2015 Financial Report by Vanderbilt Web Communications

2015 FINANCIAL REPORT

Contents Letter from the Chancellor ........................................................................................................................... 3 Vanderbilt University Statistics ..................................................................................................................... 4 Financial Overview ....................................................................................................................................... 5 Financial Ratios ........................................................................................................................................... 12 Consolidated Financial Statements Independent Auditorâ&#x20AC;&#x2122;s Report ....................................................................................................... 14 Consolidated Statements of Financial Position ............................................................................. 15 Consolidated Statements of Activities .......................................................................................... 16 Consolidated Statements of Cash Flows ....................................................................................... 18 Notes to the Consolidated Financial Statements ........................................................................... 19

Letter from the Chancellor The heart of an academic research university beats in time with the creativity, productivity, and scholarly excellence of its faculty, physicians, and scientists. In turn, this vibrant environment of learning and discovery attracts the best and brightest students, as well as patients from around the corner and across the globe. Vanderbilt University’s culture of service and caring combined with an incredible bandwidth of intellectual power has positioned the university among the world’s best. This is not a distinction that we take lightly or with complacency. Our success — which stems from a combination of vision, philanthropy, responsible stewardship, and prudent fiscal management —enables Vanderbilt to aspire boldly and invest in the people who breathe life into our mission. In FY 2015, we launched a $50 million Trans-Institutional Initiative Program (TIPS) to support cross-disciplinary research and collaborative projects. The goal with this new funding is to support innovative and creative ideas that will help solve pressing problems facing society. As part of this effort, a new Engineering and Science Building, serves as a great visual marker of the progress of the program. As the building’s construction takes shape, we are inspired to know that it will soon provide a place for students, faculty, staff, and visiting entrepreneurs to gather in an environment dedicated to discovery and innovation. Vanderbilt’s deep commitment to supporting research and scholarship is exemplified in a significant investment made this year in the inaugural class of 14 Chancellor Faculty Fellows, a diverse group of proven leaders and innovators in fields ranging from patent law and public policy - to astronomy - to mental health, to support their research and scholarship. And, Opportunity Vanderbilt, which remains one of the most generous financial aid programs in the country, has made a top-tier college education possible for thousands of deserving students. To fully appreciate Vanderbilt University’s tremendous financial and institutional strength, one must also consider the challenges facing healthcare across our nation and the broader state of discourse in higher education. Dwindling federal support for research; decreased reimbursements in funding for health care; uneven economic growth; intense scrutiny and criticism of the high cost of education; and ballooning student debt are serious concerns that we must contend with on a daily basis and throughout the year. Vanderbilt could not achieve and maintain such a high level of excellence without continually looking ahead and creating strategies to manage impending challenges. Recent changes in the education and health care fields have led us to explore a restructure of the way we conduct the activities and endeavors of Vanderbilt University Medical Center. We are giving careful consideration to how we can best allow the clinical enterprise the flexibility required to remain competitive in today’s rapidly changing health care environment while simultaneously buffering the University from the business risks inherent with today’s health care landscape. Although legally and financially distinct, the two institutions will remain connected by our shared missions of research and education. Our story, which began with Cornelius Vanderbilt’s $1 million gift and dream of founding a great university to reconnect a country torn apart by war, tells the tale of what can be achieved when vision, strategy, and philanthropy combine. Of all of the many inventions and investments made by the Commodore that helped build this great nation, I strongly believe if he visited his eponymous university today, he would declare this institution his greatest investment of all time. While his steamboats and railroads have gone the way of the passenger pigeon, Vanderbilt University thrives! We are honored and privileged to carry forward this legacy. Sincerely, Nicholas S. Zeppos Chancellor

Vanderbilt University Statistics 2014/2015

2013/2014

2012/2013

2011/2012

2010/2011

Undergraduate Graduate and professional Total fall enrollment

6,851 5,835 12,686

6,835 5,922 12,757

6,796 5,914 12,710

6,817 6,019 12,836

6,879 5,835 12,714

Undergraduate admissions Applied Accepted Enrolled Selectivity Yield

29,518 3,865 1,605 13.1% 41.5%

31,099 3,963 1,613 12.7% 40.7%

28,348 4,034 1,608 14.2% 39.9%

24,837 4,078 1,601 16.4% 39.3%

21,811 3,914 1,600 17.9% 40.9%

Degrees conferred Baccalaureate Masterâ&#x20AC;&#x2122;s M.D. Other doctoral Total degrees conferred

1,644 1,497 120 598 3,859

1,663 1,416 91 580 3,750

1,675 1,421 111 551 3,758

1,673 1,432 99 516 3,720

1,735 1,252 97 556 3,640

STUDENTS

Undergraduate six-year graduation rate Undergraduate tuition % increase over prior year

92.0% 42,768 2.0%

92.9% 41,928 2.0%

92.5% 41,088 1.9%

92.2% 40,320 3.5%

91.9% 38,952 3.5%

HOSPITALS AND CLINICS Licensed beds Inpatient days Discharges Average daily census Average length of stay (days) Average occupancy level (licensed beds) Hospital surgical operations - inpatient Hospital surgical operations - outpatient Ambulatory visits Emergency visits LifeFlight (helicopter) missions Case mix index

1,025 314,288 59,026 861 5.3 84.0% 21,573 33,575 1,885,068 121,663 1,547 1.96

1,025 310,119 59,112 850 5.2 82.9% 22,601 30,867 1,834,856 118,590 2,313 1.90

1,019 307,292 57,768 842 5.3 83.3% 22,396 30,023 1,833,337 119,225 2,359 1.93

985 285,270 53,818 782 5.3 83.6% 22,183 28,815 1,725,901 114,051 2,550 1.90

916 282,547 52,453 774 5.4 84.5% 22,246 25,650 1,586,395 109,987 2,203 1.93

FACULTY AND STAFF Full-time faculty Full-time staff Part-time faculty Part-time staff Total headcount

3,740 19,305 439 692 24,176

3,742 19,671 405 709 24,527

3,672 19,967 430 763 24,832

3,551 20,119 439 768 24,877

3,448 19,192 396 798 23,834

GRANT AND CONTRACT FUNDING (in thousands) Government sponsors Private sponsors Facilities and administrative costs recovery Total grants and contracts

348,356 74,142 137,626 560,124

358,632 69,466 140,051 568,149

377,839 61,714 142,609 582,162

397,555 54,768 147,806 600,129

399,440 53,494 145,295 598,229

ENDOWMENT Market value (in thousands) Endowment return Endowment per student Endowment payout

$ $

4,093,388 3.7% 322,670 4.1%

$ $

4,046,250 13.3% 317,179 4.1%

$ $

3,635,343 9.3% 286,022 4.3%

$ $

3,360,036 1.3% 261,767 4.4%

$ $

3,375,153 13.6% 265,467 4.8%

Financial Overview enrollment in public insurance exchanges, private sector coverage, and Medicaid Expansion is expected to, over time, reduce the cost of uncompensated care provided by Vanderbilt to uninsured individuals. While providers in Medicaid expansion states benefited from a greater population of insured patients, Tennessee has not yet expanded its Medicaid program. Vanderbilt continues to focus on strategic initiatives to increase overall revenue realization and prudent management of expenses to ensure continued financial strength in times of uncertainty.

In the face of continuing pressures on research funding and health care reimbursements, Vanderbilt experienced sustained financial success in the year ending June 30, 2015. The university’s total net assets increased $132 million to $5,975 million, driven by overall positive operating results and favorable investment performance. While Vanderbilt’s financial position continues to strengthen, our strategic metrics hold strong. Selectivity for the undergraduate schools remained steady and professional school application volumes reflected continued growth. Vanderbilt demonstrated its continued commitment to ensuring that students of every background can attend the university with increased scholarship support through Opportunity Vanderbilt.

Given the challenges facing both higher education and health care, Vanderbilt remains increasingly committed to innovation and efficiency to preserve and strengthen the university’s financial health in support of our mission.

Vanderbilt continues to address the ever-changing health care environment’s challenges. The expansion of health care coverage through

Financial Position As of June 30, 2015, Vanderbilt’s financial position consisted of assets totaling $8,271 million and liabilities totaling $2,296 million, resulting in net assets of $5,975 million.

Total liabilities increased $141 million, or 6.5%, to $2,296 million as of June 30, 2015, from $2,155 million as of June 30, 2014. This was attributable largely to the $187 million of securities sold short, partially offset by the $58 million decrease in long-term debt as a result of scheduled principal payments and net premium amortizations for the year. Interest rate exchange agreement liabilities increased $6 million as a result of the mark-to-market adjustment offset in part by the termination of fixed-payer interest rate exchange agreements. Payables and other accrued liabilities remained consistent with the prior year.

Summary of Financial Position as of June 30, in millions ASSETS Working capital cash and investments Endowment and other cash and investments Accounts and contributions receivable Property, plant, and equipment, net Prepaid expenses and other assets Total assets LIABILITIES Payables and accrued liabilities Deferred revenue Interest rate exchange agreements Securities sold short Taxable debt for liquidity Project and equipment-related debt Total liabilities NET ASSETS Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets Total net assets Total liabilities and net assets

2015

2014

$ 1,230

$ 1,119

4,639 562 1,748 92 $ 8,271

4,456 569 1,765 89 $ 7,998

599 100 175 187 250 985 2,296

3,279 1,461 1,235 5,975 $ 8,271

Cash and Liquidity Vanderbilt’s working capital cash and investments, which include highly liquid operating accounts, amounts posted as collateral (related primarily to interest rate exchange agreements), and amounts invested in the long-term investment pool alongside the endowment, totaled $1,230 million as of June 30, 2015.

600 93 169 250 1,043 2,155

Vanderbilt continues to invest operating assets in a conservative, diversified manner to ensure adequate security and liquidity under a variety of stress scenarios. During fiscal 2015, operating and endowment assets available within 30 days increased to $2,247 million from $2,158 million in fiscal 2014 (4.1% increase), while same day liquidity increased to $1,375 million from $1,133 million in fiscal 2014 (21.4% increase). A higher level of endowment assets with same day liquidity drove this increase as of June 30, 2015. Based largely on this very strong liquidity position, Vanderbilt maintains the highest short-term ratings from the major credit rating agencies.

3,180 1,467 1,196 5,843 $ 7,998

Vanderbilt’s assets, totaling $8,271 million as of June 30, 2015, increased $273 million, or 3.4%, from the prior year. Total assets increased primarily due to positive net operating results. The endowment, net of securities sold short, earned a return of 3.7% and its value (after the impact of distributions in support of operations and the addition of new gifts and unrestricted quasi-endowments) increased to $4,093 million at the end of fiscal 2015 from $4,046 million at the end of fiscal 2014.

To provide supplemental liquidity support, Vanderbilt maintains an agreement with one bank to provide a general operating line of credit with a maximum available commitment totaling $100 million. In addition, Vanderbilt carries $400 million of revolving credit facilities with two additional banks to provide dedicated self-liquidity support for the debt portfolio; one of these lines, totaling $200 million, includes a general use provision.

amount consisted of $985 million of capital project-related debt and $250 million of taxable debt for liquidity support.

Debt Vanderbilt’s debt portfolio includes fixed-rate debt, variable-rate debt, and commercial paper, along with interest rate exchange agreements used for hedging interest rate exposure within the university’s debt portfolio.

During fiscal 2015, Vanderbilt terminated $60 million notional of fixed-payer interest rate exchange agreements in order to reduce the university’s aggregate collateral exposure and eliminate ongoing settlement costs. Over the past six fiscal years, Vanderbilt terminated $510 million of fixed-payer interest rate exchange agreements and incurred net amortization of $18 million, reducing its fixed-payer portfolio notional balance to $483 million at the end of fiscal 2015 as compared to $1,011 million at the end of fiscal 2009.

For the sixth consecutive year, Vanderbilt did not issue new-money debt. Scheduled principal payments on long-term debt and elective reductions of commercial paper reduced total outstanding debt by $58 million to a balance of $1,235 million as of June 30, 2015. This

Statements of Activities Vanderbilt’s total operating and nonoperating activity resulted in a $132 million increase in net assets in fiscal 2015, compared to a $504 million increase in fiscal 2014.

$1,461 million in fiscal 2015 as compared to $1,467 million in fiscal 2014, primarily as a result of decreased market values of assets held in permanently restricted funds. All accumulated market gains on both permanently and temporarily restricted net assets are temporarily restricted until appropriated for use. Unrestricted net assets increased $99 million, or 3.1%, to $3,279 million in fiscal 2015 as compared to $3,180 million in fiscal 2014, as a result of $134 million in unrestricted operating results offset by a $39 million decrease in net assets related to noncontrolling interests and $4 million increase due to other changes in net assets.

Summary of Changes in Net Assets in millions 2015 Revenues and expenses: Unrestricted operating revenues $ 4,067 Unrestricted operating expenses (3,933) Unrestricted operating activity 134 Contribution activity in temporarily restricted and permanently restricted net assets (22) Investment income and endowment distributions in temporarily restricted and permanently restricted net assets 78 Other changes in net assets: Change in appreciation of endowment, net of distributions Change in interest rate exchange agreements Change in net assets related to noncontrolling interests Contributions for plant Other nonoperating activity

(37) 10 37

$ 5,975

132

504

$5,975

$1,196

$1,235

$1,467

$1,461

$2,972

$3,180

$3,279

$5,090

$5,019

$5,339

$1,067 $1,191

$1,132

$4,000

$1,026 $1,262 $2,802

$2,761

To facilitate Vanderbilt’s commitment to student access and affordability, the university provides significant financial aid to students and their families. In fiscal 2015, Vanderbilt provided $250 million in support to its students for tuition and room and board as shown in the table below.

$ 5,843

$5,843

$6,000

Consolidated operating revenues increased $202 million, or 5.2%, to $4,122 million in fiscal 2015, as compared to $3,920 million in fiscal 2014. The primary driver of this increase was a $203 million, or 7.8%, increase in health care services revenue to $2,816 million in fiscal 2015 from $2,613 million in fiscal 2014 due largely to increases in hospital acuity, realization rate, and increases in retail, specialty, and contract managed pharmacy revenues. The health care section of the financial overview includes further details of Vanderbilt’s health care services.

(39) 8 30 $

Consolidated Operating Revenues

(4)

322 6

Ending balance of net assets

$2,000

$ 3,833 (3,754) 79

(29) (28)

Increase in net assets

Vanderbilt University Net Assets fiscal 2011 - fiscal 2015 in millions

2014

Tuition, Room and Board, and Financial Aid – Fiscal 2015 in millions Graduate and Undergraduate Professional (6,851 students) (5,835 students)

$0 2011 Unrestricted

2012 2013 Temporarily Restricted

2014 2015 Permanently Restricted

During fiscal 2015, total net assets increased due primarily to strong net operating results. In comparison, the increase in fiscal 2014 was due primarily to strong net operating results and endowment returns.

