-05

UH

Fir

ewal

l Sec

uri

ty

Open Overdue Items by Audit - Based on Original Due Date

# o

f C

orr

ecti

ve

Act

ions

Pen

din

g O

AC

E R

evie

w

Functional Area

0

5

10

15

20

25

30

35

40

45

50

55

60

Avery Point IT Chief of Staff CPCAEnvironmental

Health andSafety

Fine ArtsInformationTechnology

IT SecurityMedical Staff

OfficeNursing Provost

Storrs and Regional Campuses UConn Health

Corrective Actions Pending OACE Review

# o

f O

pen

Over

due

Hig

h R

isk O

bse

rvat

ion

s

Campus and Functional Area

0

5

10

15

20

25

30

35

40

45

50

55

60

AcademicRenovations

Bursar's OfficeEnrollment

Services

EnvironmentalHealth and

Safety

FacilitiesOperations

InformationTechnology

President'sOffice

Psychiatry Public Safety Public Safety

Storrs and Regional Campuses UConn Health

High Risk Overdue by Functional Area

Implemented

High

3

Low

17

Medium

35

Open OverDue Items by Risk Level

High

55

Low

56

Medium

108


Audit Finding Rating Definitions

Low Meaningful reportable issue for client consideration that in the Auditor’s judgment should be communicated in writing. The finding results in minimal exposure to the University or UConn Health and has little or no impact on the University’s or UConn Health’s compliance with laws and regulations. The issues related to this control weakness will typically not lead to a material error. Medium Significant exposure to the area under review within the scope of the audit. The finding results in the potential violation of laws and regulations and should be addressed as a priority to ensure compliance with University’s or UConn Health’s policies and procedures. The significance of the potential errors related to this control weakness makes it important to correct. High Significant exposure to the University or UConn Health that could include systemic University or UConn Health wide exposure. The finding could result in a significant violation of laws and regulations and should be viewed as a highest priority which the University or UConn Health must address immediately.

TAB 4


UConn Health


1

University of Connecticut Executive Risk Management Compliance Committee Charter

February 2015 Role The University of Connecticut (UConn) Executive Risk Management and Compliance Committee (Committee) is appointed to provide direction and guidance to the UConn compliance, health and safety, and public safety risk management programs and advise the President and the Joint Audit and Compliance Committee (JACC) in their oversight of these programs. The Committee’s role is an essential component of the University’s overall risk management program, focusing on UConn’s compliance with significant legal, ethical, and regulatory requirements and on managing significant health and safety (health/safety) and public safety risks.

Membership The Committee shall be comprised of the following:

• Chief of Staff to the President & Executive Secretary to the Board of Trustees, Committee Chair;

• Chief Audit, Compliance and Ethics Officer, Executive Secretary to the Committee; • General Counsel, Committee Counsel; • Vice Provost for Academic Affairs; • Executive Vice President for Administration and Chief Financial Officer; • Vice President for Enrollment, Planning, and Management; • Vice President for Student Affairs; • Vice President for Research; • Deputy Director of Athletics/Chief of Staff; • AVP Diversity and Equity; and, • Vice Provost and CIO.

Staff support to the committee will be provided by the Office of Audit, Compliance and Ethics.

Additional voting and non-voting members may be appointed by the Chair together with the President of the University. Representatives of other University areas may also be invited to attend, as appropriate.

A quorum for any meeting will be a majority of the voting members.

Generally, each Committee member shall be independent and free from any relationship which would interfere with the exercise of independent judgment as a member of the Committee. However, should an issue arise where any member recognizes a conflict, that member will note such conflict and recuse him/herself from discussions on the topic.

Meetings The Committee shall meet on a regularly scheduled basis throughout the year but generally not less than four times per year, as circumstances dictate. Evidence of the discussions of the Committee and the actions taken by the Committee are to be reflected in recorded minutes of the meeting.

2

Responsibilities The Committee’s specific responsibilities in carrying out its oversight are as follows:

(1) Provide leadership for the UConn health/safety, public safety, and compliance risk management programs by promoting and supporting a culture that builds risk and compliance consciousness into the daily activities of UConn faculty and staff.

(2) Provide advice and guidance to the President and the JACC on the design and operation of the health/safety, public safety, and compliance risk management programs.

(3) Work closely with University managers to help ensure university-wide compliance with relevant state and federal laws and to provide a safe working environment for the UConn community.

(4) Review and approve the role, responsibilities, and structure of the UConn health/safety, public safety, and compliance committees.

(5) Review and approve the designation of specific UConn health/safety, public safety, and compliance coordinators.

(6) Identify and assess health/safety, public safety, and compliance risks at UConn that require executive oversight.

(7) Allocate resources, when necessary, to mitigate risks in activities determined to represent a high risk.

(8) Receive results of all inspections and audits that have compliance, health/safety, or public safety implications.

(9) Receive summary reports of compliance, health/safety, and public safety-related ReportLine activity.

(10) Be apprised of general compliance training outcomes. (11) Keep the President and the JACC aware of identified risks, activities, and findings. (12) Provide a forum for communication among the various units and programs within UConn

for issues relevant to health/safety, public safety, and compliance. (13) Perform any other activities consistent with this Charter and University, Schools and

Colleges By-laws and governing laws, as this Committee or the Joint Audit and Compliance Committee of the Boards deem necessary or appropriate.

The Committee will review the components of this charter at least annually and update the charter, as necessary, to reflect current practices and needs.

TAB 5


UConn Health



Status of External Audit Projects

Vendor

Area

Scope

Comments

Marcum, LLP

UConn Health Audits of the John Dempsey Hospital and Dental Clinics (Clinical Programs Fund), including the OHCA filings, UConn Medical Group (UMG) and the University of Connecticut Health Center Finance Corporation for FY2015.

Marcum, LLP will present the FY2015 audited financial statements at the February 3, 2016 JACC Meeting.

RSM US LLP (RSM),

formerly McGladrey LLP

Storrs,

Regionals & UConn Health

Audit of UCONN 2000 named projects substantially completed during FY2015, deferred maintenance projects with designated budgets substantially completed in FY2015 and agreed upon procedures performed on total UCONN 2000 expenditures (named projects, deferred maintenance and equipment) for FY2015.

FY2015 engagement is underway.

BKD

Storrs

Athletics

NCAA agreed upon procedures performed on all revenues, expenses, and capital expenditures for or on behalf of the University’s Athletics Program for FY2015.

BKD presented their FY2015 reports at the December 1, 2015 JACC meeting. Engagement Complete.

2015 AUDIT RESULTS University of Connecticut Health Center:

John Dempsey Hospital

UConn Medical Group

Finance Corporation

City Place II | 185 Asylum Street

Hartford, Connecticut 06103 Phone: 860.760.0630

marcumllp.com

1

February 3, 2016 Joint Audit and Compliance Committee of University of Connecticut & University of Connecticut Health Center We are pleased to meet with you to discuss the results of our audits of the 2015 financial statements of the University of Connecticut Health Center John Dempsey Hospital (the Hospital or JDH); University of Connecticut Health Center UConn Medical Group (UConn Medical Group or UMG); and University of Connecticut Health Center Finance Corporation (Finance Corporation), collectively the Organization. We have issued unmodified audit opinions on the aforementioned financial statements as of June 30, 2015 and for the year then ended which are included herein. This report summarizes our findings related to the significant areas of audit focus and the communications to audit committees that are required by our professional standards. We appreciate the opportunity to provide audit services to the University of Connecticut Health Center. Please contact Chris Jackson at 860.760.0630 or [email protected] with any questions or comments. Very truly yours,

UNIVERSITY OF CONNECTICUT HEALTH CENTER:

JOHN DEMPSEY HOSPITAL UCONN MEDICAL GROUP FINANCE CORPORATION

2015 Audit Results

2

AREAS OF AUDIT FOCUS The following summarizes the audit results and our observations related to the higher risk audit areas:

Emphasis Area Audit Results and Observations

Change in method of accounting for pensions

During the year ended June 30, 2015, the Hospital and UMG adopted GASB Statements No. 68 and 71, Accounting and Financial Reporting for Pensions and Pension Transition for Contributions Made Subsequent to the Measurement Date. GASB 68 requires employers to recognize liabilities, deferred outflows of resources, and deferred inflows of resources for their proportionate share of the pension plans that they participate in. The Hospital and UMG have elected to apply the "cumulative effect" method, as permitted by GASB 68, by restating beginning net position as of July 1, 2014 to record the liabilities related to the State Employees' Retirement System (SERS) and Teachers’ Retirement System (TRS). An emphasis of matter paragraph has been added to our audit auditors’ reports related to the adoption of GASB Statements 68 and 71. The following table summarizes the recorded components of the pension liabilities as of June 30, 2015:

(in 000’s) JDH UMG Pension liabilities $(148,375) $(82,197)Deferred pension outflows 16,039 15,120 Deferred pension inflows (5,303) (2,948)Net impact as of 6/30/15 $(137,639) $(70,025) Unrestricted net position (deficit) $(90,089) $(70,077)



2015 Audit Results

3


Change in method of accounting for pensions (continued)

The Auditors of Public Accounts audited the Schedule of SERS Component Unit Allocations for the University of Connecticut Health Center (UConn Health) as of and for the year ended June 30, 2014 and also audited the total net pension liability, total deferred outflows of resources, total deferred inflows of resources, and total pension expense included in the Schedule of SERS Pension Amounts for UConn Health as of and for the year ended June 30, 2014. The amounts recorded in the Hospital’s and UMG’s audited financial statements were agreed to the aforementioned audited schedules. We read the actuarial valuations and considered the qualifications of the actuaries. The GASB 68 and 71 pension activity has been appropriately recorded and disclosed in the Hospital’s and UMG’s June 30, 2015 audited financial statements.

Amounts due to third-party payors

We have tested the relevant inputs to the Hospital’s third-party payor settlement calculations and reviewed management’s third-party reserving methodology. We have concluded that the third-party reserves were reasonable as of June 30, 2015 based on the exposures that existed. The following table summarizes the Hospital’s recorded net amounts due to third-party payors based on management’s estimates of open cost report settlements and other estimated settlement matters:

(in 000’s) 6/30/15 6/30/14 Due to third-party payors $(16,726) $(4,492)



2015 Audit Results

4


Accounts receivable allowances for contractual discounts and bad debts

The Hospital and UMG estimated the net realizable value of accounts receivable as of June 30, 2015 by calculating and applying separate contractual allowance and bad debt percentages by financial class and aging bucket. We performed extensive procedures to test the Hospital’s and UMG’s allowance calculations, including independent procedures to ensure that the allowances recorded were appropriate and the discount percentages used were accurate. We tested the Hospital’s and UMG’s revenue systems including the underlying system generated reports utilized by management in the determination of Hospital’s and UMG’s accounts receivable allowances. We performed a combined hindsight analysis of the allowances for doubtful accounts and contractual adjustments recorded in the prior year, noting that the reserves were fairly stated in the prior year for both the Hospital and UMG.

(in 000’s) JDH UMG Gross accounts receivable $60,825 $13,251 Allowance for doubtful accounts (22,528) (3,557)

Net patient receivables at 6/30/15 38,297 9,694 Current year allowance percentage of

accounts receivable at 6/30/15 37% 27% Prior year allowance percentage of

accounts receivable at 6/30/14 37% 25%

Based on our procedures, we have concluded that the Hospital’s and UMG’s net patient accounts receivable balances were fairly stated as of June 30, 2015.



2015 Audit Results

5


Construction of Outpatient Pavilion

UCHCFC Circle Road Corporation, a subsidiary of Finance Corporation, continued to administer the construction contract to build the Outpatient Pavilion. The Outpatient Pavilion was placed in service in April 2015 when it became occupied. We performed procedures to test a sample of the construction costs incurred during 2015. We also tested the draws on the construction mortgage with TIAA to fund this project. No exceptions were noted during the performance of our testing.

Outpatient Pavilion direct financing lease

Finance Corporation’s 25 year lease of the Outpatient Pavilion to UConn Health became effective on April 1, 2015. Finance Corporation has accounted for the Outpatient Pavilion lease as a direct financing lease. Under direct financing lease accounting, the underlying capital assets have been reclassified and reported as a net investment in direct financing lease asset on Finance Corporation’s statement of net position. The Hospital and UMG have entered into annual subleases with UConn Health to rent the Outpatient Pavilion which have been recorded as operating leases. We audited the terms of the leases and concur with management’s accounting treatment reflected in the 2015 audited financial statements.



2015 Audit Results

6


Professional liability exposure and other legal matters

UConn Health provides malpractice insurance coverage to the Hospital and UMG on an occurrence basis. The Hospital and UMG are charged an annual malpractice premium for such coverage. The Hospital and UMG are not responsible for claim settlements in excess of the annual premiums charged by UConn Health, however, operational subsidies from the State of Connecticut or UConn Health may be affected by the performance of the malpractice program. We obtained legal representation letters from the attorneys representing the Hospital and UMG. Based on the legal letter responses received, there were no specific contingencies that were required to be recorded or disclosed in the audited financial statements. The relevant facts related to UConn Health’s malpractice program and trust fund have been disclosed in the audited financial statements.

Financial viability For the year ended June 30, 2015, UMG experienced an operating loss of approximately $51 million and UConn Health provided transfers of approximately $48 million. We obtained representations from UConn Health’s management that UConn Health is committed to continue to provide financial support to UMG in the form of working capital advances and net asset transfers through June 30, 2016 in amounts that will be sufficient for UMG to continue to meet its cash flow requirements. In addition, management made similar representations regarding UConn Health’s commitment to make future working capital advances and net asset transfers to the Hospital and Finance Corporation through June 30, 2016 in the event that they are required.



2015 Audit Results

7

REQUIRED COMMUNICATIONS The following communications are required by our professional standards: OUR RESPONSIBILITIES UNDER AUDITING STANDARDS Our engagement letter and our audit reports define our responsibilities. As described by professional standards, our responsibility is to plan and perform the audits in accordance with auditing standards generally accepted in the United States to obtain reasonable, rather than absolute, assurance that the financial statements are free of material misstatement. Management’s Discussion and Analysis for each entity and the supplementary pension schedules of the Hospital and UMG have been presented to supplement the basic financial statements. Such information is required by the Governmental Accounting Standards Board. 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 inquiries 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 audits 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. ACCOUNTING POLICIES AND DISCLOSURES Management is responsible for the selection and use of appropriate accounting policies. The Organization’s significant accounting policies are disclosed in Note 1 to the audited financial statements. The financial statement disclosures are neutral, consistent, and clear. During the year ended June 30, 2015, the Hospital and UMG adopted GASB Statements No. 68 and 71, Accounting and Financial Reporting for Pensions and Pension Transition for Contributions Made Subsequent to the Measurement Date. These GASB pronouncements required the pro rata share of State pension liabilities to be recorded at the entity level. The adoption of these new pronouncements was further described in the preceding Areas of Audit Focus section.



2015 Audit Results

8

ACCOUNTING ESTIMATES Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. The most sensitive estimates included in the financial statements relate to contractual allowances, the allowances for doubtful accounts, third-party reserves, and pension liabilities. Please refer to the preceding Areas of Audit Focus section for our analysis of these estimates. AUDIT ADJUSTMENTS An audit adjustment is a correction to the financial statements that was not detected by employees in the normal course of performing their duties or that was detected by employees subsequent to year end, but not recorded until the following year. There were no audit adjustments that were recorded by the Hospital, UMG or Finance Corporation other than Finance Corporation’s adjustments to account for the direct financing lease which was a joint effort between management and Marcum. There were no material unrecorded audit adjustments as of June 30, 2015. DISAGREEMENTS WITH MANAGEMENT Professional standards define a disagreement with management as a difference of opinion on any matter of accounting principles or practices, financial statement disclosure, auditing scope or procedures, which if not resolved to the auditors’ satisfaction would have caused the auditor to refer to the subject matter of the disagreement in connection with the auditors’ report. (Preliminary differences of opinion that are based on incomplete facts are not considered to be disagreements if the differences are resolved by obtaining more complete factual information). There were no disagreements with management related to auditing, accounting or disclosure matters. MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS In some cases, management may decide to consult with other accountants about auditing or accounting matters, similar to obtaining a “second opinion”. If such consultation involves the application of an accounting principle to the financial statements or a determination of the type of auditors’ opinion that may be expressed on those statements, our professional standards require the consulting accountant to communicate with us to determine that the consulting accountant has all the relevant facts. Management has advised us that at times they consult with the State Auditors on certain accounting matters and other events as they arise during the year.



2015 Audit Results

9

ISSUES DISCUSSED PRIOR TO OUR RETENTION AS INDEPENDENT AUDITORS We generally discussed a variety of matters, including the application of accounting principles and auditing standards, with management. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention as auditors. Further, there were no significant changes to our planned audit approach or areas of audit emphasis. In addition, there was no significant change to our estimates of planning materiality that were initially developed during the planning phase of the audits. SIGNIFICANT DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDITS Management and others within the Organization cooperated with our requests. We encountered no difficulties in dealing with management in performing our audits. MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated January 22, 2016. FRAUD AND ILLEGAL ACTS Those charged with governance should be adequately informed of fraud or violations of laws and regulations coming to the auditors’ attention during the course of the audits. We noted no fraud or possible illegal acts (all as defined under current auditing standards) which have or could have a direct effect on the financial statements. INTERNAL CONTROL In planning and performing our audits of the financial statements of the Hospital, UMG and Finance Corporation, collectively the Organization, as of and for the year ended June 30, 2015, in accordance with auditing standards generally accepted in the United States of America, we considered the Organization’s internal control over financial reporting (internal control) as a basis for designing audit procedures that were appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization’s internal control.



2015 Audit Results

10

INTERNAL CONTROL (CONTINUED) A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control was for the limited purpose described in the first paragraph in this section above and was not designed to identify all deficiencies in internal control that might be material weaknesses. Given these limitations during our audits, we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. INDEPENDENCE CONFIRMATION As required by professional standards, we communicate at least annually with you regarding all relationships between Marcum and its related entities (the Firm) and the Hospital, UMG and Finance Corporation that, in our professional judgment, may reasonably be thought to bear on our independence. We are not aware of any relationships between the Firm and the Organization that, in our professional judgment, may reasonably be thought to bear on our independence. We hereby confirm that we are independent accountants with respect to the Organization, within the meaning of the published rules and regulations of the American Institute of Certified Public Accountants and the State of Connecticut Board of Public Accountancy.

UNIVERSITY OF CONNECTICUT HEALTH CENTER JOHN DEMPSEY HOSPITAL (21002 FUND)

FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION(With Management’s Discussion and Analysis)

JUNE 30, 2015 AND 2014


CONTENTS

Management’s Discussion and Analysis .................................................................................. 1-6 Independent Auditors’ Report.................................................................................................. 7-8 Financial Statements

Statements of Net Position ...................................................................................................... 9-10 Statements of Revenues, Expenses, and Changes in Net Position .............................................11 Statements of Cash Flows ..................................................................................................... 12-13

Notes to Financial Statements ............................................................................................... 14-40 Independent Auditors’ 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 ............................................................................................ 41-42 Schedules of Required Supplementary Information .......................................................... 43-44


MANAGEMENT’S DISCUSSION AND ANALYSIS

1

The following discussion and analysis provides an overview of the financial position and activities of the University of Connecticut Health Center John Dempsey Hospital (21002 Fund) (the Hospital) as of and for the years ended June 30, 2015, 2014, and 2013. This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes thereto, which follow this section. Through the Hospital (a licensed acute care hospital with a certified 234 general acute care beds, 180 staffed), the University of Connecticut Health Center (UConn Health) provides specialized and routine inpatient and outpatient services. The Hospital also provides comprehensive healthcare services for Connecticut’s incarcerated inmates through contracts with the Correctional Managed Health Care (CMHC) program. The Hospital has long been regarded as the premier facility in the region for high-risk maternity services. It is also recognized for its cardiovascular program (interventional cardiology and surgery), cancer, musculoskeletal, and behavioral mental health services, ambulatory partial hospitalization, and outpatient treatment programs. Additionally, the Hospital is home to the only Emergency Department in Connecticut’s Farmington Valley. OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of management’s discussion and analysis and the financial statements. The basic financial statements (statements of net position, statements of revenues, expenses, and changes in net position, and statements of cash flows) present the financial position of the Hospital at June 30, 2015 and 2014, and the results of its operations and its financial activities for the years then ended. These financial statements report information about the Hospital using accounting methods similar to those used by private-sector companies. The statements of net position include all of the Hospital’s assets and liabilities. The statements of revenues, expenses, and changes in net position reflects the year’s activities on the accrual basis of accounting, i.e., when services are provided or obligations are incurred, not necessarily when cash is received or paid. These financial statements report the Hospital’s net position and how it has changed. Net position (the difference between assets and liabilities adjusted for deferred outflows and inflows) is one way to measure financial health or position. The statements of cash flows provide relevant information about each year’s cash receipts and cash payments and classifies them as to operating, investing, and noncapital financing activities. The Hospital adopted GASB statements 68 and 71 in the current fiscal year. These statements required the Hospital to recognize its pro rata share of the State’s pension liabilities as well as deferred inflows and outflows of resources. These changes were made by adjusting the July 1, 2014 opening balance to record the cumulative change in net assets. In conjunction with the adoption of these standards the Hospital decreased its beginning net assets by $138.7 million though there was no effect on current year cash flows.



2

FINANCIAL HIGHLIGHTS Hospital discharges of 8,946 represent an increase of 380 cases from 2014. Outpatient visits increased by 10,261, or 3%, from the prior year. These changes are indicative of the general healthcare trend towards outpatient treatment. The Hospital finished the year with an operating gain of $19.5 million compared to an operating loss of $17.9 million in the prior year. The Hospital received net transfers from UConn Health of $8.0 million and $13.0 million in 2015 and 2014, respectively. Current year transfers were for fringe benefit recoveries related to support services paid against the institutions’ general fund allotment. Total net position increased $19.5 million from operations in fiscal 2015, compared to a decrease of $17.9 million in fiscal 2014. The Hospital’s financial position at June 30, 2015, included assets of approximately $149.5 million, deferred outflows of $16.0 million, liabilities of approximately $199.8 million and deferred inflows of $5.3 million. Net position, which represents the residual interest in the Hospital’s assets and deferred outflows after liabilities and deferred inflows are deducted, decreased $111.0 million to approximately $(39.6) million. Changes in net position represent the activity of the Hospital, resulting from revenues, expenses, gains, losses, transfers and cumulative effect of change in accounting principles and are summarized for the years ended June 30, 2015, 2014, and 2013, including other changes in net position, as follows:

2015 2014 2013(in thousands)

Summary of assets, liabilitiesand net position at June 30:

Current assets 89,222$ 67,324$ 54,535$ Other assets 9,801 9,702 17,341 Capital assets, net 50,492 51,704 55,790

Total assets 149,515$ 128,730$ 127,666$

Deferred outflows 16,039$ --$ --$

Current liabilities 42,749$ 48,824$ 39,272$

Pension liabilities 148,375 -- -- Accrued compensated absences,

noncurrent portion 8,725 8,551 8,720

Total liabilities 199,849$ 57,375$ 47,992$

Deferred inflows 5,303$ --$ --$

Net investment in capital assets 50,492$ 51,704$ 55,790$ Unrestricted (90,089) 19,651 23,884

Total net position (39,597)$ 71,355$ 79,674$

UNIVERSITY OF CONNECICUT HEALTH CENTER JOHN DEMPSEY HOSPITAL (21002 FUND)


3

FINANCIAL HIGHLIGHTS (CONTINUED)

2015 2014 2013(in thousands)

Summary of revenues, expenses andtransfers for the year ended June 30:

Operating revenues 360,296$ 308,713$ 305,047$ Operating expenses (340,779) (326,572) (309,097)

Operating Income (Loss) 19,517 (17,859) (4,050) Nonoperating revenue, net 200 414 505

Income (Loss) before loss on dispoal of Dental Clinics and transfers 19,717 (17,445) (3,545)

Loss on disposal of Dental Clinics -- (3,850) -- Net transfers 8,002 12,976 15,178 Cumulative effect of change

in accounting principle (138,671) -- --

(Decrease) Increase in net position (110,952)$ (8,319)$ 11,633$ CAPITAL ASSETS At June 30, 2015, the Hospital had property, plant, and equipment of $193.6 million before accumulated depreciation compared to $190.9 million at June 30, 2014, as shown in the table below:

2015 2014 2013(in thousands)

Land 183$ 183$ 183$ Construction in progress 14,703 11,802 12,905 Buildings 95,594 93,653 102,066 Equipment 69,309 71,502 80,614 Capital leases 13,776 13,776 13,776

Total Property, Plant and Equipment 193,565$ 190,916$ 209,544$ For fiscal 2016 all UConn Health capital requests will be considered for funding on an individual basis. Capital requests will be considered by the senior executive committee of UConn Health. More detailed information about the Hospital’s property, plant and equipment is presented in note 7 to the financial statements.



4

STATEMENTS OF CASH FLOWS The statements of cash flows provide additional information about the Hospital’s financial results by reporting the major sources and uses of cash. A summary of the statements of cash flows for the years ended June 30, 2015, 2014, and 2013 is as follows:

2015 2014 2013(in thousands)

Cash received from operations 373,977$ 304,520$ 291,619$ Cash expended for operations (334,388) (315,683) (297,422)

Net cash provided by/(used) in operations 39,589 (11,163) (5,803)

Net cash used in investing activities (7,017) (7,781) (7,415)

Net cash (used)/provided by noncapital financing activities (8,267) 18,944 14,109

Net cash used in capital andrelated financing activities -- -- (891)

Net change in cash 24,305 -- --

Cash - Beginning -- -- --

Cash - Ending 24,305$ --$ --$ SIGNIFICANT VARIANCES IN FINANCIAL STATEMENTS In this section, the Hospital explains the reasons for those financial statement items with significant variances relating to fiscal 2015 amounts compared to fiscal 2014. SUMMARY OF ASSETS AND LIABILITIES Changes in assets included the following:

Cash – increased from June 30, 2014 to June 30, 2015 by approximately $43.1 million, to a positive position of $24.3 million. Medicaid and Medicare settlements of $21.5 million and $3.3 million respectively, accounted for approximately $24.8 million of the change in cash and third party receivables. This year the Hospital also settled RAC receivable cases with The Center for Medicare Services which resulted in $3.9 million of cash collected. UConn Health transferred $8 million to the Hospital in fiscal year 2015.



5

SUMMARY OF ASSETS AND LIABILITIES (CONTINUED)

Contract and other receivables – decreased from June 30, 2014 to June 30, 2015 by approximately $6.3 million. The decrease was mostly due from the receipt of funds against the CT Children’s receivable. CT Children’s pays the Hospital for costs associated with its administration of the Neonatal Intensive Care Unit (NICU). Due from Finance Corporation – decreased by $2 million due to the repayment of funds advanced to Finance Corporation during construction of the Outpatient Pavilion.

Changes in liabilities included the following:

Due to third-party payors – increased from June 30, 2014 to June 30, 2015 by approximately $12.2 million. The change is related to estimated and actual settlements. These amounts are the result of management’s analysis of outstanding Medicare and Medicaid cost reports and other potential settlement of claims with HMOs. Due to UConn Health Malpractice Fund – decreased from June 30, 2014 to June 30, 2015 by $1.3 million. The balance of $260,676 represents the June allocation of 2015 premiums for malpractice coverage owed to UConn Health’s malpractice fund. Pension Liability – increased in the current year due to the adoption of GASB 68. As a result the Hospital ended the year with a liability of $148.4 million which represents its proportional share of the State’s State Employees’ Retirement System (SERS) and Teachers’ Retirement System pension plans as determined by the Hospital’s percentage of overall contributions.

SUMMARY OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION

Operating revenue – increased from June 30, 2014 to June 30, 2015 by approximately $51.6 million or 16.7%. Net patient revenue went up $50.6 million or 17.6%. In fiscal year 2015, the Hospital reported approximately $1.8 million in contract revenue from meaningful use. There were no meaningful use payments recognized in fiscal year 2014. Operating expenses – increased from June 30, 2014 to June 30, 2015 by approximately $14.2 million or 4.4% due to salary and fringe increases, including those embedded in internal contractual support. Fringe benefit rates, set by the State of Connecticut, increased approximately 9.8% in 2015. Transfers from UConn Health – decreased from June 30, 2014 to June 30, 2015 by approximately $5.0 million. In the current year, the Hospital did not receive any transfers related to covering operating deficiencies and to fund strategic initiatives whereas in 2014, approximately $4.0 million was received. In the current year, the Hospital received transfers of $8.0 million related to fringe benefit recoveries for support services paid by the general fund compared to $8.9 million in fiscal year 2014.



6

FISCAL 2016 OUTLOOK As we look forward to fiscal year 2016, the Hospital’s focus is on maintaining outstanding clinical care and sufficient volumes in a rapidly evolving market. Healthcare reform continues to bring changes in the ways that the Hospital serves the community while the Bioscience Connecticut initiative is changing the scope of our treatment facilities and infrastructure. Average daily census and Hospital discharges finished below budget in 2015 but outpatient equivalents were higher than budget reflecting an overall shift in the market toward outpatient services. Management is continuing to focus on achieving inpatient volume via clinically focused advertising campaigns and strategic hiring ahead of the opening of the new Hospital Tower in 2016. BIOSCIENCE CONNECTICUT A significant amount of progress on the construction work related to the Bioscience Connecticut initiative has been achieved. The Outpatient Pavilion (formerly named the Ambulatory Care Center) was substantially completed and is 95% occupied (a portion of the 8th floor construction was postponed and will be complete in 2016). The 3rd phase of the project that renovates research labs in the Main Building is also 95% complete. Scientists have moved in and research is being conducted in the newly renovated space. The new Hospital Tower, which also includes the 3rd and final parking garage, is 70% complete and work is on schedule to be completed in 2016. Construction of the Academic Building and Incubator Lab additions to the Cell and Genome Sciences Building continues and both are on schedule. Design for both the Main Building Lab and the Clinic Building renovations will be completed this Fall and construction is scheduled to begin in early 2016. In addition, the Jackson Lab for Genomic Medicine was completed and opened in October 2014. CONTACTING THE HOSPITAL’S FINANCIAL MANAGEMENT This financial report provides the reader with a general overview of the Hospital’s finances and operations. If you have questions about this report or need additional financial information, please contact the Office of the Chief Financial Officer, University of Connecticut Health Center, Farmington, Connecticut 06030-3800.

7

INDEPENDENT AUDITORS’ REPORT

Joint Audit and Compliance Committee University of Connecticut Health Center Report on the Financial Statements We have audited the accompanying financial statements of the University of Connecticut Health Center, John Dempsey Hospital (21002 Fund) (the Hospital), an enterprise fund of the State of Connecticut, as of and for the years ended June 30, 2015 and 2014, and the related notes to the financial statements, which collectively comprise the Hospital’s basic financial statements as listed in the table of contents. 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. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 auditors’ 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 entity’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 expressing an opinion on the effectiveness of the entity’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.

8

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Connecticut Health Center, John Dempsey Hospital (21002 Fund) as of June 30, 2015 and 2014, and the results of its operations and changes in net position, and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Change in Method of Accounting for Pensions As discussed in Note 2 to the financial statements, the Hospital changed its method for accounting and financial reporting of pensions as a result of the adoption of Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions – an Amendment of GASB Statement No 27 and Governmental Accounting Standards Board Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date – An Amendment of GASB Statement No. 68, both effective July 1, 2014. 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 required supplementary information, such as Management’s Discussion and Analysis on pages 1 through 6, the Schedule of Changes in John Dempsey Hospital’s Net Position Liability and Related Ratios on page 43 and the Schedule of Pension Contributions on Page 44 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 inquiries 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 audits 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 Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 22, 2016 on our consideration of the Hospital’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 results of that testing, and not to provide an opinion on the 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 Hospital’s internal control over financial reporting and compliance.

Hartford, CT January 22, 2016


STATEMENTS OF NET POSITION

JUNE 30, 2015 AND 2014

The accompanying notes are an integral part of these financial statements.

9

2015 2014

Assets

Current Assets Cash 24,305,080$ --$

Patient accounts receivable, net of estimated uncollectibles of $22,528,000 and $19,303,000at June 30, 2015 and 2014, respectively 38,296,752 33,443,105

Inventory 7,446,576 7,660,191 Contract and other receivables 8,017,666 14,318,504 Due from Finance Corporation, current portion 5,710,122 7,710,122 Prepaid expenses 5,445,640 4,191,603

Total Current Assets 89,221,836 67,323,525

Noncurrent AssetsOther assets 765,629 666,641 Due from Finance Corporation, noncurrent portion 9,035,784 9,035,784 Capital assets, net (note 7) 50,491,734 51,704,091

Total Noncurrent Assets 60,293,147 61,406,516

Total Assets 149,514,983 128,730,041

Deferred Outflows of ResourcesDeferred amount for pensions 16,039,083 --


STATEMENTS OF NET POSITION (CONTINUED)

JUNE 30, 2015 AND 2014


10

2015 2014

Liabilities and Net Position

Current LiabilitiesCash overdraft --$ 18,819,807$ Accounts payable and accrued expenses 10,381,117 9,737,077 Accrued payroll 5,426,177 4,973,857 Due to UConn Health Malpractice Fund 260,676 1,564,057 Due to State of Connecticut 3,055,636 2,705,656 Due to third-party payors 16,725,852 4,491,574 Accrued compensated absences,

current portion (note 8) 6,899,653 6,532,440

Total Current Liabilities 42,749,111 48,824,468

Noncurrent LiabilitiesPension liabilities 148,374,928 -- Accrued compensated absences,

net of current portion (note 8) 8,724,561 8,550,544

Total Noncurrent Liabilities 157,099,489 8,550,544

Total Liabilities 199,848,600 57,375,012

Deferred Inflows of ResourcesDeferred amount for pensions 5,302,978 --

Net PositionNet investment in capital assets 50,491,734 51,704,091 Unrestricted (90,089,246) 19,650,938

Total Net Position (39,597,512)$ 71,355,029$


STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION

FOR THE YEARS ENDED JUNE 30, 2015 AND 2014


11

2015 2014Operating Revenues

Net patient service revenues (note 5) 337,300,171$ 286,757,590$ Contract and other revenues 22,995,416 21,955,590

Total Operating Revenues 360,295,587 308,713,180

Operating ExpensesSalaries and wages 107,310,852 104,623,208 Fringe benefits 57,429,802 55,729,014 Medical/dental house staff 2,138,571 1,600,000 Medical contractual support 4,500,409 5,199,144 Internal contractual support 55,087,765 50,145,627 Outside agency per diems 788,427 1,361,771 Depreciation and amortization 7,879,044 8,906,755 Pharmaceutical/medical supplies 58,778,144 54,445,527 Utilities 2,179,542 2,129,221 Outside and other purchased services 31,469,406 28,620,860 Insurance 3,390,766 3,444,465 Repairs and maintenance 7,729,172 7,039,298 Other expenses 2,097,358 3,327,751

Total Operating Expenses 340,779,258 326,572,641

Operating Income (Loss) 19,516,329 (17,859,461)

Nonoperating Revenues (Expenses)Gift income 550,000 550,000 Loss on disposals (350,209) (136,094)

Net Nonoperating Revenues 199,791 413,906

Income (Loss) before Loss onDisposal of Dental Clinics and Transfers 19,716,120 (17,445,555)

Loss on Disposal of Dental Clinics -- (3,850,361) Transfers from UConn Health - Unrestricted (note 10) 8,002,293 12,976,347

Increase (Decrease) in Net Position 27,718,413 (8,319,569)

71,355,029 79,674,598 Net Position - Beginning of year (as previously stated) Cumulative effect of implementing GASB 68 and 71 (138,670,954) --

Net Assets - Beginning of year as restated (67,315,925) --

Net Position - End of year (39,597,512)$ 71,355,029$


STATEMENTS OF CASH FLOWS

JUNE 30, 2015 AND 2014


12

2015 2014

Cash Flows from Operating ActivitiesCash received from patients and third-party payors 344,680,802$ 285,308,590$ Cash received from contract and other revenue 29,296,254 19,210,912 Cash paid to employees for salaries

and fringe benefits (163,397,124) (160,952,664) Cash paid for other than personnel services (170,990,442) (154,730,344)

Net Cash Provided by (Used in) Operating Activities 39,589,490 (11,163,506)

Cash Flows from Investing ActivitiesAdditions to property and equipment (7,016,896) (7,780,938)

Net Cash Used in Investing Activities (7,016,896) (7,780,938)

Cash Flows from Noncapital Financing ActivitiesGifts received 550,000 550,000 Transfer of Dental Clinics' cash -- (601,740) Transfer from UConn Health 8,002,293 12,976,347 Cash received from Finance Corporation 2,000,000 --Net (repayments) draw downs on cash overdraft (18,819,807) 6,019,837

Net Cash (Used in) Provided by NoncapitalFinancing Activities (8,267,514) 18,944,444

Net Change in Cash 24,305,080 --

Cash - Beginning -- --

Cash - Ending 24,305,080$ --$


STATEMENTS OF CASH FLOWS (CONTINUED)



13

2015 2014

Reconciliation of Operating Income (Loss)to Net Cash Used in Operating Activities

Operating income (loss) 19,516,329$ (17,859,461)$ Adjustments to reconcile operating income (loss)

to net cash used in operating activities:Depreciation and amortization 6,846,913 8,906,755

Changes in operating assets and liabilities:Patient accounts receivable, net (4,853,647) (3,226,614) Due from UConn Health agencies -- 10,980 Inventory 213,615 349,889 Contract and other receivables 6,300,838 (2,744,678) Prepaid expenses (1,254,037) (895,562) Other assets (98,988) (67,011) Due to third-party payors 12,234,278 1,777,614 Accounts payable and accrued expenses 644,040 420,083 Due to State of Connecticut 349,980 399,670 Due to UConn Health Malpractice Fund (1,303,381) 1,564,057 Accrued payroll 452,320 243,234 Accrued compensated absences 541,230 (42,462)

Net Cash Provided by (Used in) Operating Activities 39,589,490$ (11,163,506)$


NOTES TO FINANCIAL STATEMENTS


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NOTE 1 - DESCRIPTION OF REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY The financial statements include those asset, deferred outflows, liability, deferred inflows, revenue, and expense accounts reflected in the accounting records of the John Dempsey Hospital (the Hospital), which are primarily accounted for in the 21002 Fund of the University of Connecticut Health Center (UConn Health). There are 21 members of the Board of Trustees of the University of Connecticut. Five serve as ex officio, voting members by virtue of other positions: The Governor is President of the Board, the Commissioners of Agriculture, Education, and Economic and Community Development are Board members, and the Chair of UConn Health’s Board of Directors is a member. Two Board members are elected by alumni for four-year terms (and may be re-elected once, in succession). One undergraduate student is elected by undergraduates for a two-year term. One graduate or professional student is elected by graduate and professional students for a two-year term. Twelve members are appointed by the Governor, subject to confirmation by the General Assembly, for six-year terms, and may be reappointed without limit. There are 18 members of the University of Connecticut Health Center Board of Directors. Three serve as ex officio voting members and serve concurrently with their positions: The Commissioner of Public Health, The Secretary or a designated under-secretary of the Office of Policy and Management, and the President of the University. All other terms are for three years and include: three members appointed by the Governor, three members appointed by the chair of the Board of Trustees (two of which must be members of the Board of Trustees and one who serves as the chair of the Board of Directors), and 9 at-large members appointed by the Board of Directors itself. The Hospital is an enterprise fund of the State of Connecticut (the State) and is therefore generally exempt from federal income taxes under Section 115 of the Internal Revenue Code of 1986. The University of Connecticut Health Center Finance Corporation (Finance Corporation) was established pursuant to Public Act No 87-458. The purpose of the Finance Corporation is to provide greater flexibility for the Hospital and to promote the more efficient provision of health care services. As such, the Finance Corporation has been empowered to purchase supplies and equipment, acquire facilities, approve write-offs of Hospital accounts receivable, process malpractice claims on behalf of the Hospital and UConn Health beginning in 2011, as well as negotiate joint ventures, shared service, and other agreements for the benefit of the Hospital.




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NOTE 1 - DESCRIPTION OF REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES (CONTINUED)

BASIS OF PRESENTATION

The Hospital’s financial statements are prepared in accordance with all relevant Governmental Accounting Standards Board (GASB) pronouncements. GASB No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, states that proprietary activities may elect to apply the provisions of Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989 that do not conflict with or contradict GASB pronouncements. UConn Health has not made this election. The Hospital implemented GASB No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, which directly incorporated into GASB’s authoritative literature certain pronouncement issues by FASB on or before November 30, 1989.

The Hospital has adopted GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, as amended by GASB Statements No. 35, Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities, and No. 37, Basic Financial Statements – and Management Discussion and Analysis – for State and Local Governments: Omnibus, and as amended by GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position.

The Hospital also adopted GASB Statement No. 38, Certain Financial Statement Note Disclosures, as of July 1, 2001. These GASB pronouncements established financial reporting standards for state and local governmental entities, including net position presentation, certain classifications of revenues and expenses and management’s discussion and analysis.

During the year ended June 30, 2014, the Hospital adopted GASB Statement No. 69, Government Combinations and Disposals of Government Operations, in connection with the transfer of its Dental Clinics to UConn Health on July 1, 2013. See note 12 for additional information.

PROPRIETARY FUND ACCOUNTING

The Hospital utilizes the proprietary fund method of accounting whereby revenues and expenses are recognized on the accrual basis. All revenues and expenses are subject to accrual.




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NOTE 1 - DESCRIPTION OF REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial statement areas where management applies the use of estimates consist primarily of the allowance for uncollectible accounts, contractual allowances, pension liabilities, and third-party reimbursement reserves.

CASH AND CASH OVERDRAFT Cash includes cash in banks. Cash overdraft positions, which occur when total outstanding issued checks exceed available cash balances at the end of each reporting period, are presented as a liability within the statements of net position. See note 3 for discussion regarding the Hospital’s available borrowing. ACCOUNTS RECEIVABLE AND NET PATIENT SERVICE REVENUES Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Settlements are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods, as final settlements are determined. The amount of the allowance for uncollectible accounts is based upon management’s assessment of historical and expected net collections, business and economic conditions, trends in Medicare and Medicaid health care coverage and other collection indicators. See note 5 for additional information relative to third-party payor programs. CONTRACT AND OTHER REVENUES Contract and other revenues primarily consist of services provided to area hospitals under the terms of contractual agreements. Revenue is recorded on the accrual basis of accounting in the period the related services are rendered.




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INVENTORY Inventory, with the exception of pharmaceuticals, is recorded at cost, being determined by the first-in, first-out (FIFO) method. Pharmaceuticals are valued at market which approximates cost due to high turnover rates. Short-term or minor supplies are expensed as incurred. CAPITAL ASSETS Property and equipment acquisitions are recorded at cost. Betterments and major renewals are capitalized and maintenance and repairs are expensed as incurred. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Buildings have an estimated useful life of 5 to 50 years and equipment has an estimated useful life of 2 to 25 years. Assets acquired under capital leases and leasehold improvements are depreciated no longer than the lease term. Construction in progress is capitalized as costs are incurred during the construction phase and depreciation will begin once the assets are placed in service. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS Eligible Hospital employees, as defined, may participate in the following State retirement plans: the State Retirement System Tier I, Tier II, Tier IIa, ARP Hybrid and the Teachers’ Retirement System defined benefit plans; and the Alternate Retirement Plan which is a defined contribution plan. These plans are funded by contributions from the State as well as payroll deductions from employees, except for the Tier II Plan, which is noncontributory. In addition, eligible employees may participate in a State defined contribution deferred compensation plan, which is funded by payroll deductions from employees. The State is statutorily responsible for the pension benefits of Hospital employees who participate in the aforementioned defined benefit plans. The State is required to contribute at an actuarially determined rate, which may be reduced by an act of the State legislature. These plans do not issue stand-alone financial reports. Summary information on the plans is publicly available in the State of Connecticut’s Comprehensive Annual Financial Report.




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RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS (CONTINUED) In 2008, the State implemented GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. The State provides post retirement health care and life insurance benefits to eligible UConn Health employees, including those of the Hospital, in accordance with Sections 5-257(d) and 5-259(a) of the Connecticut General Statutes. Upon retirement, liability for retirement and other benefits rests with the State. Therefore, the liability is reported by the State and not recognized in the financial statements of the Hospital. When employees retire, the State pays up to 100% of their health care insurance premium cost (including the cost of dependent coverage). The State finances the cost of post retirement health care and life insurance benefits on a pay-as-you-go basis through an appropriation in the General Fund. During the year ended June 30, 2015, the Hospital adopted GASB statements No. 68 Accounting and Financial Reporting for Pensions and No. 71 Pension Transition for Contributions Made Subsequent to the Measurement Date. These GASB pronouncements require the pro rata share of State pension liabilities be recorded at the entity level. The Hospital continues to pay into State retirement plans on a pay-as-you-go basis but has recorded its liability as prescribed by the pronouncements. GASB 68 affects pensions only and does not supersede GASB 45. See Note 2 regarding the implementation of GASB 68. COMPENSATED ABSENCES The Hospital’s employees earn vacation, personal, compensatory and sick time at varying rates depending on their collective bargaining units. Employees may accumulate sick leave up to a specified maximum. Employees are not paid for accumulated sick leave if they leave before retirement. However, employees who retire from the Hospital may convert accumulated sick leave to termination payments at varying rates, depending on the employee’s contract. Amounts recorded on the statements of net position are based on historical experience. All other compensated absences are accrued at 100% of their balance. Compensated absences have been allocated between current and noncurrent based on historical information.




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THIRD-PARTY PAYORS

Laws governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. Each year as the Office of Inspector General’s (OIG) work plan changes, new areas of scrutiny surface. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in any given period.

MEDICAL MALPRACTICE

Health care providers and support staff of the Hospital are fully protected by State Statutes from any claim for damage or injury, not wanton, reckless or malicious, caused in the discharge of their duties or within the scope of their employment (statutory immunity). Any claims paid for actions brought against the State as permitted by waiver of statutory immunity have been charged against UConn Health’s malpractice self-insurance fund. UConn Health retains a qualified actuary to assist with calculating and determining the appropriate annual malpractice reserve. UConn Health allocates an annual malpractice premium to the Hospital, designed to reflect an estimate of the current year’s cash claims to be processed. For each of the years ended June 30, 2015 and 2014, premiums were $3,128,114. These premiums are included in insurance expense in the Hospital’s statements of revenues, expenses, and changes in net position. The due to UConn Health Malpractice Fund reported on the June 30, 2015 and 2014 statements of net position represented premiums payable for occurrence based coverage through June 30, 2015 and 2014, respectively.

NET POSITION

Net position is classified in two components. Net investment in capital assets consists of capital assets net of accumulated depreciation and reduced by the current balances outstanding of any borrowings (less amounts held in trust) used to finance the purchase or construction of those assets. All other assets less liabilities are classified as unrestricted.

PENSION LIABILITIES

In accordance with GASB 68, the Hospital records its proportionate share of collective net pension liability and collective pension expense for each defined benefit plan offered to its employees. The collective net position liability for each plan is measured as the total pension liability, less the amount of the pension plan’s fiduciary net position. The total pension liability is the portion of the actuarial present value of projected benefits payments that are attributable to the past periods of plan member service. Information about the fiduciary net




20


PENSION LIABILITIES (CONTINUED)

position and additions to/deductions from each pension plan’s fiduciary net position have been determined on the same basis as they are reported by each pension plan. For this purpose, plan member contributions are recognized in the period in which the contributions are due. Employer contributions are recognized in the period in which the contributions are appropriated. Benefits and refunds are recognized when due and payable in accordance with the terms of each plan.

DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES

The Hospital reports its proportionate share of collective deferred outflows of resources and collective deferred inflows of resources related to its defined benefit plans. Differences between expected and actual experience in the measurement of the total pension liability, changes of assumptions or other inputs, and differences between actual contributions and proportionate share of contributions are classified as either deferred outflows or deferred inflows, and are recognized over the average of the expected remaining service lives of employees eligible for pension benefits. The net differences between projected and actual earnings on pension plan investments are reported as deferred outflows or deferred inflows and are recognized over five years. Contributions to the pension plan from the Hospital subsequent to the measurement date of the net pension liability and before the end of the reporting period are reported as a deferred outflow of resources related to pensions.

REGULATORY MATTERS

The Hospital is required to file semi-annual and annual operating information with the State’s Office of Health Care Access (OHCA) and is required to file annual cost reports with Medicare and Medicaid.

RECLASSIFICATIONS

Certain 2014 amounts, including the reclassification of $18,583,070 of expenses from medical house staff expense to internal contractual support expense, have been reclassified to conform to the current year presentation.




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NOTE 2 - CHANGE IN METHOD FOR ACCOUNTING FOR PENSIONS AND UPCOMINGACCOUNTING PRONOUNCEMENTS

As of July 1, 2014, the Hospital adopted GASB 68 and GASB 71. GASB 68 requires employers to recognize liabilities, deferred outflows of resources and deferred inflows of resources for their proportionate share of the pension plans that they participate in. As the State Employees' Retirement System (SERS) and Teachers’ Retirement System (TRS) did not have a practical way to provide each of its component units with all of the information needed to fully restate their prior period financial statements, the Hospital has elected to apply the "cumulative effect" method, as permitted by GASB 68, by restating beginning net position as of July 1, 2014. The implementation of this standard resulted in an adjustment to reduce the Hospital’s beginning net position by $138.7 million as of July 1, 2014.

GASB 71 requires that, at transition, a government recognize a deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the government’s beginning net pension liability and the end of the government's reporting period. The provisions of this Statement are required to be applied simultaneously with the provisions of GASB 68. As of July 1, 2014, the Hospital recorded an adjustment to increase beginning net position by $11.7 million for contributions made to SERS for service during the period from July 1, 2013 through June 30, 2014.

The cumulative effect of applying GASB 68 and 71 is reported as a restatement of beginning net position. The following table shows the impact of the cumulative effect method of adopting and implementing GASB 68 and 71 on beginning net position.

(in millions)Net position, beginning of period,

July 1, 2014 (as previously stated) 71.4$Cumulative effect of adopting GASB 68 and 71 (138.7)

Net position, beginning of period,July 1, 2014 (as restated) (67.3)$




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NOTE 2 - CHANGE IN METHOD FOR ACCOUNTING FOR PENSIONS AND UPCOMING ACCOUNTING PRONOUNCEMENTS (CONTINUED)

UPCOMING ACCOUNTING PRONOUNCEMENTS

In February 2015, GASB issued Statement No. 72, Fair Value Measurement and Application. This Statement addresses accounting and financial reporting issues related to fair value measurements. This Statement provides guidance for determining a fair value measurement for financial reporting purposes. This Statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2015. The Hospital is evaluating the impact this standard will have on its financial statements.

In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits other than Pensions, will require additional disclosures and the recording of the Hospital’s proportionate share of the net liabilities related to its participation in the postemployment benefit plans on the statements of net position as well as more extensive disclosure and requires supplementary information about the postemployment liabilities. This Statement is effective for fiscal year beginning June 15, 2017. The Hospital is evaluating the impact this standard will have on its financial statements.

In June 2015, GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Government. The objective of this Statement is to identify, in the context of the current governmental financial reporting environment, the hierarchy of accounting principles generally accepted in the United States of America (GAAP). The “GAAP Hierarchy” consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. The provisions of this Statement are effective for fiscal years beginning after June 15, 2015. The Hospital is evaluating the impact this standard will have on its financial statements.

NOTE 3 - HYPOTHECATION

In accordance with State Statute, the Hospital can borrow from the State up to 90% of its net patient receivables, contract and other receivables to fund operations. As of June 30, 2015 and 2014, the Hospital had drawn down zero and $18,819,807, respectively. As of June 30, 2015 and 2014, the Hospital had available $41,682,976 and $24,165,640, respectively, under the State Statute.




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NOTE 4 - CHARITY CARE

The Hospital maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges forgone for services and supplies furnished under its charity care policy, the estimated cost of those services and supplies, and equivalent service statistics. During 2015 and 2014, the Hospital provided charity care services of $327,517 and $629,512, respectively. The cost of these services was $159,281 and $320,939, respectively. No net patient service revenue was recorded for these services and expenses associated with these services were included in operating expenses.

NOTE 5 - NET PATIENT SERVICE REVENUES

The Hospital provides health care services primarily to residents of the region. Revenues from the Medicare program accounted for approximately 46% and 45% of the Hospital’s net patient service revenues for the years ended June 30, 2015 and 2014, respectively. Revenues from the Medicaid program accounted for approximately 31% of the Hospital’s net patient service revenues for the years ended June 30, 2015 and 2014, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Hospital believes that it is in compliance with all applicable laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Changes in the Medicare and Medicaid programs and the reduction of funding levels could have an adverse impact on the Hospital.

Patient accounts receivable included approximately 33% and 36% due from Medicare and approximately 17% and 16% due from Medicaid at June 30, 2015 and 2014, respectively.

Patient service revenues reported net of allowances for the years ended June 30, were:

2015 2014

Gross patient service revenues 740,812,802$ 649,596,982$ Less contractual allowances (394,107,610) (357,461,826) Less provision for bad debt (9,405,021) (5,377,566)

Net patient service revenues 337,300,171$ 286,757,590$




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NOTE 5 - NET PATIENT SERVICE REVENUES (CONTINUED)

The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. As such, gross patient revenues are reduced by contractual allowances.

A summary of the payment arrangements with major third-party payors follows:

MEDICARE

Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system based on clinical, diagnostic, and other factors. The Hospital’s classification of patients under the Medicare program and the appropriateness of their admission are subject to an independent review by a peer review organization under contract with the Hospital. Services to Medicare beneficiaries are paid based on a prospective payment system (PPS) based on the classification of each case into a Diagnostic-Related Group (DRG). Inpatient psychiatric services are also reimbursed via a PPS system established for inpatient psychiatric patients based on pre-determined hospital specific per diems. The Hospital is reimbursed for Direct Graduate Medical Education and Medicare Bad Debts at an interim rate with final settlement determined after submission of annual cost reports by the Hospital and audits thereof by the Medicare fiscal intermediary. The Hospital’s Medicare cost reports have been settled by the Medicare fiscal intermediary through fiscal year 2011 with the exception of fiscal year 2006 which remains open.

During the year ended June 30, 2015, the Hospital received payments for the filed cost report for fiscal year 2013. The Hospital recognized $1,000,473 as a reduction of contractual allowances during the year ended June 30 2015 related to this cost report.

MEDICAID

Inpatient services rendered to Medicaid program beneficiaries admitted prior to January 1, 2015 were reimbursed, in part, under the Tax Equity and Fiscal Responsibility Act (TEFRA) reimbursement methodology which provides for a cost-based reimbursement subject to a maximum target rate amount per discharge. Beginning January 1, 2015, Medicaid converted to an APR DRG Prospective Payment Methodology. The Hospital was reimbursed at an interim rate prior to January 1, 2015 with final settlement determined after submission of annual cost reports. Payments for inpatient services for patients admitted after January 1, 2015 will have settlement distributions for GME and Case Mix Index withholds only.




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MEDICAID (CONTINUED) Outpatient services rendered to patients are reimbursed based on the cost of services provided. The Hospital’s Medicaid cost reports have been audited by the Medicaid fiscal intermediary through 2012. Unaudited cost reports have been submitted as requested by Department of Social Services (DSS) through fiscal year 2014 with payments made through 2013 to the Hospital. During the year ended June 30, 2015, the Hospital received payments for filed cost reports for the fiscal years 2011, 2012 and 2013. The Hospital recognized $6,661,127 as a reduction of contractual allowances during the year ended June 30, 2015 related to these cost reports.

COMMERCIAL INSURANCE AND MANAGED CARE The Hospital has agreements with certain commercial insurance carriers and Health Maintenance Organizations (HMOs) to provide medical services to subscribing participants. In addition, the HMOs make fee-for-service payments to the Hospital for certain covered services based upon discounted fee schedules. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS The Hospital’s estimation of the allowance for uncollectible accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of the Hospital’s collection efforts. The Hospital’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. On a monthly basis, the Hospital reviews its accounts receivable balances, the effectiveness of the Hospital’s reserve policies and various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following:

Revenue and volume trends by payor, particularly the self-pay components Changes in the aging and payor mix of accounts receivable, including increased focus

on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients

Various allowance coverage statistics The Hospital regularly performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of its process for estimating the allowance for uncollectible accounts.




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ICD-10 IMPLEMENTATION The Hospital is subject to the administrative simplification provisions of HIPAA which require the use of uniform electronic data transmission standards for health care claims and payment transactions submitted or received electronically. In January 2009, the Centers for Medicare and Medicaid Services (CMS) published its tenth revision of International Statistical Classification of Diseases and Related Health Problems (ICD-10) and related changes to the formats used for certain electronic transactions. ICD-10 contains significantly more diagnostic and procedural codes than the existing ICD-9 coding system, and as a result, the coding for the services provided at the Hospital will require much greater specificity. Implementation of ICD-10 on October 1, 2015 has required a significant investment in technology, resources and training. The Hospital may experience productivity delays in coding as physicians and staff transition to the new requirements of ICD-10. Cash collections and payments of claims will likely be delayed as the Hospital and payors transition to ICD-10.

NOTE 6 – ELECTRONIC HEALTH RECORD REIMBURSEMENT

The Health Information Technology for Economic and Clinical Health Act (the HITECH Act) was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009 (ARRA). The HITECH Act includes provisions designed to increase the use of electronic health records by health professionals and hospitals. Beginning with federal fiscal year 2011 and extending through federal fiscal year 2016, eligible providers participating in the Medicare and Medicaid programs are eligible for reimbursement incentives based on successfully demonstrating meaningful use of certified Electronic Health Record (EHR) technology. Conversely, those providers that do not successfully demonstrate meaningful use of EHR technology are subject to reductions in reimbursements beginning in fiscal year 2016. The Medicaid EHR incentive program provides annual incentive payments to eligible professionals and hospitals for efforts to adopt, implement, and meaningfully use certified EHR technology. The Hospital utilizes a grant accounting model to recognize EHR incentive revenues. EHR incentive revenues are recognized ratably over the relevant cost report period to determine the amount of the reimbursement.




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NOTE 6 – ELECTRONIC HEALTH RECORD REIMBURSEMENT (CONTINUED)

EHR incentive payment revenue totaling $1,831,037 for the year ended June 30, 2015 is included in contract and other revenues in the accompanying statement of revenues, expenses, and changes in net position. There was no EHR incentive payment revenue recognized by the Hospital for the year ended June 30, 2014. The Hospital’s attestation of compliance with the meaningful use criteria is subject to audit by the federal government. Additionally, Medicare EHR incentive payments received are subject to retrospective adjustment upon final settlement of the applicable cost report from which payments were calculated. A receivable of $373,649 was recorded for the Medicaid portion of the program as of June 30, 2015 and was included in Contract and Other Receivables on the 2015 statement of net position. There were no receivables recorded for this program as of June 30, 2014.

NOTE 7 – CAPITAL ASSETS, NET

Capital assets at June 30 consist of the following:

2015 2014

Land 183,137$ 183,137$ Construction in progress (estimated

cost to complete $3.7 million) 14,702,819 11,801,640 Buildings 95,593,964 93,653,262 Equipment 69,308,916 71,501,502 Capital leases 13,776,275 13,776,275

193,565,111 190,915,816 Less accumulated depreciation and amortization 143,073,377 139,211,725

Capital assets, net 50,491,734$ 51,704,091$




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NOTE 7 – CAPITAL ASSETS, NET (CONTINUED)

Plant and equipment activity for the years ended June 30, 2015 and 2014 was as follows:

2014 Additions Deductions 2015

Land 183,137$ --$ --$ 183,137$ Construction in progress 11,801,640 5,761,341 (2,860,162) 14,702,819 Buildings 93,653,262 2,768,270 (827,568) 95,593,964 Equipment 71,501,502 1,347,447 (3,540,033) 69,308,916 Capital leases 13,776,275 -- -- 13,776,275

190,915,816$ 9,877,058$ (7,227,763)$ 193,565,111$

2013 Additions Deductions 2014Land 183,137$ --$ --$ 183,137$ Construction in progress 12,904,730 6,276,980 (7,380,070) 11,801,640 Buildings 102,066,199 2,592,870 (11,005,807) 93,653,262 Equipment 80,613,427 5,572,553 (14,684,478) 71,501,502 Capital leases 13,776,275 -- -- 13,776,275

209,543,768$ 14,442,403$ (33,070,355)$ 190,915,816$ Related information on accumulated depreciation and amortization for the years ended June 30, 2015 and 2014 was as follows:


Buildings 72,440,175$ 2,223,625$ (624,662)$ 74,039,138$ Equipment 53,108,242 5,544,059 (3,392,730) 55,259,571 Capital leases 13,663,308 111,360 -- 13,774,668

139,211,725$ 7,879,044$ (4,017,392)$ 143,073,377$


Buildings 79,493,841$ 2,342,805$ (9,396,471)$ 72,440,175$ Equipment 61,024,680 6,135,645 (14,052,083) 53,108,242 Capital leases 13,235,003 428,305 -- 13,663,308

153,753,524$ 8,906,755$ (23,448,554)$ 139,211,725$ Fiscal 2014 deductions include deductions associated with the transfer of assets to UConn Health. Specifically, $13,150,174 of capital assets as well as their associated accumulated depreciation of $10,325,932 were transferred as of July 1, 2013.




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NOTE 8 – LONG-TERM LIABILITIES AND OPERATING LEASES

Activity related to compensated absences for the years ended June 30, 2015 and 2014 was as follows:

June 30, June 30, Amounts2014 2015 due within

Balance Additions Deductions Balance 1 year

Accrued compensated

absences 15,082,984$ 12,220,517$ (11,679,287)$ 15,624,214$ 6,899,653$



Accrued compensated

absences 15,298,446$ 11,727,346$ (11,942,808)$ 15,082,984$ 6,532,440$

The Hospital participates in operating lease agreements under UConn Health for which its departments are allocated expenses based on square footage occupied. Rent expense, included in outside and other purchased services, was $4,665,010 and $3,614,343 in 2015 and 2014, respectively. The Outpatient Pavilion (formerly the Ambulatory Care Center), was substantially completed and opened in 2015, and the Hospital leases space in the new facility under a sublease from UConn Health. While the sublease is expected to be renewed on an annual basis, there is no written sublease that extends beyond a one year period. UConn Health has leased the Outpatient Pavilion from Finance Corporation under a direct financing lease that expires on March 31, 2040. The amount of rent expense that was charged to the Hospital was $1,652,722 for the year ended June 30, 2015 and will be approximately $4.4 million annually thereafter. Refer to Note 10 for additional details regarding advances made by the Hospital to construct the Outpatient Pavilion.




