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Notes to Consolidated Financial Statements

(All amounts in thousands)

Note 1.

Summary of Significant Accounting Policies

Basis of Presentation

The University of Notre Dame du Lac is a private, national Catholic research university. The accompanying consolidated financial statements include the assets and operations of certain other entities under the financial control of the University of Notre Dame du Lac. The University of Notre Dame du Lac and entities included herein are referred to individually and collectively as the “University.”

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements reflect the activities of the University as a whole and present balances and transactions according to the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified as follows:

• Unrestricted Net Assets – Net assets not subject to donor-imposed restrictions and available for any purpose consistent with the University’s mission. Revenues are generally reported as increases in unrestricted net assets unless the use of the related assets is limited by donor-imposed restrictions. Investment returns generated by unrestricted funds functioning as endowment and other sources are classified as changes in unrestricted net assets. Operating expenses are reported as decreases in unrestricted net assets.
• Temporarily Restricted Net Assets – Net assets subject to specific, donor-imposed restrictions that must be met by actions of the University and/or passage of time. Contributed assets normally fund specific expenditures of an operating or capital nature. Investment returns on donor-restricted endowment funds are classified as changes in temporarily restricted net assets. Subject to the University’s endowment spending policy and any restrictions on use imposed by donors, accumulated investment returns on donor-restricted endowments are generally available for appropriation to support operational needs. Temporarily restricted contributions or investment returns received and expended within the same fiscal period are reported as increases in temporarily restricted net assets and net assets released from restrictions, respectively.
• Permanently Restricted Net Assets – Net assets subject to donor-imposed restrictions requiring they be maintained permanently. Permanently restricted net assets are generally restricted to long-term investment and are comprised primarily of donor-restricted endowment funds. The University classifies the following portions of donor-restricted endowment funds as permanently restricted net assets: (a) the original value of assets contributed to permanent endowment funds, (b) subsequent contributions to such funds valued at the date of contribution, and (c) reinvested earnings on permanent endowment when specified by the donor.

The University’s measure of operations presented in the consolidated statements of changes in unrestricted net assets includes revenues from tuition and fees, grants and contracts, unrestricted contributions designated for operations, accumulated investment return distributed under the University’s spending policy and revenues from auxiliary enterprises and other sources, such as licensing and conferences. Other additions include net assets released from restrictions based upon their expenditure in support of operations or net assets made available for operations by virtue of the expiration of a term restriction. Operating expenses are reported by functional categories, after allocating costs for operations and maintenance of plant, interest on indebtedness and depreciation.

Non-operating activities presented in the consolidated statements of changes in unrestricted net assets include unrestricted contributions designated by the University for endowment or investment in buildings and equipment, investment return in excess of or less than the amount distributed for operations under the spending policy, any gains or losses on debt-related derivative instruments, and certain net pension and postretirement benefits-related changes in net assets. Other non-operating changes in unrestricted net assets includes the net activities of the consolidated limited liability company described in Note 6 and Note 11, the effect of changes in donor intent with respect to endowment and other funds, and other activities considered unusual or non-recurring in nature. Non-operating net assets released from restrictions generally reflect the expenditure of net assets restricted to investment in land, buildings and equipment.

Grants and Contracts

The University recognizes revenues on grants and contracts for research and other sponsored programs as the awards for such programs are expended. Indirect cost recovery by the University on U.S. government grants and contracts is based upon a predetermined negotiated rate and is recorded as unrestricted revenue. Advances from granting agencies are generally considered refundable in the unlikely event specified services are not performed.

Auxiliary Enterprises

The University’s auxiliary enterprises exist primarily to furnish goods and services to students, faculty and staff. Managed as essentially self-supporting activities, the University’s auxiliaries consist principally of residence and dining halls, intercollegiate athletics, college stores and other campus retail operations. Auxiliary enterprise revenues and related expenses are reported as changes in unrestricted net assets.

Cash and Cash Equivalents

Resources invested in money market funds and in short-term investments with maturities at date of purchase of three months or less are classified as cash equivalents, except that any such investments purchased by external investment managers are classified as investments. Substantially all cash and cash equivalents are concentrated in accounts in which balances exceed Federal Deposit Insurance Corporation limits.

Accounts Receivable

Accounts receivable are recorded at face value and typically have contractual maturities of less than one year.