Total

Tuition and fees Financial aid Tuition and fees, net

307 (129) $ 178

$ 182 (88) $ 94

$ 489 (217) $ 272

Room and board Financial aid Room and board, net Total

$ $

78 (33) 45 223

$ $

78 (33) $ 45 $ 317

The financial aid number above excludes Pell Grants of $4 million. Generally Accepted Accounting Principles (GAAP) financial statements exclude Pell Grants, which are agency funds.

In fiscal 2015, permanently restricted net assets increased $39 million, or 3.3%, to $1,235 million, as compared to $1,196 million in fiscal 2014, due primarily to new true endowment corpus additions. Temporarily restricted net assets decreased $6 million, or 0.4%, to

Over the past decade, Vanderbilt nearly doubled its level of support for undergraduate aid, as shown in the graph below.

Consolidated Operating Expenses Consolidated operating expenses increased $179 million, or 4.8%, to $3,933 million in fiscal 2015, as compared to $3,754 million in fiscal 2014. The primary driver of this increase was a $123 million, or 9.9%, increase in supplies, services, and other expenses to $1,364 million in fiscal 2015 from $1,241 million in fiscal 2014. This increase was primarily due to hospital and clinic pharmaceutical expenses. Additionally, increased outpatient volumes drove increases in salaries, wages, and benefits.

Undergraduate Financial Aid fiscal 2006 - 2015, in millions $200

$162

$160 $120

$89

$80 $40

Other Changes in Net Assets 2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

Other changes in net assets included changes in appreciation of endowment, net of distributions totaling a decrease of $29 million in fiscal 2015 and an increase of $322 million in fiscal 2014. The change in appreciation for the endowment resulted from a 3.7% investment return offset by 4.1% of the endowment utilized for distributions during fiscal 2015, compared to a 13.3% investment return offset by 4.1% of the endowment utilized for distributions during fiscal 2014.

For undergraduates, aid as a percentage of gross tuition, room and board, and educational fees in fiscal 2015 was 42%. A portion of operations ($98 million), endowments ($57 million), external agencies ($4 million), working capital investments ($2 million), and gifts ($1 million) funded this aid. Critical to this support is the university’s Opportunity Vanderbilt fundraising initiative that began in fiscal 2009 to support undergraduate financial aid. Through June 30, 2015, this initiative raised $213 million.

In fiscal 2015, Vanderbilt incurred net losses of $28 million on interest rate exchange agreements compared to net gains of $6 million in fiscal 2014. Included in these net losses and gains are costs associated with the termination of interest rate exchange agreements of $22 million in fiscal 2015 compared to $32 million in fiscal 2014. Further, Vanderbilt experienced unrealized gains of $2 million in fiscal 2015 compared to $25 million in fiscal 2014 as a result of mark-to-market valuation adjustments. These adjustments resulted from the positive effect of the termination of agreements in the respective periods, offset slightly by the negative effect of decreased long-term LIBOR rates. Additionally, fiscal 2015 results were impacted by an $8 million unrealized loss resulting from a decreased discount rate to reflect counterparty risk (the risk that Vanderbilt will default), compared to a $13 million unrealized gain in fiscal 2014. During fiscal 2015, improvement to the estimated AA Higher Education credit spread and a decreased average remaining life of interest rate exchange agreements indicated a lower risk of Vanderbilt default as compared to fiscal 2014. Vanderbilt’s calculated credit risk and the corresponding adjustment decreased accordingly, resulting in the aforementioned $8 million unrealized loss and an increase to the interest rate exchange agreement liability.

Vanderbilt reports contributions revenue within the consolidated financial statements based on GAAP. This basis for measurement differs from guidelines established by the Council for Advancement and Support of Education (CASE). CASE guidelines represent the development reporting standard for colleges and universities and focus on philanthropic distributions of private resources (primarily gifts and foundation grants) to benefit the public. GAAP to CASE Reconciliation in millions 2015 Total consolidated GAAP contributions Grants and similar agreements meeting CASE guidelines (gifts per CASE standards) Net decrease in contributions receivable (fiscal 2014 to 2015) Other CASE reported gifts (cash basis)

106 28 (8) (3)

123

On a GAAP basis, in fiscal 2015, Vanderbilt recorded $106 million in contributions revenue, including pledges, a 16.5% decrease compared to the $127 million recorded in fiscal 2014.

Net assets related to noncontrolling interests decreased $39 million due to distributions of $49 million offset slightly by $8 million of appreciation and $2 million of cash contributions during fiscal 2015. Net, other nonoperating activity totaled $38 million in fiscal 2015 compared to $47 million in fiscal 2014. The decrease in other nonoperating activity resulted primarily from net endowment losses and losses on derivative financial instruments, partially offset by a $30 million gain on sale of business.

Contributions (GAAP basis) in millions $150

$116

$127

$100

$42

$41

$74

$86

$72

2013

2014

2015

$50

$106 $34

 

Unrestricted Restricted gifts, contributions for capital projects, and additions to endowment corpus.

Unrestricted Operating Activity The change in unrestricted net assets from operating activity is the measure of the universityâ&#x20AC;&#x2122;s operating results. This unrestricted operating activity totaled $134 million in fiscal 2015 and $79 million in fiscal 2014.

Grants and Contracts Revenues by Funding Source in millions Dept. of Health and Human Services Associations and foundations Corporations Dept. of Defense Dept. of Education National Science Foundation Other government and private agencies Total grants and contracts revenues by funding source

Unrestricted Operating Revenues Unrestricted operating revenues increased $234 million, or 6.1%, to $4,067 million in fiscal 2015 as compared to $3,833 million in fiscal 2014. Operating Revenues by Source Unrestricted net assets, in millions 2015 Tuition and educational fees, net of financial aid Government grants and contracts Private grants and contracts F&A costs recovery Contributions, including net assets released from restrictions Endowment distributions Investment income Health care services Room, board, and other auxiliary services, net of financial aid Other sources Total operating revenues

265 359 69 140 122 77 18 2,613

127 68 $ 4,067

112 58 $ 3,833

Government awards Private awards Total sponsored research and project awards

Salaries, wages, and benefits Supplies, services, and other Interest expense Depreciation and amortization Total operating expenses

63%

20%

Corporations Assoc. & Found. NIH

0% 2011

2012

2013

2014

2014 493 164

682

657

2015 $ 2,332 1,364 60 177 $ 3,933

2014 $ 2,272 1,241 65 176 $ 3,754

The increase in total operating expenses was due largely to a 9.9% increase in supplies, services, and other expenses and a 2.6% increase in salaries, wages, and benefits consistent with increases in health care revenues.

Dept. of Defense 64%

in millions

Dept. of Education

60%

2015 510 172

Operating Expenses by Natural Classification

NSF 80%

Unrestricted Operating Expenses Operating expenses increased $179 million, or 4.8%, to $3,933 million in fiscal 2015 as compared to $3,754 million in fiscal 2014.

100%

67%

100%

Government awards accounted for 75% of the total sponsored funding during fiscal 2015 and increased $17 million, or 3.4%, to $510 million in fiscal 2015 from $493 million in fiscal 2014. Private awards increased $8 million, or 4.9%, to $172 million in fiscal 2015 from $164 million in fiscal 2014. The growth in government awards is particularly impressive given the pressures on federal funding, while the growth in private awards signals Vanderbiltâ&#x20AC;&#x2122;s continued success in diversifying its research award pipeline.

Five-year Grants and Contracts by Revenue Source Trend Other Agencies

69%

422

in millions

As shown in the next graph, the largest source of direct grant and contract revenue was the Department of Health and Human Services (National Institutes of Health, or NIH, funding source). Other external sources included state and local governments, industry, foundations, and private sources.

70%

% 63% 7% 8% 6% 4% 5% 7%

Sponsored Research and Project Awards 120 86 18 2,816

Due largely to governmental budgetary constraints, government and private grants and contracts revenue, predominantly for research activities, declined 1.4% from fiscal 2014 to 2015 (to $422 million from $428 million). Within the pool of direct grant revenues, while government grants and contracts direct revenue declined by 3.1% from fiscal 2014 to 2015 (to $348 million from $359 million), private grants and contracts direct revenues increased 7.2% over the same time period (to $74 million from $69 million).

40%

2015 265 29 36 24 18 20 30

Sponsored research and project awards (awards represent research funding commitments that have not yet been expended by Vanderbilt), which include multiple-year grants and contracts from government sources, foundations, associations, and corporations, totaled $682 million in fiscal 2015 and $657 million in fiscal 2014.

2014

272 348 74 138

2015

Health Care The following graph illustrates the overall hospital occupancy rate for inpatients based on licensed beds as compared to average daily census.

During fiscal 2015, the health care landscape continued to evolve. Enrollment in public insurance exchanges increased to approximately 10 million effectuated enrollees nationwide. As of June 30, 2015, thirty states and the District of Columbia had expanded their Medicaid programs resulting in decreased uncompensated care percentages and many health care providers in those states experiencing improved profitability. Despite a special session of the Tennessee legislature in February 2015 to consider the Medicaid expansion program known as “Insure Tennessee,” Tennessee remains one of the states that has not yet expanded its Medicaid program (TennCare). Vanderbilt University Medical Center’s (VUMC) uncompensated care (defined as charity, bad debt, and unreimbursed cost of TennCare/Medicaid) decreased $8 million to a total of $225 million in cost-based write-offs in fiscal 2015 from $233 million in fiscal 2014.

% Occupancy (line)

90%

900 Optimal occupancy - 85%

800

80%

700 600 2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

500 2003

70%

Avg Daily Census (area)

Percentage Occupancy and Average Daily Census

VUMC’s overall hospital occupancy rate for inpatients based on licensed beds was 84.0% in fiscal 2015, a slight increase from 82.9% in fiscal 2014, due to the increased acuity of patients. The increased acuity of patients resulted in an increase in the average length of stay to 5.3 in fiscal 2015 from 5.2 days in fiscal 2014.

To compete in a dynamic health care market, VUMC continues to develop strategies to increase revenue realization and reduce operating costs. During fiscal 2015, VUMC continued to focus on revenue cycle improvements, increasing overall revenue realization through improved back-office processes, charge capture, and data analytics. These activities introduced new technology and workflow that resulted in an improvement to net revenue of $25 million in fiscal 2015.

VUMC’s internal measure of occupancy based on beds available and adjusted for outpatient utilization of bed capacity yielded an occupancy rate of 95% in fiscal 2015, an increase of 2% from an occupancy rate of 93% in fiscal 2014. Thus, VUMC continues to operate above optimal occupancy of 85% when total utilization of capacity is measured.

Health care services revenue increased $203 million, or 7.8%, to $2,816 million in fiscal 2015 from $2,613 million in fiscal 2014. This increase was due largely to outpatient volume increases, expansion of the retail pharmacy program and increased acuity of patients. Inpatient days increased 1.3%, due to increased length of stay resulting from increased acuity of patients, and outpatient visit volumes increased 2.7% in fiscal 2015 from fiscal 2014. Gross revenue from the retail pharmacy program increased $78.2 million, or 51.7%, to $229.7 million in fiscal 2015 from $151.5 million in fiscal 2014.

In October 2014, the Tennessee Health Services and Development Agency approved VUMC’s master Certificate of Need for the relocation of the obstetrical program, the newborn nursery, and the neonatal unit from VUH to new space at MCJCHV and renovation of the vacated area in VUH. This planned project will add 23 new obstetrical beds, 24 neonatal/pediatric critical care beds, 61 adult acute care beds, and 63 observation beds. The bed expansions are necessary to avoid overcrowding and long wait times for patients in the emergency room, recovery rooms, and other procedural staging areas.

Health care services expenses increased $111 million, or 4.6%, to $2,500 million in fiscal 2015 from $2,389 million in fiscal 2014. This increase was due largely to an overall increase in patient days, continued expansion of the retail pharmacy program, and overall growth in ambulatory visits.

VUMC continues to maintain strong inpatient and outpatient volumes. While experiencing an increase in inpatient days, discharges in fiscal 2015 decreased slightly to 59,026 in fiscal 2015 from 59,112 in fiscal 2014. Total VUH and MCJCHV surgical operations increased 3.1% in fiscal year 2015. Volumes continued to shift from inpatient to outpatient surgeries as inpatient surgeries decreased by 4.5% and outpatient surgeries grew by 8.8%.

In fiscal 2015, VUMC continued to prudently manage salaries, wages, and benefits. As a result, salaries, wages, and benefits as a percent of net revenue for fiscal 2015 decreased to 38.3% compared to 39.9% for fiscal 2014. Paid Full-Time Equivalent (FTE) clinical employees were 9,697 for fiscal 2015 as compared to 9,473 for fiscal 2014. Clinical FTEs per adjusted occupied bed (AOB) for Vanderbilt University Hospital (VUH) were 5.2 in fiscal 2015 as compared to 4.7 in fiscal 2014. The increase of .5 Clinical FTEs per AOB relates to an increase in acuity of patients. As a result, the Case Mix Index (CMI) for VUH increased to 2.09 from 2.04 in the prior year. CMIadjusted FTEs per AOB was 3.37 in fiscal 2015 and fiscal 2014. Monroe Carell Jr. Children’s Hospital at Vanderbilt (MCJCHV) FTEs per adjusted occupied bed for fiscal 2015 were 5.0 as compared to 5.3 in fiscal 2014.

Overall hospital ambulatory visits (outpatient visits) increased 2.7% to 1.9 million in fiscal 2015 as VUMC continued its expansion of health care services offered outside the medical center’s main campus. Approximately 45% of outpatient visits occurred at off-campus locations. Physician practice expansions in obstetrics, gynecology, and pediatrics in nearby communities contributed to the growth in ambulatory visits.

VUMC’s overall CMI increased to 1.96 in fiscal 2015 from 1.90 in fiscal 2014. The CMI increase resulted from the increased acuity of patients and aligns with VUMC’s continued focus on serving as Middle Tennessee’s only tertiary/quaternary medical center while supporting patients receiving less intensive medical services in outpatient settings or community hospitals. VUH and MCJCHV continued to see an increase in medical patients, which comprised 54.2% of total discharges in fiscal 2015 compared to 52.8% in fiscal 2014, with the medical CMI increasing to 1.35 in fiscal 2015 from 1.30 in fiscal 2014. The largest increase in acuity was in the surgical specialties with the surgical case mix index increasing to 3.57 in fiscal 2015 as compared to 3.42 in fiscal 2014.

