2005 AFR

Annual Financial Report

2005

Published by the Office of Finance

University of Wisconsin System

1220 Linden Drive

Madison, WI 53706



Editor: Ginger Hintz



Cover Photo: This wide angle shot of the UW-Eau Claire Campus Mall captures students

relaxing on a warm, sunny day. The Campus Mall is considered the hub for

many campus activities; it was created in 1986, replacing the Schofield parking

lot, and now links all the buildings of lower campus to each other and to the

footbridge.



The Campus Mall is also known for its two landmarks: the bronze “Sprites”

sculpture and the 3,000 pound four-faced bronze street clock created in 1890.



Photo by: Rick Mickelson, UW-Eau Claire Publications Office

University of Wisconsin System

2005 Annual Financial Report









TABLE OF CONTENTS





Regents, Chancellors and Officers of the UW System ............................................................................. 3



Introduction from the President ................................................................................................................ 4



Vice President’s Report ............................................................................................................................ 6



Supplemental Information ......................................................................................................................... 9



Charts 1 and 2 - Ten-Year Comparison of Current Funds Revenues ................................................ 10



Chart 3 - Ten-Year Comparison of University-Controlled Endowments ........................................... 11



Management’s Discussion and Analysis ................................................................................................... 12



Independent Auditor’s Report ................................................................................................................... 28



Audited Financial Statements ................................................................................................................... 31



Statements of Net Assets ................................................................................................................... 32



Statements of Revenues, Expenses and Changes in Net Assets ....................................................... 33



Statements of Cash Flows .................................................................................................................. 34



Notes to the Financial Statements ...................................................................................................... 36









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2

2005 Annual Financial Report







Officers Chancellors



Kevin P. Reilly, Marvin Van Kekerix (Interim), UW Colleges and

President UW-Extension

Vicki Lord Larson (Interim), UW-Eau Claire UNIVERSITY

Donald J. Mash, W. Bruce Shepard, UW-Green Bay OF WISCONSIN

Executive Senior Vice President Douglas N. Hastad, UW-La Crosse

John D. Wiley, UW-Madison SYSTEM

Cora B. Marrett, Carlos E. Santiago, UW-Milwaukee

Senior Vice President for Academic Affairs Richard H. Wells, UW-Oshkosh

John P. Keating, UW-Parkside

Deborah A. Durcan, David J. Markee, UW-Platteville

Vice President for Finance Don Betz, UW-River Falls

Linda Bunnell, UW-Stevens Point

Patricia A. Brady, Charles W. Sorensen, UW-Stout

General Counsel Julius E. Erlenbach, UW-Superior

Martha D. Saunders, UW-Whitewater









Finance Staff Regents



Douglas M. Hendrix, Roger E. Axtell, Janesville

Associate Vice President for Financial Mark J. Bradley, Wausau (Regent Vice President)

Administration Elizabeth Burmaster, Madison

Eileen Connolly-Keesler, Neenah

Ruth M. Anderson, Judith V. Crain, Green Bay

Assistant Vice President for Danae D. Davis, Milwaukee

Administrative Services Gregory L. Gracz, Milwaukee

Thomas A. Loftus, Sun Prairie

Ronald L. Yates, Milton McPike, Mazomanie

Director for Operations Review and Charles Pruitt, Milwaukee

Audit Gerard A. Randall, Jr., Milwaukee

Peggy Rosenzweig, Wauwatosa

Douglas J. Hoerr, Jesus Salas, Milwaukee

Treasury Manager/Assistant Trust Officer Christopher M. Semenas, Kenosha

Brent Smith, La Crosse

Michael J. Spector, Milwaukee

David G. Walsh, Madison (Regent President)









3

Financial reports are just one of the many tools

that allow the public to assess the UW

System’s performance on a variety of

measures. I invite you to review this year’s

report. I’m sure you will be impressed by our

commitment to ensuring academic quality,

even in a challenging fiscal environment.



Despite the challenge of managing some

staggering cuts to the levels of state support for

Wisconsin’s public university, our enterprise

has flourished through academic research and

development, gifts, grants, and other non-state

dollars. This is a testament to the expertise,

hard work, and entrepreneurial spirit of our

outstanding faculty and staff.



UW System institutions have contributed much

to Wisconsin’s economy this year. For

example:



• UW-Madison’s WiCell Research

INTRODUCTION FROM THE PRESIDENT Institute was selected as the federal

FINANCIAL REPORT 2005 government’s first and only National

Stem Cell Bank, and received $16

I am proud to serve as president of the

University of Wisconsin System, one of the

nation’s finest systems of higher education.

million in federal funding for the

project;

• UW-Milwaukee has partnered with the

Medical College of Wisconsin and

During the last 14 months, I have witnessed, business leaders to form the Wisconsin

time and again, the true power of our Institute for Biomedical Health

institution as a driving economic force in Technologies, which will champion

Wisconsin, and the nation. interdisciplinary research teams

investigating knowledge creation in the

Citizens and business leaders across the state fields of biomedical imaging, health

consistently report that the research and care informatics, and biomechanics/

academic contributions of our faculty, staff, rehabilitation, and support economic

and students are vital to their families, their development by attracting federal

communities, and their careers. Sound fiscal research funds to the campus; and

management allows us to continue to serve the

• The UW System will reach out to

160,000 students on our campuses, and the

nontraditional students through the

more than one million people we reach through

recently developed Adult Student

our statewide extension programs. We will

Initiative, a collaboration between UW-

continue to do all that we can to remain at their

Extension, UW Colleges, and the UW

service in the true spirit of the Wisconsin Idea.

System campuses. The Adult Student









4

Initiative will build a statewide network

to engage those who wish to earn their

bachelor’s degrees. The greater number

of Wisconsin’s citizens who have

baccalaureate degrees, the greater

potential economic benefit to the state.



This report shows that external funding, in the

form of federal grants and private donations,

has become even more crucial in compensating

for what the UW System loses in state support.

We are committed to ensuring that all

Wisconsin citizens who seek a UW education,

and are willing to work at it, can have access to

one. We will see to it that all of our students

are afforded every opportunity to succeed.

Reinvestment by the state in its public

university system will be essential if we are to

meet those goals.



As president of this world-class institution, I

will continue to encourage UW institutions to

expand statewide collaborations, to secure

stable fiscal support for the university’s

endeavors, and to ensure the UW System

remains a strong and vital part of Wisconsin’s

economic future.







Kevin P. Reilly

President









5

As with most public universities across the

country, our state support is becoming a

smaller share of our total revenues each year.

The year 2004-05 marked the second year in a

row where state appropriations, adjusted for

inflation, were actually less than a decade ago.

As a percentage of total revenues, they are now

less than 25% of the total. Just two years ago,

state appropriations made up about 30% of

total revenue. In 2004-05, tuition, combined

with auxiliary operations, made up about 27%.

Grants and contracts from state, local, and

federal governments and private entities

represent an additional 25% of total revenue.

Clearly, our stakeholder base is shifting.



Expenditures directly related to the student

experience, i.e., instruction, student services,

academic support, and auxiliary operations,

totaled slightly more than 52% of all

expenditures. Institutional support remains

very modest at 5.1% of the total. Salaries and

fringe benefits continue to represent close to

70% of all expenditures.



Modest funding provided modest salary

VICE PRESIDENT’S REPORT increases for faculty and staff. After frozen

FINANCIAL REPORT 2005 salaries in 2003-04, a one-percent salary

increase was granted in 2004-05. As such,





T he fiscal year 2004-05 was the second

year of the worst biennial budget in the

University of Wisconsin System’s

history. As state tax support was reduced $250

million over the two year period, tuition

faculty recruitment and retention continue to

be significant challenges. Utility costs

continue to rise and despite significant

conservation efforts, the University found itself

almost $22 million short in state utility

skyrocketed with unprecedented increases of funding. Additional funds covering this

18% and 15%, respectively. In dollar terms, shortfall were ultimately added to our base

tuition rose by $700 per year at the doctoral funding, which was very much appreciated.

institutions (UW-Madison and UW-

Milwaukee) and $500 per year at each of the As a new President began his tenure, he was

comprehensive institutions and the two-year welcomed with the first comprehensive

institutions, the UW Colleges. These tuition program audit of the UW System in many

increases provided an additional $150 million years. The Legislative Audit Bureau had just

of support to partially offset the reduced state completed its review of UW System Staffing

funding. Increases in financial aid were again and redefined many supervisory and support

supported by diverting auxiliary reserve positions as “administrative” putting additional

balances. pressure on the University to reduce







6

administrative costs. The institutions and the

System Administration collectively spent a

significant amount of time and energy in

search of administrative efficiencies during the

course of the year. As a result of these efforts,

it is anticipated that more regional

collaboration among our institutions will result

in long term savings.



While the overall financial health of the

University of Wisconsin System is still strong,

it is fragile. The continued reliance on cost-

cutting measures and reductions to

administration to meet the ongoing costs of

operations cannot be sustained. We

desperately need an infusion of state resources

to continue to serve our existing students and

to provide greater access to an ever diverse

body of students. The financial health of the

State is dependent upon increasing the number

of Wisconsin residents with a baccalaureate

degree.



I invite you to review the 2005 Annual

Financial Report, paying particular attention to

the Management’s Discussion and Analysis,

and send your comments to me directly

(ddurcan@uwsa.edu).







Deborah A. Durcan

Vice President for Finance









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8

UNIVERSITY OF WISCONSIN SYSTEM

Years Ended June 30, 2005 and 2004









Supplemental Information









9

CHART 1

TEN-YEAR COMPARISON OF CURRENT FUNDS REVENUES

1995 - 2005



$1,820





$1,560 ALL OTHER SOURCES







$1,300





$1,040

STATE APPROPRIATIONS

Millions









$780

TUITION AND FEES



$520





$260





$0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005





CHART 2

TEN-YEAR COMPARISON OF CURRENT FUNDS REVENUES

ADJUSTED FOR INFLATION

1995 - 2005

$1,820



$1,560 ALL OTHER SOURCES





$1,300



$1,040 STATE APPROPRIATIONS

Millions









$780

TUITION AND FEES



$520



$260

Inflation adjustment is average annual CPI-U.

Base Year = 1995

$0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005







10

CHART 3

TEN-YEAR COMPARISON OF UNIVERSITY-CONTROLLED ENDOWMENTS

1995 - 2005

$400



True Endowment

Quasi Endowment

$350









$300









$250

Millions









$200









$150









$100









$50









$0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Charts have been prepared based on generally accepted accounting principles in effect prior to the adoption of GASB Statement 35.









11

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Management’s Discussion and Analysis



Introduction

The following discussion and analysis provides an overview of the financial position and activities of the University of

Wisconsin System for the years ended June 30, 2005 and 2004, with comparative information for the year ending June

30, 2003. This discussion has been prepared by management and should be read in conjunction with the financial

statements and footnotes.



The University of Wisconsin System consists of 13 universities including two doctoral institutions, 13 two-year

colleges, UW-Extension and System Administration. The University of Wisconsin System enrolls approximately

160,797 students, employs approximately 28,345 faculty and staff, and in academic year 2004-2005, granted 29,585

bachelor’s, master’s, and other advanced degrees. The University of Wisconsin System institutions were awarded

over $821.4 million in federal grants and contracts in 2004-2005 and an additional $354.6 million from non-federal

sponsors. The University of Wisconsin System has a long tradition of public service, embodied by an ongoing

commitment to the Wisconsin Idea, that the boundaries of the University are the boundaries of the State.



Financial Highlights

The University of Wisconsin System’s financial standing remained sound at the conclusion of the fiscal year ended

June 30, 2005 as declining state support continued to be supplemented by higher tuition and increased extramural

support. As adopted in July 2003, the State of Wisconsin’s 2003-2005 biennial budget provided for a $250 million

reduction in state funding of the University of Wisconsin System. This reduction is allocated over the biennial budget

period as $110 million and $140 million for fiscal years ended June 30, 2004 and 2005, respectively. The biennial

budget included authority for the University of Wisconsin System to partially offset budget reductions by increasing

tuition by $50 million and $100 million for the fiscal years ended June 30, 2004 and 2005, respectively. State funding

represents 23.9% of the University of Wisconsin System’s total operating budget in 2005-06, compared to 31.9% in

1995-96.



As of June 30, 2005, the University of Wisconsin System had total assets of $4.8 billion and total liabilities of $1.1

billion for a net asset total of $3.7 billion, of which $2.9 billion is invested in capital, net of related debt. Revenues

continued strong in 2005, including net student tuition and fees (up 10.5% from 2004) and grants and contracts

revenue (up 10.7% from 2004). State appropriations continue to decline (down .5% from 2004 and 7.0% from 2003)

reflecting the state’s intense budget pressures. Revenue diversification is essential to maintaining a financially strong

institution capable of sustainable success. Over the past several years, the University of Wisconsin System has

successfully diversified its revenue streams to supplement tuition and fees and state appropriations (see Charts 1 and 2

on page 10).



The change in net assets is summarized for the fiscal years ended June 30, 2005, 2004 and 2003 as follows:



(In Millions)

2005 2004 2003



Total Revenues Before Net

Investment Income $ 3,596.3 $ 3,338.3 $ 3,263.4

Total Expenses 3,475.5 3,331.3 3,133.0

Increase in Net Assets Before

Net Investment Income 120.8 7.0 130.4

Net Investment Income 37.7 41.8 9.5

Increase in Net Assets $ 158.5 $ 48.8 $ 139.9









12

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004







Fiscal year 2005 total revenues before net investment income increased $258.0 million (7.7%) compared to $74.9

million (2.3%) for fiscal year 2004. The fiscal year 2005 increase primarily resulted from an 8.8% increase in

operating revenues, a .5% decrease in state appropriations, and a 10.9% increase in gifts – noncapital. Fiscal year

2005 total expenses increased $144.2 million (4.3%) compared to an increase of $198.3 million (6.3%) for fiscal year

2004. The fiscal year 2005 increase primarily resulted from a 3.0% increase in salary and fringe benefits and a 7.9%

increase in supplies, services, and other expenses.



Operating revenues increased by $.2 billion during fiscal years 2005 and 2004. The fiscal year 2005 8.8% increase

resulted primarily from increases in net student tuition and fees revenue (10.5%) and grants and contracts revenues

(10.7%). The net increase in student tuition and fees is primarily due to a 15% (18% in 2004) increase in tuition rates

approved by the Board of Regents in response to reductions in state support. The total headcount enrollment for the

entire University of Wisconsin System increased slightly to 160,797 from 160,703 in 2004 and total full-time

equivalent enrollment is 135,190, a decrease from 135,798 in 2004. Grants and contracts revenue increased

substantially due to the significant number of new project grants.