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NOTE 8 – LONG-TERM LIABILITIES AND OPERATING LEASES (CONTINUED)

The following is a schedule by year of existing future minimum lease payments under non-cancellable operating leases as of June 30, 2015, in addition to space in the Outpatient Pavilion through the sublease with UConn Health based on the assumption that the sublease will be extended annually through March 31, 2040:

Year ending June 30,

2016 8,091,999$ 2017 8,107,014 2018 7,809,126 2019 7,812,315 2020 7,759,512

Thereafter 100,609,077

140,189,043$

NOTE 9 – PENSION PLANS

Employees of the Hospital are eligible to participate in the State Employees' Retirement System, a defined benefit pension plan, which is administered by the State Employees' Retirement Commission, the State of Connecticut Deferred Compensation Section 457 Plan, a defined contribution plan administered by the State, or the Connecticut State Teacher’s Retirement System (TRS), a defined benefit plan administered by the Teacher’s Retirement Board. Information on the plans’ total funding status and progress, contributions required and trend information can be found in the State of Connecticut's Comprehensive Annual Financial Report available on the State's website. Information for the SERS plan, in which the Hospital holds a significant liability under GASB 68, is presented below.




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NOTE 9 – PENSION PLANS (CONTINUED)

PLAN DESCRIPTION SERS is a single-employer defined benefit Public Employees' Retirement System (PERS) established in 1939 and governed by sections 5-152 to 5-192 of the Connecticut General Statutes. Employees are covered under one of four tiers. Tier I, Tier IIA, and Tier III are contributory plans and Tier II is a non-contributory plan. Tier I Plan B participants contribute 2% or 5% of their pay, depending on their elections. Tier II Plan A and Tier III participants contribute 2% of their pay. Members who joined the retirement system prior to July 1, 1984 are enrolled in Tier I. Tier I employees who retire at or after age 65 with 10 years of credited service, or at or after age 55 with 25 years of service, or at age 55 with 10 years of credited service with reduced benefits are entitled to an annual retirement benefit payable monthly for life, in the amount of 2% of the annual average earnings (which are based on the three highest years of service) over $4,800 plus 1% of $4,800 for each year of credited service. Tier II employees who retire at or after age 60 with 25 years of service, or at age 62 with 10 years of service, or at age 70 with 5 years of service, or at age 55 with 10 years of service with reduced benefits are entitled to 1.4% times average salary at or below the breakpoint in the year of retirement, for each year of credited service. Tier III covers employees first hired on or after July 1, 2011. Tier III employees to retire at, or after age 63 with 25 years of service, or at age 65 with 10 years of service, or at age 58 with 10 years of service with reduced benefits are entitled to 1.4% times average salary at or below the breakpoint in the year of retirement, for each year of credited service. All Tier I, Tier II, Tier IIA, and Tier III members are vested after ten years. For the June 30, 2014, valuation, there were two changes in benefit terms. The 2011 SEBAC Agreement changed the benefit multiplier for the portion of the benefit below the breakpoint from 1.33% to 1.40%. This change was made effective for all active members who retire on or after July 1, 2013 in Tier II, IIA, and III.2. A one-time decision was granted to members not eligible to retire by July 1, 2022 to elect to maintain the same normal retirement eligibility applicable to members eligible to retire before July 1, 2022. Employees who elected by July 1, 2013 to maintain their eligibility are required to make additional employee contributions for the length of their remaining active service with SERS. The additional contribution was up to 0.72% of pensionable earnings.




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CONTRIBUTIONS MADE The Hospital's SERS contribution is determined by applying a State-mandated percentage to eligible salaries and wages. The mandated total fringe benefit rate, which includes allocations for retiree health care costs, rollforwards, and other adjustments, was 53.58%, 50.50%, and 54.71%, during fiscal years 2015, 2014, and 2013, respectively. The SERS contributions made compared to covered payroll follows:

2015 2014

Total Hospital payroll covered by SERS 39,054,418$ 34,257,752$ Total Hospital SERS contributions 13,358,494$ 11,749,744$ Contributions as a percentage of covered payroll 34.2% 34.3% PENSION LIABILITIES, PENSION EXPENSE, DEFERRED OUTFLOWS OF RESOURCES, AND

DEFERRED INFLOWS OF RESOURCES The implementation of GASB 68 resulted in the Hospital reporting a net pension liability for SERS in fiscal year 2015. The Statement required the Hospital to recognize a net pension liability for the difference between the present value of the projected benefits for past service known as the Total Pension Liability (TPL) and the restricted resources held in trust for the payment of pension benefits, known as the Fiduciary Net Position (FNP). For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of SERS and additions to/deductions from SERS fiduciary net position have been determined on the same basis as they are reported by SERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit term. Investments are recorded at fair value. At June 30, 2015, the Hospital reported a SERS related liability of $148.3 million for its proportionate share of the net pension liability. The net pension liability was measured as of June 30, 2014, and the total pension liability used to calculate the net pension liability was determined by actuarial valuation as of that date based on actuarial experience studies. The Hospital's allocation of the net pension liability was based on the Hospital’s percentage of total overall contributions to the SERS plan during the 2014 fiscal year. At June 30, 2014, the Hospital's proportion of contributions was .9260%.




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PENSION LIABILITIES, PENSION EXPENSE, DEFERRED OUTFLOWS OF RESOURCES, AND

DEFERRED INFLOWS OF RESOURCES (CONTINUED) For the year ended June 30, 2015, the Hospital recognized a SERS pension expense of $12.3 million. Pension expense is reported in the Hospital's financial statements as part of fringe benefits expense. At June 30, 2015, the Hospital reported deferred outflows of resources and deferred inflows of resources related to SERS pension from the following sources:

Deferred Outflows Deferred Inflowsof Resources of Resources

(in thousands)

Changes in proportionate allocation of pension expense 2,596$ --$ Changes in assumptions -- -- Hospital contributions subsequent to measurement date 13,358 -- Net difference between projected and actual

earnings on pension plan investments -- (5,296)

15,954$ (5,296)$ The amount recognized as deferred inflows of resources, representing the net difference between projected and actual earnings, and the deferred outflows related to changes in proportionate allocation of pension expense will be amortized over a five-year, closed period beginning in the year in which the difference occurs and will be recognized as an increase (decrease) to fringe benefits expense as follows:

Net differencebetween

Change in projected andproportionate actual earningsparticipation in on pension plan

SERS plan investments

Year ending June 30, 2015

2016 549$ (1,324)$ 2017 549 (1,324) 2018 549 (1,324) 2019 549 (1,324) 2020 400 --

Thereafter -- --

2,596$ (5,296)$

(in thousands)




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DEFERRED INFLOWS OF RESOURCES (CONTINUED) The amortization of the aforementioned deferred inflows and deferred outflows decreased fringe benefits expense by $1,032,131 during the year ended June 30, 2015. The Hospital also has a limited number of participants in the Connecticut State Teachers’ Retirement System. As of June 30, 2015, the Hospital recorded the following amounts in the financial statements related to the TRS:

(in thousands)

Deferred outflows of resources 85$ Deferred inflows of resources (7) Pension liability 84 ACTUARIAL METHODS AND ASSUMPTIONS The total SERS pension liability in the June 30, 2014 actuarial valuation was determined based on the results of an actuarial experience study for the period July 1, 2007 - June 30, 2011. The key actuarial assumptions are summarized below: Inflation: 2.75%Salary increase: 4.00% - 20.00%, including inflationInvestment rate of return: 8.00%, net of pension plan investment expense,

including inflationCost of living adjustment: 2.30% - 3.60% for certain tiers Mortality rates were based on the RP-2000 Mortality Table for Males or Females, as appropriate, with adjustments for mortality improvements based on Scale AA.




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

Long-TermExpected

Target Real RateAsset Class Allocation of Return

Large Cap U.S. Equities 21% 5.8%Developed Non-U.S. Equities 18% 6.6%Emerging Market (Non-U.S.) 9% 8.3%Real Estate 7% 5.1%Private Equity 11% 7.6%Alternative Investments 8% 4.1%Fixed Income (Core) 8% 1.3%High Yield Bonds 5% 3.9%Emerging Market Bond 4% 3.7%TIPS 5% 1.0%Cash 4% 0.4%

100% DISCOUNT RATE The discount rate used to measure the total SERS pension liability at June 30, 2015, was the long term expected rate of return, 8.00 percent. The projection of cash flows used to determine the discount rate assumed that employee contributions will be made at the current contribution rates and that employer contributions will be made equal to the difference between the projected actuarially determined contribution and member contributions. Projected future benefit payments for all current plan members were projected through the year 2115.




36


SENSITIVITY OF THE HOSPITAL'S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY TO

CHANGES IN THE DISCOUNT RATE The following presents the Hospital's proportionate share of the SERS net pension liability calculated using the discount rate of 8.00 percent, as well as the proportionate share of the net pension liability using a 1.00 percent increase or decrease from the current discount rate:

1% Discount 1%Decrease Rate Increase7.00% 8.00% 9.00%

Hospital's proportionate share ofthe net pension liability 176,899,258$ 148,290,790$ 124,231,414$

ALTERNATE RETIREMENT PLAN Defined Contribution Plan. The Hospital also sponsors the Alternate Retirement Plan (ARP), a defined contribution plan administered through a third-party administrator, Voya Retirement Insurance and Annuity Company. Beginning July 1, 2015, administration of ARP has changed to Prudential Financial, Inc. The Connecticut State Employees Retirement Commission has the authority to supervise and control the operation of the plan including the authority to make and amend rules and regulations relating to the administration of the plan. All unclassified employees, not already in a pension plan, of a constituent unit of the state system of higher education and the central office staff of the Department of Higher Education, are eligible to participate in ARP. Participants must contribute 5% of eligible compensation each pay period while the State will contributes an amount equal to 8% of the participant’s eligible compensation via a charge recouped from the Hospital. Participant and State contributions are both 100% vested immediately. For fiscal years 2015 and 2014, charges to JDH for ARP were approximately $7.4 million and $7.6 million, respectively. The liability for fiscal years 2015 and 2014 were approximately, $387,000 and $376,000, respectively. Upon separation from service, retirement, death or divorce (for alternate payee under a Qualified Domestic Relations Order), if the participant is age 55 or over and have more than 5 years of plan participation, a participant or designated beneficiary can withdraw a partial or lump cash payment, rollover to another eligible retirement plan or IRA, or receive installment payments or annuity payments. Other ARP provisions are described in Title 5 – State Employees, Chapter 66 – State Employees Retirement Act of the Connecticut General Statutes.




37


POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS In addition to the pension benefits, the State provides post-retirement health care and life insurance benefits to the Hospital employees in accordance with State Statutes Sections 5-257(d) and 5-259(a). When employees retire, the State may pay up to 100% of their health care insurance premium cost (including dependents’ coverage) based on the plan chosen by the employee. In addition, the State pays 100% of the premium cost for a portion of the employee's life insurance continued after retirement. The amount of life insurance continued at no cost to the retiree is determined by a formula based on the number of years of State service that the retiree had at the time of retirement. Currently, the State is responsible and finances the cost of post-retirement health care and life insurance benefits on a pay-as-you-go basis through an appropriation in the General Fund; therefore, no liability is recorded in the Hospital’s financial statements. However, implementation of GASB Statement No. 75, will require additional disclosures and the recording of the Hospital’s proportionate share of the net liability related to its participation in the postemployment benefit plans on the Statements of Net Position as well as more extensive note disclosures and required supplementary information about the postemployment liabilities. This Statement is effective for fiscal years beginning after June 15, 2017.

NOTE 10 – RELATED PARTY TRANSACTIONS The expenses reported in the statements of revenues, expenses, and changes in net position do not include undetermined amounts for salaries, services, and expenses provided to and received from UConn Health and other state agencies. Complete allocations have not been made for salaries and other services incurred by the Hospital on behalf of other UConn Health entities. In addition, certain activities accounted for in the 21002 Fund are periodically evaluated and transferred to/from other funds depending on the overall objectives of UConn Health. The Hospital is party to an agreement with UConn Health whereby the salaries of certain administrative employees are reimbursed by the Hospital. The non-clinical support services provided to the Hospital from UConn Health have been reported in the financial statements as internal contractual support expenses. UConn Health transferred $8.0 million in 2015 and $8.9 million in 2014, respectively, related to fringe benefit recoveries for support services paid by the general fund.




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NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)

In 2014, $4.0 million was transferred to the Hospital from UConn Health’s operating fund for budgeted operating support. This transfer is included in transfers in the statements of revenues, expenses and changes in net position. The Hospital’s pension liability (note 9) is owed back to the State of Connecticut. The State finances this on a pay as you go basis through allocated retirement plan rates. During Fiscal 2014, the Hospital transferred all Dental Clinic assets and liabilities to UConn Health. See note 12 for additional information. As more fully described in note 11, UConn Health charges the Hospital with an annual premium for medical malpractice costs which is determined annually by UConn Health. The Hospital is not liable beyond the annual premium, but may have future operational subsidies affected by the performance of the malpractice fund. As described in note 1, the Hospital participates in certain State retirement plans. The State charges the Hospital for these and other fringe benefits. During the years ended June 30, 2015 and 2014, the Hospital incurred $57,429,802 and $55,729,014, respectively, for employee fringe benefits. Related salary costs were $107,310,852 and $104,623,208, respectively. The amounts due to the State related to the fringe benefit programs as of June 30, 2015 and 2014 are included in the statements of net position. Contributions to the State for an assessment of postemployment benefits other than pension benefits are also included in fringe benefits expense. The related accrued postemployment benefit liability is a liability of the State. The Hospital provides medical services to Correctional Managed Health Care patients under a UConn Health contract with the State of Connecticut’s Department of Correction (CTDOC). The Hospital provides inpatient and outpatient care to Correctional Managed Health Care patients at Medicaid rates. The Hospital also provides certain other services under capitated contracts whereby Correctional Managed Healthcare pays a set amount per year for services regardless of volume. The Hospital recorded revenues of $2,123,679 and $2,224,745 for fiscal 2015 and 2014, respectively, and included these revenues in net patient services revenues in the statements of revenues, expenses, and changes in net position. As described in note 1, Finance Corporation performs critical services on behalf of the Hospital. These services include the acquisition, construction, and maintenance of clinical space such as the new Outpatient Pavilion building. Total amounts advanced to the Finance Corporation were $14,745,906 and $16,745,906 at June 30, 2015 and 2014, respectively.




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During the year ended June 30, 2015, $2 million was returned as part of the overall plan to refund advanced amounts. The Hospital has received a financial guarantee from UConn Health that it will provide the funding required for Finance Corporation to repay the $14.7 million of advances if required. Amounts advanced for construction of the Outpatient Pavilion are expected to be returned at the completion of construction.

NOTE 11 – REPORTING OF THE MALPRACTICE FUND UConn Health is self-insured with respect to medical malpractice risks. Estimated losses from asserted and unasserted claims identified under UConn Health’s incident reporting system and an estimate of incurred but not reported claims are accrued based on actuarially determined estimates that incorporate UConn Health’s past experience as well as other considerations, including the nature of each claim or incident and relevant trend factors. The Hospital provides timely incident reporting to UConn Health to assist UConn Health in maintaining appropriate reserve balances. To the extent that claims for cases exceed current year premiums charged by UConn Health, UConn Health may petition the State to make up the difference. The Hospital is not responsible for amounts beyond the annual premium allocated by UConn Health. However, operational subsidies from the State and/or UConn Health may be affected by the performance of UConn Health’s malpractice program. At June 30, 2015 and 2014, UConn Health’s Malpractice Fund had actuarial reserves of approximately $26.8 million and $21.9 million and assets of approximately $10.1 million and $9.9 million as of June 30, 2015 and 2014, respectively.

NOTE 12 – TRANSFER OF DENTAL CLINICS TO UCONN HEALTH

In fiscal 2014, UConn Health realigned the Dental Clinics by removing them from the Hospital’s operating unit and aligning them with the institution’s other dental practices. The change was made by transferring all assets and liabilities included in the Hospital’s financial statements to UConn Health. In accordance with GASB 69, during the year ended June 30, 2014, the Hospital recognized a loss of $3,850,361 on the disposal of its Dental Clinics as a special item.




40

NOTE 13 – SUBSEQUENT EVENTS

The Hospital has evaluated subsequent events through January 22, 2016, which represents the date the financial statements were available to be issued and noted no subsequent events that would have impacted the Hospital’s financial statements.

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INDEPENDENT AUDITORS’ 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

Joint Audit and Compliance Committee University of Connecticut Health Center We have audited, in accordance with the 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 financial statements of the University of Connecticut Health Center, John Dempsey Hospital (21002 Fund) (the Hospital), which comprise the statement of net position as of June 30, 2015 and the related statements of revenues, expenses and changes in net position and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated January 22, 2016. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Hospital’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 Hospital’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Hospital’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or 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. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

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Compliance and Other Matters As part of obtaining reasonable assurance about whether the Hospital’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. 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 Hospital’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 Hospital’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.



SCHEDULES OF REQUIRED SUPPLEMENTARY INFORMATION

SCHEDULE OF CHANGES IN JOHN DEMPSEY HOSPITAL’S NET PENSION LIABILITY AND RELATED RATIOS – STATE EMPLOYEES’ RETIREMENT

SYSTEM ONLY

43

(dollars

in thousands)

Total Pension LiabilityService cost 2,662$ Interest 18,508 Benefit payments, including refunds of member contributions (14,510)

Net Change in Total Pension Liability 6,660 Total Pension Liability - Beginning 238,606

Total Pension Liability - Ending (a) 245,266$

Fiduciary Net PositionContributions - employer 11,750$ Contributions - employee 1,341 Net investment income 13,366 Benefit payments, including refunds of member contributions (14,510)

Net Change in Fiduciary Net Position 11,947

Fiduciary Net Position - Beginning 85,029

Fiduciary Net Position - Ending (b) 96,976$

Hospital's Net Pension Liability - Ending (a)-(b) 148,290$

Hospital's Portion of SERS NetPension Liability 0.92599%

Fiduciary Net Position as a Percentageof the Total Pension Liability 39.54%

Hospital's Covered-Employee Payroll 34,258$

Hospital's Net Pension Liability as a Percentageof Covered-Employee Payroll 432.81%



SCHEDULE OF PENSION CONTRIBUTIONS TO THE STATE EMPLOYEES’ RETIREMENT SYSTEM

44

2015 2014 2013 2012 2011 2010

Contractually required 13,358$ 11,750$ 9,812$ 8,578$ 8,742$ 8,310$

Contributions in relation tothe contractually required contribution 13,358 11,750 9,798 8,578 7,647 6,672

Contribution deficiency --$ --$ 14$ --$ 1,095$ 1,638$

Hospital's covered-employee payroll 39,054$ 34,258$ 30,600$ 29,722$ 30,636$ 27,045$

Contributions as a percentage of covered-employee payroll 34.20% 34.30% 32.02% 28.86% 24.96% 24.67%

(dollars in thousands)

UNIVERSITY OF CONNECTICUT HEALTH CENTER UCONN MEDICAL GROUP

FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION(With Management’s Discussion and Analysis)

JUNE 30, 2015 AND 2014


CONTENTS


Statements of Net Position ...................................................................................................... 9-10 Statements of Revenues, Expenses, and Changes in Net Position .............................................11 Statements of Cash Flows ..................................................................................................... 12-13

Notes to Financial Statements ............................................................................................... 14-38 Independent Auditors’ 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 ............................................................................................ 39-40 Schedules of Required Supplemental Information ............................................................. 41-42



1

OVERVIEW OF THE FINANCIAL STATEMENTS The following discussion and analysis provides an overview of the financial position and activities of the University of Connecticut Health Center UConn Medical Group (UConn Medical Group or UMG) as of and for the years ended June 30, 2015, 2014 and 2013. UConn Medical Group is operated as a separate, identifiable unit (included in the 12018 fund) of the University of Connecticut Health Center (UConn Health). The 12018 fund represents the operating fund for all the entities that comprise UConn Health. UConn Medical Group has access to the funds available in the 12018 fund to fund their operations. This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes thereto, which follow this section. UConn Medical Group’s clinical operations are modeled, in part, on private group practices and include approximately 385 providers practicing in a wide variety of specialties. The UConn Medical Group operation is an essential element for the education and training of medical students that enables the School of Medicine to accomplish its mission. Medical students, for example, learn diagnosis and treatment by training side-by-side with faculty clinicians as these doctors see patients. Funds transferred from UConn Health support this educational mission. UMG adopted GASB 68 and 71 in the current fiscal year. These statements required UMG to recognize it’s pro rata share of the State’s pension liabilities as well as deferred inflows and outflows of resources. These changes were made by adjusting the prior year opening balance to record the cumulative change in net position. In conjunction with the adoption of these standards, UMG decreased its beginning net position by $70.0 million though there was no effect on current year cash flows. FINANCIAL HIGHLIGHTS The UConn Medical Group’s financial position at June 30, 2015, consisted of assets of $37.2 million, deferred outflows of $15.1 million, liabilities of $97.5 million, and deferred inflows of $2.9 million. Net position, which represents the residual interest in the UConn Medical Group’s assets and deferred outflows after liabilities and deferred inflows are deducted, decreased approximately $73.2 million, $3.2 million of which was due to current year activities as shown in the Statements of Revenues, Expenses, and Changes in Net Position. Fiscal year 2015 total operating revenue increased 1.2% or approximately $1.2 million. Overall, operational results were unfavorable to prior year, with the loss from operations increasing approximately $13.2 million. The unfavorable changes in operational results were driven largely by increases in physician expenses. Faculty salaries and fringe benefits increased approximately $8.5 million over the prior year to $115 million. Increases were attributed to faculty recruitment and retention strategies. These costs were supported in part by non-operating transfers to fund salary and fringe benefits. The amount of support realized in the current year increased approximately $8.9



2

FINANCIAL HIGHLIGHTS (CONTINUED) million from fiscal year 2014 to fiscal year 2015. Despite non-operating transfers from UConn Health, UMG recognized an overall decrease in net position of $3.2 million from operations in the current fiscal year compared to an increase of $1.4 million in 2014. Changes in net position represent the operating and non-operating activity of the UConn Medical Group. Account balances are summarized as follows:

2015 2014 2013(in thousands)

Summary of assets, liabilitiesand net position at June 30:

Current assets 11,182$ 13,047$ 13,798$ Other assets 4,057 4,061 4,072 Capital assets, net 21,933 23,159 18,321

Total assets 37,172$ 40,267$ 36,191$

Deferred outflows 15,120$ --$ --$

Current liabilities 11,541$ 11,491$ 9,252$ Noncurrent liabilities 85,947 3,708 3,225

Total liabilities 97,488 15,199 12,477

Deferred inflows 2,948$ --$ --$

Net investment in capital assets 21,933$ 23,159$ 18,321$ Unrestricted (70,077) 1,909 5,393

Total net position (48,144)$ 25,068$ 23,714$

Summary of revenues, expenses andtransfers for the year ended June 30:

Operating revenues 100,502$ 99,304$ 90,975$

Operating expenses 151,453 137,094 118,633

Loss from operations (50,951) (37,790) (27,658) Nonoperating (expenses) revenues, net (281) 71 (239)

Net loss (51,232) (37,719) (27,897)

Transfers, net 47,976 39,073 31,265 Cumulative effect of change in account principles (69,956) -- --

(Decrease) Increase in net position (73,212)$ 1,354$ 3,368$



3

OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of management’s discussion and analysis and the financial statements. The basic financial statements (statements of net position, statements of revenues, expenses, and changes in net position, and statements of cash flows) present the financial position of the UConn Medical Group at June 30, 2015 and 2014, and the results of its operations and its financial activities for the years then ended. These statements report information about the UConn Medical Group using accounting methods similar to those used by private-sector companies. The statements of net position include all of the UConn Medical Group’s assets, liabilities and deferred inflows and outflows. The statements of revenues, expenses, and changes in net position reflect the years’ activities on the accrual basis of accounting, i.e., when services are provided or obligations are incurred, not when cash is received or paid. These statements report the UConn Medical Group’s net position and how it has changed. Net position (the difference between assets and liabilities) is one way to measure financial health or position. The statements of cash flows provide relevant information about each year’s cash receipts and cash payments and classify them as to operating, noncapital financing, and capital and related financing activities. The financial statements include notes that explain information in the financial statements and provide more detailed data. SIGNIFICANT VARIANCES IN THE FINANCIAL STATEMENTS In this section, UConn Medical Group explains the reasons for those financial statement items with significant variances relating to fiscal 2015 amounts compared to fiscal 2014. SUMMARY OF ASSETS AND LIABILITIES Changes in assets are comprised of the following: Contract and Other Receivables – decreased approximately $1.7 million from June 30, 2014 to June 30, 2015. This decrease was driven by the Women’s Health contract ending on December 31, 2014, and the subsequent collection of amounts outstanding. Changes in liabilities are comprised of the following: Accounts payable and accrued expenses – decreased approximately $438,000 from June 30, 2014 to June 30, 2015 due to decrease in patient refunds and the timing of payments of vendor balances. Accrued payroll – increased approximately $507,000 from June 30, 2014 to June 30, 2015. Accrued payroll and compensated absences balances fluctuate in relation to the number of employees, salaries, and length of remaining unpaid periods in relation to each fiscal year end. FTE’s have increased from 676 in fiscal year 2014 to 725 in fiscal year 2015.



4

SUMMARY OF ASSETS AND LIABILITIES (CONTINUED) Pension Liability – Increased in the current year due to the adoption of GASB 68. As a result UMG ended the year with a liability of $82.2 million which represents its proportional share of the State’s State Employees’ Retirement System (SERS) and Teachers’ Retirement System (TRS) pension plans as determined by UMG’s percentage of overall contributions. SUMMARY OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION Operating revenues – increased from June 30, 2014 to June 30, 2015 by approximately $1.2 million or 1.2%. Net patient revenues increased $5.9 million or 7.3% from prior year, mostly attributed to recruiting of new physicians in fiscal year 2015, and an increase in relative value units (RVU’s). Contract and other revenue decreased by approximately $4.7 million mostly due to the Women’s Health contract ending on December 31, 2014. Operating expenses – increased from June 30, 2014 to June 30, 2015 by approximately $14.4 million or 10.5%. This increase was mostly due to an increase in salary and fringe expense, internal contractual support due to rent on the new Outpatient Pavilion building, depreciation and amortization. Salaries and Fringe Benefits – increased from June 30, 2014 to June 30, 2015 by approximately $8.5 million or 8.0%. This increase was due to increases to salaries and fringe benefits driven by physician recruiting and retention strategies as well as fringe benefit rate increases passed down by the State of Connecticut (State). Internal Contractual Support – increased from June 30, 2014 to June 30, 2015 by approximately $2.8 million, which is mostly due to internally allocated rent and facility charges due to opening of the Outpatient Pavilion in fiscal year 2015. Depreciation and Amortization - increased from June 30, 2014 to June 30, 2015 by approximately $2.1 million. This increase was mostly due to the capitalization of the next phase of the NextGen project in May 2014. NextGen is UMG’s electronic medical records software. Electronic medical records simplify the sharing of medical records between physicians and are designed to store patient data more accurately. The NextGen system will be depreciated over 5 years.



5

SUMMARY OF CASH FLOWS The statements of cash flows provide additional information about the UConn Medical Group’s financial results by reporting the major sources and uses of cash. A summary of the statements of cash flows for the years ended June 30, 2015, 2014, and 2013, is as follows:

2015 2014 2013(in thousands)

Cash received from operations 102,379$ 98,674$ 93,160$ Cash expended for operations (147,116) (132,237) (116,348)

Net cash used in operations (44,737) (33,563) (23,188)

Net cash provided by noncapital financing activities 48,129 39,179 30,241

Net cash used in capital andrelated financing activities (3,432) (7,009) (4,745)

Net change in cash (40) (1,393) 2,308

Cash - Beginning of year 915 2,308 --

Cash - End of year 875$ 915$ 2,308$ CAPITAL ACTIVITIES At June 30, 2015, UConn Medical Group had capital assets, net of accumulated depreciation, of $21.9 million. For fiscal 2016, all UConn Health capital requests will be considered for funding on an individual basis by the senior executive committee of UConn Health. More detailed information about the UConn Medical Group’s capital assets activities are presented in note 6 of the financial statements. FISCAL YEAR 2016 OUTLOOK As we look forward to fiscal year 2016, UMG’s main concerns are volume, payor mix, and cost control. Using RVU’s as a measure of productivity, UMG RVU’s increased 7.1% in 2015. Net revenue gains were outpaced by increases in salary and fringe benefits during the year leading to an increase in the total operating loss. Volume will remain a focus with management using clinically focused advertising campaigns, strategic acquisitions, operational analysis, and faculty recruiting efforts in core areas such as surgery, orthopedics, and dermatology to increase volumes in a competitive marketplace. At the same time, shifting payor dynamics have led to a greater portion of UMG’s population being from Medicare/Medicaid which have traditionally reimbursed at lower rates than private insurance.



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FISCAL YEAR 2016 OUTLOOK (CONTINUED) UMG will be challenged in the upcoming year with the continued impact of on campus construction for access to UMG’s on-campus facilities. UMG will also be impacted by the implementation of ICD-10, national healthcare reform, and changes in the U.S. and global economic environments. Management will continue to monitor these factors over the upcoming year. BIOSCIENCE CONNECTICUT A significant amount of progress on the construction work related to the Bioscience Connecticut initiative has been achieved. The Outpatient Pavilion (formerly named the Ambulatory Care Center) was substantially completed and is 95% occupied (a portion of the 8th floor was postponed and will be complete in 2016). The 3rd phase of the project that renovates research labs in the Main Building is also 95% complete. Scientists have moved in and research is being conducted in the newly renovated space. The new Hospital Tower, which also includes the 3rd and final parking garage, is 70% complete and work is on schedule to be completed in 2016. Construction of the Academic Building and Incubator Lab additions to the Cell and Genome Sciences Building continues and both are on schedule. Design for both the Main Building Lab and the Clinic Building renovations will be completed this Fall and construction is scheduled to begin in early 2016. In addition, the Jackson Lab for Genomic Medicine was completed and opened in October 2014. CONTACTING UCONN MEDICAL GROUP’S FINANCIAL MANAGEMENT This financial report provides the reader with a general overview of the UConn Medical Group’s finances and operations. If you have questions about this report or need additional financial information, please contact the Office of the Chief Financial Officer, University of Connecticut Health Center, Farmington, Connecticut 06030-3800.

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INDEPENDENT AUDITORS’ REPORT Joint Audit and Compliance Committee University of Connecticut Health Center Report on the Financial Statements We have audited the accompanying financial statements of the University of Connecticut Health Center, UConn Medical Group (UConn Medical Group or Company), a component unit of the State of Connecticut, as of and for the years ended June 30, 2015 and 2014, and the related notes to financial statements, which collectively comprise UConn Medical Group’s basic financial statements as listed in the table of contents. 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. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 auditors’ 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 entity’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 expressing an opinion on the effectiveness of the entity’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.

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Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Connecticut Health Center, UConn Medical Group as of June 30, 2015 and 2014, and the results of its operations and changes in net position, and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Change in Method of Accounting for Pensions As discussed in Note 2 to the financial statements, the UConn Medical Group changed its method for accounting and financial reporting of pensions as a result of the adoption of Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions – an Amendment of GASB Statement No 27 and Governmental Accounting Standards Board Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date – An Amendment of GASB Statement No. 68, both effective July 1, 2014. 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 required supplementary information, such as Management’s Discussion and Analysis on pages 1 through 6, the Schedule of Changes in UConn Medical Group’s Net Pension Liability and Related Ratios on page 41 and the Schedule of Pension Contributions on page 42, 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 inquiries 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 audits 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 Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 22, 2016 on our consideration of the UConn Medical Group’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 results of that testing, and not to provide an opinion on the 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 UConn Medical Group’s internal control over financial reporting and compliance.



STATEMENTS OF NET POSITION

JUNE 30, 2015 AND 2014


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2015 2014Assets

Current Assets Cash 875,282$ 915,018$

Patient accounts receivable, net of estimated uncollectibles of $3,557,000 and $3,347,000at June 30, 2015 and 2014, respectively 9,693,882 9,870,175

Inventory 225,750 154,664 Contract and other receivables 248,346 1,949,476 Prepaid expenses 139,441 157,328


Noncurrent AssetsDue from Finance Corporation (note 9) 4,056,909 4,061,366 Capital assets, net (note 6) 21,932,830 23,158,681


Total Assets 37,172,440 40,266,708

Deferred Outflows of ResourcesDeferred amount of pensions 15,119,870 --


STATEMENTS OF NET POSITION (CONTINUED)

JUNE 30, 2015 AND 2014


10

2015 2014


Current LiabilitiesAccounts payable and accrued expenses 2,622,842$ 3,060,558$ Accrued payroll 5,929,134 5,422,396 Due to UConn Health Malpractice Fund 24,474 175,330 Accrued compensated absences,

current portion (note 7) 2,965,436 2,832,595


Noncurrent Liabilities Pension liabilities (note 8) 82,197,029 --

Accrued compensated absences, noncurrent portion (note 7) 3,749,773 3,707,684

Total Noncurrent Liabilities 85,946,802 3,707,684


Deferred Inflows of ResourcesDeferred amount for pensions 2,947,991 --

Net PositionNet investment in capital assets 21,932,830 23,158,681 Unrestricted (70,077,199) 1,909,464

Total Net Position (48,144,369)$ 25,068,145$


STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION



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2015 2014

Operating RevenuesNet patient service revenues (note 3) 86,704,193$ 80,845,644$ Contract and other revenues 13,797,821 18,458,518


Operating ExpensesSalaries and wages 79,765,634 74,464,137 Fringe benefits 35,329,980 32,151,628 Medical contractual support 6,963,503 7,204,790 Internal contractual support 7,646,900 4,804,599 Outside agency per diems 271,834 219,505 Depreciation and amortization 4,224,305 2,136,109 Pharmaceutical/medical supplies 4,170,647 4,248,589 Utilities 239,891 223,147 Outside and other purchased services 9,774,320 9,011,998 Insurance 695,788 428,771 Repairs and maintenance 984,332 734,653 Other expenses 1,386,189 1,465,860


Operating Loss (50,951,309) (37,789,624)

Nonoperating Revenues (Expenses)Gift Income 152,210 105,759 Loss on disposals (433,121) (35,018)

Net Nonoperating (Expenses) Revenues (280,911) 70,741

Loss before Transfers (51,232,220) (37,718,883)

Net transfers from UConn Health - Unrestricted (note 9) 47,976,425 39,073,077

(Decrease) Increase in Net Position (3,255,795) 1,354,194

Net Position - Beginning of year (as previously stated) 25,068,145 23,713,951 Cumulative effect of implementing GASB 68 and 71 (69,956,719) --

Net Position - Beginning of year as restated (44,888,574) --

Net Position - End of year (48,144,369)$ 25,068,145$


STATEMENTS OF CASH FLOWS



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2015 2014

Cash Flows from Operating ActivitiesCash received from patients and third-party payors 86,880,486$ 80,238,092$ Cash received from contract and other revenues 15,498,951 18,435,528 Cash paid to employees for salaries

and fringe benefits (114,413,946) (104,669,114) Cash paid for other than personnel services (32,702,287) (27,567,821)

Net Cash Used in Operating Activities (44,736,796) (33,563,315)

Cash Flows from Noncapital Financing ActivitiesReimbursement from UConn Foundation 152,210 105,759 Net transfers from UConn Health's

unrestricted net assets to support operations 47,976,425 39,073,077

Net Cash Provided by NoncapitalFinancing Activities 48,128,635 39,178,836

Cash Flows from Capital andRelated Financing ActivitiesPurchases of capital assets (3,431,575) (7,008,870)

Net Cash Used in Capitaland Related Financing Activities (3,431,575) (7,008,870)

Net Change in Cash (39,736) (1,393,349)

Cash - Beginning 915,018 2,308,367

Cash - End 875,282$ 915,018$


STATEMENTS OF CASH FLOWS (CONTINUED)



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2015 2014

Reconciliation of Operating Loss to Net CashUsed in Operating ActivitiesOperating loss (50,951,309)$ (37,789,624)$ Adjustments to reconcile operating loss

to net cash used in operating activities:Depreciation and amortization 4,292,736 2,136,109

Changes in operating assets and liabilities:Patient accounts receivable 176,293 (607,552) Inventory (71,086) 93,820 Contract and other receivables 1,701,130 (22,990) Prepaid expenses 17,887 (105,559) Due from Finance Corporation 4,457 10,980 Accounts payable and accrued expenses (437,716) 599,520 Due to UConn Health Malpractice Fund (150,856) 175,330 Accrued payroll 506,738 1,064,452 Accrued compensated absences 174,930 882,199

Net Cash Used in Operating Activities (44,736,796)$ (33,563,315)$




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REPORTING ENTITY The University of Connecticut Health Center UConn Medical Group (UConn Medical Group or UMG) clinical operations are modeled, in part, on private group practices and include approximately 385 providers practicing in a wide variety of specialties. The financial statements include those asset, liability, revenue, and expense accounts reflected in the accounting records of UConn Medical Group, which is operated as a separate, identifiable unit (included in the 12018 fund) of the University of Connecticut Health Center (UConn Health). The 12018 fund represents the operating fund for all the entities that comprise UConn Health. UConn Medical Group has unlimited access to the funds available in the 12018 fund to fund their operations. The Governor of the State of Connecticut (the State) appoints the Board of Trustees of the University of Connecticut whose chairman then appoints the Board of Directors, which oversees UConn Health, including UConn Medical Group. Reference is made to note 9 for related party transactions. UConn Medical Group is a component unit of the State and is therefore generally exempt from federal income taxes under Section 115 of the Internal Revenue Code of 1986. BASIS OF PRESENTATION UConn Medical Group’s financial statements are prepared in accordance with all relevant Governmental Accounting Standards Board (GASB) pronouncements. GASB No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting, states that proprietary activities may elect to apply the provisions of Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989 that do not conflict with or contradict GASB pronouncements. UConn Health has not made this election. UMG implemented GASB No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, which directly incorporated into GASB’s authoritative literature certain pronouncements issued by FASB on or before November 30, 1989. UConn Medical Group has adopted GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, as amended by GASB Statements No. 35, Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities, and No. 37, Basic Financial Statements – and Management Discussion and Analysis – for State and Local Governments: Omnibus, and as amended by GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position.




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BASIS OF PRESENTATION (CONTINUED) UMG also adopted GASB Statement No. 38, Certain Financial Statement Note Disclosures, as of July 1, 2001. These GASB pronouncements established financial reporting standards for state and local governmental entities, including net position presentation, certain classifications of revenues and expenses and management’s discussion and analysis. 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 and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial statement areas where management applies the use of estimates consist primarily of contractual allowances, the allowance for uncollectible accounts and pension liabilities. PROPRIETARY FUND ACCOUNTING UConn Medical Group utilizes the proprietary fund method of accounting whereby revenues and expenses are recognized on the accrual basis. All revenue and expenses are subject to accrual. ACCOUNTS RECEIVABLE AND NET PATIENT SERVICE REVENUES Patient accounts receivable and net patient service revenues are recorded at the estimated net realizable amounts from patients when patient services are performed. The amount of the allowance for uncollectible accounts is based upon management’s assessment of historical and expected net collections, business and economic conditions, trends in Medicare and Medicaid health care coverage and other collection indicators. See note 3 for additional information relative to third-party payor programs.




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CAPITAL ASSETS Property and equipment acquisitions are recorded at cost. Betterments and major renewals are capitalized and maintenance and repairs are expensed as incurred. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Buildings have an estimated useful life of 5 to 50 years and equipment has an estimated useful life of 2 to 25 years. Leasehold improvements are depreciated over the expected life of the assets, but no longer than the lease term. Construction in progress is capitalized as costs are incurred during the construction phase and depreciation will begin once the assets are placed in service. INVENTORY Inventory is recorded at cost, being determined by the first-in, first-out (FIFO) method. Short-term or minor supplies are expensed as incurred. CASH Cash balances are included in a pooled cash account with the cash balances of the other entities included in the 12018 fund. See note 10 for discussion regarding UConn Medical Group’s available borrowing. RETIREMENT PLANS AND POSTEMPLOYMENT BENEFITS Eligible employees of UMG, as defined, may participate in the following State retirement plans: the State Retirement System Tier I, Tier II, Tier IIa, the Teachers’ Retirement System defined benefit plans and the Alternate Retirement Plan which is a defined contribution plan. These plans are funded by contributions from the State as well as payroll deductions from employees, except for the Tier II Plan, which is noncontributory. In addition, eligible employees may participate in a State defined contribution deferred compensation plan, which is funded by payroll deductions from employees. The State is statutorily responsible for the pension benefits of UMG employees who participate in the aforementioned defined benefit plans. The State is required to contribute at an actuarially determined rate, which may be reduced by an act of the State legislature. These plans do not issue stand-alone financial reports. Summary information on the plans is publicly available in the State of Connecticut’s Comprehensive Annual Financial Report.




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RETIREMENT PLANS AND POSTEMPLOYMENT BENEFITS (CONTINUED) In 2008, the State implemented GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. The State provides postretirement health care and life insurance benefits to eligible UConn Health employees, including those of UMG, in accordance with Sections 5-257(d) and 5-259(a) of the Connecticut General Statutes. Upon retirement, liability for retirement and other benefits rests with the State. Therefore, the liability is reported by the State and not recognized in the financial statements of the UMG. When employees retire, the State pays up to 100% of their health care insurance premium cost (including the cost of dependent coverage). The State finances the cost of post-retirement health care and life insurance benefits on a pay-as-you-go basis through an appropriation in the General Fund. During the year ended June 30, 2015, UMG adopted GASB Statements No. 68 and No. 71 Accounting and Financial Reporting for Pensions and Pension Transition for Contributions Made Subsequent to the Measurement Date. These GASB pronouncements require the pro rata share of State pension liabilities to be recorded at the entity level. UMG continues to pay into State retirement plans on a pay-as-you-go basis but has recorded its liability as prescribed by the pronouncements. GASB 68 affects pensions only and does not supersede GASB 45. See note 2 regarding the implementation of GASB 68. COMPENSATED ABSENCES UMG’s employees earn vacation, personal, compensatory and sick time at varying rates depending on their collective bargaining units. Employees may accumulate sick leave up to a specified maximum. Employees are not paid for accumulated sick leave if they leave before retirement. However, employees who retire from UMG may convert accumulated sick leave to termination payments at varying rates, depending on the employee’s contract. Amounts recorded on the statements of net position are based on historical experience. All other compensated absences are accrued at 100% of their balance. Compensated absences have been allocated between current and noncurrent based on historical information.




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THIRD-PARTY PAYORS Laws governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. Each year as the Office of Inspector General’s (OIG) work plan changes, new areas of scrutiny surface. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in any given period. MEDICAL MALPRACTICE The physicians and all of the health care providers and support staff of UConn Medical Group are fully protected by State Statutes from any claim for damage or injury, not wanton, reckless or malicious, caused in the discharge of their duties or within the scope of their employment (statutory immunity). Any claims paid for actions brought against the State as permitted by waiver of statutory immunity have been paid against UConn Health’s malpractice self-insurance fund. UConn Health allocates an annual malpractice premium to UConn Medical Group, designed to reflect an estimate for the current year’s cash claims to be processed. For the years ended June 30, 2015 and 2014, such premiums were approximately $237,000 and $294,000, respectively. These premiums are included in insurance expense in UMG’s statements of revenues, expenses, and changes in net position. The due to UConn Health Malpractice Fund reported on the June 30, 2015 and 2014 statements of net position represents premiums payable for occurrence based coverage through June 30, 2015 and 2014, respectively. NET POSITION Net position is classified in two components. Net investment in capital assets consists of capital assets net of accumulated depreciation and reduced by the current balances of any outstanding borrowings (less amounts held in trust) used to finance the purchase or construction of those assets. All other assets less liabilities are classified as unrestricted.




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PENSION LIABILITIES

In accordance with GASB 68, UConn Medical Group records its proportionate share of collective net pension liability and collective pension expense for each defined benefit plan offered to its employees. The collective net pension liability for each plan is measured as the total pension liability, less the amount of the pension plan’s fiduciary net position. The total pension liability is the portion of the actuarial present value of projected benefits payments that are attributable to past periods of plan member service. Information about the fiduciary net position and additions to/deductions from each pension plan’s fiduciary net position have been determined on the same basis as they are reported by each pension plan. For this purpose, plan member contributions are recognized in the period in which the contributions are due. Employer contributions are recognized in the period in which the contributions are made. Benefits and refunds are recognized when due and payable in accordance with the terms of each plan. DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES

UConn Medical Group reports its proportionate share of collective deferred outflows of resources and collective deferred inflows of resources related to its defined benefit plans. Differences between expected and actual experience in the measurement of the total pension liability, changes of assumptions or other inputs, and differences between actual contributions and proportionate share of contributions are classified as either deferred outflows or deferred inflows, and are recognized over the average of the expected remaining service lives of employees eligible for pension benefits. The net differences between projected and actual earnings on pension plan investments are reported as deferred outflows or deferred inflows and are recognized over five years. Contributions to the pension plan from UConn Medical Group subsequent to the measurement date of the net pension liability and before the end of the reporting period are reported as a deferred outflow of resources related to pensions.




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NOTE 2 - CHANGE IN METHOD FOR ACCOUNTING FOR PENSIONS AND UPCOMING ACCOUNTING PRONOUNCEMENTS

As of July 1, 2014, UMG adopted GASB 68 and GASB 71. GASB 68 requires employers to recognize liabilities, deferred outflows of resources, and deferred inflows of resources, for their proportionate share of the pension plans that they participate in. As the State Employees' Retirement System (SERS) and Teachers’ Retirement System (TRS) did not have practical ways to provide each of its component units with all of the information needed to fully restate their prior period financial statements, UMG has elected to apply the "cumulative effect" method, as permitted by GASB 68, by restating beginning net position as of July 1, 2014. The implementation of this standard resulted in an adjustment to reduce UMG’s beginning net position by $70 million as of July 1, 2014. GASB 71 requires that, at transition, a government recognize a deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the government’s beginning net pension liability and the end of the government's reporting period. The provisions of this Statement are required to be applied simultaneously with the provisions of GASB 68. As of July 1, 2014, UMG recorded an adjustment to increase beginning net position by $6.5 million for contributions made to the plans for service during the period from July 1, 2013 through June 30, 2014. The cumulative effect of applying GASB 68 and 71 is reported as a restatement beginning net position. The following table shows the impact of the cumulative effect method of adopting and implementing GASB 68 and 71 on beginning net position.

(in millions)Net position, beginning of period, July 1, 2014 (as previously stated) 25.1$

Cumulative effect of adopting GASB 68 and 71 (70.0)

Net position, beginning of period, July 1, 2014 (as restated) (44.9)$




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NOTE 2 - CHANGE IN METHOD FOR ACCOUNTING FOR PENSIONS AND UPCOMING ACCOUNTING PRONOUNCEMENTS (CONTINUED)

UPCOMING ACCOUNTING PRONOUNCEMENTS In February 2015, GASB issued Statement No. 72, Fair Value Measurement and Application. This Statement addresses accounting and financial reporting issues related to fair value measurements. This Statement provides guidance for determining a fair value measurement for financial reporting purposes. This Statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2015. UMG is evaluating the impact this standard will have on its financial statements. In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits other than Pensions, will require additional disclosures and the recording of UMG’s proportionate share of the net liabilities related to its participation in the postemployment benefit plans on the statements of net position as well as more extensive disclosure and requires supplementary information about the postemployment liabilities. This Statement is effective for fiscal years beginning after June 15, 2017. UMG is evaluating the impact this standard will have on its financial statements. In June 2015, GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Government. The objective of this Statement is to identify, in the context of the current governmental financial reporting environment, the hierarchy of accounting principles generally accepted in the United States of America (GAAP). The “GAAP Hierarchy” consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. The provisions of this Statement are effective for fiscal years beginning after June 15, 2015. UMG is evaluating the impact this standard will have on its financial statements.




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NOTE 3 - PATIENT SERVICE REVENUES

UConn Medical Group provides health care services primarily to residents of the region. Revenues from the Medicare program accounted for approximately 29% and 30% of UConn Medical Group’s net patient service revenues for the years ended June 30, 2015 and 2014, respectively. Revenues from the Medicaid program accounted for approximately 16% and 14% of UConn Medical Group’s net patient service revenues for the years ended June 30, 2015 and 2014, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. UConn Medical Group believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries are outstanding, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Changes in the Medicare and Medicaid programs and the reduction of funding levels could have an adverse impact on UConn Medical Group. Patient accounts receivable included approximately 16% and 13% due from Medicaid and approximately 28% due from Medicare at June 30, 2015 and 2014. Patient service revenues reported net of allowances for the years ended June 30 were:

2015 2014

Gross patient service revenues 235,338,209$ 212,622,959$ Less contractual allowances (147,039,444) (130,503,071) Less provision for bad debt (1,594,572) (1,274,244)

Net patient service revenues 86,704,193$ 80,845,644$ UConn Medical Group has agreements with certain third-party payors that provide for payments to UConn Medical Group at amounts different from established billing rates. A summary of these agreements are as follows: MEDICARE All services provided to traditional Medicare participants are reimbursed based on the resource-based relative value system (RBRVS). Various third-party payors, with the approval of the Centers for Medicare and Medicaid Services (CMS), provide Medicare managed care programs to its members, which reimburse UConn Medical Group based on their own fee schedules.




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NOTE 3 - PATIENT SERVICE REVENUES (CONTINUED)

MEDICAID Services are reimbursed based on Medicaid fee schedules except for various third-party payors who provide Medicaid managed care programs under the supervision of the State of Connecticut Department of Social Services. These third-parties reimburse UMG based upon their own individual fee schedules. BLUE CROSS HOSPITAL-BASED PROVIDERS Hospital-based practices, including radiology, are reimbursed based on the Blue Cross Hospital Based Providers (HBP) fee schedule. BLUE SHIELD Physicians are reimbursed according to Blue Shield’s published fee schedule. MANAGED CARE UConn Medical Group has entered into contracts with managed care companies. The basis for payment under these arrangements is primarily agreed-upon fee schedules with limited capitated contracts for primary care services. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS UMG’s estimation of the allowance for uncollectible accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of UMG’s collection efforts. UMG’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. On a monthly basis, UMG reviews its accounts receivable balances, the effectiveness of UMG’s reserve policies and various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following: Revenue and volume trends by payor, particularly the self-pay components Changes in the aging and payor mix of accounts receivable, including increased focus on

accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients

Various allowance coverage statistics




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NOTE 3 - PATIENT SERVICE REVENUES (CONTINUED)

ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS (CONTINUED) UMG regularly performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of its process for estimating the allowance for uncollectible accounts. ICD-10 IMPLEMENTATION UMG is subject to the administrative simplification provisions of HIPAA which require the use of uniform electronic data transmission standards for health care claims and payment transactions submitted or received electronically. In January 2009, the Centers for Medicare and Medicaid Services published its tenth revision of International Statistical Classification of Diseases and Related Health Problems (ICD-10) and related changes to the formats used for certain electronic transactions. ICD-10 contains significantly more diagnostic and procedural codes than the existing ICD-9 coding system, and as a result, the documentation and coding for the services provided by UMG will require much greater specificity. Implementation of ICD-10 on October 1, 2015 has required a significant investment in technology, resources, and training. UMG may experience productivity delays in coding as physicians and staff transition to the new requirements of ICD-10. Cash collections and payments of claims will likely be delayed as UMG and payors transition to ICD-10.

NOTE 4 - CONTRACT AND OTHER REVENUES

UConn Medical Group enters into contracts with external entities including hospitals, retirement homes, and schools to provide physician services. UConn Medical Group also provides physician services to entities within UConn Health, including the School of Medicine, John Dempsey Hospital and Correctional Managed Health Care. Revenue related to these services is included in patient care revenues when relating to patient visits. Other miscellaneous revenues including revenues related to the performance of administrative duties at UConn Health are included in contract and other revenues in the statements of revenues, expenses, and changes in net position. Contract and other revenues are recorded when the services are rendered.




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NOTE 4 - CONTRACT AND OTHER REVENUES (CONTINUED)

CHARITY CARE The UConn Medical Group maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges forgone for services and supplies furnished under its charity care policy, the estimated cost of those services and supplies, and equivalent service statistics. During 2015 and 2014, the UConn Medical Group provided charity care services of $83,392 and $166,849, respectively.

NOTE 5 – ELECTRONIC HEALTH RECORD REIMBURSEMENT The Health Information Technology for Economic and Clinical Health Act (the HITECH Act) was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009 (ARRA). The HITECH Act includes provisions designed to increase the use of electronic health records by health professionals. Beginning with federal fiscal year 2011 and extending through federal fiscal year 2016, eligible physicians participating in the Medicare and Medicaid programs are eligible for reimbursement incentives based on successfully demonstrating meaningful use of certified Electronic Health Record (EHR) technology. Conversely, those physicians that do not successfully demonstrate meaningful use of EHR technology are subject to reductions in reimbursements beginning in fiscal year 2016. The Medicaid EHR incentive program provides annual incentive payments to eligible professionals for efforts to adopt, implement, and meaningfully use certified EHR technology. UMG utilizes a grant accounting model to recognize EHR incentive revenues. EHR incentive revenues are recognized ratably over the relevant period to determine the amount of reimbursement. EHR incentive payment revenue totaling approximately $974,000 and $1,571,000 for the years ended June 30, 2015 and 2014, respectively, is included in contract and other revenues in the accompanying statements of revenues, expenses and changes in net position. UMG’s attestation of compliance with the meaningful use criteria is subject to audit by the federal government. As of June 30, 2014 receivables of $166,000 were recorded for the Medicare portion of the program in contract and other receivables on the statement of net position. There were no receivables recorded as of June 30, 2015.




26

NOTE 6 – CAPITAL ASSETS, NET

Property and equipment at June 30, consist of the following:

2015 2014

Land 89,132$ 89,132$ Construction in progress (estimated

cost to complete $1,075,000) 5,616,551 4,629,334 Buildings and leasehold improvements 11,513,449 10,263,411 Equipment 23,356,693 24,455,255

40,575,825 39,437,132 Less accumulated depreciation 18,642,995 16,278,451

Property and equipment, net 21,932,830$ 23,158,681$ Property and equipment activity for the years ended June 30, 2015 and 2014 was as follows:


Land 89,132$ --$ --$ 89,132$ Construction in progress 4,629,334 3,314,899 (2,327,682) 5,616,551 Buildings and

leasehold improvements 10,263,411 2,201,383 (951,345) 11,513,449 Equipment 24,455,255 242,975 (1,341,537) 23,356,693

39,437,132$ 5,759,257$ (4,620,564)$ 40,575,825$


Land 89,132$ --$ --$ 89,132$ Construction in progress 11,151,628 6,504,766 (13,027,060) 4,629,334 Buildings and

leasehold improvements 9,863,444 399,967 -- 10,263,411 Equipment 13,311,781 13,131,197 (1,987,723) 24,455,255

34,415,985$ 20,035,930$ (15,014,783)$ 39,437,132$




27

NOTE 6 - CAPITAL ASSETS, NET (CONTINUED)

Related information on accumulated depreciation for the years ended June 30, 2015 and 2014 was as follows:


Buildings andleasehold improvements 7,121,574$ 562,369$ (596,523)$ 7,087,420$

Equipment 9,156,877 3,661,936 (1,263,238) 11,555,575

16,278,451$ 4,224,305$ (1,859,761)$ 18,642,995$


Buildings andleasehold improvements 6,753,172$ 368,402$ --$ 7,121,574$

Equipment 9,341,875 1,767,707 (1,952,705) 9,156,877

16,095,047$ 2,136,109$ (1,952,705)$ 16,278,451$

NOTE 7 - LONG-TERM LIABILITIES AND OPERATING LEASES Activity related to compensated absences for the years ended June 30, 2015 and 2014 was as follows:



Accrued compensatedabsences 6,540,279$ 4,591,933$ (4,417,003)$ 6,715,209$ 2,965,436$



Accrued compensatedabsences 5,658,080$ 4,787,658$ (3,905,459)$ 6,540,279$ 2,832,595$




28

NOTE 7 - LONG-TERM LIABILITIES AND OPERATING LEASES (CONTINUED)

UConn Medical Group leases office space under operating leases. Total rental expense for the years ended June 30, 2015 and 2014 was $5,150,554 and $3,925,659, respectively. Rental expense paid to UConn Health for the years ended June 30, 2015 and 2014 was $2,550,125 and $1,940,685, respectively. The Outpatient Pavilion (formerly the Ambulatory Care Center), was substantially completed and opened in 2015 and UMG leases space in the new facility under a sublease from UConn Health. While the sublease is expected to be renewed on an annual basis, there is no written sublease that extends beyond a one year period. UConn Health has leased the Outpatient Pavilion from Finance Corporation under a direct financing lease that expires on March 31, 2040. The amount of rent expense that was charged to UMG was $1,447,174 in fiscal year 2015 and will be approximately $5.8 million annually thereafter. The following is a schedule by year of existing future minimum lease payments under non-cancelable operating leases as of June 30, 2015, in addition to space in the Outpatient Pavilion through the sublease with UConn Health based on the assumption that the sublease will be extended annually through March 31, 2040.


2016 11,175,928$ 2017 11,167,625 2018 11,001,491 2019 11,037,569 2020 10,576,657


229,220,470$




29

NOTE 8 – PENSION PLANS

Employees of UMG are eligible to participate in the State Employees' Retirement System, a defined benefit pension plan, which is administered by the State Employees' Retirement Commission, the State of Connecticut Deferred Compensation Section 457 Plan, a defined contribution plan administered by the State, or the Connecticut State Teacher’s Retirement System (TRS), a defined benefit plan administered by the Teacher’s Retirement Board. Information on the plans’ total funding status and progress, contributions required and trend information can be found in the State of Connecticut's Comprehensive Annual Financial Report available on the State's website. Information for the SERS plan, in which UMG holds a significant liability under GASB 68, is presented below. PLAN DESCRIPTION SERS is a single-employer defined benefit Public Employees' Retirement System (PERS) established in 1939 and governed by sections 5-152 to 5-192 of the Connecticut General Statutes. Employees are covered under one of four tiers. Tier I, Tier IIA, and Tier III are contributory plans and Tier II is a non-contributory plan. Tier I Plan B participants contribute 2% or 5% of their pay, depending on their elections. Tier II Plan A and Tier III participants contribute 2% of their pay. Members who joined the retirement system prior to July 1, 1984 are enrolled in Tier I. Tier I employees who retire at or after age 65 with 10 years of credited service, or at or after age 55 with 25 years of service, or at age 55 with 10 years of credited service with reduced benefits are entitled to an annual retirement benefits payable monthly for life, in the amount of 2% of the annual average earnings (which are based on the three highest years of service) over $4,800 plus 1% of $4,800 for each year of credited service. Tier II employees who retire at or after age 60 with 25 years of service, or at age 62 with 10 years of service, or at age 70 with 5 years of service, or at age 55 with 10 years of service with reduced benefits are entitled to 1.4% times average salary at or below the breakpoint in the year of retirement, for each year of credited service. Tier III covers employees first hired on or after July 1, 2011. Tier III employees to retire at, or after age 63 with 25 years of service, or at age 65 with 10 years of service, or at age 58 with 10 years of service with reduced benefits are entitled to 1.4% times average salary at or below the breakpoint in the year of retirement, for each year of credited service. All Tier I, Tier II, Tier IIA, and Tier III members are vested after ten years. For the June 30, 2014, valuation, there were two changes in benefit terms.




30


PLAN DESCRIPTION (CONTINUED) The 2011 SEBAC Agreement changed the benefit multiplier for the portion of the benefit below the breakpoint from 1.33% to 1.40%. This change was made effective for all active members who retire on or after July 1, 2013 in Tier II, IIA, and III.2. A one-time decision was granted to members not eligible to retire by July 1, 2022 to elect to maintain the same normal retirement eligibility applicable to members eligible to retire before July 1, 2022. Employees who elected by July 1, 2013 to maintain their eligibility are required to make additional employee contributions for the length of their remaining active service with SERS. The additional contribution was up to 0.72% of pensionable earnings. CONTRIBUTIONS MADE UMG's SERS contribution is determined by applying a State-mandated percentage to eligible salaries and wages. The mandated total fringe benefit rate, which includes allocations for retiree health care costs, rollforwards, and other adjustments, was 53.58%, 50.50%, and 54.71%, during fiscal years 2015, 2014, and 2013, respectively. The SERS contributions made compared to covered payroll follows:

2015 2014

Total UMG payroll covered by SERS 23,424,085$ 19,273,282$ Total UMG SERS contributions 7,952,815$ 6,491,806$ Contributions as a percentage of covered payroll 34.0% 33.7%

Years Ended June 30


DEFERRED INFLOWS OF RESOURCES The implementation of GASB 68 resulted in the UMG reporting a net pension liability for fiscal year 2015. The Statement required UMG to recognize a net pension liability for the difference between the present value of the projected benefits for past service known as the Total Pension Liability (TPL) and the restricted resources held in trust for the payment of pension benefits, known as the Fiduciary Net Position (FNP).




31



DEFERRED INFLOWS OF RESOURCES (CONTINUED) For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of SERS and additions to/deductions from SERS fiduciary net position have been determined on the same basis as they are reported by SERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit term. Investments are recorded at fair value. At June 30, 2015, UMG reported a SERS related liability of $81.9 million for its proportionate share of the net pension liability. The net pension liability was measured as of June 30, 2014, and the total pension liability used to calculate the net pension liability was determined by actuarial valuation as of that date based on actuarial experience studies. UMG's allocation of the net pension liability was based on the UMG’s percentage of total overall contributions to the plan during the 2014 fiscal year. At June 30, 2014, UMG’s proportion of contributions was .51%. For the year ended June 30, 2015, UMG recognized SERS pension expense of $8.0 million. The pension expense is reported in UMG's financial statements as part of fringe benefits expenses. At June 30, 2015, UMG reported deferred outflows of resources and deferred inflows of resources related to the SERS pension plan from the following sources:

Deferred DeferredOutflows Inflows

of Resources of Resources(in thousands)

Change in proportionate allocation of pension expense 6,903$ --$ Changes in assumptions -- -- UMG contributions subsequent to measurement date 7,952 -- Net difference between projected and actual

earnings on pension plan investments -- (2,926)

14,855$ (2,926)$




32



DEFERRED INFLOWS OF RESOURCES (CONTINUED) The amount recognized as deferred inflows of resources, representing the net difference between projected and actual earnings and the deferred outflows related to changes in proportionate allocation of pension expense will be amortized over a five-year closed period beginning in the year in which the difference occurs and will be recognized as an increase (decrease) to fringe benefits expense as follows:


2016 $ 1,459 $ (731)2017 1,459 (731) 2018 1,459 (731) 2019 1,459 (733) 2020 1,067 --

Thereafter -- --

6,903$ (2,926)$

Net difference between

projected and actual earnings

on pension plan investments

Change in proprortionate participation in

SERS plan(in thousands)

The amortization of the aforementioned deferred inflows and deferred outflows increased fringe benefits expense by $68,431 during the year ended June 30, 2015. UMG also has a limited number of participants in the Connecticut State Teachers’ Retirement System. As of June 30, 2015, UMG recorded the following amounts in the financial statements related to the TRS:

(in thousands)

Deferred outflows of resources 265$ Deferred inflows of resources (22) Pension liability 265




33


ACTUARIAL METHODS AND ASSUMPTIONS The total SERS pension liability in the June 30, 2014 actuarial valuation was determined based on the results of an actuarial experience study for the period July 1, 2007 - June 30, 2011. The key actuarial assumptions are summarized below: Inflation: 2.75%Salary increase: 4.00% - 20.00%, including inflationInvestment rate of return: 8.00%, net of pension plan investment expense, including inflationCost of living adjustment: 2.30% - 3.60% for certain tiers Mortality rates were based on the RP-2000 Mortality Table for Males or Females, as appropriate, with adjustments for mortality improvements based on Scale AA.