Uncompensated Care in millions Unreimbursed charity care cost $ Unreimbursed cost of TennCare/Medicaid Unreimbursed bad debt cost Total uncompensated care Charity care as % of total uncompensated care

2015 103 103 19

2014 127 76 30

225

233

45.8%

54.5%

In addition to the uncompensated care described above, the medical center provides a number of other services to benefit the economically disadvantaged for which the medical center receives little or no payment. This includes public health education and training for new health professionals and provides, without charge, services to the community at large, together with support groups for many patients with special needs.

The following table presents payer mix percentages based on gross charges for Vanderbilt’s hospitals and clinics in fiscal 2015 and fiscal 2014. Payer Mix Vanderbilt hospitals and clinics (% of gross charges) 2015 Commercial/Managed Care 47.8% Medicare/Managed Medicare 29.5% TennCare/Medicaid 18.0% Uninsured (self-pay) 4.7% Total payer mix 100.0%

The following table provides a summary of costs for the community benefit activities, reported in Vanderbilt’s Form 990 filing (Return of Organization Exempt from Income Taxes).

2014 47.2% 29.5% 17.2% 6.1% 100.0%

Charity Care Assistance, Community Benefits, and Other Unrecovered Costs in millions 2015

Overall uninsured patients decreased while governmental payers TennCare/Medicaid and commercial/managed care increased 80 and 60 basis points, respectively. The commercial/managed care increase primarily resulted from the growth in the retail pharmacy service line, which has a higher commercial/managed care payer mix than other service lines.

Charity care and community benefits Unreimbursed charity care cost Resident and Allied Health education Unreimbursed cost of TennCare/ Medicaid Other community health programs Clinical and laboratory research support Total costs of charity care and community benefits Other unrecovered costs using IRS Form 990 Schedule H guidelines but not includable as community benefits Unreimbursed cost of Medicare Unreimbursed bad debt costs Unreimbursed cost of TRICARE Total other unrecovered costs Total cost of charity care, community benefits, and other unrecovered costs

VUMC remains committed to providing high-quality health care services that meet key community needs, including providing substantial charity care for members of the community who otherwise would not be able to secure needed services. VUMC maintains a charity care policy that sets forth the criteria for health care services provided without expectation of payment, or at a reduced payment rate, to patients who meet income criteria based on federal poverty limit guidelines. Vanderbilt does not report charity care services as revenue. These services represented 4.5% and 5.7% of total gross patient services revenue in fiscal 2015 and 2014, respectively.

103 84

2014 $

127 91

103 4 128

76 1 107

422

402

65 19 7 91

86 30 7 123

513

525

In the preceding table, clinical and laboratory expense of $128 million included sponsored research, primarily from the NIH as well as other federal and nonfederal agencies, for the support of basic and clinical research. In addition, institutional funds provided support for unfunded research such as bridge funds for faculty members between grant periods, and for new ideas or new science that may receive funding in future years.

Endowment For fiscal 2015, Vanderbilt’s endowment portfolio returned 3.7%. The endowment ended fiscal 2015 with a total market value of $4,093 million, compared to $4,046 million at the end of fiscal 2014. The difference between the investment return and change in absolute value of the endowment was attributable to the net impact of new endowment gifts, additions to institutional endowments (quasi-endowments), investment returns, costs for managing the endowment, and the distribution of endowment funds to support university operations. During fiscal 2015, the university added $76 million to the endowment portfolio through new gifts and additions to institutional endowments. Endowment distributions totaled $165 million in fiscal 2015, compared to $158 million in fiscal 2014. These distributions support the university’s education, research, and public service missions.

will from time to time present chances to be opportunistic in deploying new investments. Meanwhile, Vanderbilt is laying a strong foundation for the endowment by collaborating with some of the world’s best investment managers across all asset classes. Endowment Market Value and Annual Distributions in millions Market Value

Distributions $200

Endowment Market Value

$4,000

Annual Distributions

$150

$3,000 $100

$2,000

The past year witnessed a choppy capital market environment relative to the appreciation in risk-based assets over each of the prior five fiscal years. Global equity markets were up only 1%, with wide dispersion across the U.S. (up 7%), non-U.S. developed markets (up 4%), and emerging markets (down 5%). U.S. bond markets were sanguine (up 2%), a relatively small return attributable to historically low yields and credit spreads. Commodity prices crashed (down 37%), and in a related move the U.S. dollar appreciated (by 19%).

$50

$1,000

2015

2014

2013

2012

2011

2010

2009

2008

2007

$0 2006

Endowment Asset Allocation As of June 30, 2015 (% of portfolio) Global equities Hedged strategies Commodities Fixed income Cash and cash equivalents Total public investments Private capital Real estate Natural resources Total nonmarketable Total endowment

Given this environment, Vanderbilt’s endowment held up well. Looking into the future, significant headwinds could still lie ahead. U.S. equity valuations are reasonably full, European equity markets are challenged by the volatility of the European Union and “Grexit” dynamics, and Asian markets are struggling in the midst of excessive leverage. And globally, markets are wrestling with government intervention, changing regulatory pressures, and slow-growth economies. In addition, conversations about when the U.S. Federal Reserve will normalize monetary policy and increase the Fed Funds rate continue to contribute to market volatility. That said, these challenges

Allocation 22.3% 20.4% 2.2% 5.0% 9.2% 59.1% 29.8% 4.5% 6.6% 40.9% 100.0%

Looking forward As FY15 comes to a close, Vanderbilt’s financial foundation remains strong despite a year of continued economic challenges including pressured health care reimbursements and declining federal support for research. Despite this environment, the health care enterprise continues to generate strong operating results while the academic and research areas demonstrate sustained stability.

The legal reorganization of Vanderbilt University Medical Center currently being explored will position both entities to better achieve their strategic priorities while remaining focused on a shared mission of scholarship, teaching, and creative experimentation. Vanderbilt made significant progress towards the legal separation over the past year and will maintain this momentum in FY16. Included in the pages that follow are Vanderbilt’s audited financial statements, financial ratios, and other key financial metrics for fiscal 2015.

Financial Ratios Expendable Net Assets to Debt Expendable Net Assets / Project Debt and Lease Commitments 2011 2012 2013 2014 2.3x 2.4x 2.7x 3.1x

Operating Cash Flow Margin Unrestricted Operating Results before Interest and Depreciation / Unrestricted Operating Revenues 2011 2012 2013 2014 11.1% 10.9% 5.5% 8.4%

2015 3.1x

Expendable net assets to debt measures the university’s leverage. Debt used for calculating this ratio consists of all project-related debt, the net present value of lease commitments, and debt guarantees.

The operating cash flow margin measures the cash flow generated from each dollar of operating revenue. The resulting net cash flows may occur in the current or future years depending on changes in receivables and payables.

Vanderbilt's expendable net assets to debt ratio for fiscal 2015 remained fairly stable. Vanderbilt’s expendable net assets to debt improved in fiscal 2014 as the result of a net increase in endowment market value and a decline in outstanding debt. Vanderbilt aims to maintain expendable net assets to debt of at least 2.0.

In fiscal 2015, Vanderbilt’s unrestricted operating results before interest and depreciation increased 15.9% to $371 million from $320 million in fiscal 2014. Fiscal 2015 unrestricted operating revenues at $4,067 million represented a 6.1% increase from $3,833 million in fiscal 2014. The fiscal 2014 operating cash flow margin increased in comparison to fiscal 2013 due in part to the $121 million change in estimate of net realizable value of patient receivable in fiscal 2013.

Debt Service Coverage Ratio Unrestricted Operating Results before Interest and Depreciation / Normalized Annual Debt Service 2011 2012 2013 2014 4.0x 4.1x 2.1x 3.5x

2015 9.1%

2015 4.3x

Capital Intensiveness Ratio Acquisitions of Property, Plant, and Equipment / Unrestricted Operating Revenues 2011 2012 2013 3.6% 3.9% 6.2%

The debt service coverage ratio measures the university’s ability to pay annual debt service obligations from current year operating activities. In this context, annual debt service is normalized to calculate long-term (25 years) level principal and interest payments that would be required based on the portfolio’s then-prevailing weighted average interest rates inclusive of the effects of interest rate exchange agreements. The scope for this ratio is all outstanding debt, except for taxable commercial paper used for short-term liquidity support prior to fiscal 2012.

2014 4.0%

2015 4.2%

The capital intensiveness ratio measures the university’s annual investments in property, plant, and equipment as a percentage of the university’s annual operating revenues. In fiscal 2015, the capital intensiveness ratio remained fairly stable with similar increases to both PP&E additions and operating revenues as compared to fiscal 2014. Vanderbilt’s capital spending activity in fiscal 2014 decreased to $153 million from fiscal 2013 capital spending of $224 million as several large projects approached completion in fiscal 2014 (e.g., Warren College and Moore College, Vanderbilt Recreation and Wellness Center, and Alumni Hall).

In fiscal 2015, better net operating results and slightly less normalized annual debt service resulted in an increase in the debt service coverage ratio. In fiscal 2014, net operating results increased from fiscal 2013, while normalized annual debt service decreased slightly resulting in an increased debt service coverage ratio. Vanderbilt aims to maintain a debt service coverage ratio of at least 2.0.

Average Age of Plant Accumulated Depreciation / Depreciation Expense 2011 2012 2013 2014 10.2 yrs 11.2 yrs 11.8 yrs 12.6 yrs

Debt Service Burden Normalized Annual Debt Service / Unrestricted Operating Expenses 2011 2012 2013 2014 2015 2.9% 2.8% 2.6% 2.4% 2.2%

2015 12.5 yrs

The average age of plant metric provides a sense of the age of the university’s facilities. A low average age of plant indicates that an institution has made significant recent investments in its plant.

The debt service burden measures the percent of the annual operating budget devoted to servicing outstanding debt.

The retirement of $150 million of fully depreciated equipment in fiscal 2015 resulted in a slightly improved ratio. Decreased capital spending combined with normal growth of accumulated depreciation (primarily in buildings and movable equipment categories) increased average age of plant to 12.6 years in fiscal 2014 from 11.8 years in fiscal 2013.

Consistent with the trend noted since fiscal 2011, Vanderbilt’s debt service burden decreased in fiscal 2015 and 2014 due to increases in operating expenses, strengthened by decreases in normalized annual debt service. Vanderbilt aims to maintain a debt service burden below 5.0%.

Consolidated Financial Statements

Independent Auditor's Report Board of Trust Vanderbilt University We have audited the accompanying consolidated financial statements of Vanderbilt University (the â&#x20AC;&#x153;Universityâ&#x20AC;?), which comprise the consolidated statements of financial position as of June 30, 2015 and 2014, and the related consolidated statements of activities and cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Universityâ&#x20AC;&#x2122;s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Universityâ&#x20AC;&#x2122;s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vanderbilt University at June 30, 2015 and 2014, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

October 22, 2015

PricewaterhouseCoopers LLP, PricewaterhouseCoopers Center, 300 Madison Avenue, New York, NY 10017 T: (646) 471 3000, F: (813)236 6000, www.pwc.com/us 14

Vanderbilt University Consolidated Statements of Financial Position As of June 30, 2015 and 2014 (in thousands) 2015

2014

ASSETS Cash and cash equivalents Accounts receivable, net Prepaid expenses and other assets Contributions receivable, net Student loans and other notes receivable, net Investments Investments allocable to noncontrolling interests Property, plant, and equipment, net Interests in trusts held by others Total assets

1,291,631 404,145 92,296 82,418 35,438 4,465,738 110,954 1,748,410 40,154 8,271,184

1,244,720 414,565 89,192 74,820 40,251 4,179,606 150,067 1,765,244 39,790 7,998,255

LIABILITIES Accounts payable and accrued liabilities Accrued compensation and withholdings Deferred revenue Actuarial liability for self-insurance Actuarial liability for split-interest agreements Government advances for student loans Commercial paper Long-term debt and capital leases Fair value of securities sold short Fair value of interest rate exchange agreements Total liabilities

251,670 174,115 100,511 116,753 33,757 22,356 263,454 971,415 187,431 174,713 2,296,175

212,167 216,117 92,985 113,626 35,667 22,366 209,845 1,083,285 168,451 2,154,509

NET ASSETS Unrestricted net assets controlled by Vanderbilt Unrestricted net assets related to noncontrolling interests Total unrestricted net assets Temporarily restricted net assets Permanently restricted net assets Total net assets Total liabilities and net assets

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

3,167,702 110,954 3,278,656 1,461,162 1,235,191 5,975,009 8,271,184

3,029,763 150,067 3,179,830 1,467,482 1,196,434 5,843,746 7,998,255

Vanderbilt University Consolidated Statement of Activities Year Ended June 30, 2015 (in thousands) 2015 Unrestricted

Temporarily Restricted

Permanently Restricted

Total

REVENUES Tuition and educational fees Less student financial aid Tuition and educational fees, net Grants and contracts: Government sponsors Private sponsors Facilities and administrative costs recovery Total grants and contracts Contributions Endowment distributions Investment income Health care services, net Room, board, and other auxiliary services, net Other sources Net assets released from restrictions Total revenues and other support

489,018 (216,815) 272,203

348,356 74,142 137,626 560,124 30,602 86,369 17,517 2,816,116 126,215 68,381 89,463 4,066,990

29,047 77,426 119 (89,463) 17,129

37,880 1,036 (1,215) 37,701

348,356 74,142 137,626 560,124 97,529 164,831 16,421 2,816,116 126,215 68,381 4,121,820

2,331,715 1,364,217 60,034 177,176 3,933,142 133,848

2,331,715 1,364,217 60,034 177,176 3,933,142

(10,454) 1,975 (1,985) (27,728) 3,145 16,752 (7,735) 30,121 4,091

(18,242) 4,866 (16,752) 6,679 (23,449)

1,056 1,056

(28,696) 1,975 (1,985) (27,728) 8,011 30,121 (18,302)

137,939 (39,113) 98,826

(6,320) (6,320)

38,757 38,757

170,376 (39,113) 131,263

EXPENSES Salaries, wages, and benefits Supplies, services, and other Interest expense Depreciation Total expenses Change in unrestricted net assets from operating activity

OTHER CHANGES IN NET ASSETS Change in appreciation of endowment, net of distributions Change in appreciation of self-insurance assets Change in appreciation of other investments Change in appreciation of interest rate exchange agreements Contributions for plant Net assets released from restrictions for plant Nonoperating net asset reclassifications Other Total other changes in net assets Increase (decrease) in net assets controlled by Vanderbilt Decrease in net assets related to noncontrolling interests Total increase (decrease) in net assets

Net assets, June 30, 2014

3,179,830

1,467,482

1,196,434

5,843,746

Net assets, June 30, 2015

3,278,656

1,461,162

1,235,191

5,975,009

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

Vanderbilt University Consolidated Statement of Activities Year Ended June 30, 2014 (in thousands) 2014 Unrestricted