Operating expenses increased by $.1 billion during fiscal year 2005 and $.2 billion during fiscal year 2004.

Scholarship and fellowships decreased by 1.1% and supplies, services and other increased by 7.9%. The fiscal year

2005 increase in salary and fringe benefits of 3.0% includes health insurance increases of approximately 7.7% (11.0%

in fiscal 2004) and pay plan increases of approximately 1%. Salary and fringe benefits, the largest component of

operating expenses, increased from $2.2 billion in fiscal years 2003 and 2004 to $2.3 billion in fiscal year 2005.



The University of Wisconsin System’s net investment income decreased to $37.7 million in fiscal year 2005 from the

prior year of $41.8 million. The investment return is comprised of dividend and interest income, as well as realized

and unrealized gains and losses. Investments are reported at fair market value as of June 30 of each fiscal year. The

change in market value that occurred from fiscal year 2004 to fiscal year 2005 is included in the reported earnings.



Using the Financial Statements

The University of Wisconsin System’s annual financial report includes the Statements of Net Assets; the Statements of

Revenues, Expenses and Changes in Net Assets; and the Statements of Cash Flows. These financial statements are

prepared in accordance with standards established by the Governmental Accounting Standards Board (GASB) which

emphasize reporting on a consolidated basis rather than segregating operations by individual fund groups.



The Statements of Net Assets are financial condition snapshots as of June 30, 2005 and 2004, and include all assets

and liabilities, both current and noncurrent. Current assets are those that are available to satisfy current liabilities

inclusive of assets that will be converted to cash within one year. Current liabilities are those that will be paid within

one year. The Statements of Net Assets are prepared under the accrual basis of accounting which requires revenue and

asset recognition when the service is provided, and expense and liability recognition when goods or services are

received despite when cash is actually exchanged. The difference between assets and liabilities (net assets) is one

indicator of the University of Wisconsin System's financial health. Increases or decreases in net assets provide an

indicator of the improvement or erosion of the University of Wisconsin System’s financial health when considered in

conjunction with non-financial information such as conditions of facilities and enrollment levels. Net Assets are

divided into three major categories: Invested in Capital Assets, Net of Related Debt; Restricted Net Assets; and

Unrestricted Net Assets. Invested in Capital Assets, Net of Related Debt, consist of capital assets reduced by the

outstanding balances of borrowings that are attributable to the construction, acquisition, or improvement of those

assets. Restricted Net Assets have constraints put on by external parties such as sponsors for research and donors or

by State Statute as in the case of Auxiliaries. Unrestricted Net Assets are net assets that do not meet the definition of

“restricted” or “invested in capital assets, net of related debt.”



The Statements of Revenues, Expenses and Changes in Net Assets are operating statements that present the revenues

earned and expenses incurred during the fiscal year ended June 30, 2005 and 2004 on a full accrual basis. Revenue







13

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





and expense activities are reported as either operating or nonoperating. Operating revenue includes tuition, grants and

contracts, and sales and services of various self-supporting operations. Although the University of Wisconsin System

is dependent upon state appropriations and gifts to fund educational and general operations, under GASB rules these

funding sources are reported as nonoperating revenues, as is investment income.



The Statements of Cash Flows summarize cash inflows and outflows by category as either relating to operating,

capital, financing, or investing activities. Cash flow information can be used to evaluate the financial viability of the

University of Wisconsin System’s ability to meet financial obligations as they mature. Cash flows from operating

activities result from exchange transactions in which one party gives another something in return. Cash flows from

noncapital financing activities include state appropriations, and private gifts restricted for noncapital purposes. Cash

inflows from capital activities include receipts from capital grants, donor receipts specifying use for capital assets,

and/or proceeds from issuing debt for the explicit purpose of acquisition, construction, or improvement of capital

assets. Cash outflows for capital activities include acquisition, construction, or improvement of capital assets inclusive

of interest. Cash inflows from investing activities are a result of the sale of investments, withdrawals from the long-

term investment pool, and collecting interest and dividends earned. Cash outflows from investing activities generally

result from the purchase of investments.



The Notes to the Financial Statements are an integral part of the basic financial statements and communicate

information essential for fair presentation. For example, the notes convey information concerning significant

accounting policies used to prepare the financial statements, detailed information on cash and investments,

receivables, compensated absences, lease commitments, retirement benefits, capital assets, notes and bonds payable,

the relationships with the University of Wisconsin Hospital and Clinics Authority and the University of Wisconsin

Foundation, and a report of operating expenses by function since operating expenses by natural classification are

reported in the Statements of Revenues, Expenses and Changes in Net Assets.



Statements of Net Assets



The Statements of Net Assets present the assets and liabilities and resultant financial position of the University of

Wisconsin System under the accrual basis of accounting. Net Assets, the difference between total assets and total

liabilities, is one indicator of the financial condition of the University of Wisconsin System. Improvement or

deterioration in the University of Wisconsin System's financial position is reflected by changes in the net asset balance

over time.



The following provides a summarized comparison of the University of Wisconsin System’s assets, liabilities, and net

assets at June 30, 2005, 2004 and 2003:



(In Millions)

2005 2004 2003



Current Assets $ 918.0 $ 808.1 $ 821.0

Noncurrent Assets:

Endowment Investments 331.9 322.4 289.7

Capital Assets – Net 3,350.4 3,154.4 2,962.0

Student Loans Receivable – Net 157.3 153.5 149.6

UW Hospital Authority 14.8 18.2 19.9

Total Assets 4,772.4 4,456.6 4,242.2



Current Liabilities 490.9 405.1 379.5

Noncurrent Liabilities 580.4 495.0 356.7

Total Liabilities 1,071.3 900.1 736.2

Total Net Assets $ 3,701.1 $ 3,556.5 $ 3,506.0









14

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Current Assets: Current assets, which consist primarily of operating cash and investments, accounts receivable,

student loans receivable, supply inventories, and prepaid expenses, increased by $109.9 million during fiscal year

2005 and decreased by $12.9 million during fiscal year 2004. The fiscal year 2005 increase primarily relates to a

$69.1 million increase in cash and cash equivalents and a $27.3 million increase in accounts receivable. The largest

change within fiscal 2004 current assets primarily relates to changes in cash and cash equivalents.



The University of Wisconsin System held cash and cash equivalents of $562.9 million at June 30, 2005, consisting

primarily of shares in the State Investment Fund, a short-term pool of state and local funds managed by the State of

Wisconsin Investment Board (SWIB). Also included in cash and cash equivalents is $76.1 million in balances

maintained by individual University of Wisconsin System institutions in local bank accounts that are used to meet

operating needs and $17.7 million held by the Mellon Bank of Boston to meet cash needs associated with investing

activities. Additional information on cash and investments is provided in Note 3 to the Financial Statements.



Current Liabilities: Current liabilities consist of accounts payable, accrued personnel costs and compensation,

deferred revenue, and other liabilities due in one year or less. Current liabilities increased by $85.8 and $25.6 million

during 2005 and 2004, respectively. The fiscal year 2005 increase primarily relates to a $40.1 million increase in

accounts payable and accrued liabilities and a $38.1 million increase in deferred revenue. The largest changes within

fiscal year 2004 current liabilities primarily relate to a $4.7 million increase in capital lease obligations and a $15.7

million increase in deferred revenue.



Current assets minus current liabilities represent the net working capital of the University of Wisconsin System. Net

working capital has remained fairly stable over the past three years and was $427.1 million at June 30, 2005. The net

working capital at year end represented approximately 46 days of 2005 operating expenses. This indicates that the

University of Wisconsin System could support normal operations for 46 days without additional revenues or

liquidating noncurrent assets. The current ratio, which is current assets divided by current liabilities, has declined

from 2.2 to 1 at June 30, 2003 to 1.9 to 1 at June 30, 2005, but still indicates good short-term financial flexibility.



Noncurrent Assets: Noncurrent assets are comprised mainly of endowment investments, property and equipment, and

student loans receivable. Endowment investments, valued at $331.9 million at June 30, 2005, increased by $9.5 and

$32.7 million during fiscal year 2005 and 2004, respectively. The increases in property and equipment of $196.0

million in fiscal year 2005 and $192.4 million in fiscal year 2004 were primarily due to new building construction and

renovations. Student loans receivable increased by $3.8 and $3.9 million during fiscal year 2005 and 2004,

respectively, primarily from loans being granted at a faster pace than loans being collected.



In an effort to maintain quality in the University of Wisconsin System’s academic and research programs, and

residence halls, implementation of its long-range plan to fund new construction as well as modernize existing facilities

is imperative, as described below under Capital and Debt Activities. Capital additions consist of new construction of

academic and research facilities, replacement and renovation, as well as a significant investment in technology and

equipment. Capital assets including land, buildings, “improvements” (e.g., parking lots, fences, street lighting, etc.),

and equipment and library holdings are stated at cost at date of acquisition or fair market value at date of donation in

the case of gifts-in-kind. Note 9 to the Financial Statements further describes capitalization and depreciation policies,

and includes summarized changes in the book value of these assets from July 1, 2004 to June 30, 2005 and July 1,

2003 to June 30, 2004.



The Board of Regents has authority to invest gifts and bequests received by the University of Wisconsin System.

Investments are valued at market and held primarily in two investment pools: the Long Term Fund and the

Intermediate Term Fund. The Board of Regents establishes investment policies and guidelines and has retained

external investment counsel for funds representing 97.0% of market-value principal. On June 30, 2005, the portfolio

at market contained 75.3% in stocks, 18.2% in fixed income obligations, 2.5% in alternative assets, and 4.0% in short-

term investments. The total return on the principal long-term portfolio including capital appreciation was 12.3%. The

total return on the principal intermediate-term portfolio including capital appreciation was 5.5%. Benefiting UW

entities receive quarterly distributions from the Long Term Fund, principally endowed assets, based on an annual

spending rate applied to a twelve-quarter moving average market value of the Fund. Distributions from the

Intermediate Term Fund, principally quasi-endowments and unspent income distributions, consist of interest earnings



15

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





distributed monthly. Effective the final quarter of the fiscal year, the annual spending rate has decreased from 4.5 to

4.0 percent. A comparison of university-controlled endowments over the past several years can be found in Chart 3 on

page 11 of this report. Additional information on cash and investments is provided in Note 3 to the Financial

Statements.



The majority of student loans receivable is for federal Perkins loans and nursing loans. In the fiscal years ended June

30, 2005, 2004, and 2003, the University of Wisconsin System collected $36.3, $39.0, and $37.8 million, respectively,

in outstanding student loans and granted $45.6, $47.5, and $39.1 million, respectively, in new loans.



Noncurrent Liabilities: Noncurrent liabilities increased by $85.4 and $138.3 million during fiscal year 2005 and 2004,

respectively, to a total of $580.4 million as of June 30, 2005. The increases resulted primarily from changes in general

obligation bonds and notes issued by the State of Wisconsin, the proceeds of which were spent by various University

of Wisconsin System self-supporting operations to construct or acquire facilities and other capital assets. The

University of Wisconsin System holds title to the assets acquired. Debt incurred to obtain these assets will be repaid

with program revenues generated by the benefiting operations within the University of Wisconsin System.



At June 30, 2005 and 2004, the long-term bonds and notes payable totaled $498.4 and $421.1 million, respectively, an

increase of $77.3 million. The remainder of the noncurrent liabilities consists of capital financing leases of $41.0 and

$37.5 million, respectively, and the accumulated leave balances earned by University of Wisconsin System staff of

$40.9 and $36.4 million, respectively.



Net Assets: Net assets represent the University of Wisconsin System's residual interest in assets net of liabilities. The

University of Wisconsin System's net assets at June 30, 2005, 2004 and 2003 are summarized below:



(In Millions)

2005 2004 2003



Invested in Capital, Net of Related Debt $ 2,865.2 $ 2,743.5 $ 2,706.0

Restricted:

Nonexpendable – Endowment Principal 126.3 116.8 99.1

Expendable – Restricted Gifts and Grants 148.0 143.7 118.8

Auxiliary Operations 119.9 97.5 164.1

Student Loans 210.7 204.7 198.8

Other 106.4 30.7 24.1

Unrestricted 124.6 219.6 195.1

Total Net Assets $ 3,701.1 $ 3,556.5 $ 3,506.0



Invested in capital assets, net of related debt, represents the University of Wisconsin System’s investment in capital

assets net of accumulated depreciation and the associated debt outstanding. Restricted net assets are those net assets in

which the use is constrained by parties external to the University, primarily resource providers such as through gift

restrictions, grant/contractual obligations, or by provisions in the Wisconsin statutes that limit the use of certain funds

to certain specified purposes. Unrestricted net assets are those that do not meet the definition of “restricted” or

“invested in net assets, net of related debt.” Substantially all of the unrestricted net assets have been designated by the

Board of Regents for purposes to fulfill the University of Wisconsin System's fiduciary responsibilities including

academic and research programs and capital projects.



Capital and Debt Activities



The University of Wisconsin System has approximately 1,814 buildings totaling 57 million gross square feet of space

with replacement costs of nearly $6.5 billion. This accounts for 63% of the total state-owned facilities in Wisconsin.

The Board of Regents holds title to approximately 18,000 acres of land throughout Wisconsin, the majority of which

has been donated to the university and is deed restricted for research and nature preserves. About 4,600 acres

comprise the main campuses of the 13 universities.





16

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





While the portfolio of the University of Wisconsin System facilities includes buildings from the mid-1800’s,

approximately 70% were constructed in the last 30 to 40 years. Most of these buildings were built to 30-year life

expectancy standards and are in need of significant maintenance and renovation.



The University of Wisconsin System has made significant investments to meet maintenance needs through biennial

capital budgets in recent years, however, a backlog continues to grow. In order to address this backlog, the state and

universities are investing in major remodeling projects of entire facilities.



Capital Budget



The quality of education depends on careful integration of curriculum, faculty, and facilities. Long range physical

planning for campuses of the University of Wisconsin System is an ongoing process designed to provide appropriate

facilities in response to the dynamics of higher education. Each university has a Campus Development Plan that

defines overall land use patterns, identifies potential construction needs, and serves as an illustration to ensure

cohesive, aesthetic development compatible with the community and environment.



