Audit Committee Meeting May 20, 2009

1. Audit Committee MeetingMay 20, 2009 Auxiliary and Supplemental Revenue Sources – preliminary report

2. Objectives – Phase 1 • To what extent have colleges and universities generated auxiliary revenues? • What are the most significant sources of these revenues? • Have colleges and universities established sufficient institutional policies and practices regarding controls and compliance for auxiliary revenues?

3. Scope and Methodology • Audit Scope: Fiscal Years 06, 07 and 08 • Data Analysis (2008 Revenues shown) • Focused only on revenues ($167 million) • cost of goods sold not in analysis • Excluded the following revenues • Tuition and most fees ($743 million) • Revenue fund ($84 million) • Customized training ($36 million) • Grants ($266 million)

4. Scope and Methodology • Data Analysis continued • Summarized into four categories • Enterprise Activities ($110 million) • Supplemental Academic Program Revenue ($26 million) • Leveraged Asset Capacity ($19 million) • Event Revenue ($11 million) • Reviewed and discussed with all colleges and universities • Summaries are preliminary – adjustments may occur

5. Overall • Limited supplemental revenue operations found. • Focus on academic missions • Varying practices found • Limited formal policies and procedures in place.

6. Enterprise Activity Summary as of April 2009 Note: 54 campuses used in the analysis

7. Significant Revenue Sources • Enterprise Activity • Bookstore Operations ($63 million) • Universities: 5 outsource, 2 operate • Colleges: 2 outsource, 45 campuses operate • Laptop Rentals ($8 million) • 75% of revenues at one university • Computer Store ($7 million) • Primarily internal activity • Health Services ($8 million) • State University Health Clinics – student fee and patient charges • Colleges – student fee revenue

8. Significant Revenue Sources • Supplemental Academic Program • Resale Operations ($8 million) • Examples of operations: Culinary Arts, Cosmetology, Automotive, and Carpentry • Personal Property and Service Charges ($5 million) • Versus charging differential tuition • Study Abroad ($4 million) • Other ($8 million) • 2 universities had substantial increases from 2007 to 2008 in contract revenue

9. Significant Revenue Sources • Leveraged Asset Capacity • Facility Rental ($3 million) • Service Center Revenue ($5 million) • Primarily internal activity • Other ($7 million) • Misc. revenues

10. Significant Revenue Sources • Event Revenue • Athletics ($7 million) • Student fee at some institutions • Ticket and concession sales

11. Policies and Procedures • Number of institutions with formal policies: • Budget Setting Principles - 7 (Procedure 7.3.4, Part 2, B) • Competition – 6 (Procedure 7.6.1, Part 3) • Multi-year Business Plans – 8 (Procedure 7.3.2, Part 7) • Indirect Cost Allocation– 11 (Procedure 7.3.4 – Cost Allocation)

12. Objectives – Phase 2 • What are the primary strategic and operational features of these activities, such as owning vs. contracting the services, pricing practices, operating margins, levels of retained earnings, extent of institutional support, indirect cost recoveries, etc., for these activities? • Have colleges and universities established sufficient internal controls to protect their assets and ensure compliance with major legal and policy provisions?

13. Phase 2: Audit Scope • Suggested Operations to Review • Bookstore • Health Services • Academic Program Resale Activities

14. Phase 2: Methodology • Determine Net Profits for all operations. • For sample of operations review: • internal controls over operations • Cash Handling • Pricing • retained earnings • indirect cost allocations

15. Questions and Discussion about Phase 2