Temporarily Restricted

Permanently Restricted

Total

478,320 (213,543) 264,777

358,632 69,466 140,051 568,149 38,182 76,525 18,264 2,613,441 111,925 58,517 83,582 3,833,362

23,980 79,900 3,268 (83,582) 23,566

55,551 1,135 6,655 63,341

358,632 69,466 140,051 568,149 117,713 157,560 28,187 2,613,441 111,925 58,517 3,920,269

2,271,831 1,241,393 65,478 175,779 3,754,481 78,881

2,271,831 1,241,393 65,478 175,779 3,754,481

EXPENSES Salaries, wages, and benefits Supplies, services, and other Interest expense Depreciation Total expenses Change in unrestricted net assets from operating activity

128,449 10,049 27,237 6,352 3,235 6,405 (15,778) 165,949

193,706 6,445 (6,405) 15,104 208,850

244,830 (36,834) 207,996

Increase in net assets controlled by Vanderbilt Decrease in net assets related to noncontrolling interests Total increase in net assets

232,416 232,416

Net assets, June 30, 2013

2,971,834

1,235,066

Net assets, June 30, 2014

3,179,830

1,467,482

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

674 674

322,155 10,049 27,237 6,352 9,680 375,473

64,015 64,015

541,261 (36,834) 504,427

1,132,419

5,339,319

1,196,434

5,843,746

Vanderbilt University Consolidated Statements of Cash Flows Years Ended June 30, 2015 and 2014 (in thousands) 2015

2014

CASH FLOWS FROM OPERATING ACTIVITIES Change in total net assets Adjustments to reconcile change in total net assets to net cash provided by operating activities: Change in net assets related to noncontrolling interests Realized and unrealized gain on investments, net Contributions for plant and endowment Contributions of securities other than for plant Proceeds from sale of donated securities Depreciation Amortization of bond discounts and premiums Payments to terminate interest rate exchange agreements Gain on sale of business Loss from disposals of property, plant, and equipment Net change in fair value of interest rate exchange agreements

Change in: Accounts receivable, net of accrued investment income Prepaid expenses and other assets Contributions receivable Interests in trusts held by others Change in: Accounts payable and accrued liabilities, net of nonoperating items Accrued compensation and withholdings Deferred revenue Actuarial liability for self-insurance Actuarial liability for split-interest agreements Net cash provided by operating activities

131,263

504,427

39,113 (164,715) (47,540) (13,082) 2,590 177,176 (4,600) 21,467 (28,932) 6,635 6,262

36,834 (426,297) (75,606) (20,717) 2,773 175,779 (5,210) 31,930 1,670 (38,282)

10,921 (3,104) (7,598) -

(1,271) (3,517) (4,518) (908)

37,660 (42,002) 7,526 3,127 (1,910) 130,257

(23,014) (19,052) (44) 6,112 1,699 142,788

(4,240,401) 4,306,051 (1,478) 48,685 (501) (21,467) (172,218) 36,016 (1,337) 6,150 (40,500)

(2,734,836) 3,122,144 (4,004) 70,668 (122) (31,930) (152,862) (2,439) 5,770 272,389

47,540 (10) (112,269) 58,608 10,492 1,478 (48,685) (42,846) 46,911 1,244,720 1,291,631

75,606 314 (43,129) 17,944 4,004 (70,668) (15,929) 399,248 845,472 1,244,720

CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments Proceeds from sales of investments Purchases of investments allocable to noncontrolling interests Proceeds from sales of investments allocable to noncontrolling interests Change in accrued investment income Payments to terminate interest rate exchange agreements Acquisitions of property, plant, and equipment Proceeds from sale of business Student loans and other notes receivable disbursed Principal collected on student loans and other notes receivable Net cash (used in) provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES Contributions for plant and endowment Change in government advances for student loans Payments to retire or defease debt Proceeds from debt refinancing Proceeds from sale of donated securities restricted for endowment Proceeds from noncontrolling interests in investment partnerships Payments to noncontrolling interests in investment partnerships Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

$ $ $

Supplemental disclosure of cash flow information: Cash paid for interest Donated securities The accompanying notes are an integral part of the consolidated financial statements.

65,377 13,082

$ $ $ $

71,657 20,717

Vanderbilt University Notes to the Consolidated Financial Statements 1. Organization The Vanderbilt University (Vanderbilt) is a private, coeducational, not-for-profit, nonsectarian institution located in Nashville, Tennessee. Founded in 1873, Vanderbilt owns and operates educational, research, and health care facilities as part of its mission to be a leading center for informed and creative teaching, scholarly research, and public service. Vanderbilt provides educational services to approximately 6,900 undergraduate and 5,800 graduate and professional students enrolled across its 10 schools and colleges.

Vanderbilt University Hospitals and Clinics (the Hospital); Vanderbilt Medical Group, a physician practice plan; and Vanderbilt Health Services, Inc. (VHS), which includes wholly owned and joint ventured businesses primarily consisting of community physician practices, imaging services, outpatient surgery centers, radiation oncology centers, a home health care agency, a home infusion and respiratory service, an affiliated health network, and a rehabilitation hospital.

The consolidated financial statements include the accounts of all entities in which Vanderbilt has a significant financial interest and over which Vanderbilt has control. The patient care enterprise includes

Vanderbilt eliminates all material intercompany accounts and transactions in consolidation.

2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements of Vanderbilt have been prepared on the accrual basis in accordance with U.S. generally accepted accounting principles (GAAP). Based on the existence or absence of donor-imposed restrictions, Vanderbilt classifies resources into three categories: unrestricted, temporarily restricted, and permanently restricted net assets.

Prepaid Expenses and Other Assets Prepaid expenses and other assets primarily represent inventories, prepaid expenses, and other segregated investment-related assets managed by third parties related to a legacy deferred compensation program that are earmarked to ultimately settle certain liabilities. Vanderbilt excludes this latter group of assets, reported at fair value, from the investments category since it will not directly benefit from the investment return.

Unrestricted net assets are free of donor-imposed restrictions. This classification includes all revenues, gains, and losses not temporarily or permanently restricted by donors. Vanderbilt reports all expenditures in the unrestricted class of net assets, since the use of restricted contributions in accordance with donorsâ&#x20AC;&#x2122; stipulations results in the release of the restriction.

Fair Value Measurements Fair value measurements represent the price received to sell an asset or price paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a three-level hierarchy for fair value measurements based on the observable inputs to the valuation of an asset or liability at the measurement date. Inputs to the valuation techniques used are prioritized to measure fair value by giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

Temporarily restricted net assets contain donor-imposed stipulations that expire with the passage of time or that can be satisfied by action of Vanderbilt. These net assets may include unconditional pledges, split-interest agreements, interests in trusts held by others, and accumulated appreciation on donor-restricted endowments not yet appropriated by the Board of Trust for distribution.

Vanderbilt gives consideration to certain investment funds that do not have readily determinable fair values including private investments, hedge funds, real estate, and other funds. Vanderbilt uses net asset value per share or its equivalent in estimating the fair value of interests in investment companies for which a readily determinable fair value is not available.

Permanently restricted net assets are amounts held in perpetuity as requested by donors. These net assets may include unconditional pledges, donor-restricted endowments (at historical value), split-interest agreements, and interests in trusts held by others. Generally, the donors of these assets permit Vanderbilt to use a portion of the income earned on related investments for specific purposes. Vanderbilt reports expirations of temporary restrictions on net assets, i.e., the passage of time and/or fulfilling donor-imposed stipulations, as net assets released from restrictions between the applicable classes of net assets in the consolidated statements of activities.

Investments Vanderbilt reports investments at fair value using the three-level hierarchy established under GAAP. After review and evaluation, Vanderbilt utilizes estimates provided by fund managers for certain alternative investments, mainly investments in limited partnerships where a ready market for the investments does not exist.

Cash and Cash Equivalents Cash and cash equivalents are liquid assets with minimal interest rate risk and maturities of three months or less when purchased. Such assets, reported at fair value, primarily consist of depository account balances, money market funds, and short-term U.S. Treasury securities.

Vanderbilt has exposure to a number of risks including liquidity, interest rate, counterparty, basis, tax, regulatory, market, and credit risks for both marketable and nonmarketable securities. Due to the level of risk exposure, it is possible that near-term valuation changes for investment securities may occur to an extent that could materially affect the amounts reported in Vanderbiltâ&#x20AC;&#x2122;s financial statements.

Vanderbilt University Vanderbilt sometimes uses derivatives to manage investment market risks and exposure. The consolidated financial statements contain derivatives, which consist of both internally managed transactions and those entered into through external investment managers, at fair value. The most common instruments utilized are futures contracts and hedges against currency risk for investments denominated in other than U.S. dollars. For internally managed transactions, Vanderbilt utilizes futures contracts with durations of less than three months.

surveys to estimate the net present value for applicable future costs, e.g., asbestos abatement or removal. Vanderbilt reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Vanderbilt recognizes an impairment charge when the fair value of the asset or group of assets is less than the carrying value. Refer to the property, plant, and equipment footnote for further discussion.

Vanderbilt records purchases and sales of securities on the trade dates, and realized gains and losses are determined based on the average historical cost of the securities sold. Vanderbilt reports net receivables and payables arising from unsettled trades as a component of investments.

Debt Portfolio Financial Instruments Vanderbilt reports long-term debt and capital leases at carrying value. The carrying value of Vanderbilt’s debt is the par amount adjusted for the net unamortized amount of bond premiums and discounts. Vanderbilt employs derivatives, primarily interest rate exchange agreements, to help manage interest rate risks associated with variable-rate debt. The consolidated statements of activities include any gain or loss resulting from recording the fair value of derivative financial instruments as a nonoperating item. In addition to the credit risk of the counterparty owing a balance, Vanderbilt calculates the fair value of interest rate exchange agreements based on the present value sum of future net cash settlements that reflect market yields as of the measurement date and reports periodic net cash settlement amounts with counterparties as adjustments to interest expense on the related debt.

Unless donor-restricted endowment gift agreements require separate investment, Vanderbilt manages all endowment investments as an investment pool. Investments Allocable to Noncontrolling Interests and Net Assets Related to Noncontrolling Interests Vanderbilt reports the respective assets for entities in which other organizations are minority equity participants at fair value as investments allocable to noncontrolling interests on the consolidated statements of financial position. The balance representing such organizations’ minority or noncontrolling interests is recorded based on contractual provisions, which represent an estimate of a settlement value assuming the entity was liquidated in an orderly fashion as of the report date.

Parties to interest rate exchange agreements are subject to risk for changes in interest rates as well as risk of credit loss in the event of nonperformance by the counterparty. Vanderbilt deals only with high-quality counterparties that meet rating criteria for financial stability and credit worthiness. Additionally, the agreements require the posting of collateral when amounts subject to credit risk under the contracts exceed specified levels.

Split-Interest Agreements and Interests in Trusts Held by Others Vanderbilt’s split-interest agreements with donors consist primarily of irrevocable charitable remainder trusts, charitable gift annuities, and life income funds for which Vanderbilt serves as trustee. Vanderbilt reports assets held in these trusts in investments at fair value. Vanderbilt recognizes contribution revenue at the dates the trusts are established, net of the liabilities for the present value of the estimated future payments to the donors and/or other beneficiaries. Annually, Vanderbilt records the change in fair value of split-interest agreements based on the assets that are associated with each trust and recalculates the liability for the present value of the estimated future payments to the donors and/or other beneficiaries.

Revenue Recognition Vanderbilt’s revenue recognition policies are: Tuition and educational fees, net—Vanderbilt recognizes student tuition and educational fees as revenues in the year the related academic services occur and defers amounts received in advance of services rendered. Vanderbilt reflects financial aid provided for tuition and educational fees as a reduction of tuition and educational fees. Financial aid does not include payments made to students for services provided to Vanderbilt. Grants and contracts —Vanderbilt recognizes revenues from grants and contracts when allowable expenditures under such agreements occur.

Vanderbilt is also the beneficiary of certain trusts held and administered by others. Vanderbilt records its share of these trust assets at fair value as interests in trusts held by others with any resulting gains or losses reported as investment income.

Facilities and administrative (F&A) costs recovery—Vanderbilt recognizes F&A costs recovery as revenue. This activity represents reimbursement, primarily from the federal government, of F&A costs on sponsored activities. Vanderbilt’s federal F&A costs recovery rate for on-campus research was 57.0% in fiscal 2015 and 56.0% in fiscal 2014. Vanderbilt’s federal F&A costs recovery rate for off-campus research was 28.5% in both fiscal 2015 and 2014.

Property, Plant, and Equipment Purchased property, plant, and equipment, recorded at cost, includes, where appropriate, capitalized interest on construction financing net of income earned on unspent proceeds. Vanderbilt capitalizes donated assets at fair value on the date of donation, expenses repairs and maintenance costs as incurred, and expenses additions to the library collection at the time of purchase.

Health care services—Vanderbilt reports health care services revenue at established rates, net of contractual adjustments, charity care, and provision for bad debt. Vanderbilt accrues third party contractual revenue adjustments under governmental reimbursement programs on an estimated basis in the period the related services occur. Vanderbilt adjusts the estimated amounts for Medicare based on final settlements determined by Vanderbilt’s Medicare Administrative Contractor (MAC).

Vanderbilt calculates depreciation using the straight-line method to allocate the cost of various classes of assets over their estimated useful lives. Vanderbilt removes property, plant, and equipment from the accounting records upon disposal. Conditional asset retirement obligations related to legal requirements to perform certain future activities associated with the retirement, disposal, or abandonment of assets are accrued utilizing site-specific

Vanderbilt University to Vanderbilt’s other primary programs such as instruction, research, and public service.

Contributions Vanderbilt recognizes unconditional promises to give (pledges) as contribution revenue upon receipt of a commitment from the donor. Vanderbilt records pledges with payments due in future periods as increases in temporarily restricted or permanently restricted net assets at the estimated present value of future cash flows, net of an allowance for estimated uncollectible promises. Vanderbilt calculates an allowance for uncollectible contributions receivable based upon an analysis of past collection experience and other judgmental factors.

Vanderbilt allocates costs related to the operation and maintenance of physical plant, including depreciation of plant assets, to operating programs and supporting activities based upon facility usage. Additionally, the university allocates interest expense to the activities that have benefited most directly from the debt proceeds. Income Taxes Vanderbilt is a tax-exempt organization as described in Section 501(c)(3) of the Internal Revenue Code (the Code), and generally is exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. Vanderbilt is, however, subject to federal and state income tax on unrelated business income, and provision for such taxes is included in the accompanying consolidated financial statements.