The Capital Budget is generally the mechanism for universities to receive funding for facilities needs. Those needs

defined within the parameters of the Campus Development Plan, are more specifically stated in a Six Year Facilities

Plan.



The Six Year Facilities Plan aids the universities by identifying long-term program directions and describing their

effect on the institution's facilities needs. The Six Year Plan is required for each university by Sections 16.84(6) and

13.48(6) of the Wisconsin Statutes.



The Campus Development Plan and Six Year Facilities Plan are developed to reflect the needs of students, faculty and

staff, and the local communities. Each university has established Campus Planning Committees that involve the

various affected entities within the institution. Additionally, separate committees are established for individual major

projects. Those committees include representatives of the user groups of the proposed facility.



The University of Wisconsin System Office of Capital Planning and Budget is responsible for formulating a biennial

capital budget request for consideration by the Board of Regents. Once approved by the Board of Regents, the budget

request is submitted to the Department of Administration’s Division of State Facilities (DSF). The division prepares a

capital budget request for all state agencies. There are three primary sources of funding for capital projects: General

Fund Supported Borrowing (GFSB) 20-year state-issued bonds repaid with GPR; Program Revenue Supported

Borrowing (PRSB) 20-year state-issued bonds repaid with the University of Wisconsin System program revenue; and

gift and grant funds. The University of Wisconsin System does not issue its own bonds.



Construction and maintenance projects are approved in two primary categories: Major Projects – requiring specific

enumeration and cost $500,000 or more; and All Agency Projects – requiring Building Commission approval from a

fund for capital maintenance.



Wisconsin State Building Commission



The Wisconsin State Building Commission is an eight-member body consisting of the Governor, three senators and

three representatives, and one citizen member who is appointed by the Governor. The commission is subdivided into

two subcommittees: a Higher Education Subcommittee and an Administrative Affairs Subcommittee. The Higher

Education Subcommittee is responsible for reviewing building program requests of the University of Wisconsin

System. The Administrative Affairs Subcommittee is responsible for reviewing building program requests of all other

state agencies.



Every two years, as part of the biennial budget process, the commission recommends to the Legislature a state building

program, which includes a list of projects and funding sources to meet the state’s capital improvement and

maintenance needs over the following two-year budget cycle.





17

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004



The All Agency program provides funding to the commission to support general categories of repair and renovation

projects. The University of Wisconsin System is given a funding allocation from which to request specific projects for

construction. The University of Wisconsin System manages these requests on a competitive basis and submits

projects to the DSF and commission for approval.



As required under Wisconsin Statutes Section 13.48(7), the commission’s capital budget recommendations are

forwarded to the Legislature’s Joint Committee on Finance by the first Tuesday in April. The committee reviews the

recommendations and may modify them before incorporating the capital budget into the biennial operating budget.

Both houses of the legislature take up the capital budget as part of their deliberations on the biennial budget.



Implementation of the Building Program



After projects are approved in the capital budget, the commission must again review and approve each project. Upon

recommendation of the universities and University of Wisconsin System Administration, the DSF advertises for, hires

and contracts with an Architectural or Engineering firm (A/E) to prepare preliminary designs. When the preliminary

design work reaches 35%, a design report is prepared that describes the proposed design, budget and schedule. Before

construction can proceed, the commission must approve the design report. If it is approved, the A/E firm completes

final construction documents and DSF solicits construction bids. State statutes require that contracts be awarded to the

lowest qualified responsible bidder, unless the commission has approved an alternative method.



All building projects in excess of $100,000 must be approved by the commission prior to construction. For projects

under this threshold, the DSF is authorized under the Small Projects Program (Wisconsin Statutes Section 13.48 (10),

(29)) to design and bid projects upon request of the universities.



Major Construction Projects



Partial List of Projects Completed in Fiscal Year 2004 and 2005



Approximate

UW Primary Funding

Project Primary Purpose Budget

Institution Sources

(in millions of $)

Madison Integrated Dairy Phase I (Marshfield) Academic 1.9 GFSB/Gifts

Madison Genetics/Biotechnology Building Addition Academic 27.0 GFSB/Gifts

Madison Chamberlin Hall Renovation Academic 22.4 GFSB/PRSB/Gifts

Madison Crew House Addition Athletics 8.5 PRSB/Gifts

Madison Camp Randall Stadium Renov & Expansion Athletics 109.5 PRSB/GFSB/Gifts

Madison Walnut Street Greenhouse Replacement Academic 6.9 Gifts/GFSB

Madison West Campus Cogeneration Facility Utility 90.0 PRSB

Madison Parking Ramp 76 Parking 18.0 PRSB

Oshkosh Taylor Hall Renovation Housing 13.0 PRSB

Platteville Ullrich Hall Renovation Academic 7.0 GFSB

Platteville Living and Learning Center Housing 1.1 PRSB

River Falls Hunt Knowles Athletic Facilities Athletics 2.5 GFSB/PRSB

River Falls New Student Union Student Life 34.1 PRSB

River Falls New Residence Hall Housing 10.6 PRSB

Stevens Point Fine Arts Center Remodel & Addition Academic 27.7 GFSB/Gifts

Stout North Campus Residence Hall Housing 16.7 PRSB

Superior Gates Physical Education Addition & Remodel Athletics 15.7 GFSB/PRSB

Superior Aquaculture Demonstration Facility Academic 3.4 PRSB

Whitewater Upham Hall Renovation and Addition Academic 26.8 GFSB









18

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004



Partial List of Projects in Progress



Approximate

UW Primary Funding

Project Primary Purpose Budget

Institution Sources

(in millions of $)

Eau Claire Children's Center Child Care 1.8 PRSB

Extension Lowell Hall Improvements & Parking Struct Conf/Parking 3.1 PRSB

Green Bay Phoenix Sports Center Athletics 32.0 PRSB/Gifts/GFSB

Green Bay Union Addition Student Life 4.1 PRSB

La Crosse Residence Hall Housing 22.3 PRSB

Madison Microbial Sciences Building & Parking Struct Academic 120.6 Gifts/GFSB/PRSB

Madison Mechanical Engineering Renov & Addn Academic 50.6 GFSB/Gifts

Madison Biochemistry Phase II Academic 89.0 Gifts/GFSB

Madison Health Science Learning Center Academic 63.9 GFSB/Gifts/PRSB

Madison WI Veterinary Diagnostic Lab Academic 25.1 GFSB/PRSB

Madison Grainger Hall Grad School Addition Academic 41.1 Gifts/GFSB

Madison Integrated Dairy Phase II (Marshfield) Academic 8.3 GFSB/Gifts

Madison Interdisciplinary Research Complex Phase I Academic 134.0 Gifts/GFSB

Madison Dayton Street Residence Hall Housing 36.0 PRSB

Madison University Ridge Golf Course Athletics 4.9 PRSB

Milwaukee Lapham North Wing Remodeling Academic 11.7 GFSB/Gift

Milwaukee Kenilworth Redevelopment Academic/Housing 68.7 PRSB

Oshkosh Titan Athletic Complex Renovation & Expan Athletics 5.0 Gifts

Oshkosh Student Recreation and Wellness Center Student Life 21.0 PRSB

Parkside Student Union Addn & Remodeling Student Life 25.2 PRSB/GFSB

Platteville Residence Hall Housing 18.0 PRSB

Platteville Dairy Center Replacement Academic 1.8 GFSB

River Falls Dairy Science Teaching Center Academic 10.4 GFSB/Gifts

River Falls New Student Union Student Life 34.1 PRSB

Stevens Point University Center Remodel & Addition Student Life 23.3 PRSB/GFSB

Stout Hovlid Hall Remodel & Addition Housing 8.6 PRSB

Superior Rothwell Student Center - Phase I and II Student Life 20.8 PRSB/Gifts

Superior Wessman Arena Locker Room Addition Athletics 1.1 PRSB/GFSB

Whitewater Connor University Center Student Life 20.2 PRSB/GFSB/Gifts

Whitewater Moraine Hall Remodeling Bookstore 2.4 PRSB

UW System Utilities Improv - Multiple Campuses Utilities 22.0 GPR/PR

UW System Classroom Renovation/IT Improvements Academic 4.0 GFSB



Maintenance and Renewal Projects Funded in Fiscal Year 2004 and 2005 by Category



FACILITIES HEALTH &

MAINTENANCE SAFETY REMODELING UTILITIES TOTAL FUNDS



GFSB $57,412,565 $8,607,400 $5,000,000 $30,042,740 $101,062,705



PR $15,999,700 $717,800 $2,149,400 $6,202,979 $25,069,879



GIFTS/GRANTS $0 $68,700 $2,476,800 $197,000 $2,742,500



TOTALS $73,412,265 $9,393,900 $9,626,200 $36,442,719 $128,875,084









19

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Projects Enumerated in the 2005-07 Capital Budget



GPR projects



Approximate

UW Primary Funding

Project Primary Purpose Budget

Institution Sources

(in millions of $)

Madison University Square Development Student Services 56.0 GFSB/PRSB

Madison Sterling Hall Renovation Academic 39.5 GFSB/Gifts

Madison WI Institute for Discovery – Phase I Academic 150.0 GFSB/PRSB/Gifts

Milwaukee Columbia/St/ Mary's Purchase & Renovation Academic 112.2 GFSB/PRSB

Milwaukee Golda Meir Library Remodeling - Phase I Academic 4.9 GFSB/Gifts

Platteville Tri-State Initiative-Ullsvik & New Engineering Admin/Academic 50.6 PRSB/GFFSB/Gifts

Bldgs

Stevens Point Waste Management Laboratory Academic 1.8 GFSB

Stout Jarvis Science Wing Renovation & Addition Academic 35.1 GFSB

Superior Jim Dan Hill Library Renovation Academic 6.5 GFSB/Gifts

Whitewater College of Business and Economics Building Academic 41.0 GFSB/Gifts

UW System Classroom Renovation/IT Improvements Academics 2.5 GFSB

UW System Utilities Improvements - Three Campuses Utilities 28.6 GFSB/PRSB



Non-GPR projects



Approximate

UW Primary Funding

Project Primary Purpose Budget

Institution Sources

(in millions of $)

Madison Chadbourne Food Service Renovation Student Life 6.6 PRSB

Madison Education Building Restor, Renewal, & Addn Academic 31.0 Gifts

Madison Chazen Museum Addition Academic 31.5 Gifts

Madison Engineering Student Learning Center Academic 0.5 Gifts

Madison Park Street Res Hall/Parking Ramp/Serv Garage Housing/Parking 46.8 PRSB

Madison Primate Research Center Addition - Phase I Academic 8.5 Gifts

Madison University Research Park II - Roads & Utilities Utilities 15.0 PRSB

Madison Waisman Center Renovation Academic 6.0 Gifts

Madison Kegonsa Research Facility Academic 4.5 Gifts

Oshkosh South Campus Parking Ramp Parking 7.3 PRSB

Platteville Pioneer Stadium Locker/Wrest/Storage Bldg Athletics 0.7 PRSB

Platteville Residence Hall Housing 20.0 PRSB







Statements of Revenues, Expenses and Changes in Net Assets



The Statements of Revenues, Expenses and Changes in Net Assets present the University of Wisconsin System's

operating results as well as nonoperating revenues and expenses. Operating revenues are comprised primarily of

student tuition and fees, grants and contracts, and auxiliary service activities. GASB 35 requires that state

appropriations, gifts, and investments be reported as nonoperating revenue. Public universities, including the

University of Wisconsin System, are typically reliant on these revenue sources to fulfill their missions and, therefore,

report operating expenses in excess of operating revenues. As a result, nonoperating revenues and expenses are

significant components in determining an increase or decrease to total net assets.



One of the University of Wisconsin System's greatest strengths has been its ability to supplement student tuition and

fee revenue with support from individuals, foundations, investment income, and government sponsored programs and

appropriations. The University of Wisconsin System will continue to aggressively seek funding sources consistent

with its mission to meet operating activities in a financially prudent manner. In addition, the University of Wisconsin

System will continue to make cost containment and revenue diversification a top priority.









20

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Revenues, expenses, and changes in net assets for the fiscal years ended June 30, 2005, 2004 and 2003 are

summarized as follows:



(In Millions)

2005 2004 2003



Operating Revenues:

Student Tuition and Fees, Net $ 721.6 $ 653.3 $ 577.5

Sales and Services of Educational Activities 216.5 221.1 195.8

Sales and Services of Auxiliaries, Net 263.3 247.5 232.4

Federal Grants and Contracts 654.7 612.9 567.9

State, Local, and Private Grants and Contracts 254.8 208.7 189.2

Sales and Services to UW Hospital Authority 42.9 39.5 32.3

Other 190.5 171.6 170.7



Total Operating Revenues 2,344.3 2,154.6 1,965.8



Operating Expenses 3,411.6 3,300.8 3,100.4



Operating Loss (1,067.3) (1,146.2) (1,134.6)



Nonoperating Revenues (Expenses):

State Appropriations 897.0 901.9 970.2

Gifts – Noncapital 203.0 183.1 185.7

Net Investment Income 37.7 41.8 9.5

Capital Contributions 145.1 93.4 139.6

Additions to Permanent Endowments 0.6 5.3 2.1

Transfer to DOA – General Fund (29.5) - -

Other (28.1) (30.5) (32.6)

Net Nonoperating Revenues (Expenses) 1,225.8 1,195.0 1,274.5



Increase in Net Assets 158.5 48.8 139.9



Net Assets Beginning of Year* 3,542.6 3,507.7 3,366.1

Net Assets End of Year $ 3,701.1 $ 3,556.5 $ 3,506.0





* Net Assets Beginning of Year include a prior period adjustment of $(13.9) million, $1.7 million (Note 16) and $66.8

million, respectively.









21

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Operating revenues: Student tuition and fees, net of scholarship allowances, increased by $68.3 and $75.8 million

during fiscal years 2005 and 2004, respectively, to a total of $721.6 million for the fiscal year ending June 30, 2005.

The increases resulted primarily from increases in tuition rates. The annual undergraduate tuition for State residents

was raised $700 to $5,254 and $5,138 for UW-Madison and UW-Milwaukee, respectively, and raised $500 to $4,000

and $3,700 for Comprehensive campuses and UW Colleges, respectively, beginning in the fall of 2004.



A significant number of new project grants resulted in federal grants and contracts increases of $41.8 and $45.0

million during fiscal year 2005 and 2004, respectively; as well as state, local and private grants and contracts increases

of $46.1 and $19.5 million during fiscal year 2005 and 2004, respectively.