DISCOUNT RATE The discount rate used to measure the total pension liability at June 30, 2015, was the long term expected rate of return, 8.00 percent. The projection of cash flows used to determine the discount rate assumed that employee contributions will be made at the current contribution rates and that employer contributions will be made equal to the difference between the projected actuarially determined contribution and member contributions. Projected future benefit payments for all current plan members were projected through the year 2115. EXPECTED RATE OF RETURN ON INVESTMENTS The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.




34


EXPECTED RATE OF RETURN ON INVESTMENTS (CONTINUED) The target asset allocation and best estimate of arithmetic real rates of return for each major asset class are summarized in the following table:

Long-TermExpected

Target Real RateAsset Class Allocation of Return

Large Cap U.S. Equities 21% 5.8%Developed Non-U.S. Equities 18% 6.6%Emerging Market (Non-U.S.) 9% 8.3%Real Estate 7% 5.1%Private Equity 11% 7.6%Alternative Investments 8% 4.1%Fixed Income (Core) 8% 1.3%High Yield Bonds 5% 3.9%Emerging Market Bond 4% 3.7%TIPS 5% 1.0%Cash 4% 0.4%

100% SENSITIVITY OF UMG’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY TO

CHANGES IN THE DISCOUNT RATE The following table presents UMG’s proportionate share of the net pension liability calculated using the discount rate of 8.0%, as well as the proportionate share of the net pension liability using a 1% increase or decrease from the current discount rate:

1% Current 1%Decrease Discount Rate Increase(7.0%) (8.0%) (9.0%)

UMG's proportionate share of the net pension liability 97,737,931$ 81,931,576$ 68,638,622$




35


ALTERNATE RETIREMENT PLAN UMG also participates in the Alternate Retirement Plan (ARP), a defined contribution plan administered through a third-party administrator, Voya Retirement Insurance and Annuity Company. Beginning July 1, 2015, administration of ARP has changed to Prudential Financial, Inc. The Connecticut State Employees Retirement Commission has the authority to supervise and control the operation of the plan including the authority to make and amend rules and regulations relating to the administration of the plan. All unclassified employees, not already in a pension plan, of a constituent unit of the state system of higher education and the central office staff of the Department of Higher Education, are eligible to participate in ARP. Participants must contribute 5% of eligible compensation each pay period while the State will contribute an amount equal to 8% of the participant’s eligible compensation via a charge recouped from UMG. Participant and State contributions are both 100% vested immediately. For fiscal years 2015 and 2014, UMG contributions to ARP were approximately $5.2 million and $5.3 million, respectively. The liability for fiscal years 2015 and 2014 were approximately $269,000 and $263,000, respectively. Upon separation from service, retirement, death or divorce (for alternate payee under a Qualified Domestic Relations Order), if the participant is age 55 or over and have more than 5 years of plan participation, a participant or designated beneficiary can withdraw a partial or lump cash payment, rollover to another eligible retirement plan or IRA, or receive installment payments or annuity payments. Other ARP provisions are described in Title 5 – State Employees, Chapter 66 – State Employees Retirement Act of the Connecticut General Statutes. POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS In addition to the pension benefits, the State provides post-retirement health care and life insurance benefits to UMG employees in accordance with State Statutes Sections 5-257(d) and 5-259(a). When employees retire, the State may pay up to 100% of their health care insurance premium cost (including dependents’ coverage) based on the plan chosen by the employee. In addition, the State pays 100% of the premium cost for a portion of the employee's life insurance continued after retirement. The amount of life insurance continued at no cost to the retiree is determined by a formula based on the number of years of State service that the retiree had at the time of retirement. Currently, the State is responsible and finances the cost of post-retirement health care and life insurance benefits on a pay-as-you-go basis through an appropriation in the General Fund; therefore, no liability is recorded in




36


POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) UMG’s financial statements. However, implementation of GASB Statement No. 75, will require additional disclosures and the recording of the UMG’s proportionate share of the net liability related to its participation in the postemployment benefit plans on the Statements of Net Position as well as more extensive note disclosures and required supplementary information about the postemployment liabilities. This Statement is effective for fiscal years beginning after June 15, 2017.

NOTE 9 - RELATED PARTY TRANSACTIONS

The expenses reported in the accompanying statements of revenues, expenses, and changes in net position do not include undetermined amounts for salaries, services, and expenses provided to and received from UConn Health and other state agencies, other than certain School of Medicine faculty-related personnel expenses which have been allocated to UConn Medical Group based upon State funding and an estimated amount for UConn Health administrative services. Reference is made to note 1 related to medical malpractice costs paid to UConn Health. UConn Medical Group is party to an agreement with UConn Health whereby the salaries of certain employees are reimbursed by UConn Health operations. The reimbursed expenses are accounted for as a transfer from the UConn Health under the heading “Net Transfers from UConn Health”. Unrestricted assets of $19,530,765 and $17,215,396 were transferred from UConn Health in 2015 and 2014, respectively. This agreement is expected to continue indefinitely into the future. UConn Health also allocates working capital based on organizational need throughout the year on an as needed basis. UConn Health transferred $28,445,660 and $21,857,681 to UConn Medical Group in 2015 and 2014, respectively. As a result, the total transfers from UConn Health were $47,976,425 and $39,073,077 for 2015 and 2014, respectively. As described in note 1 and note 8, UConn Medical Group participates in certain State of Connecticut retirement and fringe benefit plans. During the years ended June 30, 2015 and 2014, UConn Medical Group expensed $35,329,980 and $32,151,628, respectively, for employee fringe benefits including contributions to the State employee retirement funds. Related salary costs were $79,765,634 and $74,464,137, respectively.




37

NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)

Contributions to the State for an assessment of postemployment benefits other than pension benefits are included in fringe benefits expense. The related accrued postemployment benefit liability is a liability of the State. Patient service revenues and contract and other revenues include approximately $9,778,000 and $10,375,000 in 2015 and 2014, respectively, of professional service revenues arising under contracts with UConn Health, John Dempsey Hospital, and other State agencies. Effective July 1, 1987, the Finance Corporation was established pursuant to Public Act No. 87-458. The purpose of the Finance Corporation is to provide greater flexibility for UConn Medical Group and other UConn Health units to promote the more efficient provision of health care services. As such, the Finance Corporation has been empowered to enter into purchase agreements, acquire facilities, approve write-offs of patient accounts receivable as well as negotiate joint ventures, shared service, and other agreements for the benefit of UConn Medical Group. UConn Medical Group’s receivable from the Finance Corporation was $4,056,909 and $4,061,366 as of June 30, 2015 and 2014, respectively. The Finance Corporation historically entered into certain transactions on behalf of the UConn Medical Group and funded those transactions by drawing cash from UMG. The balance due/receivable between these entities has not significantly fluctuated since 2012. UConn Health has guaranteed the repayment of the $4,056,909 of advances made to the Finance Corporation if the Finance Corporation is unable to make the repayments.

UConn Medical Group provided faculty to UConn Health in the form of administrative leadership and other support. As a result of these efforts, UConn Health reimbursed UMG for physician salaries during the years 2015 and 2014. The amounts received totaled $4,902,672 for each year, and were recorded as contract and other revenues in the statements of revenues, expenses, and changes in net position. UMG’s pension liability (note 8) is owed back to the State of Connecticut. The State finances pension and benefits other than pension on a pay-as-you-go basis through allocated retirement plan rates.




38

NOTE 10 - HYPOTHECATION

UConn Medical Group has an arrangement with the State whereby it can borrow up to 70% of its net patient and contract and other receivables, if the 12018 fund has an overall negative balance, to continue to fund operations. As of June 30, 2015 and 2014, UConn Medical Group had a positive cash position of $875,282 and $915,018, respectively. Management believes internal and external sources of cash, including the ability to receive additional transfers from UConn Health, will be sufficient to fund activities.

NOTE 11 - SUBSEQUENT EVENTS

UConn Medical Group has evaluated subsequent events through January 22, 2016, which represents the date the financial statements were available to be issued and noted no subsequent events that would have impacted UConn Medical Group’s financial statements.

39

INDEPENDENT AUDITORS’ 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

Joint Audit and Compliance Committee University of Connecticut Health Center We have audited, in accordance with the 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 financial statements of the University of Connecticut Health Center, UConn Medical Group (UConn Medical Group or Company), which comprise the statement of net position as of June 30, 2015 and the related statements of revenues, expenses and changes in net position and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated January 22, 2016. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Company’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 Company’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Company’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or 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. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

40

Compliance and Other Matters As part of obtaining reasonable assurance about whether the Company’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. 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 Company’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 Company’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.




SCHEDULE OF CHANGES IN UCONN MEDICAL GROUP’S NET PENSION

LIABILITY AND RELATED RATIOS – STATE EMPLOYEES’ RETIREMENT SYSTEM ONLY

41

(dollars

in thousands)Total Pension Liability

Service cost 1,471$ Interest 10,226 Benefit payments, including refunds of member contributions (8,017)

Net Change in Total Pension Liability 3,680 Total Pension Liability - Beginning 131,831

Total Pension Liability - Ending (a) 135,511$

Fiduciary Net PositionContributions - employer 6,492$ Contributions -employee 741 Net investment income 7,385 Benefit payments, including refunds of member contributions (8,017)

Net Change in Plan Fiduciary Net Position 6,600

Fiduciary Net Position - Beginning 46,979

Fiduciary Net Position - Ending (b) 53,579$

UMG's Net Pension Liability - Ending (a) - (b) 81,932$

UMG's portion of SERS net pension liability 0.51%

Fiduciary Net Position as a Percentage of the TotalPension Liability 39.54%

UMG's Covered-Employee Payroll 19,273$

UMG's Net Pension Liability as a Percentage of Covered-Employee Payroll 425.11%



SCHEDULE OF PENSION CONTRIBUTIONS

TO THE STATE EMPLOYEES’ RETIREMENT SYSTEM

42

2015 2014 2013 2012 2011 2010(dollars in thousands)

Contractually requiredcontribution 7,953$ 6,492$ 5,672$ 4,958$ 5,053$ 4,804$

Contributions in relation to thecontractually required contribution 7,953 6,492 5,664 4,958 4,420 3,857

Contribution deficiency --$ --$ 8$ --$ 633$ 947$

UMG's covered-employee payroll 23,424$ 19,273$ 17,688$ 17,181$ 17,709$ 15,633$

Contributions as a percentage or covered-employee payroll 33.95% 33.68% 32.02% 28.86% 24.96% 24.67%

UNIVERSITY OF CONNECTICUT HEALTH CENTER FINANCE CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

AND SUPPLEMENTARY INFORMATION (With Management’s Discussion and Analysis)

JUNE 30, 2015 AND 2014


CONTENTS


Consolidated Statements of Net Position .................................................................................. 6-7 Consolidated Statements of Revenues, Expenses, and Changes in Net Position ....................................................................................................8 Consolidated Statements of Cash Flows ................................................................................. 9-10

Notes to Consolidated Financial Statements ....................................................................... 11-21 Independent Auditors’ 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 ............................................................................................ 22-23 Supplementary Information

Schedule I – Consolidating Statement of Net Position ......................................................... 24-25 Schedule II – Consolidating Statement of Revenues, Expenses, and Changes in Net Position .................................................................................26



1

The following discussion and analysis provides an overview of the consolidated financial position and activities of the University of Connecticut Health Center Finance Corporation and Subsidiaries (Finance Corporation) as of and for the years ended June 30, 2015, 2014, and 2013. This discussion has been prepared by management and should be read in conjunction with the consolidated financial statements and the notes thereto, which follow this section. FINANCIAL HIGHLIGHTS Finance Corporation’s financial position at June 30, 2015, 2014, and 2013, included assets of $250.8 million, $209.3 million, and $95.4 million, respectively, and liabilities of $243.0 million, $201.5 million, and $89.2 million, respectively. The value of both the assets and liabilities is attributable mainly to the Finance Corporation’s maintaining the real estate and related financing on the UConn Musculoskeletal Institute formerly known as (MARB), 16 Munson Road (Munson Road), and the construction of the new Outpatient Pavilion (OP). Changes in net position represent the operating activity of the Finance Corporation, primarily composed of revenue and expenses related to the UConn Musculoskeletal Institute, Munson Road and OP properties and are summarized below for the years ended June 30, 2015, 2014, and 2013:

2015 2014 2013(In thousands)

Summary of assets and liabilities at June 30:Current assets 38,209$ 62,905$ 27,702$ Other assets -- -- 16 Net investment in direct financing lease,net of current portion 184,105 -- -- Capital assets, net 28,476 146,356 67,724

Total assets 250,790$ 209,261$ 95,442$

Current liabilities 19,230$ 22,543$ 6,517$ Long-term liabilities 223,793 178,992 82,695

Total liabilities 243,023$ 201,535$ 89,212$

Net investment in capital assets 11,332$ 22,575$ 22,244$ Unrestricted (deficit) (3,565) (14,849) (16,014)

Total net position 7,767 7,726 6,230

Total liabilities and net position 250,790$ 209,261$ 95,442$



2

2015 2014 2013

(In thousands)Summary of revenues, expenses,

and nonoperating expensesfor the year ended June 30:

Operating revenues 6,234$ 3,340$ 3,340$ Operating expenses (6,186) (1,838) (1,999) Nonoperating expenses (7) (6) (6)

Increase in net position 41$ 1,496$ 1,335$ OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of management’s discussion and analysis and the consolidated financial statements. The basic financial statements (consolidated statements of net position, consolidated statements of revenues, expenses, and changes in net position, and consolidated statements of cash flows) present the financial position of the Finance Corporation at June 30, 2015 and 2014, respectively and the results of its operations and financial activities for the years then ended. These statements report information about the Finance Corporation using accounting methods similar to those used by private-sector companies. The consolidated statements of net position include all of the Finance Corporation’s assets and liabilities. The consolidated statements of revenues, expenses, and changes in net position reflect the years’ activities on the accrual basis of accounting, i.e., when services are provided or obligations are incurred, not necessarily when cash is received or paid. These consolidated statements report the Finance Corporation’s net position and how they have changed. Net position (the difference between assets and liabilities) is one way to measure financial health or position. The consolidated statements of cash flows provide relevant information about each year’s cash receipts and cash payments and classifies them as to operating, investing, and capital and related financing activities. The consolidated financial statements include notes that explain information in the consolidated financial statements and provide more detailed data. CAPITAL AND DEBT RELATED ACTIVITIES In fiscal year 2015, the Finance Corporation continued the financing of the OP through the mortgage with Teachers Insurance and Annuity Association of America (TIAA) and its facilitator, Wells Fargo. The full mortgage for $203 million has been fully advanced for construction as of January 2, 2015. The TIAA mortgage for the OP is supported by a 25 year fixed term lease between UConn Health and the Finance Corporation. As a result, capital assets associated with the OP have been reclassified and reported as investment in direct financing lease. For additional information on capital assets and the breakout of the OP’s underlying assets please see notes 3 and 6. The current estimated cost to complete the OP is $14.2 million.



3

Beginning April 2015, the Finance Corporation rented the OP to University of Connecticut Health Center (UConn Health) which in turn subleased the space to related parties. Also, in April 2015, regular monthly payments began on the OP’s secured mortgage. As of June 30, 2015 the principal debt has been reduced by $1,056,368. The Finance Corporation continues to own and rent both the UConn Musculoskeletal Institute and Munson Road properties to UConn Health. For the years ended June 30, 2015 and 2014, the Finance Corporation had made all regularly scheduled payments on the UConn Musculoskeletal Institute’s secured mortgage thereby reducing the amount of secured mortgage principal debt on the UConn Musculoskeletal Institute by $1,073,243 and $1,007,480, respectively. There is no outstanding debt on the Munson Road property. SUBSIDIARIES The Finance Corporation’s UCHCFC Munson Road Corporation (MRC) ceased transactions effective June 30, 2013. The MRC was dissolved in fiscal year 2014 with balances combined into Finance Corporation. The MRC had served as the vehicle for the loan supporting the purchase of the property at Munson Road. After the completion of loan payments the MRC held no further purpose and therefore was dissolved and its assets and liabilities merged back into the Finance Corporation. The Finance Corporation is currently the sole member and parent to the UCHCFC Circle Road Corporation (Circle Road Corporation). The Circle Road Corporation’s primary purpose is to serve as the financing vehicle for the construction of the OP. The Circle Road Corporation is a 501(c) 3 entity. FISCAL YEAR 2016 OUTLOOK The Finance Corporation was created by statute in recognition of UConn Health’s need to implement decisions rapidly in order to provide excellent care in a competitive health care environment with a special focus on the need for rapid and smoother processes in the areas of purchasing, leasing, construction, and through joint ventures with other organizations. The economic position of the Finance Corporation is closely tied to that of UConn Health’s clinical entities serviced by the Finance Corporation. The Finance Corporation assists UConn Health by facilitating the acquisition of clinical space. The Finance Corporation has previously served as the vehicle to acquire both the UConn Musculoskeletal Institute and Munson Road properties and to construct the OP. The Finance Corporation will continue to serve as owner/leaseholder of these properties in 2016. If you have questions about this report or need additional financial information, please contact the Office of the Chief Financial Officer, University of Connecticut Health Center, Farmington, Connecticut 06030-3800.

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INDEPENDENT AUDITORS’ REPORT Joint Audit and Compliance Committee University of Connecticut Health Center Finance Corporation Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of the University of Connecticut Health Center Finance Corporation (Finance Corporation or Company), a component unit of the State of Connecticut, as of and for the years ended June 30, 2015 and 2014, and the related notes to the consolidated financial statements, which collectively comprise Finance Corporation’s basic consolidated financial statements as listed in the table of contents.

Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 auditors’ 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 entity’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 expressing an opinion on the effectiveness of the entity’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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the University of Connecticut Health Center Finance Corporation as of June 30, 2015 and 2014, and the results of their operations and changes in net position, and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

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Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the required supplementary information, such as Management’s Discussion and Analysis on pages 1 through 3, be presented to supplement the basic consolidated financial statements. Such information, although not a part of the basic consolidated 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 consolidated 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 inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic consolidated financial statements, and other knowledge we obtained during our audits of the basic consolidated 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 audits were conducted for the purpose of forming an opinion on the consolidated financial statements that collectively comprise the University of Connecticut Health Center Finance Corporation’s basic consolidated financial statements. The consolidating information in Schedules I and II is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. The consolidating information in Schedules I and II is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic consolidated financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic consolidated financial statements or to the basic consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the 2015 consolidating information in Schedules I and II is fairly stated, in all material respects, in relation to the basic consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 22, 2016 on our consideration of the Company’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 results of that testing, and not to provide an opinion on the 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 Company’s internal control over financial reporting and compliance.



CONSOLIDATED STATEMENTS OF NET POSITION

JUNE 30, 2015 AND 2014

The accompanying notes are an integral part of these consolidated financial statements.

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2015 2014

Assets

Current AssetsCash 15,981,330$ 6,269,613$ Malpractice fund 788,923 297,152 Due from Education Clinics 15,061 15,061 Construction escrow account 18,871,756 56,323,213 Net investment in direct financing lease,

current portion 2,551,973 --


Noncurrent AssetsNet investment in direct financing lease,

net of current portion 184,104,869 -- Capital assets, net 28,475,809 146,355,700


Total Assets 250,789,721$ 209,260,739$


CONSOLIDATED STATEMENTS OF NET POSITION (CONTINUED)

JUNE 30, 2015 AND 2014


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2015 2014


Current LiabilitiesAccounts payable and accrued expenses 2,721,808$ 11,649,486$ Due to UConn Health - Malpractice fund 788,923 297,152 Due to Correctional Managed Health Care 286,807 286,807 Due to Central Administrative Services 4,211,496 462,707 Due to John Dempsey Hospital, current portion 5,710,122 7,710,122 Advances for construction 6,619 6,619 Security deposits 6,050 -- Loans payable, current portion 5,497,829 2,129,611


Long-Term LiabilitiesDue to John Dempsey Hospital, net of current portion 9,035,784 9,035,784 Loans payable, net of current portion 210,700,241 165,894,642 Due to UConn Medical Group 4,056,909 4,061,366

Total Long-Term Liabilities 223,792,934 178,991,792


Net PositionNet investment in capital assets 11,332,399 22,575,023 Unrestricted (deficit) (3,565,266) (14,848,580)

Total Net Position 7,767,133 7,726,443

Total Liabilities and Net Position 250,789,721$ 209,260,739$


CONSOLIDATED STATEMENTS OF REVENUES, EXPENSES, AND CHANGES

IN NET POSITION



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2015 2014

Operating Revenues

Rental income 3,355,195$ 3,340,230$ Interest income from direct financing lease 2,878,581 --


Operating ExpensesProfessional services 26,468 25,100 Interest expense 3,819,590 1,006,708 Depreciation 2,293,458 753,300 Other 46,277 52,531


Operating Income 47,983 1,502,591

Nonoperating ExpensesLoan servicing fees (7,293) (6,043)

Total Nonoperating Expenses (7,293) (6,043)

Increase in Net Position 40,690 1,496,548

Net Position - Beginning 7,726,443 6,229,895

Net Position - End 7,767,133$ 7,726,443$


CONSOLIDATED STATEMENTS OF CASH FLOWS



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2015 2014

Cash Flows from Operating ActivitiesCash paid to suppliers, contractors and others (972,201)$ (1,030,204)$ Cash received for rental income 3,340,230 3,340,230 Cash paid for administrative expenses (40,024) (27,859)

Net Cash Provided by Operating Activities 2,328,005 2,282,167

Cash Flows from Investing ActivitiesPayments for purchase of capital assets (74,505,359) (71,775,792)

Net Cash Used in Investing Activities (74,505,359) (71,775,792)

Cash Flows from Capital Financing ActivitiesDirect financing lease payments received

(including $2,878,581 of interest) 3,494,138 -- Cash (returned to) John Dempsey Hospital

to repay advances in support of OutpatientPavilion construction (2,000,000) --

Cash received from Central Administrative Servicesin support of Outpatient Pavilion construction 1,314,217 --

Transfers from construction escrow accountand loan proceeds 81,217,620 71,678,623

Repayments of capital debt (2,129,611) (1,007,480) Loan servicing fees (7,293) (6,043)

Net Cash Provided by CapitalFinancing Activities 81,889,071 70,665,100

Net Increase in Cash 9,711,717 1,171,475

Cash - Beginning 6,269,613 5,098,138

Cash - End 15,981,330$ 6,269,613$


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)



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2015 2014

Reconciliation of Operating Income to Net CashProvided by Operating Activities

Operating income 47,983$ 1,502,591$ Depreciation 2,293,458 753,300 Direct financing lease interest payments received (2,878,581) -- Changes in operating assets and liabilities:

Assets limited to use -- 15,700 Due to Central Administrative Services 2,435,330 7,467 Accounts payable and accrued expenses, excluding payables for capital assets 434,272 25,069 Due to John Dempsey Hospital -- (10,980) Due to UConn Medical Group (4,457) (10,980)

Net Cash Provided by Operating Activities 2,328,005$ 2,282,167$

Schedule of Non-Cash Financing TransactionsChange in mortgage proceeds held by Trustee in

construction escrow account (37,451,457)$ 34,464,367$

As of June 30, 2015 and 2014, the Finance Corporation had construction invoices payable of $6,473,938 and $12,079,637, respectively that were included in accounts payable, accrued expenses and due to Central Administrative Services.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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REPORTING ENTITY Effective July 1, 1987, the University of Connecticut Health Center Finance Corporation (Finance Corporation or Company) was established pursuant to Public Act No. 87-458. The purpose of the Finance Corporation is to provide greater flexibility for John Dempsey Hospital (21002 Fund) (the Hospital), UConn Medical Group, University Dentists, and Correctional Managed Health Care (CMHC) (collectively the entities) and to promote the more efficient provision of health care services. As such, the Finance Corporation has been empowered to purchase supplies and equipment, acquire facilities, approve write-offs of accounts receivable, in addition to negotiate joint ventures, shared service, and other agreements for all of the entities, as well as process malpractice claims on behalf of University of Connecticut Health Center (UConn Health), the Hospital, UConn Medical Group, and University Dentists. The Finance Corporation is administered by a board of directors currently consisting of the President of the University of Connecticut, the Secretary of the Office of Policy and Management for the State of Connecticut, a member of the Board of Directors of the University of Connecticut Health Center, the Executive Vice President for Health Affairs, and the Chairman of the Board of Trustees for the University of Connecticut who is appointed by the Governor of the State of Connecticut. The Governor appoints one of these members as Chairman of the Board of the University of Connecticut Health Center Finance Corporation. The UCHCFC Munson Road Corporation, a subsidiary of the Finance Corporation, was formed pursuant to Section 10a-254 of the Connecticut General Statutes by the University of Connecticut Health Center Finance Corporation (its sole member). This subsidiary corporation ceased operations at the end of fiscal 2013 and was dissolved during fiscal 2014. Balances were consolidated with the Finance Corporation as part of the dissolution. The UCHCFC Circle Road Corporation (Circle Road Corporation), a subsidiary of the Finance Corporation, was formed pursuant to Section 10a-254 of the Connecticut General Statutes by the University of Connecticut Health Center Finance Corporation (its sole member). This subsidiary corporation is administered by a board of directors elected on an annual basis by the sole member’s board of directors or appointed by the Governor of the State of Connecticut, as prescribed in the bylaws of the Circle Road Corporation. The number of directors shall be not less than three or more than ten, and 50% shall be members of the board of directors of the sole member or appointed by the Governor. At least one of these directors must be an Independent Director. There are four members of the subsidiary corporation’s board of directors and five members of the sole member’s board of directors.




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REPORTING ENTITY (CONTINUED) The expenses reported in the consolidated statements of revenues, expenses, and changes in net position do not include undetermined amounts for salaries, services, and expenses provided to and received from UConn Health and other Connecticut State agencies. The Finance Corporation is a component unit of the State of Connecticut and is therefore generally exempt from federal income taxes under Section 115 of the Internal Revenue Code of 1986. BASIS OF PRESENTATION The Finance Corporation’s consolidated financial statements are prepared in accordance with all relevant Governmental Accounting Standards Board (GASB) pronouncements. GASB No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, states that proprietary activities may elect to apply the provisions of Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989 that do not conflict with or contradict GASB pronouncements. UConn Health has not made this election. The Finance Corporation implemented GASB No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, which directly incorporated into GASB’s authoritative literature certain pronouncements issued by FASB on or before November 30, 1989. The Finance Corporation has adopted Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, as amended by GASB Statements No. 35, Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities, and No. 37, Basic Financial Statements – and Management Discussion and Analysis – for State and Local Governments: Omnibus, and as amended by GASB No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. The Finance Corporation also adopted GASB Statement No. 38, Certain Financial Statement Note Disclosures, as of July 1, 2001. These GASB pronouncements established financial reporting standards for state and local governmental entities, including net position presentation, certain classifications of revenues and expenses and management’s discussion and analysis.




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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 and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PROPRIETARY FUND ACCOUNTING The Finance Corporation utilizes the proprietary fund method of accounting whereby revenues and expenses are recognized on the accrual basis. CASH Cash includes cash in banks. DESCRIPTION OF LEASING ARRANGEMENTS The Finance Corporation has leasing arrangements with UConn Health for the UConn Musculoskeletal Institute, Munson Road property, and the Outpatient Pavilion building and associated equipment. The UConn Musculoskeletal Institute and Munson Road properties are leased under year to year operating leases. The Outpatient Pavilion lease, effected through the Circle Road Corporation, is a direct financing lease for both the Outpatient Pavilion building and associated equipment. Under this treatment, the underlying capital assets are reported as net investment in direct financing lease. The associated equipment will be depreciated over a maximum ten year life while the building will be depreciated over 40 years. The term of the lease is 25 years as stipulated in the mortgage agreement with Teachers Insurance and Annuity Association of America (TIAA). At the conclusion of the lease, any residual amounts will revert to capital assets, net. The Finance Corporation will review the estimated residual value of property leased under the direct financing lease on an annual basis. See note 6 for additional information. RENTAL INCOME AND INTEREST INCOME Rental income on operating leases is recognized on a time basis over the rental period by reference to the lease agreements. Interest income on the direct financing lease is recognized over the term of the lease to produce a constant, periodic rate of return on the net investment of the lease. Unearned income related to the direct financing lease is amortized over the lease term using the interest method.




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MALPRACTICE FUND The malpractice fund includes investments held on behalf of UConn Health and is offset by due to UConn Health on the consolidated statements of net position. The funds are invested in the State of Connecticut Short-Term Investment Fund. The cost of these funds approximates market value. The Finance Corporation is responsible for the timely payment of malpractice fund claims. Therefore, it holds an amount estimated to be the current portion due for the malpractice fund liabilities in its account. The claim liability is reflected on UConn Health’s financial statements. CAPITAL ASSETS Property and equipment acquisitions are recorded at cost. Betterments and major renewals are capitalized, and maintenance and repairs are expensed as incurred. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method. Buildings have an estimated useful life of 5 to 50 years and equipment has an estimated useful life of 2 to 25 years. Assets acquired under capital leases and leasehold improvements are depreciated no longer than the lease term. Construction in progress is capitalized as costs are incurred during the construction phase and depreciation will begin once the assets are placed in service. CONSTRUCTION ESCROW ACCOUNT The construction escrow account represents amounts advanced from TIAA to Wells Fargo Bank Northwest, N.A. (Trustee) for the financing of the Outpatient Pavilion construction project. Such amounts have not yet been drawn down fully by the Finance Corporation for construction expenses. Refer to Note 4 for additional information related to the debt. ADVANCES FOR CONSTRUCTION Advances for construction in the amount of $6,619 as of June 30, 2015 and 2014, represent the unused portion of bond proceeds that were received in March 1993 by the Finance Corporation which are to be used for the Farm Hollow Building renovations.




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NET POSITION Net position is classified in two components. Net investment in capital assets consists of capital assets net of accumulated depreciation and reduced by the current net balances of any outstanding borrowings (less amounts held in trust) used to finance the purchase or construction of those assets. All other assets less liabilities are classified as unrestricted. UPCOMING ACCOUNTING PRONOUNCEMENTS In February 2015, GASB issued Statement No. 72, Fair Value Measurement and Application. This Statement addresses accounting and financial reporting issues related to fair value measurements. This Statement provides guidance for determining a fair value measurement for financial reporting purposes. This Statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2015. The Finance Corporation is currently evaluating the impact this standard will have on its financial statements. In June 2015, GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The objective of this Statement is to identify, in the context of the current governmental financial reporting environment, the hierarchy of accounting principles generally accepted in the United States of America (GAAP). The “GAAP hierarchy” consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. The provisions of this Statement are effective for fiscal years beginning after June 15, 2015. The Finance Corporation is currently evaluating the impact this standard will have on its financial statements.




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NOTE 2 - DUE FROM (TO) RELATED PARTIES

As of June 30, 2015 and 2014, the Finance Corporation had the following amounts due from (to) related parties:

2015 2014

Due from Education Clinics 15,061$ 15,061$ Due to UConn Medical Group (4,056,909) (4,061,366) Due to Correctional Managed Health Care (286,807) (286,807) Due to John Dempsey Hospital (14,745,906) (16,745,906) Due to UConn Health Center - Malpractice fund (788,923) (297,152) Due to Central Administrative Services (4,211,496) (462,707)

NOTE 3 - CAPITAL ASSETS Capital assets as of June 30, 2015 and 2014, consisted of the following:

2015 2014

Building 29,730,870$ 29,730,870$ Land 6,593,084 6,593,084 Equipment 20,998 20,998 Construction in progress -- 117,126,591

36,344,952 153,471,543 Less accumulated depreciation 7,869,143 7,115,843

Capital assets, net 28,475,809$ 146,355,700$ As of June 30, 2015, the Finance Corporation estimated that its future costs to complete construction projects will be $14.2 million. During the year ended June 30, 2015, the Finance Corporation placed the Outpatient Pavilion in service and leased it to UConn Health under the terms of a direct financing lease. In connection therewith, certain capital assets totaling $187,272,400 were transferred out of the construction in progress category into the net investment in direct financing lease lines in the 2015 consolidated statement of financial position.




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NOTE 3 - CAPITAL ASSETS (CONTINUED)

Capital assets and depreciation activity for the years ended June 30, 2015 and 2014 was as follows:


Building 29,730,870$ --$ --$ 29,730,870$ Land 6,593,084 -- -- 6,593,084 Equipment 20,998 -- -- 20,998 Construction in progress 117,126,591 71,685,967 (188,812,558) -- Less depreciation -

Buildings (7,094,845) (2,293,458) 1,540,158 (7,848,145) Less depreciation -

Office equipment (20,998) -- -- (20,998)

146,355,700$ 69,392,509$ (187,272,400)$ 28,475,809$


Building 29,730,870$ --$ --$ 29,730,870$ Land 6,593,084 -- -- 6,593,084 Equipment 20,998 -- -- 20,998 Construction in progress 37,741,901 79,384,690 -- 117,126,591 Less depreciation -

Buildings (6,341,545) (753,300) -- (7,094,845) Less depreciation -

Office equipment (20,998) -- -- (20,998)

67,724,310$ 78,631,390$ --$ 146,355,700$




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NOTE 4 – LONG-TERM LIABILITIES

The Finance Corporation has a loan agreement with Capital Lease Funding which financed the construction of the UConn Musculoskeletal Institute. The Finance Corporation through its subsidiary, the Circle Road Corporation, has a mortgage with TIAA for the construction of the Outpatient Pavilion. Activity related to these loans was as follows:



Secured mortgages -Capital Lease Funding 15,327,681$ --$ (1,073,243)$ 14,254,438$ 1,143,299$ TIAA 152,696,572 50,303,428 (1,056,368) 201,943,632 4,354,530

168,024,253$ 50,303,428$ (2,129,611)$ 216,198,070$ 5,497,829$

June 30, June 30, Amounts

2013 2014 due withinBalance Additions Deductions Balance 1 year

Secured mortgages -Capital Lease Funding 16,335,161$ --$ (1,007,480)$ 15,327,681$ 1,073,243$ TIAA 46,553,582 106,142,990 -- 152,696,572 1,056,368

62,888,743$ 106,142,990$ (1,007,480)$ 168,024,253$ 2,129,611$

Long-term debt obligations as of June 30 consisted of the following:

2015 2014

Secured mortgage - Capital Lease Funding,principal and interest payments beganJanuary 2004 and continue untilNovember 2024, with interest at 6.34% 14,254,438$ 15,327,681$

Secured mortgage - TIAA, 25 year, 4.809%coupon. Total mortgage commitment is $203 million which was advanced in fullJanuary 2, 2015. Principal and interestpayments began on April 15, 2015 andwill continue until March 15, 2040. 201,943,632 152,696,572

216,198,070$ 168,024,253$




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NOTE 4 – LONG-TERM LIABILITIES (CONTINUED)

Aggregate maturities of long-term debt are as follows:


2016 5,497,829$ 2017 5,786,546 2018 6,090,659 2019 6,411,004 2020 6,748,463


216,198,070$

The Finance Corporation made interest payments of $9,914,554 and $5,999,521, respectively, during 2015 and 2014. Interest costs of $6,537,264 and $4,992,813 were added to the cost of the property held for lease under the direct financing lease during the years ended June 30, 2015 and 2014, respectively.

NOTE 5 – RELATED PARTY TRANSACTIONS The Finance Corporation enters into transactions for the benefit of UConn Health entities. In 2006, the Finance Corporation entered into transactions resulting in the acquisition of the UConn Musculoskeletal Institute and Munson Road properties. The Finance Corporation leases these buildings to entities from UConn Health under operating agreements that renew annually. The Circle Road Corporation has a 25 year direct financing lease with UConn Health, designed to facilitate the monthly debt service payments on its mortgage with TIAA. Beginning in February, 2015, the Circle Road Corporation began charging rent to UConn Health’s clinical enterprises, including the Hospital and UConn Medical Group. The amounts allocated to each of UConn Heath’s internal business units is determined based on the square footage.




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Payments to be received under these agreements over the next five years and thereafter is estimated to be as follows:

UConn Outpatient Musculoskeletal

Year ending June 30, Pavilion (a) Institute Munson Road

2016 13,976,552$ 2,020,230$ 1,320,000$ 2017 13,976,552 2,020,230 1,320,000 2018 13,976,552 2,020,230 1,320,000 2019 13,976,552 2,020,230 1,320,000 2020 13,976,552 2,020,230 1,320,000

Thereafter 276,036,901 4,153,288 --

345,919,661$ 14,254,438$ 6,600,000$ (a) Outpatient Pavilion amounts are due under a noncancellable direct financing lease with UConn Health. Additional

details can be found in note 6.

During the year ended June 30, 2015, the Finance Corporation repaid advances previously received from the Hospital in the amount of $2,000,000. The advances had been used to facilitate the construction of the Outpatient Pavilion. Advances are non-interest bearing and are scheduled to be repaid to the Hospital upon completion of the project.

NOTE 6 – INVESTMENT IN DIRECT FINANCING LEASE The Outpatient Pavilion lease, created through the Circle Road Corporation, is a noncancellable 25 year lease supporting the repayment of the TIAA mortgage. As such, this lease is classified as a direct financing lease. Under this treatment, the underlying capital assets are reported instead as net investment in direct financing lease. The components of the net investment in direct financing lease are shown below as of June 30, 2015. Net minimum lease payments receivable 345,919,661$ Estimated residual value of leased property (unguaranteed) 65,861,269 Less unearned income (225,124,088)

Net investment in direct financing lease 186,656,842$




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NOTE 6 – INVESTMENT IN DIRECT FINANCING LEASE (CONTINUED)

The following schedule provides an analysis of the Circle Road Corporation’s cost of the property held for lease under the direct financing lease as of June 30, 2015. Building 170,036,445$ Equipment 17,131,604 Art 104,351

187,272,400$ The associated equipment has a maximum useful life of ten years while the building has a useful life of 40 years. The term of the lease is 25 years as stipulated in the mortgage agreement with TIAA. Initial direct costs associated with the direct financing lease to obtain the mortgage were capitalized in the amount of $1.69 million. At the conclusion of the lease, any residual amounts will revert to capital assets.

NOTE 7 – SUBSEQUENT EVENTS Finance Corporation has evaluated subsequent events through January 22, 2016, which represents the date the financial statements were available to be issued. There were no subsequent events requiring recognition or disclosure in the financial statements.

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INDEPENDENT AUDITORS’ 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

Joint Audit and Compliance Committee University of Connecticut Health Center We have audited, in accordance with the 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 consolidated financial statements of the University of Connecticut Health Center Finance Corporation (the Company), which comprise the consolidated statement of net position as of June 30, 2015 and the related consolidated statements of revenues, expenses and changes in net position and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated January 22, 2016. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Company’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 Company’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Company’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or 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. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

23

Compliance and Other Matters As part of obtaining reasonable assurance about whether the Company’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. 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 Company’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 Company’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.



SCHEDULE I – CONSOLIDATING STATEMENT OF NET POSITION

JUNE 30, 2015

See independent auditors’ report.

24

University ofConnecticut

Health Center UCHCFCFinance Circle Road

Corporation Corp. Total

Assets

Current AssetsCash 14,392,307$ 1,589,023$ 15,981,330$ Malpractice fund 788,923 -- 788,923 Due from Education Clinics 15,061 -- 15,061 Construction escrow account -- 18,871,756 18,871,756 Net investment in direct financing lease,current portion -- 2,551,973 2,551,973

Total Current Assets 15,196,291 23,012,752 38,209,043

Noncurrent AssetsNet investment in direct financing lease,net of current portion -- 184,104,869 184,104,869 Capital assets, net 28,475,809 -- 28,475,809

Total Noncurrent Assets 28,475,809 184,104,869 212,580,678

Total Assets 43,672,100$ 207,117,621$ 250,789,721$


SCHEDULE I – CONSOLIDATING STATEMENT OF NET POSITION

(CONTINUED)

JUNE 30, 2015


25

University ofConnecticut

Health Center UCHCFCFinance Circle Road

Corporation Corp. Total


Current LiabilitiesAccounts payable and

accrued expenses 54,721$ 2,667,087$ 2,721,808$ Due to UConn Health – Malpractice fund 788,923 -- 788,923 Due to Correctional Managed Health Care 286,807 -- 286,807 Due to Central Administrative Services 287 4,211,209 4,211,496 Due to John Dempsey Hospital, current portion 5,710,122 -- 5,710,122 Advances for construction 6,619 -- 6,619 Security deposits -- 6,050 6,050 Loans payable, current portion 1,143,299 4,354,530 5,497,829

Total Current Liabilities 7,990,778 11,238,876 19,229,654

Long-Term LiabilitiesDue to John Dempsey Hospital, net of current portion 9,035,784 -- 9,035,784 Loans payable, net of current portion 13,111,139 197,589,102 210,700,241 Due to UConn Medical Group 4,061,366 (4,457) 4,056,909

Total Long-Term Liabilities 26,208,289 197,584,645 223,792,934

Total Liabilities 34,199,067 208,823,521 243,022,588

Net PositionNet investment in capital assets 14,221,372 (2,888,973) 11,332,399 Unrestricted (Deficit) (4,748,339) 1,183,073 (3,565,266)

Total Net Position (Deficit) 9,473,033 (1,705,900) 7,767,133

Total Liabilities and Net Position 43,672,100$ 207,117,621$ 250,789,721$


SCHEDULE II – CONSOLIDATING STATEMENT OF REVENUES, EXPENSES,

AND CHANGES IN NET POSITION

FOR THE YEAR ENDED JUNE 30, 2015


26

University of

ConnecticutHealth Center UCHCFC

Finance Circle RoadCorporation Corp. Total

Operating RevenuesRental income 3,340,230$ 14,965$ 3,355,195$ Interest income from direct financing lease -- 2,878,581 2,878,581

Total Operating Revenues 3,340,230$ 2,893,546$ 6,233,776$

Operating ExpensesProfessional services 25,733 735 26,468 Interest expense 978,600 2,840,990 3,819,590 Depreciation 753,300 1,540,158 2,293,458 Other 8,024 38,253 46,277

Total Operating Expenses 1,765,657 4,420,136 6,185,793

Operating Income (Loss) 1,574,573 (1,526,590) 47,983

Nonoperating ExpensesLoan servicing fee (6,043) (1,250) (7,293)

Total Nonoperating Expenses (6,043) (1,250) (7,293)

Increase (Decrease) in Net Position 1,568,530 (1,527,840) 40,690

Net Position (Deficit) - Beginning 7,904,503 (178,060) 7,726,443

Net Position (Deficit) - End 9,473,033$ (1,705,900)$ 7,767,133$

University of Connecticut

UConn 2000 Construction Program Audit and Agreed Upon Procedures

Year end June 30, 2015

Audit Timeline (tentative) RSM Team:

Mark Bloom - Partner Jonathan Reeves - Manager Chris Kotos – In-Charge Dave Potak - Supervisor

Timeline: November 30 – December 4, 2015 – Planning at the University of Connecticut (Completed) December 4, 2015 – Working Group Meeting (Completed) February 26, 2016 – First cut-off for downloads for project expenses March 7, 2016 – Deadline to send all downloads to RSM March 12, 2016 – Selections to be made from all the downloads March 28-April 4, 2016 – Fieldwork for the audit and agreed upon procedures April 15, 2016 – Second cut-off for downloads for project expenses April 22, 2016 – Draft Report to be sent to the Working Group April 28, 2016 – Meeting (conference call) to discuss the reports with Working Group May 16, 2016– Senior Management meeting for approval of the financial statements May 17, 2016 – Meeting with the JACC for approval of the financial statements

http://images.search.yahoo.com/images/view;_ylt=A0PDoS8.wMVO0yEA6xaJzbkF;_ylu=X3oDMTBlMTQ4cGxyBHNlYwNzcgRzbGsDaW1n?back=http://images.search.yahoo.com/search/images?_adv_prop=image&va=university+connecticut+logo&fr=yfp-t-471-s&b=1&tab=organic&w=150&h=150&imgurl=www.american-school-search.com/images/logo/university-of-connecticut.gif&rurl=http://www.american-school-search.com/review/university-of-connecticut&size=10.8+KB&name=University+of+Connecticut+Logo&p=university+connecticut+logo&oid=5278bc66c3de902376ce54e87a2ef23f&fr2=&fr=yfp-t-471-s&tt=University+of+Connecticut+Logo&b=0&ni=21&no=17&tab=organic&ts=&sigr=126kc1p28&sigb=13qhhj63c&sigi=128bjor6i&.crumb=.4GdjIbzNw2

TAB 6


UConn Health


Auditors of Public Accounts

University of Connecticut and University of Connecticut Health Center

Financial Statements as of and for the year ended June 30, 2015

Communication to the Joint Audit and Compliance Committee

February 3, 2016


This document provides an outline of our audits of the University of Connecticut (UConn) and the University of ConnecticutHealth Center (UConn Health). It is intended for the use of the Joint Audit and Compliance Committee, UConn’s Board ofTrustees, UConn Health’s Board of Directors, management and others affiliated with UConn and/or UConn Health. However, thisdocument is a matter of public record and its distribution is not limited. We would be happy to elaborate on any of the mattersdiscussed herein, or any other matters of interest.


Index

I. Audit Opinions

II. Reliance on Other Auditors

III. Internal Control

IV. Integration with Other Audits

V. Required Communications


Audit Opinions

The University of Connecticut system includes UConn UConn Health The University of Connecticut Foundation

We audited, and expressed opinions on the financial statements of, only UConn

o Includes the Law School Foundation. UConn Health

o Includes the John Dempsey Hospital.o Includes the Finance Corporation.o Includes the UConn Medical Group.

We do not audit The University of Connecticut Foundation

Audit opinions The financial statements of UConn, as of and for the years ending June 30, 2015 and 2014, are presented fairly, in all

material respects in conformity with accounting principles generally accepted in the United States of America. The financial statements of UConn Health, as of and for the years ending June 30, 2015 and 2014, are presented

fairly, in all material respects in conformity with accounting principles generally accepted in the United States ofAmerica.

1


We Placed Reliance on Audits Performed by Other Auditors of The John Dempsey Hospital The Finance Corporation The UConn Medical Group The Law School Foundation

We Did Not Review the Working Papers of the Other Auditors We relied on their professional reputation. We performed various supplementary audit procedures that addressed component units of UConn Health. The Law School Foundation’s financial statements represented less than one percent of the assets of UConn as of

June 30, 2015 and 2014 and less than one percent of total revenues and support for UConn for the years then ended. Legal restrictions essentially prevent us from accessing Law School Foundation records except in special

circumstances. We requested representations from the other auditors stating that they were:

o Independento Aware that we intended to place reliance on their audits.o Familiar with applicable accounting and auditing standards.

Reliance on Other Auditors

2


Internal Control

Internal Control An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity’s internal control over financial reporting.

Accordingly, we express no such opinion regarding UConn’s or UConn Health’s internal control. However, we did evaluate internal control and did place reliance on internal control in our audits of UConn and

UConn Health. We are required to report significant control deficiencies (conditions less severe than a material weakness, yet

important enough to merit attention by those charged with governance) and material weaknesses (control deficienciesthat create a reasonable possibility that a material misstatement of the entity’s financial statements will not beprevented or detected and corrected on a timely basis) to management and governing boards.

3


Integration with Other Audits

Integration with Other Audits Audit procedures carried out to support our opinions on the financial statements are integrated with procedures

carried out in connection with other audits we perform at UConn and UConn Health.o Statutorily required (Section 2-90) departmental audits addressing compliance with laws and regulations and

internal control.o Our audit of the basic financial statements of the State of Connecticut.o Our audit of federal financial assistance under the requirements of the Federal Single Audit Act (at UConn

and UConn Health this is generally limited to a review of Federal Research and Development and StudentFinancial Assistance).

Our departmental audits are performed in accordance with generally accepted government auditing standards(GAGAS) for performance audits. Our other audits, including our audits of UConn’s and UConn Health’s financialstatements, are carried out in accordance with GAGAS for financial audits. For financial audits, GAGAS incorporateby reference generally accepted auditing standards (GAAS) promulgated by the American Institute of CertifiedPublic Accountants. Therefore, all financial audits carried out in accordance with GAGAS are also carried out inaccordance with GAAS.

Though we perform our audits of UConn’s and UConn Health’s financial statements in accordance with GAGAS forfinancial audits, our reports on those audits are issued under GAAS, as permitted by paragraph 4.18 of the 2011revision of Government Auditing Standards (also known as the Yellow Book).

As the procedures undertaken for purposes of our audits of the financial statements are integrated with thoseundertaken for other purposes, they are sometimes of greater extent than would be necessary if our sole objective wasto express an opinion on the financial statements.

4


Required Communications

Management Letter Historically we have not issued a formal management letter at the conclusion of our financial statement audit. Significant findings related to our audit of federal financial assistance are conveyed in the variety of reports required

under the Single Audit Act. Any other significant compliance and control findings are reported in our next departmental audit report. Those relevant to the financial statements would be included in this presentation; we did not have any findings of this

nature.

Our Responsibilities Under Generally Accepted Auditing Standards: As stated in our engagement letter dated June 12, 2015, our responsibility, as described in professional standards, is

to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free ofmaterial misstatement. Our audit does not relieve management or those charged with governance of theirresponsibilities.

Planned Scope and Timing of the Audit: We performed the audit according to the planned scope and timing previously communicated to you in our

engagement letter dated June 12, 2015.

Accounting Estimates: Accounting estimates are an integral part of the financial statements prepared by management and are based on

management’s knowledge and experience about past and current events and assumptions about future events. Certainaccounting estimates are particularly sensitive because of their significance to the financial statements and because ofthe possibility that future events affecting them may differ significantly from those expected. The most sensitiveestimates affecting the financial statements were for:

o The net pension liability and other pension-related measures (new for 2015 per GASB Statement No. 68).o UConn Health’s malpractice reserves.

5


Difficulties Encountered in Performing the Audit: We encountered no significant difficulties in dealing with management in performing and completing our audit.

Disagreements with Management: Professional standards define a disagreement with management as a financial accounting, reporting, or auditing

matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or theauditor’s report. We are pleased to report that no such disagreement arose during the course of our audit.

Management Representations: We requested certain representations from management that are included in the management representation letters

dated December 31, 2015 for UConn and January 22, 2016 for UConn Health.


6



Summary of Uncorrected Financial Statement Misstatements (Iron Curtain Approach) 1 for the Year Ended June 30, 2015

7

UConn Health

Statement of Net Position Over (Under) Statement

Assets:Deferred outflows of resources

Net Position:Unrestricted

Statement of Revenues, Expenses and Changes in Net Position

Operating Expenses:Pension Expense

$ (231,148)

$ (231,148)

Over (Under) Statement

$ 231,148

1 Uncorrected misstatements related to prior periods have already been communicated to you under separate cover



Summary of Uncorrected Financial Statement Misstatements (Iron Curtain Approach)1 for the Year Ended June 30, 2015

Statement of Net Position Over (Under) Statement

Assets:Accounts ReceivableCapital Assets

Liabilities:Deferred Income

Net Position:Invested in Capital Assets Restricted for Capital ProjectsUnrestricted

$ 107,176$ (763,569)

$ 107,176

$ (763,569)$ 771,266$ (771,266)

Statement of Revenues, Expenses and Changes in Net Position Over (Under) Statement

Operating Expenses:Various

Increase in Net Position

$ 763,569

$ (763,569)

1 Uncorrected misstatements related to prior periods have already been communicated to you under separate cover

8

UConn



Other Information in Documents Containing Audited Financial Statements Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise

UConn’s and UConn Health’s basic financial statements.

The Management Discussion and Analysis is not a required part of the basic financial statements but is requiredsupplementary information under accounting principles generally accepted in the United States of America.

o We applied certain limited procedures, which consisted principally of inquiries of management regarding themethods of measurement and presentation of the required supplementary information.

o We did not audit the information and express no opinion on it.

Major Issues Discussed with Management We audit UConn and UConn Health on an ongoing basis and discuss significant issues as they arise.

Management Advisory Services We do not perform management advisory services.

9

Financial Report For the Year Ended June 30, 2015

University of Connecticut June 30, 2015

Message from the Executive Vice President for Administration and Chief Financial Officer

I am pleased to present the University of Connecticut’s financial report for the fiscal year ended June 30, 2015. Founded in 1881, the University of Connecticut (University) serves as the State of Connecticut’s (State) flagship institution for higher education, meeting the educational needs of undergraduate, graduate, professional, and continuing education students through the integration of teaching, research, service and outreach. The University of Connecticut is a comprehensive institution of higher education which includes the University of Connecticut Health Center (UConn Health). Although governed by a single Board of Trustees, the University and UConn Health maintain separate budgets and are, by statute, separate entities for purposes of maintaining operating funds and State appropriations. UConn Health also has a Board of Directors to whom the Board of Trustees has delegated certain responsibility and authority. This financial report for the fiscal year ended June 30, 2015 represents the transactions and balances of the University, herein defined as all programs except UConn Health. This includes Storrs-based undergraduate and graduate programs, the regional campuses, the School of Law and the School of Social Work. The University’s Board of Trustees is vested by law with fiscal oversight of the University. The operational authority granted to the University builds upon the successful implementation of legislation known as the Flexibility Acts enacted in the early 1990s. These statutory changes enabled the University to become responsible and accountable for its operational decisions independent of many of the previously imposed regulatory requirements. The University is responsible for the budgetary allocation of its State appropriation, check-writing authority, human resource control, and purchasing authority and, with the advent of the UCONN 2000 building program in 1995, management of capital projects. While the University’s operational flexibility and capacity has grown, all of these activities also take place within a context of continuing vigilance. The financial statements contained in this report reflect budget execution results consistent with spending plans and operating and capital budgets approved by the University’s Board of Trustees. The Board of Trustees, through its Joint Audit and Compliance Committee, exercises oversight of the integrity of the University’s financial statements and internal control systems, as well as direct engagement in the approval of independent auditing services to augment the University’s internal audit capacity and the work performed by the Auditors of Public Accounts. An important component of external oversight, the Auditors of Public Accounts issue an Independent Auditors’ Report on the financial statements of the University. They are responsible for auditing its financial operations and their audit opinion appears in this report. The fiscal operations of the University are not an end in themselves—rather, the maintenance of fiscal health and stability serves the ultimate goal of enabling the University to achieve its teaching, research, service and outreach mission. Over the past decade, the growth and diversification of the University’s funding streams, combined with the continuing physical transformation through UCONN 2000, have led the University to record enrollments, research success, and significant contributions to the economy of the State. Through the combined efforts of faculty, staff, alumni, and UConn supporters, the University continues to strive for excellence and over the last few years has improved its educational quality on every level. This ongoing success has attracted higher quality students from across the state, country and internationally. Among its many accomplishments, the University ranks as the top public university in New England and is among the top 25 of public universities in the nation in the annual U.S. News and World Report America’s Best Colleges (2015). The University is also 28th on Kiplinger’s Personal Finance list of 100 Best Values in Public Colleges which ranks schools that combine outstanding education with economic value. Additional highlights during the 2014-15 academic year include the following: In fall 2014, 3,588 new freshmen enrolled at the main campus, bringing the total number of

undergraduate students to an all-time high of 22,973, including 50% women and 29% minority students. The University ranks 15 out of 58 public research universities in graduation rates for all freshmen and 9 out of 58 for minority freshmen.


The University is committed to Connecticut students and enrolls 79% of undergraduates who are residents of the State of Connecticut. Additionally, the University provides a tremendous return on investment to our State by awarding 8,080 degrees across all disciplines to highly qualified and educated students who entered into the workforce in 2015.

Improving the University’s financial performance while maintaining its commitment to affordability are high priorities for the University. The University has shown this commitment by providing $336 million in financial aid in fiscal year 2015. Nearly a quarter of UConn undergraduate students received Pell Grants, 46% of students received University financial aid, and 78% receive financial aid for all sources.

By the end of the fiscal year 2015, the UCONN 2000 capital project program has led to the

authorization of 113 major projects totaling $2.6 billion in bond proceeds.

The total change in net position, excluding the beginning balance for pensions, was a $139.8 million increase in fiscal year 2015 over fiscal year 2014.

Looking ahead, the University will continue to build on these accomplishments and further strengthen its programs and services for faculty, staff, students and the UConn Nation. Respectfully Submitted,

Scott Jordan Executive Vice President for Administration and Chief Financial Officer

TABLE OF CONTENTS Independent Auditors' Report 1 – 2

Management’s Discussion and Analysis 4 – 16

Statements of Net Position 19

Statements of Revenues, Expenses, and Changes in Net Position 20

Statements of Cash Flows 21 – 22

The University of Connecticut Law School Foundation, Inc. - Component Unit Financial Statements 23

Notes to Financial Statements 24 – 50

Required Supplementary Information 52 – 54

Trustees and Financial Officers 55

STATE OF CONNECTICUT

AUDITORS OF PUBLIC ACCOUNTS STATE CAPITOL

JOHN C. GERAGOSIAN 210 CAPITOL AVENUE ROBERT M. WARD

HARTFORD, CONNECTICUT 06106-1559

INDEPENDENT AUDITORS' REPORT

Board of Trustees of the University of Connecticut

Report on Financial Statements

We have audited the accompanying financial statements of the University of Connecticut (UConn), a component unit of the University of Connecticut system, which includes UConn, the University of Connecticut Health Center and the University of Connecticut Foundation, Inc. The accompanying financial statements, which consist of the statements of net position as of June 30, 2015 and 2014 and the related statements of revenues, expenses and changes in net position and cash flows for the years then ended, and the related notes to the financial statements, collectively comprise UConn’s basic financial statements as listed in the table of contents.

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 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We did not audit the financial statements of the University of Connecticut Law School Foundation, Inc., a discretely presented component unit of UConn, which represented less than one percent of the assets of UConn as of June 30, 2015 and 2014 and less than one percent of total revenues and support for UConn for the years then ended. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for the University of Connecticut Law School Foundation, Inc., is based solely on the reports of the other auditors. The audits of the University of Connecticut Law School Foundation, Inc. were conducted in accordance with auditing standards generally accepted in the United States of America.

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 entity’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 expressing an opinion on the effectiveness of the entity’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.

1

Opinion

In our opinion, based upon our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of UConn as of June 30, 2015 and 2014 and the respective changes in financial position and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matters

Required Supplementary Information

The accompanying Management’s Discussion and Analysis on pages 4 through 16 and the Required Supplementary Information on pages 52 through 54 is required by accounting principles generally accepted in the United States of America to supplement the basic financial statements. Such information, although not 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 inquiries 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.

Sincerely,

Robert M. Ward John C. Geragosian Auditor of Public Accounts Auditor of Public Accounts

December 31, 2015 State Capitol Hartford, Connecticut

2

3

[This Page Intentionally Left Blank]

4

MANAGEMENT’S DISCUSSION AND

ANALYSIS


5

Management’s Discussion and Analysis

INTRODUCTION The following Management’s Discussion and Analysis (MD&A) is required supplemental information. Its purpose is to provide users of the basic financial statements with a narrative introduction, overview, and analysis of those statements. The MD&A, which is unaudited, includes an analysis of the financial position and results of activities of the University of Connecticut (University, as defined below) for the fiscal year ended June 30, 2015, based on currently known facts, decisions, or conditions. It also includes selected comparative information for the fiscal years ended June 30, 2014 and 2013. As the MD&A presentation includes highly summarized information, it should be read in conjunction with the accompanying financial statements and related notes to the financial statements. The financial statements, notes to the financial statements, and this MD&A are the responsibility of management. Founded in 1881, the University of Connecticut serves as the State of Connecticut’s (State) flagship for higher education, meeting the educational needs of undergraduate, graduate, professional, and continuing education students through the integration of teaching, research, service and outreach. The University of Connecticut is a comprehensive institution of higher education, which includes the University of Connecticut Health Center (UConn Health). Although governed by a single Board of Trustees, the University and UConn Health maintain separate budgets and are, by statute, separate entities for purposes of maintaining operating funds and State appropriations. UConn Health also has a Board of Directors to whom the Board of Trustees has delegated certain responsibility and authority. The financial report for the fiscal year ended June 30, 2015 represents the transactions and balances of the University, herein defined as all programs except UConn Health. This includes Storrs-based undergraduate and graduate programs, the regional campuses, the School of Law and the School of Social Work. The University of Connecticut Law School Foundation, Inc. (Law School Foundation) is discretely presented as a component unit of the University (see Note 1). For the purposes of this MD&A, the Law School Foundation is excluded. FINANCIAL HIGHLIGHTS For fiscal year 2015, the University adopted new accounting standards that significantly changed its accounting polices related to pensions. The new standards address accounting and financial reporting requirements for governmental employers that provide their employees with pension benefits administered through a qualified trust and require that the University report a pension liability and related deferred outflows and deferred inflows for the first time. The purpose of these standards is to improve pension information and increase transparency, consistency, and comparability of pension information across governments. It was not feasible to restate financial information for fiscal years 2014 and 2013 with respect to these new accounting policies. As a result, the cumulative effect of applying the new reporting standards is reported as a restatement of beginning net position of $577.6 million for the year ended June 30, 2015 (see Note 1). Total combined assets and deferred outflows of resources increased $485.4 million and total combined liabilities and deferred inflows of resources increased $923.1 million in fiscal year 2015. The majority of the changes are due to the implementation of the new pension accounting standards along with newly issued debt under the UCONN 2000 program (see Note 5). Operating revenues, which exclude State support, continue to exhibit strength during fiscal year 2015, reflecting an overall increase of $46.2 million (6.9%) over fiscal year 2014. The University’s largest operating revenue, student tuition and fees (net of scholarship allowances) increased $28.6 million (10.2%) in fiscal year 2015, which is both driven by enrollment growth and increases as shown below: The University’s total enrollment grew to 30,564 students in fiscal year 2015, a 10.7% increase since 2006. Undergraduate enrollment at the University reached a record 22,973 students in fiscal year 2015, 1.7% more than

fiscal year 2014.