Vanderbilt records contributions with donor-imposed restrictions as unrestricted revenue if the university meets the restrictions and receives the contribution in the same reporting period. Otherwise, Vanderbilt records contributions with donor-imposed restrictions as increases in temporarily restricted or permanently restricted net assets, depending on the nature of the restriction. After meeting donor stipulations, Vanderbilt releases contributions recorded as temporarily restricted from restrictions and recognizes these contributions as unrestricted net assets. Vanderbilt releases from restrictions contributions for plant facilities and recognizes these contributions as a nonoperating item only after incurring expenses for the applicable plant facilities or when the related asset is placed in service based on donor intent.

Use of Estimates The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting period as well as the disclosure of contingent assets and liabilities. Actual results ultimately could differ from management’s estimates. Reclassifications Vanderbilt made certain reclassifications within endowment distributions, net assets released from restriction, health care services revenue, other sources revenue, and certain functional expense categories to prior year amounts to conform to the current year presentation. These reclassifications were not material to the financial statements.

In contrast to unconditional promises as described above, Vanderbilt does not record conditional promises (primarily bequest intentions) until the university substantially meets donor contingencies. Unrestricted Operating Results Unrestricted operating results (change in unrestricted net assets from operating activity) in the consolidated statements of activities reflect all transactions that change unrestricted net assets, except for nonoperating activity related to endowment and other investments, changes in the fair value of derivative financial instruments, contributions for plant facilities, and certain other nonrecurring items.

Gain on Sale of Business During fiscal year 2015, Vanderbilt sold its air ambulance service, LifeFlight, for $36 million, resulting in a gain of $29 million. Vanderbilt reported the gain on sale as a component of other changes in net assets in the accompanying consolidated statement of activities.

Endowment distributions reported as operating revenue consist of endowment return (regardless of when such income arose) distributed to support current operational needs in the current period. Vanderbilt’s Board of Trust approves the distribution amount from the endowment pool on an annual basis, determined by applying a spending rate to an average of the previous three calendar year-end market values. The primary objective of the endowment distribution methodology is to reduce the impact of capital market fluctuations on operational programs.

Subsequent Events Vanderbilt evaluated events subsequent to June 30, 2015, through October 22, 2015, the date of issuance of the consolidated financial statements. During this period, Vanderbilt terminated fixed-payer interest rate exchange agreements with notional values totaling $65 million. Vanderbilt did not identify any other material subsequent events for recognition or disclosure. Recent Accounting Pronouncements In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). Pursuant to ASU 2014-08, only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results qualify for treatment as discontinued operations upon disposal. The provisions of ASU 2014-08 are effective prospectively for all disposals or classifications of components of an entity as held for sale that occur within annual periods beginning on or after December 15, 2014. Vanderbilt will adopt ASU 2014-08 for fiscal 2016.

Operating investment income consists of dividends, interest, and gains and losses on unrestricted, non-endowed investments directly related to core operating activities, as well as investment returns on Vanderbilt’s working capital assets. For working capital assets invested in long-term pooled investments managed in conjunction with endowment funds, the amount resulting from pre-established distributions from pooled investments is deemed operating investment income; the difference between total returns for these pooled investments and the aforementioned pre-established distributions is reported as nonoperating activity. Operating investment income excludes investment returns on segregated gift funds and funds set aside for nonoperating purposes such as segregated assets for self-insurance relative to malpractice and professional liability and assets on deposit with trustees.

Vanderbilt is in the process of exploring alternative arrangements with Vanderbilt University Medical Center (VUMC) as a not-forprofit academic medical center that is financially distinct from Vanderbilt. As of the time of issuance of the fiscal 2015 financial statements, the arrangement has not been finalized or formally approved by the Board, and therefore does not meet the criteria required for classification as held for sale as of the balance sheet date.

Vanderbilt allocates management and administrative support costs attributable to divisions that primarily provide health care or auxiliary services based upon institutional budgets. Thus, institutional support expense reported in the functional expense footnote relates 21

Vanderbilt University In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive standard for revenue recognition across all industries and supersedes most existing revenue recognition guidance. In addition, ASU 201409 will require new and enhanced disclosures. ASU 2014-09 will become effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted in periods beginning after December 15, 2017. Vanderbilt is currently evaluating the effect of the new revenue recognition guidance.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments measured at fair value using the net asset value per share practical expedient. The provisions of ASU 2015-07 are effective for fiscal years beginning after December 15, 2016 (with early adoption permitted) and will require retrospective application to all periods presented. Vanderbilt expects to early adopt ASU 2015-07 for fiscal 2016.

3. Accounts Receivable The Hospital provides services to patients in advance of receiving payment and generally does not require collateral or other security for those services. However, the Hospital routinely obtains assignment of (or is otherwise entitled to receive) patientsâ&#x20AC;&#x2122; benefits payable under their health insurance programs, plans, or policies (e.g., Medicare, Medicaid, TennCare, Blue Cross, health maintenance organizations, or other commercial insurance policies).

Accounts receivable as of June 30 were as follows (in thousands): 2015

Patient care Tuition/fees, grants, other Accrued investment income Accounts receivable and related allowance Days receivable

Gross Bad Debt Net Receivable Allowance Receivable $ 378,462 $ (76,720) $ 301,742 101,586 (1,885) 99,701 2,702 2,702 (78,605)

$ 404,145 36.2

As of June 30, the Hospital had receivables, net of related contractual allowances, including estimated amounts for cost reports and other settlements with government payers, from the following payers (in thousands):

Gross Receivable $ 386,271 98,679 2,201

Bad Debt Allowance $ (70,522) (2,064) -

Net Receivable $ 315,749 96,615 2,201

Medicare TennCare/Medicaid Blue Cross Other commercial carriers Patient responsibility Total Hospital receivables, net

$ 487,151

$ (72,586)

$ 414,565 39.5

$ 482,750

2014

Patient care Tuition/fees, grants, other Accrued investment income Accounts receivable and related allowance Days receivable

2015 42,959 36,734 50,847 108,726 21,735 261,001

2014 37,794 34,453 68,031 95,570 34,811 270,659

Patient care bad debt charges, reported as a reduction to health care services revenue on the consolidated statements of activities, totaled $59.1 million and $96.6 million as of June 30, 2015 and 2014, respectively (both recorded at gross charge level).

Patient care receivables represented 78.4% and 79.3% of total gross accounts receivables as of June 30, 2015 and 2014, respectively. The largest portion of patient care receivables relates to the Hospital and in turn, the largest component of the Hospitalâ&#x20AC;&#x2122;s receivables was from third party payers.

4. Contributions Receivable Contributions receivable as of June 30 were as follows (in thousands): 2015 Unconditional promises expected to be collected: in one year or less between one year and five years in more than five years Contributions receivable Less: Discount Less: Allowance for uncollectible promises Contributions receivable, net

41,072 53,058 502 94,632 1,612 10,602 82,418

write-offs as a percentage of gross pledges receivable along with assessing the age and activity of outstanding pledges. In addition to pledges reported as contributions receivable, Vanderbilt had cumulative bequest intentions and conditional promises to give of approximately $282.3 million and $242.2 million as of June 30, 2015 and 2014, respectively. Due to their conditional nature, Vanderbilt does not recognize intentions to give as assets.

2014

33,929 51,461 841 86,231 1,404

Contributions receivable, net as of June 30, were as follows (in thousands):

10,007 74,820

2015 Contributions receivable, net: Temporarily restricted Permanently restricted Total

Vanderbilt discounts contributions receivable at a rate commensurate with the scheduled timing of receipt. Vanderbilt applied discount rates ranging from 0.5% to 1.5% to amounts outstanding as of June 30, 2015, and June 30, 2014. Vanderbiltâ&#x20AC;&#x2122;s methodology for calculating an allowance for uncollectible promises consists of analyzing

$ $

38,933 43,485 82,418

2014 $ $

32,859 41,961 74,820

Vanderbilt University 5. Student Loans and Other Notes Receivable pool from repayments on outstanding loans. Vanderbilt assigns loans receivable from students under governmental loan programs, also carried at cost, to the federal government or its designees. Vanderbilt classifies refundable advances from the federal government as liabilities in the statements of financial position. Outstanding loans cancelled under a governmental program result in a reduction of the funds available for loan and a decrease in the university’s liability to the government.

Student loans and other notes receivable as of June 30 were as follows (in thousands): 2015 Gross Bad Debt Receivable Allowance $ 22,489 $ (2,146) 17,095 (6,637) 4,637 -

Federal loans Institutional loans Faculty mortgages Student loans, other notes receivable and related allowance $ 44,221 $ (8,783)

Net Receivable $ 20,343 10,458 4,637

Vanderbilt establishes bad debt allowances based on prior collection experience and current economic factors which, in management’s judgment, could influence the ability of loan recipients to repay amounts due. When deemed to be uncollectible, Vanderbilt writes off institutional loan balances.

$ 35,438

2014 Gross Bad Debt Receivable Allowance $ 20,077 $ (1,995) 19,238 (2,820) 5,751 -

Federal loans Institutional loans Faculty mortgages Student loans, other notes receivable and related allowance $ 45,066 $ (4,815)

Net Receivable $ 18,082 16,418 5,751

Included in institutional loans as of June 30, 2015, is an outstanding note receivable of $3.6 million from McKendree Village, LLC, an affiliate of Vanderbilt that sold all of its operations in fiscal 2012 and is in the process of dissolving. Because it is unlikely McKendree Village, LLC will repay this debt, it has been fully reserved in the consolidated financial statements.

$ 40,251

Vanderbilt remains committed to “no loans” for its undergraduate students, meaning that the university is meeting full demonstrated financial need with scholarship and grant assistance. For other groups (e.g., professional school students), participation in several federal revolving loan programs, including the Perkins, Nursing, and Health Professionals Student Loan programs, has continued. Vanderbilt carries loans to students at cost, which, based on secondary market information, approximates the fair value of education loans with similar interest rates and payment terms. The availability of funds for new loans under these programs is dependent on reimbursements to the

As part of Vanderbilt’s efforts to attract and retain a world-class faculty, Vanderbilt provides various incentives and historically provided home mortgage financing assistance in select situations. Notes receivable amounting to $4.6 million were outstanding at June 30, 2015. Deeds of trust on properties concentrated in the surrounding region collateralize these notes. Vanderbilt has not recorded an allowance for doubtful accounts against these loans based on their collateralization and prior collection history.

6. Investments Investments consist of the following as of June 30 (in thousands): 2015

2014

Derivative contract collateral and short-term securities1 Global equities1 Fixed income 5 Hedged strategies6 Private capital 3 Real estate 3 Natural resources 3 Equity method securities Commodities2 Trusts 4 Other investments4 Total value

82,139 1,094,368 248,978 904,782 1,406,331 228,975 294,298 16,010 98,311 4,258 10,811 $ 4,389,261

77,839 1,205,839 177,867 781,368 1,439,513 279,042 335,955 15,782 4,652 11,816 $ 4,329,673

Total cost

$ 3,595,067

$ 3,382,507

reported at fair value. During fiscal 2015, the minority limited partners funded capital commitments totaling $1.5 million. Additionally, Vanderbilt made payments to the minority limited partners of $48.7 million reflecting a distribution of earnings and returned capital from the underlying private fund assets. For the year ended June 30, 2015, the minority limited partners’ interests in the results of the underlying returns from the private fund assets were $248.3 million. The balance of unrestricted net assets related to noncontrolling interests, calculated in accordance with the partnership agreements, was $111.0 million as of June 30, 2015.

Investments, along with cash and cash equivalents, provide liquidity support for Vanderbilt’s operations. Of these combined amounts, based on prevailing market conditions as of June 30, 2015, $1,374.5 million of liquid assets were available on a same-day basis and an additional $872.1 million was available within 30 days.

Quoted prices in active markets determine fair value or fund managers provide the net asset value per share of the specific investment to establish fair value. Quoted prices in active markets determine fair value. 3 Fund managers provide the net asset value of Vanderbilt’s ownership interests at the fund level to establish fair value. 4 Carrying value provides a reasonable estimate of fair value for certain components. 5 Quoted prices in active markets determine fair value or fund managers provide the net asset value per share of the specific investment to establish fair value. Includes $32 million of equity short positions. 6 Quoted prices in active markets determine fair value or fund managers provide the net asset value per share of the specific investment to establish fair value. Includes $155 million of equity short positions.

Derivative contract collateral and short-term securities are composed primarily of amounts posted as collateral in accordance with interest rate exchange agreements and unspent bond proceeds with trustees.

Global equities consist of investment funds globally diversified across public markets including U.S. markets, other developed markets, and emerging and frontier markets. Fund managers of these investments have the ability to shift investments from value to growth strategies, from small to large capitalization stocks, and from a net long position to a net short position.

Included in the amounts reported in the table above are investments allocable to noncontrolling interests (i.e., minority limited partners) 23

Vanderbilt University Private capital consists of illiquid investments in buyouts, distressed debt, mezzanine debt, growth equity, and venture capital. Vanderbilt may make investments through commingled vehicles, separately managed accounts, synthetic transactions, limited partnership interests, and direct investments.

Fixed income includes investments directed towards capital preservation and predictable yield as well as more opportunistic strategies focused on generating return on price appreciation. These investments are primarily public investments such as U.S. Treasuries and other government obligations, investment-grade corporate bonds, high-yield corporate bonds, bank debt, commercial mortgage-backed securities, residential non-agency mortgagebacked securities, asset-backed securities, direct lending, and below investment-grade developed and emerging market sovereign debt. Vanderbilt may make investments through commingled vehicles, separately managed accounts, synthetic transactions, and limited partnership interests.

Real estate comprises illiquid investments in residential and commercial real estate assets, projects, publicly traded REITs or land held directly through separately managed accounts, limited partnership interests, and direct investments in properties. The nature of the investments in this category is such that distributions generally reflect liquidation of the underlying assets of the funds. Natural resources include illiquid investments in timber, oil and gas production, mining, energy, and related services businesses held directly or in commingled limited partnership funds.

Hedged strategies investments reflect multiple strategies such as event driven, relative value, and equity funds to diversify risks and reduce volatility in the portfolio generally in hedge fund structures. These strategies also include investments in both long and short primarily credit-oriented securities. Investments may include mortgage-backed securities, trade finance, debt and asset-backed securities, repurchase agreements, senior loans, and bank loans. The fair value of open short positions is recorded as a liability and the university records an unrealized gain or loss to the extent of the difference between the proceeds received and the value of the open short position. By entering into short sales, the university bears the market risk of increases in the value of the security sold short in excess of the proceeds received. Possible losses from short sales differ from losses that could be incurred from purchases of securities because losses from short sales may be unlimited whereas losses from purchases cannot exceed the total amount invested.

Commodities include public investments such as commodity futures, commodity-related equities, and private investments in energy, power, infrastructure, and timber. Investments may be made through commingled vehicles, separately managed accounts, synthetic transactions, limited partnership interests, and direct investments. Equity method securities and trusts are investments in joint ventures accounted for under the equity method of accounting and Vanderbiltâ&#x20AC;&#x2122;s split-interest agreements with donors.