The following is a graphic representation of operating revenue by source for the fiscal year ended June 30, 2005:









Fiscal Year 2005 Operating Revenue





Student Loan

Sales and Services to Other Operating

Activities

UW Hospital Revenue

0.2%

Authority 8.0%

1.8%

Student Tuition

Sales and Services of and Fees, Net

Auxiliary Enterprises 30.8%

11.2%





Sales and Services of

Educational Activities

9.2%



State, Local, and Federal Grants and

Private Grants and Contracts

Contracts 27.9%

10.9%









22

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Nonoperating revenues: State appropriations decreased by $4.9 and $68.3 million during fiscal year 2005 and 2004,

respectively, to a total of $897.0 million for the fiscal year ending June 30, 2005. The .5% and 7.0% decreases,

respectively, resulted from decreases in state support through legislative budget actions. State appropriations continue

to decline as a percentage of net nonoperating revenues of 73.2%, 75.5%, and 76.1% for fiscal years 2005, 2004, and

2003, respectively, and of total revenues of 24.7%, 26.7%, and 29.6% during the same time periods. Combined gifts

and investment income comprised $240.7 million or 19.6% of net nonoperating revenue for fiscal year 2005 and

$224.9 million or 18.8% of net nonoperating revenue for the prior fiscal year.



The following is a graphic representation of total revenue by source for the fiscal year ended June 30, 2005:







Fiscal Year 2005 Total Revenue







Sales and Services to UW

Sales and Services of Auxiliary Hospital Authority Student Loan Activities

Enterprises 1.2% 0.1%

7.2%



Sales and Services of

Educational Activities Other Operating Revenue

6.0% 5.1%

State Appropriations

24.7%



State, Local, and Private Grants

and Contracts

7.0%

Gifts and Net Investment Income

Other 6.6%

35.5%





Federal Grants and Contracts Capital Contributions

18.0% 4.0%



Addition to Permanent

Endowments

0.0%

Other

0.2%

Student Tuition and Fees, Net

19.9%









23

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Operating expenses: The University of Wisconsin System invests the majority of its operating funds in people as

depicted in the graphic entitled “Fiscal Year 2005 Operating Expenses by Natural Classification.” Over 67.6% of total

operating expenses go toward salaries and fringe benefits. Scholarship and fellowship payments make up 2.4% and

supplies and services account for 25.6%. The utilization of capital assets, which is reflected as depreciation, amortizes

the cost of the capital assets over their useful lives. Depreciation expense in fiscal year 2005 totaled $147.9 million or

4.3% of total operating expenses.



Expenses are summarized by natural classification for the fiscal years ended June 30, 2005, 2004 and 2003 as follows:



(In Millions)

2005 2004 2003



Operating Expenses:

Salary and Fringe Benefits $ 2,306.6 $ 2,238.7 $ 2,179.8

Scholarships and Fellowships 80.7 81.6 62.2

Supplies, Services, and Other 876.4 812.3 738.3

Depreciation 147.9 168.2 120.1

3,411.6 3,300.8 3,100.4

Nonoperating Expenses:

Loss on Disposal 11.4 10.4 15.9

Interest 23.0 18.7 15.9

Transfer to DOA – General Fund 29.5 - -

Other - 1.4 0.8



Total Expenses $ 3,475.5 $ 3,331.3 $ 3,133.0



The following illustration graphically presents total expenses by natural classification for the fiscal year ended June

30, 2005:

Fiscal Year 2005 Operating Expenses by Natural Classification









Other Operating

Expenses Depreciation

0.1% 4.3%



Supplies

and Services

25.6%









Salary and

Scholarship and Fringe Benefits

Fellowships 67.6%

2.4%









24

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Operating expenses are classified by function for the fiscal years ended June 30, 2005, 2004 and 2003 as follows:



(In Millions)

2005 2004 2003



Instruction $ 932.8 $ 898.2 $ 879.0

Research 685.8 650.9 609.9

Public Service 250.0 240.5 241.0

Academic Support 302.2 303.8 304.3

Farm Operations 11.9 11.2 10.9

Student Services 298.2 287.6 277.0

Institutional Support 174.5 182.8 172.1

Operation/Maintenance 220.8 216.2 170.8

Financial Aid 97.8 70.1 64.4

Auxiliary Enterprises 246.5 232.5 218.6

Hospitals 43.2 38.8 32.3

Depreciation 147.9 168.2 120.1

Total Operating Expenses $ 3,411.6 $ 3,300.8 $ 3,100.4





The following is a graphic representation showing operating expenses by functional classification for the fiscal year

ended June 30, 2005:







Fiscal Year 2005 Expenses by Functional Classification







Auxiliary Enterprises Hospitals

7.2% 1.3%

Financial Aid Depreciation

2.9% 4.3% Instruction

27.4%



Operation/Maintenance

6.5%



Institutional Support

5.1%





Student Services

8.7%



Research

20.1%

Farm Operations Public Service

Academic Support 7.3%

0.3%

8.9%









Instruction and research increased 3.9% and 5.4%, respectively. Student services increased by $10.6 million, or 3.7%.

Institutional support decreased by $8.3 million, or 4.5% to $174.5 million in fiscal year 2005.





25

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Statements of Cash Flows



The Statements of Cash Flows impart additional information about the University of Wisconsin System's financial

results by providing relevant information about the cash receipts and cash payments during fiscal year 2005.



Cash flows for the years ending June 30, 2005, 2004 and 2003 are summarized as follows:



(In Millions)

2005 2004 2003



Cash Flows:

Cash Received from Operations $ 2,374.2 $ 2,160.5 $ 1,998.2

Cash Expended for Operations (3,281.9) (3,160.1) (3,018.8)

Net Cash Used in Operating Activities (907.7) (999.6) (1,020.6)

Net Cash Provided by (Used in)

Investing Activities 30.8 0.5 (2.6)

Net Cash Used in Capital and Related

Financing Activities (232.1) (193.1) (172.1)

Net Cash Provided by Noncapital

Financing Activities 1,178.5 1,132.0 1,249.7



Net Increase (Decrease) in Cash and Cash

Equivalents 69.5 (60.2) 54.4



Cash and Cash Equivalents, Beginning 493.8 559.3 486.7

Prior Period Adjustment (0.4) (5.3) 18.2

Cash and Cash Equivalents, Ending $ 562.9 $ 493.8 $ 559.3





The University of Wisconsin System’s cash and cash equivalents increased by $69.1 million primarily due to a $91.9

million decrease of funds expended for operating activities and a $46.5 million increase of funds generated from

noncapital financing activities. As defined by GASB 35, the University of Wisconsin System's significant sources of

cash provided by noncapital financing activities include state appropriations and private gift receipts utilized to fund

operating activities. Fiscal year 2005 state appropriations and gifts received totaled $996.5 and $203.0 million,

respectively, compared to $949.4 and $183.1 million, respectively, for fiscal year 2004.



Factors Affecting Future Periods



A crucial element to the University of Wisconsin System’s future continues to be the level of support provided by the

State of Wisconsin. During the fiscal year ended June 30, 2003, the UW System absorbed a budget rescission of $8.3

million in previously approved state funding and the State of Wisconsin’s 2003-2005 biennial budget included a $250

million reduction in state funding of the UW System. Tuition increases of approximately 15% (18% for 2004) for

resident undergraduate students partially offset the reduction in state support by $150 million. The 2005-07 biennial

budget continues the recent pattern of operational budget reductions for the University of Wisconsin System. State

funding is not adequate to cover the projected $179 million in anticipated cost increases for fringe benefits, debt

service, and utilities. The University of Wisconsin System institutions have little control over these costs. The

balance of the $179 million and other budget increases will be funded from $125 million in reductions to existing

University of Wisconsin System operational budgets. The University of Wisconsin System will be challenged to

maintain its tradition of high quality, high access, and low tuition with declining state support.



The long-term health of the State of Wisconsin and the University of Wisconsin System is dependent upon meeting the

changing educational needs of citizens across Wisconsin and growing the economy of the state. Despite the state's

economic difficulties and competing demands for public resources, business and political leaders are well aware of the

importance of the UW System to the state's overall economic health. Over the past several years, the University of

26

UNIVERSITY OF WISCONSIN SYSTEM

Management’s Discussion and Analysis

Years Ended June 30, 2005 and 2004





Wisconsin System has greatly expanded its traditional role of providing an educated workforce; sharing university

expertise with businesses, communities, and the public; and making it possible to transfer university research to

industry spin-off companies. The University of Wisconsin System is also committed to expanding the percentage of

Wisconsin residents who have bachelor's degrees and to meeting the needs of adult and other non-traditional students,

two efforts that can result in higher per capita incomes, more state tax revenues, and a more robust economy.



Gifts, grants, and contracts are important supplements to state support and student tuition and are significant factors in

the University of Wisconsin System’s growth. Economic pressures affecting donors may affect the future level of

support the University of Wisconsin System receives from its donor base. The University of Wisconsin System will

continue to employ its long-term investment strategy for its trust funds to maximize total returns, at an appropriate

level of risk, while utilizing a spending rate policy to insulate operations from market volatility.



Attracting and retaining outstanding faculty continues to be a cost pressure as the University of Wisconsin System

replaces a significant numbers of faculty that are expected to retire over the next five to ten years. Additional cost

pressures are also found with maintaining aging facilities. Like all other organizations, the University of Wisconsin

System faces significant fiscal pressure resulting from the increasing cost of utilities and health care, and more

recently, from increases in workers compensation premiums due to increasing medical costs.



The University of Wisconsin System is committed to meeting the financial challenges it faces by diversifying its

revenues and continuing to implement best business practices to ensure maximum operating efficiency.









27

INDEPENDENT AUDITOR’S REPORT ON THE FINANCIAL STATEMENTS

OF THE UNIVERSITY OF WISCONSIN SYSTEM





University of Wisconsin System Board of Regents:



We have audited the accompanying Statements of Net Assets of the University of Wisconsin

System as of June 30, 2005 and 2004, and the related Statements of Revenues, Expenses, and

Changes in Net Assets and Statements of Cash Flows for the years then ended. These financial

statements are the responsibility of the University of Wisconsin System management. Our

responsibility is to express an opinion on these financial statements based on our audits. We did

not audit the financial statements of the University of Wisconsin Foundation, which are

presented in a condensed format in Note 13. These financial statements were audited, and

subsequently subjected to agreed-upon procedures to determine pledges receivable, by other

auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to

the University of Wisconsin Foundation amounts included in Note 13, is based upon their

reports.



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 an audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement. The financial statements of the University

of Wisconsin Foundation were audited, and subsequently subjected to agreed-upon procedures,

by the other auditors in accordance with auditing standards generally accepted in the United

States of America and attestation standards established by the American Institute of Certified

Public Accountants, respectively, but not in accordance with Government Auditing Standards.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in

the financial statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall financial statement

presentation. We believe that our audits and the reports of the other auditors provide a reasonable

basis for our opinion.



As discussed in Note 1, the financial statements referred to in the first paragraph present only the

University of Wisconsin System and do not purport to, and do not, present fairly the financial

position of the State of Wisconsin and the changes in its financial position and its cash flows,

where applicable, in conformity with accounting principles generally accepted in the United

States of America.



28

In our opinion, the financial statements referred to above present fairly, in all material respects,

the financial position of the University of Wisconsin System as of June 30, 2005 and 2004, and

the changes in its financial position and its cash flows for the years then ended in conformity

with accounting principles generally accepted in the United States of America.



As discussed in Note 1 to the financial statements, Governmental Accounting Standards Board

Statement Number 39, Determining Whether Certain Affiliated Organizations Are Component

Units is effective for fiscal year 2003-04. Accordingly, the University of Wisconsin Foundation

is considered a component unit of the State of Wisconsin. The University of Wisconsin System

includes condensed financial statements related to the University of Wisconsin Foundation in

Note 13.



As discussed in Note 2 to the financial statements, effective July 1, 2004, the University of

Wisconsin System changed its method of capitalizing costs associated with construction projects

to conform with generally accepted accounting principles. Effective July 1, 2003, the University

of Wisconsin System changed its method of depreciating capital assets for research-intensive

facilities, which resulted in an increase of depreciation expense of $37.1 million for fiscal year

2003-04.



Our audits were conducted for the purpose of forming an opinion on the financial statements of

the University of Wisconsin System. Additional information, such as Management’s Discussion

and Analysis, is presented for purposes of additional analysis and is not a required part of the

financial statements referred to in the first paragraph. We have applied certain limited

procedures, which consisted principally of inquiries of management regarding the methods of

measurement and presentation of the additional information. However, we did not audit the

information and, accordingly, we express no opinion on it.



In accordance with Government Auditing Standards, we have also prepared a report dated

December 14, 2005, on our consideration of the University of Wisconsin System’s internal

control over financial reporting; our tests of its compliance with certain provisions of laws,

regulations, contracts, and grant agreements; and other matters. The purpose of that report is to

describe the scope of our testing of internal control over financial reporting and compliance and

the results of that testing, and not to provide an opinion on 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 and should be read in conjunction with this report in

considering the results of our audits.