Graduate and professional enrollment totaled 7,591, a 3.5% increase over fiscal year 2014. In-state tuition and mandatory fee increases of 5.6% and an out-of-state increase of 6.2% were approved for fiscal

year 2015 for undergraduate students.

Graduate tuition and mandatory fees also increased 5.9% for in-state and 6.3% for out-of-state.


6

Total operating expenses increased $62.8 million (5.7%) over fiscal year 2014 which were driven by a rise in salary and fringe related costs. Therefore, the University experienced an operating loss of $447.2 million for the year ended June 30, 2015 as compared to $430.6 million for the year ended June 30, 2014, and $367.9 million for the year ended June 30, 2013. Operating loss does not include State support. For public institutions, income or loss before other changes in net position, which includes revenue from the State appropriation, is more indicative of normal and recurring activities. Overall, the University experienced a loss before other changes in net position of $73.1 million in fiscal year 2015 as compared to $105.7 million and $64.6 million for fiscal years 2014 and 2013, respectively. ECONOMIC OUTLOOK The State’s budget difficulties continue to pose many fiscal challenges for the University’s operations and hinder its ability to achieve long-term goals. State funding is critical to the University's finances as it provides approximately 31% of overall revenue. In recent years, the University has mitigated modest reductions in State appropriations through institutional cost-cutting and by reallocating one-time funds, while at the same time working to protect the academic core. Significant reductions in State funding are expected for upcoming fiscal years, resulting in more spending reductions, tuition and fee increases, and other cost-cutting measures necessary to mitigate against this. As always, the University’s focus will be on carrying out the Academic Plan, funding key academic priorities in support of teaching and research, and delivering its high standard of service to its students, faculty, staff, and the citizens of the State. The University’s Academic Plan pursues excellence in five key areas over the next decade: research and scholarship, undergraduate education, graduate education, teaching effectiveness, and public engagement. This plan provides a blueprint during this pivotal time as key investments are planned through the Next Generation Connecticut initiative (see below) and the development of the UConn Technology Park (Tech Park), and its partnerships with industry and researchers. The Next Generation Connecticut initiative greatly expands educational opportunities, research, and innovation in the science, technology, engineering, and math disciplines at the University over the next decade. The commitment to Next Generation Connecticut is a shared fiduciary responsibility with the State. Proposed capital and operating funding for Next Generation Connecticut will be allocated incrementally between fiscal years 2015 and 2024. Additionally, the University will commit significant institutional resources to launch Next Generation Connecticut and support the academic program components. Future operating funds for Next Generation Connecticut beyond fiscal year 2015 are subject to the annual appropriations approval process. The total State request for operating funds by fiscal year 2024 is $137.0 million. Certain goals and objectives of the 10-year plan include hiring new research and teaching faculty, increasing enrollment of undergraduate students at the Storrs and regional campuses, upgrading aging infrastructure to accommodate new faculty and students, and relocating the University’s Greater Hartford campus. The UConn Tech Park, to be built on the Storrs campus, continues to evolve and is a critical component of the State’s plan to stimulate long-term economic growth by supporting innovation, new technologies and the creation of new companies and sustainable jobs. Public Act (PA) No. 11-57, as amended by PA 14-98, authorized $169.5 million of State General Obligation Bonds to develop the inaugural building for the Tech Park, the Innovation Partnership Building (IPB), and related infrastructure. The IPB will consist of approximately 115,000 square feet and be outfitted with agile and flexible-use laboratories. These laboratories will feature specialized equipment to support the collaborative research and development

20,525 20,784 20,846 21,372 21,496 21,881 22,472 22,301 22,595 22,973

7,073 7,210 7,344 7,508 7,505 7,623 7,522 7,427 7,337 7,591

0

5000

10000

15000

20000

25000

30000

35000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

HEADCOUNT ENROLLMENT IN FALL OF EACH FISCAL YEARTEN YEAR COMPARISON

Undergraduate Graduate and Professional


7

activities of industry and entrepreneurial partners. Areas of emphasis will include advanced manufacturing, cyber-infrastructure, pharmaceuticals, biotechnology, and related fields to build opportunities for industry and attract federal support for technology innovation. The goal for the Tech Park is not just to attract partnerships and faculty from the region, but to draw innovative companies and researchers to Storrs from around the globe. FINANCIAL STATEMENTS The University’s financial report includes three basic financial statements: Statements of Net Position; Statements of Revenues, Expenses, and Changes in Net Position; and Statements of Cash Flows. In addition, the following elements are included with these general-purpose financial statements: Management’s Discussion and Analysis, Notes to the Financial Statements, and Required Supplementary Information. These statements and required supplemental information are prepared in accordance with standards issued by the Governmental Accounting Standards Board (GASB). The financial statements reflect budget execution results consistent with operating budgets and spending plans approved by the University’s Board of Trustees. The University prepares and presents its Operating Budget requests and annual Spending Plan in a current funds format. STATEMENTS OF NET POSITION The following table shows condensed Statements of Net Position at June 30 (in millions):

2015 2014 2013 Current assets $ 816.8 $ 653.8 $ 499.7 Noncurrent assets State debt service commitment 1,050.5 931.7 751.0 Investments 14.7 12.3 10.6 Property and equipment, net 1,506.4 1,468.8 1,474.6 Other 12.0 12.0 11.8 Total assets $3,400.4 $3,078.6 $2,747.7 Deferred outflows of resources $ 171.1 $ 7.5 $ 17.9 Current liabilities $ 467.2 $ 429.0 $ 296.3 Noncurrent liabilities Long-term debt and bonds payable 1,335.0 1,202.3 1,008.8 Pension liabilities 726.1 - - Other 19.1 19.5 21.1 Total liabilities $2,547.4 $1,650.8 $1,326.2 Deferred inflows of resources $ 26.5 $ - $ - Net investment in capital assets $1,207.9 $1,187.6 $1,217.4 Restricted 219.0 116.9 68.5 Unrestricted (429.3) 130.8 153.5 Total net position $ 997.6 $1,435.3 $1,439.4

The Statements of Net Position present the assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position of the University as of the end of the fiscal year, June 30. The Statements of Net Position are a point in time financial statement – a snapshot – and a measure of the financial condition of the University. These statements present end-of-year data concerning assets, classified as current (those available for use within one year) and noncurrent (those available beyond one year), liabilities, categorized as current (those maturing and due within one year) and noncurrent (those maturing and due after one year) and net position. Net position represents assets, plus deferred outflows, less liabilities, less deferred inflows. Assets represent what is owned by or what is owed to the University, including payments made to others before a service was received. Assets are recorded at their current value, except for property and equipment which are recorded at historical cost, net of accumulated depreciation and amortization. Liabilities represent what is owed to others or what has been received from others prior to services being provided by the University. A deferred outflow of resources represents the


8

consumption of net assets by the University that is applicable to a future reporting period, while a deferred inflow of resources is an acquisition of net assets by the University that is applicable to a future reporting period. The Statements of Net Position demonstrate the assets available to continue the operations of the University. The University’s net position is the residual value in the University’s assets and deferred outflows, after liabilities and deferred inflows are deducted. Over time, an increase in net position is an indicator of the University’s improving financial strength. Total assets and deferred outflows of resources increased $485.4 million in fiscal year 2015 over 2014 as compared to an increase of $320.4 million in fiscal year 2014 over 2013. The rise was primarily due to the following: Due from State of Connecticut increased $119.7 million ($3.4 million decrease in fiscal year 2014) primarily due to

the capital allocation from the State for the Tech Park (see Note 13). State debt service commitment increased $126.2 million ($195.9 million in fiscal year 2014) due to the issuance of

new debt offset by principal payments and refundings (see Note 5).

Property and equipment, net increased $37.5 million ($5.7 million decrease in fiscal year 2014) due to a large number of capital projects that were initiated and in progress in fiscal year 2015 (see Note 4).

Deferred outflows of resources increased $163.6 million ($10.5 million decrease in fiscal year 2014), primarily the result of the adoption of new pension accounting standards (see Notes 1 and 6).

Total liabilities and deferred inflows of resources increased $923.1 million in fiscal year 2015 over 2014 as compared to an increase of $324.5 million in fiscal year 2014 over 2013. The rise was primarily due to $726.1 million in pension liabilities and $26.5 million in deferred inflows of resources relating to the adoption of new pension accounting standards (see Notes 1 and 6). The increase was also due to newly acquired debt of $292.0 million ($469.9 million in fiscal year 2014) offset by retirements and refundings of debt on existing bonds and loans of $151.4 million ($261.1 million in fiscal year 2014). The combination of the increase in total assets and deferred outflows of $485.4 million and total liabilities and deferred inflows of $923.1 million yielded a decrease in total net position of $437.8 million ($4.1 million in fiscal year 2014). The significant decrease in net position for fiscal year 2015 also includes a reduction of $577.6 million to beginning net position for the cumulative effect of applying the new pension standards. No such reduction occurred in fiscal year 2014. The total change in net position, excluding the beginning balance adjustment for pensions, was a $139.8 million increase in fiscal year 2015. Capital and Debt Activities During fiscal year 2015, the University recorded additions to property and equipment totaling $135.9 million ($90.8 million and $136.1 million in fiscal years 2014 and 2013, respectively) of which $100.5 million related to buildings and construction in progress ($71.7 million and $110.9 million in fiscal years 2014 and 2013, respectively). The growth of the University’s property and equipment is a direct result of the successful UCONN 2000 program (see following page). The following pie chart presents the total property and equipment at cost:

Land, $20.3 , 1%

Non‐structural improvements, $245.2 , 9%

Buildings, $1,969.1 , 71%

Equipment, $419.9 , 15%

Construction in progress, $100.7 , 4%

TOTAL PROPERTY AND EQUIPMENT AT COST AT JUNE 30, 2015 ($ in Millions) Total $2,755.2


9

PA No. 95-230 enabled the University to borrow money in its own name for a special ten year capital improvement program (UCONN 2000) which was designed to modernize and expand the physical plant of the University. As amended, it provides for a twenty-nine year capital budget program in three phases for the University and UConn Health, estimated to cost $4.6 billion. The UCONN 2000 Act was originally adopted in 1995 to authorize and finance Phase I and Phase II projects at the University. It was amended in 2002, to add Phase III projects, and again in fiscal years 2010 and 2011 which extended the UCONN 2000 program for two more years and increased the estimated cost for certain UConn Health projects. In June 2013, the General Assembly of the State of Connecticut enacted and the Governor signed into law PA No. 13-233, An Act Concerning Next Generation Connecticut, which increased the authorized bond funding by $1.6 billion, including funds for UConn Health, and extended UCONN 2000 for an additional six fiscal years to 2024. In fiscal year 2015, the University issued UCONN 2000 general obligation bonds with a combined face value of $254.8 million ($425.9 million in fiscal year 2014) of which $159.8 million was committed to UConn Health for its UCONN 2000 projects (see Note 5). The State has made a commitment to fund the University for all principal and interest payments due on UCONN 2000 general obligation debt. As the general obligation debt is incurred, the commitment from the State is recorded as a current and noncurrent receivable (State debt service commitment in the accompanying Statements of Net Position). When bonds are issued, the amount of the commitment for UConn Health is reflected as a liability by the University. The following chart illustrates the categories of debt as of June 30, 2015, exclusive of premiums and discounts:

See Notes 4 and 5 of the financial statements for further information on capital and debt activities. Net Position Net position is divided into three major categories. The first category, net investment in capital assets, represents the University’s equity in property and equipment. The second category, restricted net position, is subdivided into nonexpendable and expendable. The corpus of restricted nonexpendable resources is only available for investment purposes, and in the University’s Statements of Net Position this amount represents endowment assets. Expendable restricted net position is available for expenditure by the institution, but must be spent for purposes determined by donors and/or external entities that have placed time or purpose restrictions on the use of the assets. The final category is unrestricted net position. Unrestricted net position is defined by GASB to include funds not restricted by third-parties, including unrestricted current funds, retirement of indebtedness funds, and plant funds. Unrestricted net position may be assigned to specific purposes by action of management or the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. However, GASB prohibits a breakout of assigned unrestricted funds on the face of the Statements of Net Position. Unrestricted funds are available to the University for any lawful purpose of the institution. For the most part all unrestricted funds are assigned to academic and research programs, capital programs, retirement of debt, and auxiliary enterprise activities. The University incurred a significant decrease in unrestricted net position due to the adoption of new pension accounting and reporting standards in fiscal year 2015. The graph on the following page shows a comparison between fiscal years by category in net position. In addition, the unrestricted net position has been divided into two categories to show the impact of the new pension standards.

General Obligation Bonds, $1,148.0 ,

87%

Revenues Bonds, $118.6 , 9%

Obligation under Capital Lease for Cogeneration,

$51.4 , 4%

Other Debt, $1.0 , 0%

CATEGORIES OF DEBT AT JUNE 30, 2015 ($ in Millions) Total $1,319.0


10

STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION Revenues and expenses are classified as operating, nonoperating, or other changes in net position according to definitions prescribed by GASB. Significant recurring sources of nonoperating revenues utilized in balancing the operating loss each year include State appropriation for general operations, State debt service commitment for interest, noncapital gifts, and short-term investment income. By its very nature, a State funded institution does not receive tuition, fees, and room and board revenues sufficient to support the operations of the University. Therefore, these nonoperating revenues are essential to the programs and services provided by the University. Unless a significant increase in tuition and fees and room and board revenues occurs, the University will always show a loss from operations. The following table shows condensed Statements of Revenues, Expenses, and Changes in Net Position for the fiscal years ended June 30 (in millions):

2015 2014 2013 Operating revenues $ 713.4 $ 667.2 $ 630.6 Operating expenses 1,160.6 1,097.7 998.5 Operating loss (447.2) (430.5) (367.9) Net nonoperating revenues 374.1 324.8 303.3 Loss before other changes in net position

(73.1)

(105.7)

(64.6)

Net other changes in net position 212.9 101.6 26.8 Increase (decrease) in net position $ 139.8 $ (4.1) $ (37.8)

While the Statements of Net Position present the financial condition at a point in time, the Statements of Revenues, Expenses, and Changes in Net Position represent the activity for a period of time – one year. These statements present either an increase or decrease in net position based on the revenues received by the University, both operating and nonoperating, the expenses paid by the University, operating and nonoperating, and any other revenues, expenses, gains and losses received or spent by the University.

$1,217.4

$68.5

$153.5

$1,187.6

$116.9

$130.8

$1,207.9

$219.0

$159.0

$(429.3)

($900) ($700) ($500) ($300) ($100) $100 $300 $500 $700 $900 $1,100 $1,300

Net Investment in Capital Assets

Restricted

Unrestricted, Excluding Pension Deficit

Unrestricted, Including Pension Deficit

NET POSITION ($ in Millions)

2013 2014 2015


11

Generally, operating revenues are earned when providing goods and services to the various customers of the University. Operating expenses are incurred in the normal operation of the University and represent those expenses paid to acquire or produce the goods and services provided in return for the operating revenues. Operating expenses also include the provision for estimated depreciation and amortization of property and equipment. The difference between operating revenues and operating expenses is the operating income or loss. The University typically experiences an operating loss each year because State appropriation is not included as operating income. Nonoperating revenues are revenues received for which goods and services are not provided, including State appropriation and State debt service commitment for interest. Such revenues are provided by the State to the University without the State directly receiving commensurate goods and services in exchange for those revenues. Nonoperating revenues (expenses) also include noncapital gifts, investment income, interest expense, and other expenses not considered operating expenses. Other changes in net position are comprised of the State’s debt service commitment for principal payments on general obligation bonds used for capital purposes, capital allocation, capital grants and gifts, the disposal of property and equipment, and additions to permanent endowments. The Statements of Revenues, Expenses, and Changes in Net Position reflect an increase in net position of $139.8 million in fiscal year 2015 and decreases in net position of $4.1 million in fiscal year 2014 and $37.8 million in fiscal year 2013. Revenues Revenue highlights, for fiscal years 2015 and 2014 and comparison between fiscal years, including operating and nonoperating revenues and other changes in net position, are as follows: Student tuition and fees, net of scholarship allowances, increased 10.2% in fiscal year 2015 (6.9% in fiscal year

2014). The increase in fiscal year 2015 was due in part to a 5.6% increase (5.8% in fiscal year 2014) for undergraduate in-state tuition and mandatory fees, a 6.2% increase (6.1% in fiscal year 2014) for undergraduate out-of-state tuition and mandatory fees, and an increase of 1.7% in undergraduate enrollment (1.3% in fiscal year 2014). Increased fee revenue was also attributed to an increase in enrollment for summer session programs as well as graduate business programs.

Total grants and contracts increased $8.2 million (5.1%) in fiscal year 2015 ($2.8 million or 1.8% in fiscal year 2014) primarily due to an increase in state and local grant aid as well as private foundation grants.

$630.6

$(998.5)

$(367.9)

$303.3

$(64.6)

$26.8

$(37.8)

$667.2

$(1,097.7)

$(430.5)

$324.8

$(105.7)

$101.6

$(4.1)

$713.4

$(1,160.6)

$(447.2)

$374.1

$(73.1)

$212.9 $139.8

($1,300)

($1,000)

($700)

($400)

($100)

$200

$500

$800

OperatingRevenues

OperatingExpenses

Operating Loss NetNonoperatingRevenues

Loss BeforeOther Changesin Net Position

Net OtherChanges in Net

Position

Increase(Decrease) inNet Position

STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION ($ in Millions)

2013 2014 2015


12

Sales and services of auxiliary enterprises, net of scholarship allowances, increased approximately 2.8% and 5.6% during fiscal years 2015 and 2014, respectively. The increase in fiscal year 2015 resulted from an increase in fees charged for both room and board of 3.0% for undergraduate students. The increase in fiscal year 2014 resulted from an increase in fees charged for both room and board of 3.0% for undergraduate combined with an increase in room occupancy of 2.0% over fiscal year 2013.

The largest source of nonoperating revenue, State appropriation including fringe benefits, increased $42.6 million in fiscal year 2015 compared to $19.6 million in fiscal year 2014. The State appropriation increase was primarily due to additional funds for the Next Generation Connecticut initiative, collective bargaining increases and an increase in payments for fringe benefits. However, the increase was less than expected due to rescissions of $11.5 million in fiscal year 2015 and $1.2 million in fiscal year 2014.

The State also provides State debt service commitment for the interest payments made annually on general obligation bonds. State debt service commitment for interest revenue is included with nonoperating revenues and corresponds to the total interest paid and accrued on general obligation bonds. Effectively, this revenue offsets a significant portion of interest expense each year. Also, as general obligation bonds are issued (see Note 5) the State commits to the repayment of the future principal amounts and a receivable is recorded on the Statements of Net Position to reflect this commitment. This results in revenue that is recorded in other changes in net position that totaled $56.4 million and $80.3 million in fiscal years 2015 and 2014, respectively. Included in other changes in net position, the State also allocated $131.5 million to finance construction for Tech Park in fiscal year 2015 (see Note 13).

Gift revenue, both capital and noncapital, is derived from gifts made directly to the University and from the

Foundation and the Law School Foundation. These spendable funds are provided to the University for educational, cultural, recreational, and research activities. Both the Foundation and the Law School Foundation disburse funds to the University as requests are made, provided the request is in accordance with donor restrictions, if any. These gifts, including capital gifts, received by the University from both foundations in fiscal years 2015 totaled approximately $25.9 million compared to $39.6 million in fiscal year 2014. On a combined basis, both Foundations also paid approximately $4.0 million in fiscal year 2015 ($3.8 million in fiscal year 2014) to third parties on behalf of the University. This amount is not reflected in the University’s financial statements. Total nonoperating gifts and capital grants revenue to the University from all sources amounted to $49.2 million and $43.3 million in fiscal years 2015 and 2014, respectively.

The following table summarizes operating and nonoperating revenues and other changes in net position for the fiscal years ended June 30 (in millions):

2015 2014 2013 Operating revenues: Student tuition and fees, net $ 308.2 $ 279.6 $ 261.7 Grants and contracts 170.8 162.6 159.8 Sales and services of educational departments 21.0 19.3 15.8 Sales and services of auxiliary enterprises, net 201.1 195.5 185.2 Other sources 12.3 10.2 8.1 Total operating revenues 713.4 667.2 630.6 Nonoperating revenues: State appropriation 350.7 308.1 288.4 State debt service commitment for interest 46.6 42.1 40.6 Gifts 23.8 21.7 20.0 Investment income 0.9 0.8 0.9 Other nonoperating revenue, net - - 0.4 Total nonoperating revenues 422.0 372.7 350.3 Other changes in net position: State debt service commitment for principal 56.4 80.3 - Capital allocation 131.5 - 20.0 Capital grants and gifts 25.4 21.6 6.7 Disposal of property and equipment, net and additions to permanent endowments 0.1 0.7 0.1 Total other changes in net position 213.4 102.6 26.8 Total revenues $ 1,348.8 $ 1,142.5 $ 1,007.7


13

Revenues, excluding other changes in net position, come from a variety of sources and are illustrated in the following graph:

*Revenues are shown net of scholarship allowances of $137.6 million. Expenses Operating expenses are classified by function in the accompanying Statements of Revenues, Expenses, and Changes in Net Position. These functions directly contribute to the major mission of the University. The following table summarizes operating and nonoperating expenses and other changes in net position for the fiscal years ended June 30 (in millions):

2015 2014 2013 Operating expenses: Instruction $ 382.3 $ 353.3 $ 302.2 Research 73.6 79.5 74.9 Academic support 131.9 125.5 117.7 Operations and maintenance of plant 114.9 105.1 95.0 Auxiliary enterprises 209.6 196.9 186.1 Depreciation and amortization 96.0 95.4 91.7 Other 152.3 142.0 130.9 Total operating expenses 1,160.6 1,097.7 998.5 Nonoperating expenses: Interest expense 46.4 46.0 47.0 Other nonoperating expense, net 1.5 1.9 - Total nonoperating expenses 47.9 47.9 47.0 Other changes in net position: Disposal of property and equipment, net 0.5 1.0 - Total other changes in net position 0.5 1.0 - Total expenses $ 1,209.0 $ 1,146.6 $ 1,045.5

Instruction is the University’s largest operating expense, representing 32.9% of total operating expenses in fiscal year 2015 (32.2% in fiscal year 2014 and 30.3% in fiscal year 2013). Other expenses under operating include public service, student services, institutional support, and aid paid to students after tuition, fees, and room and board are applied. Institutional support, which represents 5.0% of total operating expenses in fiscal years 2015 and 2014, contains the University’s general administrative costs but also includes fundraising, public relations and development activities.

Tuition and Fees*, $308.2 , 27%

Grants & Contracts, $170.8 , 15%

Sales & Services of Auxiliary Services*, $201.1 , 18%

Other Operating Revenues, $33.3 , 3%

State Appropriation, $350.7 , 31%

State Debt Service Commitment for Interest,

$46.6 , 4%

Gifts, Investment Income & Other, $24.7 , 2%

REVENUES FOR FISCAL YEAR 2015 ($ in Millions)Total: $1,135.4

OPERATING REVENUES

$713.4 , 63%

NONOPERATING REVENUES$422.0, 37%


14

The following graph depicts total operating expenses by function:

*Expenses are shown net of scholarship allowances of $137.6 million. The University’s operating expenses by natural classification are shown below:

2015 2014 2013 Operating expenses: Salaries and wages $ 542.1 $ 521.1 $ 482.7 Fringe benefits 271.2 237.7 190.6 Supplies and other expenses 228.1 222.6 213.8 Utilities 23.2 20.9 19.7 Depreciation and amortization 96.0 95.4 91.7 Total operating expenses $ 1,160.6 $ 1,097.7 $ 998.5

Total operating expenses were $1,160.6 million and $1,097.7 million in fiscal years 2015 and 2014, respectively. Highlights of expenses by natural classification for fiscal years 2015 and 2014 and comparison between fiscal years are as follows:

As demonstrated in the table above, salaries and wages with fringe benefits account for over half of the University’s

operating costs. Combined expenses for salaries and fringe benefits increased $54.5 million (7.2%) over fiscal year 2014 compared to an $85.6 million (12.7%) increase over fiscal year 2013. This was due in part to an average compensation increase of 4.5% for collective bargaining units, increases attributable to the new pension accounting standards, as well as increases in fringe benefit costs for employee transfers from the Alternate Retirement Plan to the Hybrid Plan (see Note 6). In addition, full-time equivalent faculty and staff also increased 1.1%. Full-time faculty members increased by 32 faculty over fiscal year 2014 (108 over fiscal year 2013), primarily a result of the faculty hiring initiative to reduce the student to faculty ratio. These factors drove the majority of the increases in instruction, academic support, public service, institutional support, and auxiliary enterprises. The increase over 2013 was attributed to an average compensation increase for collective bargaining units of approximately 5%, an increase of 3.5% in full-time equivalent faculty and staff, along with a rise in state-mandated fringe benefit rates related to the State’s defined benefit plan.

Supplies and other expenses increased $5.5 million (2.5%) primarily attributable to increases in expenses for

operations and maintenance of plant and auxiliary enterprises, offset in part by decreases in research activity and institutional support. Specific items include changes made to the University’s capitalization threshold for construction projects that resulted in significant increases in operations and maintenance expenses related to new and ongoing projects. The increase in auxiliary enterprises is attributable to asset impairment losses during fiscal year 2015 (see Note 4). Supplies and other expenses increased $8.8 million (4.1%) in fiscal year 2014 over 2013

Instruction*, $382.3 , 33%

Auxiliary Enterprises*, $209.6 , 18%

Academic Support*, $131.9 , 12%

Operations and Maintenance of Plant,

$114.9 , 10%Depreciation and

Amortization, $96.0 , 8%

Research*, $73.6 , 6%

Institutional Support*, $57.3 , 5%

Public Service*, $48.9 , 4%

Student Services*, $37.0 , 3%

Student Aid*, $9.1 , 1%

Other, $152.3 , 13%

OPERATING EXPENSES FOR FISCAL YEAR 2015 ($ in Millions) Total: $1,160.6*


15

due to increases in instructional program expenses, research activity, student aid issued directly to students, and the write-off of consumable inventory as a result of a change in accounting policy.

Utilities increased $2.2 million (10.7%) in fiscal year 2015 compared to a $1.2 million (6.3%) increase in fiscal year

2014. The change in the current year was primarily due to a need to purchase more electricity from external providers to support Cogeneration plant operations combined with a rise in gas costs attributed to increased transportation costs passed through from the provider. Oil costs were also higher by 13.9% in fiscal year 2015 due to a significant increase in consumption that was triggered by the Cogeneration plant being forced to switch from gas to oil for a longer period of time during the winter compared to the prior year.

Total property and equipment subject to depreciation in fiscal year 2015 increased $82.0 million ($131.8 million in

fiscal year 2014) which attributed to an increase of $0.6 million ($3.7 million in fiscal year 2014) in depreciation and amortization expense.

STATEMENTS OF CASH FLOWS The Statements of Cash Flows present detailed information about the cash activity of the University during the year. The first section of these statements, cash flows from operating activities, will always be different from the operating loss amount on the Statements of Revenues, Expenses, and Changes in Net Position. The difference results from noncash items such as depreciation and amortization expense and the use of the accrual basis of accounting in preparing the Statements of Revenues, Expenses, and Changes in Net Position. These statements show revenues and expenses when incurred, not necessarily when cash is received or used. The Statements of Cash Flows, on the other hand, show cash inflows and outflows without regard to accruals. The Statements of Cash Flows have four additional sections including: cash flows from noncapital financing activities including State appropriation, gifts and other nonoperating revenues and expenses; cash flows from capital financing activities that reflect the cash received and used by the University for financing, principally capital in nature, capital grants and gifts, and State debt service commitments for principal and interest; cash flows from investing activities showing the purchases, proceeds and interest received from investing activities; and a reconciliation of operating loss reflected on the Statements of Revenues, Expenses, and Changes in Net Position to net cash used in operating activities. The following table shows condensed Statements of Cash Flows for the years ended June 30 (in millions):

2015

2014

2013

Cash provided from operating activities $ 707.9 $ 673.4 $ 622.3 Cash used in operating activities (1,192.4) (1,069.1) (926.2) Net cash used in operating activities (484.5) (395.7) (303.9) Net cash provided from noncapital financing activities 367.9 321.0 304.4 Net cash provided from (used in) capital financing activities 142.9 216.7 (142.8) Net cash provided from (used in) investing activities (11.5) (168.6) 120.3 Net increase (decrease) in cash and cash equivalents $ 14.8 $ (26.6) $ (22.0)

$482.7

$190.6 $213.8

$19.7

$91.7

$521.1

$237.7 $222.6

$20.9

$95.4

$542.1

$271.2

$228.1

$23.2

$96.0

$0

$100

$200

$300

$400

$500

$600

Salaries andWages

Fringe Benefits Supplies andOther Expenses

Utilities Depreciation andAmortization

Operating Expenses by Natural Classification ($ in Millions)

2013 2014 2015


16

Net cash used in operating activities was $484.5 million and $395.7 million in fiscal years 2015 and 2014, respectively, and is consistent with the operating loss discussed earlier after adding back depreciation and amortization, a noncash expense. GASB requires that cash flows from noncapital financing activities include State appropriation and noncapital gifts. Cash flows from these activities totaled $367.9 million in fiscal year 2015 ($321.0 million in fiscal year 2014), a $46.9 million increase over fiscal year 2014 ($16.6 million over fiscal year 2013). Cash flows provided from capital financing activities was $142.9 million and $216.7 million in fiscal years 2015 and 2014, respectively. The major difference between fiscal years 2015 and 2014 was a decrease in bond proceeds of $59.0 million in fiscal year 2015 ($309.0 million increase in fiscal year 2014) in addition to an increase in the amount of purchases of property and equipment of $11.4 million ($30.1 million decrease in fiscal year 2014) and a decrease in capital grants and gifts received of $7.1 million ($15.1 million increase in fiscal year 2014). Net cash used in investing activities was $11.5 million in fiscal year 2015 and $168.6 million in fiscal year 2014. The major difference between fiscal years 2015 and 2014 was attributed to a decrease of $59.0 million in bond proceeds that were received in fiscal year 2015 as compared to an increase of $309.0 million in fiscal year 2014 which were invested in the deposit with bond trustee. Total cash and cash equivalents increased $14.8 million in fiscal year 2015 and decreased $26.6 million in fiscal year 2014 as a result of these activities. The following bar graph shows the cash flows provided from and used in major categories and as described in the preceding paragraphs:

$622.3

($926.2)

$304.4

($142.8)

$120.3

($22.0)

$673.4

($1,069.1)

$321.0

$216.7

($168.6)

($26.6)

$707.9

($1,192.4)

$367.9

$142.9

($11.5)

$14.8

($1,300)

($1,100)

($900)

($700)

($500)

($300)

($100)

$100

$300

$500

$700

Cash Provided fromOperating Activities

Cash Used inOperating Activities

Net Cash Providedfrom Noncapital

Financing Activities

Net Cash Providedfrom (Used in)

Capital FinancingActivities

Net Cash Providedfrom (Used in)

Investing Activities

Increase (Decrease)in Cash and Cash

Equivalents

CASH FLOWS ($ in Millions)

2013 2014 2015

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18

FINANCIAL STATEMENTS


19

UNIVERSITY OF CONNECTICUT STATEMENTS OF NET POSITION

As of June 30, 2015 and 2014 ($ in thousands) 2015 2014 ASSETS Current Assets Cash and cash equivalents $ 231,522 $ 216,759 Accounts receivable, net 44,490 42,239 Student loans receivable, net 2,088 2,018 Due from State of Connecticut 191,182 71,504 Due from related agencies 2,847 - State debt service commitment 114,840 107,401 Inventories 982 817 Deposit with bond trustee 221,928 209,621 Prepaid expenses and other assets 6,962 3,411 Total Current Assets 816,841 653,770Noncurrent Assets Cash and cash equivalents 1,429 1,432 Investments 14,661 12,264 Student loans receivable, net 10,649 10,609 State debt service commitment 1,050,470 931,745 Property and equipment, net 1,506,382 1,468,854 Total Noncurrent Assets 2,583,591 2,424,904 Total Assets 3,400,432 3,078,674 DEFERRED OUTFLOWS OF RESOURCES 171,080 7,452 LIABILITIES Current Liabilities Accounts payable 90,514 66,903 Unearned revenue 33,162 29,433 Deposits held for others 2,804 2,745 Wages payable 49,710 45,717 Compensated absences 27,464 25,810 Due to State of Connecticut 27,598 22,145 Due to affiliate (see Note 5) 80,294 91,429 Current portion of long-term debt and bonds payable 118,198 110,408 Other current liabilities 37,418 34,379 Total Current Liabilities 467,162 428,969Noncurrent Liabilities Compensated absences 7,633 8,146 Long-term debt and bonds payable 1,335,043 1,202,281 Refundable for federal loan program 11,461 11,370 Pension liabilities (see Note 6) 726,099 - Total Noncurrent Liabilities 2,080,236 1,221,797 Total Liabilities 2,547,398 1,650,766 DEFERRED INFLOWS OF RESOURCES 26,515 - NET POSITION Net investment in capital assets 1,207,892 1,187,602Restricted nonexpendable 13,091 13,546Restricted expendable Research, instruction, scholarships and other 19,334 15,465 Loans 2,533 2,482 Capital projects 184,023 85,447Unrestricted (see Note 1) 7 (429,274) 130,818 Total Net Position $ 997,599 $ 1,435,360


20

UNIVERSITY OF CONNECTICUT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION

For the Years Ended June 30, 2015 and 2014

($ in thousands) 2015 2014 OPERATING REVENUES

Student tuition and fees (Net of scholarship allowances of $134,279 for 2015 and $123,312 for 2014. See Note 1.)

$ 308,174

$ 279,577

Federal grants and contracts 118,383 118,492State and local grants and contracts 31,931 29,512Nongovernmental grants and contracts 20,535 14,619Sales and services of educational departments 21,028 19,280Sales and services of auxiliary enterprises (Net of scholarship allowances of $3,338 for 2015 and $3,213 for 2014. See Note 1.)

201,066

195,525

Other sources 12,263 10,168 Total Operating Revenues 713,380 667,173OPERATING EXPENSES

Educational and general Instruction 382,256 353,251 Research 73,596 79,484 Public service 48,884 41,919 Academic support 131,914 125,557 Student services 36,955 36,787 Institutional support 57,330 54,484 Operations and maintenance of plant 114,889 105,148 Depreciation and amortization 95,990 95,377 Student aid 9,127 8,796Auxiliary enterprises 209,633 196,935

Total Operating Expenses 1,160,574 1,097,738 Operating Loss (447,194) (430,565)NONOPERATING REVENUES (EXPENSES)

State appropriation 350,699 308,069State debt service commitment for interest 46,635 42,091Gifts 23,828 21,703Investment income 889 799Interest expense (46,420) (45,955)Other nonoperating expenses, net (1,540) (1,873)

Net Nonoperating Revenues 374,091 324,834 Loss Before Other Changes in Net Position OTHER CHANGES IN NET POSITION

(73,103) (105,731)

State debt service commitment for principal 56,430 80,346Capital allocation 131,500 (20)Capital grants and gifts 25,412 21,643Disposal of property and equipment, net (473) (1,043)Additions to permanent endowments 66 743

Net Other Changes in Net Position 212,935 101,669 Increase (Decrease) in Net Position 139,832 (4,062)NET POSITION

Net Position-beginning of year 1,435,360 1,439,422Prior year adjustment for pensions (see Note 1) (577,593) - Net Position-beginning of year, adjusted 857,767 1,439,422Net Position-end of year $ 997,599 $ 1,435,360


21

UNIVERSITY OF CONNECTICUT STATEMENTS OF CASH FLOWS


($ in thousands) 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES

Student tuition and fees $ 301,682 $ 277,809Grants and contracts 168,978 163,893Sales and services of auxiliary enterprises 202,887 197,202Sales and services of educational departments 20,841 19,623Payments to suppliers and others (407,836) (326,090)Payments to employees (538,324) (514,970)Payments for benefits (243,790) (225,325)Loans issued to students (2,500) (2,763)Collection of loans to students 2,367 2,269Other receipts, net 11,137 12,612

Net Cash Used in Operating Activities (484,558) (395,740) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES

State appropriation 348,899 302,223Gifts 19,298 19,543Other nonoperating expenses, net (255) (738)

Net Cash Provided from Noncapital Financing Activities 367,942 321,028 CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES

Proceeds from bonds 250,000 309,000State debt service commitment 136,712 119,753Purchases of property and equipment (110,871) (99,472)Proceeds from sale of property and equipment 312 125Principal paid on debt and bonds payable (103,389) (88,481)Interest paid on debt and bonds payable (51,929) (49,062)Capital allocation 10,909 6,636Capital grants and gifts 11,138 18,189

Net Cash Provided from Capital Financing Activities 142,882 216,688 CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of investments, net (86) (762)Interest on investments 888 782Deposit with bond trustee (12,308) (168,591)

Net Cash Used in Investing Activities (11,506) (168,571)INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,760 (26,595) BEGINNING CASH AND CASH EQUIVALENTS 218,191 244,786ENDING CASH AND CASH EQUIVALENTS $ 232,951 $ 218,191


22

UNIVERSITY OF CONNECTICUT STATEMENTS OF CASH FLOWS (Continued)

For the Years Ended June 30, 2015 and 2014 ($ in thousands) 2015 2014 RECONCILIATION OF OPERATING LOSS TO NET CASH USED IN OPERATING ACTIVITIES Operating Loss $ (447,194) $ (430,565) Adjustments to Reconcile Operating Loss to Net Cash

Provided from (Used in) Operating Activities: Depreciation and amortization expense 95,990 95,377 Property and equipment 3,092 (127) Investment (1,910) -

In-kind worker’s compensation 2,294 1,831 Obligations under capital leases 61 101 Changes in Assets and Liabilities:

Receivables, net (2,551) 3,081 Inventories (165) 3,420 Prepaid expenses and other assets (3,551) (457) Accounts payable, wages payable and compensated absences 6,805 8,988 Unearned revenue 3,729 3,908 Deposits 59 320 Due from (to) State of Connecticut 6,436 4,483 Due to affiliate (159,245) (86,932) Pension liabilities 10,707 - Other liabilities 904 1,110 Loans to students (19) (278)

Net Cash Used in Operating Activities $ (484,558) $ (395,740)

ACCOMPANYING SCHEDULE OF SIGNIFICANT NONCASH TRANSACTIONS Proceeds from refunding bonds $ 40,279 $ 157,743 Amortization of premiums/discounts/net loss on debt refundings 7,885 6,032 Unrealized gain on investment 401 888 Capital assets acquired through gifts 16,324 256 Loss on disposal of capital assets (2,332) (1,168) Investment under corporate licensing agreement 1,440 -


23

UNIVERSITY OF CONNECTICUT COMPONENT UNIT

THE UNIVERSITY OF CONNECTICUT LAW SCHOOL FOUNDATION, INC. STATEMENTS OF FINANCIAL POSITION

As of June 30, 2015 and 2014 ($ in thousands) ASSETS 2015 2014 Current Assets Cash and cash equivalents $ 3,102 $ 1,557 Pledges receivable, net of allowance 351 170 Other current assets 37 51 Total Current Assets 3,490 1,778Noncurrent Assets Pledges receivable, net of allowance 111 48 Investments 19,252 19,314 Property and equipment, net of accumulated depreciation of $133 for 2015 and $131 for 2014

1

3

Total Noncurrent Assets 19,364 19,365 Total Assets $ 22,854 $ 21,143 LIABILITIES AND NET ASSETS

Current Liabilities Accounts payable $ 3 $ 6 Net Assets

Unrestricted 1,792 1,787 Temporarily restricted 7,022 5,648 Permanently restricted 14,037 13,702 Total Net Assets 22,851 21,137 Total Liabilities and Net Assets $ 22,854 $ 21,143

STATEMENTS OF ACTIVITIES For the Years Ended June 30, 2015 and 2014

($ in thousands)

Unrestricted Temporarily

Restricted Permanently

Restricted 2015 Total

2014 Total

REVENUES AND SUPPORT Contributions and grants $ 448 $ 1,409 $ 381 $ 2,238 $ 1,314 Interest and dividends 25 477 - 502 489 Net realized and unrealized gains 31 613 - 644 2,137 Net assets released from restrictions 1,123 (1,123) - - - Write-off of pledges receivable 48 (2) (46) - -

Total Revenues and Support 1,675 1,374 335 3,384 3,940 EXPENSES Program Expenses

Scholarships and awards 257 - - 257 231 Student support and faculty support 681 - - 681 592 Alumni and graduate relations 72 - - 72 73

Total Program Expenses 1,010 - - 1,010 896 Support Expenses

Management and general 458 - - 458 436 Fundraising 202 - - 202 113 Total Support Expenses 660 - - 660 549

Total Expenses 1,670 - - 1,670 1,445 Changes in Net Assets 5 1,374 335 1,714 2,495

Net Assets-beginning of year 1,787 5,648 13,702 21,137 18,642 Net Assets-end of year $ 1,792 $ 7,022 $ 14,037 $ 22,851 $ 21,137

24



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Notes to Financial Statements For the Years Ended June 30, 2015 and 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity The University of Connecticut is a comprehensive institution of higher education, which includes the University of Connecticut Health Center (UConn Health). Although governed by a single Board of Trustees, the University of Connecticut and UConn Health maintain separate budgets and are, by statute, separate entities for purposes of maintaining operating funds and appropriations from the State of Connecticut (State). UConn Health also has a Board of Directors to whom the Board of Trustees has delegated certain responsibility and authority. This financial report for the fiscal years ended June 30, 2015 and 2014 represents the transactions and balances of the University of Connecticut (University), herein defined as all programs except UConn Health. Two related, but independent, corporate entities support the mission of the University: The University of Connecticut Foundation, Inc. (Foundation) (see Note 13) and The University of Connecticut Law School Foundation, Inc. (Law School Foundation). The Foundation raises funds to promote, encourage, and assist education and research at both the University and UConn Health, while the Law School Foundation, with similar objectives, supports only the University. In accordance with standards issued by the Governmental Accounting Standards Board (GASB), the financial reporting entity consists of the primary government, organizations for which the primary government is financially accountable, and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading. Legally separate and tax exempt entities shall be presented as component units of the reporting entity if they meet all of the following criteria: the economic resources of the organization are entirely or almost entirely for the direct benefit of the reporting unit; the reporting unit is entitled to access all or a majority of the economic resources received or held by the organization; and the economic resources received or held by the organization are significant to the reporting unit. The Law School Foundation, which is organized for the benefit of the University and whose economic resources can only be used by or for the benefit of the University, is included as a component unit of the University. The Law School Foundation’s audited Statements of Financial Position and Statements of Activities are discreetly presented in their original formats on a separate page of the accompanying financial statements. The Foundation materially supports the mission of the University and UConn Health, which are separately audited, producing their own financial statements. Displaying the Foundation’s financial statements as a component unit of either the University or UConn Health would distort its actual contribution or economic benefit to that entity and therefore, the Foundation is not included as a component unit in the accompanying financial statements. Financial Statement Presentation The accompanying financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, as prescribed by GASB. The University follows the “business-type activities” (BTA) model as required by GASB Statement No. 35, Basic Financial Statements - and Management’s Discussion and Analysis - for Public Colleges and Universities. BTAs are defined as those that are financed in whole or in part by fees charged to external parties for goods or services. In conformity with GASB reporting requirements, the University presents a Management’s Discussion and Analysis; a Statement of Net Position; a Statement of Revenues, Expenses, and Changes in Net Position; a Statement of Cash Flows; Notes to the Financial Statements; and Required Supplementary Information. All significant intra-agency transactions have been eliminated. New Accounting Standards In 2012, GASB issued Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68, Accounting and Financial Reporting for Pensions. GASB 67 pertains to financial reporting by state and local government pension plans, effective for plan years beginning after June 15, 2013. GASB 68 addresses new accounting and financial reporting requirements for governmental employers that provide their employees with pension benefits administered through a qualified trust and is effective for the University beginning July 1, 2014. This statement establishes standards for measuring and recognizing pension liabilities, deferred outflows of resources, deferred inflows of resources, and expenses.


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The State is statutorily responsible for the retirement benefits of State employees, including employees of the University, a component unit of the State. Under GASB 68, component units are required to recognize a liability for their proportionate share of the net pension liability of the primary government. Consequently, the University must report its proportionate share of the collective pension amounts related to the State Employees’ Retirement System and the Teachers’ Retirement System in its stand-alone financial statements effective for the fiscal year ended June 30, 2015. This statement also requires extensive note disclosure and required supplementary information (RSI) related to pensions. In addition, the University adopted GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, effective simultaneously with the provisions of GASB 68. This Statement amends GASB 68 to require that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. For the implementation of GASB 68, it was not feasible for the University to restate financial statements for the year ended June 30, 2014. As a result, the cumulative effect of applying GASB 68 and 71 is reported as a restatement of beginning net position for the year ended June 30, 2015. The following table presents the impact of this change (amounts in thousands):

2015 Beginning net position, July 1, 2014 $ 1,435,360 Cumulative effect of adoption of GASB 68 and 71 (577,593) Adjusted beginning net position, July 1, 2014 $ 857,767

The University also adopted GASB Statement No. 69, Government Combinations and Disposals of Government Operations, effective July 1, 2014 on a prospective basis. This Statement establishes accounting and financial reporting standards pertaining to government combinations and disposals of government operations. GASB 69 defines government combinations to include mergers, acquisitions and transfers of operations. This statement also provides guidance for disposals of government operations that have been transferred or sold. There was no significant impact on the accompanying financial statements for fiscal year 2015 as a result of this adoption. Cash Equivalents (see Note 2) For the purposes of the Statements of Cash Flows, the University considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Funds invested in the State of Connecticut Treasurer’s Short-Term Investment Fund are also considered cash equivalents. Investments (see Note 2) The University accounts for its investments at fair value. Changes in the unrealized gain (loss) on the carrying value are recorded in nonoperating revenues (expenses) in the accompanying Statements of Revenues, Expenses, and Changes in Net Position. Noncurrent investments are externally restricted by donors or outside sources that have stipulated as a condition of the gift instrument that the principal be maintained inviolate and in perpetuity. Accounts and Student Loans Receivable (see Note 3) Accounts receivable consist of tuition, fees, auxiliary enterprises service fees and amounts due from state and federal governments for grants and contracts. Student loans receivable consist primarily of amounts due from students under the Federal Perkins Loan Program, which are subject to significant restrictions. The student loans receivable is classified as current and noncurrent based on the amount estimated to be collected from students in one year and beyond one year. Accounts and student loans receivable are recorded net of an estimated allowance for doubtful accounts. Inventories Inventories that consist primarily of maintenance and custodial supplies, repair parts, and other general supplies used in the daily operations of the University are fully expensed when received. Inventories classified as available for resale are reported on the accompanying Statements of Net Position and are valued at cost as determined by the first-in, first-out method. Deposit with Bond Trustee (see Note 5) Tax-exempt bond proceeds are deposited to various accounts held by the Trustee Bank as required by certain trust indentures. The funds are invested and disbursed as directed by the University. The University’s bond proceeds investment policy is to balance an appropriate risk-return level heavily weighted towards safety of assets, as defined and permitted under the relative indentures and State General Statutes.


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The University directs the Trustee Bank to invest UCONN 2000 General Obligation construction fund proceeds in the State Treasurer’s Short-Term Investment Fund. Similarly, the University has directed the Trustee Bank to invest the debt service funds and cost of issuance for the special obligation bonds in dedicated Short-Term Investment Fund accounts. Investment earnings from UCONN 2000 General Obligation bond proceeds are retained by the State Treasurer’s Office and do not flow to the University or to the Trustee Bank. The Student Fee Revenue Bonds investment earnings are part of the pledged revenues and are directly retained by the Trustee Bank to pay debt service on the bonds or for other indenture permitted purposes. The earnings on the UCONN 2000 General Obligation Debt Service Commitment Refunding Bonds and the Special Obligation Student Fee Revenue Refunding Redemption Fund escrows form part of the irrevocable escrows and are used by the Trustee Bank to meet the debt service payments on the defeased bonds until called. Noncurrent Cash and Cash Equivalents (see Note 2) Noncurrent cash and cash equivalents are related to endowment assets and are externally restricted as to use. Property and Equipment (see Note 4) Property and equipment are reported at cost at date of acquisition or fair value at date of donation as in the case of gifts. Property and equipment that are exchanged for other assets are recorded based on the fair value of the asset given up or the fair value of the asset received, whichever value is most clearly evident. Renovations that significantly increase the value or useful life of an asset are capitalized. Routine repairs and maintenance, and certain library materials, are charged to operating expenses in the year incurred. Building components and non-structural improvements have estimated useful lives of 2 years to 60 years. Equipment has estimated useful lives of 3 years to 30 years. Most University capital assets are financed through the issuance of general obligation bonds, which are restricted in accordance with State legislation. Additionally, the repayment of principal and related interest on these bonds are funded through the State (see Note 5). Therefore, the University generally does not include interest in the cost of the capital assets constructed. Compensated Absences (see Note 8) Employee vacation, holiday, compensatory, and sick leave are accrued at year end for financial statement purposes. The liability and expense incurred are recorded at year end as compensated absences in the accompanying Statements of Net Position and in the various expense functions on the accompanying Statements of Revenues, Expenses, and Changes in Net Position. The liability for compensated absences is also classified as current and noncurrent based on the amount estimated to be paid to employees in one year and beyond one year, respectively. Noncurrent Liabilities Noncurrent liabilities include the long-term portion of compensated absences of the University, principal payments due on bonds (net of unamortized premiums and discounts), loans and capital leases with a maturity of more than one year, pension liabilities, and governmental advances for revolving loan programs that would be returned to the federal government upon cessation of the student loan program. Pension Liabilities (see Note 6) In accordance with GASB 68, the University records its proportionate share of the State’s collective net pension liability and collective pension expense for each defined-benefit plan offered to its employees. The collective net pension liability for each plan is measured as the total pension liability less the amount of the pension plan’s fiduciary net position. The total pension liability is the portion of the actuarial present value of projected benefit payments that are attributable to past periods of plan member service. Information about the fiduciary net position and additions to/deductions from each pension plan’s fiduciary net position has been determined on the same basis as they are reported by each pension plan. For this purpose, plan member contributions are recognized in the period in which the contributions are due. Employer contributions are recognized in the period in which the contributions are appropriated. Benefits and refunds are both recognized when due and payable in accordance with the terms of each plan. Unearned Revenue (see Note 11) Unearned revenue includes amounts received for services to be rendered in a future accounting period including tuition and fee revenues and event ticket sales. It also includes amounts received for certain restricted research grants that are included in revenue until the funds are expended.


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Deferred Outflows and Deferred Inflows of Resources (see Note 7) The University reports its proportionate share of collective deferred outflows or collective deferred inflows of resources related to the State’s defined-benefit plans. Differences between expected and actual experience in the measurement of the total pension liability, changes of assumptions, changes in proportion, and differences between actual and proportionate share of contributions are classified as either deferred outflows or deferred inflows and are recognized over the average of the expected remaining service lives of employees eligible for pension benefits. The net differences between projected and actual earnings on pension plan investments are reported as deferred outflows or deferred inflows and are recognized over five years. Contributions to the pension plan from the University, subsequent to the measurement date of the net pension liability and before the end of the reporting period, are reported as a deferred outflow of resources related to pensions. The difference between the reacquisition price and the net carrying amount of refunded bonds is classified as an accumulated net gain or loss in deferred inflows or deferred outflows of resources. Such amounts are amortized as a component of interest expense on a straight-line basis over the life of the old debt, or the new debt, whichever is shorter. Net Position GASB requires that resources be classified for accounting and reporting purposes into the following categories of net position: Net investment in capital assets: Capital assets, net of accumulated depreciation and amortization, and reduced

by outstanding principal balances of bonds (net of State debt service commitment) and notes that are attributable to the acquisition, construction, or improvement of those assets. Deferred outflows of resources and deferred inflows of resources that are attributable to the acquisition, construction, or improvement of those assets or related debt are also included in this component.

Restricted nonexpendable: Represents endowment and similar type assets in which donors or 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 expended or reinvested in principal.

Restricted expendable: Assets reduced by liabilities and deferred inflows of resources related to those assets that

are expendable but where the University is legally or contractually obligated to spend the resources in accordance with restrictions imposed by external third parties.

Unrestricted: The net amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of

resources that do not meet the definition of “restricted” or “net investment in capital assets”. These assets are not subject to externally imposed stipulations; however, they are subject to internal designations. For example, amounts classified as unrestricted may be assigned to specific purposes by action of management or the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. For the most part, all unrestricted amounts in net position are assigned to support academic and research programs, capital projects, retirement of indebtedness, and auxiliary enterprise activities.

The University’s policy regarding whether to first apply restricted or unrestricted resources when an expense is incurred is based on a variety of factors, including consideration of prior or future revenue sources, the type of expense incurred, and the University’s budgetary policies surrounding the various revenue sources or whether the expense is a recurring cost. In order to ensure observance of limitations and restrictions placed on the use of the resources available to the University, the accounts of the University are maintained internally following the principles of "fund accounting". This is the procedure by which resources for various purposes are classified for accounting and reporting purposes into funds that are in accordance with specified activities or objectives. Revenues and Expenses Operating revenues consist of tuition and fees, state and federal grants and contracts, sales and services of educational activities, auxiliary enterprises revenue, and other sources of revenue. GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, requires recipients of government-mandated and voluntary nonexchange transactions to recognize revenue when all applicable eligibility requirements are met for these transactions. Restricted grant revenue that does not meet the nonexchange transaction definition is recognized to the extent expended or in the case of fixed price contracts, when the contract terms are met or completed. Operating expenses, except for depreciation and amortization, are reported using functional classification, including those under educational and general and auxiliary enterprises. See Note 15 for operating expenses by natural classification. All


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other revenues and expenses of the University are reported as nonoperating revenues and expenses including State appropriation, debt service commitment for interest, noncapital gifts, investment income, interest expense, net other nonoperating revenues (expenses), and other changes in net position. Revenues are recognized when earned and expenses are recognized when incurred. GASB requires that revenues be reported net of discounts and scholarship allowances. Student aid for scholarships and fellowships, recorded in the accompanying Statements of Revenues, Expenses and Changes in Net Position, includes payments made directly to students. Any aid applied directly to the students’ accounts in payment of tuition and fees, housing charges and dining services is reflected as a scholarship allowance and is deducted from the University’s revenues. Certain governmental grants, such as Pell grants, and other federal, state or nongovernmental programs, are recorded as operating revenues in the University’s financial statements. To the extent that revenues from such programs are used to satisfy tuition and fees and other student charges, the University has recorded a scholarship allowance. Component Unit The Law School Foundation prepares its financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Net assets, revenues and expenses are classified based on the terms of donor-imposed restrictions, if any. Accordingly, the Law School Foundation’s net assets and changes therein are classified and reported as follows: Unrestricted Net Assets: Net assets that are not subject to donor-imposed restrictions. Temporarily Restricted Net Assets: Net assets subject to donor-imposed stipulations that may or will be met,

either by actions of the Law School Foundation and/or passage of time. When the restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets.

Permanently Restricted Net Assets: Net assets subject to donor-imposed stipulations that they be maintained

permanently by the Law School Foundation. Generally, the donors of these assets permit the Law School Foundation to use all or part of the income earned on related investments for general or specific purposes.

Unconditional contributions are recognized as revenue when pledged or received. Conditional promises to give are not recognized as revenue until the conditions on which they depend are substantially met. Investments in marketable debt and equity securities, money market funds and mutual funds are stated at fair value. 2. CASH AND CASH EQUIVALENTS AND INVESTMENTS GASB Statement No. 40, Deposit and Investment Risk Disclosures, requires governmental entities to disclose credit risk associated with cash deposits and investment balances, and investment policies applied to mitigate such risks. This is especially important as they relate to uninsured and unregistered investments for which the securities are held by the broker or dealer, or by its trust department or agent, but not in the University's name. The University’s total cash and cash equivalents balance was $233.0 million and $218.2 million as of June 30, 2015 and 2014, respectively, and included the following (amounts in thousands):

2015 2014 Cash maintained by State of Connecticut Treasurer $ 197,261 $ 190,067 Invested in State of Connecticut Short-Term Investment Fund 27,868 14,244 Invested in State of Connecticut Short-Term Investment Fund - Endowments 1,429 1,432 Invested in Short-Term Corporate Notes 3,881 5,511 Deposits with Financial Institutions and Other 2,512 6,937 Total cash and cash equivalents 232,951 218,191 Less: current balance 231,522 216,759 Total noncurrent balance $ 1,429 $ 1,432

Collateralized deposits are protected by State statute. Under this statute, any bank holding public deposits must at all times maintain, segregated from its other assets, eligible collateral in an amount equal to at least a certain percentage of its public deposits. The applicable percentage is determined based on the bank's risk-based capital ratio – a measure of the bank's financial condition. The collateral is kept in the custody of the trust department of either the pledging bank or another bank


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in the name of the pledging bank. Portions of the bank balance of the State are insured by the Federal Deposit Insurance Corporation or collateralized. As a State agency, the University benefits from this protection, though the extent to which the deposits of an individual State agency such as the University are protected cannot be readily determined. Short-Term Investment Fund (STIF) is a money market investment pool in which the State, municipal entities, and other political subdivisions of the State are eligible to invest. The State Treasurer is authorized to invest monies of STIF in United States government and agency obligations, certificates of deposit, commercial paper, corporate bonds, savings accounts, bankers’ acceptances, repurchase agreements, asset-backed securities, and student loans. For financial reporting purposes, STIF is considered to be “cash equivalents” in the accompanying Statements of Net Position. The University's cash management investment policy permits the University to invest in STIF, United States Treasury bills, United States Treasury notes and bonds, United States Government Agency obligations, banker's acceptances, certificates of deposit (including EURO Dollars), commercial paper, money market funds, repurchase agreements, and savings accounts. Cash and cash equivalents include amounts of $27.9 million and $1.4 million invested in STIF, which had a Standard and Poor’s rating of AAAm during fiscal year 2015. The $3.9 million invested in Short-Term Corporate Notes during fiscal year 2015 includes repurchase agreements held with a financial institution and is collateralized by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, both of which had an AA+ Standard and Poor’s rating. The University designated the Foundation as the manager of the University's endowment funds. Gifts that are internally designated as endowments, and externally designated endowment gifts that are to be processed for transfer to the Foundation, are included in cash and cash equivalents. The Foundation makes spending allocation distributions to the University for each participating endowment. The distribution is spent by the University in accordance with the respective purposes of the endowments, the policies and procedures of the University and State statutes, and in accordance with the Foundation’s endowment spending policy described below. The endowment spending policy adopted by the Foundation's Board of Directors, in conjunction with the strategic asset allocation policy for the long-term pooled investment portfolio, is designed to provide reliable growth in annual spending allocation levels and to preserve or increase the real value of the endowment principal over time. To meet these objectives, the Foundation utilizes a total return investment approach, with total return consisting of interest and dividends as well as realized and unrealized gains and losses, net of management fees. The Foundation’s endowment spending allocation policy adheres to the Connecticut Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA considers prudence in maintaining an endowment fund in perpetuity. Therefore, spending can occur from an endowment fund whose fair value is below its historic value as long as the governing body has determined that its policies will continue the perpetual nature of the endowment over time. An administrative fee is assessed to fund expenses incurred in meeting the Foundation’s fiduciary and fundraising responsibilities to donors and the University. The endowment spending allocation and administrative fee taken together cannot exceed 6.5% or fall below 3.0% of the fair value of endowment funds at March 31. Should this occur, the calculated amounts will be decreased or increased, respectively, on a pro rata basis. Over the long term, the Foundation expects the current spending allocation and administrative fee policies to allow endowments to grow at least at the annualized rate of inflation on average. This is consistent with the organization’s objective of providing resources for the underlying purposes of endowment assets over the life of the endowments whether in perpetuity or for a specified term, as well as to provide additional growth through new gifts and investment return. The cost and fair value of the University's investments including those managed by the Foundation at June 30, 2015 and 2014 were (amounts in thousands):

2015 2014 Cost Fair Value Cost Fair Value Endowments: Foundation managed $ 10,442 $ 11,661 $ 10,356 $ 12,114 Other: POET Technologies, Inc. 1,440 2,850 - - Campus Associates Limited Partnership interest 150

150 150

150

Total investments $ 12,032 $ 14,661 $ 10,506 $ 12,264


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University endowment investments are managed by the Foundation in a pooled portfolio, which is actively managed by professional investment managers as determined by the Investment Committee of the Foundation’s Board of Directors. The Foundation has established asset allocation guidelines for the pooled investment portfolio, which provide that the maximum exposure with any one manager would be 20% for actively managed liquid assets and 5% for illiquid assets. The Foundation’s Board of Directors also established an asset allocation policy for the long-term pooled investment portfolio (see following table). The Foundation expects that portfolios will be invested in only the strategies described in the table, not above or below the individual strategy percentage and its total percentage by objective, unless otherwise specified by its Board of Directors.

Investment Objective/Strategies

Allocation Range as Percentage of Market Value

Growth High yield fixed income 0% - 10% Global equities 0% - 70% Private capital 0% - 20% Global macro strategies 0% - 10% Event driven strategies (ex diversified) 0% - 10% Real estate (public & private) 0% - 10% Other opportunistic 0% - 10% Total Growth 40% - 85% Inflation Hedge TIPS 0% - 10% Natural resources/commodities 0% - 15% Other inflation hedging strategies 0% - 10% Total Inflation Hedge 5% - 25% Risk Minimizing Investment grade fixed income 0% - 20% Relative value/event driven (diversified) 0% - 15% Cash equivalents 0% - 10% Other low volatility strategies 0% - 10% Total Risk Minimizing 5% - 40%

The endowments invested with the Foundation are subject to risk due to the uncollateralized nature of most of its investments. Certain investments of the Foundation include external investment pools. The bond mutual funds, high yield fixed income, and bank loans had average credit quality of B1 (Moody’s). The University endowment’s foreign publicly traded equities totaled $1.8 million in fiscal years 2015 and 2014. Private capital investments totaled approximately $1.3 million and $1.7 million at June 30, 2015 and 2014, respectively.