7. Investment Return A summary of investment return, including endowment distributions, by net asset category for the fiscal years ended June 30 follows (in thousands):

The components of total investment return for the fiscal years ended June 30 were as follows (in thousands): 2015

2015 OPERATING Unrestricted: Endowment distributions Investment income Total operating return

NONOPERATING Unrestricted: Change in appreciation of institutional endowments, net of distributions Change in appreciation of self-insurance assets Investment (loss) income

86,369 17,517 103,886

2014

Interest, dividend, and partnership income, net of fees Net realized gains (losses) Change in unrealized appreciation Total investment return

76,525 18,264 94,789

(10,454)

128,449

1,975 (1,985)

10,049 27,237

(12,169) 306,477 (141,762) 152,546

2014 $

118,891 (63,811) 490,108 545,188

In addition to a core group of investment professionals dedicated to the management of Vanderbiltâ&#x20AC;&#x2122;s endowment, Vanderbilt employs external investment managers. Particularly for alternative investments such as hedge funds, investment manager fee structures frequently have a base component along with a performance component relative to the entire life of the investments. Under these arrangements, management fees are frequently subject to substantial adjustments based on cumulative future returns for a number of years hence.

Temporarily restricted: Endowment distributions Investment income Change in appreciation of donor-restricted endowments, net of distributions

77,426 119

79,900 3,268

Vanderbilt reports investment returns net of returns attributed to limited partners on investments allocable to noncontrolling interests.

(18,242)

193,706

Permanently restricted: Endowment distributions Investment income Total nonoperating return Total investment return

1,036 (1,215) 48,660 152,546

1,135 6,655 450,399 545,188

Vanderbilt incurred internal investment management costs of $9.9 million in fiscal 2015 and $11.9 million in fiscal 2014. Fees paid directly to external investment managers (i.e., segregated investment account fees) totaled $13.8 million and $4.5 million in fiscal 2015 and 2014, respectively. Vanderbilt reports investment returns net of these external manager fees.

$ $

Vanderbilt University 8. Endowment Endowment-related assets include donor-restricted endowments and institutional endowments (quasi-endowments). Vanderbilt’s endowment does not include gift annuities, interests in trusts held by others, contributions pending donor designation, and contributions receivable.

temporarily restricted net assets. In this context, historical value represents the original value of initial contributions restricted as permanent endowments plus the original value of subsequent contributions and, if applicable, the value of accumulations made in accordance with the direction of specific donor gift agreements.

The Board of Trust’s interpretation of its fiduciary responsibilities for donor-restricted endowments under the Uniform Prudent Management of Institutional Funds Act (UPMIFA) requirements, barring the existence of any donor-specific provisions, is to preserve intergenerational equity. Under this broad guideline, future endowment beneficiaries should receive at least the same level of real economic support as the current generation. The overarching objective is to preserve and enhance the real (inflation-adjusted) purchasing power of the endowment in perpetuity. Vanderbilt invests assets to provide a relatively predictable and stable stream of earnings to meet spending needs and attain long-term return objectives without the assumption of undue risks.

Specific appropriation for expenditure of Vanderbilt’s endowment funds occurs each spring when the Board of Trust approves the university’s operating budget for the ensuing fiscal year. For fiscal years 2015 and 2014, Vanderbilt’s Board of Trust approved endowment distributions based on 4.5% of the average of the previous three calendar year-end market values. Vanderbilt reinvests actual realized endowment return earned in excess of distributions. For years when the endowment return is less than the distribution, the endowment pool’s cumulative returns from prior years cover the shortfall. Vanderbilt may not fully expend Board-appropriated endowment distributions in a particular fiscal year. In some cases, Vanderbilt will approve endowment distributions for reinvestment into the endowment.

UPMIFA specifies that unless stated otherwise in a gift instrument, donor-restricted assets in an endowment fund are restricted assets until appropriated for expenditure. Barring the existence of specific instructions in gift agreements for donor-restricted endowments, Vanderbilt reports the historical value for such endowments as permanently restricted net assets and the net accumulated appreciation as

A summary of Vanderbilt’s endowment for the fiscal years ended June 30 follows (in thousands):

2015 Unrestricted $ -

Donor-restricted endowments at historical value Accumulated net appreciation of donor-restricted endowments Reinvested distributions of donor-restricted endowments At historical value Accumulated net appreciation Institutional endowments At historical value Accumulated net appreciation Endowment net assets as of June 30, 2015

Temporarily Restricted $ 22,021 1,311,212

Permanently Restricted $ 1,123,852 -

Total $ 1,145,873 1,311,212

95,019 106,541

11,696 2,285

106,715 108,826

362,356 1,058,406 $ 1,622,322

$ 1,347,214

$ 1,123,852

362,356 1,058,406 $ 4,093,388

Unrestricted $ -

Temporarily Restricted $ 24,785 1,329,499

Permanently Restricted $ 1,080,443 -

Total $ 1,105,228 1,329,499

2014

94,224 108,417

3,783 2,239

98,007 110,656

335,875 1,066,985 $ 1,605,501

$ 1,360,306

$ 1,080,443

335,875 1,066,985 $ 4,046,250

portfolio consists of three primary components designed to serve a specific role in establishing the right balance between risk and return. These three components are global, public, and private equity investments. Vanderbilt expects these three investments, including private capital and many hedge funds, to produce favorable returns in environments of accelerated growth and economic expansion. Vanderbilt expects hedged strategies and fixed income investments to generate stable returns and preserve capital during periods of poor equity performance. Vanderbilt uses real estate and natural resources allocations to provide an inflation hedge.

The components of the life-to-date accumulated net appreciation of pooled endowments as of June 30 were as follows (in thousands):

Net realized appreciation less endowment distributions Net unrealized appreciation Total

2015

2014

$ 1,814,157 664,287 $ 2,478,444

$ 1,708,468 798,672 $ 2,507,140

In striving to meet the overarching objectives for the endowment, over the past 20 years the university has experienced an 11% annualized standard deviation in its returns. This level of risk is consistent with that accepted by peer institutions. Currently, the endowment

From time to time, the fair value of assets associated with an endowed fund may fall below the level that a donor or UPMIFA requires in

Vanderbilt University terms of maintenance of perpetual duration endowments. As of June 30, 2015 and 2014, Vanderbilt had deficiencies of this nature of approximately $1.5 million consisting of 66 endowments and $1 million consisting of 50 endowments, respectively. These deficiencies resulted from unfavorable market declines that occurred after the investment of recent permanently restricted contributions. Vanderbilt

believes these declines are modest in relation to the total market value for donor-restricted endowments and that these deficiencies will be relatively short-term in nature. Changes in endowment net assets for the fiscal years ended June 30 were as follows (in thousands):

2015 Unrestricted $ 1,605,501

Endowment net assets as of June 30, 2014 Endowment investment return: Investment income, net of fees Net appreciation (realized and unrealized) Total endowment investment return Gifts and additions to endowment, net Endowment distributions Transfers for internal management costs Other Endowment net assets as of June 30, 2015

Temporarily Restricted $ 1,360,306

Permanently Restricted $ 1,080,443

Total $ 4,046,250

(2,097) 56,383 54,286

(3,651) 98,152 94,501

(5,748) 154,535 148,787

27,291 (60,139) (3,604) (1,013) $ 1,622,322

5,134 (104,692) (6,273) (1,762) $ 1,347,214

43,409 $ 1,123,852

75,834 (164,831) (9,877) (2,775) $ 4,093,388

Temporarily Restricted $ 1,163,129

Permanently Restricted $ 1,021,892

Total $ 3,635,343

2014 Unrestricted $ 1,450,322

Endowment net assets as of June 30, 2013 Endowment investment return: Investment income, net of fees Net appreciation (realized and unrealized) Total endowment investment return

49,319 146,586 195,905

Gifts and additions to endowment, net Endowment distributions Transfers for internal management costs Other Endowment net assets as of June 30, 2014

26,730 (62,822) (4,754) 120 $ 1,605,501

74,375 221,057 295,432 3,471 (94,738) (7,170) 182 $ 1,360,306

123,694 367,643 491,337

58,551 $ 1,080,443

88,752 (157,560) (11,924) 302 $ 4,046,250

9. Property, Plant, and Equipment Vanderbilt reports property, plant, and equipment at cost or, if a gift, at fair value as of the date of the gift, net of accumulated depreciation. Vanderbilt computes depreciation using the straight-line method over the estimated useful lives of the assets.

Vanderbilt did not capitalize interest in either fiscal 2015 or fiscal 2014 due to immateriality. Vanderbilt capitalized internal-use software development costs of $1.0 million and $6.5 million in fiscal 2015 and 2014, respectively.

Property, plant, and equipment as of June 30 were as follows (in thousands):

Land Buildings and improvements Moveable equipment Construction in progress Property, plant, and equipment Less: Accumulated depreciation Property, plant, and equipment, net

2015 78,825 2,933,333 840,582 113,750 3,966,490 2,218,080 $ 1,748,410

Vanderbilt reviews property, plant, and equipment for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The university recognizes an impairment loss only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a longlived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Vanderbilt booked impairment losses of $6.3 million and $1.3 million in fiscal 2015 and 2014, respectively, related to property, plant, and equipment.

2014 73,897 2,902,231 937,059 67,483 3,980,670 2,215,426 $ 1,765,244

Vanderbilt identified conditional asset retirement obligations, primarily for the costs of asbestos removal and disposal, resulting in liabilities of $17.2 million and $16.5 million as of June 30, 2015 and 2014, respectively. These liability estimates, included in accounts payable and accrued liabilities in the consolidated statements of financial position, use an inflation rate of 4.0% and a discount rate of 5.0% based on relevant factors at origination.

Purchases for the library collection are not included in the amounts above since Vanderbilt expenses them at the time of purchase. As of June 30, 2015, the estimated replacement cost for library collections, including processing costs to properly identify, catalog, and shelve materials, totaled $375 million. The replacement cost remained flat because some Vanderbilt University libraries are transitioning to ebooks.

Vanderbilt University 10. Long-Term Debt, Capital Leases, and Commercial Paper Long-term debt consists of bonds and notes payable with scheduled final maturity dates at least one year after the original issuance date. Outstanding long-term debt, capital leases, and commercial paper

(CP) obligations reflected in the financial statements at carrying value as of June 30 were as follows (in thousands):

Years to Nominal Maturity FIXED-RATE DEBT Series 2008A Series 2008B1 Series 2009A Series 2009B1 Series 2009A Taxable Series 2012C Series 2012D Series 2012E Fixed-rate debt VARIABLE-RATE DEBT Series 2012A Series 2012B Variable-rate debt

4 4 25 25 4 3 23 5

5.00% 4.00%-5.00% 4.00%-5.50% 5.00%-5.50% 5.25% 3.00%-5.00% 3.00%-5.00% 2.00%-5.00%

Par amount of long-term debt Net unamortized premium Total long-term debt Capital leases Total long-term debt and capital leases Tax-exempt commercial paper Taxable commercial paper Total commercial paper

<1 <1

Total long-term debt, capital leases, and commercial paper 1 2

Outstanding Fixed Coupon Fiscal 2015 Interest Rates as Effective of June 30, 2015 Interest Rate2 4.0% 4.0% 4.9% 5.0% 5.3% 1.4% 3.2% 0.9% 4.4%

Outstanding Principal 2015 2014 $

94,600 59,550 97,100 232,900 250,000 17,955 106,230 33,550 891,885

109,600 78,185 97,100 232,900 250,000 18,620 106,230 39,490 932,125

0.5% 0.7% 0.6%

67,000 67,000

67,000 67,000 134,000

4.0% 4.0% 2.3% 4.0%

958,885 12,530 971,415 971,415

1,066,125 17,131 1,083,256 29 1,083,285

0.2% 0.3% 0.2%

90,000 173,454 263,454

95,000 114,845 209,845

3.3%

$ 1,234,869

$ 1,293,130

Issued under Master Trust Indenture structure. Exclusive of interest rate exchange agreements. Inclusive of these agreements, the overall portfolio effective interest rate was 4.8%.

Trust indentures for certain bond issues contain covenants and restrictions involving the issuance of additional debt, maintenance of a specified debt service coverage ratio, and the maintenance of credit facilities for liquidity purposes. Vanderbilt was in compliance with such covenants and restrictions as of June 30, 2015.

The preceding table reflects fixed/variable allocations before the effects of interest rate exchange agreements. A successive note discusses these agreements in more detail. The Health and Educational Facilities Board of The Metropolitan Government of Nashville and Davidson County, Tennessee (HEFB) issued Vanderbilt’s tax-exempt CP and all of the aforementioned bonds, with the exception of the Series 2009A Taxable notes. As a conduit issuer, the HEFB loans the debt proceeds to Vanderbilt. Pursuant to loan agreements, Vanderbilt’s debt service requirements under these loan agreements coincide with required debt service of the actual HEFB bonds.

The components of interest for total long-term debt, capital leases, CP, and interest rate exchange agreements follows (in thousands):

Payments for interest costs Accrued interest expense

All debt instruments are general obligations of Vanderbilt. Vanderbilt did not pledge any of its assets as collateral for this debt.

$ $

2015 65,377 60,034

$ $

2014 71,657 65,478

Payments for interest costs, including amounts capitalized, occur on varying scheduled payment dates for debt, maturity dates for CP, and settlement dates for interest rate exchange agreements. Vanderbilt calculates accrued interest expense for its debt, CP, and interest rate exchange agreements based on applicable interest rates for the respective fiscal year.

Included in the foregoing table are Hospital bonds, with a $292.5 million principal balance outstanding as of June 30, 2015, that were issued under a Master Trust Indenture (MTI) structure. The MTI provides the flexibility for multiple parties to participate in debt issuances as part of an obligated group. Presently, Vanderbilt’s hospitals and clinics have no other members participating in the obligated group. Bonds issued under the MTI are payable from hospital revenues. A Vanderbilt debt service guarantee supplements all outstanding MTI bonds.

Vanderbilt University includes a general use provision. These commitments expire in March 2016 and April 2017. The maximum repayment period, which may extend beyond the expiration date, ranges from 90 days to three years. Vanderbilt has never borrowed against revolving credit agreements to support redemptions of debt.