LEGISLATIVE AUDIT BUREAU





December 14, 2005 by

Janice Mueller

State Auditor







29

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30

UNIVERSITY OF WISCONSIN SYSTEM

Years Ended June 30, 2005 and 2004









Audited Financial Statements









31

Statements of Net Assets

University of Wisconsin System June 30, 2005 June 30, 2004



ASSETS

Current Assets:

Cash and Cash Equivalents $ 562,906,365 $ 493,765,784

Accounts Receivable, Net 249,334,180 222,064,106

Student Loans Receivable, Net 32,854,276 29,754,118

Capital Lease Receivable from UW Hospital Authority 3,345,462 1,797,968

Inventories 34,418,871 27,596,950

Prepaid Expenses 27,399,691 26,252,543

Deferred Charges 7,815,270 6,921,514

Total Current Assets 918,074,115 808,152,983



Noncurrent Assets:

Endowment Investments 331,878,203 322,374,756

Student Loans Receivable, Net 157,266,391 153,499,091

Capital Lease Receivable from UW Hospital Authority 14,820,744 18,162,365

Land 107,859,322 107,524,664

Improvements Other Than Buildings, Net 85,202,145 88,876,889

Construction In Progress 134,835,015 -

Buildings, Net 1,790,741,572 1,749,970,227

Equipment, Net 212,465,255 205,524,304

Library Holdings 1,019,283,877 1,002,591,507

Total Noncurrent Assets 3,854,352,524 3,648,523,803



TOTAL ASSETS $ 4,772,426,639 $ 4,456,676,786



LIABILITIES

Current Liabilities:

Accounts Payable and Accrued Liabilities $ 259,866,337 $ 219,718,971

Notes and Bonds Payable 26,055,791 18,266,894

Capital Lease Obligations 4,782,255 8,824,890

Deferred Revenue 148,489,058 110,346,752

Compensated Absences 50,166,856 46,385,074

Deposits of Student Organizations 1,580,004 1,586,156

Total Current Liabilities 490,940,301 405,128,737



Noncurrent Liabilities:

Notes and Bonds Payable 498,437,809 421,155,789

Capital Lease Obligations 40,994,355 37,492,071

Compensated Absences 40,927,350 36,378,226

Total Noncurrent Liabilities 580,359,514 495,026,086



TOTAL LIABILITIES $ 1,071,299,815 $ 900,154,823



NET ASSETS

Invested in Capital Assets, Net of

Related Debt $ 2,865,243,527 $ 2,743,521,308

Restricted for:

Nonexpendable 126,336,467 116,835,099

Expendable 267,840,406 241,164,502

Student Loans 210,724,950 204,713,367

Other 106,405,454 30,725,864

Unrestricted 124,576,020 219,561,823

TOTAL NET ASSETS $ 3,701,126,824 $ 3,556,521,963





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









32

Statements of Revenues, Expenses and Changes in Net Assets

University of Wisconsin System Year Ended June 30, 2005 Year Ended June 30, 2004



OPERATING REVENUES

Student Tuition and Fees (Net of Scholarship

Allowances of $74,057,193 and $70,883,209, respectively) $ 721,578,838 $ 653,268,456

Federal Grants and Contracts 654,735,439 612,929,232

State, Local and Private Grants and Contracts 254,806,060 208,739,777

Sales and Services of Educational Activities 216,480,131 221,119,123

Sales and Services of Auxiliary Enterprises (Net of Scholarship

Allowances of $13,128,478 and $13,321,403, respectively) 263,256,099 247,450,458

Sales and Services to UW Hospital Authority 42,925,218 39,457,071

Student Loan Interest Income and Fees 3,396,077 3,677,254

Other Operating Revenue 187,084,125 167,948,560

Total Operating Revenues 2,344,261,987 2,154,589,931



OPERATING EXPENSES

Salary and Fringe Benefits 2,306,581,023 2,238,697,302

Scholarships and Fellowships 80,718,759 81,624,526

Supplies and Services 874,574,081 808,009,696

Other Operating Expenses 1,770,201 4,299,120

Depreciation 147,925,885 168,219,211

Total Operating Expenses 3,411,569,949 3,300,849,855





OPERATING LOSS (1,067,307,962) (1,146,259,924)



NON-OPERATING REVENUES AND EXPENSES

State Appropriations 896,990,557 901,946,542

Gifts 203,035,923 183,129,148

Investment Income (Net of Investment

Expense of $1,597,377 and $1,550,202, respectively) 37,668,484 41,793,699

Loss on Disposal of Capital Assets (11,380,504) (10,388,699)

Interest on Indebtedness (22,993,166) (18,716,496)

Transfer to DOA - General Fund (29,521,401) -

Other Revenues (Expenses), Net 6,267,071 (1,426,398)

Income (Loss) Before Capital and Endowment

Additions/Deductions 12,759,002 (49,922,128)



Capital Contributions 145,111,910 93,390,871

Additions to Permanent Endowment 634,191 5,343,394



INCREASE IN NET ASSETS 158,505,103 48,812,137



NET ASSETS

Net Assets - Beginning of Period 3,556,521,963 3,505,961,015

Prior Period Adjustments (13,900,242) 1,748,811

NET ASSETS - End of Period $ 3,701,126,824 $ 3,556,521,963





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









33

Statements of Cash Flows

University of Wisconsin System Year ended June 30, 2005 Year ended June 30, 2004





Cash Flows from Operating Activities

Student Tuition and Fees $ 729,089,092 $ 659,836,825

Federal, State, Local and Private Grants and Contracts 876,928,044 821,316,460

Sales and Services of Educational Activities 234,571,712 199,184,213

Sales and Services of Auxiliary Enterprises 264,301,601 228,249,641

Sales and Services to UW Hospital Authority 41,316,702 40,384,411

Payments for Salaries and Fringe Benefits (2,281,302,269) (2,240,863,669)

Payments to Vendors and Suppliers (874,269,070) (790,159,881)

Payments for Scholarships and Fellowships (80,718,759) (81,624,526)

Student Loans Collected 36,261,328 39,026,540

Student Loan Interest and Fees Collected 3,391,466 3,676,357

Student Loans Issued (45,624,376) (47,470,815)

Other Revenue, Net 188,372,828 168,779,916

Net Cash Used in Operating Activities (907,681,701) (999,664,528)



Cash Flows from Investing Activities

Interest and Dividends on Investments, Net 10,801,069 7,295,649

Proceeds from Sales and Maturities of Investments 454,623,393 484,136,484

Purchase of Investments (434,629,346) (490,931,814)

Net Cash Provided by Investing Activities 30,795,116 500,319



Cash Flows from Capital and Related Financing Activities

Proceeds from Issuance of Capital Debt 220,501,104 227,450,899

Gifts and Other Receipts 30,365,018 19,133,792

Purchase of Capital Assets (336,832,070) (351,724,325)

Principal Payments on Capital Debt and Leases (86,592,163) (33,094,841)

Interest Payments on Capital Debt and Leases (59,519,787) (54,839,793)

Net Cash Used in Capital and Related

Financing Activities (232,077,898) (193,074,268)



Cash Flows from Noncapital Financing Activities

State Appropriations 996,490,667 949,411,670

Gifts and Other Receipts 207,402,180 180,525,152

Transfer to DOA - General Fund (29,521,401) -

Additions to Permanent Endowments 634,191 5,343,394

Student Direct Lending Receipts 153,151,604 134,211,222

Student Direct Lending Disbursements (149,684,792) (137,446,106)

Net Cash Provided by Noncapital Financing

Activities 1,178,472,449 1,132,045,332

Net Increase (Decrease) in Cash and Cash Equivalents 69,507,966 (60,193,145)



Cash and Cash Equivalents - Beginning of Year 493,765,784 559,344,126

Prior Period Adjustment (367,385) (5,385,197)

Cash and Cash Equivalents - End of Year $ 562,906,365 $ 493,765,784









34

Statements of Cash Flows (Continued)

University of Wisconsin System Year ended June 30, 2005 Year ended June 30, 2004





Reconciliation of Operating Loss to Net Cash Used in Operating Activities



Operating Loss $ (1,067,307,962) $ (1,146,259,924)

Adjustments to Reconcile Operating Loss to

Net Cash Used in Operating Activities:

Depreciation Expense 147,925,885 168,219,211

Changes in Assets and Liabilities:

Receivables, Net (36,118,211) (56,433,506)

Inventories (4,766,616) 1,651,147

Prepaid Expenses (1,149,155) (2,454,502)

Deferred Charges (557,234) (1,372,809)

Accounts Payable and Accrued Liabilities 20,259,052 15,669,312

Deferred Revenue 25,701,634 15,891,359

Compensated Absences 8,330,906 5,425,184

Net Cash Used in Operating Activities $ (907,681,701) $ (999,664,528)





Noncash Investing, Capital and Financing Activities



Capital Leases (Initial Year):

Fair Market Value $ 4,549,348 $ 12,566,585

Current Year Cash Payments (91,836) (707,561)

Gifts-In-Kind 1,717,127 2,086,192

Net Change in Unrealized Gains and Losses 13,810,531 17,401,284









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









35

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 1 – Organization and Summary of Significant Accounting Policies



Organization and Basis of Presentation: The University of Wisconsin System, a unit of the State of

Wisconsin, consists of 13 universities, 13 two-year colleges, University of Wisconsin-Extension and

System Administration. The financial statements do not include the accounts of the University of

Wisconsin Hospital and Clinics Authority (UWHCA), which became a legally separate public authority on

June 29, 1996; Note 12 describes the effect on the financial statements of the various affiliation and

operating agreements between the University of Wisconsin System and UWHCA. The financial

statements do not include the accounts of various legally independent and fully self-governing support

organizations such as booster clubs and alumni groups; funds contributed to the University of Wisconsin

System by these organizations are reported at the time they are received. Post-retirement benefit plans for

the University of Wisconsin System employees are administered by the State of Wisconsin’s Department

of Employee Trust Funds. The assets and liabilities of these programs are reported by the State of

Wisconsin and not by the University of Wisconsin System.



The University of Wisconsin System is a major enterprise fund of the State of Wisconsin and is not a

component unit of the State in accordance with the provisions of Governmental Accounting Standards

Board (GASB) Statement No. 14, The Financial Reporting Entity.



In May 2002, GASB issued Statement No. 39, Determining Whether Certain Organizations Are

Component Units, an amendment of GASB Statement No. 14, The Financial Reporting Entity, and it is

effective for the year ending June 30, 2004. The University of Wisconsin Foundation is a component unit

of the State of Wisconsin in accordance with the provisions of GASB Statement No. 39. Condensed

financial information is provided in Note 13.



In March 2003, GASB issued Statement No. 40, Deposit and Investment Risk Disclosures, and it is

effective for the year ending June 30, 2005. This statement requires disclosure of the credit risk associated

with cash deposits and investment balances, and the investment policies applied to mitigate such risks.

Specific disclosures are included in Note 3.



The financial statements have been prepared in accordance with accounting principles generally accepted

in the United States of America as prescribed by GASB. In addition, the University of Wisconsin System

applies all applicable Financial Accounting Standards Board (FASB) Statements and Interpretations,

Accounting Principles Board (APB) Opinions and Accounting Research Bulletins of the Committee on

Accounting Procedures issued on or before November 30, 1989, unless those pronouncements conflict

with or contradict GASB pronouncements. The University of Wisconsin System has elected not to apply

FASB pronouncements issued after November 30, 1989.



The University of Wisconsin System’s annual report consists of three basic financial statements prepared

in accordance with GASB principles: the Statements of Net Assets; the Statements of Revenues, Expenses

and Changes in Net Assets; and the Statements of Cash Flows.



The Statements of Net Assets, the Statements of Revenues, Expenses and Changes in Net Assets, and the

Statements of Cash Flows have been prepared using the economic resources measurement focus and the

accrual basis of accounting. The University of Wisconsin System reports as a Business Type Activity, as

defined by GASB Statement 35, Basic Financial Statements – Management Discussion and Analysis – for

Public Colleges and Universities. Business Type Activities are those that are financed in whole or in part

by fees charged to external parties for goods or services.









36

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 1 – Organization and Summary of Significant Accounting Policies (continued)



The Statements of Revenues, Expenses, and Changes in Net Assets classify the University of Wisconsin

System’s fiscal year activity as operating and nonoperating. Operating revenue results from exchange

transactions such as payment received for providing goods and services including tuition and fees, certain

grants and contracts, sales and services of educational activities, and auxiliary enterprise revenue. Certain

significant revenue streams relied upon for operations are reported as nonoperating revenues, as defined by

GASB Statement 35, including state appropriations, gifts and investment income. The majority of the

University of Wisconsin System’s expenses are exchange transactions which GASB defines as operating

expenses for financial statement presentation. Nonoperating expenses include capital financing costs and

costs related to investment activity.



Summary of Significant Accounting Policies: Student tuition and fees are presented net of scholarships

and fellowships applied to student accounts. Stipends and other payments made directly to students are

presented as scholarship and fellowship expenses.



Restricted funds received as gifts and grants and contracts are used according to donor restrictions or the

specific purpose of the grantor. In addition, restrictions are statutorily established that limit the use of

specific resources for specific purposes. These restrictions apply not only to state support but to many of

the University of Wisconsin System’s program revenue sources, including auxiliary operations. The net

assets reported as restricted will be used in accordance with the purposes for which they are restricted and

are the first resources used for these purposes. Unrestricted net assets would be used only secondarily to

support these restricted purposes.



The University of Wisconsin System eliminates intra-fund assets and liabilities to prevent double counting

in the Statements of Net Assets. Likewise, revenues and expenses relative to internal service activities are

also eliminated in the Statements of Revenues, Expenses and Changes in Net Assets.



Deferred revenues consist of payments received but not yet earned as of June 30th, primarily summer

session tuition payments, tuition and room deposits for the next fall term, advance ticket sales for athletic

events, and amounts received from grant and contract sponsors which have not yet been earned under the

terms of the agreement.



Prepaid items represent payments made prior to June 30th, for goods and services received after the close of

the fiscal year, including primarily health and life insurance coverage.



Deferred charges represent costs associated with revenues that have not yet been earned as of June 30th,

primarily summer session costs incurred prior to the close of the fiscal year. The revenues and expenses of

the 2005 summer session are reportable within the fiscal year beginning July 1, 2004 and ending June 30,

2005, based on the prorata portion of the number of summer session days that occurred in fiscal year 2005.

The revenues and expenses of the 2004 summer session are reportable within the fiscal year beginning July

1, 2003 and ending June 30, 2004, based on the prorata portion of the number of summer session days that

occurred in fiscal year 2004.



Accrual of interest on bonds payable and salaries and fringe benefits paid after the close of the fiscal year,

for hours worked by the University of Wisconsin System employees prior to June 30th, account for the

major portion of accrued liabilities.









37

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 1 – Organization and Summary of Significant Accounting Policies (continued)



Inventories consist of consumable supplies used in operations or items held for resale. Supplies held by

central stores are valued at average cost, fuels are reported at market value and other inventories held by

individual institutional cost centers are valued using a variety of cost flow assumptions that, for each type

of inventory, are consistently applied from year to year. In addition to central stores and fuels, the major

types of inventories include laboratory supplies, physical plant supplies, food service and student housing

supplies, and items held for resale by campus microcomputer outlets. Accounting polices related to capital

assets are described in Note 9.



The Statements of Cash Flows present the change in the cash and cash equivalents balance for the fiscal

year. Cash and cash equivalents include bank accounts and investments with original maturity dates of

ninety days or less at the time of purchase. These investments consist primarily of commercial paper,

money market funds, and U.S. Treasury bills. Investments in marketable securities are carried at fair value

as established by the major securities markets.