The University also holds a partnership interest in Campus Associates Limited Partnership (see Note 13). The cost basis was used to estimate fair market value for this investment because the fair value was not readily available as of June 30, 2015 and 2014. As a result, the estimated fair value may differ from the value that would have been assigned had a ready market for such an investment existed; however, it is unlikely that such differences would be material. In fiscal year 2012, the University received 250,000 shares in POET Technologies, Inc. (POET) as partial consideration for entering into a licensing agreement. During fiscal year 2014, the University restructured its license agreement with POET and accepted 2.0 million of common shares in exchange for reducing its sublicense royalty payment from 30% to 3%. As part of this restructured agreement, trading of these shares is restricted until May 2016. As a result, the University did not record a fair value estimate for fiscal year 2014 given that the amount was not readily determinable. Since the trading restriction expires within one year, the quoted market price was used to determine the fair value as of June 30, 2015. In accordance with the University’s royalty sharing policy, 33 1/3% of the value of the POET shares must be distributed to the inventor and accordingly, a corresponding liability was recorded. The investment in POET is denominated in Canadian dollars and therefore is subject to foreign currency risk. Foreign currency risk is the risk that investments denominated in foreign currencies may lose value due to adverse fluctuation in the value of the U.S. dollar relative to the foreign currencies. Certain other funds are held in trust for investment by outside trustees. The University is designated as the income beneficiary and the funds are not under the direct control of the University. Accordingly, the assets of these funds are not included in the accompanying financial statements. The fair value of these funds was $14.1 million and $14.2 million as of June 30, 2015


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and 2014, respectively. Investment income earned on these assets is transferred to the University in accordance with applicable trust agreements. Income received from those sources for the years ended June 30, 2015 and 2014 was $554,000 and $499,000, respectively. 3. ACCOUNTS AND STUDENT LOANS RECEIVABLE Accounts receivable at June 30, 2015 and 2014 consisted of the following (amounts in thousands):

2015 2014 Grants and contracts $ 29,368 $ 27,558 Student and general 20,829 20,239 Investment income 82 81 Allowance for doubtful accounts (5,789) (5,639) Total accounts receivable, net $ 44,490 $ 42,239

The University participated in the U.S. Department of Education Federal Direct Lending program during fiscal years 2015 and 2014 and distributed student loans through this program of $162.6 million and $155.8 million, respectively. These distributions and related funding are not reflected as expenses and revenues or as cash disbursements and cash receipts in the accompanying financial statements. The excess of direct loans distributed over funding received from the U.S. Department of Education as of June 30, 2015 and 2014 was $184,000 and $262,000, respectively, and these amounts were included as receivables under grants and contracts. The University reported student loans receivable of $12.7 million and $12.6 million for fiscal years ended June 30, 2015 and 2014, respectively. Student loans receivable are substantially comprised of amounts owed from students under the Federal Perkins Loan Program and are reported separately from accounts receivable on the accompanying Statements of Net Position. The amounts are reported net of an allowance for doubtful accounts of $1.0 million and $1.1 million at June 30, 2015 and 2014, respectively. 4. PROPERTY AND EQUIPMENT Land, buildings, non-structural improvements, and equipment are reported at cost at date of acquisition or fair value at date of donation as in the case of gifts. Property and equipment that are exchanged for other assets are recorded based on the fair value of the asset given up or the fair value of the asset received, whichever value is most clearly evident. Any gains or losses on the exchange are recognized immediately. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the respective assets. Building components and non-structural improvements have estimated useful lives of 2 years to 60 years. Equipment has estimated useful lives of 3 years to 30 years. Library materials, capitalized software, art and historical collections are all included in equipment in the accompanying schedule of Changes in Property and Equipment. Library materials have an estimated useful life of 15 years. The value of library materials, before depreciation, was $81.7 million and $81.2 million with accumulated depreciation of $63.5 million and $58.0 million at June 30, 2015 and 2014, respectively. Capitalized software has an estimated life of 3 years to 5 years. The value of capitalized software, before amortization, was $22.6 million and $29.4 million with accumulated amortization of $13.8 million and $18.9 million at June 30, 2015 and 2014, respectively. Art and historical collections are recognized at their estimated fair values at the time of donation and are not depreciated. Art totaled $14.0 million and $13.8 million at June 30, 2015 and 2014, respectively. Historical collections totaled $41.7 million and $41.1 million at June 30, 2015 and 2014, respectively. The Thomas J. Dodd Research Center (Dodd Center) maintains historical collections of original source materials used for research as well as the University’s official archive. In fiscal year 2002, historical collections were initially valued at $31.1 million based on an internal valuation performed by the Dodd Center. Beginning in 2002, the value of the Dodd Center Collection had been adjusted for new items if their fair value could


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be substantiated by an appraisal or an internal valuation. Beginning in 2011, new items have been added to the collection only if their fair value could be substantiated by an external appraisal. On July 1, 2010, the University increased the capitalization threshold for equipment from $1,000 to $5,000. Equipment previously capitalized under the $5,000 threshold will be written-off when it becomes fully depreciated. For both years ended June 30, 2015 and 2014, total amounts of $3.0 million of fully depreciated equipment falling under the new threshold are included in equipment retirements. For the year ended June 30, 2015, a total of $1.5 million was expensed under auxiliary enterprises in the accompanying Statements of Revenues, Expenses, and Changes in Net Position for impairment losses due to structural deficiencies at a residential complex.


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The following table describes the changes in property and equipment for the years ended June 30, 2015 and 2014 (amounts in thousands):

Changes in Property and Equipment for the Year Ended June 30, 2015: Balance Transfers and Balance July 1, 2014 Additions Retirements other June 30, 2015 Property and equipment: Land $ 20,029 $ 247 $ (2) $ - $ 20,274 Non-structural improvements 239,637 1,978 - 3,619 245,234 Buildings 1,902,953 31,503 (1,982) 36,607 1,969,081 Equipment 408,748 33,137 (22,134) 134 419,885 Construction in progress 72,076 68,985 - (40,360) 100,701 Total property and equipment 2,643,443 135,850 (24,118) - 2,755,175 Less accumulated depreciation and amortization: Non-structural improvements 124,403 8,635 - - 133,038 Buildings 794,159 63,597 (381) - 857,375 Equipment 256,027 23,758 (21,405) - 258,380 Total accumulated depreciation and amortization 1,174,589 95,990 (21,786) - 1,248,793 Property and equipment, net: Land 20,029 247 (2) - 20,274 Non-structural improvements 115,234 (6,657) - 3,619 112,196 Buildings 1,108,794 (32,094) (1,601) 36,607 1,111,706 Equipment 152,721 9,379 (729) 134 161,505 Construction in progress 72,076 68,985 - (40,360) 100,701

Property and equipment, net $ 1,468,854 $ 39,860 $ (2,332) $ - $ 1,506,382 Changes in Property and Equipment for the Year Ended June 30, 2014: Balance Transfers and Balance July 1, 2013 Additions Retirements other June 30, 2014 Property and equipment: Land $ 18,497 $ 1,511 $ (1) $ 22 $ 20,029 Non-structural improvements 226,290 3,071 - 10,276 239,637 Buildings 1,789,418 30,907 (1,512) 84,140 1,902,953 Equipment 403,364 14,562 (9,178) - 408,748 Construction in progress 125,735 40,779 - (94,438) 72,076 Total property and equipment 2,563,304 90,830 (10,691) - 2,643,443 Less accumulated depreciation and amortization: Non-structural improvements 115,474 8,929 - - 124,403 Buildings 732,301 62,535 (677) - 794,159 Equipment 240,960 23,913 (8,846) - 256,027 Total accumulated depreciation and amortization 1,088,735 95,377 (9,523) - 1,174,589 Property and equipment, net: Land 18,497 1,511 (1) 22 20,029 Non-structural improvements 110,816 (5,858) - 10,276 115,234 Buildings 1,057,117 (31,628) (835) 84,140 1,108,794 Equipment 162,404 (9,351) (332) - 152,721 Construction in progress 125,735 40,779 - (94,438) 72,076

Property and equipment, net $ 1,474,569 $ (4,547) $ (1,168) $ - $ 1,468,854


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5. LONG-TERM DEBT PAYABLE Public Act (PA) No. 95-230 enabled the University to borrow money in its own name for a special ten year capital improvement program (UCONN 2000) designed to modernize, rehabilitate, and expand the physical plant of the University. It authorized projects for Phases I and II of UCONN 2000, estimated to cost $1,250.0 million, of which $962.0 million was to be financed by bonds of the University; $18.0 million was to be funded by State general obligation bonds; and the balance of $270.0 million was to be financed by gifts, other revenue, or borrowing resources of the University. In fiscal year 2002, the General Assembly of the State of Connecticut (General Assembly) enacted and the Governor signed into law PA No. 02-3, An Act Concerning 21st Century UConn (Act). The new Act authorized additional projects for the University and UConn Health for what is called Phase III of UCONN 2000. This Act amended PA No. 95-230 and extended the UCONN 2000 financing program. The Act, as amended by PA No. 10-104 and 11-75, authorized projects under Phase III at a total estimated cost of $1,818.3 million, of which $1,769.9 million was financed by bonds of the University secured by the State’s Debt Service Commitment and $48.4 million was financed by the issuance of special obligation bonds of the University, from gifts, other revenue or borrowing resources of the University, or through the deferring of projects or achieved savings. In June 2013, the General Assembly enacted and the Governor signed into law PA No. 13-233, An Act Concerning Next Generation Connecticut, an extension of Phase III which authorized additional projects, increased the cost of certain projects, increased the authorized bond funding secured by the State’s Debt Service Commitment by $1,551.0 million and extended UCONN 2000 for an additional six fiscal years to 2024. The total estimated cost for Phase I, II, and III under UCONN 2000, a twenty-nine year capital project program, is $4,619.3 million. As part of the UCONN 2000 program, and in addition to $4.6 billion for phases I through III, the General Assembly and the Governor authorized $169.5 million in State General Obligation Bonds to finance the development of the Technology Park (Tech Park) on the Storrs campus for the University (see Note 13). In August 2011 and April 2013, $18.0 million and $20.0 million respectively, were allocated by the State Bond Commission. Also, in May 2015, the State Bond Commission allocated $131.5 million for the development of Tech Park. These bonds are obligations of the State and are not included as debt in the University’s financial statements. The University issues general obligation bonds to finance UCONN 2000 projects. The University has also issued several series of general obligation refunding bonds, providing debt service savings for bonds refunded in advance of maturity. Sufficient proceeds were deposited into irrevocable escrow accounts held by the Trustee Bank to meet all obligations on the refunded debt (see Note 1) and invested in U.S. Treasury, State and Local Government Securities and cash in accordance with the Escrow Agreement. These bonds are general obligations of the University, for which its full faith and credit are pledged, and are payable from all assured revenues. The bonds are additionally secured by the pledge of and a lien upon the State debt service commitment. The State debt service commitment is the commitment by the State to pay an annual amount of debt service on securities issued as general obligations of the University. The University, consistent with the Act, is relying upon the receipt of the annual amount of the pledged State debt service commitment for the payment of the bonds and, accordingly, is not planning to budget any revenues for the payment of these bonds. Under the Master Indenture, the University expects to issue additional bonds to finance UCONN 2000 projects secured by the State debt service commitment. In fiscal year 2015, the University issued the 2015 Series A bonds. The University recorded $220.2 million as State debt service commitment for principal together with part of the original issue premium, which resulted in total proceeds of $250.0 million. The proceeds included $159.8 million to finance projects for UConn Health for fiscal year 2015. In fiscal year 2014, the University issued the 2013 and 2014 Series A bonds. The University recorded $172.7 million and $109.0 million as State debt service commitment for principal together with part of the original issue premium, which resulted in total proceeds of $189.0 million and $120.0 million for the 2013 and 2014 Series A bonds, respectively. The proceeds included $116.8 million from the 2013 Series A bonds and $76.4 million from the 2014 Series A bonds to finance projects for UConn Health for fiscal year 2014. As bonds are issued, the amount of the commitment for UConn Health is reflected as an offset to the revenue for the University. This offset to finance projects for UConn Health, recorded in other changes in net position on the accompanying Statements of Revenues, Expenses, and Changes in Net Position, resulted in net revenue of $56.4 million and $88.5 million for the years ended June 30, 2015 and 2014, respectively. A corresponding liability is recorded in due to affiliate in the Statements of Net Position for the unspent portion of the bonds due to UConn Health ($80.3 million and $91.4 million at June 30, 2015 and 2014, respectively). Also, for the years ended June 30, 2015 and 2014, nonoperating revenues


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include the State debt service commitment for interest on general obligation bonds of $46.6 million and $42.1 million, respectively. A portion of interest on general obligation bonds is associated with UConn Health projects. During fiscal years 2015 and 2014, the University issued the 2015, 2014, and 2013 Refunding Series A bonds to refund portions of the previously issued Series A General Obligation Bonds in advance of maturity. The decrease in bonds as a result of refundings in the amount of $3.9 million and $8.1 million is reflected as a reduction of the State debt service commitment for principal in fiscal years 2015 and 2014, respectively, on the accompanying Statements of Revenues, Expenses, and Changes in Net Position. The refundings reduced the general obligation debt service payments in the future years by approximately $18.2 million and resulted in an economic gain (present value of the savings) of approximately $16.0 million. The following table reflects the change in debt as a result of the Series A 2015, 2014, and 2013 refundings (amounts in thousands):

2015 2014 2004 Series A $ - $ 17,270 2005 Series A - 45,840 2004 Series A Refunding - 89,195 2006 Series A 38,550 - Total defeased debt 38,550 152,305 Total refunding bonds 34,625 144,190 Decrease in bonds as a result of refunding $ 3,925 $ 8,115

The University may also issue special obligation bonds, also called student fee revenue bonds, which are backed by certain pledged revenues of the University. In fiscal years 2015 and 2014, there were no special obligation bonds issued or refunded. The special obligation bonds are secured by certain pledged revenues, as defined in the indenture, including gross and net revenue amounts. The total gross and net pledged revenues from tuition and fees, auxiliary, investment and other revenues of the University were approximately $85.7 million in fiscal years 2015 and 2014. Gross pledged revenues include the infrastructure maintenance fee and the general university fee plus investment income on the bond accounts held by the Trustee Bank, prior to any payments, deductions, offsets, or provisions. Net pledged revenues include the residential life room fee, student apartment rentals, Greek housing fee, the board (dining) fee, and the parking and transportation fees, after providing for the cost of maintaining, repairing, insuring, and operating the facilities for which the fees are imposed and before depreciation expense is deducted. In addition to securing revenue bonds, the gross and net pledged revenues available are pledged toward certain other debt. The University has covenanted to collect in each fiscal year, fees representing pledged revenues so that the sum of gross and net revenue amounts is no less than 1.25 times the debt service requirements in such fiscal year for the special obligation bonds. The total principal and interest remaining to be paid on all special obligation bonds as of June 30, 2015 and 2014 was $164.5 million and $176.1 million, respectively. The total amount paid by pledged revenues was $6.0 million and $5.8 million for the principal and $5.6 million and $5.7 million for the interest on this debt in fiscal years 2015 and 2014, respectively. Net unamortized premium and discounts are recorded as additions to the face value of bonds payable. These amounts are amortized using the straight-line basis over the life of the bonds, reducing interest expense for premiums and increasing it for discounts. The University also has a long-term UCONN 2000 Governmental Lease Purchase Agreement to finance the UCONN 2000 project related to Cogeneration (see Note 10). The State issues certain general obligation bonds that are categorized as self-liquidating bonds. These bonds are issued to fund the construction and renovations of revenue-generating capital projects. The University reimburses the State primarily with revenue from student fee charges in the amount equal to the debt service on self-liquidating bonds.


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Long-term debt activity for the years ended June 30, 2015 and 2014 was as follows (amounts in thousands):

Long-term Debt Activity for the Year Ended June 30, 2015: Balance Balance Current July 1, 2014 Additions Retirements June 30, 2015 portion General obligation bonds $ 1,023,985 $ 254,790 $ (130,790) $ 1,147,985 $ 97,515 Revenue bonds 124,615 - (5,990) 118,625 6,215 Self-liquidating bonds 551 - (202) 349 74 Installment loans 1,027 61 (417) 671 425 Obligation under capital lease for Cogeneration 55,437 - (4,039) 51,398 4,169 Total long-term debt 1,205,615 254,851 (141,438) 1,319,028 108,398 Premiums/discounts 107,074 37,134 (9,995) 134,213 9,800 Total long-term debt, net $ 1,312,689 $ 291,985 $ (151,433) $ 1,453,241 $ 118,198

Long-term Debt Activity for the Year Ended June 30, 2014: Balance Balance Current July 1, 2013 Additions Retirements June 30, 2014 portion

General obligation bonds $ 828,795 $ 425,900 $ (230,710) $ 1,023,985 $ 92,240 Revenue bonds 130,415 - (5,800) 124,615 5,990 Self-liquidating bonds 1,050 - (499) 551 202 Installment loans 1,319 101 (393) 1,027 405 Obligation under capital lease for Cogeneration 59,320 - (3,883) 55,437 4,040 Total long-term debt 1,020,899 426,001 (241,285) 1,205,615 102,877 Premiums/discounts 82,980 43,897 (19,803) 107,074 7,531 Total long-term debt, net $ 1,103,879 $ 469,898 $ (261,088) $ 1,312,689 $ 110,408


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Long-term debt outstanding at June 30, 2015 and 2014 consisted of the following (amounts in thousands):

Type of debt and issue date

Type of issue

Principal payable

Maturity

dates through

fiscal year

Interest rate*

Balance Bonds: 2015 2014 GO 2005 Series A original annually 2025 3.7% $ - $ 4,895 GO 2006 Series A original annually 2026 4.0-5.0% 3,860 46,270 GO 2006 Ref. Series A refund annually 2020 4.75-5.0% 52,270 55,035 GO 2007 Series A original annually 2027 3.6-5.0% 50,400 54,600 GO 2007 Ref. Series A refund various 2022 5.0% 46,030 46,030 GO 2009 Series A original annually 2029 3.0-5.0% 100,990 108,115 GO 2010 Series A original annually 2030 3.0-5.0% 72,820 77,680 GO 2010 Ref. Series A refund annually 2021 2.25-5.0% 19,470 23,930 GO 2011 Series A original annually 2031 3.515-5.0% 143,775 152,765 GO 2011 Ref. Series A refund various 2023 2.0-5.0% 27,005 29,420 GO 2013 Series A original annually 2034 2.0-5.0% 164,030 172,660 GO 2013 Ref. Series A refund various 2024 2.0-5.0% 48,460 50,595 GO 2014 Series A original annually 2034 2.0-5.0% 103,600 109,050 GO 2014 Ref. Series A refund various 2025 2.0-5.0% 60,485 92,940 GO 2015 Series A original annually 2035 1.0-5.0% 220,165 - GO 2015 Ref. Series A refund annually 2026 4.0-5.0% 34,625 - Total general obligation bonds 1,147,985 1,023,985 Rev 2010 Ref. Series A refund annually 2028 3.0-5.0% 35,945 39,260 Rev 2012 Ref. Series A refund annually 2030 1.5-5.0% 82,680 85,355 Total revenue bonds 118,625 124,615 June 2001 refund annually 2016 5.5% 74 149 April 2005 refund various 2017 4.37-5.25% 275 275 December 2007 refund annually 2015 3.5-5.0% - 127 Total self-liquidating bonds 349 551 Total bonds 1,266,959 1,149,151 Loans and other debt: Installment loans various various 1.05-1.959% 671 1,027 Obligation under capital lease for Cogeneration

monthly

2026

3.22-5.09% 51,398

55,437

Total loans and other debt 52,069 56,464 Total bonds, loans and installment purchases 1,319,028 1,205,615 Premiums/discounts 134,213 107,074 Total bonds, loans and installment purchases, net 1,453,241 1,312,689 Less: current portion, net 118,198 110,408 Total noncurrent portion, net $ 1,335,043 $ 1,202,281

*Weighted average coupon rates averaged by year of redemption.


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Long-term debt including general obligation bonds, revenue bonds, and loans are scheduled to mature in the following fiscal years as of June 30 (amounts in thousands):

General obligation bonds Long-term debt other than general

obligation bonds Total obligations

Year(s) Principal Interest Total Principal Interest Total Principal Interest Total

2016 $ 97,515 $ 50,850 $ 148,365 $ 10,882 $ 6,989 $ 17,871 $ 108,397 $ 57,839 $ 166,236

2017 95,275 48,870 144,145 11,263 6,594 17,857 106,538 55,464 162,002

2018 92,100 44,691 136,791 11,167 6,186 17,353 103,267 50,877 154,144

2019 88,455 40,520 128,975 11,425 5,779 17,204 99,880 46,299 146,179

2020 82,755 36,402 119,157 12,487 5,325 17,812 95,242 41,727 136,969

2021-2025 336,175 129,468 465,643 65,617 18,813 84,430 401,792 148,281 550,073

2026-2030 235,380 59,508 294,888 48,202 5,636 53,838 283,582 65,144 348,726

2031-2035 120,330 14,038 134,368 - - - 120,330 14,038 134,368

Total $ 1,147,985 $ 424,347 $ 1,572,332 $ 171,043 $ 55,322 $ 226,365 $ 1,319,028 $ 479,669 $ 1,798,697

6. RETIREMENT PLANS AND POST EMPLOYMENT BENEFITS The University implemented GASB 68 for the fiscal year ended June 30, 2015. Under GASB 68, governmental employers whose employees participate in pension plans covered under GASB 67, and who prepare accrual based financial statements are required to report their share of the pension liabilities and related deferred outflows and deferred inflows of resources in their stand-alone financial statements. The University did not restate the accompanying financial statements for the year ended June 30, 2014; therefore, pension liabilities and related deferred outflows or deferred inflows were not reflected for that fiscal year based on prior pension accounting standards. Alternatively, the cumulative effective of implementing GASB 68 was recorded as an adjustment to beginning net position for the year ended June 30, 2015 (see Note 1). State Employees' Retirement System (SERS) Pension plan. SERS is a single-employer defined-benefit plan that covers substantially all of the State’s full-time employees who are not eligible for another State sponsored retirement plan. Approximately 51% of the University’s eligible employees participate in SERS which is administered by the State Comptroller’s Retirement Division under the direction of the State Employees Retirement Commission. SERS consists of five plans: Tier I, Tier II, Tier IIA, Tier III, and the Hybrid Plan. The University, a component unit of the State, must report its proportionate share of the collective net pension liability and related measures as if SERS was a cost-sharing employer plan in accordance with GASB 68. Benefits provided. SERS was established by the General Assembly for the purpose of providing retirement, disability, and death benefits along with annual cost-of-living adjustments (COLAs) to plan members and their beneficiaries. Generally, the monthly pension benefit is calculated in accordance with a basic formula that takes into consideration average salary, credited service, and age at retirement. Further details on plan benefits, COLAs and other plan provisions are described in Sections 5-152 to 5-192x of the State General Statutes. SERS does not issue a stand-alone financial report but is reported as a fiduciary fund within the State’s Comprehensive Annual Financial Report (CAFR). Financial reports are available on the website of the Office of the State Comptroller at www.osc.ct.gov. Contributions. The contribution requirements are established and may be amended by the State legislature subject to the contractual rights established by collective bargaining. Tier I Plan B regular and Hazardous Duty members are required to contribute 2.0% and 4.0% of their annual salary, respectively, up to the Social Security Taxable Wage Base plus 5.0% above that level; Tier I Plan C members are required to contribute 5.0% of their annual salary; Tier II Plan Hazardous Duty members are required to contribute 4.0% of their annual salary; Tier IIA and Tier III Plans regular and Hazardous Duty members are required to contribute 2.0% and 5.0% of their annual salary, respectively. Individuals hired on or after July 1, 2011 otherwise eligible for the Alternate Retirement Plan are eligible to become members of the Hybrid Plan in addition to their other existing choices. The Hybrid Plan has defined benefits identical to Tier II/IIA/III for individuals hired on or after July 1, 2011, but requires employee contributions 3.0% higher than the contribution required from the applicable Tier II/IIA/III Plan. The University makes contributions on behalf of the employees through a fringe benefit charge assessed by the State at 35.2% and 34.5% for fiscal years 2015 and 2014, respectively. These amounts are expected to finance the costs of benefits earned


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by employees during the year, with an additional amount to finance any unfunded accrued liability. The University’s contributions for regular and hazardous duty members were $66.9 million and $57.2 million for fiscal years 2015 and 2014, respectively. Proportionate share of collective Net Pension Liability (NPL). At June 30, 2015, the University reported a liability of $722.0 million for its proportionate share of the collective NPL. The collective NPL was measured as of June 30, 2014, and the total pension liability (TPL) used to calculate the collective NPL was determined by an actuarial valuation as of that date. The University’s proportion of the collective NPL was based on the University’s share of contributions relative to total contributions made to SERS. Based on this calculation, the University’s proportion was 4.51% at June 30, 2014 which was an increase of a 0.7 percentage point from its proportion measured as of June 30, 2013. The significant change in proportion was primarily due to increased transfers to the new hybrid plan. Actuarial assumptions. TPL for SERS was determined based on the annual actuarial funding valuation report prepared as of June 30, 2014 and was based on the results of an actuarial experience study for the period July 1, 2007 – June 30, 2011. The key actuarial assumptions are summarized below:

Inflation 2.75% Salary increases 4.00% – 20.00%, including inflation Investment rate of return 8.00%, net of pension plan investment

expense, including inflation

Mortality rates were based on the RP-2000 Mortality Table for Annuitants and Non-Annuitants projected with the scale AA, 15 years for men (setback 2 years) and 25 years for women (setback 1 year) for the period after service retirement and for dependent beneficiaries. For the period after disability retirement, 55% (men) and 80% (women) of the RP-2000 Disabled Mortality Table was used. The projection of the RP-2000 mortality rates with age setbacks as described provides an approximate 13% margin in the assumed rates of mortality. The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of arithmetic real rates of return for each major asset class as of June 30, 2014 are summarized in the following table:

Asset Class Target

Allocation Long-term Expected Real Rate of Return

Large Cap U.S. Equities 21.0% 5.8% Developed Non-U.S. Equities 18.0% 6.6% Emerging Market (Non-U.S.) 9.0% 8.3% Real Estate 7.0% 5.1% Private Equity 11.0% 7.6% Alternative Investments 8.0% 4.1% Fixed Income (Core) 8.0% 1.3% High Yield Bonds 5.0% 3.9% Emerging Market Bond 4.0% 3.7% TIPS 5.0% 1.0% Cash 4.0% 0.4% Total 100.0%

Discount rate. The discount rate used to measure the TPL at June 30, 2014 was the long-term rate of return of 8.0%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rates and that employer contributions will be made equal to the difference between the projected


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actuarially determined contribution and member contributions. Projected future benefit payments for all current plan members were projected through the year 2115. Based on those assumptions, SERS’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the TPL and a municipal bond rate was not used in determining the discount rate. Sensitivity of the University’s proportionate share of the collective NPL to changes in the discount rate. The following table presents the University’s proportionate share of the collective NPL calculated using the discount rate of 8.0%, as well as what the University’s proportionate share of the collective NPL would be if it were calculated using a discount rate that is 1-percentage-point lower (7.0%) or 1-percentage-point higher (9.0%) than the current rate (amounts in thousands):

1% Current 1% Decrease Discount Rate Increase (7.0%) (8.0%) (9.0%)

University’s proportionate share of the collective NPL – (SERS) $ 861,300 $ 722,009 $ 604,867

A recent study performed on this plan suggested lowering the long-term assumed investment return to reduce funding shortfalls for ongoing benefits. The State is considering lowering the discount rate to 7.0% for future reporting periods. Pension plan fiduciary net position. Detailed information about the fiduciary net position of the SERS pension plan is available in the State’s CAFR for the fiscal year ended June 30, 2014. Connecticut Teachers’ Retirement System (TRS) Pension plan. TRS is a cost-sharing multiple-employer defined-benefit plan covering any teacher, principal, superintendent, or supervisor engaged in service of public schools in the State. Employees previously qualified for TRS continue coverage during employment with the University, and do not participate in any other offered retirement plans. TRS is governed by Chapter 167a of the State General Statutes, as amended through the current session of the State Legislature, and is administered by the Teachers’ Retirement Board. Benefits provided. TRS provides retirement, disability, and death benefits, and annual COLAs to plan members and their beneficiaries. Generally, monthly plan benefits are based on a formula in combination with the member’s age, service, and the average of the highest three years of paid salaries. Further information on TRS plan benefits, COLAs, and other plan provisions are described in Sections 10-183b to 10-183ss of the State General Statutes. TRS does not issue a stand-alone financial report but is reported as a fiduciary fund within the State’s CAFR, which is available on the website of the Office of the State Comptroller. Contributions. The contribution requirements are established and may be amended by the State legislature. Plan members are required to contribute 6.0% of their annual salary. According to Section 10-183z of the State General Statutes, a special funding situation requires the State to contribute 100% of employer’s contributions on behalf of its municipalities at an actuarially determined rate. This special funding situation does not apply to the University, an agency of the State, because there is not a separate non-employer contributing entity. The University makes contributions on behalf of the employees through a fringe benefit charge assessed by the State at 35.0% and 33.0% for fiscal years 2015 and 2014, respectively. The University’s contributions for fiscal years 2015 and 2014 were $425,000 and $393,000, respectively. Proportionate share of collective NPL. At June 30, 2015, the University reported a liability of $4.1 million for its proportionate share of the collective NPL. The collective NPL was measured as of June 30, 2014, and the TPL used to calculate the collective NPL was determined by an actuarial valuation as of that date. The University’s proportion of the collective NPL was based on the University’s share of contributions relative to total contributions made to TRS. Based on this calculation, the University’s proportion was 0.04% at June 30, 2014 which was a decrease less than a .01 percentage point from its proportion measured as of June 30, 2013. Actuarial assumptions. TPL as of June 30, 2014 was determined based on the annual actuarial funding valuation report prepared as of June 30, 2014 and was based on the results of an actuarial experience study for the period July 1, 2005 – June 30, 2010.


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The key actuarial assumptions are summarized below:

Inflation 3.00% Salary increases 3.75% – 7.00%, including inflation Investment rate of return 8.50%, net of pension plan investment


Mortality rates were based on the RP-2000 Combined Mortality Table projected 19 years using scale AA, with a two-year setback for males and females for the period after service retirement and for dependent beneficiaries. The Scale AA projection to 2019 of the RP-2000 mortality rates with two-year setbacks is estimated to provide a sufficient margin in the assumed rates of mortality to allow for additional improvement in mortality experience. The post-retirement mortality rates are multiplied by 75% for death in active service. The post-retirement mortality rates are set forward ten years for the period after disability retirement. The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of arithmetic real rates of return for each major asset class as of June 30, 2014 are summarized in the following table:

Asset Class Target


Mutual Equity 25.0% 7.3% Developed Markets ISF 20.0% 7.5% Emerging Markets ISF 9.0% 8.6% Core Fixed Income 13.0% 1.7% Emerging Market Debt 4.0% 4.8% High Yield 2.0% 3.7% Inflation Linked Bonds 6.0% 1.3% Liquidity Fund 6.0% 0.7% Real Estate 5.0% 5.9% Private Investment 10.0% 10.9% Total 100.0%

Discount rate. The discount rate used to measure the TPL was 8.5%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that State contributions will be made at the actuarially determined rates in future years. Based on those assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the TPL. Sensitivity of the University’s proportionate share of the collective NPL to changes in the discount rate. The following presents the University’s proportionate share of the collective NPL calculated using the discount rate of 8.5%, as well as what the University’s proportionate share of the collective NPL would be if it were calculated using a discount rate that is 1-percentage-point lower (7.5%) or 1-percentage-point higher (9.5%) than the current rate (amounts in thousands):


University’s proportionate share of the collective NPL – (TRS) $ 5,220 $ 4,090 $ 3,128


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A recent study performed on this plan suggested lowering the long-term assumed investment return to reduce funding shortfalls for ongoing benefits. The State is considering lowering the discount rate to 7.0% for future reporting periods. Pension plan fiduciary net position. Detailed information about the fiduciary net position of the TRS pension plan is available in the State’s CAFR for the fiscal year ended June 30, 2014. Proportionate Share of Collective NPL and Collective Pension Expense The University’s portion of the collective NPL at June 30, 2015 and related pension expense for fiscal year 2015 consisted of the following (amounts in thousands):

SERS TRS Total University’s proportionate share of the

collective NPL $ 722,009 $ 4,090 $ 726,099 University’s proportionate share of the

collective pension expense $ 77,766 $ 240 $ 78,006 Deferred Outflows and Deferred Inflows of Resources Related to Pensions The University reported deferred outflows of resources related to pensions of $164.3 million as of June 30, 2015. This consisted of changes in the University’s proportion of the collective NPL for SERS of $97.0 million in addition to University contributions made subsequent to the measurement date but before the end of the reporting period of $66.9 million for SERS and $425,000 for TRS. The University reported deferred inflows of resources related to pensions of $26.5 million as of June 30, 2015. This included the University’s proportionate share of each plan’s collective deferred inflows relating to net differences between projected and actual earnings on pension plan investments of $25.8 million and $336,000 for SERS and TRS, respectively. Changes in the University’s proportion and contributions included for TRS totaled $392,000. The $67.3 million in deferred outflows relating to University contributions made subsequent to the measurement date will be recognized as a reduction of the collective NPL in the year ending June 30, 2016. Other amounts reported above as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows (amounts in thousands):

Fiscal Year SERS TRS Total 2016 $ 14,064 $ (152) $ 13,912 2017 14,064 (152) 13,912 2018 14,064 (151) 13,913 2019 14,063 (151) 13,912 2020 14,973 (68) 14,905 Thereafter - (55) (55) Total $ 71,228 $ (729) $ 70,499

Alternate Retirement Plan The University also sponsors the Alternate Retirement Plan (ARP), a defined contribution plan administered through a third-party administrator, Voya Retirement Insurance and Annuity Company. Beginning July 1, 2015, administration of ARP has changed to Prudential Financial, Inc. The Connecticut State Employees Retirement Commission has the authority to supervise and control the operation of the plan including the authority to make and amend rules and regulations relating to the administration of the plan. All unclassified employees, not already in a pension plan, of a constituent unit of the State system of higher education and the central office staff of the Department of Higher Education, are eligible to participate in ARP. Participants must contribute 5% of eligible compensation each pay period while the University will contribute an amount equal to 8% of the participant’s eligible compensation. Participant and University contributions are both 100% vested immediately. For fiscal years 2015 and 2014, University contributions to ARP were approximately $18.9 million and $19.0 million, respectively. A participant who retires or who experiences severance of employment for any reason other than retirement may elect, by written notice to the Plan administrator, to commence distribution of his or her account after attaining age 55; provided however, that the participant who experiences a severance of employment from state service with less than 5 years of


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participation may elect, at the time and in the manner prescribed by the Plan administrator, to have his or her entire account paid directly to an eligible retirement plan in a direct rollover prior to attaining age 55. The participant or designated beneficiary can withdraw a partial or lump cash payment or receive installment payments or annuity payments. Other ARP provisions are described in Title 5 – State Employees, Chapter 66 – State Employees Retirement Act of the Connecticut General Statutes. Department of Dining Services With respect to the University’s Department of Dining Services (DDS), of its 514 full-time employees, 68 participate in either SERS or ARP, while 446 are eligible to participate in two other retirement plans: the University of Connecticut, Department of Dining Services Money Purchase Pension Plan (MPPP) or the University of Connecticut, Department of Dining Services 403(b) Retirement Plan. Both plans are administered through a third-party administrator (TPA), Pension Consultants, Inc. The fiduciary of the plans has the authority to supervise and control the operation of the plans including the authority to make and amend rules and regulations relating to the administration of the plans. The MPPP is a defined contribution plan. Under the provisions of MPPP, all employees of DDS with 700 hours of service and 12 months of service are eligible to participate. DDS is required to contribute 6% or 8% of employees’ covered compensation for eligible employees, dependent upon hire date, and its employees do not make any contributions to the Plan. Employees are vested after 3 years of credited service. Employees who terminated prior to January 1, 2007 are subject to a 5 year vesting cliff. Any amounts forfeited shall be used to reduce DDS’s contribution. On behalf of MPPP participants, DDS contributed approximately $771,000 and $702,000 to the plan for the years 2015 and 2014, respectively. Forfeitures used to reduce the required contributions were approximately $19,600 and $10,700, respectively. Upon separation of service in accordance with plan provisions, a participant or designated beneficiary can withdraw a lump sum payment or receive annuity payments. Other plan provisions can be found in the MPPP document. The University of Connecticut, Department of Dining Services 403(b) Retirement Plan is also a defined contribution plan. Under the provisions of the 403(b) Retirement Plan, all employees who perform services for DDS as common law employees are eligible to participate. For any department participant employed on September 1, 1994 or terminated and rehired prior to September 1, 1995 who has 700 hours of service, DDS is required to contribute 50% of the first 4% of compensation, if deferred. Participants hired after August 31, 1994, do not receive a DDS match. Participant and State matches are both 100% vested. On behalf of 403(b) Retirement Plan participants, DDS contributed approximately $21,100 and $20,200 to the plan for the years 2015 and 2014, respectively. Upon separation of service in accordance with plan provisions, a participant or designated beneficiary can withdraw a lump sum payment or receive annuity payments. Other plan provisions can be found in the 403(b) Retirement Plan document. Post-Employment Benefits other than Pension In addition to the pension benefits, the State provides post-retirement health care and life insurance benefits to University employees in accordance with State Statutes Sections 5-257(d) and 5-259(a). When employees retire, the State may pay up to 100% of their health care insurance premium cost (including dependents’ coverage) based on the plan chosen by the employee. In addition, the State pays 100% of the premium cost for a portion of the employee's life insurance continued after retirement. The amount of life insurance continued at no cost to the retiree is determined by a formula based on the number of years of State service that the retiree had at the time of retirement. Currently, the State is responsible for and finances the cost of post-retirement health care and life insurance benefits on a pay-as-you-go basis through an appropriation in the General Fund; therefore, no liability is recorded in the University’s financial statements. However, implementation of GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits other than Pensions, will require additional disclosures and reporting of the University’s proportionate share of the net liability related to its participation in the postemployment benefit plans on the Statements of Net Position as well as more extensive note disclosures and required supplementary information about the postemployment liabilities. This Statement is effective for fiscal years beginning after June 15, 2017. The University is still evaluating the overall impact of this requirement to its financial statements.


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7. DEFERRED OUTFLOWS AND DEFERRED INFLOWS OF RESOURCES Deferred outflows and deferred inflows of resources consisted of the following as of June 30, 2015 and 2014 (amounts in thousands):

2015 2014 Deferred Outflows of Resources

Accumulated loss on debt refundings, net $ 6,766 $ 7,452 Amounts related to pension liabilities 164,314 -

Total deferred outflows of resources $ 171,080 $ 7,452 Deferred Inflows of Resources

Amounts related to pension liabilities $ 26,515 $ - 8. COMPENSATED ABSENCES AND WAGES PAYABLE Compensated absences are recorded in accordance with GASB Statement No. 16, Accounting for Compensated Absences. The liability for compensated absences is classified as current and noncurrent based on the amount estimated to be paid to eligible employees in one year and beyond one year, respectively. Compensated absences include accrued unused vacation, holiday, compensatory and sick leave balances for employees. As of June 30, 2015 and 2014, compensated absences totaled $35.1 million and $34.0 million, respectively. During fiscal year 2009, the State offered a Retirement Incentive Plan (RIP) to University employees. According to the terms of the RIP, unused vacation and sick leave will be paid in three payments on July 1 of each year, beginning July 1, 2012. Included in the current compensated absences liability as of June 30, 2014 was $860,000 for accrued vacation and sick leave for University employees that participated in RIP. The final payment of the RIP was made in July 2014. The following table shows activity for compensated absences for the fiscal years ended June 30 (amounts in thousands):

2015 2014 Beginning balance, July 1 $ 33,956 $ 33,227 Additions, net 4,189 3,783 Deductions (separations only) (3,048) (3,054) Ending balance, June 30 $ 35,097 $ 33,956

Wages payable includes salaries and wages for amounts owed at the fiscal year end June 30. The State administers benefit and retirement plans for the University. Therefore, the liability for fringe benefits related to wages payable is included in due to State as of June 30. 9. COMMITMENTS The University had outstanding commitments, in excess of $500,000 each, of $346.4 million at June 30, 2015. This amount included $210.0 million related to capital projects for the University and $134.2 million related to UCONN 2000 capital projects that are administered by the University for UConn Health. UCONN 2000 expenditures made on behalf of UConn Health offset the due to affiliate liability on the accompanying Statements of Net Position (see Note 5). In addition to the amounts related to capital outlay, approximately $2.2 million in outstanding commitments related to operating expenses. A portion of the total amount of outstanding commitments was also included in accounts payable on the accompanying Statement of Net Position as of June 30, 2015. See Note 10 for amounts related to operating leases.


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10. LEASES Operating Leases The University leases equipment and building space that expire at various dates. Future minimum rental payments at June 30, 2015 under non-cancellable operating leases that exceeded $500,000 each were as follows (amounts in thousands):

Fiscal Year Payments 2016 $ 1,693 2017 687 2018 624 2019 632 2020 641 Thereafter 1,106 Total $ 5,383

Expenses related to operating lease commitments in excess of $500,000 each were approximately $1.0 million and $1.1 million for the fiscal years ended June 30, 2015 and 2014, respectively. Capital Leases In December 2003, the University entered into a 20-year lease purchase agreement for a project to provide on-site generation of electricity, steam and chilled water for heating and cooling for the University at its Storrs campus. The project initially assumed a total cost of $75.0 million and included construction of the Cogeneration facility, engineering, design and installation of certain equipment at the Storrs campus. The lease was amended in August 2005 as a result of an increase in the total anticipated cost to $81.9 million. With the amendment, monthly payments of $471,000 increased to $517,000. Payments began January 2006 with interest at a nominal rate of 4.42% on the first $75.0 million and 5.09% for the last $6.9 million of advances. The lease was amended again in July 2013 to reflect a new nominal rate of 3.22% on the total amount of advances. The remaining monthly payments decreased to $482,000 beginning August 2013, and the original lease term did not change. Amounts advanced by the lessor include capitalized interest during construction, and are reflected as long-term debt in the accompanying financial statements. At the completion of the lease term, the University has an option to purchase the project assets for one dollar. The historical cost and accumulated depreciation of the Cogeneration facility were $82.6 million and $32.4 million, respectively, as of June 30, 2015. The University leases equipment assets with a historical cost and accumulated depreciation of $2.0 million and $698,000, respectively, as of June 30, 2015. All assets subject to capital lease agreements are included in property and equipment on the accompanying Statements of Net Position, and depreciation on these assets is included in depreciation and amortization expense in the accompanying Statements of Revenues, Expenses, and Changes in Net Position (see Note 4). Loans related to these capital lease agreements are included in long-term debt and bonds payable on the accompanying Statements of Net Position (see Note 5). 11. UNEARNED REVENUE Unearned revenue is comprised of certain restricted research and operating grants that are not included in revenue until the funds are expended; tuition and fees and auxiliary enterprises fees received in advance of services rendered for summer and fall sessions; and athletic ticket sales and commitments received in advance of the season. As of June 30, 2015 and 2014 unearned revenue was as follows (amounts in thousands):

2015 2014 Tuition and fees and auxiliary enterprises $ 22,062 $ 17,935 Certain restricted research and operating grants 9,037 8,431 Athletic ticket sales and commitments 2,063 3,067 Total unearned revenue $ 33,162 $ 29,433


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12. TUITION WAIVERS AND GRADUATE ASSISTANTSHIPS The University is required by law to waive tuition for certain veterans and children of veterans, certain students over the age of 62, graduate assistants, and certain other students. The University is also required by collective bargaining agreements to waive tuition for certain employees and their dependents. The University has included the portion of waived tuition related to employees and their dependents as a fringe benefit cost and the same amount as tuition revenue in the Statements of Revenues, Expenses, and Changes in Net Position. This increased tuition and fee revenues and operating expenses by $6.5 million and $5.7 million for the fiscal years ended June 30, 2015 and 2014, respectively. The total amount of waivers not reflected in the accompanying financial statements were $50.7 million and $48.6 million in fiscal years 2015 and 2014, respectively. Approximately 94% was provided to graduate assistants in fiscal years 2015 and 2014. Of these amounts, $2.0 million and $2.2 million, respectively, were charged back to grants for reimbursement. 13. RELATED PARTY TRANSACTIONS Transactions with related parties occur in the normal course of the University’s operations. The following related party transactions were deemed significant and material in nature:

The Foundation The Foundation is a tax-exempt organization supporting the University and UConn Health (see Note 1). The University has entered into a written agreement with the Foundation whereby the University agreed to provide financial support to the Foundation through a guaranteed contractual amount and the Foundation agreed to reimburse the University for certain operating expenses incurred on the Foundation’s behalf. The terms of the agreement also stipulate that goals, objectives, and financial arrangements are reviewed and agreed upon by both parties on an annual basis. The University also provides other services to the Foundation in addition to this agreement. The following transactions occurred between the University and the Foundation as of and for the years ended June 30, 2015 and 2014 (amounts in thousands):

2015 2014 Amount paid to the Foundation for its guaranteed contractual services

$ 7,170

$ 7,120

Reimbursements from the Foundation for operating expenses $ 165 $ 172 Accrued capital and noncapital gift and grant revenue from the Foundation $ 25,152 $ 39,190 Amount receivable from the Foundation* $ 5,620 $ 5,913

*Included in accounts receivable, net, in the accompanying Statements of Net Position.

In accordance with the terms of a ground lease between the University and the Foundation, the University leases approximately 1.58 acres to the Foundation, on which the Foundation building was constructed, at an annual rental amount of one dollar. The initial term of the ground lease is ninety-nine years and the Foundation has the right to extend the term of the ground lease for another ninety-nine years. The ground lease provides that, at its expiration or earlier termination, the Foundation shall surrender the premises and title to the building will be transferred to the University. University of Connecticut Research and Development Corporation The University of Connecticut Research and Development Corporation, also known as UConn Ventures (UCV), was established to assist in the efficient transfer of innovative technologies and processes developed by the faculty and staff of the University, through creation of new commercial enterprises. The Foundation is the sole shareholder of UCV. The University and UCV entered into an Invention Administration Agreement (IAA) in fiscal year 2013 under which the University granted UCV an option to license certain rights to the University’s technology developed in faculty labs, provide funding to operate UCV and pay for UCV’s patent portfolio. In accordance with the IAA, the University will pay the UCV an amount not to exceed $876,000 through December 31, 2015. The amounts paid by the University to UCV per the IAA totaled $511,000 and $100,000 as of June 30, 2015 and 2014, respectively.


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University of Connecticut Alumni Association The University and the University of Connecticut Alumni Association (Association), a Connecticut non-stock corporation that is exempt from taxation under section 501(c)(3) of the Internal Revenue Code, have an agreement that recognizes the benefits of a coordinated approach to alumni relationship building and defines the responsibilities of the parties. During the years ended June 30, 2015 and 2014, the University directed support to the Association in the amount of $1.1 million and $526,000, respectively. The amounts supported by the University consist primarily of payroll and other operating expenses that facilitate the alumni programs and services for the benefit of the University. The Association also agreed to reimburse the University for certain operating expenses incurred on the Association’s behalf. The amounts owed to the University related to these expenses from the Association as of June 30, 2015 and 2014 were $8,000 and $40,000, respectively, which were included in net accounts receivable in the accompanying Statements of Net Position. Additionally, the Association manages the University’s license plate program that has been established through the Department of Motor Vehicles. All revenue received by the University from the license plate program is disbursed to the Association to fund scholarships and to further support alumni outreach efforts. In June 2015, members of the Association approved dissolving the organization and transferring most of its assets to the Foundation in order to strengthen alumni engagement efforts. Under the terms of the agreement, the Association’s assets will be transferred to the Foundation, specifically designated for alumni/chapter programming, scholarship support and maintenance of the Alumni House. As part of the dissolution, in September 2015, the Association and the University executed an agreement transferring ownership of the Alumni House to the University for one dollar. The State The University receives funding from the State for capital projects via UConn 2000 (see Note 5). In addition, the State supports the University’s mission primarily via two mechanisms: State appropriation and the provision of payments for fringe benefits. State appropriation represents amounts appropriated to the University from the State’s General Fund. Payments for fringe benefits are made by the State for reimbursements related to salaries expensed from the General Fund. State appropriation and the provision of payments for fringe benefits for the years ended June 30, 2015 and 2014 consisted of the following (amounts in thousands):

2015 2014 Amount of General Fund appropriation received from the State $ 222,212 $ 202,574 Amount of payments for fringe benefits received from the State 128,981 101,479 Increase (Decrease) of General Fund payroll included in receivable from the State (494) 4,016 Total appropriation and payments for fringe benefits from the State $ 350,699 $ 308,069

For fiscal years 2015 and 2014, the University was subject to reductions in State support of approximately $11.5 million and $1.2 million, respectively. In fiscal year 2016, similar adjustments are expected to reduce appropriation and payments for fringe benefits by approximately $5.5 million with additional reductions possible. Also in fiscal year 2016, the State’s deficit mitigation plan will result in a transfer of $8.5 million from the University’s unrestricted funds to the State’s General Fund. Pursuant to various public or special bond acts, the General Assembly empowers the State Bond Commission to allocate and approve the issuance of bonds for a variety of projects or purposes. PA No. 11-57, as amended by PA 14-98, authorized $169.5 million of State General Obligation Bonds to create a Tech Park on the Storrs campus (see Note 5). The State Bond Commission allocated $38.0 million of the authorized amount in prior fiscal years to finance the initial design, development costs, and equipment purchases for the Tech Park. On May 11, 2015, the State Bond Commission allocated $131.5 million to finance construction for the Tech Park. These bonds are an obligation of the State; therefore, they are not recorded as a liability in the accompanying financial statements. The $131.5 million allotted by the State was recorded as a capital allocation in other changes in net position in the accompanying Statements of Revenues, Expenses, and Changes in Net Position for the year ended June 30, 2015. The unspent portions related to these bonds were $149.5 million and $29.0 million as of June 30, 2015 and 2014, respectively, and were included in due from State in the accompanying Statements of Net Position.


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The State and the University were defendants in two significant lawsuits that were settled in fiscal years 2014 and 2015. One was settled for $5.5 million in September 2013 and another unrelated suit was settled for $1.2 million in July 2014. These amounts were paid directly by the State in accordance with State statute; therefore, they were not reflected in the accompanying financial statements (see Note 14). UConn Health The University is responsible for the management of UCONN 2000 funds for UConn Health’s construction projects. The unspent portion of these funds was recorded under due to affiliate on the accompanying Statements of Net Position (see Note 5). In addition, the University engaged in certain cost share arrangements with UConn Health for shared services. The University and UConn Health have also partnered to support economic development activities and to achieve successful outcomes for the Tech Park and Bioscience Connecticut initiative. In fiscal years 2015 and 2014, UConn Health and the University each provided an equal share of funding for economic development activities in accordance with an annual memorandum of agreement. The budget was managed by the University while selected expenses were paid directly by UConn Health. Any amounts owed by UConn Health for its remaining funding obligations were reimbursed directly to the University. Campus Associates Limited Partnership The University entered into a 50-year land lease with Campus Associates Limited Partnership (Campus Associates) on February 1, 2000. The limited partnership was formed for the purpose of managing the Nathan Hale Inn, a hotel located on campus. The lease provided for base rents of $5,000 for the first five years and $25,000 for the sixth year. For the seventh year and every year thereafter, base rent was adjusted by the increase in the Consumer Price Index. In exchange for a rent concession amounting to $100,000 in total for five years, the University received two limited partnership units. The University purchased a third unit in the limited partnership for $50,000 in fiscal year 2009 (see Note 2). Under the land lease agreement, Campus Associates was also obligated for certain costs which include real estate taxes, charges for public utilities, and other services. Amounts due from Campus Associates, net of allowances, totaled $16,000 and $109,000 as of June 30, 2015 and 2014, respectively. In December 2014, the Board of Trustees approved a plan to negotiate an agreement to buy the Nathan Hale Inn to help meet the University’s student housing needs. On July 1, 2015 the University purchased the Nathan Hale Inn from Campus Associates for a purchase price of $8.4 million. As part of the purchase price, the University agreed to assume payments on an outstanding promissory note between Campus Associates and a previous lender. The outstanding balance on the promissory note on July 1, 2015 was $5.4 million. In accordance with the Escrow and Closing Agreement, on June 30, 2015 the University made an initial payment of $3.0 million prior to closing which is included in prepaid expenses and other assets in the Statement of Net Position. Mansfield Downtown Partnership, Incorporated The Mansfield Downtown Partnership, Incorporated (MDP) is a not-for-profit corporation that is exempt from taxation under section 501(c)(3) of the Internal Revenue Code and is comprised of the Town of Mansfield, the University, and individual business members and residents. MDP is responsible for organizing the enhancement and revitalization of three of the Town of Mansfield’s commercial areas: Storrs Center, King Hill Road and Four Corners. In accordance with its governing by-laws, members are required to submit annual dues, as determined by the board of directors, in lieu of financial support. In fiscal years 2015 and 2014, the University paid $125,000 each year in annual membership dues to MDP. In connection with the Storrs Center project, the University entered into an agreement with the master developer of the project to sell 18.80 acres of land for approximately $101,000 per acre which is to be divided up in phases. In fiscal years 2015 and 2014, the University conveyed 3.09 acres and 1.24 acres, respectively, to the master developer which were sold at the stated price per acre. Further land transactions are expected as the Storrs Center project continues to progress. Moreover, the University also provided water and sewer services, which were billed in accordance with the University’s standard billing practices. 14. CONTINGENCIES Certain claims and judgments against the University are covered by the State under Connecticut General Statute § 4-160 (see Note 13), which governs most tort and breach of contract claims. Additional coverage is provided for the University by insurance policies and funds maintained by the State.


___________________________________________________________________________________________________

50

The University is a party to various legal actions arising in the ordinary course of its operations. While it is not feasible to predict the ultimate outcome of these actions, it is the opinion of management that the resolution of the majority of these matters will not have a material effect on the University's financial statements. However, there are a small number of outstanding matters, including unasserted claims, of potential individual significance. With respect to two matters, certain claimants seek an aggregate of approximately $25.0 million. If claimants are successful, the claim will be paid from the State’s General Fund, not from the University. The State expects these matters to be resolved for substantially less than the amounts claimed. In the opinion of legal counsel, the aggregate exposure pertaining to the other remaining claims and unasserted claims cannot be reasonably estimated but is not expected to exceed $5.0 million. In the fiscal year ended June 30, 2014, it was determined that fringe benefit assessments charged to the State’s General Fund were overstated in fiscal years 2003 to 2014 due to an allocation error in the State’s accounting system. As a result of this error, State appropriation funding received from the State exceeded what should have been received had the correct assessments been charged. In fiscal year 2016, the General Assembly passed the State’s deficit mitigation plan that included $4.4 million to compensate for this allocation error and released the University from any associated liability. The University also participates in federal, state and local government programs that are subject to final audit by the granting agencies. Management believes the adjustment of costs, if any, resulting from such audits would not have a material effect on the University’s financial statements. 15. OPERATING EXPENSES BY NATURAL CLASSIFICATION The table below details the University’s operating expenses by natural classification for the years ended June 30, 2015 and 2014 (amounts in thousands):

For the fiscal year ended June 30, 2015:

Salaries and wages

Fringe

benefits

Supplies and

other expenses

Utilities

Depreciation and

amortization

Total Instruction $ 240,095 $ 110,779 $ 31,372 $ 10 $ - $ 382,256 Research 37,462 11,796 24,338 - - 73,596 Public service 27,443 10,986 10,455 - - 48,884 Academic support 65,025 35,905 30,984 - - 131,914 Student services 20,179 11,392 5,382 2 - 36,955 Institutional support 29,909 19,067 8,286 68 - 57,330 Operations and maintenance

31,836 27,213

39,605 16,235 -

114,889

Depreciation and amortization

-

-

- - 95,990

95,990

Student aid 265 33 8,829 - - 9,127 Auxiliary enterprises 89,868 43,993 68,875 6,897 - 209,633 $ 542,082 $ 271,164 $ 228,126 $ 23,212 $ 95,990 $ 1,160,574

For the fiscal year ended June 30, 2014:

Salaries and

wages

Fringe

benefits

Supplies and

other expenses

Utilities

Depreciation and

amortization

Total Instruction $ 227,015 $ 95,325 $ 30,899 $ 12 $ - $ 353,251 Research 39,733 10,910 28,841 - - 79,484 Public service 24,495 8,648 8,776 - - 41,919 Academic support 63,884 32,496 29,140 37 - 125,557 Student services 20,345 10,651 5,791 - - 36,787 Institutional support 26,547 15,238 12,638 61 - 54,484 Operations and maintenance

33,506 25,144

31,964 14,534 -

105,148

Depreciation and amortization

-

-

- - 95,377

95,377

Student aid 1 - 8,795 - - 8,796 Auxiliary enterprises 85,550 39,303 65,763 6,319 - 196,935 $ 521,076 $ 237,715 $ 222,607 $ 20,963 $ 95,377 $ 1,097,738

52

REQUIRED SUPPLEMENTARY

INFORMATION


53

Required Supplementary Information State Employees’ Retirement System (SERS) The University’s schedule of its proportionate share of the collective net pension liability (NPL) as of June 30 is shown below (amounts in thousands):

Year Ended June 30

University's proportion of the collective

NPL

University's proportionate share of the

collective NPL

Covered-employee payroll

University's proportionate share of the collective NPL

as a % of covered-employee payroll

Plan fiduciary net position as a

% of the total pension liability

2015 4.51% $ 722,009 $ 165,841 435.36% 39.54%

The University’s schedule of employer contributions as of June 30 is the following (amounts in thousands):

Year Ended June 30

Contractually required

contribution

Contributions in relation to the contractually

required contribution

Contribution deficiency (excess)


Contributions as a % of covered-

employee payroll

2015 $ 66,875 $ 66,875 $ - $ 189,903 35.22%

Notes to Required Schedules Changes of benefit terms: For the June 30, 2014 valuation, there were two changes in benefit terms:

a. The 2011 SEBAC Agreement changed the benefit multiplier for the portion of benefit below the breakpoint from 1.33% to 1.40%. This change was made effective for all active members who retire on or after July 1, 2013 in Tier II, IIA and III.

b. A one-time decision was granted to members not eligible to retire by July 1, 2022 to elect to maintain the same

normal retirement eligibility applicable to members eligible to retire before July 1, 2022. Employees who elected by July 1, 2013 to maintain the eligibility are required to make additional employee contributions for the length of their remaining active service with SERS. The additional contribution was up to 0.72% of pensionable earnings.