Principal retirements and scheduled sinking fund requirements based on nominal maturity schedules for long-term debt due in subsequent fiscal years ending June 30 are as follows (in thousands): 2016 2017 2018 2019 2020 Thereafter Total long-term debt principal retirements

54,245 44,875 47,070 342,300 17,165 453,230 958,885

Vanderbilt has entered into an agreement with one bank to provide a general use line of credit with a maximum available commitment totaling $100.0 million as of June 30, 2015. This line of credit expires in October 2015. Vanderbilt had no outstanding draws against these credit facilities as of June 30, 2015, or June 30, 2014. Vanderbilt reports long-term debt at carrying value, which is the par amount adjusted for the net unamortized amount of bond premiums and discounts. The carrying value and estimated fair value of Vanderbilt’s long-term debt as of June 30 were as follows (in thousands):

Requirements in earlier years in the preceding table could be greater if Vanderbilt must purchase either a portion or all of its floating-rate notes or CP in the event of failed remarketings, on mandatory tender dates, or scheduled maturities as described in the following paragraphs. During fiscal 2015, Vanderbilt redeemed the $67.0 millon 2012A floating rate notes. This redemption was funded by the issuance of two $30.0 million tranches of taxable CP and $7.0 million of operating cash. Vanderbilt had $67.0 million of variable-rate bonds outstanding as of June 30, 2015, consisting entirely of floating-rate notes with a mandatory tender date of October 1, 2017.

Carrying value of long-term debt Fair value of long-term debt

2015 $ 971,415 $ 1,053,467

2014 $ 1,083,256 $ 1,175,327

Vanderbilt bases estimated fair value of long-term debt on market conditions prevailing at fiscal year-end reporting dates. Besides potentially volatile market conditions, fair value estimates typically also reflect limited secondary market trading. Vanderbilt reports capital leases and commercial paper at carrying value, which closely approximates fair value for those liabilities.

As of June 30, 2015, Vanderbilt had $90.0 million of tax-exempt CP outstanding and $173.5 million of taxable CP outstanding. The weighted average duration of Vanderbilt’s CP portfolio totaled 92 days as of June 30, 2015, and 97 days as of June 30, 2014.

None of Vanderbilt’s fixed-rate debt has a mandatory tender date preceding the respective final maturity date. The Series 2008A and 2008B bonds include amortizing principal amounts each year but these bonds are noncallable before their October 2018 final maturity date. The Series 2009A and 2009B bonds include amortizing principal amounts each year beginning fiscal 2016 and a call feature at par beginning October 2019. The Series 2009A Taxable notes do not amortize and include a call feature before the April 2019 maturity date only if Vanderbilt pays a make-whole call provision to the bondholders. The Series 2012C bonds include annual amortizing principal amounts each year, excluding October 2015, until their final maturity in October 2017. The Series 2012D bonds include amortizing principal amounts each year beginning in fiscal 2021 and a call feature at par beginning October 2023. The Series 2012E bonds include annual amortizing principal amounts beginning October 2013, until their final maturity in October 2019.

Vanderbilt’s current tax-exempt CP program began on March 29, 2010, with all draws completed by September 30, 2011. The final maturity under the current tax-exempt CP program is May 31, 2036. Vanderbilt can issue an additional $411.5 million under its current taxable CP program. Debt liquidity support with short-term remarketing periods (CP totaling $263.5 million) is provided by Vanderbilt’s self-liquidity. As of June 30, 2015, Vanderbilt estimates that $1,374.5 million of liquid assets were available on a same-day basis and an additional $872.1 million was available within 30 days. A second tier of debt liquidity support consists of two revolving credit facilities with maximum available commitments totaling $400 million as of June 30, 2015, dedicated to Vanderbilt’s debt portfolio liquidity support. One of these lines totaling $200 million

Vanderbilt University 11. Interest Rate Exchange Agreements Vanderbilt utilizes interest rate exchange agreements as part of its debt portfolio management strategy. These agreements result in periodic net cash settlements paid to, or received from, counterparties. Adjustments to interest expense for net settlements due to counterparties totaled $18.9 million and $23.0 million in fiscal 2015 and 2014, respectively.

net gains of $6.4 million in fiscal 2014. The $27.7 million change in appreciation of interest rate exchange agreements in fiscal 2015 includes an $8.6 million unrealized loss to adjust the discount rate to reflect counterparty credit risk partially offset by a $2.4 million net unrealized gain from the combination of the positive effect of the termination of fixed-rate payer interest rate exchange agreements and the decrease in the long-term LIBOR rate. The $6.4 million change in appreciation of interest rate exchange agreements in fiscal 2014 includes a $13.4 million unrealized gain resulting from an adjustment to the discount rate to reflect counterparty credit risk and a $24.9 million net unrealized gain from the combination of the positive effect of the termination of fixed-rate payer interest rate exchange agreements and the decrease in the long-term LIBOR rate. LIBOR decreased to 2.9% as of June 30, 2015, from 3.3% as of June 30, 2014. In fiscal 2015 Vanderbilt incurred costs of $21.5 million to terminate interest rate exchange agreements compared to $31.9 million in fiscal 2014. These costs are reflected in the change in appreciation of interest rate exchange agreements in the respective periods.

Vanderbilt estimates the fair value of interest rate exchange agreements by calculating the present value sum of future net cash settlements that reflect market yields as of the measurement date and estimated amounts that Vanderbilt would pay, or receive, to terminate the contracts as of the report date. Vanderbilt considers current interest rates and creditworthiness of the interest rate exchange counterparties when estimating termination settlements. The estimated fair value of Vanderbilt’s outstanding interest rate exchange agreements represented liabilities of $174.7 million and $168.4 million as of June 30, 2015 and 2014, respectively. Vanderbilt did not enter into any new interest rate exchange agreements during fiscal 2015 or 2014. During fiscal 2015, Vanderbilt terminated $60.0 million notional of fixed-rate payer interest rate exchange agreements at a cost of $21.5 million to reduce collateral exposure and eliminate ongoing settlement costs. Following the terminations and scheduled amortizations, Vanderbilt had $482.9 million of aggregate fixed-payer interest rate exchange agreements outstanding for which the university receives 68.2% of one-month LIBOR and pays a weighted average fixed rate of 3.86%. Vanderbilt also had $500.0 million of basis interest rate exchange agreements outstanding in fiscal 2015 and 2014 for which the university receives 81.5% of one-month LIBOR and pays SIFMA. Vanderbilt did not terminate any basis interest rate exchange agreements in either fiscal year.

The interest rate exchange agreements include collateral pledging requirements based on the fair value of the contracts. Collateral held by counterparties as of June 30, 2015 and 2014, totaled $84.4 million and $75.8 million, respectively. Vanderbilt estimates that a decline in long-term LIBOR rates to approximately 1% would result in the fair value of the portfolio being a liability of approximately $390 million and correspondingly increase Vanderbilt’s collateral pledging requirements to approximately $260 million. As of June 30, 2015, 30-year LIBOR was 2.9%. As of June 30, 2015, Vanderbilt’s adjusted debt portfolio, after taking into account outstanding fixed-payer interest rate exchange agreements, was fully hedged.

Changes in the fair value of interest rate exchange agreements, reported in the nonoperating section of the consolidated statements of activities, resulted in net losses of $27.7 million in fiscal 2015 and

The notional amounts of Vanderbilt’s outstanding interest rate exchange agreements as of June 30 were as follows (in thousands):

Description

Rate Paid

Rate Received

Maturity

Fixed-payer interest rate exchange agreements

Avg fixed rate of 3.86%

Avg of 68.2% of one-month LIBOR1

16 to 25 years

482,900

544,800

Basis interest rate exchange agreements

SIFMA2

Avg of 81.5% of one-month LIBOR1

20 to 21 years

500,000

1 2

2015

2014

LIBOR (London Interbank Offered Rate) is a reference rate based on interest rates at which global banks borrow funds from other banks in the London interbank lending market. SIFMA (Securities Industry and Financial Markets Association) is a seven-day high-grade market index rate based upon tax-exempt variable rate debt obligations.

12. Net Assets Designated for plant facilities represents (a) Vanderbilt’s investment in property, plant, and equipment, net of accumulated depreciation, as well as (b) funds designated for active construction projects and retirement of capital-related debt, offset by (c) Vanderbilt’s conditional asset retirement obligation.

Unrestricted net assets consist of the following internally designated groups: Designated for operations represents cumulative operating activity. These net assets also reflect the realized losses of derivative financing activities.

Reinvested distributions of donor-restricted endowments at historical value are amounts related to donor-restricted endowments reinvested in the endowment in accordance with donor requests.

Designated gifts and grants include gift and grant funds. Designated for student loans represents Vanderbilt funds set aside to serve as revolving loan funds for students.

Vanderbilt University Accumulated net appreciation of reinvested distributions represents cumulative appreciation on reinvestments of donor-restricted endowments.

Temporarily restricted net assets were designated by donors and Vanderbilt for the following purposes as of June 30 (in thousands):

Institutional endowments (quasi-endowments) at historical value are amounts set aside by Vanderbilt to generate income in perpetuity to support operating needs.

Student scholarships Endowed chairs Operations Program support Capital improvements Subsequent period operations and other Total temporarily restricted net assets

Accumulated net appreciation of institutional endowments represents cumulative appreciation on institutional endowments. Fair value of interest rate exchange agreements, net represents the mark-to-market valuation for interest rate exchange contracts.

Donor-restricted endowments at historical value Contributions Interests in trusts held by others Life income and gift annuities Total permanently restricted net assets

Based on the foregoing designations, unrestricted net assets as of June 30 were composed of the following (in thousands):

2015 929,122 69,450 18,681 702,840

95,019

2014 791,540 78,893 22,227 700,053

108,417

362,356

335,875

1,058,406

1,066,985

(174,713)

(168,451)

110,954

150,067

$ 3,278,656

$ 3,179,830

Financial aid Endowed chairs Operations Program support Research, lectureships, fellowships, and other Total support

Temporarily restricted net assets as of June 30 were composed of the following (in thousands): 2015 Donor-restricted endowments at historical value Accumulated net appreciation of donor-restricted endowments Reinvested distributions of donor-restricted endowments at historical value Accumulated net appreciation of reinvested distributions Contributions Interests in trusts held by others Life income and gift annuities Total temporarily restricted net assets

22,021

2014 $

24,785

1,311,212

1,329,499

11,696

3,783

2,285 92,130 6,916 14,902

2,239 86,153 5,769 15,254

$ 1,461,162

$ 1,467,482

2014 469,118 384,130 294,966 107,802 15,954

180,008

195,512

$ 1,461,162

$ 1,467,482

2015

2014

$ 1,123,852 43,484 33,238 34,617

$ 1,080,443 41,961 34,021 40,009

$ 1,235,191

$ 1,196,434

Based on relative fair values as of June 30, donor-restricted endowments supported the following:

94,224

106,541

2015 466,907 377,934 298,565 109,039 28,709

Permanently restricted net assets as of June 30 were composed of the following (in thousands):

Net assets related to noncontrolling interests represents minority partnersâ&#x20AC;&#x2122; share of the equity in two partnerships (endowment private equity and real estate partnerships) formed to acquire, hold, and manage private fund assets.

Designated for operations Designated gifts and grants Designated for student loans Designated for plant facilities Reinvested distributions of donor-restricted endowments at historical value Accumulated net appreciation of reinvested distributions Institutional endowments at historical value Accumulated net appreciation of institutional endowments Fair value of interest rate exchange agreements, net Net assets related to noncontrolling interests Total unrestricted net assets

2015 35% 29% 21% 8%

2014 35% 29% 21% 8%

7% 100%

Vanderbilt University 13. Fair Value Measurement Vanderbilt utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels:

The significance of the unobservable inputs to the overall fair value measurement determines the classification of a financial instrument within level 3.

Level 1 consist of quoted prices (unadjusted) in active markets for identical assets or liabilities accessible at the measurement date.

The consolidated statements of activities reflect: all net realized and unrealized gains and losses on level 3 investments as changes in endowment appreciation or changes in appreciation of other investments; gains and losses on investments allocable to noncontrolling interests as a component of net endowment appreciation; and net realized and unrealized gains and losses on interests in trusts held by others as changes in appreciation of other investments.

Level 2 include inputs other than quoted prices in Level 1 directly or indirectly observable for the assets or liabilities. Level 3 are unobservable inputs for the assets or liabilities. The level in the fair value hierarchy within which a fair value measurement in its entirety is classified depends on the lowest level input that is significant to the fair value measurement. Beginning balance as of June 30, 2014

Net realized gains (losses)

Rollforwards of amounts for level 3 financial instruments for the fiscal years ended June 30 follow (in thousands):

Net change in unrealized gains (losses)*

Purchases

Transfers into/(out of) level 3

Sales

Ending balance as of June 30, 2015

LEVEL 3 ASSETS Fixed income Global equities Hedge strategies Private capital Real estate Natural resources Trusts Other investments Interests in trusts held by others

19,987 112,179 370,881 1,437,157 279,042 335,955 4,652 11,224

39,790

30 37,801 (33,170) 235,571 3,290 4,991 310 60

657 (37,310) (34,486) 36,543 19,876 (48,950) (548) -

364

1,613 2,838 5,083 169,427 27,333 44,032 207

(5,107) (83,170) (199,783) (485,962) (100,566) (41,870) (156) (3,433)

17,180 32,338 108,525 1,392,736 228,975 294,158 4,258 8,058 40,154

Total Level 3 $ 2,610,867 $ 248,883 $ (63,854) $ 250,533 $ (920,047) $ $ 2,126,382 *Total change in unrealized gains/(losses) relating to Level 3 investment assets held by the University at June 30, 2015 is $24,761 and is reflected in “Net change in unrealized appreciation on investments” in the Consolidated Statements of Cash Flows.

Beginning balance as of June 30, 2013

Net realized gains (losses)

Net change in unrealized gains (losses)*

Purchases

Transfers into/(out of) level 3

Sales

Ending balance as of June 30, 2014

LEVEL 3 ASSETS Fixed income Global equities Hedge strategies Private capital Real estate Natural resources Trusts Other investments Interests in trusts held by others

19,040 164,301 650,561 1,260,275 292,746 286,397 4,137 11,176 38,091

5 (1,611) (210,225) 143,299 8,137 18,411 1,613 (38)

(608) 23,011 21,853 239,591 13,763 39,072 690 -

908

791

2,397 5,583 53,488 171,833 35,044 48,903 1,710 216 -

(847) (79,105) (245,784) (377,841) (70,648) (56,828) (3,498) (130) -

100,988 -

19,987 112,179 370,881 1,437,157 279,042 335,955 4,652 11,224 39,790

Total Level 3 $ 2,726,724 $ (39,501) $ 338,163 $ 319,174 $ (834,681) $ 100,988 $ 2,610,867 *Total change in unrealized gains/(losses) relating to Level 3 investment assets held by the University at June 30, 2014 is $337,819 and is reflected in “Net change in unrealized appreciation on investments” in the Consolidated Statements of Cash Flows.