The preparation of financial statements in conformity with accounting principles generally accepted in the

United States requires management to make estimates and assumptions that affect amounts reported in the

financial statements and accompanying notes. Actual results could differ from those estimates.



Certain items in the June 30, 2004 financial statements have been reclassified to correspond to the June 30,

2005 presentation.





NOTE 2 – Change in Accounting Principle



The University of Wisconsin System previously capitalized costs associated with construction projects at

the time the cost occurred to the respective capital asset category and commenced depreciation. Effective

July 1, 2004, the University of Wisconsin System changed its method to accumulate capitalized costs

associated with construction projects at the time the cost occurred in construction in progress. Upon

completion of the project, the costs are transferred to the respective capital asset category and depreciation

is commenced. Management believes the change is preferable under accounting principles generally

accepted in the United States of America.



The University of Wisconsin System previously calculated depreciation on its buildings using the straight-

line method over the estimated useful life of the related assets. Effective July 1, 2003, the University of

Wisconsin System changed its method of calculating depreciation for major research facilities to use the

componentized method over the estimated useful life of the related assets. Management believes the

change in accounting principle is preferable under accounting principles generally accepted in the United

States of America and it is the method used for indirect cost reporting purposes. The cumulative effect of

this change amounts to an additional $65 million in depreciation which will be amortized over the

estimated remaining useful life of the respective components.









38

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 3 – Cash and Investments



Summary: Other than certain contingent funds held in local banks, the University of Wisconsin System

does not internally hold or manage its cash or relatively short duration assets. As required by state statute,

all operating funds are held, and managed by the State of Wisconsin Investment Board in the State

Investment Fund (SIF) which is principally comprised of investment-grade money market instruments.

Except for balances associated with trust funds, auxiliary operations, and federally funded financial aid

programs which receive interest distributions on a monthly basis, no investment earnings from these assets

accrue to the University of Wisconsin System.



The University of Wisconsin System invests its Trust Funds, principally gifts and bequests, in two of its

own investment pools: the Long Term and the Intermediate Term Funds. Benefiting University of

Wisconsin System entities receive quarterly distributions from the Long Term Fund, principally endowed

assets, based on an annual spending rate applied to a twelve-quarter moving average market value of the

Fund. Effective in the final quarter of fiscal year 2005, a spending rate of 4.0% was applied. Prior to the

final quarter of fiscal year 2005, a spending rate of 4.5% was applied. Distributions from the Intermediate

Term Fund, principally quasi-endowments and unspent income distributions, consist of interest earnings

distributed quarterly. Spending rate and interest distributions from both of these Funds are transferred to

the State Investment Fund, pending near-term expenditures. During the fiscal year ending on June 30,

2005, the amount available to spend from the Long Term Fund was $8,881,767, relative to $8,343,958

available during the fiscal year ending June 30, 2004.



Authorizations: The University of Wisconsin System investment policies and guidelines for the Long Term

and Intermediate Term Funds are governed and authorized by the Board of Regents. The current approved

asset allocation policy for the Long Term Fund sets a general target of 30% marketable equities, 14% fixed

income, 31% alternatives, and 25% tactical strategies. This target allocation, which will enhance the Long

Term Fund diversification, was approved in June, 2005. As such, attaining these new targets will be a

gradual process. The approved asset allocation for the Intermediate Term Fund is 100% intermediate

maturity, investment-grade fixed income.



Cash and Cash Equivalents: Cash and cash equivalents consist primarily of shares in the State Investment

Fund, a short term pool of state and local funds managed by the State of Wisconsin Investment Board

(SWIB) with oversight by a Board of Trustees as authorized in s. 25.14 and 25.17, Wisconsin Statutes.

SWIB is not registered with the SEC as an investment company. The objectives of this fund are to provide

liquidity, safety of principal, and a reasonable rate of return. Investments consist primarily of obligations of

the U.S. Government and its agencies and high quality commercial bank and corporate debt obligations. Of

the $562.9 and $493.8 million in cash and cash equivalents as of June 30, 2005 and 2004, respectively,

$184.5 and $150.1 million, respectively, represents an amount held within the State Investment Fund,

$76.1 and $77.3 million, respectively, was maintained by individual University of Wisconsin System

institutions in local bank accounts to meet operating needs, and $17.7 million and $19.2 million,

respectively, was held at Mellon Bank of Boston to meet the cash needs associated with the investing

activities of the Long Term and Intermediate Term Funds which is also categorized as investments in

accordance with governmental standards. The remainder of the cash and cash equivalents balance resided

in the State of Wisconsin Treasury.



In accordance with reporting standards established by the GASB, investments, including cash equivalents,

are categorized as to the level of risk assumed by the University. As of June 30, 2005 and 2004, the $184.5

and $150.1 million, respectively, invested in the State Investment Fund were outside this system of

categorization; the fair value of these pool shares were 99% of their carrying value. Of the $93.8 and $96.5

million, respectively, in bank balances, $2.0 million was FDIC insured and thus falls within Category 1 as









39

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 3 – Cash and Investments (continued)



defined by GASB. The remaining $91.8 and $94.5 million, respectively, falls within Category 3 as defined

by GASB. Risk Category 3 includes investments that are uninsured and unregistered.



Investments: At June 30, 2005 and 2004, the University of Wisconsin System’s investments include credit

Risk Category 1 investments as defined by GASB (investments that are insured or registered and held by

the University of Wisconsin System or its agents in the name of the University of Wisconsin System) and

other investments not categorized by risk category as follows:



2005 2004

Category 1:

U.S. Government Securities $ 24,579,506 $ 18,645,313

U.S Agency Securities 42,965,772 35,425,636

Bonds and Preferred Stock 52,422,480 59,459,392

Common Stock and Convertible Securities 147,766,828 146,399,377

267,734,586 259,929,718

Not Categorized:

Pooled Equity Funds 66,801,371 56,728,805

Pooled Fixed Income Fund - 7,882,580

Custodial Pooled Cash and Cash

Equivalents 7,990,717 14,152,231

Limited Partnerships 7,060,131 2,920,012

81,852,219 81,683,628



Total Investments $ 349,586,805 $ 341,613,346



On June 30, 2005, the Long Term Fund at market contained 75.3% in stocks, 18.2% in fixed income

obligations, 2.5% in alternative assets, and 4.0% in short-term investments. The total return on the Long

Term Fund including capital appreciation was 12.3% compared to 17.0% in fiscal year 2004. The total

return on the Intermediate Fund including capital appreciation was 5.5% compared to 0.9% in fiscal year

2004. External investment counsel was furnished for funds representing 97.0% of the market value of the

Long Term and Intermediate Term Funds. In addition to the limited partnerships market value listed above,

the University of Wisconsin System has unfunded limited partnership commitments of $27.5 million for

the fiscal year ending June 30, 2005, relative to $32.0 million for the fiscal year ending June 30, 2004.



Off-Balance Sheet Risk: The University of Wisconsin System’s investment strategy incorporates very

limited, if any, amounts of financial instruments which involve, to varying degrees, elements of market risk

and credit risk in excess of amounts recorded in the financial statements. Market risk is the potential for

changes in the value of financial instruments due to market changes, including interest and foreign

exchange rate movements and fluctuations embodied in forward, futures, and commodity or security

prices. Market risk is directly impacted by the volatility and liquidity of the markets in which the related

underlying assets are traded.



Credit Risk: Credit Risk is the risk that an issuer or other counterparty to an investment will not fulfill its

obligation. The University of Wisconsin System’s investment guidelines prohibit security transactions that

involve a counterparty rated below AA by Standard & Poor's and/or Aa by Moody's. In addition, all

securities held within individual investment manager portfolio’s must have a minimum quality rating of

investment grade of BBB by Standard & Poor's and/or Baa by Moody's with an average portfolio quality of

at least AA as rated by Standard & Poor's and/or Aa by Moody's.









40

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 3 – Cash and Investments (continued)



At June 30, 2005, the University of Wisconsin System had securities and quality ratings as shown below.

U.S. Government issues and issues explicitly guaranteed by the U.S. Government are considered to be

without credit risk and therefore not included.



Credit quality for fixed income securities:



Ratings Market Value Market Value

(Standard & Poor’s/Moody’s) Standard & Poor’s Moody’s



AAA/Aaa $ 47,220,255 $ 9,487,514

AA+/Aa1 343,998 513,932

AA/Aa2 2,837,647 2,903,711

AA-/Aa3 1,069,490 5,752,446

A+ /A1 12,036,130 3,063,927

A/A2 5,506,417 3,885,359

A-/A3 4,207,514 6,075,795

BB+/Ba1 1,256,308 966,656

BB/Ba2 617,530 95,950

BBB+/Baa1 6,158,521 3,758,401

BBB/Baa2 6,733,238 7,521,063

BBB-/Baa3 4,165,963 5,671,995

No Rating 3,235,241 2,725,731

Agency - 42,965,772

Unrated Pooled Cash 7,990,717 7,990,717

Totals $103,378,969 $103,378,969



Custodial Credit Risk: Custodial credit risk related to deposits is the risk that, in the event of a failure of a

depository financial institution, the University of Wisconsin System will not be able to recover deposits

that are in possession of an outside party. The University of Wisconsin System does not have a formal

deposit policy for custodial credit risk. There is a difference between assets, such as securities, held by a

financial institution in a custodial capacity and assets, such as cash, placed on deposit with that institution.

Assets held by a financial institution in a representative capacity, such as custodian, trustee or escrow agent

for another party, are not considered to be the assets of the financial institution in the event of insolvency

of that financial institution. There should be no effect on those assets as a result of a seizure of a custodian.

However, cash which the University of Wisconsin System has placed on deposit with the custodian is

treated differently. When cash is placed in a deposit account, it becomes an asset of the depository financial

institution. To provide protection from depositors, the FDIC offers depository insurance equal to $100,000

per depositor, subject to certain aggregation rules. To provide additional protection, banks are required to

deliver collateral to cover the amounts of trust cash on deposit to the extent it exceeds the amount covered

by the FDIC. However, it is generally not possible to collateralize cash on deposit for custody clients. As a

result, custodial cash on deposit in excess of the amounts covered by FDIC insurance may not be recovered

in the event of insolvency of the depository financial institution. The University of Wisconsin System’s

investment guidelines require equity managers to maintain a minimum of 95% of the market value of the

portfolio invested in approved securities at all times. The University of Wisconsin System’s ICM Asset

Management equity manager held 7.0% in cash as of June 30, 2005 in violation of the restriction,

however, the combined equity managers cash percentage was 2.6% as of June 30, 2005.









41

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 3 – Cash and Investments (continued)



Cash positions for the remainder of the portfolio should not be employed for tactical asset allocation

purposes, but only for facilitating transactions from one active position to another. In addition, the

University of Wisconsin System’s investment guidelines state that to the extent frictional cash awaits

investment, managers are expected to handle short-term investment needs using U.S. Government and

Agency issues as well as the custodian's Common Trust Cash Investment Fund. As of June 30, 2005, the

University of Wisconsin System held $7,990,717 in the custodian's Common Trust Cash Investment Fund.



Concentration of Credit Risk: Concentration of credit risk is the risk of loss attributed to the magnitude of

an organization’s investment in a single issuer. The University of Wisconsin System’s investment

guidelines prohibit more than 7% of the Fund being invested in the securities of any one issuer, unless the

issue is U.S. Government guaranteed, or an issue of an agency of the U.S. Government. The University of

Wisconsin System’s largest concentration by issuer is Citigroup/Citibank with 1.3% of total Trust Funds

assets.



Interest Rate Risk: Interest rate risk is the risk that changes in interest rates will adversely affect the fair

value of an investment. The University of Wisconsin System uses the option adjusted duration method to

analyze interest rate risk. The University of Wisconsin System’s investment guidelines mandate that

individual fixed income manager portfolios must maintain an effective modified duration within one year

of the effective modified duration of the index. As of June 30, 2005, all investment managers were in

compliance with the effective modified duration guideline. As of June 30, 2005, the University of

Wisconsin System’s Long Term Fund had an aggregated modified duration of 4.49 while the Lehman

Aggregate benchmark had an aggregated modified duration of 4.32. As of June 30, 2005, the University of

Wisconsin System’s Intermediate Term Fund had an aggregated modified duration of 2.97 while the

Lehman Government/Credit Intermediate benchmark had an aggregated modified duration of 3.65.



As of June 30, 2005, the University of Wisconsin System had interest rate risk statistics as detailed below:



Fixed Income Sector: Market Value Modified Duration



Corporates and Other Credit $ 34,451,402 4.02

U.S. Government Mortgages 27,746,750 2.34

Government 22,369,183 5.18

Other 7,707,743 0.08

Commercial Mortgage Backed Securities 6,064,665 3.22

Collateralized Mortgage Obligations: U.S. Agencies 5,645,927 2.32

U.S. Private Placements 5,619,616 5.01

U.S. Agencies 5,570,754 0.04

Asset Backed Securities 5,519,704 1.16

Treasury 4,147,130 0.08

Collateralized Mortgage Obligations: Corporate 1,970,408 2.99

Treasury Inflation Protected Securities 661,147 3.82

Total $127,474,429









42

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 3 – Cash and Investments (continued)



Foreign Currency Risk: As of June 30, 2005, the Long Term Fund held equity securities denominated in

foreign currencies within pooled investment vehicles only, with market values totaling $66,801,371. Some

of the trades for such foreign positions will not settle in foreign currencies until after the fiscal year end.

Foreign currency forward exchange contracts are often used to manage the risk related to fluctuations in

currency exchange rates between the time of purchase or sale and the actual settlement of foreign

currencies. The Fund's foreign pooled investment managers also use foreign exchange forwards and futures

to manage longer term currency risk exposures. Counterparty risk in foreign exchange forwards and

futures instruments is negligible. Even in the unlikely event of counterparty default with these instruments,

loss is typically limited to the amounts recognized in the Statements of Net Assets and is not represented by

the contract or notional amounts of the instruments.