Method and assumptions used in calculations of actuarially determined contributions: The actuarially determined contributions in the schedule of employer contributions are calculated as of June 30 each biennium for the fiscal years ending two and three years after the valuation date. The following actuarial methods and assumptions were used to determine the most recent contributions reported in that schedule:

Actuarial cost method Projected Unit Credit Amortization method Level percent of pay, closed Single equivalent amortization period 19 years Asset valuation method 5-year smoothed market Inflation 2.75% Salary increase 4.00-20.00%, including inflation Investment rate of return 8.00%, net of investment related expense


54

Teachers’ Retirement System (TRS) The University’s schedule of its proportionate share of the collective NPL as of June 30 is shown below (amounts in thousands):

Year Ended June 30

University's proportion of the collective

NPL

University's proportionate share of the

collective NPL


University's proportionate share of the collective NPL

as a % of covered-employee payroll

Plan fiduciary net position as a

% of the total pension liability

2015 0.04% $ 4,090 $ 1,191 343.41% 61.51%

The University’s schedule of employer contributions as of June 30 is the following (amounts in thousands):

Year Ended June 30


contribution






employee payroll

2015 $ 425 $ 425 $ - $ 1,214 35.01% Notes to Required Schedules Changes in assumptions: In 2011, rates of withdrawal, retirement and assumed rates of salary increase were adjusted to more closely reflect actual and anticipated experience. These assumptions were recommended as part of the Experience Study for TRS for the five year period ended June 30, 2010. Method and assumptions used in calculations of actuarially determined contributions: The actuarially determined contributions in the schedule of employer contributions are calculated as of June 30 each biennium for the fiscal years ending two and three years after the valuation date. The following actuarial methods and assumptions were used to determine the most recent contributions reported in that schedule:

Actuarial cost method Entry age Amortization method Level percent of pay, closed Single equivalent amortization period 22.4 years Asset valuation method 4-year smoothed market Inflation 3.00% Salary increase 3.75-7.00%, including inflation Investment rate of return 8.50%, net of investment related expense

55

TRUSTEES AND FINANCIAL OFFICERS As of June 30, 2015

BOARD OF TRUSTEES

MEMBERS EX OFFICIO The Honorable Dannel P. Malloy Governor of the State of Connecticut President ex officio Hartford The Honorable Steven K. Reviczky Commissioner of Agriculture Member ex officio Hartford The Honorable Catherine H. Smith Commissioner of Economic

and Community Development Member ex officio Hartford

The Honorable Dianna R. Wentzell Commissioner of Education Member ex officio Hartford Sanford Cloud, Jr. Chair, UConn Health Board of Directors Member ex officio Farmington

ELECTED BY THE ALUMNI Donny E. Marshall CoventryRichard T. Carbray, Jr. Rocky Hill

APPOINTED BY THE GOVERNOR

Lawrence D. McHugh, Chairman MiddletownLouise M. Bailey, Secretary West HartfordAndy F. Bessette West HartfordCharles F. Bunnell East HaddamShari G. Cantor West HartfordAndrea Dennis-LaVigne SimsburyMarilda L. Gandara HartfordThomas E. Kruger StamfordRebecca Lobo GranbyDenis J. Nayden StamfordThomas D. Ritter Hartford

ELECTED BY THE STUDENTS

Jeremy L. Jelliffe WillimanticMichael K. Daniels Plainville

FINANCIAL OFFICERS

Scott A. Jordan, Executive Vice President for Administration and Chief Financial Officer Charles H. Eaton, Controller

Robin G. Hoagland, Associate Controller and Director of Accounting

Financial Report For the Year Ended June 30, 2015

UConn Health June 30, 2015

Message from the Executive Vice President for Administration and the Chief Financial Officer

Founded in 1881, the University of Connecticut (the “University”) serves as the state’s flagship for higher education, meeting the educational needs of undergraduate, graduate, professional, and continuing education students through the integration of teaching, research and service. The University of Connecticut is a comprehensive institution of higher education which includes the University of Connecticut Health Center (“UConn Health”). Although governed by a single Board of Trustees, the University and UConn Health maintain separate budgets and are by statute separate entities for purposes of maintaining operating funds and state appropriations. UConn Health also has a Board of Directors to whom the Board of Trustees has delegated certain responsibility and authority. The financial statements contained herein represent the transactions and balances of UConn Health only. The University’s Board of Trustees is vested by law with fiscal oversight of the University. The operational authority granted to the University builds upon the successful implementation of several pieces of legislation known as the Flexibility Acts, enacted in the early 1990’s. These statutory changes enabled the University to become responsible and accountable for its operational decisions independent of many of the previously imposed regulatory requirements. The University is now responsible for the budgetary allocation of its State appropriation, check-writing authority, human resource control, and purchasing authority and, with the advent of UCONN 2000 in 1995, management of capital activities, including projects for UConn Health starting in 2005. While the University’s operational flexibility and capacity has grown, all of these activities also take place within a context of continuing vigilance. The financial statements contained in this report reflect budget execution results consistent with spending plans, operating and capital budgets approved by the University Board of Trustees. The Board of Trustees, through its Joint Audit and Compliance Committee, exercises oversight of all University financial reporting and processes and internal control systems, as well as direct engagement in the approval of independent auditing services to augment the University’s internal audit capacity and the work performed by state auditors. An important component of external oversight, the Auditors of Public Accounts issue an Independent Auditors’ Report on the financial statements of UConn Health. They are responsible for auditing its financial operations and their opinion appears in this report. The University of Connecticut Health Center is an academic medical center composed of the School of Medicine, School of Dental Medicine, John Dempsey Hospital, the UConn Medical Group, University Dentists, the University of Connecticut Finance Corporation and Correctional Managed Healthcare (CMHC). Established in 1961, UConn Health pursues its mission of providing outstanding health care education in an environment of exemplary patient care, research and public service. With approximately 4,915 employees, UConn Health is one of Connecticut's largest employers and an important contributor to the local and regional economy. UConn Health's campus in Farmington is situated on 209 acres of wooded hilltop from which the skyline of Hartford, the capital of Connecticut, can be seen about eight miles to the east. (The University's main campus is in Storrs, about 30 miles east of Hartford.) UConn Health’s campus includes 23 buildings totaling close to 2.4 million square feet. Educational Programs Dedicated to providing broad educational opportunities in the biomedical sciences, UConn Health offers degree programs in medicine (M.D.), dental medicine (D.M.D.), and biomedical science (Ph.D.); master's degree programs in public health and dental science; postdoctoral fellowships; residency programs providing specialty training for newly graduated physicians and dentists; and continuing education programs for practicing health care professionals. Combined degree programs, such as the M.D. /Ph.D., D.M.D. /Ph.D., Dental Clinical Specialty/Ph.D. and M.D. /M.P.H. are also offered. UConn Health is the only academic health center in the nation where a medical school was founded concurrently with a dental school, a circumstance which led to strong links. Medical and dental students share an essentially common curriculum during the first two years of their four-year degree programs and study the basic medical sciences together. This experience provides UConn's dental students with an especially strong foundation in the biomedical sciences, reflected in the dental school’s decision to award its graduates the D.M.D. (Doctor of Medical Dentistry). Each year at UConn, approximately 396 students work toward the medical doctor's degree and 168 toward the doctor of medical dentistry degree. Admission to each school is highly competitive; both schools offer preferential consideration to qualified Connecticut residents in their admissions policies. School of Dental Medicine students have a long history of outstanding performance on the National Boards. In the years since


UConn Health graduated its first students in 1972, 2,246 men and women have received the D.M.D. degree; 3,478 the M.D. degree. Through a variety of residency programs, the School of Medicine provides postgraduate training for more than 600 newly graduated M.D.s each year. These physicians come from all over the country to acquire advanced skills in fields such as the surgical specialties, internal medicine, and primary care. Some of the residency training occurs on UConn Health's main campus, but much of it takes place in community hospitals in Greater Hartford, thereby extending UConn Health's positive impact on the region. Research Programs Since UConn Health's inception, high-quality research programs have been part of the institution's fabric. This history has enabled UConn Health to recruit distinguished researchers with expertise in neuroscience, molecular biology, molecular pharmacology, biochemistry, cell physiology, toxicology, and endocrinology, among other fields. The Alcohol Research Center is one of only 27 such federally supported centers in the nation; the Connecticut Clinical Chemosensory Research Center, one of eight. In recent years, UConn Health has also become a leader in stem cell research. Clinical research is facilitated by the Lowell Weicker General Clinical Research Center and the Clinical Trials Unit. Research awards were over $97.1 million in fiscal 2015. Health Care Services Through John Dempsey Hospital (234 licensed, 180 staffed beds), UConn Health provides specialized and routine inpatient and outpatient services, including comprehensive cardiovascular, cancer and musculoskeletal services, as well as high risk maternity and neonatal intensive care. John Dempsey Hospital is home to the only Emergency Department in Connecticut's fast-growing Farmington Valley and contributes to the region’s health in other ways. UConn Medical Group, one of the largest medical practices in Greater Hartford, offers primary care and services in more than 50 specialties. While the hospital and faculty practice continue to have strong volume, the challenges of the health care marketplace (recruitment, malpractice reserves and low reimbursement) continue to take their toll. John Dempsey Hospital’s financial health is also directly affected by its small size, bed distribution, poorly reimbursed services provided as part of its public mission and cost factors resulting from its status as a state entity. Connecticut Health UConn Health faculty, staff, residents, and students participate in a variety of joint efforts to address public health and community health needs of citizens throughout our state. Under the umbrella of Connecticut Health, hundreds of projects have been developed in collaboration with other state agencies, city and town governments, community-based organizations and the public to serve the poor and uninsured by providing better medical care and health education. UConn Health is committed to finding new and effective ways to reach out to the public at large as part of UConn Health’s ongoing effort to bring a better quality of life to all our citizens. Respectfully Submitted,

Scott Jordon Jeffrey P. Geoghegan Executive Vice President for Administration & Chief Financial Officer Chief Financial Officer University of Connecticut University of Connecticut Health Center

TABLE OF CONTENTS Independent Auditors' Report 1-2

Management’s Discussion & Analysis 4-10

Statements of Net Position 12

Statements of Revenues, Expenses, and Changes in Net Position 13

Statements of Cash Flows 14-15

Notes to Financial Statements 18-35

Supplemental Information 37-42

Directors, Trustees and Financial Officers 43-44

3

MANAGEMENT’S DISCUSSION & ANALYSIS


4

Management’s Discussion and Analysis

INTRODUCTION The following discussion and analysis provide an overview of the financial position and activities of the University of Connecticut Health Center (“UConn Health”) for the year ended June 30, 2015. This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes thereto, which follow this section. Founded in 1881, the University of Connecticut (the “University”) serves as the state’s flagship for higher education, meeting the educational needs of undergraduate, graduate, professional, and continuing education students through the integration of teaching, research and service. The University of Connecticut is a comprehensive institution of higher education, which includes UConn Health. Although governed by a single Board of Trustees, the University of Connecticut and UConn Health maintain separate budgets and are by statute separate entities for purposes of maintaining operating funds and state appropriations. UConn Health also has a Board of Directors to whom the Board of Trustees has delegated certain responsibility and authority. The financial statements presented here represent the transactions and balances of UConn Health only. UConn Health offers medical and dentistry degrees and operates a physician/dentist practice and a teaching and research hospital. UConn Health’s component parts are the School of Medicine, School of Dental Medicine, UConn Medical Group, the University of Connecticut Finance Corporation, Correctional Managed Healthcare (CMHC), University Dentists (“Primary Institution”) and John Dempsey Hospital (“Hospital”). UConn Health’s enrollment in fiscal year 2015 was 396 in the School of Medicine, 168 in the School of Dental Medicine, and 348 Graduate students, taught by over 500 faculty members. UConn Health finished fiscal 2015 with 4,915 FTE’s. John Dempsey Hospital (JDH) has 180 staffed acute care beds. In fiscal year 2015, adjusted patient days (a measure of total hospital volume) were 102,499, a 6.7% increase from the prior year. During 2015, UConn Medical Group (UMG) had 626,207 unique patient visits, a 6.4% increase. The following Management’s Discussion and Analysis (MD&A) is required supplemental information. Its purpose is to provide users of the basic financial statements with a narrative introduction, overview and analysis of those statements. It is designed to assist readers in understanding the accompanying financial statements required by GASB. This discussion, which is unaudited, includes an analysis of the financial condition and results of activities of UConn Health for the fiscal year ended June 30, 2015, based on currently known facts, decisions, or conditions. As the MD&A presentation includes highly summarized information, it should be read in conjunction with the accompanying financial statements and related notes to the financial statements. The financial statements, notes to the financial statements, and this MD&A are the responsibility of management.


5

OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of management’s discussion and analysis and the financial statements. The basic financial statements (statements of net position, statements of revenues, expenses and changes in net position and statements of cash flows) present the financial position of UConn Health at June 30, 2015, and the results of operations and financial activities for the year then ended. These statements report information about UConn Health using accounting methods similar to those used by private-sector companies. In addition, a prior year column is presented for comparison purposes. The statements of net position include all of UConn Health’s assets and liabilities. The statements of revenues, expenses and changes in net position reflect the year’s activities on the accrual basis of accounting, i.e., when services are provided or obligations are incurred, not when cash is received or paid. These statements report UConn Health’s net assets and how they have changed. Net assets (the difference between assets and liabilities) are one way to measure financial health or position. The statements of cash flows provides relevant information about each year’s cash receipts and cash payments and classifies them as to operating, investing, noncapital financing and capital and related financing activities. The financial statements include notes that explain information in the financial statements and provide more detailed data. FINANCIAL HIGHLIGHTS UConn Health’s financial position at June 30, 2015, consisted of assets of $1.12 billion and liabilities of $1.18 billion. Net assets, which represent the residual interest in UConn Health’s assets after liabilities are deducted, decreased $1.7 million in fiscal 2015 before capital appropriations and other changes in net position.

Current Liabilities

5%

Noncurrent Liabilities

46%

Net Assets2%

Noncurrent Assets34%

Current Assets13%

Statement of Net Position

Overall net assets show a year over year decline of approximately $541 million due primarily to the adoption of GASB 68 and 71. Operating losses and the additional pension liability booked under GASB 68 were only partially offset by Capital Appropriations and nonoperating revenues including State Appropriations. Expenses associated with Capital Appropriations will be borne in the future through increased depreciation expenses.


6

Changes in net assets represent the operating activity of UConn Health, which results from revenues, expenses, gains and losses, and are summarized for the years ended June 30, 2015, 2014, and 2014 as follows:

2015 2014 2013

Total operating revenues $ 721.2 $ 659.2 $ 636.7Total operating expenses 1,007.0 945.3 864.2Operating (loss) (285.8) (286.1) (227.5)

Net nonoperating revenues 284.1 272.5 220.1 (Loss) before Other Changes

in Net Position (1.7) (13.6) (7.4)

Net other changes in net position 155.9 192.7 2.0Increase/(Decrease) in net position $ 154.2 $ 179.1 $ (5.4)

(in millions)

The financial statements contained herein show an operating loss of $285.8 million for the year ending June 30, 2015 (fiscal year 2015). The measure more indicative of normal and recurring activities is net income before Other Changes in Net Position, which includes revenue from state appropriations. Additions to capital assets are, in a large part, funded by capital appropriations from the state and issuance of UCONN 2000 bond funds (included in the Other Changes in Net Position above), which are not included as revenues in this measurement. However, depreciation expense on those assets is included as an expense in calculating operating income, so a loss under this measurement is expected. UConn Health experienced a loss before Other Changes in Net Position of $1.7 million in fiscal year 2015. Some sources of recurring operating and non-operating revenues increased in 2015, including tuition and fees revenue and patient service revenue. These categories are expected to have slight increases in 2016. State support, not including state funded capital appropriations, increased 5.5% in fiscal 2015. The increase was the result of higher In Kind fringe benefits on increasing fringe benefit rates charged by the State. State support is expected to remain stable for the upcoming fiscal year. STATEMENTS OF NET POSITION The statements of net position present the financial position of UConn Health at the end of the fiscal years 2015, 2014 and 2013; it includes all assets, deferred outflows of resources, liabilities, deferred inflows of resources and net position of UConn Health. Net position represents assets plus deferred outflows, less liabilities and deferred inflows. Assets represent what is owned by or what is owed to UConn Health. Assets and liabilities are generally measured using current values. One notable exception is capital assets, which are stated at historical cost less an allowance for depreciation. A deferred outflow of resources represents the consumption of net assets by UConn Health that is applicable to a future reporting period, while a deferred inflow of resources is an acquisition of net assets by UConn Health that is applicable to a future reporting period. UConn Health’s net position is the residual value in UConn Health’s assets and deferred outflows, after liabilities are deducted. The change in net position is an indicator of whether the overall financial condition has improved or deteriorated during the year. A summary of UConn Health’s assets, deferred outflows, liabilities, deferred inflows and net assets at June 30, 2015, 2014, and 2013 is as follows:


7

2015 2014 2013

Current assets $ 310.9 $ 313.6 $ 193.2Noncurrent assets:

Capital assets, net 795.4 573.7 397.9Other 9.1 7.7 6.7Total assets 1,115.4 895.0 597.8

Deferred Outflow of Resources 130.4 - -

Current liabilities 119.6 106.4 94.0Noncurrent liabilities 1,061.7 211.8 106.1

Total liabilities 1,181.3 318.2 200.1

Deferred Inflow of Resources 28.6 - -

Net position $ 36.0 $ 576.8 $ 397.7

(in millions)

The total assets of UConn Health increased by $220.4 million, or 24.6%, over the prior year. The increase was primarily attributable to increases in Cash of $46.4 million and Property, and Equipment, which increased $221.7 million. Deferred outflows of resources, related to the recording of pension liabilities under GASB 68 and 71, increased $130.4 million. Total liabilities increased by $863.1 million or 271.2% from 2014. The driver of the increase was the addition of $800 million in pension liability as well as additional long term debt of $44.8 million related to construction of the Outpatient Pavilion. The combination of the increase in total assets of $220.4 and total liabilities of $863 million, offset by the net addition of $101.8 million in deferred inflows/outflows yielded a decrease in total net position of $540.8. Net Assets Net assets represent the residual interest in UConn Health’s assets after liabilities are deducted. UConn Health had net assets of $36 million at June 30, 2015.

Net investment in capital assets,

579,241

Restricted, 105,352

Unrestricted, (648,621)

Net Asset Composition ($ in thousands)


8

STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION The statements of revenues, expenses and changes in net position present UConn Health’s results of operating and nonoperating activities. A summary of UConn Health’s revenues, expenses and changes in net assets for the years ended June 30, 2015, 2014, and 2013 is presented below:

2015 2014 2013

Operating revenuesPatient Services $ 513.0 $ 450.3 $ 432.0Grants and Contracts 82.3 86.3 88.2Other 125.9 122.6 116.5Total operating revenues 721.2 659.2 636.7

Operating expensesPatient services 607.4 581.6 522.8Instruction 163.7 152.6 141.2Other 235.9 211.1 200.2Total operating expenses 1,007.0 945.3 864.2

Operating (loss) (285.8) (286.1) (227.5)

Net nonoperating revenues 284.1 272.5 220.1Other Changes in Net Position 155.9 192.7 2.0

Inc/(Dec) in net assets $ 154.2 $ 179.1 $ (5.4)

(in millions)

Revenue highlights for the year ending June 30, 2015, including operating and nonoperating revenues, presented on the Statements of Revenues Expenses, and Changes in Net Position are as follows:

The largest source of revenue was patient service revenue. Net Patient service revenue increased $62.6 million or 13.9% over prior year. Prior to eliminations the increase for John Dempsey Hospital was $50.5 million. Increases in John Dempsey Hospital reflect higher surgical and outpatient volumes and strategic rate increases throughout the Hospital’s lines of service. UConn Medical Group net revenue increased $5.5 million. UMG’s increases are attributed to an increase in relative value units (RVU’s). The Correctional Managed Health Care program revenue increased by $3.3 million compared to prior year. This increase was attributed to higher operational costs of the program. More detailed information about UConn Health’s patient revenue is presented in note 4 of the financial statements.

The state appropriation (including In Kind fringe benefits), which is included in nonoperating revenues, totaled

$280.6 million. This represents a 5.5% increase over the prior year and includes increases in amounts of recognized In Kind fringe benefits.

Highlights of expenses including operating and nonoperating expenses presented on the Statements of Revenues, Expenses and Changes in Net Position are as follows:

Patient service expense is the largest expense category for UConn Health; it accounts for 60.3% of total operating expenses. It increased by $25.9 million or 4.4% over the prior year. The increase was driven by necessary expenses to support additional clinical income in JDH and UMG as well as increased expenses associated with the Correctional Managed Health Care program.


9

Institutional Support expenses, which comprise about 8.3% of total expenses, grew to $83.3 million from $66.4 million in fiscal 2014. The increase was primarily due to increases in salaries and associated fringe benefit expenses including those borne as part of the institution’s commitment to research.

STATEMENTS OF CASH FLOWS The statements of cash flows provide additional information about UConn Health’s financial results by reporting the major sources and uses of cash. A summary of the statements of cash flows for the years ended June 30, 2015, 2014, and 2013 is as follows:

2015 2014 2013

Cash received from operations $ 735.8 $ 631.9 $ 591.1Cash expended for operations (826.6) (752.6) (716.1)

Net cash used in operating activities (90.8) (120.7) (125.0) Net cash provided by (used in) investing activities 0.2 0.1 (0.5) Net cash provided by noncapital financing activities 152.1 146.1 130.0Net cash used in capital and

related financing activities (14.8) (25.8) (42.7) Net increase/(decrease) in cash and cash equivalents 46.7 (0.3) (38.2)

Cash and cash equivalents, beginning of the year 46.3 46.6 84.8 Cash and cash equivalents, end of the year $ 93.0 $ 46.3 $ 46.6

(in millions)

CAPITAL AND DEBT ACTIVITIES During fiscal year 2015 UConn Health again participated in the UCONN 2000 program. This is the third phase of the program also known as 21st Century UConn, which provides $1.8 billion for improvements to facilities at the University and UConn Health. UConn Health is scheduled to receive $775.3 million over the life of this program. UConn Health received $159.8 and $193.2 million during 2015 and 2014, respectively, from the UCONN 2000 bond issuance which was included in the capital appropriation line in the Statements of Revenues, Expenses, and Changes in Net Position. At June 30, 2015, UConn Health had property and equipment, net of accumulated depreciation, of $795.4 million. UConn Health’s fiscal 2016 capital budget allows for spending of approximately $107.7 million, with the majority of funds being provided through the UCONN 2000 Bond Funds. During fiscal year 2013, UConn Health entered into a mortgage agreement with Teachers Insurance and Annuity Association (TIAA) to provide $203 million for the construction of the Outpatient Pavilion (formerly the Ambulatory Care Center). The project was substantially completed in fiscal 2015 and clinical space in the building is now open. UConn Health continued to meet all existing debt requirements during the year. The Finance Corporation began scheduled payments on the TIAA mortgage and continued payments on the UConn Musculoskeletal Institute (formerly the Medical Arts and Research Building). More detailed information about UConn Health’s capital assets and debt activities are presented in notes 5 and 7 of the financial statements. BIOSCIENCT CONNECTICUT A significant amount of progress on the construction work related to the Bioscience Connecticut initiative has been achieved. The UConn Health Outpatient Pavilion (formerly named the Ambulatory Care Center) was substantially completed and the building, with the exception of a portion of the 8th floor that was postponed for later completion, is now occupied. The 3rd phase of the project that renovates research labs in the Main Building is substantially complete. Scientists have moved in and research is being conducted in the newly renovated space. The new Hospital Tower, which also includes the 3rd and final parking garage, is 70% complete with completion scheduled for spring of 2016. Construction of the Academic Building Addition and the Incubator Lab addition to the Cell and Genome Science Building continues and both are on schedule. Construction for both the Main Building Lab and the Clinic Building renovations will begin in 2016. In addition, the Jackson Lab for Genomic Medicine was completed and opened in October 2014.


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FISCAL YEAR 2016 OUTLOOK As we look forward to fiscal year 2016, UConn Health’s looks forward to the completion of several cornerstones of the state’s Bioscience Connecticut initiative including the grand opening of the new Hospital tower and the expansion of both academic and research facilities on campus. At the same time, we continue to focus on maintaining outstanding research, education and clinical care while adapting to changes in both the education and healthcare industries and adjusting to challenges from unsettled State, Federal, and world landscapes. CONTACTING UCONN HEALTH’S FINANCIAL MANAGEMENT This financial report provides the reader with a general overview of UConn Health’s finances and operations. If you have questions about this report or need additional financial information, please contact the Office of the Chief Financial Officer, University of Connecticut Health Center, Farmington, Connecticut 06030.

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FINANCIAL STATEMENTS

The accompanying notes are an integral part of these financial statements. 12

UCONN HEALTH STATEMENTS OF NET POSITION

As of June 30, 2015 and 2014 ($ in thousands) 2015

ASSETSCurrent Assets

Cash and cash equivalents $ 92,247 $ 45,897 Patient receivables, net 48,472 43,781

Contract and other receivables 37,229 46,952 Construction escrow account 18,872 56,323 Due from Affiliates 80,294 91,429 Due from State of Connecticut 9,984 8,967 Due from Department of Correction 7,367 3,975 Inventories 9,673 9,964 Prepaid expenses 6,764 6,303 Total current assets 310,902 313,591

Noncurrent AssetsRestricted cash and cash equivalents 735 417 Other assets 3,430 2,328 Due from State of Connecticut 4,916 4,955 Capital assets, net 795,439 573,696 Total noncurrent assets 804,520 581,396 Total assets $ 1,115,422 $ 894,987

Deferred Outflows of Resources $ 130,449 $ -

LIABILITIESCurrent Liabilities

Accounts payable and accrued liabilities $ 41,032 $ 47,895 Due to State of Connecticut 5,774 5,079 Accrued salaries 23,540 21,497 Compensated absences 22,039 21,016 Due to third party payors 16,726 4,492 Unearned revenues 1,330 564 Malpractice reserve 3,627 3,736 Long-term debt - current portion 5,498 2,130 Total current liabilities 119,566 106,409

Noncurrent LiabilitiesMalpractice reserve 23,123 18,139 Compensated absences 27,869 27,750 Pension Liability 800,024 - Long-term debt 210,700 165,895 Total noncurrent liabilities 1,061,716 211,784 Total liabilities $ 1,181,282 $ 318,193

Deferred Inflows of Resources $ 28,617 $ -

NET POSITIONNet investment in capital assets $ 579,241 $ 405,672 Restricted for Nonexpendable Scholarships 61 61 Expendable Research (139) 547 Loans 1,348 104 Capital projects 104,082 152,707 Unrestricted (648,621) 17,703 Total net position $ 35,972 $ 576,794

2014

The accompanying notes are an integral part of these financial statements. 13

UCONN HEALTH STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION

For the Years Ended June 30, 2015 and 2014 ($ in thousands) 2015

OPERATING REVENUESStudent tuition and fees (net of scholarship

allowances of $5,556 and $4,517, respectively) $ 16,557 $ 15,794 Patient services (net of charity care of $328 and $630, respectively) 512,960 450,315 Federal grants and contracts 57,920 62,527 Nonfederal grants and contracts 24,407 23,803 Contract and other operating revenues 109,324 106,771

Total operating revenues 721,168 659,210

OPERATING EXPENSESEducational and General

Instruction 163,703 152,618 Research 56,961 59,518 Patient services 607,435 581,558 Academic support 22,458 20,824 Institutional support 83,260 66,416 Operations and maintenance of plant 35,363 31,548 Depreciation 37,830 32,780 Student aid 32 50

Total operating expenses 1,007,042 945,312 Operating loss (285,874) (286,102)

NONOPERATING REVENUES (EXPENSES)State appropriations 280,645 266,139 Gifts 7,175 7,300 Investment income (net of investment expense

of $85 and $70, respectively) 176 93 Interest on capital asset - related debt (3,820) (1,007)

Net nonoperating revenues 284,176 272,525 Loss before other revenues,expenses, gains or losses (1,698) (13,577)

OTHER CHANGES IN NET POSITIONCapital appropriations 159,810 193,214 Loss on Disposal (3,902) (573)

Net Other Changes in Net Position 155,908 192,641

Increase in net position 154,210 179,064

NET POSITIONNet position-beginning of year (as previously stated) 576,794 397,730 Cumulative effect of implementing GASB 68 and 71 (see note 1) (695,032) - Net position-beginning of year as restated (118,238) 397,730 Net position-end of year $ 35,972 $ 576,794

2014

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UCONN HEALTH STATEMENTS OF CASH FLOWS

For the Years Ended June 30, 2015 and 2014 2015 2014

($ in thousands)Cash flows from operating activities:

Cash received from patients and third-party payors $ 517,112 $ 458,446 Cash received from tuition and fees 16,557 15,792 Cash received from grants, contracts and other revenue 202,139 186,100 Cash paid to employees for personal services and fringe benefits (527,524) (515,252) Cash paid for other than personal services (299,081) (265,839)

Net cash used in operating activities (90,797) (120,753)

Cash flows from investing activities:Net change in malpractice, advances and bond trust funds — (4) Interest received 176 91

Net cash provided by investing activities 176 87

Cash flows from noncapital financing activities:State appropriations 144,948 138,808

Gifts 7,175 7,300

Net cash provided by noncapital financing activities 152,123 146,108

Cash flows from capital and related financing activities:Additions to property and equipment (268,066) (201,228) Capital appropriations 170,984 105,800 Interest paid (3,377) (1,007) Net repayment, proceeds from long-term debt 85,625 70,671

Net cash used in capital and related financing activities (14,834) (25,764)

Net increase/(decrease) in cash and cash equivalents 46,668 (322)

Cash and cash equivalents at beginning of year 46,314 46,636

Cash and cash equivalents at end of year $ 92,982 $ 46,314

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UCONN HEALTH

STATEMENTS OF CASH FLOWS (Continued) For the Years Ended June 30, 2015 and 2014

Reconciliation of operating loss to net cash used in operating activities:

($ in thousands) 2015 2014

Operating loss $ (285,874) $ (286,102) Adjustments to reconcile operating loss to net cash

Used in operating activities:Depreciation and amortization 40,550 32,780 Personal services and fringe benefits In Kind from State 134,680 123,631

Changes in assets and liabilities:Patients receivables, net (4,691) (2,309) Contract and other receivables 9,723 (2,863) Due from DOC (3,392) 8,662 Inventories 290 515 Third party payors 12,234 1,778 Prepaid expenses (461) 889 Other assets (1,103) (1,030) Accounts payable and accrued liabilities (1,258) 561 Due to State of Connecticut (321) 799 Accrued salaries 2,043 2,212 Compensated absences 1,142 1,879 Deferred revenue 766 (4,141) Malpractice reserve 4,875 1,986

Net cash used in operating activities $ (90,797) $ (120,753)

Schedule of Non-Cash Financing Transactions

Mortgage proceeds held by Trustee in construction escrow account $ (37,451) $ 34,464 Accruals of expenses related to construction in progress $ 6,474 $ 12,080

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UCONN HEALTH Notes to Financial Statements


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Related Entities The University of Connecticut Health Center (“UConn Health”) is a part of a comprehensive institution of higher education, the University of Connecticut (the “University”). Although governed by a single Board of Trustees, UConn Health and the University maintain separate budgets and are by statute separate entities for purposes of maintaining operating funds and state appropriations. UConn Health also has a Board of Directors to whom the Board of Trustees has delegated certain responsibility and authority. These financial statements represent transactions and balances of UConn Health for the years ended June 30, 2015 and 2014, which includes the School of Medicine, School of Dental Medicine, UConn Medical Group (UMG), University of Connecticut Health Center Finance Corporation, Correctional Managed Healthcare (CMHC), University Dentists (the “Primary Institution”) and John Dempsey Hospital (the “Hospital”). UConn Health offers medical and dentistry degrees and operates a physician/dentist practice and a teaching and research hospital. There is also an affiliated entity that supports the mission of UConn Health: The University of Connecticut Foundation Inc. (the “Foundation”). The Foundation raises funds to promote, encourage, and assist education and research at the University, including UConn Health. Basis of Presentation UConn Health’s financial statements are prepared using the economic resources measurement focus and in accordance with all relevant Governmental Accounting Standards Board (GASB) pronouncements. GASB No. 20, “Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting,” states that proprietary activities may elect to apply the provisions of Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989 that do not conflict with or contradict GASB pronouncements. UConn Health has not elected this option. Effective July 1, 2001, UConn Health adopted GASB Statement No. 35, Basic Financial Statements - and Management’s Discussion and Analysis - for Public Colleges and Universities, as amended by GASB Statements Nos. 37 and 38. GASB Statement No. 35 establishes standards for financial reporting for public colleges and universities. These reporting standards focus on the University as a whole rather than on accountability by individual fund groups and provide accounting and financial reporting guidelines, enhancing the usefulness and comprehension of financial reports by external users. To that end, GASB requires that resources be classified for accounting and reporting purposes into the following net asset categories:

Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation, and reduced by outstanding principal balances of borrowings attributable to the acquisition, construction, or improvement of those assets.

Restricted nonexpendable: Represents endowment and similar type assets in which donors or 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 expended or reinvested in principal.

Restricted expendable: Net assets that are expendable but where UConn Health is legally or contractually obligated to spend the resources in accordance with restrictions imposed by external third parties.

Unrestricted: Consists of net assets that do not meet the definition of “restricted” or “invested in capital assets, net of related debt.” These assets are not subject to externally imposed stipulations. These assets, while not restricted, are generally designated to support instruction, research, auxiliary enterprises, and capital projects.

Expenses are charged to either restricted or unrestricted net assets based on the variety of factors, including consideration of prior or future revenue sources, the type of expense incurred, UConn Health’s budgetary policies surrounding the various revenue sources or whether the expense is a recurring cost.

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For reporting periods beginning after June 15, 2005, GASB Statement No. 47, Accounting for Termination Benefits, was required for universities. This statement requires employers to recognize a liability and expense for voluntary termination benefits when the termination offer is accepted and the amount of the benefits can be estimated. UConn Health records pension liabilities, including those for retired personnel, in accordance with GASB 68 (see Note 8). Change in Accounting Principle During 2015, UConn Health adopted GASB issued Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68, Accounting and Financial Reporting for Pensions. GASB 67 pertains to financial reporting by state and local government pension plans, effective for plan years beginning after June 15, 2013. GASB 68 addresses new accounting and financial reporting requirements for governmental employers that provide their employees with pension benefits administered through a qualified trust and is effective for UConn Health beginning July 1, 2014. This statement establishes standards for measuring and recognizing pension liabilities, deferred outflows of resources, deferred inflows of resources, and expenses. Under GASB 68, cost-sharing employers not in a special funding situation are required to recognize a liability for their proportionate share of the net pension liability (of all employers for benefits provided through the pension plan)—the collective net pension liability. Consequently, UConn Health must report its proportionate share of the collective pension amounts related to the State Employees’ Retirement System and the Teachers’ Retirement System in its stand-alone financial statements for the first time. This statement also requires more extensive note disclosure and required supplementary information (RSI) related to pensions. In addition, UConn Health adopted GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, effective simultaneously with the provisions of GASB 68. This Statement amends GASB 68 to require that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. For the implementation of GASB 68, it was not feasible for UConn Health to restate financial statements for the year ended June 30, 2014. As a result, the cumulative effect of applying GASB 68 and 71 is reported as a restatement of beginning net position for the year ended June 30, 2015. The following table presents the impact of this change (amounts in thousands):

2015 Beginning net position, July 1, 2014 $ 576,794 Cumulative effect of adoption of GASB 68 & 71 (695,032) Adjusted beginning net position, July 1, 2014 $ (118,238)

Upcoming Accounting Pronouncements In February 2015, GASB issued Statement No. 72, Fair Value Measurement and Application. This Statement addresses accounting and financial reporting issues related to fair value measurements. This Statement provides guidance for determining a fair value measurement for financial reporting purposes. This Statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2015. In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits other than Pensions, will require additional disclosures and reporting of UConn Health’s proportionate share of the net liabilities related to its participation in the postemployment benefit plans on the statements of net position as well as more extensive note disclosures and required supplementary information about the postemployment liabilities. This Statement is effective for fiscal years beginning June 15, 2017.

In June 2015, GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The objective of this Statement is to identify, in the context of the current governmental financial reporting environment, the hierarchy of accounting principles generally accepted in the United States of America (GAAP). The “GAAP hierarchy” consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. The provisions of this Statement are effective for fiscal years beginning after June 15, 2015 UConn Health is currently evaluating the impact these standards will have on its financial statements.

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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, deferred inflows and outflows of resources and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Proprietary Fund Accounting UConn Health utilizes the proprietary fund method of accounting whereby revenue and expenses are recognized on the accrual basis. All revenues and expenses are subject to accrual. Basis of Presentation All significant intra-agency transactions have been eliminated in the presentation of the Consolidated Financial Statements. Additional information about eliminations may be found in the supplemental schedules. Operating and Non-operating revenues: UConn Health breaks out revenues between operating and non-operating based on the nature of the transaction as being either an exchange or non-exchange transaction. Exchange transactions principally include services provided by UConn Health to the community. Non-exchange transactions include State Appropriations, Gifts, Loss on disposal of property, and equipment, and Investment Returns. Cash and Cash Equivalents: UConn Health considers all funds that have not been otherwise board designated and which are held on its behalf by the State of Connecticut to be cash. Construction Escrow Account: Funds related to the financing of the Outpatient Pavilion are placed into the Construction Escrow account upon advancement from the lender. UConn Health does not have immediate access to these funds and must submit receipts and other prescribed documentation in order to apply for reimbursement of construction expenses from the fund. Accounts Receivable and Net Patient Service Revenues Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. Settlements are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Investments and Investment Income The State of Connecticut has established various funds to account for the operations of UConn Health. These funds include the University Health Center Operating Fund (Fund 12018), the University Health Center Research Foundation Fund (Fund 12023), the University Health Center Hospital Fund (Fund 21002) and the UConn Health Malpractice Trust Fund (Fund 35015). Grants and contracts for research and related retained overhead recoveries are accounted for in the Research Foundation Fund. The Malpractice Trust Fund accounts for assets set aside in conjunction with actuarial funding recommendations. The Operating Fund acts as a "General Fund" for UConn Health, accounting for all operations not accounted for elsewhere. Unrestricted Research Foundation Fund and Malpractice Trust Fund assets in excess of immediate cash needs are invested in the State of Connecticut Short-Term Investment Fund (STIF). Most restricted Research Foundation Fund assets are not invested, though there are certain exceptions including gift accounts and funds invested at the request of sponsoring organizations. Local student activity funds controlled by UConn Health are also invested in STIF; these funds are minimal in amount. The STIF, which was established and is operated under Sections 3-27a through 3-27i of the General Statutes, provides State agencies, funds, political subdivisions and others with a mechanism for investing at a daily-earned rate with interest from day of deposit to day of withdrawal. STIF participants have daily access to their account balances. Underlying investments of the STIF are mainly in money market instruments.

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Though Operating Fund participation in STIF is not significant, UConn Health earns interest on Operating Fund cash balances through the State Treasurer's interest credit program. Under this program, the Treasurer pays UConn Health STIF equivalent interest on the average daily cash balance held in the Operating Fund each quarter. Additionally, interest is paid on monies transferred from UConn Health's civil list funds into the direct disbursement account used to process checks issued directly to vendors by UConn Health. Though the balance in this account may include assets of the Operating, Research Fund and Hospital Funds, all interest earned is credited to the Operating Fund. The Hospital Fund does not participate in STIF or, other than described above, the Treasurer's interest credit program. Investment Income also includes amounts received from endowments. Inventories Consumable supplies are expensed when received with the exception of certain central inventories. Cost of the inventory is determined on a moving average basis for the Central Warehouse, and on a first-in, first-out basis for the others. Pharmacy inventory is valued at market which approximates cost due to high turnover rates for institutional pharmaceuticals. Capital Assets Property and equipment acquisitions are recorded at cost. Betterments and major renewals are capitalized and maintenance and repairs are expensed as incurred. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Buildings have an estimated useful life of 5 to 50 years and equipment has an estimated useful life of 2 to 25 years. Medical Malpractice Health care providers and support staff of the UConn Health are fully protected by state statutes from any claim for damage or injury, not wanton, reckless or malicious, caused in the discharge of their duties or within the scope of their employment (“statutory immunity”). Any claims paid for actions brought against the State as permitted by waiver of statutory immunity have been charged against UConn Health’s malpractice self-insurance fund. Effective July 1, 1999, UConn Health developed a methodology by which it could allocate malpractice costs between the Hospital, UMG, and Dental practices. For the years ended June 30, 2015, and 2014, these costs are included in the statements of revenues, expenses and changes in net position. Compensated Absences UConn Health’s employees earn vacation, personal, compensatory and sick time at varying rates depending on their collective bargaining units. Employees may accumulate sick leave up to a specified maximum. Employees are not paid for accumulated sick leave if they leave before retirement. However, employees who retire from the Hospital may convert accumulated sick leave to termination payments at varying rates, depending on the employee’s contract. Amounts recorded on the statements of net position are based on historical experience. All other compensated absences are accrued at 100% of their balance. Compensated absences have been allocated between current and noncurrent based on historical information. Pension Liabilities In accordance with GASB 68, UConn Health records its proportionate share of the collective net pension liability and collective pension expense for each defined-benefit plan offered to its employees. The collective net pension liability for each plan is measured as the total pension liability, less the amount of the pension plan’s fiduciary net position. The total pension liability is the portion of the actuarial present value of projected benefits payments that are attributable to past periods of plan member service. Information about the fiduciary net position and additions to/deductions from each pension plan’s fiduciary net position have been determined on the same basis as they are reported by each pension plan. For this purpose, plan member contributions are recognized in the period in which the contributions are due. Employer contributions are recognized in the period in which the contributions are appropriated. Benefits and refunds are recognized when due and payable in accordance with the terms of each plan. Deferred Outflows of Resources and Deferred Inflows of Resources UConn Health reports its proportionate share of collective deferred outflows of resources or collective deferred inflows of resources related to its defined-benefit plans. Differences between expected and actual experience in the measurement of the total pension liability, changes of assumptions or other inputs, and differences between actual contributions and proportionate share of contributions are classified as either deferred outflows or deferred inflows, and are recognized over the average of the expected remaining service lives of employees eligible for pension benefits. The net differences between projected and actual earnings on pension plan investments are reported as deferred outflows or deferred inflows and are

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recognized over five years. Contributions to the pension plan from UConn Health subsequent to the measurement date of the net pension liability and before the end of the reporting period are reported as a deferred outflow of resources related to pensions. Regulatory Matters The Hospital is required to file semi-annual and annual operating information with the State of Connecticut Office of Health Care Access (“OHCA”), and is required to file annual cost reports with Medicare and Medicaid. Reclassification Certain amounts in the 2014 financial statements have been reclassified to conform to the 2015 presentation. 2. CASH DEPOSITS AND INVESTMENTS Statement No. 40 of the GASB requires governmental entities to disclose credit risk associated with cash deposits and investment balances, and investment policies applied to mitigate such risks, especially as it relates to uninsured and unregistered investments for which the securities are held by the broker or dealer, or by its trust department or agent, but not in UConn Health's name. UConn Health’s cash and cash equivalents, current and noncurrent, balance was $92,981,255 and $46,314,171, as of June 30, 2015 and 2014, respectively and included the following:

2015 2014Cash maintained by State of Connecticut Treasurer $ 40,716,408 $ (13,246,799)Invested in State of Connecticut Short-Term Investment Fund 51,855,383 53,226,258 Deposits with Financial Institutions and Other 407,964 6,333,212 Currency (Change Funds) 1,500 1,500 Total cash and cash equivalents 92,981,255 46,314,171 Less: current balance 92,246,555 45,897,156 Total noncurrent balance $ 734,700 $ 417,015

Collateralized deposits are protected by Connecticut statute. Under this statute, any bank holding public deposits must at all times maintain, segregated from its other assets, eligible collateral in an amount equal to at least a certain percentage of its public deposits. The applicable percentage is determined based on the bank's risk-based capital ratio – a measure of the bank's financial condition. The collateral is kept in the custody of the trust department of either the pledging bank or another bank in the name of the pledging bank. Portions of the bank balance of the State of Connecticut were insured by the Federal Deposit Insurance Corporation or collateralized. As a State agency, UConn Health benefits from this protection, though the extent to which the deposits of an individual State agency such as UConn Health are protected cannot be readily determined. Short-Term Investment Fund (STIF) STIF is a money market investment pool in which the State, municipal entities, and political subdivisions of the State are eligible to invest. The State Treasurer is authorized to invest monies of STIF in United States government and agency obligations, certificates of deposit, commercial paper, corporate bonds, saving accounts, bankers' acceptances, repurchase agreements, asset-backed securities, and student loans. For financial reporting purposes, STIF is considered to be "cash equivalents" in the statements of net position. UConn Health's cash management investment policy authorizes UConn Health to invest in the State Treasurer’s Short Term Investment Fund, United States Treasury bills, United States Treasury notes and bonds, United States Government Agency obligations, banker's acceptances, certificates of deposit (including EURO Dollars), commercial paper, money market funds, repurchase agreements and savings accounts. The $51,855,383 invested in the State of Connecticut Investment Pool is invested by the State Treasurer in its Short-term Investment Fund and had a Standard and Poor’s rating of AAAm during fiscal year 2015.

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Certain funds are held by outside fiscal agents and are not under the direct control of UConn Health. Accordingly, the assets of these funds are not included in the financial statements. The fair value amount of these funds was $2,543,779 and $2,546,348 as of June 30, 2015 and 2014, respectively. Investment income earned on these assets is transferred to UConn Health in accordance with the applicable trust agreement. Income received from those sources was $6,476 and $3,959 for the years ended June 30, 2015 and 2014, respectively. 3. CHARITY CARE

The Hospital maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges forgone for services and supplies furnished under its charity care policy, the estimated cost of those services and supplies, and equivalent service statistics. During 2015 and 2014, the Hospital provided charity care services of $327,517 and $629,512, respectively. The cost basis of these services was $159,281 and $320,939, respectively. All related expenses are included in operating expenses. 4. NET PATIENT SERVICE REVENUE

UConn Health provides health care services primarily to residents of the region. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. UConn Health believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries are outstanding, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Changes in the Medicare and Medicaid programs and the reduction of funding levels could have an adverse impact on UConn Health.

UConn Health has agreements with third-party payers that provide for payments at amounts different from its established rates. These third party payers include Medicare, Medicaid and certain commercial insurance carriers and Health Maintenance Organizations. Additionally, under the Correctional Managed Health Care Program, UConn Health provides medical, dental and psychiatric care to the inmates incarcerated at the State’s correctional facilities. This program is funded from the State’s General Fund through the Department of Correction. Patient service revenue for UConn Health is as follows:


Gross patient services revenue $ 740,812,802 $ 649,596,982 Less allowances 394,107,610 357,461,826 Less bad debts 9,405,021 5,377,566

Net patient service revenue 337,300,171 286,757,590

UConn Medical GroupGross patient services revenue 231,482,031 209,088,015 Less allowances 147,039,444 130,503,071 Less bad debts 1,594,572 1,274,244

Net patient service revenue 82,848,015 77,310,700

Correctional Managed Health Care 88,862,714 85,578,829

All other 10,238,995 7,475,073 Total net patient service revenue per business unit 519,249,895 457,122,192

Eliminations (6,289,720) (6,806,979) Total net patient service revenue $ 512,960,175 $ 450,315,213

20142015

(Amounts above include internal transactions eliminated on the face of the statements. Additional information is provided in the Supplemental Information at the end of these statements)

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5. CAPITAL ASSETS Capital assets at June 30, 2015 and 2014 consisted of the following:

2015 2014

Land $ 13,537,051 $ 13,537,051 Construction in Progress 384,211,179 317,554,407 Buildings 607,773,561 441,009,227 Equipment 241,382,446 244,212,445 Capital leases 13,776,275 13,776,275

1,260,680,512 1,030,089,405

Less accumulated depreciation 465,241,626 456,393,500

Capital assets, net $ 795,438,886 $ 573,695,905

UConn Health’s fine art collection is capitalized on the statements of net position. This collection is included in equipment in the Primary Institution and totaled $958,643 and $833,567 at June 30, 2015 and 2014, respectively. Plant and equipment activity and related information on accumulated depreciation for UConn Health for the years ended June 30, 2015 and 2014 was as follows:

2014 Additions Deletions 2015Property and equipment:Land $ 13,537,051 $ - $ - $ 13,537,051 Construction in Progress 317,554,407 254,035,408 (187,378,636) 384,211,179 Buildings and Building Improvements 441,009,227 181,350,817 (14,586,483) 607,773,561 Equipment 244,212,445 15,467,678 (18,297,677) 241,382,446 Capital leases 13,776,275 - - 13,776,275 Total property and equipment 1,030,089,405 450,853,903 (220,262,796) 1,260,680,512

Less accumulated depreciation:Buildings and Building Improvements 260,680,539 16,909,830 (11,131,680) 266,458,689 Equipment 182,049,653 20,811,001 (17,850,140) 185,010,514 Capital Leases 13,663,308 109,115 - 13,772,423 Total accumulated depreciation 456,393,500 37,829,946 (28,981,820) 465,241,626

Net property and equipment:Land 13,537,051 - - 13,537,051 Construction in Progress 317,554,407 254,035,408 (187,378,636) 384,211,179 Buildings and Building Improvements 180,328,688 164,440,987 (3,454,803) 341,314,872 Equipment 62,162,792 (5,343,323) (447,537) 56,371,932 Capital leases 112,967 (109,115) - 3,852 Total capital assets, net $ 573,695,905 $ 413,023,957 $ (191,280,976) $ 795,438,886

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2013 Additions Deletions 2014Property and equipment:Land $ 13,537,051 $ - $ - $ 13,537,051 Construction in Progress 165,414,650 210,419,090 (58,279,333) 317,554,407 Buildings and Building Improvements 408,394,523 32,614,704 - 441,009,227 Equipment 261,165,976 24,390,669 (41,344,200) 244,212,445 Capital leases 13,776,275 - - 13,776,275 Total property and equipment 862,288,475 267,424,463 (99,623,533) 1,030,089,405

Less accumulated depreciation:Buildings and Building Improvements 248,365,128 12,315,411 - 260,680,539 Equipment 202,785,134 20,036,207 (40,771,688) 182,049,653 Capital leases 13,235,003 428,305 - 13,663,308 Total accumulated depreciation 464,385,265 32,779,923 (40,771,688) 456,393,500

Net property and equipment:Land 13,537,051 - - 13,537,051 Construction in Progress 165,414,650 210,419,090 (58,279,333) 317,554,407 Buildings and Building Improvements 160,029,395 20,299,293 - 180,328,688 Equipment 58,380,842 4,354,462 (572,512) 62,162,792 Capital leases 541,272 (428,305) - 112,967 Total capital assets, net $ 397,903,210 $ 234,644,540 $ (58,851,845) $ 573,695,905

Construction in progress at June 30, 2015 and 2014, represents accumulated costs for various UConn Health construction projects. UConn Health has entered into various contractual arrangements related to these projects. Upon completion, the cost of the project is transferred to the appropriate investment in property and equipment category and depreciation will commence. 6. ENDOWMENTS UConn Health designated the Foundation as manager of UConn Health’s endowment funds. The Foundation makes spending allocation distributions to UConn Health for each participating endowment. The distribution is spent by UConn Health in accordance with the respective purposes of the endowments and with the policies and procedures of UConn Health. Additional information is presented in footnote 12.

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7. LONG-TERM LIABILITIES Long-term liability activity for the years ended June 30, 2015 and 2014 was as follows:

June 30, 2014 June 30, 2015 Amounts due

Balance Additions Reductions Balance within 1 yearLong-Term debt:

Mortgage Agreements Primary Institution 168,024,254 50,303,427 2,129,611 216,198,070 5,497,829 Total Long-Term Debt 168,024,254 50,303,427 2,129,611 216,198,070 5,497,829

Malpractice reserve 21,875,000 9,884,237 5,009,237 26,750,000 3,627,000

Compensated absences 48,765,638 35,768,444 34,626,592 49,907,490 22,039,148

Total Long - Term Liabilities $ 238,664,892 95,956,108 41,765,440 292,855,560 $ 31,163,977

June 30, 2013 June 30, 2014 Amounts dueBalance Additions Reductions Balance within 1 year

Long-Term debt:Mortgage Agreements Primary Institution 62,888,744 106,142,990 1,007,480 168,024,254 2,129,611 Total Long-Term Debt 62,888,744 106,142,990 1,007,480 168,024,254 2,129,611

Malpractice reserve 19,889,000 2,434,701 448,701 21,875,000 3,736,000

Compensated absences 46,886,167 35,399,046 33,519,575 48,765,638 21,015,981

Total Long - Term Liabilities $ 129,663,911 143,976,737 34,975,756 238,664,892 $ 26,881,592

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Estimated cash basis interest and principal requirements for the long-term debt (including the full amounts payable for the Outpatient Pavilion) for the next five years and thereafter are as follows:

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

$16,000,000

$18,000,000

2016 2017 2018 2019 2020

Principal & Interest

Years

Long-Term Debt Requirement

Year Long-Term Debt2016 15,985,039 2017 15,985,039 2018 15,985,039 2019 15,985,039 2020 15,985,039


Totals $ 364,745,514

UConn Health is self-insured with respect to medical malpractice risks. Estimated losses from asserted and unasserted claims identified under UConn Health’s incident reporting system and an estimate of incurred but not reported claims are accrued based on actuarially determined estimates that incorporate UConn Health’s past experience as well as other considerations, including the nature of each claim or incident and relevant trend factors. The scope of UConn Health’s assessment for establishing budgets for malpractice costs encompasses physicians, dentists, and all other UConn Health health care providers, and support staff. UConn Health is involved in litigation claiming a substantial amount of damages arising in the ordinary course of business. Specifically, claims alleging malpractice have been asserted against UConn Health and are currently in various stages of litigation. Costs associated with these known claims, including settlements, as well as any new claims arising during the course of business will be paid from the malpractice trust fund. Pursuant to Public Act No. 09-3, to the extent that claims for cases exceed current year premiums budgeted by UConn Health, UConn Health may petition the State to make up any difference. However, operational subsidies from the State and/or UConn Health may be affected by the performance of UConn Health’s malpractice program. At June 30, 2015, UConn Health Malpractice Trust Fund had actuarial reserves of approximately $26.8 million and assets of approximately $10.4 million.

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8. RETIREMENT PLAN AND OTHER POST EMPLOYMENT BENEFITS UConn Health implemented GASB 68 for the fiscal year ended June 30, 2015. Under GASB 68, governmental employers whose employees participate in pension plans covered under GASB 67, and who prepare accrual based financial statements are required to report their share of the pension liabilities and related deferred outflows and deferred inflows of resources in their stand-alone financial statements. UConn Health did not restate the accompanying financial statements for the year ended June 30, 2014; therefore, pension liabilities and related deferred outflows or deferred inflows were not reflected based on prior pension accounting standards. Alternatively, the cumulative effective of implementing GASB 68 was recorded as an adjustment to beginning net position for the year ended June 30, 2015 (see Note 1). State Employees' Retirement System (SERS) Pension plan. SERS is a single-employer defined-benefit plan that covers substantially all of the State’s full-time employees who are not eligible for another State sponsored retirement plan. SERS is administered by the State Comptroller’s Retirement Division under the direction of the State Employees Retirement Commission. SERS consists of five plans: Tier I, Tier II, Tier IIA, Tier III, and the Hybrid Plan. In accordance with GASB 68, UConn Health must report for its participation in SERS as if it were a cost-sharing employer plan. Benefits provided. SERS was established by the Connecticut General Assembly for the purpose of providing retirement, disability, and death benefits along with annual cost-of-living adjustments (COLAs) to plan members and their beneficiaries. Generally, the monthly pension benefit is calculated in accordance with a basic formula, which takes into consideration average salary, credited service, and age at retirement. Further details on plan benefits, COLAs, and other plan provisions are described in Sections 5-152 to 5-192 of the State General Statutes. SERS does not issue a stand-alone financial report but is reported as a fiduciary fund within the State’s Comprehensive Annual Financial Report (CAFR). Financial reports are available on the website of the Office of the State Comptroller at http://www.osc.ct.gov/reports/. Contributions. The contribution requirements are established and may be amended by the State legislature subject to the contractual rights established by collective bargaining. Tier I Plan B regular and Hazardous Duty members are required to contribute 2.0% and 4.0% of their annual salary, respectively, up to the Social Security Taxable Wage Base plus 5.0% above that level; Tier I Plan C members are required to contribute 5.0% of their annual salary; Tier II Plan Hazardous Duty members are required to contribute 4.0% of their annual salary; Tier IIA and Tier III Plans regular and Hazardous Duty members are required to contribute 2.0% and 5.0% of their annual salary, respectively. Individuals hired on or after July 1, 2011 otherwise eligible for ARP are eligible to become members of the Hybrid Plan in addition to their other existing choices. The Hybrid Plan has defined benefits identical to Tier II/IIA and Tier III for individuals hired on or after July 1, 2011, but requires employee contributions 3.0% higher than the contribution required from the applicable Tier II/IIA plan. UConn Health makes contributions on behalf of the employees, through a fringe benefit charge assessed by the State. These amounts are expected to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. UConn Health’s contributions for regular and hazardous duty members were $72.5 million for fiscal year 2015. Proportionate share of collective Net Pension Liability (NPL). At June 30, 2015, UConn Health reported a liability of $799.1 million for its proportionate share of the SERS collective NPL. The collective NPL was measured as of June 30, 2014, and the total pension liability (TPL) used to calculate the collective NPL was determined by an actuarial valuation as of that date. UConn Health’s proportion of the collective NPL was based on UConn Health’s share of contributions relative to total contributions made to SERS. Based on this calculation, the UConn Health’s proportion was 4.99% at June 30, 2014. Actuarial assumptions. TPL for SERS was determined based on the annual actuarial funding valuation report prepared as of June 30, 2014 and was based on the results of an actuarial experience study for the period July 1, 2007 – June 30, 2011. The key actuarial assumptions are summarized below:

Inflation 2.75 % Salary increases 4.00% – 20.00%, including inflation Investment rate of return 8.00%, net of pension plan investment


Mortality rates were based on the RP-2000 Mortality Table for Annuitants and Non-Annuitants projected with the scale AA, 15 years for men (set back 2 years) and 25 years for women (set back 1 year) for the period after service retirement and

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for dependent beneficiaries. For the period after disability retirement, 55% (men) and 80% (women) of the RP-2000 Disabled Mortality Table was used. The projection of the RP-2000 mortality rates with age setbacks as described provides an approximate 13% margin in the assumed rates of mortality. The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of arithmetic real rates of return for each major asset class as of June 30, 2014 are summarized in the following table:

Asset Class Target


Large Cap U.S. Equities 21.0% 5.8% Developed Non-U.S. Equities 18.0% 6.6% Emerging Market (Non-U.S.) 9.0% 8.3% Real Estate 7.0% 5.1% Private Equity 11.0% 7.6% Alternative Investments 8.0% 4.1% Fixed Income (Core) 8.0% 1.3% High Yield Bonds 5.0% 3.9% Emerging Market Bond 4.0% 3.7% TIPS 5.0% 1.0% Cash 4.0% 0.4% Total 100.0%

Discount rate. The discount rate used to measure the TPL at June 30, 2014 was the long-term rate of return of 8.0%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rates and that employer contributions will be made equal to the difference between the projected actuarially determined contribution and member contributions. Projected future benefit payments for all current plan members were projected through the year 2115. Based on those assumptions, SERS’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the TPL and a municipal bond rate was not used in determining the discount rate. Sensitivity of UConn Health’s proportionate share of the collective NPL to changes in the discount rate. The following table presents UConn Health’s proportionate share of the collective NPL calculated using the discount rate of 8.0%, as well as what UConn Health’s proportionate share of the collective NPL would be if it were calculated using a discount rate that is 1-percentage-point lower (7.0%) or 1-percentage-point higher (9.0%) than the current rate (amounts in thousands):


UConn Health’s proportionate share of the collective NPL – (SERS) $ 953,217 $ 799,061 $ 669,418

A recent study performed on this plan suggested lowering the long-term assumed investment return to reduce funding shortfalls for ongoing benefits. The State is considering lowering the discount rate to 7.0% for future reporting periods. Pension plan fiduciary net position. Detailed information about the fiduciary net position of the SERS pension plan is available in the State’s CAFR for the fiscal year ended June 30, 2014.

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Connecticut Teachers’ Retirement System (TRS) Pension plan. TRS is a cost-sharing multiple-employer defined-benefit plan covering any teacher, principal, superintendent, or supervisor engaged in service of public schools in the State. Employees previously qualified for TRS continue coverage during employment with UConn Health, and do not participate in any other offered retirement plans. TRS is governed by Chapter 167a of the State General Statutes, as amended through the current session of the State Legislature, and is administered by the Teachers’ Retirement Board. Benefits provided. TRS provides retirement, disability, and death benefits, and annual COLAs to plan members and their beneficiaries. Generally, monthly plan benefits are based on a formula in combination with the member’s age, service, and the average of the highest three years of paid salaries. Further information on TRS plan benefits, COLAs, and other plan provisions are described in Sections 10-183b to 10-183ss of the State General Statutes. TRS does not issue a stand-alone financial report but is reported as a fiduciary fund within the State’s CAFR, which is available on the website of the Office of the State Comptroller (http://www.osc.ct.gov/reports/). Contributions. The contribution requirements are established and may be amended by the State legislature. Plan members are required to contribute 6.0% of their annual salary. According to Section 10-183z of the State General Statutes a special funding situation requires the State to contribute 100.0% of employer’s contributions on behalf of its municipalities at an actuarially determined rate. However, a special funding situation does not apply to UConn Health because it is an agency of the State and there is not a separate non-employer contributing entity. Therefore, like SERS, UConn Health makes contributions on behalf of the employees, through a fringe benefit charge assessed by the State. UConn Health’s contributions were $6,184 for fiscal year 2015. Proportionate share of collective NPL. At June 30, 2015, UConn Health reported a liability of $962,000 for its proportionate share of the collective NPL. The collective NPL was measured as of June 30, 2014, and the TPL used to calculate the collective NPL was determined by an actuarial valuation as of that date. UConn Health’s proportion of the collective NPL was based on the UConn Health’s share of contributions relative to total contributions made to TRS. Based on this calculation, UConn Health’s proportion was 0.001% at June 30, 2014. Actuarial assumptions. TPL as of June 30, 2014 was determined based on the annual actuarial funding valuation report prepared as of June 30, 2014 and was based on the results of an actuarial experience study for the period July 1, 2005 – June 30, 2010. The key actuarial assumptions are summarized below:

Inflation 3.00% Salary increases 3.75% – 7.00%, including inflation Investment rate of return 8.50 %, net of pension plan investment


Mortality rates were based on the RP-2000 Combined Mortality Table projected 19 years using scale AA, with a two year setback for males and females for the period after service retirement and for dependent beneficiaries. The Scale AA projection to 2019 of the RP-2000 mortality rates with two-year setbacks is estimated to provide a sufficient margin in the assumed rates of mortality to allow for additional improvement in mortality experience. The post-retirement mortality rates are multiplied by 75% for death in active service. The post retirement mortality rates are set forward ten years for the period after disability retirement. The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.

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The target asset allocation and best estimates of arithmetic real rates of return for each major asset class as of June 30, 2014 are summarized in the following table:

Asset Class Target


Mutual Equity 25.0% 7.3% Developed Markets ISF 20.0% 7.5% Emerging Markets ISF 9.0% 8.6% Core Fixed Income 13.0% 1.7% Emerging Market Debt 4.0% 4.8% High Yield 2.0% 3.7% Inflation Linked Bonds 6.0% 1.3% Liquidity Fund 6.0% 0.7% Real Estate 5.0% 5.9% Private Investment 10.0% 10.9% Total 100.0%

Discount rate. The discount rate used to measure the TPL was 8.5%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that State contributions will be made at the actuarially determined rates in future years. Based on those assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the UConn Health’s proportionate share of the collective NPL to changes in the discount rate. The following presents UConn Health’s proportionate share of the collective NPL calculated using the discount rate of 8.5%, as well as what the UConn Health’s proportionate share of the collective NPL would be if it were calculated using a discount rate that is 1-percentage-point lower (7.5%) or 1-percentage-point higher (9.5%) than the current rate (amounts in thousands):


UConn Health’s proportionate share of the collective NPL – (TRS) $ 1,228 $ 962 $ 736

A recent study performed on this plan suggested lowering the long-term assumed investment return to reduce funding shortfalls for ongoing benefits. The State is considering lowering the discount rate to 7.0% for future reporting periods. Pension plan fiduciary net position. Detailed information about the fiduciary net position of the TRS pension plan is available in the State’s CAFR for the fiscal year ended June 30, 2014.

Alternate Retirement Plan Defined Contribution Plan. UConn Health also sponsors the Alternate Retirement Plan (ARP), a defined contribution plan administered through a third-party administrator, Voya Retirement Insurance and Annuity Company. Beginning July 1, 2015, administration of ARP has changed to Prudential Financial, Inc. The Connecticut State Employees Retirement Commission has the authority to supervise and control the operation of the plan including the authority to make and amend rules and regulations relating to the administration of the plan. All unclassified employees, not already in a pension plan, of a constituent unit of the state system of higher education and the central office staff of the Department of Higher Education, are eligible to participate in ARP. Participants must contribute 5% of eligible compensation each pay period while the State will contribute an amount equal to 8% of the participant’s eligible compensation. Participant and State contributions are both 100% vested immediately. For fiscal years 2015 and 2014, State contributions on behalf of UConn Health to ARP were approximately $25.4 million and $25.3 million, respectively.