The tables on the following pages present the amounts within each valuation hierarchy level for those assets and liabilities carried at fair value: cash and cash equivalents; investments; investments allocable to noncontrolling interests (in Vanderbilt-controlled real estate and other partnerships); interests in trusts held by others; and the fair value of interest rate exchange agreements.

Noted in the tables on the following page, as a measure of liquidity, are the redemption terms and restrictions of investments, along with the numbers of days notice required to liquidate these investments. Most investments classified as levels 2 and 3 consist of shares or units in investment funds as opposed to direct interests in the funds’ underlying holdings. Vanderbilt uses the net asset value reported by the fund as a practical expedient to estimate the fair value of interest therein for the majority of these assets; Vanderbilt’s ability to redeem its interest at or near the financial statement date determines the net

Vanderbilt University assets classification as level 2 or level 3. Vanderbilt defines near-term as within 90 days of the financial statement date. Derivative contract collateral and short-term securities are primarily composed of amounts posted as collateral in accordance with interest rate exchange agreements and unspent bond proceeds with trustees. Vanderbilt deems a redemption or liquidation frequency for these amounts as nonapplicable. Global equities and fixed income provide varying levels of liquidity as defined in the following tables. Hedged strategies include daily, quarterly, and annual redemption frequencies. These strategies allow Vanderbilt to provide notice to the fund managers to exit from the respective funds in the time periods noted. Lockup provisions range from none to five years.

terms of these limited partnership agreements, Vanderbilt is obligated to remit additional funding periodically as capital calls are exercised by the general partner. These partnerships have a limited existence and the agreements may provide for annual extensions relative to the timing for disposing portfolio positions and returning capital to investors. Depending on market conditions, the ability or inability of a fund to execute its strategy, and other factors, the general partner may extend the terms or request an extension of terms of a fund beyond its originally anticipated existence or may liquidate the fund prematurely. Unforeseen events prevent Vanderbilt from anticipating such changes. As a result, the timing and amount of future capital calls or distributions in any particular year are uncertain and the related asset values are illiquid.

The total asset values for private capital, real estate, natural resources, and other investments are illiquid as of June 30, 2015. These amounts predominantly consist of limited partnerships. Under the

The following tables summarize the fair value measurements and terms for redemptions or liquidations for those assets and liabilities carried at fair value as of June 30 (in thousands):

Assets Reported at Fair Value as of June 30, 2015 -------------------- Fair Value Measurements -------------------Level 1 Level 2 Level 3 Total Cash and cash equivalents

Derivative contract collateral and short-term securities

1,291,631 82,139

Global equities

1,016,529

45,501

Redemption Terms

Redemption Restriction

1,291,631

Daily, with same-day to 90 day notice

No restrictions

82,139

N/A

Not redeemable

32,338

1,094,368

Daily to annually, with 1 to 90 day notice

Lock-up provision ranging from none to 4 years

Fixed income

231,798

17,180

248,978

Daily with 1 to 5 day notice

No restrictions

Private capital

13,595

1,392,736

1,406,331

N/A

Not redeemable

108,525

904,782

Daily to annually, with 1 to 90 day notice

Lock-up provision ranging from none to 3 years

98,311

Daily to monthly, with 1 to 30 day notice N/A N/A N/A N/A N/A

No restrictions

Hedged strategies

752,434

Commodities Natural resources Real estate Trusts Other investments Interests in trusts held by others Total assets reported at fair value

43,823

98,311

140 2,753 -

3,489,330

294,158 228,975 4,258 8,058 40,154

$ 89,324 $ 2,126,382

294,298 228,975 4,258 10,811 40,154 $

5,705,036

174,713

Liabilities Reported at Fair Value as of June 30, 2015 Interest rate exchange agreements

$ 174,713

Not redeemable Not redeemable Not redeemable Not redeemable Not redeemable

Vanderbilt University Assets Reported at Fair Value as of June 30, 2014 -------------------- Fair Value Measurements -------------------Level 1 Level 2 Level 3 Total Cash and cash equivalents

1,244,720

Derivative contract collateral and short-term securities

Redemption Terms

Redemption Restriction

1,244,720

Daily, with same-day to 90 day notice

No restrictions

77,839

N/A

Not redeemable

1,091,046

2,614

112,179

1,205,839

Daily to annually, with 1 to 90 day notice

Lock-up provision ranging from none to 4 years

Fixed income

157,880

19,987

177,867

Daily, with 2 to 30 day notice

No restrictions

Private capital

2,356

1,437,157

1,439,513

N/A

Not redeemable

316,367

94,120

370,881

781,368

Daily to annually, with 1 to 180 day notice

Lock-up provision ranging from none to 2 years*

592 -

335,955 279,042 4,652 11,224 39,790

335,955 279,042 4,652 11,816 39,790

N/A N/A N/A N/A N/A

Not redeemable Not redeemable Not redeemable Not redeemable Not redeemable

Total assets reported at fair value $ 2,890,800 *Certain partnerships not redeemable

$ 96,734

$2,610,867

Global equities

Hedged strategies Natural resources Real estate Trusts Other investments Interests in trusts held by others

5,598,401

168,451

Liabilities Reported at Fair Value as of June 30, 2014 Interest rate exchange agreements

$ 168,451

14. Retirement Plans Vanderbiltâ&#x20AC;&#x2122;s full-time faculty and staff members participate in defined contribution retirement plans administered by third-party investment and insurance firms. For eligible employees with one year of continuous service, these plans require employee and matching employer contributions. The employee immediately vests in these contributions.

Vanderbilt funds the obligations under these plans through monthly transfers to the respective retirement plan administrators with the corresponding expenses recognized in the year incurred. Vanderbiltâ&#x20AC;&#x2122;s retirement plan contributions for fiscal 2015 and 2014 were $63.8 million and $63.1 million, respectively.

15. Student Financial Aid Vanderbilt provides financial aid to students based upon need and merit. Institutional resources, contributions, endowment distributions, and externally sponsored programs fund this financial assistance.

For the fiscal years ended June 30, financial aid for room and board was as follows (in thousands):

Room and board, gross Less: Financial aid for room and board Room and board, net

For the fiscal years ended June 30, financial aid for tuition and education fees was as follows (in thousands):

Tuition and educational fees, gross Less: Financial aid for tuition and educational fees Tuition and educational fees, net

2015 489,018

2014 478,320

(216,815) 272,203

(213,543) 264,777

$ $

2015 77,476 (32,663) 44,813

$ $

2014 70,809 (30,303) 40,506

Vanderbilt University 16. Functional Classification of Expenses and Allocations 2015

For the fiscal years ended June 30, operating expenses incurred were as follows (in thousands): 2015 Instruction $ 489,383 Research 419,003 Health care services 2,500,022 Public service 42,229 Academic support 158,312 Student services 107,172 Institutional support 117,303 Room, board, and other auxiliary services 99,718 Total operating expenses $ 3,933,142

Instruction Research Health care services Academic support Student services Institutional support Room, board, and other auxiliary services Total

2014 495,824 434,009 2,389,431 41,298 139,026 99,969 61,778 93,146 $ 3,754,481 $

Depreciation $ 19,509 23,340 76,430 11,667 8,766 12,024

25,440 177,176

Interest 2,762 5,385 38,198 1,325 693 994 10,677 60,034

2014 Instruction Research Health care services Academic support Student services Institutional support Room, board, and other auxiliary services Total

Natural expense classifications include certain allocations of institutional and other support costs to Vanderbilt’s primary programs. Based on the functional uses of space on its campus, Vanderbilt allocated depreciation and interest on indebtedness to the functional operating expense categories as follows (in thousands):

Depreciation $ 20,997 23,792 79,652 8,314 6,739 11,724

24,561 175,779

Interest 3,448 6,189 40,672 1,122 790 1,107 12,150 65,478

17. Charity Care Assistance and Community Benefits The total cost of uncompensated care (charity care and bad debt) was $225.0 million and $233.2 million for fiscal 2015 and 2014, respectively. Of the total uncompensated care, charity care represented 45.8% and 54.5% in fiscal 2015 and 2014, respectively.

VUMC (including hospitals, clinics, and physician practice units) maintains a policy which sets forth the criteria to provide without expectation of payment or at a reduced payment rate health care services to patients who have minimal financial resources to pay for medical care. VUMC does not report these charity care services as revenue.

In addition to the charity care services described above, the medical center provides a number of other services to benefit the economically disadvantaged for which the medical center receives little or no payment. TennCare/Medicaid and state indigent programs do not cover the full cost of providing care to beneficiaries of those programs. As a result, in addition to direct charity care costs, the medical center provided services related to TennCare/Medicaid and state indigent programs and was reimbursed substantially below the cost of rendering such services.

The medical center maintains records to identify and monitor the level of charity care it provides, and these records include the amount of gross charges and patient deductibles, co-insurance and co-payments forgone for services furnished under its charity care policy, and the estimated cost of those services. Charity care utilizes a tiered grid to determine the level of assistance based on federal poverty guidelines. State of Tennessee law mandates uninsured patient eligibility for a discount from billed charges for medically necessary services, in addition to charity care assistance. VUMC provides additional discounts based on the income level of the patient household using a sliding scale for those patients with a major catastrophic medical event that do not qualify for full charity assistance.

The medical center also provides public health education and training for new health professionals and provides, without charge, services to the community at large, together with support groups for many patients with special needs.

18. Related Parties Intermittently, members of Vanderbilt’s Board of Trust or Vanderbilt employees may be directly or indirectly associated with companies engaged in business activities with the university. Accordingly, Vanderbilt has a written conflict of interest policy that requires, among other things, that members of the university community (including trustees) may not review, approve, or administratively control contracts or business relationships when (a) the contract or business relationship is between Vanderbilt and a business in which the individual or a family member has a material financial interest or (b) the individual or a family member is an employee of the business and is directly involved with activities pertaining to Vanderbilt.

the foregoing business activities in that disclosure is required for any situation in which an applicable individual’s financial, professional, or other personal activities may directly or indirectly affect, or have the appearance of affecting, an individual’s professional judgment in exercising any university duty or responsibility, including the conduct or reporting of research. The policy extends to all members of the university community (including trustees, university officials, and faculty and staff and their immediate family members). Each applicable person is required to certify compliance with the conflict of interest policy on an annual basis. This certification includes specifically disclosing whether Vanderbilt conducts business with an entity in which he or she (or an

Furthermore, Vanderbilt’s conflict of interest policy extends beyond

Vanderbilt University immediate family member) has a material financial interest as well as any other situation that could appear to present a conflict with Vanderbiltâ&#x20AC;&#x2122;s best interests.

When situations exist relative to the conflict of interest policy, Vanderbilt takes active measures to manage appropriately the actual or perceived conflict in the best interests of the university, including periodic reporting of the measures taken to the Board of Trust Audit Committee.

19. Lease Obligations Vanderbilt primarily classifies certain equipment and real property leases as operating leases with lease terms of up to 15 years. Total operating lease expense in fiscal 2015 and 2014 was $83.2 million and $70.8 million, respectively.

Detail of significant noncancelable operating leases by type:

As of June 30, 2015, future committed minimum rentals by fiscal year on significant noncancelable operating leases with initial terms in excess of one year were as follows (in thousands):

Property leases (132 leases) Equipment leases (142 leases) Total future minimum rentals

2016 2017 2018 2019 2020 Thereafter Total future minimum rentals

Property leases for One Hundred Oaks (46%) and 2525 West End Avenue (7%) account for approximately 53% of the total future minimum rentals.

53,768 47,783 39,163 29,307 24,764 134,242 329,027

% of Minimum Rentals 84% 16% 100%

Minimum Rentals $ 277,895 51,132 $ 329,027

Vanderbilt University 20. Commitments and Contingencies (A) Construction. As of June 30, 2015, Vanderbilt had contractual commitments for approximately $115.6 million of projects under construction and equipment purchases. The largest components of these commitments were for the Engineering and Science Building ($71.4 million).

(F) Federal and State Contracts and Other Requirements. Expenditures related to federal and state grants and contracts are subject to adjustment based upon review by the granting agencies. Amounts of expenditures that granting agencies might disallow cannot be determined at this time. These amounts affect government grants and contract revenue as well as facilities and administrative cost recovery. Vanderbilt would not expect these costs to influence the consolidated financial position significantly.

(B) Litigation. Vanderbilt is a defendant in several legal actions. One such legal action is a qui tam civil action related to billing and government reimbursement for certain professional health care services provided by the Vanderbilt University Medical Center. The lawsuit was unsealed in the fall of 2013, and the government has decided not to intervene in the litigation at this time. Accordingly, the litigation is currently in the discovery phase with private plaintiffs. Vanderbilt believes that the outcome of these actions will not have a significant effect on its consolidated financial position.

(G) Health Care Services. Revenue from health care services includes amounts paid under reimbursement agreements with certain third-party payers and is subject to examination and retroactive adjustments. Vanderbilt reports any differences between estimated year-end settlements and actual final settlements at the time of final settlement. The financial statements include substantially all final settlements through the year ended June 30, 2010. Vanderbilt expects to receive final settlements relative to periods through June 30, 2011, during fiscal 2016.

(C) Regulations. Vanderbilt’s compliance with regulations and laws is subject to future government reviews and interpretations, as well as regulatory actions unknown at this time. Vanderbilt believes that the liability, if any, from such reviews will not have a significant effect on Vanderbilt’s consolidated financial position.

(H) HIPAA Compliance. Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the federal government has authority to complete fraud and abuse investigations. HIPAA has established substantial fines and penalties for offenders. Vanderbilt maintains policies, procedures, and organizational structures to enforce and monitor compliance with HIPAA, as well as other applicable local, state, and federal statutes and regulations.

(D) Medical Malpractice Liability Insurance. Vanderbilt is selfinsured for the first level of medical malpractice claims. The current self-insured retention is $5.5 million per occurrence, not to exceed an annual aggregate of $43.0 million. Vanderbilt segregates investments for this self-insured retention. An independent actuarial firm performs studies to determine the funding for these segregated assets. Excess malpractice and professional liability coverage has been obtained from commercial insurance carriers on a claims-made basis for claims above the retained self-insurance risk levels.

(I) Partnership Investment Commitments. There were $472.1 million of commitments to venture capital, real estate, and private equity investments as of June 30, 2015. At the request of the general partners, Vanderbilt may draw down funds over the next several years. Vanderbilt expects to finance these commitments with available cash and expected proceeds from the sales of securities. In addition, Vanderbilt is a secondary guarantor for $13.2 million of commitments for certain investment vehicles where minority limited partners in subsidiaries that Vanderbilt controls have the primary obligations.

(E) Employee Health and Workers Compensation Insurance. Vanderbilt is self-insured for employee health insurance and workers compensation coverage. Vanderbilt bases estimated liabilities upon studies conducted by independent actuarial firms.

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