NOTE 4 – Receivables



Accounts receivable, amounts due from state agencies and other governments, amounts due from the UW

Hospital Authority, and student loans receivable as of June 30, 2005 and 2004, are summarized as follows:



2005 2004

Receivables (Net):

Federal Grants and Contracts $ 19,114,440 $ 30,950,009

State and Private Grants and Contracts 67,949,996 23,397,399

Student Academic Fees 6,477,936 9,899,705

Auxiliary Enterprises 4,973,892 6,673,940

Educational Activities 7,957,834 11,028,195

Student Loans Receivable 190,120,667 183,253,209

State Agencies 49,968,869 59,773,451

UW Hospital Authority 20,778,268 20,963,878

Investment 4,697,873 6,419,704

Other Governments 73,761,876 54,736,685

Other 11,819,402 18,181,473



Total Receivables (Net) $ 457,621,053 $ 425,277,648



Student loans receivable at June 30, 2005, include allowances for uncollectible loans of $12.1 million

relative to $12.2 million in the prior year. Principal repayment and interest rates of university and federal

loans vary. Federal loan programs are funded primarily with federal contributions to the University of

Wisconsin System under the Perkins loan program and a variety of health professions loan programs.



The University of Wisconsin System distributed $149.7 million in student loans through the United States

Department of Education federal direct lending program during fiscal year 2005 and $137.4 million in

2004. These distributions and the related funding sources are not reflected as expenses and revenues in the

financial statements. However, cash inflows and outflows are shown in the Statements of Cash Flows.









43

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 5 – Liabilities



Accounts payable and accrued liabilities, consisting of salary and fringe benefits, due to state agencies and

other governments, and vendor payables, resulting from University of Wisconsin System activities as of

June 30, 2005 and 2004 are summarized as follows:





Due to State

Agencies and

Fiscal Year 2005 Salary and Fringe Other Total

Benefits Governments Vendors Payables



UW System Activities:

Operating $ 58,468,402 $ 63,828,919 $ 17,856,913 $ 140,154,234

Gifts, Grants and Contracts 36,521,157 2,294,924 8,938,819 47,754,900

Capital Projects - 1,280,042 41,774,079 43,054,121

Auxiliary Enterprises 5,931,417 1,036,707 3,820,016 10,788,140

Investment and Other 286,014 324,426 17,504,502 18,114,942

Total Activities $ 101,206,990 $ 68,765,018 $ 89,894,329 $ 259,866,337







Due to State

Agencies and

Fiscal Year 2004 Salary and Fringe Other Total

Benefits Governments Vendors Payables



UW System Activities:

Operating $ 40,379,687 $ 67,413,858 $ 15,121,243 $ 122,914,788

Gifts, Grants and Contracts 33,818,681 2,462,778 12,631,332 48,912,791

Capital Projects - 890,054 21,414,422 22,304,476

Auxiliary Enterprises 6,011,338 490,114 3,311,163 9,812,615

Investment and Other 412,538 339,611 15,022,152 15,774,301

Total Activities $ 80,622,244 $ 71,596,415 $ 67,500,312 $ 219,718,971





As of June 30, 2005, current liabilities totaled $490.9 million inclusive of $1.6 million in deposits of

student organizations, $259.9 million of accounts payable and accrued liabilities, $148.5 million of

deferred revenue, and the current portion of notes and bonds payable, capital lease obligations, and

compensated absences. Noncurrent liabilities consisted of notes and bonds payable, capital lease

obligations, and compensated absences that totaled $580.4 million at June 30, 2005, relative to a total of

$495.0 million at June 30, 2004. Total noncurrent liabilities increased by $85.4 million relative to fiscal

year 2004.









44

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 5 – Liabilities (continued)



A summarization of noncurrent liability activity for the fiscal year ended June 30, 2005 and 2004 follows:



2005 Balance Increases/ Balance Current

Noncurrent Liabilities July 1, 2004 Decreases June 30, 2005 Portion



Bonds Payable $ 426,758,814 $ 86,632,603 $ 513,391,417 $ 24,415,974

Notes Payable 12,663,869 (1,561,686) 11,102,183 1,639,817

Capital Lease Obligations 46,316,961 (540,351) 45,776,610 4,782,255

Compensated Absences 82,763,300 8,330,906 91,094,206 50,166,856

Total $ 568,502,944 $ 92,861,472 $ 661,364,416 $ 81,004,902





2004 Balance Increases/ Balance Current

Noncurrent Liabilities July 1, 2003 Decreases June 30, 2004 Portion



Bonds Payable $ 291,127,577 $ 135,631,237 $ 426,758,814 $ 16,705,304

Notes Payable 14,150,736 (1,486,867) 12,663,869 1,561,590

Capital Lease Obligations 38,495,852 7,821,109 46,316,961 8,824,890

Compensated Absences 77,338,115 5,425,185 82,763,300 46,385,074

Total $ 421,112,280 $ 147,390,664 $ 568,502,944 $ 73,476,858





NOTE 6 – Lease Commitments



The University of Wisconsin System has capital lease obligations with a net present value of $45,776,610

as of June 30, 2005. This compares to $46,316,961 at June 30, 2004. The payment schedule for capital

lease obligations is as follows:



2006 $ 6,937,031

2007 6,400,867

2008 25,144,496

2009 2,336,156

2010 2,165,007

2011-2015 10,112,181

2016-2020 945,973



Tota1 Scheduled Lease Payments 54,041,711



Amount Representing Interest (8,265,101)



Net Present Value $ 45,776,610









45

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 6 – Lease Commitments (continued)



Assets Held Under Capital Lease:



Original Cost Accumulated Book Value

2005 June 30, 2005 Depreciation June 30, 2005



Buildings and Improvements $ 54,653,647 $ 7,904,073 $ 46,749,574

Equipment 9,761,298 5,153,647 4,607,651



Total Assets $ 64,414,945 $ 13,057,720 $ 51,357,225





Original Cost Accumulated Book Value

2004 June 30, 2004 Depreciation June 30, 2004



Buildings and Improvements $ 57,352,800 $ 6,741,394 $ 50,611,406

Equipment 9,711,858 4,416,547 5,295,311



Total Assets $ 67,064,658 $ 11,157,941 $ 55,906,717





Facilities and equipment rented through operating leases are not recorded as assets on the balance sheet.

Operating lease expenditures amounted to $17,290,931 for the fiscal year ended June 30, 2005. Minimum

commitments for future operating lease payments are as follows:



2006 $ 12,380,321

2007 11,425,029

2008 5,245,987

2009 4,399,872

2010 1,925,339

2011-2015 5,874,434

2016-2020 4,373,478

2021-2025 3,497,361

2026-2030 1,186,132

2031-2035 503,804



Total $ 50,811,757





NOTE 7 – Compensated Absences



The compensated absences liability at June 30, 2005, consists of accumulated unpaid annual leave,

compensatory time, personal holiday hours, and Saturday/legal holiday hours earned and vested.

Compensated absences for the University of Wisconsin System employees at June 30, 2005, totaled

$91,094,206 compared with $82,763,300 for the previous year. The compensated absences balance

consists of a $50,166,856 current liability and $40,927,350 noncurrent liability compared to a $46,385,074

current liability and $36,378,226 noncurrent liability for the previous year. The University of Wisconsin

System leave policies restrict the accumulation of unused vacation and thus limit the actual payments made

to employees upon termination or retirement.









46

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 8 – Retirement Benefits



Retirement benefits are provided for substantially all employees through the Wisconsin Retirement System

(WRS), a cost-sharing, multiple-employer, defined benefit plan governed by Chapter 40 of the Wisconsin

Statutes. State and local government public employees are entitled to an annual formula retirement benefit

based on the employee’s final average earnings, years of creditable service, and a formula factor. Final

average earnings is the average of the participant’s three highest years’ earnings. Creditable service is the

creditable current and prior service expressed in years or decimal equivalents of partial years for which a

participant receives earnings and makes contributions as required. The formula factor is a standard

percentage based on employment category. If an employee’s contributions, matching employer’s

contributions, and interest credited to the employee’s account exceed the value of the formula benefit, the

retirement benefit may instead be calculated as a money purchase benefit. WRS is part of the State of

Wisconsin’s financial reporting entity. Copies of the separately issued financial report that includes

financial statements and required supplementary information may be obtained by writing to: Department of

Employee Trust Funds, P.O. Box 7931, Madison, WI 53707-7931.



Generally, the State’s policy is to fund retirement contributions on a level-percentage-of-payroll basis to

meet normal and prior service costs of the retirement system. Prior service costs are amortized over 40

years, beginning January 2, 1990. However, in December 2003 the State issued bonds and subsequently

fully liquidated its prior service liability balance as of January 2003. The liquidation of the State’s prior

service liability resulted in credits being granted to state agencies for amounts already paid in 2003. In

addition, state agencies will be required to make future contributions to fund the bond payments. The

retirement plan requires employee contributions equal to specified percentages of qualified earnings based

on the employee’s classification, as well as employer contributions at a rate determined annually. The

University of Wisconsin System made contributions of $171,546,238 during fiscal year 2005, compared

with $186,177,376 for the previous year.



In addition to the Wisconsin Retirement System, certain employees associated with federally funded

activities are partially covered by the Federal Retirement Program. The University of Wisconsin System's

contributions to this program amounted to $487,794 during the current year, compared with $461,228 for

the previous year.



NOTE 9 – Capital Assets



Land, buildings, improvements (e.g., parking lots, fences, street lighting, etc.), equipment and library

holdings are capitalized at cost at date of acquisition or fair market value at date of donation in the case of

gifts-in-kind. Generally, capital equipment is defined as any single asset with a minimum value of $5,000

and having a useful life of more than one year. Depreciation is calculated on a straight-line basis over the

estimated useful lives of the respective assets: buildings over forty years, improvements over twenty years

and capital equipment over periods ranging from three to fifteen years for specified asset classes. The

componentized methodology of depreciation is used for major research facilities generally using estimated

useful lives ranging from ten to fifty years. Library holdings are not depreciated because these resources

are viewed as inexhaustible assets. Disposals of library holdings are removed at either a historically

calculated average cost or at an amount that approximates original cost as nearly as is practical to

determine. The University of Wisconsin System does not capitalize the $230.4 million in works of art or

historical treasures that are held for exhibition, education, research and public service. These collections

are neither disposed of for financial gain nor encumbered in any way. Proceeds from the sale, exchange, or

other disposal of any item belonging to a collection of works of art or historical treasures must be applied

to the acquisition of additional items for the same collection.









47

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 9 – Capital Assets (continued)



Depreciation expense for the years ended June 30, 2005 and 2004 was $147.9 and $168.2 million,

respectively.



The change in book value from July 1, 2004 to June 30, 2005 is summarized as follows:



Book Value Deductions/ Book Value

July 1, 2004 Additions Adjustments June 30, 2005



Buildings $ 2,983,629,551 $ 128,633,004 $ (8,106,122) $ 3,104,156,433

Improvements 223,187,475 4,120,262 - 227,307,737

Land 107,524,664 334,658 - 107,859,322

Construction in Progress - 134,510,015 325,000 134,835,015

Equipment 677,867,927 70,495,247 (35,733,562) 712,629,612

Library Holdings 1,002,591,507 21,143,392 (4,451,022) 1,019,283,877

Subtotal 4,994,801,124 359,236,578 (47,965,706) 5,306,071,996



Less: Accumulated Depreciation:



Buildings 1,233,659,324 85,667,186 (5,911,649) 1,313,414,861

Improvements 134,310,586 7,795,006 - 142,105,592

Equipment 472,343,623 54,463,693 (26,642,959) 500,164,357

Total Accumulated

Depreciation 1,840,313,533 147,925,885 (32,554,608) 1,955,684,810



Capital Assets, Net $ 3,154,487,591 $ 211,310,693 $ (15,411,098) $ 3,350,387,186





The change in book value from July 1, 2003 to June 30, 2004 is summarized as follows:



Book Value Deductions/ Book Value

July 1, 2003 Additions Adjustments June 30, 2004



Buildings $ 2,717,850,073 $ 265,400,724 $ 378,754 $ 2,983,629,551

Improvements 214,795,361 8,392,114 - 223,187,475

Land 107,240,467 284,197 - 107,524,664

Equipment 620,611,964 72,332,380 (15,076,417) 677,867,927

Library holdings 986,646,248 21,524,201 (5,578,942) 1,002,591,507

Subtotal 4,647,144,113 367,933,616 (20,276,605) 4,994,801,124



Less: Accumulated Depreciation:



Buildings 1,126,791,581 107,143,161 (275,418) 1,233,659,324

Improvements 126,702,570 7,608,016 - 134,310,586

Equipment 431,594,912 53,468,033 (12,719,322) 472,343,623

Total Accumulated

Depreciation 1,685,089,063 168,219,210 (12,994,740) 1,840,313,533



Capital assets, Net $ 2,962,055,050 $ 199,714,406 $ (7,281,865) $ 3,154,487,591









48

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 10 – Long Term Debt



The State of Wisconsin issues general obligation bonds and notes on behalf of its constituent agencies,

including the University of Wisconsin System, the proceeds of which are used to construct or acquire

facilities and other capital assets. The University of Wisconsin System holds title to the assets thus

acquired. As an enterprise fund of the State of Wisconsin, the University of Wisconsin System reports on

its Statements of Net Assets that portion of the debt that will be repaid with program revenues generated by

the University of Wisconsin System’s self-supporting operations. Debt on academic facilities that is repaid

by an appropriation from the State of Wisconsin to the University of Wisconsin System for that purpose is

reported by the State of Wisconsin and not as an obligation of the University of Wisconsin System.

However, cash inflows and outflows are shown in the Statements of Cash Flows.



The following information relates to the status of bonds and notes payable outstanding at June 30, 2005:



Maturity Balance New Debt/ Principal Paid/ Balance

Dates July 1, 2004 Accretion Adjustments June 30, 2005



G.O. Bonds (Gross) 2006-2034 $ 418,721,433 $ 154,508,961 $ (72,721,481) $ 500,508,913

Notes 2006-2011 12,663,869 - (1,561,686) 11,102,183

$ 431,385,302 $ 154,508,961 $ (74,283,167) $ 511,611,096



The bonds have maturity dates ranging from October 15, 2005 to April 15, 2034. The notes have maturity

dates ranging from May 1, 2006 to May 1, 2011.



The current and noncurrent General Obligation bonds payable net of discounts, premiums, and deferred

refunding total $24,415,974 and $488,975,443, respectively.