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Upon separation from service, retirement, death or divorce (including alternate payee under a Qualified Domestic Relations Order), if you are age 55 or over and have more than 5 years of plan participation, a participant or designated beneficiary can withdraw a partial or lump cash payment, rollover to another eligible retirement plan or IRA, or receive installment payments or annuity payments. Other ARP provisions are described in Title 5 – State Employees, Chapter 66 – State Employees Retirement Act of the Connecticut General Statutes. Other Post-Employment Benefits other than Pension In addition to the pension benefits, the State provides post-retirement health care and life insurance benefits to UConn Health employees in accordance with State Statutes Sections 5-257(d) and 5-259(a). When employees retire, the State may pay up to 100% of their health care insurance premium cost (including dependents’ coverage) based on the plan chosen by the employee. In addition, the State pays 100% of the premium cost for a portion of the employee's life insurance continued after retirement. The amount of life insurance continued at no cost to the retiree is determined by a formula based on the number of years of State service that the retiree had at the time of retirement. Currently, the State is responsible and finances the cost of post-retirement health care and life insurance benefits on a pay-as-you-go basis through an appropriation in the General Fund; therefore, no liability is recorded in UConn Health’s financial statements. However, implementation of GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits other than Pensions, will require additional disclosures and reporting of the UConn Health’s proportionate share of the net liability related to its participation in the postemployment benefit plans on the Statements of Net Position as well as more extensive note disclosures and required supplementary information about the postemployment liabilities. This Statement is effective for fiscal years beginning after June 15, 2017. 9. RESIDENCY TRAINING PROGRAM UConn Health’s School of Medicine Residency Training Program provides area hospitals with the services of interns and residents. Participating hospitals remit payments to UConn Health, in accordance with an established rate schedule, for services provided. UConn Health, in turn, funds the Capital Area Health Consortium, Inc., which coordinates the payment of payroll and the provision of related fringe benefits to the interns and residents, under a contractual arrangement. Amounts remitted or owed by participating hospitals for payments made to interns and residents, and amounts paid or due under contract to the Capital Area Health Consortium, Inc., are reflected in the accompanying financial statements as current unrestricted revenues and expenditures, respectively. UConn Health’s School of Dental Medicine also operates its Residency Training Program through the Consortium. Dental Residents work in local dental clinics honing their skills while providing services to traditionally underserved populations. 10. BOND FINANCED ALLOTMENTS UConn Health recognizes an asset when an allotment is processed for State general obligation bonds or when bonds are funded from UConn Health resources or issued under the UCONN 2000 program are sold. In fiscal year 2002, the General Assembly of the State of Connecticut enacted and the Governor signed into law Public Act No. 02-3, An Act Concerning 21st Century UConn (Act), also known as Phase III. This Act amended Public Act No. 95-230 and extended the UCONN 2000 financing program that was scheduled to end in 2005, for an additional 10 years to June 30, 2015. The 21st Century UConn program was amended in fiscal year 2008, extending it an additional year to June 30, 2016, without any change in the total amount. In fiscal year 2010, the Act was amended again including a $25 million reallocation from existing UCONN 2000 UConn Health allocations, and a $207 million increase in UCONN 2000 debt service commitment authorizations for the UConn Health Network. This also extended the UCONN 2000 program two additional years to fiscal year 2018. In fiscal year 2011, the General Assembly enacted and the Governor signed Public Act No. 11-75, An Act Concerning the University of Connecticut Health Center, which increased the authorized project costs for UConn Health under Phase III. The Act, as amended, authorized additional projects for UConn Health at an estimated cost of $775.3 million. The Act also requires UConn Health to contribute not less than $69 million through operations, eligible gifts, or other sources towards new UConn Health construction. In fiscal 2015, the University recorded total revenue of $250 million as State debt service commitment for principal for the 2014 and 2015 Series A bonds which included $159.8 million to finance projects for UConn Health. In fiscal year 2014, UConn Health recorded $193.2 million related to bond issuances. UConn Health reports revenues from these bonds as Capital Appropriations. As noted above, Phase III includes a commitment to fund projects totaling $775.3 million for UConn Health. These bonds are general obligations of the University, for which its full faith and credit are pledged, and

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are payable from all assured revenues. The bonds are additionally secured by the pledge of and a lien upon the State Debt Service Commitment. The State Debt Service Commitment is the commitment by the State to pay an annual amount of debt service on securities issued as general obligations of the University. The University, consistent with the Act, is relying upon the receipt of the annual amount of the pledged State Debt Service Commitment for the payment of the bonds and, accordingly, is not planning to budget any of the other revenues for the payment of the bonds. The University therefore acts as custodian of the funds for UConn Health. A corresponding receivable, Due from Affiliates, is recorded for the unspent portion of the bonds, $80,293,929 and $91,428,873 at June 30, 2015 and 2014, respectively, in the Statements of Net Position. 11. COMMITMENTS On June 30, 2015, UConn Health had individual outstanding commitments exceeding $300,000 in amount, totaling $28,599,604. A portion of this amount was included in the June 30, 2015 accounts payable. Commitments above do not include any commitments arising from the administration of UCONN 2000 funds by the University on UConn Health’s behalf. Such obligations would be paid directly from proceeds of current and future bond issuances. UConn Health agreed to pay $54,950,721 during the 2015-2016 fiscal year to the Capitol Area Health Consortium to cover the payment of payroll, related fringe benefits, and certain program expenses for interns and residents participating in the School of Medicine and Dental Medicine Residency Training Programs. These costs are to be funded by participating hospitals, which will remit payments to UConn Health, in accordance with an established rate schedule, for services provided. Dental Residency costs will be funded by the School of Dental Medicine. UConn Health leases various building space under operating lease commitments, which expire at various dates through fiscal year 2027. Expenses related to these leases were $5,549,000 and $4,868,000 for the years ended June 30, 2015 and 2014, respectively. Future minimum rental payments at June 30, 2015 under non-cancelable operating leases are approximately as follows:

Year Payments2016 4,524,216 2017 4,360,942 2018 3,931,797 2019 3,975,363 2020 3,435,657


Total $ 37,219,938

12. RELATED PARTY TRANSACTIONS The University of Connecticut Foundation, Inc. (the “Foundation”) is a tax-exempt organization whose objective is the betterment of the University, including UConn Health. The Foundation is a consolidated part of the University and therefore an affiliated party. As is the case with the University’s Storrs based program, UConn Health has entered into a written agreement with the Foundation whereby UConn Health agrees to reimburse the Foundation for certain administrative services and the Foundation agreed to reimburse UConn Health for certain services performed and for operating expenses of the Foundation. The following transactions occurred between UConn Health and the Foundation during the year ended June 30, 2015:

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Amount paid to the Foundation $ 963,188

Amount received from the Foundationfor personnel services and operating expenses $ 5,801,357

Amount received from the Foundation

from endowments and gifts $ 1,762,929

In addition, UConn Health engages in transactions with the University. Listed below are the material transactions with the University. Not included in this list are certain cost share arrangements for shared services and transactions related to UCONN 2000 for which notation has been made in note 10.

Funds Paid to the University of Connecticut $ 8,527,720

UConn Health is a component unit of the State of Connecticut. Through UConn Health, the State seeks to meet certain unmet needs in the community including the training and development of new doctors and dentists. The State supports UConn Health’s mission primarily via two mechanisms: State Appropriations and the provision of In Kind benefits. State Appropriations represent amounts the State allows UConn Health to charge back directly to the State’s General Fund. In Kind benefits take the form of forgone fringe benefit expense reimbursements related to salaries expensed on the General Fund. For the year ended June 30, 2015, the amounts of these benefits recognized were as follows:

Amount of General Fund Appropriations from State of Connecticut $ 144,948,405

In Kind Fringe Benefits:Recognized through CMHC 53,159,923 Received elsewhere in Primary Institution 82,536,773

Total In Kind Fringe Benefits receivedfrom State of Connecticut: $ 135,696,696

Total Appropriations and In Kind Fringe benefits received from State of Connecticut $ 280,645,101

13. DENTAL CLINICS TRANSFER FROM JOHN DEMPSEY HOSPITAL TO PRIMARY INSTITUTION On July 1, 2013, UConn Health realigned the Dental Clinics removing them from the Hospital’s operating unit and aligning it with the institution’s other dental practices in the Primary Institution. The change was made by transferring all assets and liabilities included in the Hospital’s financial statements to UConn Health. During the year ended June 30, 2014, the Hospital stand-alone financial statements recognized a loss of $3,850,361 on the disposal of its Dental Clinics as a special item. The Dental Clinics comprised net patient service revenues of $7,531,254 and total operating expenses of $10,476,216 that were included in the 2014 statement of revenues, expenses and changes in position. UConn Health’s consolidated financial statements recognize the realignment as a transfer of Dental Clinic Assets as seen in the accompanying consolidated schedules.

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14. CONTINGENCIES UConn Health is a party to various legal actions arising in the ordinary course of its operations. While it is not feasible to predict the ultimate outcome of these actions, it is the opinion of management that the resolution of these matters will not have a material effect on UConn Health’s financial statements. 15. HYPOTHECATION Individual components of UConn Health are allowed to borrow from the State on the basis of their net patient receivables and contract and other receivables to fund operations. These units include John Dempsey Hospital and the UConn Medical Group. John Dempsey Hospital is allowed to borrow from the State at up to 90% of its receivables. UConn Medical Group is allowed to borrow at up to 70% of its accounts receivable. As of June 30, 2015 and 2014, the Hospital and UMG had the following draws and availability under the State statute:


UConn Medical Group


UConn Medical Group

Amount Drawn under Hypothecation $ - - $ 18,819,807 -

Remaining amounts available under Hypothecation $ 41,682,976 6,959,560 $ 24,165,640 8,273,756

2015 2014

16. OPERATING EXPENSES BY OBJECT The table below details UConn Health’s operating expenses by object for the years ended June 30, 2015 and 2014. Operating Expenses by object for the Years Ended June 30:

2015 2014

Salaries and Wages $ 430,987,568 $ 418,304,692 Fringe Benefits 239,287,699 223,850,517 Supplies and Other Expenses 286,170,289 258,778,354 Utilities 12,766,229 11,598,819 Depreciation and Amortization 37,829,946 32,779,922 Total $ 1,007,041,731 $ 945,312,304

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REQUIRED SUPPLEMENTARY

INFORMATION

37

UCONN HEALTH Required Supplementary Information

For the Year Ended June 30, 2015

State Employees’ Retirement System (SERS) UConn Health’s schedule of its proportionate share of the collective net pension liability (NPL) as of June 30 is shown below (amounts in thousands):

Year Ended

June 30

UConn Health’s proportion of the

collective NPL

UConn Health’s

proportionate share of the

collective NPL


UConn Health's proportionate share of the collective NPL as a % of

covered-employee payroll

Plan fiduciary

net position as a % of the total

liability

2015 4.99% $ 799,061 $ 167,523 476.99% 39.54%

UConn Health’s schedule of employer contributions as of June 30 is the following (amounts in thousands):

Year Ended June 30


contribution






employee payroll

2015 $ 63,313 $ 63,313 $ - $ 167,523 37.79%

Changes of benefit terms: For the June 30, 2014 valuation, there were two changes in benefit terms:

a. The 2011 SEBAC Agreement changed the benefit multiplier for the portion of benefit below the breakpoint from 1.33% to 1.40%. This change was made effective for all active members who retire on or after July 1, 2013 in Tier II, IIA and III.

b. A one-time decision was granted to members not eligible to retire by July 1, 2022 to elect to maintain the same

normal retirement eligibility applicable to members eligible to retire before July 1, 2022. Employees who elected by July 1, 2013 to maintain the eligibility are required to make additional employee contributions for the length of their remaining active service with SERS. The additional contribution was up to 0.72% of pensionable earnings.

Method and assumptions used in calculations of actuarially determined contributions. The actuarially determined contributions in the schedule of employer contributions are calculated as of June 30 each biennium for the fiscal years ending two and three years after the valuation date. The following actuarial methods and assumptions were used to determine the most recent contributions reported in that schedule:

Actuarial cost method Projected Unit Credit Amortization method Level percent of pay, closed Single equivalent amortization period 19 years Asset valuation method 5-year smoothed market Inflation 2.75% Salary increase 4.00-20.00%, including inflation Investment rate of return 8.00%, net of investment related expense

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Teachers’ Retirement System (TRS) UConn Health’s schedule of its proportionate share of the collective NPL as of June 30 is shown below (amounts in thousands):

Year Ended June 30

UConn Health's

proportion of the collective

NPL

UConn Health's proportionate share of the

collective NPL


UConn Health's proportionate share of the collective NPL as a

% of covered-employee payroll

Plan fiduciary net position as

a % of the total liability

2015 0.009% $ 963 $ 384 250.78% 61.56%

UConn Health’s schedule of employer contributions as of June 30 is the following (amounts in thousands):

Year Ended June 30


contribution






employee payroll

2015 $ 90 $ 146 $ 56 $ 384 38.02% Changes in assumptions: In 2011, rates of withdrawal, retirement and assumed rates of salary increase were adjusted to more closely reflect actual and anticipated experience. These assumptions were recommended as part of the Experience Study for the System for the five year period ended June 30, 2010. Method and assumptions used in calculations of actuarially determined contributions: The actuarially determined contributions in the schedule of employer contributions are calculated as of June 30 each biennium for the fiscal years ending two and three years after the valuation date. The following actuarial methods and assumptions were used to determine the most recent contributions reported in that schedule:

Actuarial cost method Entry age Amortization method Level percent of pay, closed Single equivalent amortization period 22.4 years Asset valuation method 4-year smoothed market Inflation 3.00% Salary increase 3.75-7.00%, including inflation Investment rate of return 8.50%, net of investment related expense


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UCONN HEALTH CONSOLIDATING STATEMENT OF NET POSITION

As of June 30, 2015

($ in thousands) Primary John Dempsey Eliminations TotalInstitution Hospital


Cash and cash equivalents $ 67,942 $ 24,305 $ - $ 92,247 Patient receivables, net 10,175 38,297 - 48,472 Contract and other receivables 29,211 8,018 - 37,229 Construction escrow account 18,872 - - 18,872 Due from Affiliates 80,294 - - 80,294 Due from State of Connecticut 9,984 - - 9,984 Due from Primary Institution - 14,485 (14,485) - Due from Department of Correction 7,367 - - 7,367 Inventories 2,226 7,447 - 9,673 Prepaid expenses 1,318 5,446 - 6,764 Total current assets 227,389 97,998 (14,485) 310,902

.Noncurrent Assets

Restricted cash and cash equivalents 735 - - 735 Other assets 2,664 766 - 3,430 Due from State of Connecticut 4,916 - - 4,916 Capital assets, net 744,947 50,492 - 795,439 Total noncurrent assets 753,262 51,258 - 804,520 Total assets $ 980,651 $ 149,256 $ (14,485) $ 1,115,422

Deferred Outflows of Resources $ 114,410 $ 16,039 $ - $ 130,449


Accounts payable and accrued liabilities $ 30,651 $ 10,381 $ - $ 41,032 Due to State of Connecticut 2,718 3,056 - 5,774 Accrued salaries 18,114 5,426 - 23,540 Compensated absences 15,139 6,900 - 22,039 Due to John Dempsey Hospital 14,485 - (14,485) - Due to third party payors - 16,726 - 16,726 Unearned revenues 1,330 - - 1,330 Malpractice reserve 3,627 - - 3,627 Long-term debt - current portion 5,498 - - 5,498 Total current liabilities 91,562 42,489 (14,485) 119,566

Noncurrent LiabilitiesMalpractice reserve 23,123 - - 23,123 Compensated absences 19,142 8,727 - 27,869 Pension Liability 651,649 148,375 - 800,024 Long-term debt 210,700 - - 210,700 Total noncurrent liabilities 904,614 157,102 - 1,061,716 Total liabilities $ 996,176 $ 199,591 $ (14,485) $ 1,181,282

Deferred Inflows of Resources $ 23,314 $ 5,303 $ - $ 28,617

NET POSITIONNet investment in capital assets $ 528,749 $ 50,492 $ - $ 579,241 Restricted for Nonexpendable Scholarships 61 - - 61 Expendable Research (139) - - (139) Loans 1,348 - - 1,348 Capital projects 104,082 - - 104,082 Unrestricted (558,530) (90,091) - (648,621) Total net position $ 75,571 $ (39,599) $ - $ 35,972

2015


40

UCONN HEALTH CONSOLIDATING STATEMENT OF NET POSITION

As of June 30, 2014

($ in thousands) Primary John Dempsey Eliminations TotalInstitution Hospital


Cash and cash equivalents $ 64,717 $ - $ (18,820) $ 45,897 Patient receivables, net 10,338 33,443 - 43,781 Contract and other receivables 32,633 14,319 - 46,952 Construction escrow account 56,323 - - 56,323 Due from Affiliates 91,429 - - 91,429 Due from State of Connecticut 8,967 - - 8,967 Due from Primary Institution - 15,182 (15,182) - Due from Department of Correction 3,975 - - 3,975 Inventories 2,304 7,660 - 9,964 Prepaid expenses 2,111 4,192 - 6,303 Total current assets 272,797 74,796 (34,002) 313,591

.Noncurrent Assets

Restricted cash and cash equivalents 417 - - 417 Other assets 1,661 667 - 2,328 Due from State of Connecticut 4,955 - - 4,955 Capital assets, net 521,992 51,704 - 573,696 Total noncurrent assets 529,025 52,371 - 581,396 Total assets $ 801,822 $ 127,167 $ (34,002) $ 894,987

Deferred outflow of resources $ - $ - $ - $ -


Cash overdraft $ - $ 18,820 $ (18,820) $ - Accounts payable and accrued liabilities 38,158 9,737 - 47,895 Due to State of Connecticut 2,373 2,706 - 5,079 Accrued salaries 16,523 4,974 - 21,497 Compensated absences 14,484 6,532 - 21,016 Due to John Dempsey Hospital 15,182 - (15,182) - Due to third party payors - 4,492 - 4,492 Unearned revenues 564 - - 564 Malpractice reserve 3,736 - - 3,736 Long-term debt - current portion 2,130 - - 2,130 Total current liabilities 93,150 47,261 (34,002) 106,409

Noncurrent LiabilitiesMalpractice reserve 18,139 - - 18,139 Compensated absences 19,199 8,551 - 27,750 Long-term debt 165,895 - - 165,895 Total noncurrent liabilities 203,233 8,551 - 211,784 Total liabilities $ 296,383 $ 55,812 $ (34,002) $ 318,193

Deferred inflows of resources $ - $ - $ - $ -

NET POSITIONNet investment in capital assets $ 353,968 $ 51,704 $ - $ 405,672 Restricted for Nonexpendable Scholarships 61 - - 61 Expendable Research 547 - - 547 Loans 104 - - 104 Capital projects 152,707 - - 152,707 Unrestricted (1,948) 19,651 - 17,703 Total net position $ 505,439 $ 71,355 $ - $ 576,794

2014


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UCONN HEALTH CONSOLIDATING STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION


($ in thousands) Primary John Dempsey Total Eliminations ConsolidatedInstitution Hospital (Memo Only)

OPERATING REVENUES

Student tuition and fees, net $ 16,557 $ - $ 16,557 $ - $ 16,557 Patient services, net 181,950 337,300 519,250 (6,290) 512,960 Federal grants and contracts 57,920 - 57,920 - 57,920 Nonfederal grants and contracts 24,407 - 24,407 - 24,407 Contract and other operating revenues 124,589 22,995 147,584 (38,260) 109,324

Total operating revenues 405,423 360,295 765,718 (44,550) 721,168


Instruction 184,598 - 184,598 (20,895) 163,703 Research 56,961 - 56,961 - 56,961 Patient services 298,190 332,900 631,090 (23,655) 607,435 Academic support 22,458 - 22,458 - 22,458 Institutional support 83,260 - 83,260 - 83,260 Operations and maintenance of plant 35,363 - 35,363 - 35,363 Depreciation 29,951 7,879 37,830 - 37,830 Student aid 32 - 32 - 32

Total operating expenses 710,813 340,779 1,051,592 (44,550) 1,007,042 Operating loss (305,390) 19,516 (285,874) - (285,874)

NONOPERATING REVENUES (EXPENSES)State appropriations 280,645 - 280,645 - 280,645 Gifts 6,625 550 7,175 - 7,175 Hospital transfer (8,001) 8,001 - - - Tranfer of Dental Clinics - - - - - Investment income, net 176 - 176 - 176 Interest on capital asset - related debt (3,820) - (3,820) - (3,820)

Net nonoperating revenues 275,625 8,551 284,176 - 284,176 Loss before other revenues,expenses, gains or losses (29,765) 28,067 (1,698) - (1,698)

OTHER CHANGES IN NET POSITIONCapital appropriations 159,810 - 159,810 - 159,810 Loss on Disposal (3,552) (350) (3,902) - (3,902)

Net Other Changes in Net Position 156,258 (350) 155,908 - 155,908 Increase in net position 126,493 27,717 154,210 - 154,210

NET POSITIONNet position-beginning of year (as previously stated) 505,439 71,355 576,794 - 576,794

(556,361) (138,671) (695,032) - (695,032) Net position-beginning of year as restated (50,922) (67,316) (118,238) - (118,238) Net position-end of year $ 75,571 $ (39,599) $ 35,972 $ - $ 35,972

2015

Cumulative effect of implementing GASB 68 and 71 (see note 1)


42

UCONN HEALTH CONSOLIDATING STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION


($ in thousands) Primary John Dempsey Total Eliminations ConsolidatedInstitution Hospital (Memo Only)

OPERATING REVENUES

Student tuition and fees, net $ 15,794 $ - $ 15,794 $ - $ 15,794 Patient services, net 170,365 286,757 457,122 (6,807) 450,315 Federal grants and contracts 62,527 - 62,527 - 62,527 Nonfederal grants and contracts 23,803 - 23,803 - 23,803 Contract and other operating revenues 115,609 21,956 137,565 (30,794) 106,771

Total operating revenues 388,098 308,713 696,811 (37,601) 659,210


Instruction 171,191 - 171,191 (18,573) 152,618 Research 59,518 - 59,518 - 59,518 Patient services 282,920 317,666 600,586 (19,028) 581,558 Academic support 20,824 - 20,824 - 20,824 Institutional support 66,416 - 66,416 - 66,416 Operations and maintenance of plant 31,548 - 31,548 - 31,548 Depreciation 23,873 8,907 32,780 - 32,780 Student aid 50 - 50 - 50

Total operating expenses 656,340 326,573 982,913 (37,601) 945,312 Operating loss (268,242) (17,860) (286,102) - (286,102)

NONOPERATING REVENUES (EXPENSES)State appropriations 266,139 - 266,139 - 266,139 Gifts 6,750 550 7,300 - 7,300 Hospital transfer (12,975) 12,975 - - - Transfer of Dental Clinics 3,850 (3,850) - - - Investment income, net 93 - 93 - 93 Interest on capital asset - related debt (1,007) - (1,007) - (1,007)

Net nonoperating revenues 262,850 9,675 272,525 - 272,525 Loss before other revenues,expenses, gains or losses (5,392) (8,185) (13,577) - (13,577)

OTHER CHANGES IN NET POSITIONCapital appropriations 193,214 - 193,214 - 193,214 Loss on Disposal (437) (136) (573) - (573)

Net Other Changes in Net Position 192,777 (136) 192,641 - 192,641 Increase in net position 187,385 (8,321) 179,064 - 179,064

NET POSITIONNet position-beginning of year (as previously stated) 318,054 79,676 397,730 - 397,730

318,054 79,676 397,730 - 397,730 Net position-end of year $ 505,439 $ 71,355 $ 576,794 $ - $ 576,794

2014

Cumulative effect of implementing GASB 68 and 71 (see note 1)


43

DIRECTORS AND FINANCIAL OFFICERS June 30, 2015

BOARD OF DIRECTORS

Members at Large Appointed by the Governor Francis X. Archambault, Jr. Richard M. Barry Francisco L. Borges Cheryl A. Chase

Storrs Avon Farmington Hartford

Kathleen D. Woods Teresa M. Ressel Joel Freedman

Avon New Canaan S. Glastonbury

John F. Droney W. Hartford

Timothy A. Holt Glastonbury Members Ex Officio Wayne Rawlins

Cromwell

Susan Herbst

Storrs

Charles W. Shivery Avon

Robert S. Dakers

Glastonbury

Jewel Mullen Middlefield Appointed by Chairperson, Board of Trustees Sanford Cloud Jr, Chairperson

Farmington

Andy F. Bessette

W. Hartford

Richard T. Carbray, Jr. Rocky Hill

FINANCIAL OFFICERS

Scott A. Jordan, Executive Vice President for Administration and Chief Financial Officer Jeffrey P. Geoghegan, Chief Financial Officer

Chad A. Bianchi, Controller


44

TRUSTEES As of June 30, 2015

BOARD OF TRUSTEES

MEMBERS EX OFFICIO The Honorable Dannel P. Malloy Governor of the State of Connecticut President ex officio Hartford The Honorable Steven K. Reviczky Commissioner of Agriculture Member ex officio Hartford The Honorable Catherine H. Smith Commissioner of Economic

and Community Development Member ex officio Hartford

The Honorable Dianna R. Wentzell Commissioner of Education Member ex officio Hartford Sanford Cloud, Jr. Chair, UConn Health Board of Directors Member ex officio Farmington ELECTED BY THE ALUMNI Donny E. Marshall CoventryRichard T. Carbray, Jr. Rocky Hill

APPOINTED BY THE GOVERNOR

Lawrence D. McHugh, Chairman MiddletownLouise M. Bailey, Secretary West HartfordAndy F. Bessette West HartfordCharles F. Bunnell East HaddamShari G. Cantor West HartfordAndrea Dennis-LaVigne SimsburyMarilda L. Gandara HartfordThomas E. Kruger StamfordRebecca Lobo GranbyDenis J. Nayden StamfordThomas D. Ritter Hartford

ELECTED BY THE STUDENTS

Jeremy L. Jelliffe WillimanticMichael K. Daniels Plainville

TAB 7


UConn Health


UCONN Current Issues in Compliance November 2015

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SUMMARY Following are excerpts from news articles having a risk management or compliance impact. The full article may be seen at the referenced source (some may require subscription to access). Topics for this month include the following:

• Data Security • Legislation

Data Security/Privacy AG: Hartford Hospital, contractor to pay $90,000 in 2012 data theft The CT Mirror - November 6, 2015

Hartford Hospital and one of its contractors have agreed to pay the state $90,000 and undertake training and security measures to resolve an investigation into the theft of a laptop containing unencrypted patient information in June 2012, according to Attorney General George Jepsen’s office.

The laptop contained protected health information for 8,883 Connecticut residents when it was stolen from the home of an employee of a Hartford Hospital contractor, EMC Corporation. The hospital had hired the company as part of a project aimed at reducing readmissions.

The laptop has never been recovered. Hartford Hospital said it has no evidence that any of the personal information was misused, according to an agreement the two companies reached with Jepsen’s office to resolve the allegations. Patients whose information was on the laptop were notified in 2012.

The agreement calls for the hospital to continue several training and security measures it undertook after the theft. Other requirements include using a combination of hardware and software to encrypt files or data containing protected health information before it is transferred; requiring each employee to certify that he or she has participated in annual privacy training; and submitting a report to the attorney general’s office in one year demonstrating that the corrective action measures are being implemented.

Similarly, the agreement requires EMC to maintain policies requiring, “if technically feasible,” all protected health information to be encrypted if stored on laptops or other portable devices and transmitted across wireless or public networks; to maintain reasonable security policies for employees on storing, accessing and transferring protected health information outside EMC premises; and to provide regular training on protecting and securing protected health information to employees who are responsible for handling it.

The agreement says it “will not be considered an admission” by either company of alleged violations related to the incident.

EMC spokeswoman Katryn McGaughey said Friday that the company had "fully cooperated with the Connecticut attorney general's office during its review of this matter."

"While EMC believes it did not violate any laws, resolving things by agreement was the best course for all involved. EMC remains fully committed to the privacy and data security of all customer with which it deals," she said.

Hartford Hospital spokeswoman Rebecca Stewart said, "We treat all matters related to patient privacy and confidentiality with the utmost seriousness. After the incident occurred in 2012, Hartford Hospital put into place several educational and procedural changes. These include remedial education, new policies, operational checklists, enhanced mandatory compliance training, more robust training modules regarding privacy, new contract templates and additional contracting procedures."

$750,000 HIPAA Settlement underscores the need for organization wide risk analysis HHS Office for Civil Rights in Action – December 14, 2015

The University of Washington Medicine (UWM) has agreed to settle charges that it potentially violated the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Security Rule by failing to implement policies and procedures to prevent, detect, contain, and correct security violations. UWM is an affiliated covered entity, which includes designated health care components and other entities under the control of the University of Washington,

http://ctmirror.org/2015/11/06/ag-hartford-hospital-contractor-to-pay-90000-in-2012-data-theft/

http://www.ct.gov/ag/lib/ag/press_releases/2015/20151105_hartford_hospital_privacyavc.pdf


2

including University of Washington Medical Center, the primary teaching hospital of the University of Washington School of Medicine. Affiliated covered entities must have in place appropriate policies and processes to assure HIPAA compliance with respect to each of the entities that are part of the affiliated group. The settlement includes a monetary payment of $750,000, a corrective action plan, and annual reports on the organization’s compliance efforts.

The U.S. Department of Health and Human Services (HHS) Office for Civil Rights (OCR) initiated its investigation of the UWM following receipt of a breach report on November 27, 2013, which indicated that the electronic protected health information (e-PHI) of approximately 90,000 individuals was accessed after an employee downloaded an email attachment that contained malicious malware. The malware compromised the organization’s IT system, affecting the data of two different groups of patients: 1) approximately 76,000 patients involving a combination of patient names, medical record numbers, dates of service, and/or charges or bill balances; and 2) approximately 15,000 patients involving names, medical record numbers, other demographics such as address and phone number, dates of birth, charges or bill balances, social security numbers, insurance identification or Medicare numbers.

OCR’s investigation indicated UWM’s security policies required its affiliated entities to have up-to-date, documented system-level risk assessments and to implement safeguards in compliance with the Security Rule. However, UWM did not ensure that all of its affiliated entities were properly conducting risk assessments and appropriately responding to the potential risks and vulnerabilities in their respective environments.

EY Identifies Top Fraud and Corruption Trends for 2016 December 14, 2015

Today, EY Fraud Investigation & Dispute Services (FIDS) announced top fraud and corruption trends for 2016. A dramatic rise in geopolitical instability and persistent cyber-attacks are pushing organizations to be more vigilant about planning to guard against, and respond to, internal and external threat actors.

New guidance for prosecutors from the United States Department of Justice (DoJ) in the form of the Yates Memorandum, as well as the ongoing protection provided to whistleblowers, suggest that law enforcement and regulators will play a bigger role as an integrity gatekeeper. Meanwhile, renewed interest in data privacy in Europe is forcing organizations to revisit their strategies for information governance.

Brian Loughman, EY Americas FIDS Leader, commented, “The geopolitical risk facing companies is manifesting itself with increased exposure to bribery, fraud, cyber breaches and terrorist financing. Companies are being confronted with risks on all fronts at the same time that their ability to invest in the compliance function is under pressure. Companies will need to stay vigilant, work harder at providing the right training to their employees and focus more on monitoring risks proactively.”

EY FIDS identified these top trends that companies should address in their 2016 planning:

1. Preparing for the inevitable cyber breach. Cyber breaches will continue and recent destructive attack techniques will be adopted by hacktivists to drive their agenda. With more than one-third of global organizations still lacking confidence in their ability to detect sophisticated cyber-attacks, according to EY’s Global Information Security Survey, companies are looking to technology to reduce cybersecurity risks associated with both insider and external threats. “Cyber savvy” companies and their Boards are demanding more information about the specific threats they face, evaluating their resources, bolstering protection for critical assets and preparing for incursions by advanced threat actors.

2. Focusing on the individual. As the United States Securities and Exchange Commission (SEC) and DoJ have continued to invest in specialized resources to combat fraud, bribery and corruption, there is increased focused on the individual. While statutory safeguards exist to protect and motivate whistleblowers, the DoJ Yates Memorandum advances expectations for companies to fully identify all individuals who took part in corporate wrongdoing if they are to secure credit for cooperation with the authorities.

3. Data privacy and information sharing. The European Court of Justice recently invalidated the Safe Harbor Data Privacy regulation between the U.S. and the European Union that enabled the movement of personal information across the Atlantic. In addition, In addition, the Cybersecurity Information Sharing Act passed the Senate and is close to being signed into law. If passed, corporations will be sharing information to help reduce

http://www.ey.com/US/en/Newsroom/News-releases/news-more-than-one-third-of-global-organizations-still-lack-confidence-in-their-ability-to-detect-sophisticated-cyber-attacks-ey-survey-finds



3

cyber breaches and attacks, but will need to protect the data privacy of individuals using their systems. The ongoing focus on how personal information is handled internationally and how commercial information is shared between companies and the government during a cyber-breach investigation will drive companies to revisit their information governance strategies.

4. Sanctions and their commercial implications. As governments continue to enforce trade sanctions against individuals, companies and other governments, companies are left navigating a difficult regulatory compliance environment. They need to be vigilant about understanding risks posed by third parties and individuals that are often masked by corporate structures involving illicit drug trade or terrorist financing. Companies will need to build more robust local compliance teams and increase oversight and training.

In addition to these four trends, there are special considerations for Life Sciences industries:

• Specialty pharmacy and distributors should expect increased scrutiny. There will be greater examination of third-party relationships such as therapeutic and specialty pharmacy relationships. Pharma companies will need to be even more careful with service-based agreements and marketing/distribution contracts.

• Use of data analytics in monitoring will be on the rise. More companies will use sophisticated forensic data analytics to self-identify issues combined with Centers for Medicare & Medicaid Services open payment databases. Elements under investigation will include average payment per doctor.

Legislation ED Revises Cash Management Rules NACUBO Current - November 2, 2015

As expected, the Department of Education published the final version of its Program Integrity and Improvement regulations on October 30. The package revises ED’s cash management rules and will particularly impact colleges and universities that offer bank accounts to students through agreements with financial institutions as well as those that use third-party servicers to process Title IV credit balance refunds. Several other changes to the regulations will impact all colleges and universities. The rules, with a few exceptions, are effective July 1, 2016.

The new rules also include provisions that apply broadly to all institutions, including:

• Allowing students to use Title IV aid when retaking coursework in some circumstances.

• Prohibiting cash sweeps of Title IV funds and requiring them to be maintained in insured accounts.

• Restricting an institution’s ability to include charges for books and supplies in tuition and fees.

• Requiring institutions on the heightened cash monitoring payment method to pay credit balances to students before requesting reimbursement of Title IV funds.

• Clarifying the use of Title IV funds to pay for minor prior-year charges.

• Streamlining clock-to-credit-hour conversions.

Financial Aid; Program Integrity: Final Regulation Published on Program Integrity and Improvement NACUA New Cases and Documents – October 26-October 30, 2015

The Final regulation was published by the U.S. Department of Education on program integrity and improvement. The regulation amends the cash management regulations and other sections of the Student Assistance General Provisions regulations to grant the Secretary of Education the right to establish a method for directly paying credit balances to student aid recipients. The regulation also establishes two different types of arrangements between institutions and financial account providers, which distinguish those arrangements between an educational institution and a third-party servicer ("tier one (T1) arrangements") from those between an educational institution and a financial institution/entity that offers and markets financial accounts directly to students ("tier two (T2) arrangements"). Finally, the regulations clarify how previously-passed coursework is treated for Title IV eligibility purposes and streamline the requirements for converting clock hours to credit hours.

http://www.nacubo.org/Business_and_Policy_Areas/Student_Financial_Services/Student_Financial_Services_News/ED_Revises_Cash_Management_Rules.html

http://www.gpo.gov/fdsys/pkg/FR-2015-10-30/pdf/2015-27145.pdf



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For Study-Abroad Offices, Sexual-Assault Cases May Be Unfamiliar Territory The Chronicle of Higher Education - November 23, 2015

Complying with federal law governing sexual assault on campuses can be a complicated business. But the recent expulsion of a Middlebury College student accused of assaulting a fellow student on an overseas program — and the expelled student’s subsequent lawsuit — raises questions that stretch beyond the usual boundaries of campus rape: What if an alleged incident occurs while a student is studying abroad?

The two primary federal statutes that cover sexual assault on campuses — Title IX, the gender-equity law; and the Clery Act, the campus-safety law — do not directly apply to colleges and universities in foreign countries or to third-party providers that offer international programs, because none of those entities receive federal funding. Neither the foreign institutions nor the companies are required to report such incidents publicly, to have Title IX coordinators, or to follow the same investigative process that American colleges use.

But when American students participate in those programs, their own colleges’ obligations can come into play. Some colleges with robust study-abroad programs have planned for responding to such incidents, and a growing number of large institutions have created dedicated positions to deal with overseas health and safety.

For others, however, the intersection of study abroad, sexual assault, and federal law is an unexplored area. There is no national standard for how colleges should handle such cases. "Colleges are nervous," says Ann Olivarius, a senior partner at McAllister Olivarius, a law firm that advises colleges on Title IX and other issues.

The lawsuit involving Middlebury has called attention to that lack of clarity. A female student, who attended a different university, reported to the School for International Training, a third-party provider, that a Middlebury student on her study-abroad program had assaulted her. The provider looked into the allegations and did not find the accused student responsible. Middlebury officials then did their own investigation, found the student responsible, and expelled him.

The male student sued Middlebury in August, arguing that its investigation was both unnecessary and biased against him. Several weeks later a federal judge ordered Middlebury to re-enroll him while the case made its way through the courts. Middlebury and the student agreed to drop the college’s appeal of the judge’s order last week. (The underlying lawsuit continues.)

Was Middlebury simply upholding its legal obligations? That’s how the college sees it. In a statement, it said that "a Middlebury student’s off-campus conduct may be subject to Middlebury’s disciplinary processes when, among other things, such conduct may represent a threat to the safety of the Middlebury community or any of its members."

College officials added that "we believe we properly applied our policies in this case." A Middlebury spokesman declined to comment further, citing the continuing lawsuit. John Lucas, provost at the School for International Training, also declined to comment on the case.

Responding to Complaints

The Clery Act governs safety from a geographical standpoint. It applies to a campus, adjacent areas, and any other property owned by the college. Many overseas incidents don’t need to be reported; host-family arrangements, for instance, are not considered off-campus locations under the law. However, a 2011 update of the Clery Act made clear that if colleges own or lease facilities abroad, such property is covered by the law’s reporting requirements.

Title IX applies to the person participating in the educational activity. An institution’s Title IX obligations depend on how a student is going abroad, says Gary Rhodes, director of the Center for Global Education, a clearinghouse for resources on international health and safety issues.

When students are going overseas on trips led by college faculty members, "there is a clear line of Title IX responsibility," says Denise Cope, director of the Office of International Education at the University of Denver. And even if a student is studying with an outside provider, Mr. Rhodes says, "if it is approved by the campus and the campus is helping you take your financial aid abroad, then its responsibility goes up."

That means officials should be conducting investigations into reports, especially if the alleged perpetrator is also a student at that college, says Rhasheda S. Douglas, Title IX manager at Rowan University and a former lawyer in the U.S. Department of Education’s Office for Civil Rights. Colleges, she says, also have "the obligation to assess whether the off-campus conduct trickled back to the on-campus setting."

http://chronicle.com/article/For-Study-Abroad-Offices/234306?cid=at&utm_source=at&utm_medium=en&elq=52d9089245d2469bb47230d293445ac8&elqCampaignId=1908&elqaid=6988&elqat=1&elqTrackId=5f57586735624de684a83291df46ad1e

http://www.rutlandherald.com/article/20150901/THISJUSTIN/709019906

http://bigstory.ap.org/article/2b6faecf29d146508b71195b5711489e/judge-reinstate-student-expelled-study-abroad-behavior

https://www2.ed.gov/admins/lead/safety/handbook.pdf

http://globaled.us/safeti/


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Some colleges go above and beyond that obligation in responding to complaints. Heather A. Salko, a senior claims counsel at United Educators, a risk-management and insurance firm, recalls that when one Massachusetts college received a student’s report of a sexual assault, administrators immediately decided that "we’re putting our Title IX coordinator on a plane," Ms. Salko says. "They did not hesitate."

Although colleges are already legally required to educate students about Title IX, many find it helpful as well to have a separate training for study abroad, says Joseph C. Storch, an associate counsel in the State University of New York system. "You want to talk to students differently who are going overseas than first-semester freshmen at orientation," he says.

‘They’re Still Our Students’

While independent study-abroad providers are not bound by the government regulations, many of them have come to take a proactive approach toward dealing with sexual assault.

The School for International Training has a designated a Title IX coordinator and procedures for handling sexual-misconduct cases, says Mr. Lucas, the provost. Faculty and staff members employed by the program are also regularly trained on Title IX and other regulations related to sexual assault, he says.

That means, however, that it is not always clear whether the college or the program should take the lead on responding to and investigating a sexual-assault report.

Several years ago officials at American University, in Washington, did not learn until "quite late in the process" that an outside provider was dealing with a case involving one of their students, says Sara E. Dumont, executive director of AU Abroad.

American is renegotiating its contracts with outside providers of study-abroad programs, to require that they immediately notify the university if any sexual assault or harassment occurs. All but one or two providers have agreed to those terms for American University students, Ms. Dumont says.

"They may be abroad," she says, "but they’re still our students."

The University of Denver has developed a protocol for communicating with partners — foreign universities and outside providers — about serious incidents, like sexual assaults, and for handling such reports, says Ms. Cope, the international-education director. "They’re not going to be experts at Title IX or Clery," she says of the partners. But they can help with "creating a safe environment for the complainant," such as moving a student to a new dormitory or apartment.

Data-protection laws in some countries, particularly Britain, have been an obstacle to information-sharing agreements, Ms. Cope notes. Students at Denver now sign waivers authorizing their foreign colleges or program providers to release information about them in an emergency.

Still, plenty of American colleges are not up to speed on those nuances. Part of the problem, says Julie Friend, director of global safety and security at Northwestern University, is that many colleges continue to wrestle with putting policies into effect on their home campuses, nevermind abroad.

Perceptions that "education abroad is behind the eight ball on sexual assault aren’t fair," she says. "If you’re struggling with these issues on campus, it’s almost impossible to be clear about the international process."

Greater Transparency

Conversations on those issues are taking shape at many colleges in the midst of a broader push for greater transparency and oversight of students’ safety overseas. Congress as well as several states have considered legislation to require the reporting of additional safety statistics.

The Forum on Education Abroad, an association of American and overseas colleges and outside programs, has appointed a committee to examine best practices on responding to and reporting on sexual assaults overseas. The panel expects to release a report next year giving study-abroad offices and providers general guidance — for example, a list of questions they might raise when working with campus Title IX committees.

Natalie A. Mello, the forum’s vice president for member service and training, hardly welcomes litigation, but she says the Middlebury lawsuit could help clarify the roles and responsibilities of colleges and provider organizations. If the court decides that the School for International Training’s investigation was sufficient, then colleges would have to vet partners to make certain that they had a system in place for responding to assaults, and that the college officials were comfortable with that process.

http://chronicle.com/article/A-Wide-World-of-Risk/28323

http://chronicle.com/article/Drive-to-Make-Study-Abroad/149757

https://www.congress.gov/bill/114th-congress/house-bill/3551?q=%7B%22search%22%3A%5b%22maloney%22%5d%7D&resultIndex=4

http://www.forumea.org/about-us


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Still, dealing with sexual assault in study abroad is likely to continue to be complicated. What about home stays, asks Ms. Dumont, of American University. Those arrangements, in which students live with foreign host families, have grown in popularity, as students seek a more-immersive experience. But responding to allegations of assault in a private home raises additional cultural and due-process complications.

Such a scenario also presupposes that students report sexual misconduct while they are abroad. Some students, says Ms. Friend, of Northwestern, don’t disclose such incidents until they return to the United States. Belated reporting further complicates the investigation and handling of allegations.

The most crucial step colleges can take is to plan ahead, says Ms. Salko, of United Educators. "If you got that call from the victim, you don’t want that to be the first time that you’re thinking, what resources can we offer abroad?"

UCONN Current Issues in Compliance December 2015

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• Compliance Programs • Cybersecurity • Discrimination • Legislation and Regulation • NCAA and Athletics

Compliance Programs U.S. Justice Department Outlines Metrics for Evaluating Compliance Programs Wall Street Journal – November 2, 2015

The Justice Department laid out on Monday metrics that the agency’s new compliance expert, Hui Chen, will use to judge companies by in criminal matters.

Those metrics include seven steps that Chen will use to judge a compliance program in addition to a specific road map for judging compliance at financial institutions, according to prepared remarks from Assistant Attorney General Leslie Caldwell, delivered at a compliance conference in New York.

The guidelines come a day before Chen starts her work at the Justice Department, Ms. Caldwell said.

Summarized from Ms. Caldwell’s remarks, the compliance expert’s metrics are as follows:

• Do directors and managers offer strong support for corporate compliance policies?

• Do compliance personnel have stature in the company? Do the compliance teams get the resources they need?

• Are compliance policies clear and in writing? Are they easily understood and translated.

• Are the compliance policies effectively communicated to employees? Are they easy to find and do employees get repeated training?

• Are the compliance policies updated?

• Are there ways to enforce the compliance policies and is compliance incentivized and violators disciplined?

• Are third parties informed of compliance expectations?

While the compliance expert will have benchmarks for accessing programs, Ms. Caldwell attempted to do away with the idea that companies will be able to avail themselves of a compliance defense to protect themselves from corporate liability.

“Some have suggested that our retention of a compliance counsel is an indication that the Department is moving toward recognizing or instituting a ‘compliance defense.’ That is not the case,” Ms. Caldwell said.

“Our hiring of a compliance counsel should be an indication to companies about just how seriously we take compliance.”

Ms. Caldwell also said it wasn’t the department’s goal to go after compliance officers.

“We’re not interested in prosecuting mistakes or accidents, or bad business judgement. And we are not looking to prosecute compliance professionals,” she said.

http://blogs.wsj.com/riskandcompliance/2015/11/02/u-s-justice-department-outlines-metrics-for-new-compliance-expert/


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Cybersecurity DoD Addresses Cybersecurity Preparedness, Incident Reporting, and Cloud Computing Acquisitions with new DFARS interim rule Government Contracts Law Blog – August 26, 2015

Announced and effective August 26, 2015, DoD has issued an interim rule that significantly expands existing DFARS provisions and clauses requiring contractors and subcontractors to report cyber incidents. The interim rule will apply “to all contractors with covered defense information transiting their information systems,” an estimated 10,000 contractors. Additionally, in an effort to ensure acquisition uniformity across the Department, the interim rule implements DoD policies and procedures to be used when contracting for or utilizing cloud computing services. Due to “urgent and compelling reasons,” the rule was issued without an opportunity for public comment.

The interim rule is an amalgamation of multiple statutes, manuals, and policies and it affects numerous DFARS clauses and provisions in implementing and consolidating requirements found in:

• Section 941 of the National Defense Authorization Act (NDAA) for Fiscal Year 2013;

• Requiring cleared defense contractors to report penetrations of networks and information systems, and • Allowing DoD personnel access to equipment and information to assess the impact of reported penetrations

• Section 1632 of the NDAA for FY 2015;

• Requiring that a contractor designated as “operationally critical” must report each time a cyber incident occurs on that contractor’s network or information systems.

• A December 15, 2014, DoD Chief Information Officer (CIO) memorandum entitled “Updated Guidance on the Acquisition and Use of Commercial Cloud Computing Services”; and

• The January 13, 2015 DoD Cloud Computing Security Requirements Guide (SRG) Version 1, Release 1.

For cybersecurity issues, contractors should focus their attention on the newly refined cyber incident reporting procedures (now found at DFARS 204.7302(a)(1) and clause 252.204-7012(c)), including more exacting report requirements (although the reporting period remains at 72 hours); the reporting requirements of all subcontractors (now found at DFARS 204.7302(a)(2)); and the inclusion of new contractual clauses when “covered defense information” is at issue (now found at DFARS 204.7304).

Cloud service providers and contractors wishing to employ cloud resources should be aware that DoD will only accept “cloud computing services using commercial terms and conditions that are consistent with Federal law, and an agency’s needs.” Accordingly, a cloud provider – be it as a prime or as a subcontractor – must have received “provisional authorization by Defense Information Systems Agency, at the level appropriate to the requirement” (now found at DFARS 239.7602-1(b)). Furthermore, any “Government data” stored in the cloud and not resident on a DoD installation must reside on servers in the United Sates unless otherwise authorized (now found at DFARS 239.7602-2(a)). Contractors will also be obligated affirmatively to advise the government of their intent to use cloud services for their government data (now found at DFARS 252.239–7009).

DoD is presently soliciting comments from “small entities” concerning the impact of these regulations on their business. However, in light of the statutory underpinnings and the previous DFARS provisions, large contractors should not expect to/hope to see any major changes in the final rule.

President Obama Signs Cybersecurity Act of 2015 to Encourage Cybersecurity Information Sharing National Law Review - January 2, 2016

On December 18, 2015, President Obama signed into law a $1.1 trillion omnibus spending bill that contained the Cybersecurity Act of 2015 (the “Act”), a compromise bill based on competing cybersecurity information sharing bills that passed the House and Senate earlier this year. The Act creates a voluntary cybersecurity information sharing process designed to encourage public and private sector entities to share cyber threat information.

Summary of Key Provisions Although laws have long authorized the sharing of certain cybersecurity information, in practice there have been numerous obstacles impeding the effective exchange of information between and among the federal government and entities in the private sector. These include concerns about the possible public release through a public records request

http://www.governmentcontractslawblog.com/2015/08/articles/dfars/dod-addresses-cybersecurity-preparedness-incident-reporting-and-cloud-computing-acquisitions-with-new-dfars-interim-rule/


http://www.natlawreview.com/article/president-obama-signs-cybersecurity-act-2015-to-encourage-cybersecurity-information


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of data shared with the federal government, the privacy rights of individuals whose information may be included in information shared with the federal government, potential antitrust violations, and the use of shared information as evidence in regulatory enforcement actions against entities that have shared information with the federal government. The Cybersecurity Act of 2015 aims to address many of those concerns, creating a mechanism to facilitate and encourage information sharing between and among the federal government and entities in the private sector. Under the Act, the federal government is directed to create a process for sharing both classified and unclassified cyber threat indicators and defensive measures with the private sector, as well as information relating to certain cybersecurity threats and best practices. Entities in the private sector, in turn, are afforded several protections when they share cybersecurity information in accordance with the Act. Under the Act’s key information sharing provision, “a non-Federal entity may, for a cybersecurity purpose and consistent with the protection of classified information, share with, or receive from, any other non-Federal entity or the Federal Government a cyber threat indicator or defensive measure.”

Implications and Takeaways The Cybersecurity Act of 2015 – Congress’s first major piece of cybersecurity legislation – has been years in the making. The Act’s focus, however, is relatively modest, with one commentator calling information sharing “last decade’s answer” to the cybersecurity problem.

The law’s provisions are voluntary in nature, and as such, businesses are under no obligation to share cyber threat indicators with the federal government or each other. The benefits of the bill’s liability protection may also be somewhat overstated, at least with respect to information sharing among private entities. The recent proliferation of private sector information sharing organizations, such as Facebook’s ThreatExchange, may suggest that companies are not especially concerned about potential liability arising from such sharing Indeed, the Act’s antitrust liability protections probably are little more than a legislative formality, as the Department of Justice and Federal Trade Commission’s joint Antitrust Policy Statement on Sharing of Cybersecurity Information made clear that the antitrust enforcement agencies “do not believe that antitrust is—or should be—a roadblock to legitimate cybersecurity information sharing” and provided guidelines on sharing such information without running afoul of the antitrust laws. The Act’s protection from liability for private entities when sharing cyber threat indicators or defensive measures with the federal government likely was unnecessary as well, as privacy experts and technologists have long argued that such indicators typically do not contain private data and are already being shared with the federal government in the case of a cyber attack.

Although a limited measure, the Cybersecurity Act of 2015 should facilitate increased information sharing among private sector entities and between the private sector and the federal government, which will at least marginally improve the nation’s cybersecurity. And while the Act provides for liability protection, private actors looking to share cyber threat indicators or other cyber-related information with each other or with the government should continue to consult counsel, especially when assessing how the Act’s provisions interact with other federal and state laws and regulations regarding access to and use of proprietary or personally identifiable information.

Discrimination Judge Rules Sexual Orientation Discrimination Falls Under Purview of Landmark Title IX Law Los Angeles Times – December 22, 2015

A federal judge in California has ruled that discrimination on the basis of sexual orientation falls under the purview of the landmark Title IX law, giving a broader interpretation to the 1972 statute that prohibits sex discrimination in the nation's schools and colleges.

In his 22-page ruling, U.S. District Judge Dean Pregerson said that discrimination on the basis of sexual orientation is not a separate category of discrimination, but rather, such claims fall under Title IX's view of discrimination on the basis of gender or sex.

The ruling allows two former players on the Pepperdine University women's basketball team to proceed with a lawsuit that alleges the university harassed and discriminated against them because they were dating. Haley Videckis and Layana White said that the coach wanted them off the team because their lesbian relationship "would cause the team to lose games," the complaint alleged.

http://www.latimes.com/local/california/la-me-1222-pepperdine-sex-discrimination-20151222-story.html


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Seeking to dismiss parts of the women's lawsuit, Pepperdine argued in court papers that Title IX does not cover claims based on sexual orientation and that their allegations failed to meet the law's standard for gender stereotype discrimination.

Pregerson, however, disagreed, and said the women could pursue their suit because the alleged maltreatment turned on the nature of each individual's sex in the same-sex relationship.

"Plaintiffs allege that they were told that 'lesbianism' would not be tolerated on the team," Pregerson wrote. "If plaintiffs had been males dating females, instead of females dating females, they would not have been subjected to the alleged different treatment," he said, concluding that the pair have a "straightforward claim of sex discrimination."

Citing nearly four decades of jurisprudence, Pepperdine's attorneys asserted that Title IX did not apply to a sexual orientation discrimination claim.

Pregerson had previously sided with Pepperdine and dismissed the claims made by Videckis and White under Title IX, writing that the line between gender stereotype and sexual orientation discrimination was "blurry, at best." He allowed the women to amend their lawsuit.

In this ruling, issued Dec. 15, Pregerson said he reversed his earlier decision because he found himself unable to distinguish sexual orientation from sex and gender discrimination.

"Simply put, the line between sex discrimination and sexual orientation discrimination is 'difficult to draw' because that line does not exist, save as a lingering and faulty judicial construct," Pregerson wrote.

He also faulted reasoning that focuses too much on the sexual orientation of the alleged victim, which he found to be irrelevant: "It is the biased mind of the alleged discriminator that is the focus of the analysis."

Doug NeJaime, faculty director of the Williams Institute at UCLA School of Law, said that the ruling is among the first to apply Title IX to sexual orientation discrimination, drawing on evolving views of Title VII of the Civil Rights Act.

In a landmark decision this summer, the Equal Employment Opportunity Commission held that Title VII covers sexual orientation discrimination because such allegations "necessarily state a claim of discrimination on the basis of sex." Pregerson cited that analysis.

"In light of there being no federal anti-discrimination law for sexual orientation, it's potentially a quite significant ruling," NeJaime said. "We'll start to see whether other federal courts start to do this and see whether they're applying the EEOC's logic."

Legislation and Regulation It’s Time to Review and Update Safety and Compliance Regimens – OSHA Penalties Set to Surge in 2016 National Law Review - November 19, 2015

For the first time since 1990, the Occupational Safety and Health Administration (OSHA) has been authorized to increase its civil penalties. The provision was inserted into the expansive Bipartisan Budget Act of 2015, which was signed this month by President Barack Obama.

OSHA is authorized to conduct workplace inspections and investigations to determine whether employers are complying with standards issued by the agency for safe and healthful workplaces. The ten most frequently cited violations involve safety requirements for fall protection, hazard communication, scaffolding, respiratory protection, powered industrial trucks, lockout/tagout, ladders, electrical wiring, machine guarding, and electrical systems design.

Section 701, entitled the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015,” permits OSHA to increase its civil penalties, following a one-time “catch up adjustment” in 2016. The increases, which are expected to be significant, will be calculated based on the Consumer Price Index (CPI) between 1990-2015. While the law provides that the maximum adjustment must be capped at 150 percent, most reports indicate that because the catch up adjustment cannot exceed the rate of inflation from 1990 through 2015, the increase will most likely be approximately 80 percent.

http://www.natlawreview.com/article/it-s-time-to-review-and-update-safety-and-compliance-regimens-osha-penalties-set-to?utm_content=d6cd8e755df15c6fa96a9edd3a98592a&utm_campaign=Labor%20and%20Employment%20News%20for%2012-01-2015&utm_source=Robly.com&utm_medium=email


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Based upon the “CPI Inflation Calculator” from the Bureau of Labor Statistics website, the maximum allowable OSHA fines beginning next year are estimated to increase as follows:

• “Other Than Serious” citations — where there is a direct relationship to job safety and/or workplace health, but it is unlikely to result in death or serious bodily injury — have a current maximum fine of $7,000, but are expected to increase to approximately $12,500 each;

• “Serious” citations — where there was a death or serious bodily harm and the employer knew or should have reasonably known about the hazard — have a current maximum fine of $7,000, but are expected to increase to approximately $12,500 each;

• “Willful” citations — where an employer knows it is in violation of OSHA standards and is aware of the hazardous condition, and makes no reasonable effort to remedy the condition — have a current maximum fine of $70,000, but are expected to increase to approximately $125,000 each; and

• “Repeat” citations — where an OSHA standard is violated after the initial charge for the same or similar breach — have a current maximum fine of $70,000, but are expected to increase to approximately $125,000 each.

The Act will be adjusted through an interim final rulemaking, and the adjustment will go into effect by August 2016. Additionally, the Act mandates annual inflation increases for OSHA penalties going forward. Starting in January 2017, OSHA will be required to publish these fine increases by January 15th of each year. The annual adjustments will not require formal rule-making.

NCAA and Athletics Education Department Reverses Course on Prohibition Against Incentive Compensation Based on Retention and Graduation; Clears Way for Graduation Rate and APR Based Bonuses in Coaching Contracts Higher Education Law Report – November 30, 2015

On November 27, 2015, the United States Department of Education announced a reversal of its previously existing prohibition against the payment of incentive compensation based on students’ program completion or graduation rates. The announcement follows two successive federal appeals court decisions, in 2012 and 2014, that the Department had not articulated a sufficient rationale for the prohibition.

Although the announcement may impact retention and graduation based incentives on any number of fronts, it is of particular interest in the context of coaching and other athletics personnel employment contracts, where the prohibition had created significant uncertainty as to the permissibility of bonuses based on these metrics.

As many will recall, on October 29, 2010, the Department adopted so-called Title IV “Program Integrity Rules.” Among other things, these new regulations eliminated previously existing regulatory safe harbors under the statutory prohibition against payment of incentive compensation for securing enrollment, and reversed a prior Department position that payments based on retention, degree completion or graduation were not considered impermissible enrollment-based compensation. In response to a comment questioning the applicability of the prohibition to the recruitment of student-athletes, the Department explained that:

Recruitment of student-athletes is not different from recruitment of other students. Incentive compensation payments to athletic department staff are governed by the restrictions included in the regulations. If the payments are made based on success in securing enrollments or the award of financial aid, the payments are prohibited; however, the Department does not consider “bonus” payments made to coaching staff or other athletic department personnel to be prohibited if they are rewarding performance other than securing enrollment or awarding financial aid, such as a successful athletic season, team academic performance, or other measures of a successful team.

Based upon the Department’s statements that (a) incentivizing retention, degree completion or graduation is equivalent to prohibited incentivization of success in securing enrollments, and (b) athletic recruitment is no different than recruitment of other students, it appeared as though athletic department bonuses tied to student-athlete retention or program completion (e.g., graduation rate bonuses and/or Academic Progress Rate (APR)-based bonuses) would violate the new regulations.

http://www.higheredlawreport.com/2015/11/education-department-reverses-course-on-prohibition-against-incentive-compensation-based-on-retention-and-graduation-clears-way-for-graduation-rate-and-apr-based-bonuses-in-coaching-contracts/?utm_source=Bond%2C+Schoeneck+%26+King%2C+PLLC+-+Higher+Education+Law+Report&utm_medium=email&utm_campaign=575fc8f343-RSS_EMAIL_CAMPAIGN&utm_term=0_9759e4d1fb-575fc8f343-70210961

https://www.federalregister.gov/articles/2015/11/27/2015-30158/program-integrity-issues

https://www.federalregister.gov/articles/2010/10/29/2010-26531/program-integrity-issues


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On March 17, 2011, however, the Department issued a “Dear Colleague” letter for the stated purpose of clarifying a number of new Title IV regulatory requirements, including the revised incentive compensation restrictions. Among other things, the “Dear Colleague” letter noted that:

The preamble to the new regulations noted that bonuses for athletic personnel to reward performance other than securing enrollment or awarding financial aid, such as a successful athletic season, team academic performance, or other measures of a successful team, are permitted. . . . This statement merely reflects the fact that the payment of bonuses to athletic personnel is a common practice and is not typically viewed as incentive compensation based on recruitment of individuals as students, but at most may indirectly reward success in recruiting that small subset of individuals whose enrollment would benefit the institution’s athletic program.

Unfortunately, this “clarification” created more ambiguity than it resolved. In the wake of the Dear Colleague letter, institutions adopted varying practices with respect to retention- or graduation-based incentive compensation in coaching and other athletics employment agreements. Some institutions proceeded cautiously, and restructured academic performance bonuses to be based on GPA or other clearly permissible metrics. Others, believing strongly in the merit of compensating personnel for keeping student-athletes in school and questioning whether the Department truly intended to prohibit this practice, retained graduation rate and APR-based bonus structures. Thankfully, the Department’s November 27 announcement removes any remaining uncertainty in this regard, and clearly supports the use of such bonus structures, as well as retention- or graduation-based compensation in other contexts.

The Department’s announcement does not change other aspects of the continuing prohibition on paying commissions, bonuses or other forms of incentive compensation based directly or indirectly on securing enrollments or financial aid. Among other things, the Department expressly refused to alter its prohibition on compensation tied to minority enrollments, which had also been questioned in the court decisions referenced above, stating that the Program Integrity Rules bar compensation based on the number of students enrolled, “irrespective of the student’s minority or other status and irrespective of whether the goal of the recruiters is to increase diversity.”

http://ifap.ed.gov/dpcletters/GEN1105.html

UConn Health Current Issues in Compliance November 2015

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SUMMARY Following are excerpts from news articles having a risk management or compliance impact. The full article may be seen at the referenced source (some may require subscription to access). Topics for this month include the follow-ing:

• Data Security/Privacy • Legislation/Regulation • HHS/OIG Activity

Data Security/Privacy AG: Hartford Hospital, contractor to pay $90,000 in 2012 data theft The CT Mirror - November 6, 2015

Hartford Hospital and one of its contractors have agreed to pay the state $90,000 and undertake training and security measures to resolve an investigation into the theft of a laptop containing unencrypted patient information in June 2012, according to Attorney General George Jepsen’s office.

The laptop contained protected health information for 8,883 Connecticut residents when it was stolen from the home of an employee of a Hartford Hospital contractor, EMC Corporation. The hospital had hired the company as part of a project aimed at reducing readmissions.

The laptop has never been recovered. Hartford Hospital said it has no evidence that any of the personal information was misused, according to an agreement the two companies reached with Jepsen’s office to resolve the allegations. Patients whose information was on the laptop were notified in 2012.

The agreement calls for the hospital to continue several training and security measures it undertook after the theft. Other requirements include using a combination of hardware and software to encrypt files or data containing protected health information before it is transferred; requiring each employee to certify that he or she has participated in annual privacy training; and submitting a report to the attorney general’s office in one year demonstrating that the corrective action measures are being implemented.

Similarly, the agreement requires EMC to maintain policies requiring, “if technically feasible,” all protected health information to be encrypted if stored on laptops or other portable devices and transmitted across wireless or public networks; to maintain reasonable security policies for employees on storing, accessing and transferring protected health information outside EMC premises; and to provide regular training on protecting and securing protected health information to employees who are responsible for handling it.

The agreement says it “will not be considered an admission” by either company of alleged violations related to the incident.

$750,000 HIPAA Settlement Underscores the Need for Organization Wide Risk Analysis HHS Office for Civil Rights in Action – December 14, 2015

The University of Washington Medicine (UWM) has agreed to settle charges that it potentially violated the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Security Rule by failing to implement policies and procedures to prevent, detect, contain, and correct security violations. UWM is an affiliated covered entity, which includes designated health care components and other entities under the control of the University of Washington, including University of Washington Medical Center, the primary teaching hospital of the University of Washington School of Medicine. Affiliated covered entities must have in place appropriate policies and processes to assure HIPAA compliance with respect to each of the entities that are part of the affiliated group. The settlement includes a monetary payment of $750,000, a corrective action plan, and annual reports on the organization’s compliance efforts.

The U.S. Department of Health and Human Services (HHS) Office for Civil Rights (OCR) initiated its investigation of the UWM following receipt of a breach report on November 27, 2013, which indicated that the electronic protected health information (e-PHI) of approximately 90,000 individuals was accessed after an employee downloaded an email attachment that contained malicious malware. The malware compromised the organization’s IT system, affecting the data of two different groups of patients: 1) approximately 76,000 patients involving a combination of patient names,

http://ctmirror.org/2015/11/06/ag-hartford-hospital-contractor-to-pay-90000-in-2012-data-theft/

http://www.ct.gov/ag/lib/ag/press_releases/2015/20151105_hartford_hospital_privacyavc.pdf

http://www.hhs.gov/about/news/2015/12/14/750000-hipaa-settlement-underscores-need-for-organization-wide-risk-analysis.html


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medical record numbers, dates of service, and/or charges or bill balances; and 2) approximately 15,000 patients in-volving names, medical record numbers, other demographics such as address and phone number, dates of birth, charges or bill balances, social security numbers, insurance identification or Medicare numbers.


EY Identifies Top Fraud and Corruption Trends for 2016 December 14, 2015

Today, EY Fraud Investigation & Dispute Services (FIDS) announced top fraud and corruption trends for 2016. A dramatic rise in geopolitical instability and persistent cyber-attacks are pushing organizations to be more vigilant about planning to guard against, and respond to, internal and external threat actors.

New guidance for prosecutors from the United States Department of Justice (DoJ) in the form of the Yates Memoran-dum, as well as the ongoing protection provided to whistleblowers, suggest that law enforcement and regulators will play a bigger role as an integrity gatekeeper. Meanwhile, renewed interest in data privacy in Europe is forcing organ-izations to revisit their strategies for information governance.

Brian Loughman, EY Americas FIDS Leader, commented, “The geopolitical risk facing companies is manifesting itself with increased exposure to bribery, fraud, cyber breaches and terrorist financing. Companies are being con-fronted with risks on all fronts at the same time that their ability to invest in the compliance function is under pressure. Companies will need to stay vigilant, work harder at providing the right training to their employees and focus more on monitoring risks proactively.”

EY FIDS identified these top trends that companies should address in their 2016 planning:

1. Preparing for the inevitable cyber breach. Cyber breaches will continue and recent destructive attack tech-niques will be adopted by hacktivists to drive their agenda. With more than one-third of global organizations still lacking confidence in their ability to detect sophisticated cyber-attacks, according to EY’s Global Information Security Survey, companies are looking to technology to reduce cybersecurity risks associated with both insider and external threats. “Cyber savvy” companies and their Boards are demanding more information about the spe-cific threats they face, evaluating their resources, bolstering protection for critical assets and preparing for incur-sions by advanced threat actors.

2. Focusing on the individual. As the United States Securities and Exchange Commission (SEC) and DoJ have continued to invest in specialized resources to combat fraud, bribery and corruption, there is increased focused on the individual. While statutory safeguards exist to protect and motivate whistleblowers, the DoJ Yates Mem-orandum advances expectations for companies to fully identify all individuals who took part in corporate wrong-doing if they are to secure credit for cooperation with the authorities.

3. Data privacy and information sharing. The European Court of Justice recently invalidated the Safe Harbor Data Privacy regulation between the U.S. and the European Union that enabled the movement of personal infor-mation across the Atlantic. In addition, In addition, the Cybersecurity Information Sharing Act passed the Senate and is close to being signed into law. If passed, corporations will be sharing information to help reduce cyber breaches and attacks, but will need to protect the data privacy of individuals using their systems. The ongoing focus on how personal information is handled internationally and how commercial information is shared between companies and the government during a cyber-breach investigation will drive companies to revisit their infor-mation governance strategies.

4. Sanctions and their commercial implications. As governments continue to enforce trade sanctions against in-dividuals, companies and other governments, companies are left navigating a difficult regulatory compliance environment. They need to be vigilant about understanding risks posed by third parties and individuals that are often masked by corporate structures involving illicit drug trade or terrorist financing. Companies will need to build more robust local compliance teams and increase oversight and training.

In addition to these four trends, there are special considerations for Life Sciences industries:




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• Specialty pharmacy and distributors should expect increased scrutiny. There will be greater examination of third-party relationships such as therapeutic and specialty pharmacy relationships. Pharma companies will need to be even more careful with service-based agreements and marketing/distribution contracts.

• Use of data analytics in monitoring will be on the rise. More companies will use sophisticated forensic data analytics to self-identify issues combined with Centers for Medicare & Medicaid Services open payment data-bases. Elements under investigation will include average payment per doctor.

Legislation/Regulation ED Revises Cash Management Rules NACUBO Current - November 2, 2015

As expected, the Department of Education published the final version of its Program Integrity and Improvement reg-ulations on October 30. The package revises ED’s cash management rules and will particularly impact colleges and universities that offer bank accounts to students through agreements with financial institutions as well as those that use third-party servicers to process Title IV credit balance refunds. Several other changes to the regulations will im-pact all colleges and universities. The rules, with a few exceptions, are effective July 1, 2016.

The new rules also include provisions that apply broadly to all institutions, including:

• Allowing students to use Title IV aid when retaking coursework in some circumstances. • Prohibiting cash sweeps of Title IV funds and requiring them to be maintained in insured accounts. • Restricting an institution’s ability to include charges for books and supplies in tuition and fees. • Requiring institutions on the heightened cash monitoring payment method to pay credit balances to students

before requesting reimbursement of Title IV funds. • Clarifying the use of Title IV funds to pay for minor prior-year charges. • Streamlining clock-to-credit-hour conversions.

Hospital Must Give Observation Patients a Written Notice under the Notice Act Compliance Mentor- November 2015

President Obama recently signed the Notice Law, or H.R. 876, also known as the Notice of Observation Treatment and Implication for Care Eligibility Act.

Hospitals, including critical access hospitals, will now have to give each patient a written notice when they receive observation services for more than 24 hours. The notice must be provided before discharge and no later than 36 hours after observation begins. It must explain implications, such as cost sharing and information for subsequent eligibility, and that the beneficiary is an observation outpatient, not an inpatient. The patient must sign it. If the pa-tient refuses to sign it then the staff member who presents it can sign a certification that the notice was presented along with the date and time.

Observations do not count for the three qualifying stays for Medicare reimbursement for skilled nursing care. Some-times, patients were not aware of this. For example, a patient arrived at the hospital and was placed in an outpatient observation bed. The next day she was changed to inpatient admission status. She was then sent to a skilled nursing bed. She was in the hospital three days, but since one of these was an observation day, Medicare did not pay her $54,000 skilled nursing home bill. The new law wants to make sure patients understand the difference.

It can also affect their out-of-pocket expenses. In general, Part A requires patients who are admitted as an inpatient to pay a deductible, which was $1,260 in CY2015. Observation is an outpatient status and the Medicare beneficiary pays 20% of the Medicare reimbursement amount for outpatient items and services after paying the annual Part B deductible, which was $147 in CY2015. The beneficiary could potentially have greater cost-sharing liability as an observation patient. In 2012, the OIG said that in 6% of the observation stays the beneficiary paid more than the in-patient deductible. Hospitals may request patients who consult their physicians while in the hospital be classified as an inpatient. CMS Eases Regulatory Burdens & Creates New Exceptions in “Phase V” of the Stark Reg-ulations Mintz Levin Health Law and Policy Matters - Nov 17, 2015

http://www.nacubo.org/Business_and_Policy_Areas/Student_Financial_Services/Student_Financial_Services_News/ED_Revises_Cash_Management_Rules.html


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On November 16, 2015, the Centers for Medicare and Medicaid Services (“CMS”) published the most significant changes to the physician self-referral law (“Stark Law” or “Stark”) regulations since 2008. Because this rulemaking is the fifth substantive rulemaking under the Stark Law amendments of 1993, it will likely become known as Stark Phase V. This rule, which is part of a larger package of annual regulatory adjustments to the Medicare Physician Fee Schedule, contains important changes that clarify or ease the burden of existing exceptions, solicits comments on new exceptions in light of health care reform, and introduces two new exceptions.

For a more detailed analysis of the impact of these changes, please see Client Alert.

1. Easing of Regulatory Burdens

With Phase V, CMS seeks to reduce a number of regulatory compliance burdens that have plagued Stark.

Writing Requirement CMS concluded that there is substantial uncertainty in the provider community as to what exactly is required by the writing requirement that is found in a number of Stark exceptions. In particular, CMS is often asked whether an agreement must be reduced to a single formal contract. Phase V clarifies that a single formal written contract is not required and that contemporaneous documents evidencing the course of conduct between the parties may be suffi-cient to satisfy the writing requirement.

Length of Term A number of Stark exceptions require that the duration of the arrangement in question be at least 1 year. CMS con-cluded that there is confusion as to how to meet this requirement. Phase V clarifies that a formal agreement specify-ing a 1-year term is not necessary. Rather, an arrangement that lasts as a matter of fact for at least 1 year will be suf-ficient.

Holdover Arrangements The rental of office space, rental of equipment, and personal service arrangements exceptions have historically per-mitted “holdover” arrangements for up to six months after the expiration of an arrangement, provided that certain criteria are met. CMS chose to address the treatment of holdover arrangements in response to numerous submissions under the Self-Referral Disclosure Protocol of rentals and personal service arrangements that failed to satisfy an ex-ception solely because the parties continued the arrangement after the six-month holdover period. In Phase V, CMS revises these exceptions and other exceptions to include an indefinite holdover period.

Temporary Non-Compliance with Signatures Existing Stark regulations include a special provision to permit arrangements involving temporary noncompliance with an exception’s signature requirements. The regulations require an analysis of whether the reason for noncom-pliance is inadvertent: if so, parties have up to 90 days to obtain signatures; if not inadvertent, the parties only have 30 days. Phase V eliminates this distinction and instead applies a blanket 90 day window to obtain the necessary sig-natures in all cases. CMS also clarifies that it does not expect every document in a collection of documents to bear the signature of one or both parties.

Definition of Remuneration The Stark Law creates a specific “carve out” from the definition of “remuneration” (i.e., things that are not remuner-ation) for items, devices, or supplies that are “used solely” to collect, transport, process, or store specimens for the entity providing the items, devices, or supplies, or to order or communicate the results of tests or procedures for such entity. With the disjunctive “or”, there has been confusion, particularly with laboratory and pathology providers and their customers, as to whether the exception applies if an arrangement involves one or more of these specified uses, but no other purpose. CMS reiterated its existing policy that as long as the arrangement is used for “one or more” of these statutorily exempt purposes, but solely for these purposes, the exception still applies. Phase V also clarifies potential confusion regarding so-called “split bill” arrangements where a physician makes use of a provider’s re-sources (e.g., exam rooms, supplies) to treat the entity’s patients, but bills for his own professional services, with the entity billing its technical fee. In the commentary to Phase V, CMS clarifies that it does not believe that such an ar-rangement involves remuneration between the parties because no benefit is given to either party.

Stand-in-the-Shoes (“SITS”) Phase IV of Stark limited the SITS doctrine so that only physicians with an ownership or investment interest in their physician organization (“PO”) (aside from physicians with mere titular ownership or investment interests) were deemed to stand in the shoes of their PO. (Physicians without an ownership interest can voluntarily elect to stand in the shoes of their PO for purposes of determining compliance with the Stark Law.) Stakeholders have inquired to CMS whether, when applying SITS to the Stark exceptions, the only “parties” to consider are the physicians with

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ownership or investment interests in the POs, and not all physicians. That is, does the referral analysis apply only to the narrow group of physicians to which SITS is deemed to apply? Phase V clarifies that CMS did not intend for Phase IV to narrow the scope of referrals and other business generated when SITS applies. However CMS does acknowledge that only physicians to which SITS applies are considered parties to the arrangement for the purposes of the signature requirements of the applicable exceptions.

2. Solicitation of Comments on Potential New Exceptions to Better Encourage Stakeholder Participation in Health Care Reform Initiatives

In its Final Rule, CMS acknowledged the rapidly changing landscape of health care reimbursement. These changes are due in no small part to alternative payment models ushered in by the federal government, such as the Medicare Shared Savings Program for accountable care organizations (“ACOs”), and other care delivery and payment models sponsored by the Center for Medicare and Medicaid Innovation. These initiatives, and the integration that they re-quire between health care entities, such as hospitals and physicians, trigger concerns that participation in such initia-tives could run afoul of existing fraud and abuse laws. To mitigate these fears, and encourage ACO participation in the MSSP, CMS and the Office of Inspector General released a final rule on October 29, 2015, updating the 2011 MSSP waivers in certain circumstances. These waivers, however, do not apply to the many other CMMI initiatives by CMS. Further, providers may be in a precarious situation when participating in, for example, an ACO run by a private payor. This is because, in CMS’s view, the financial arrangements between the parties that result from par-ticipation in these models must satisfy the requirements of an applicable Stark exception to avoid Stark’s referral and billing prohibition for Medicare beneficiaries. Since the waivers do not apply outside of the MSSP, providers are left in an awkward situation where they are participating in a non-federal program while at the same time facing exposure under federal fraud and abuse laws, all without the protections afforded to the similar federal programs. In the commentary to Phase V, CMS indicates that it continues to analyze these issues. CMS also discusses its future role in issuing two separate reports related to fraud and abuse and gainsharing laws.

3. New Exception for Timeshare Arrangements

Phase V addresses the issue of timeshare arrangements through the creation of a new exception. Under a timeshare arrangement, a hospital or other provider may, for example, request the assistance of a specialist on a limited or as-needed basis. In such cases, the specialist will be provided with such space and equipment to enable the specialist to provide services. Since these arrangements do not provide for exclusive use, in CMS’s view they cannot satisfy the exclusive use requirement of the rental of office space exception. Phase V provides a new exception for such timeshare arrangements. In addition to requirements commonly found in other Stark exceptions (e.g., writing re-quirement, compensation set in advance, etc.), the exception contains some notable limitations. First, it is only avail-able to timeshare arrangements between certain physicians, POs and hospitals. Second, and perhaps most limiting, the timeshare arrangement must be predominantly for the provision of E&M services to patients. Consequently, the exception may not be available to protect arrangements that include a large number of referrals for designated health services.

4. New Exception for Assistance to Compensate Nonphysician Practitioners

CMS uses Phase V to help address the growing shortage of primary care and mental health professionals by creating an exception for compensation paid to nonphysician practitioners. This exception will allow hospitals, federally qualified health care centers (“FQHCs”) and rural health clinics (“RHCs”) to provide remuneration to physicians in order to assist the physicians in compensating NPPs. The exception contains typical requirements found in other ex-ceptions, including requirements that the arrangement be in a signed writing, and that the compensation be fair mar-ket value, and not conditioned on or take into account referrals or other business generated between these parties. Importantly, the exception is limited to situations where “substantially all” of the NPPs services are for primary care services or mental health care services. CMS also places restrictions on the total amount and duration of the remu-neration. Finally, the NPP may not have, within one year of the commencement of the compensation arrangement, practiced in the geographic area.

5. Clarification and Language Clean Up

CMS uses Phase V to address several areas of Stark that require clarification or clean up in the regulatory text. These changes include:

1. The Term “Takes Into Account”. A number of Stark’s statutory exceptions include a requirement that the arrangement not “take into account” the volume or value of the physician’s referrals or other business gen-erated. However, the phrase “take into account” is not used consistently in the regulatory exceptions, with

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some exceptions using words such as: “based on” or “without regard to” instead of “takes into account.” CMS stated in Phase V that it reviewed four exceptions with the volume or value standard and revised them so that they contain the same “takes into account” language. CMS explicitly declined to define “takes into account.”

2. Retention Payments. Phase V clarifies that the cap placed on payments by a hospital, FQHC or RHC to re-tain a physician on their medical staff must be based on the physician’s annual income averaged over the previous 24 months.

3. Geographic Area Served by FQHC and RHC. Phase III added FQHCs and RHCs to the list of entities that could pay physicians to induce them to move their practices into their geographic area in order to become a member of their medical staff. Phase V clarifies how the geographical area of FQHCs and RHCs is calcu-lated for purposes of complying with the exception.

4. Publicly Traded Securities. Phase V adds a new catch-all category of securities to the list of securities that are protected under the publicly-traded securities exception.

5. Physician-Owned Hospitals. The Affordable Care Act placed restrictions on the ability of physician-owned hospitals to take advantage of Stark’s rural provider or hospital ownership exceptions by requiring certain public disclosure and public advertising requirements as well as a cap on physician ownership and invest-ment. Phase V clarifies what CMS will consider “public advertising.” It also clarifies that the calculation of the cap on ownership and investment interests must include direct and indirect ownership and investment interests held by any individuals satisfying Stark’s definition of “physician”, regardless of whether or not they refer to the hospital.

HHS/OIG Activity Turning an Exacting Eye to Physician-Hospital Compensation New York Law Journal – November 25, 2015

On June 9, 2015, the Office of Inspector General for the Department of Health and Human Services (the HHS-OIG) issued a fraud alert cautioning physicians in particular that while "many compensation arrangements are legitimate, a compensation arrangement may violate the anti-kickback statute if even one purpose of the arrangement is to com-pensate a physician for his or her past or future referrals of federal health care program business."

The HHS-OIG placed the onus on physicians to ensure that compensation arrangements reflect fair market value for bona fide services the physicians actually provide to their patients and admonished physicians to take the initiative in ensuring compliance by diligently analyzing the terms and conditions of such arrangements.

The alert followed recent settlements between the HHS-OIG and 12 individual physicians who entered into "ques-tionable" medical directorship and other compensation arrangements. According to the HHS-OIG, these physicians received compensation which considered the volume and value of referrals, did not reflect fair market value for the services performed and compensated physicians for services not actually rendered. Several of the physicians also entered into compensation arrangements where the health care entity paid the salaries of the physicians' staff.

The alert and corresponding settlements signal a new focus on physician accountability in unlawful compensation and kickback schemes. It appears that HHS-OIG is now focused on subjecting both the health care entities and indi-vidual physicians to criminal and civil penalties. For hospitals and physicians, it's worth knowing that payment of a "kickback" renders an arrangement illegal even if a patient is otherwise getting medically necessary, excellent qual-ity health care.

The Applicable Law Physician-hospital compensation arrangements implicate three related federal statutes. The Anti-Kickback Stat-ute provides criminal penalties for physicians and health care entities "who knowingly and willfully solicit or re-ceive any remuneration" in exchange for patient referrals from federal health care programs. Remuneration includes anything of value, such as rent, staffing compensation, and excessive compensation for medical directorships or con-sultancies.

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Physicians and health care entities who pay or accept kickbacks face jail terms up to five years per violation, fines up to $25,000 per violation and expulsion from participation in federal health care programs. Penalties up to $50,000 per kickback plus three times the amount of the remuneration may also be assessed.

The Physician Self-Referral Law, more commonly referred to as the Stark Law, prohibits physicians who have a financial relationship, including compensation arrangements, with a health care entity from referring patients to that entity to receive "designated health services" billed to federal health care programs. While the Stark Law includes exceptions for many legitimate hospital-physician arrangements, it generally mandates all payments made to refer-ring physicians be at fair market value for the services rendered. Compensation taking into consideration the volume or value of the physician's referrals to the hospital is strictly prohibited. Civil penalties for Stark Law violations in-clude denial of payments, refund of payments, a $15,000 per service civil monetary penalty and civil assessments of up to three times the amount claimed.

The False Claims Act prohibits the submission of fraudulent claims for payment to federal health care programs. Claims that violate the Anti-Kickback Statute and/or the Stark Law may also render the claim fraudulent under the False Claims Act. Civil penalties for false claims violations include fines up to three times the program's loss plus $11,000 per claim filed.

Prosecutions and Settlements Since the June alert, HHS-OIG has issued a flurry of announcements related to ongoing investigations. The cases highlight critical areas of focus for hospitals and physicians.

Sacred Heart Hospital. In July 2015, the former executives and two physicians of the now-shuttered Sacred Heart Hospital on Chicago's West Side were sentenced to prison terms for their roles in orchestrating and participating in unlawful compensation schemes for physicians providing Medicare and Medicaid patient referrals. From 2001 to April 2013, the executives conspired to pay kickbacks and bribes to physicians to induce them to refer patients to the hospital for services that would be reimbursed by Medicare and Medicaid. The kickbacks were disguised in a variety of ways, including a sublease for space the hospital never used and teaching contracts to instruct non-existent stu-dents.

The court imposed prison sentences on the individuals running the hospital and the doctors involved in the scheme that ranged from six months to 54 months, and included the imposition of an order of forfeiture for $8.48 million.

Mercy Medical Communities. In August, Mercy Health Springfield Communities, formerly known as St. John's Health System, and Mercy Clinic Springfield Communities, formerly known as St. John's Clinic, agreed to pay the United States $5.5 million to settle allegations that they violated the False Claims Act by submitting false claims to Medicare for services rendered to patients referred by physicians who received bonuses based on a formula that took into consideration the value of the physicians' referrals of patients to the clinic. According to the settlement, physi-cians were placed in different "stark groups" based on the volume and value of services ordered. Physicians who ordered high-volume and value services were placed in a stark group with similar high-volume and value orders. The proceeds from these services then went into a single pot for each stark group and were divided among like-value orders.

North Broward Hospital District. In September 2015, North Broward Hospital District agreed to pay the United States $69.5 million to settle allegations that it violated the False Claims Act by providing commercially unreasona-ble compensation to nine employed physicians that exceeded the fair market value of their services. The compensa-tion formulas, which considered the volume and value of physician referrals, would have resulted in major net oper-ating losses if the profits from Medicare and Medicaid referrals were not considered. Physicians were awarded con-tracts with excessive compensation levels, guaranteeing base salaries in excess of their gross revenues from previous years and offering bonuses based on inflated rates of compensation per relative value units, or referral revenues, based on the allegations in the settlement. The Justice Department noted "this settlement should deter similar con-duct in the future and help make health care more affordable."

Adventist Health Systems. In September 2015, Adventist Health Systems agreed to pay $115 million to settle alle-gations that it violated the False Claims Act by submitting false claims to the Medicare and Medicaid programs for services rendered to patients referred by employed physicians who received bonuses based on a "bottom line" and "pay for play" formulas that unlawfully took into consideration the number of tests and procedures ordered by the referring physician. Adventist Health also allegedly compensated physicians in amounts that exceeded fair market value and were commercially unreasonable.


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Tuomey Healthcare System. In October 2015, Tuomey Healthcare System agreed to pay the United States $72.4 million to settle a $237 million judgment against it for entering into contracts with 19 specialist physicians that re-quired the physicians to refer their outpatient procedures to Tuomey and, in exchange, paid them compensation that far exceeded fair market value, was not commercially reasonable, and took into consideration the volume and value of the referrals. On average, physicians were paid over 130 percent of the amount their own services generated for the hospital. The Justice Department warned that it is "determined to prevent the kind of abuses uncovered in this case, and [is] willing to take such cases to trial to protect the integrity of the Medicare program."

Change in Incentives The issues with physician-hospital compensation arrangements arise in part from the financial incentives baked into federal health care repayments. For example, Medicare assumes that hospital care, by its very nature, is more expen-sive than its office-based counterpart and so pays higher reimbursement rates for the same procedures when per-formed by hospital-employed physicians rather than independent physicians. Historically, higher hospital rates have been justified by a mixture of reasons, including hospital hours, emergency room overhead, and hospital's stricter regulatory and reporting requirements.

The differences in compensation schematics means that the same physician doing the same work will be paid more by the government if they sell their private practices to hospitals. In recent years, there have been dramatic increases in the number of physicians working for hospitals and other health care entities across the spectrum of specialties. While other motivations for hospital-owned practices play a role in this trend away from independent practice—in-cluding the benefits of having health systems manage a patient's entire health care experience—the reimbursement discrepancies are a critical focus of the drive for physician-hospital mergers.

This reimbursement disparity has, to a limited extent, changed. In February 2015, the Obama administration asked Congress in its budget reform to "[e]ncourage efficient care by improving incentives to provide care in the most ap-propriate ambulatory setting." The proposed budget would effectively equalize reimbursement payments between independent physicians and physicians who work in "off-campus," hospital-owned practices. Only those physicians who work "on-campus" would continue to receive the higher hospital reimbursement rate. On Nov. 2, the budget bill was passed, eliminating the Medicare reimbursement distinctions between hospitals and independently owned out-patient clinics and offices. However, the equalization of Medicare reimbursement rates for off-campus facilities is only applicable to off-campus entities acquired going forward. Existing hospital-owned off-campus outpatient clin-ics and offices are permitted to continue to capitalize on the Medicare reimbursement disparities.

The rapidly changing landscape of doctor compensation makes assessing the appropriate level of play all the more challenging for doctors and hospitals. But it is clear that HHS is focused on ensuring that hospitals do not pay doc-tors more than fair market rates.

OIG Suggests Recoupment Beyond Three Years in Reviews, Links It to 60-Day Rule Report on Medicare Compliance – November 23, 2015

In a curveball for hospitals, the HHS Office of Inspector General (OIG) is extending the scope of overpayment find-ings in Medicare compliance reviews beyond the usual three years. As a result, relatively modest overpayments have recently ballooned into million-dollar overpayments, and not just from the familiar extrapolation of errors.

OIG acknowledges it lacks the authority to go outside the three-year recovery period, but suggests hospitals work with CMS to repay the money because of their obligations under the 60-day Medicare overpayment refund mandate.

“This is a game changer,” says Kelly Sauders, a partner with Deloitte & Touche LLP in New York City. “If this is the approach the OIG is going to be taking on these hospital compliance reviews, it opens up significant additional risk.”

Since 2010, OIG’s Office of Audit Services (OAS) has been performing Medicare compliance reviews, in which auditors simultaneously scrutinize multiple risk areas at the hospital undergoing the review. As of Nov. 18, there were 143 Medicare compliance reviews on OIG’s website, says Kimberly Zeoli, a partner in Deloitte & Touche in Boston. The risk areas vary somewhat, but there are mainstays, including inpatient admissions that should have been outpatient or observation services and manufacturer credits for replaced medical devices that weren’t passed onto Medicare.

For the most part, OIG identifies the errors, quantifies overpayments and pins the cause on internal control failures. It’s up to CMS to recover the overpayments. Medicare compliance reviews crossed one barrier when OIG started extrapolating findings at some hospitals, which morphed smaller overpayments into million-dollar or multimillion-


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dollar overpayments. For example, OIG bent noses out of shape last year when it extrapolated a $603,267 overpay-ment at University of Cincinnati Medical Center into an overpayment finding of $9.8 million.

And now OIG has entered new territory by looking outside what has traditionally been the safety zone of a three-year look-back period, which is consistent with the RACs’ three-year look-back period, which means they don’t au-dit older claims. Five of the nine Medicare compliance reviews issued since June have overpayment findings based on years before the period audited by OIG, Zeoli says. The Medicare compliance reviews contain language stating that the hospital should pay Medicare back for claims incorrectly billed during the three-year recovery period and recommending that the hospital “work with the contractor to return [up to $X more in] overpayments outside of the 3-year recovery period in accordance with the 60-day repayment rule.”

For example, in a Medicare compliance review of Naples Community Hospital posted Nov. 10, OIG found errors on 91 claims submitted in 2011 and 2012. That added up to an actual overpayment of $409,366, but OIG enlarged it to $4.58 million, with more than $3 million coming from “claim payment dates that are outside the three-year recovery period”. The other hospitals that had similar experiences are Boca Raton Regional Hospital, Mary Hitchcock Me-morial Hospital, University of Kentucky HealthCare and Loma Linda University Medical Center.

OIG Explains Its Position OIG isn’t demanding the return of the overpayments outside the three years. It suggests that hospitals and CMS, through its Medicare administrative contractors (MACs), work out a solution in light of the 60-day Medicare over-payment rule, which requires hospitals to report and return overpayments within 60 days of identifying them. The proposed CMS regulation interpreting the 60-day rule, which was mandated in the Affordable Care Act, calls for a 10-year audit look-back period.

In response to questions from RMC, OIG officials said in a statement that “OIG cannot question overpayments out-side of the Medicare Statute of Limitations in the context of an audit.” The officials explained why OIG is looking beyond three years in Medicare compliance reviews: “While we use the most current data possible to conduct our audits, we also need complete data in order to perform our audit work. As a result, we are often working with histor-ical information and reviewing older claims as well. We recognize that this means, in some audits, we will have findings outside of the Medicare Statute of Limitations. To address that, we use the OIG/OAS statistical software to estimate the total amount of Medicare overpayments made to the provider during our audit period. We then estimate the amount of Medicare overpayments within the Medicare Statute of Limitations. To obtain the value of the over-payments that are outside of the Medicare Statute of Limitations we subtract the estimate of the overpayments within the Medicare Statute of Limitations from the total overpayments during our audit period.

“While OIG cannot question those overpayments that are outside of the Medicare Statute of Limitations in the con-text of an audit, importantly we believe that the 60-day rule under ACA triggers a duty for providers to, at a mini-mum, conduct a reasonable inquiry into potential overpayments,” they said. “Therefore, our recommendations iden-tify those potential overpayments that are outside of the Medicare Statute of Limitations and notify the provider that they may have duties or liability under the 60-day rule and should consider performing a reasonable inquiry into those claims.”

Recent Law Muddied Waters The three-year lookback period is rooted in Sec. 1870 of the Social Security Act, which CMS explained in the Medi-care Financial Management Manual. The waters were muddied, though, by the American Taxpayer Relief Act of 2012, which gave MACs five years to recover overpayments instead of three years. But, Zeoli says, CMS never put this authority in manual form, and even OIG isn’t citing it in Medicare compliance reviews.

Hospitals should take heed of OIG’s maneuver as they comply with the 60-day Medicare overpayment rule, Zeoli says. “Providers that have been audited by OIG or have identified potential Medicare overpayments through internal audits and other means should carefully consider how these latest regulatory developments may impact their remedi-ation plans and timelines,” she says. “In my experience, 60 days to refund an identified overpayment can go by fast. It is not a lot of time. Providers should also proactively consult with health care regulatory counsel when they are handling resolution of potential or identified Medicare overpayments.”

Given OIG’s bent for audit findings outside the three-year recovery period and hospitals’ vulnerability because of the 60-day rule, they have a lot to consider about the Medicare overpayment recovery period.

University of Florida Agrees to Pay $19.875 Million to Settle False Claims Act Allegations Department of Justice, Office of Public Affairs – November 20, 2015

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On November 20, 2015, the U.S. Department of Justice announced, "The University of Florida (UF) has agreed to pay the United States $19.875 million to settle allegations that the university improperly charged the U.S. Depart-ment of Health and Human Services (HHS) for salary and administrative costs on hundreds of federal grants, the Department of Justice announced today. The grants in question were administered from the UF campuses in Gainesville and Jacksonville, Florida."

According to the government press release, "The settlement announced today resolves the alleged misuse of grant funds awarded by HHS to UF between 2005 and December 2010. The United States contended that the university overcharged hundreds of grants for the salary costs of its employees, where it did not have documentation to support the level of effort claimed on the grants for those employees. The government also contended that UF charged some of these grants for administrative costs for equipment and supplies when those items should not have been directly charged to the grants under federal regulations. Lastly, UF allegedly inflated costs charged to HHS grants awarded at its Jacksonville campus for services performed by an affiliated entity, Jacksonville Healthcare Inc."

HIPAA Settlement Reinforces Lessons for Users of Medical Devices HHS.gov - November 25, 2015

Lahey Hospital and Medical Center (Lahey) has agreed to settle potential violations of the Health Insurance Porta-bility and Accountability Act of 1996 (HIPAA) Privacy and Security Rules with the U.S. Department of Health and Human Services (HHS), Office for Civil Rights (OCR). Lahey will pay $850,000 and will adopt a robust corrective action plan to correct deficiencies in its HIPAA compliance program. Lahey is a nonprofit teaching hospital affili-ated with Tufts Medical School, providing primary and specialty care in Burlington, Massachusetts.

Lahey notified OCR that a laptop was stolen from an unlocked treatment room during the overnight hours on Au-gust 11, 2011. The laptop was on a stand that accompanied a portable CT scanner; the laptop operated the scanner and produced images for viewing through Lahey’s Radiology Information System and Picture Archiving and Com-munication System. The laptop hard drive contained the protected health information (PHI) of 599 individuals. Ev-idence obtained through OCR’s subsequent investigation indicated widespread non-compliance with the HIPAA rules, including:

• Failure to conduct a thorough risk analysis of all of its ePHI; • Failure to physically safeguard a workstation that accessed ePHI; • Failure to implement and maintain policies and procedures regarding the safeguarding of ePHI maintained on

workstations utilized in connection with diagnostic/laboratory equipment; • Lack of a unique user name for identifying and tracking user identity with respect to the workstation at issue in

this incident; • Failure to implement procedures that recorded and examined activity in the workstation at issue in this incident;

and • Impermissible disclosure of 599 individuals’ PHI.

In addition to the $850,000 settlement, Lahey must address its history of noncompliance with the HIPAA Rules by providing OCR with a comprehensive, enterprise-wide risk analysis and corresponding risk management plan, as well as reporting certain events and providing evidence of compliance.

http://www.hhs.gov/about/news/2015/11/25/hipaa-settlement-reinforces-lessons-users-medical-devices.html

UConn Health Compliance News December 2015

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• Compliance Programs • Cybersecurity • Discrimination • Legislation and Regulation • CMS Regulations

Compliance Programs U.S. Justice Department Outlines Metrics for Evaluating Compliance Programs Wall Street Journal – November 2, 2015

The Justice Department laid out on Monday metrics that the agency’s new compliance expert, Hui Chen, will use to judge companies by in criminal matters.

Those metrics include seven steps that Chen will use to judge a compliance program in addition to a specific road map for judging compliance at financial institutions, according to prepared remarks from Assistant Attorney General Leslie Caldwell, delivered at a compliance conference in New York.

The guidelines come a day before Chen starts her work at the Justice Department, Ms. Caldwell said.

Summarized from Ms. Caldwell’s remarks, the compliance expert’s metrics are as follows:

• Do directors and managers offer strong support for corporate compliance policies?

• Do compliance personnel have stature in the company? Do the compliance teams get the resources they need?

• Are compliance policies clear and in writing? Are they easily understood and translated.

• Are the compliance policies effectively communicated to employees? Are they easy to find and do employees get repeated training?

• Are the compliance policies updated?

• Are there ways to enforce the compliance policies and is compliance incentivized and violators disciplined?

• Are third parties informed of compliance expectations?

While the compliance expert will have benchmarks for accessing programs, Ms. Caldwell attempted to do away with the idea that companies will be able to avail themselves of a compliance defense to protect themselves from corporate liability.

“Some have suggested that our retention of a compliance counsel is an indication that the Department is moving toward recognizing or instituting a ‘compliance defense.’ That is not the case,” Ms. Caldwell said.

“Our hiring of a compliance counsel should be an indication to companies about just how seriously we take compliance.”

Ms. Caldwell also said it wasn’t the department’s goal to go after compliance officers.

“We’re not interested in prosecuting mistakes or accidents, or bad business judgement. And we are not looking to prosecute compliance professionals,” she said.

http://blogs.wsj.com/riskandcompliance/2015/11/02/u-s-justice-department-outlines-metrics-for-new-compliance-expert/


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Cybersecurity/Privacy DoD Addresses Cybersecurity Preparedness, Incident Reporting, and Cloud Computing Acquisitions with new DFARS Interim Rule Government Contracts Law Blog – August 26, 2015

Announced and effective August 26, 2015, DoD has issued an interim rule that significantly expands existing DFARS provisions and clauses requiring contractors and subcontractors to report cyber incidents. The interim rule will apply “to all contractors with covered defense information transiting their information systems,” an estimated 10,000 contractors. Additionally, in an effort to ensure acquisition uniformity across the Department, the interim rule implements DoD policies and procedures to be used when contracting for or utilizing cloud computing services. Due to “urgent and compelling reasons,” the rule was issued without an opportunity for public comment.

The interim rule is an amalgamation of multiple statutes, manuals, and policies and it affects numerous DFARS clauses and provisions in implementing and consolidating requirements found in:

• Section 941 of the National Defense Authorization Act (NDAA) for Fiscal Year 2013;

• Requiring cleared defense contractors to report penetrations of networks and information systems, and

• Allowing DoD personnel access to equipment and information to assess the impact of reported penetrations

• Section 1632 of the NDAA for FY 2015;

• Requiring that a contractor designated as “operationally critical” must report each time a cyber incident occurs on that contractor’s network or information systems.

• A December 15, 2014, DoD Chief Information Officer (CIO) memorandum entitled “Updated Guidance on the Acquisition and Use of Commercial Cloud Computing Services”; and

• The January 13, 2015 DoD Cloud Computing Security Requirements Guide (SRG) Version 1, Release 1.

For cybersecurity issues, contractors should focus their attention on the newly refined cyber incident reporting procedures (now found at DFARS 204.7302(a)(1) and clause 252.204-7012(c)), including more exacting report requirements (although the reporting period remains at 72 hours); the reporting requirements of all subcontractors (now found at DFARS 204.7302(a)(2)); and the inclusion of new contractual clauses when “covered defense information” is at issue (now found at DFARS 204.7304).

Cloud service providers and contractors wishing to employ cloud resources should be aware that DoD will only accept “cloud computing services using commercial terms and conditions that are consistent with Federal law, and an agency’s needs.” Accordingly, a cloud provider – be it as a prime or as a subcontractor – must have received “provisional authorization by Defense Information Systems Agency, at the level appropriate to the requirement” (now found at DFARS 239.7602-1(b)). Furthermore, any “Government data” stored in the cloud and not resident on a DoD installation must reside on servers in the United Sates unless otherwise authorized (now found at DFARS 239.7602-2(a)). Contractors will also be obligated affirmatively to advise the government of their intent to use cloud services for their government data (now found at DFARS 252.239–7009).

DoD is presently soliciting comments from “small entities” concerning the impact of these regulations on their business. However, in light of the statutory underpinnings and the previous DFARS provisions, large contractors should not expect to/hope to see any major changes in the final rule.

President Obama Signs Cybersecurity Act of 2015 to Encourage Cybersecurity Information Sharing National Law Review - January 2, 2016

On December 18, 2015, President Obama signed into law a $1.1 trillion omnibus spending bill that contained the Cybersecurity Act of 2015 (the “Act”), a compromise bill based on competing cybersecurity information sharing

http://www.governmentcontractslawblog.com/2015/08/articles/dfars/dod-addresses-cybersecurity-preparedness-incident-reporting-and-cloud-computing-acquisitions-with-new-dfars-interim-rule/


http://www.natlawreview.com/article/president-obama-signs-cybersecurity-act-2015-to-encourage-cybersecurity-information


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bills that passed the House and Senate earlier this year. The Act creates a voluntary cybersecurity information sharing process designed to encourage public and private sector entities to share cyber threat information.

Summary of Key Provisions

Although laws have long authorized the sharing of certain cybersecurity information, in practice there have been numerous obstacles impeding the effective exchange of information between and among the federal government and entities in the private sector. These include concerns about the possible public release through a public records request of data shared with the federal government, the privacy rights of individuals whose information may be included in information shared with the federal government, potential antitrust violations, and the use of shared information as evidence in regulatory enforcement actions against entities that have shared information with the federal government. The Cybersecurity Act of 2015 aims to address many of those concerns, creating a mechanism to facilitate and encourage information sharing between and among the federal government and entities in the private sector. Under the Act, the federal government is directed to create a process for sharing both classified and unclassified cyber threat indicators and defensive measures with the private sector, as well as information relating to certain cybersecurity threats and best practices. Entities in the private sector, in turn, are afforded several protections when they share cybersecurity information in accordance with the Act. Under the Act’s key information sharing provision, “a non-Federal entity may, for a cybersecurity purpose and consistent with the protection of classified information, share with, or receive from, any other non-Federal entity or the Federal Government a cyber threat indicator or defensive measure.”

Implications and Takeaways

The Cybersecurity Act of 2015 – Congress’s first major piece of cybersecurity legislation – has been years in the making. The Act’s focus, however, is relatively modest, with one commentator calling information sharing “last decade’s answer” to the cybersecurity problem.

The law’s provisions are voluntary in nature, and as such, businesses are under no obligation to share cyber threat indicators with the federal government or each other. The benefits of the bill’s liability protection may also be somewhat overstated, at least with respect to information sharing among private entities. The recent proliferation of private sector information sharing organizations, such as Facebook’s ThreatExchange, may suggest that companies are not especially concerned about potential liability arising from such sharing Indeed, the Act’s antitrust liability protections probably are little more than a legislative formality, as the Department of Justice and Federal Trade Commission’s joint Antitrust Policy Statement on Sharing of Cybersecurity Information made clear that the antitrust enforcement agencies “do not believe that antitrust is—or should be—a roadblock to legitimate cybersecurity information sharing” and provided guidelines on sharing such information without running afoul of the antitrust laws. The Act’s protection from liability for private entities when sharing cyber threat indicators or defensive measures with the federal government likely was unnecessary as well, as privacy experts and technologists have long argued that such indicators typically do not contain private data and are already being shared with the federal government in the case of a cyber attack.

Although a limited measure, the Cybersecurity Act of 2015 should facilitate increased information sharing among private sector entities and between the private sector and the federal government, which will at least marginally improve the nation’s cybersecurity. And while the Act provides for liability protection, private actors looking to share cyber threat indicators or other cyber-related information with each other or with the government should continue to consult counsel, especially when assessing how the Act’s provisions interact with other federal and state laws and regulations regarding access to and use of proprietary or personally identifiable information.

$750,000 HIPAA Settlement Underscores the need for Organization-Wide Risk Analysis HHS.gov – December 14, 2015

The University of Washington Medicine (UWM) has agreed to settle charges that it potentially violated the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Security Rule by failing to implement policies and procedures to prevent, detect, contain, and correct security violations. UWM is an affiliated covered entity, which includes designated health care components and other entities under the control of the University of Washington, including University of Washington Medical Center, the primary teaching hospital of the University of Washington School of Medicine. Affiliated covered entities must have in place appropriate policies and processes to assure

http://www.hhs.gov/about/news/2015/12/14/750000-hipaa-settlement-underscores-need-for-organization-wide-risk-analysis.html


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HIPAA compliance with respect to each of the entities that are part of the affiliated group. The settlement includes a monetary payment of $750,000, a corrective action plan, and annual reports on the organization’s compliance efforts.

The U.S. Department of Health and Human Services (HHS) Office for Civil Rights (OCR) initiated its investigation of the UWM following receipt of a breach report on November 27, 2013, which indicated that the electronic protected health information (e-PHI) of approximately 90,000 individuals was accessed after an employee downloaded an email attachment that contained malicious malware. The malware compromised the organization’s IT system, affecting the data of two different groups of patients: 1) approximately 76,000 patients involving a combination of patient names, medical record numbers, dates of service, and/or charges or bill balances; and 2) approximately 15,000 patients involving names, medical record numbers, other demographics such as address and phone number, dates of birth, charges or bill balances, social security numbers, insurance identification or Medicare numbers.


Discrimination Judge Rules Sexual Orientation Discrimination Falls Under Purview of Landmark Title IX Law Los Angeles Times – December 22, 2015

A federal judge in California has ruled that discrimination on the basis of sexual orientation falls under the purview of the landmark Title IX law, giving a broader interpretation to the 1972 statute that prohibits sex discrimination in the nation's schools and colleges.

In his 22-page ruling, U.S. District Judge Dean Pregerson said that discrimination on the basis of sexual orientation is not a separate category of discrimination, but rather, such claims fall under Title IX's view of discrimination on the basis of gender or sex.

The ruling allows two former players on the Pepperdine University women's basketball team to proceed with a lawsuit that alleges the university harassed and discriminated against them because they were dating. Haley Videckis and Layana White said that the coach wanted them off the team because their lesbian relationship "would cause the team to lose games," the complaint alleged.

Seeking to dismiss parts of the women's lawsuit, Pepperdine argued in court papers that Title IX does not cover claims based on sexual orientation and that their allegations failed to meet the law's standard for gender stereotype discrimination.

Pregerson, however, disagreed, and said the women could pursue their suit because the alleged maltreatment turned on the nature of each individual's sex in the same-sex relationship.

"Plaintiffs allege that they were told that 'lesbianism' would not be tolerated on the team," Pregerson wrote. "If plaintiffs had been males dating females, instead of females dating females, they would not have been subjected to the alleged different treatment," he said, concluding that the pair have a "straightforward claim of sex discrimination."

Citing nearly four decades of jurisprudence, Pepperdine's attorneys asserted that Title IX did not apply to a sexual orientation discrimination claim.

Pregerson had previously sided with Pepperdine and dismissed the claims made by Videckis and White under Title IX, writing that the line between gender stereotype and sexual orientation discrimination was "blurry, at best." He allowed the women to amend their lawsuit.

http://www.latimes.com/local/california/la-me-1222-pepperdine-sex-discrimination-20151222-story.html


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In this ruling, issued Dec. 15, Pregerson said he reversed his earlier decision because he found himself unable to distinguish sexual orientation from sex and gender discrimination.

"Simply put, the line between sex discrimination and sexual orientation discrimination is 'difficult to draw' because that line does not exist, save as a lingering and faulty judicial construct," Pregerson wrote.

He also faulted reasoning that focuses too much on the sexual orientation of the alleged victim, which he found to be irrelevant: "It is the biased mind of the alleged discriminator that is the focus of the analysis."

Doug NeJaime, faculty director of the Williams Institute at UCLA School of Law, said that the ruling is among the first to apply Title IX to sexual orientation discrimination, drawing on evolving views of Title VII of the Civil Rights Act.

In a landmark decision this summer, the Equal Employment Opportunity Commission held that Title VII covers sexual orientation discrimination because such allegations "necessarily state a claim of discrimination on the basis of sex." Pregerson cited that analysis.

"In light of there being no federal anti-discrimination law for sexual orientation, it's potentially a quite significant ruling," NeJaime said. "We'll start to see whether other federal courts start to do this and see whether they're applying the EEOC's logic."

Legislation and Regulation It’s Time to Review and Update Safety and Compliance Regimens – OSHA Penalties Set to Surge in 2016

National Law Review - November 19, 2015

For the first time since 1990, the Occupational Safety and Health Administration (OSHA) has been authorized to increase its civil penalties. The provision was inserted into the expansive Bipartisan Budget Act of 2015, which was signed this month by President Barack Obama.

OSHA is authorized to conduct workplace inspections and investigations to determine whether employers are complying with standards issued by the agency for safe and healthful workplaces. The ten most frequently cited violations involve safety requirements for fall protection, hazard communication, scaffolding, respiratory protection, powered industrial trucks, lockout/tagout, ladders, electrical wiring, machine guarding, and electrical systems design.

Section 701, entitled the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015,” permits OSHA to increase its civil penalties, following a one-time “catch up adjustment” in 2016. The increases, which are expected to be significant, will be calculated based on the Consumer Price Index (CPI) between 1990-2015. While the law provides that the maximum adjustment must be capped at 150 percent, most reports indicate that because the catch up adjustment cannot exceed the rate of inflation from 1990 through 2015, the increase will most likely be approximately 80 percent.

Based upon the “CPI Inflation Calculator” from the Bureau of Labor Statistics website, the maximum allowable OSHA fines beginning next year are estimated to increase as follows:

• “Other Than Serious” citations — where there is a direct relationship to job safety and/or workplace health, but it is unlikely to result in death or serious bodily injury — have a current maximum fine of $7,000, but are expected to increase to approximately $12,500 each;

• “Serious” citations — where there was a death or serious bodily harm and the employer knew or should have reasonably known about the hazard — have a current maximum fine of $7,000, but are expected to increase to approximately $12,500 each;

• “Willful” citations — where an employer knows it is in violation of OSHA standards and is aware of the hazardous condition, and makes no reasonable effort to remedy the condition — have a current maximum fine of $70,000, but are expected to increase to approximately $125,000 each; and

http://www.natlawreview.com/article/it-s-time-to-review-and-update-safety-and-compliance-regimens-osha-penalties-set-to?utm_content=d6cd8e755df15c6fa96a9edd3a98592a&utm_campaign=Labor%20and%20Employment%20News%20for%2012-01-2015&utm_source=Robly.com&utm_medium=email


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• “Repeat” citations — where an OSHA standard is violated after the initial charge for the same or similar breach — have a current maximum fine of $70,000, but are expected to increase to approximately $125,000 each.

The Act will be adjusted through an interim final rulemaking, and the adjustment will go into effect by August 2016. Additionally, the Act mandates annual inflation increases for OSHA penalties going forward. Starting in January 2017, OSHA will be required to publish these fine increases by January 15th of each year. The annual adjustments will not require formal rule-making.

Internal Investigations Change as DOJ Hits Individuals in Corporate Fraud Cases Report on Medicare Compliance – December 14, 2015

Some employees may clam up during an internal investigation of a compliance issue now that the Department of Justice (DOJ) is pursuing “culpable” individuals as part of corporate fraud cases. Fearful they will be thrown under the bus, employees may refuse to answer questions, a sentiment that’s understandable but thwarts the health care organization’s efforts to address the potential problem and, if relevant, earn credit for cooperating in a DOJ civil or criminal investigation.

The possibility of employees essentially pleading the fifth is one consequence of the September 2015 DOJ policy set forth in the so-called Yates memo, which revised the Principles of Corporate Prosecution and were put into practice Nov. 16 in the U.S. Attorney’s Manual. According to the Yates memo, corporations won’t be able to settle fraud cases unless they divulge the names of the people involved, who may face civil or criminal enforcement actions.

There are other ways the Yates memo will affect internal investigations, said Dallas attorney Frank Sheeder at a webinar sponsored by the Health Care Compliance Association on Dec. 8. Organizations may have to add attorneys to interviews of key employees to ensure they preserve attorney-client privilege and work-product protection. Also, compliance officers will have to look at who was responsible for the wrongdoing, not just what went wrong, and more carefully map out the steps of an internal investigation when where’s a hint an executive is implicated. Yet somehow compliance officers have to avoid the appearance that they are agents of DOJ. “Everything will get more complicated, more protracted and more costly,” he said.

The silver lining is the Yates memo will “reinvigorate” compliance programs, according to Sheeder. “It’s an opportunity for organizations to take a look at compliance programs and to shore them up and to get senior leadership more engaged, and the same with boards,” he said. They will be motivated by the powerful message that DOJ is sending about individual accountability.

“Being an ethical organization is not sufficient,” said Sheeder, with DLA Piper. “Instead of saying, ‘mistakes happened or a decision was made in a diffuse manner,’ [DOJ is] moving toward ‘who made the decision, who wasn’t committed to compliance, who knew about it and looked the other way or shut something down, or who could have known but chose not to get involved?’”

However, he advised against using the Yates memo as a hammer. Compliance officers are more effective when they act as the mayor, not the sheriff, Sheeder said. “The mayor brings different stakeholders together, reaches compromises, encourages people to do the right thing but shakes hands and kisses babies, while the sheriff is in ‘gotcha’ mode,” he said. “If compliance officers are not careful, they will be branded as sheriffs or relegated to a sheriff’s role, and that is a lesser role.”

There are six steps to the Yates memo, which were amplified by the U.S. Attorney’s Manual revisions:

(1) “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.”

(2) “Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.”

(3) “Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.”

(4) “Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.”

https://aishealth.com/


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(5) “Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized.”

(6) “Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.”

They were brought to life in the manual, as Deputy Attorney General Sally Q. Yates explained in a Nov. 16 speech in Washington, D.C., to the American Bar Association. She noted that if a company wants credit for cooperating with DOJ — which would reduce its civil or criminal liability — “it must provide all nonprivileged information about individual wrongdoing.” In addition, it must conduct a timely and appropriate investigation.

There’s no easy answer, said Sheeder, who suggested that “organizations proactively assess their compliance programs and further educate senior leaders and boards about the risks and challenges posed by the DOJ’s policy shift.” Meanwhile, during investigations, organizations may have to get employees separate attorneys.

CMS Regulations CMS Finalizes Two New Stark Exceptions and Provides Clarity to Others Murtha/Cullina Health Care Group News – December 2015

On October 30, 2015, the Centers for Medicare and Medicaid Services (CMS) issued a final rule, to be effective January 1, 2016, which added two new exceptions to the Stark regulations.

Exception for Recruitment of Non-Physician Practitioners (NPPs)

Currently, a facility’s ability to provide financial assistance for the purpose of recruiting and relocating practitioners to the facility’s geographic service area is limited to physicians. In the final rule, CMS articulates a need for a new exception for NPPs due to the projection of a significant shortage in primary care providers. As a result, the new exception will allow hospitals, federally qualified health centers (FQHC) and rural health clinics (RHC) to make payments to physicians to assist in recruiting, employing and contracting NPPs to work in the geographic area served by the facility. Most of the requirements of the new exception track the requirements of the existing physician recruitment exception, but it is important to highlight three key elements.

• First, an NPP does not qualify for the exception if the NPP practiced in the geographic area served by the hospital, FQHC or RHC in the year preceding his or her employment by the physician.

• Second, for purposes of the exception, NPPs include physician assistants, nurse practitioners, clinical nurse specialists, certified nurse midwives, clinical social workers and clinical psychologists.

• Third, the NPP must be providing primary care or mental health services to patients of the physician’s practice and be a bona fide employee of the physician receiving the remuneration from the hospital, FQHC or RHC.

Exception for Timeshare Arrangements

The second new Stark exception enables timeshare arrangements. These arrangements permit a licensee to use the premises, equipment, personnel, items, supplies and/or services of the licensor entity

(i) without establishing a possessory leasehold interest as is required under the existing lease exception and

(ii) without requiring a block lease arrangement set in advance, as is also required under the existing lease exception.

These timeshare arrangements can be on an “as needed” basis so long as the compensation is time-based and not in any way related to the amount or value of services provided during the timeshare or referred between the parties.

In order for a timeshare arrangement to fit within the new exception, several other requirements must be met including an advance written agreement; the arrangement cannot be conditioned on the referral of patients by the physician-licensee to the hospital or physician practice-licensor; and, the compensation for the term of the arrangement must be set in advance, consistent with fair market value, and not take into account volume or value of referrals or other business generated between the parties.

http://www.murthalaw.com/files/hc_cms_finalizes_stark_exceptions_12.2015.pdf


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CMS Revises Two-Midnight Rule to Allow an Exception for Part A Payment for Hospital Services Provided to Patients Requiring Inpatient Care for Less Than Two Midnights American Health Lawyers Association – December 2015

After two years of dialogue with stakeholders regarding challenges associated with the Two-Midnight Rule, the Centers for Medicare & Medicaid Services (CMS) recently finalized policy changes in the Calendar Year (CY) Outpatient Prospective Payment System (OPPS) Final Rule. Specifically, under the revised rule, CMS will allow an exception for Medicare Part A (Part A) payment on a case-by-case basis for inpatient admissions that are not expected to cross two midnights, if the admitting physician determines and documents in the medical record that inpatient hospital care is reasonable and necessary. The changes in the Final Rule will go into effect on January 1, 2016.

In the CY 2016 OPPS Final Rule, CMS has made it clear that these modifications do not entirely negate the two-midnight benchmark or presumption. Rather, the changes simply mean a broader range of cases could be considered exceptions to the benchmark, if the medical record adequately supports the inpatient admission.

CMS' revisions to the Two-Midnight Rule will provide an exception to allow Part A payment for hospital stays lasting less than two midnights that are documented to be reasonable and necessary inpatient admissions. This exception provides some flexibility to reimburse services provided during short hospital stays in a manner that aligns with medical judgment regarding the inpatient admission, rather than universally applying a rigid time-based standard to determine whether a stay should be reimbursed as inpatient or outpatient. The dialogue around inpatient status is likely to continue as the revised Two-Midnight Rule is implemented and QIO reviews of short inpatient stays move forward. CMS has indicated that it will continue to monitor and evaluate the application of the Two-Midnight Rule, the new exception, and reimbursement for short inpatient stays, and may make modifications in the future based on any observations.

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OACE welcomes Minor Protection Coordinator

Omar Andujar joined the Office of Audit,

Compliance & Ethics in December as the Minor

Protection Coordinator for Storrs, Regional

and UConn Health Campuses. He is

responsible for the development,

implementation, and evaluation of University-

wide Protection of Minors efforts, including

developing and delivering training and

educational resources, implementing risk

reduction strategies, managing the central

registration of activities involving minors, and

carrying out compliance monitoring activities.

Omar’s previous work experience includes managing Protection of Minors efforts

and organization-wide compliance efforts within the higher education and non-

profit sectors. He is a Certified Compliance and Ethics Professional (CCEP). Omar

holds a B.B.A. in Supervisory Management and a M.B.A. in Corporate

Innovations. He has frequently presented and published articles on the topic of

minors on campus and is a member of the Institute of Internal Auditors and the

University Risk Management and Insurance Association.

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Volume 9, Issue 2

Winter 2016

Annual Compliance Training

It’s that time of year again! The Office of Audit, Compliance & Ethics is launching its annual Compliance Training in February. Compliance Training consists of an overview of policies that affect all employees such as the Code of Conduct and the University Guide to the State Code of Ethics.

Training is available in two formats. You may attend an in-person presentation at the Student Union Theatre or take the training online. The online training will require participants to accurately answer questions throughout the session and will be available in February. We will be introducing a new electronic scanning system for in-person training to document individual’s attendance. Employees will need to bring their UConn ID’s when attending a live session.

Faculty and Staff must complete one or the other by May 20, 2016.

This year’s Compliance Training topics will cover:

Code of Conduct and the Importance of Individual Behaviors;

University Guide to the State Code of Ethics;

Information Management at UConn;

and Various other Topics.

For information on training, please visit:

http://audit.uconn.edu/annual-compliance-training-storrs/

Contact The Office of Audit, Compliance & Ethics at (860) 486-2530 with questions.

UConn

Office of Audit, Compliance & Ethics

9 Walter’s Avenue, Unit 5084

Storrs, Connecticut, 06269-5084

Telephone: (860) 486-4526

Facsimile: (860) 486-4527

Web: www.audit.uconn.edu

REPORTLINE

Phone: 1-888-685-2637

https://uconncares.alertline.com/

gcs/welcome



https://uconncares.alertline.com/gcs/welcome

https://uconncares.alertline.com/gcs/welcome

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Did You Know? We feature policy updates in the Daily Digest?

Previous editions of our quarterly newsletter may be found at http://audit.uconn.edu/newsletter/?

The Joint Audit and Compliance Committee (JACC) Meeting Minutes are viewable here?

The Compliance Courier is a quarterly newsletter issued by the Office of Audit, Compliance & Ethics. Each newsletter will provide updates on important compliance issues. For questions or concerns or to suggest future articles, please contact Kimberly Fearney at (860) 486-6195 or [email protected].

New Resource: Compliance Listserv

The Office of Audit, Compliance & Ethics values its collaborative relationship with administrative staff in each of our schools, colleges and departments. We rely on these relationships to help disseminate key compliance information to all our faculty and staff. We are looking to expand these efforts through the newly created Compliance at UConn Listserv. We will be sending periodic updates on policy, training, records management, privacy and other important compliance information.

If you have any colleagues that would benefit from this Listserv please email their names to [email protected].

Policy Updates The Board of Trustees recently approved the Policy Against Discrimination, Harassment, and Related Interpersonal Violence effective January 1, 2016. The policy is an updated, streamlined policy that more clearly articulates the University’s commitment to maintaining a safe and non-discriminatory learning, living and working environment for all members of the University community– students, employees and visitors. The new policy will combine three existing, separate policies (Sexual Assault Response Policy; Policy Against Discrimination, Harassment and Inappropriate Romantic Relationships; Title IX Notice) under one coordinated, easier-to-read policy.

Please review the policy at http://policy.uconn.edu/?p=6592. We ask that managers who supervise employees with limited computer access, please post the policy in a common area.

For more information, please contact the Office of Diversity & Equity at (860) 486-2943.

Revolving Door Provisions If you are leaving the University or you are actively pursuing alternative employment opportunities, please consider the Code of Ethics obligations that address post-state employment. One year and life-time bans may apply depending on the circumstance. The OSE (The Office of State Ethics) specifies instances of bans in the “Public Officials and State Employees Guide to the Code of Ethics.”

Lifetime

You may never disclose any confidential

information you learned during the course of

your state service for anyone’s financial gain.

One

year

You may not be hired for one year after you

leave state service by a party to a state contract

valued at $50,000 or more if you were

substantially involved in, or supervised, the

negotiation or award of that contract and it was

signed within your last year of service.

Examples of Restrictions

http://audit.uconn.edu/newsletter/

http://audit.uconn.edu/jacc-archives/

mailto:[email protected]

mailto:%[email protected]

http://policy.uconn.edu/?p=6592

http://www.ct.gov/ethics/lib/ethics/guides/2014/public_officials_and_state_employees_guide_rev-jan2014.pdf

http://www.ct.gov/ethics/lib/ethics/guides/2014/public_officials_and_state_employees_guide_rev-jan2014.pdf