Balance

June 30, 2005 Current Noncurrent



G.O. Bonds (Gross) $ 500,508,913 $ 22,232,809 $ 478,276,104

Discount (146,495) (15,293) (131,202)

Premium 24,056,520 3,395,197 20,661,323

Deferred Refunding (11,027,521) (1,196,739) (9,830,782)

G.O. Bonds (Net) $ 513,391,417 $ 24,415,974 $ 488,975,443

Notes 11,102,183 1,639,817 9,462,366

$ 524,493,600 $ 26,055,791 $ 498,437,809



The following information relates to the status of bonds and notes payable outstanding at June 30, 2004:



Maturity Balance New Debt/ Principal Paid/ Balance

Dates July 1, 2003 Accretion Adjustments June 30, 2004



G.O. Bonds (Gross) 2005-2034 $ 287,847,642 $ 188,491,091 $ (57,617,300) $ 418,721,433

Notes 2005-2011 14,150,736 - (1,486,867) 12,663,869

$ 301,998,378 $ 188,491,091 $ (59,104,167) $ 431,385,302





The bonds have maturity dates ranging from October 15, 2004 to April 15, 2034. The notes have maturity

dates ranging from May 1, 2005 to May 1, 2011.









49

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 10 – Long Term Debt (continued)



The current and noncurrent General Obligation bonds payable net of discounts, premiums, and deferred

refunding total $16,705,304 and $410,053,510, respectively.



Balance

June 30, 2004 Current Noncurrent



G.O. Bonds (Gross) $ 418,721,433 $ 15,632,304 $ 403,089,129

Discount (346,302) (26,320) (319,982)

Premium 17,204,255 2,081,326 15,122,929

Deferred Refunding (8,820,572) (982,006) (7,838,566)

G.O. Bonds (Net) $ 426,758,814 $ 16,705,304 $ 410,053,510

Notes 12,663,869 1,561,590 11,102,279

$ 439,422,683 $ 18,266,894 $ 421,155,789



Future debt service requirements for bonds and notes outstanding at June 30, 2005 are as follows:



Future Repayment Schedule

Bonds Notes

Fiscal Year Principal Interest Principal Interest



2006 $ 22,232,809 $ 25,725,164 $ 1,639,817 $ 555,114

2007 22,160,452 23,810,221 1,712,156 473,123

2008 22,365,710 22,701,089 1,797,794 387,510

2009 23,053,985 21,614,513 1,888,020 297,621

2010 23,344,917 20,473,281 1,982,878 203,220

2011-2015 132,520,919 83,130,283 2,081,518 104,076

2016-2020 128,837,099 49,796,989 - -

2021-2025 95,373,022 21,197,968 - -

2026-2030 15,340,000 6,196,000 - -

2031-2034 15,280,000 1,956,750 - -

Total $ 500,508,913 $ 276,602,258 $ 11,102,183 $ 2,020,664



As noted above, debt on academic facilities that is repaid by an appropriation from the State of Wisconsin

to the University of Wisconsin System for that purpose is reported by the State of Wisconsin and not as an

obligation of the University of Wisconsin System. As of June 30, 2005, the principal balance of such

bonds and notes was $872,507,878 and $61,509,786, respectively. As of June 30, 2004, the principal

balance of such bonds and notes was $841,672,531 and $69,937,172, respectively.









50

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 10 – Long Term Debt (continued)



Debt service payments made by the State of Wisconsin for the years ended June 30, 2005 and 2004 are

allocated as follows:



2005 Bonds Notes

Principal $ 55,864,516 $ 8,454,843

Interest 33,911,127 1,269,624

Total Paid $ 89,775,643 $ 9,724,467



2004 Bonds Notes

Principal $ 10,558,055 $ 1,737,260

Interest 34,434,761 735,053

Total Paid $ 44,992,816 $ 2,472,313



NOTE 11 – Funds Held In Trust by Others



Not included in the financial statements are endowment funds held by outside trustees for the benefit of the

University of Wisconsin System. The cost of these funds amounted to $165,854,550 at June 30, 2005,

compared with $158,861,931 at June 30, 2004.



NOTE 12 – University of Wisconsin Hospital and Clinics Authority



The financial statements of the University of Wisconsin System do not include the accounts of the

University of Wisconsin Hospital and Clinics Authority (UWHCA) which, pursuant to an act of the

Wisconsin State Legislature, began operating on June 29, 1996, as a separate public authority. As required

by this legislation, the University of Wisconsin System has entered into various affiliation and operating

agreements with UWHCA, including a lease agreement. Under the terms of the lease, UWHCA makes

payments equal to the debt service on all outstanding bonds issued by the State of Wisconsin to acquire,

construct or improve the leased facilities. At June 30, 2005, the present value of these future lease

payments totaled $18.2 million, an amount equal to the principal on the related bonds outstanding; the asset

is separately captioned on the balance sheet and the related debt is included as part of the total UW System

bonds outstanding of $500.5 million. The leased facilities are not included as part of the University of

Wisconsin System’s investment in buildings since they have been reported by UWHCA in their audited

financial statements in accordance with the generally accepted accounting principles that pertain to the

reporting of leased assets.



During the fiscal year ended June 30, 2005, the University of Wisconsin System received services from

UWHCA totaling $4.2 million and provided services to UWHCA totaling $42.9 million. The cost of the

services provided and the associated revenue are separately identified in the Statements of Revenues,

Expenses and Changes in Net Assets. The amounts spent for services received are included as salaries and

fringe benefits and supplies and services expenses on this statement. The services received are funded by

an equivalent amount of state appropriations revenue.



NOTE 13 – University of Wisconsin Foundation



In May, 2002, GASB issued Statement No. 39, Determining Whether Certain Organizations Are

Component Units, an amendment of GASB Statement No. 14, The Financial Reporting Entity, and it is

effective for the year ending June 30, 2004. In accordance with the provisions of GASB Statement No. 39,

the University of Wisconsin Foundation (Foundation) is a component unit of the State of Wisconsin. The

financial statements of the University of Wisconsin System do not include the accounts of the Foundation.







51

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 13 – University of Wisconsin Foundation (continued)



The Foundation is the official not-for-profit fund raising corporation for the University of Wisconsin-

Madison and several other units of the University of Wisconsin System. It receives gifts and bequests,

administers and invests securities and property and disburses payments to and on behalf of the University

of Wisconsin for advancement of scientific, literary, athletic and educational purposes. The Foundation

reports on a fiscal year ended December 31. Copies of the separately issued financial statements may be

obtained by writing to: University of Wisconsin Foundation, Attn: Finance, P.O. Box 8860, Madison, WI

53708-8860.



Significant financial data for the Foundation for the years ending December 31, 2004 and 2003, are

presented below (in thousands):



Condensed Balance Sheet 2004 2003

Assets:

Cash, Investments and Other Assets $ 2,164,543 $ 1,796,283

Capital Assets, Net 7,583 7,818

Total Assets $ 2,172,126 $ 1,804,101



Liabilities:

Accounts Payable and Other Current Liabilities $ 20,168 $ 294,099

Amounts Held for Other Component Units 178,918 172,191

Long-term Liabilities (Current and Noncurrent Portions) 12,696 2,792

Total Liabilities 211,782 469,082



Fund Equity:

Invested in Capital Assets, Net of Related Debt 7,583 7,818

Restricted 1,840,755 1,227,680

Unrestricted 112,006 99,521

Total Fund Equity 1,960,344 1,335,019

Total Liabilities and Fund Equity $ 2,172,126 $ 1,804,101



Condensed Statement of Revenues, Expenses and Changes in Fund Equity

Program Expenses:

Depreciation $ 281 $ 313

Payments to Primary Government 108,531 98,587

Other 28,742 29,641

Total Program Expenses 137,554 128,541



Program Revenues:

Investment and Interest Income 171,124 236,516

Operating Grants and Contributions 591,602 160,426

Other 153 161

Total Program Revenues 762,879 397,103



Net Program Revenue 625,325 268,562



Change in Fund Equity 625,325 268,562

Fund Equity, Beginning of Year 1,335,019 1,066,457

Fund Equity, End of Year $ 1,960,344 $ 1,335,019









52

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 14 – Contingent Liabilities



The University of Wisconsin System is covered by the State of Wisconsin’s self-insurance program with

settlements or judgments paid from the State Risk Management Fund. Loss experience is rated back to the

individual University of Wisconsin institutions in subsequent years with a maximum payment of $100,000

per incident.



The University of Wisconsin System is party in a number of legal actions. While final resolutions have not

yet been determined, management is of the opinion that any liabilities resulting from these actions will not

have a material adverse effect on the University of Wisconsin System’s financial position.



NOTE 15 – Operating Expense by Functional Classification



Operating expenses by functional classification for the fiscal year ended June 30, 2005:





Salary Scholarships Supplies

and and and

Fringe Benefits Fellowships Services Other Depreciation Total



Instruction $ 836,818,523 $ 1,013,662 $ 94,126,012 $ 840,428 $ - $ 932,798,625

Research 488,838,670 1,943,581 194,658,071 307,297 - 685,747,619

Public Service 162,798,487 269,530 85,930,153 1,009,179 - 250,007,349

Academic Support 232,207,744 45,869 70,185,679 (192,504) - 302,246,788

Farm Operations 7,789,388 - 4,099,396 1,349 - 11,890,133

Student Services 196,397,465 688,856 100,959,324 131,210 - 298,176,855

Institutional Support 165,662,541 16,039 8,854,861 (47,284) - 174,486,157

Operation/Maintenance 124,108,184 - 96,660,998 6,003 - 220,775,185

Financial Aid 6,022,211 76,712,400 15,530,777 (463,006) - 97,802,382

Auxiliary Enterprises 85,937,810 28,822 160,369,198 177,529 - 246,513,359

Hospital - - 43,199,612 - - 43,199,612

Depreciation - - - - 147,925,885 147,925,885



Total Operating Expenses $ 2,306,581,023 $ 80,718,759 $ 874,574,081 $ 1,770,201 $ 147,925,885 $ 3,411,569,949







Operating expenses totaled $3.4 billion. Salary and fringe benefits, scholarships and fellowships, and

supplies and services and other expenses constituted 67.6%, 2.4%, and 25.7% of total operating expenses,

respectively. Depreciation comprised $147.9 million or 4.3% of total operating expenses.









53

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 15 – Operating Expense by Functional Classification (continued)



Operating expenses by functional classification for the fiscal year ended June 30, 2004:





Salary Scholarships Supplies

and and and

Fringe Benefits Fellowships Services Other Depreciation Total



Instruction $ 812,548,187 $ 988,695 $ 83,551,593 $ 1,082,493 $ - $ 898,170,968

Research 465,003,211 1,853,091 183,672,766 328,762 - 650,857,830

Public Service 157,224,580 241,786 82,227,806 817,546 - 240,511,718

Academic Support 231,586,777 32,648 72,117,740 28,712 - 303,765,877

Farm Operations 7,880,769 - 3,310,434 212 - 11,191,415

Student Services 188,875,166 701,406 97,957,786 107,888 - 287,642,246

Institutional Support 162,326,595 13,719 20,412,727 92,433 - 182,845,474

Operation/Maintenance 121,717,790 - 94,527,993 (6,647) - 216,239,136

Financial Aid 4,950,090 77,764,339 (14,349,224) 1,781,853 - 70,147,058

Auxiliary Enterprises 86,571,560 28,842 145,823,149 65,868 - 232,489,419

Hospital 12,577 - 38,756,926 - - 38,769,503

Depreciation - - - - 168,219,211 168,219,211



Total Operating Expenses $ 2,238,697,302 $ 81,624,526 $ 808,009,696 $ 4,299,120 $ 168,219,211 $ 3,300,849,855



Operating expenses totaled $3.3 billion. Salary and fringe benefits, scholarships and fellowships, and

supplies and services and other expenses constituted 67.8%, 2.5%, and 24.6% of total operating expenses,

respectively. Depreciation comprised $168.2 million or 5.1% of total operating expenses.



NOTE 16 – Prior Period Adjustments



The June 30, 2005 Statement of Net Assets include prior period adjustments showing a decrease of $13.9

million. These adjustments are summarized as follows:



Adjustment Amount (millions)



Deferred Revenue Adjustment $ (12.1)

Equipment Adjustment (4.0)

Supplies Inventory Adjustment 2.1

Other .1

Total $ (13.9)



The June 30, 2004 Statement of Net Assets include prior period adjustments of $1.7 million. These

adjustments are summarized as follows:



Adjustment Amount (millions)



Building, Equipment, and Library Holdings

Adjustments $ 5.8

Bond Security Redemption Fund Adjustments .5

Capital Improvement Fund Cash Balance

Adjustments (5.1)

Direct Student Loan Adjustments .7

Other (.2)

Total $ 1.7







54

UNIVERSITY OF WISCONSIN SYSTEM

Notes to the Financial Statements

Years Ended June 30, 2005 and 2004





NOTE 17 – Classification of Net Assets



Net assets are reported in the following six categories: 2005 2004



• Invested in capital assets, net of related debt $ 2,865,243,527 $ 2,743,521,308



• Restricted - Nonexpendable

Net assets subject to externally-imposed stipulations

that they be maintained permanently by the University

of Wisconsin System including:

Gifts provided in trust as permanent endowment 126,336,467 116,835,099



• Restricted - Expendable

Net assets whose use by the University of Wisconsin

System is subject to externally-imposed stipulations

that can be fulfilled by actions of the University of

Wisconsin System pursuant to those stipulations or that

expire by the passage of time including:

Funds managed by the University of Wisconsin

System in trust as quasi-endowment 147,971,861 143,654,953

Auxiliary operations as established by state

statute 119,868,545 97,509,549



• Restricted - Student Loans 210,724,950 204,713,367



• Restricted - Other

Net assets of other legally separate appropriations 106,405,454 30,725,864



• Unrestricted

Net assets that are not subject to externally-imposed

stipulations. Unrestricted net assets may be designated

for specific purposes by action of Management or the

Board of Regents or may otherwise be limited by

contractual agreements with outside parties.

Substantially all unrestricted net assets are designated

for academic and research programs and initiatives, and

capital programs. 124,576,020 219,561,823





In the State of Wisconsin’s Comprehensive Annual Financial Report, $177.2 million, compared to $244.2

million the prior year, was reported as unrestricted net assets for the University of Wisconsin System. The

State considers the net assets of auxiliary operations of $119.9 million, compared to $97.5 million the prior

year, unrestricted and quasi-endowments of $67.2 million, compared to $72.9 million the prior year, as

restricted to the University of Wisconsin System. As a reporting entity, the Board of Regents of the

University of Wisconsin System cannot exercise total discretion over the use of net assets of auxiliary

operations because of statutory mandates; however, they do have discretion in the use of the net assets of

quasi-endowments.









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