Contributions Receivable

Pledges that represent unconditional promises to give are recognized at fair value as contributions—either temporarily restricted or permanently restricted—in the period such promises are made by donors. Contributions recognized as such during the year ended June 30, 2009 and subsequent periods are discounted at a risk-adjusted rate commensurate with the duration of the donor’s payment plan. Contributions recognized in prior periods under such commitments were recorded at a discount based on a U.S. Treasury rate. Amortization of the discounts is recorded as additional contribution revenue. Allowance is made for uncollectible contributions based upon management’s expectations regarding collection of outstanding promises to give and past collection experience.

Notes Receivable

Notes receivable, which are recorded at face value, principally represent amounts due from students under Perkins and other U.S. government sponsored loan programs. A general allowance is made for uncollectible student loans after considering both long-term collection experience and current trends, such as recent default rates of cohorts entering repayment status. Other notes receivable are evaluated individually for impairment, with allowances recorded based on management’s expectations given facts and circumstances related to each note.

Investments

Investments are stated at estimated fair value. The University measures the fair values of investments in securities at the last sales price on the primary exchange where the security is traded. Non-exchange-traded instruments and over-the-counter positions are primarily valued using independent pricing services, broker quotes or models with externally verifiable inputs. The fair values of alternative investments (interests in private equity, hedge, real estate and other similar funds) for which quoted market prices are not available are generally measured based on reported partner’s capital or net asset value (“NAV”) provided by the associated external investment managers. The reported partner’s capital or NAV is subject to management’s assessment that the valuation provided is representative of fair value. The University exercises diligence in assessing the policies, procedures and controls implemented by its external investment managers, and thus believes the carrying amount of these assets represents a reasonable estimate of fair value. However, because alternative investments are generally not readily marketable, their estimated value is subject to inherent uncertainty and therefore may differ from the value that would have been used had a ready market for such investments existed.

As described in Note 12, the University utilizes certain derivative instruments to manage risks associated with its investment portfolio. These instruments are stated at fair value. Open futures and options contracts are primarily valued at the closing exchange quotations on the last business day of the fiscal year. The fair value of certain over-the-counter contracts for which market quotations are not readily available is based upon third party pricing services, broker quotes or models with externally verifiable inputs. When appropriate, independent appraisers may also be engaged to assist in the valuation of such instruments. The fair value of forward currency exchange contracts is estimated using quotes obtained from foreign exchange dealers. Where management believes a legal right of offset exists under an enforceable netting agreement, the fair value of these contracts is reported on a net-by-counterparty basis. Gains or losses resulting from changes in the fair value of derivative instruments associated with the investment portfolio or periodic net cash settlements with counterparties are recorded as gains or losses on investments.

Investments Held on Behalf of Other Entities

The University serves as the trustee for its employees’ defined benefit pension plan and certain revocable charitable trusts, managing the investment assets held within the plan and the trusts. The University also invests assets on behalf of religious affiliates that share the University’s Catholic ministry and educational missions. Accordingly, the University reports an equal asset and liability in the consolidated statements of financial position representing the fair value of investments managed on behalf of these entities.

Debt-Related Derivative Instruments

The University utilizes derivative instruments in a limited manner outside of its investment portfolio. As described in Notes 11 and 12, interest rate swap agreements are used to manage interest rate risk associated with variable rate bond obligations. These instruments are reported in the consolidated statements of financial position at fair value. Fair value is estimated based on pricing models that utilize significant observable inputs, such as relevant interest rates, that reflect assumptions market participants would use in pricing the instruments. Any gains or losses resulting from changes in the fair value of these instruments or periodic net cash settlements with counterparties, including settlements related to the termination of such instruments, are recognized as non-operating changes in unrestricted net assets.

Land, Buildings and Equipment

Institutional properties are stated at cost or at estimated fair value if acquired by gift, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, averaging 15 years for land improvements, 25-50 years for buildings and 5-25 years for equipment.

The University does not capitalize the cost of library books, nor the cost or fair value of its art collection. The latter is held for exhibition and educational purposes only and not for financial gain.

Conditional Asset Retirement Obligations

The University recognizes asset retirement obligations when incurred. A discounting technique is used to calculate the present value of the capitalized asset retirement costs and the related obligation. Asset retirement costs are depreciated over the estimated remaining useful life of the related asset and the asset retirement obligation is accreted annually to the current present value. Upon settlement of an obligation, any difference between the retirement obligation and the cost to settle is recognized as a gain or loss in the consolidated statement of changes in unrestricted net assets. The University’s conditional asset retirement obligations relate primarily to asbestos remediation and will be settled upon undertaking associated renovation projects.

Split-Interest Agreements

The University’s split-interest agreements consist principally of charitable gift annuities and irrevocable charitable remainder trusts for which the University serves as trustee. Contribution revenue is recognized at the date a gift annuity or trust is established after recording a liability at fair value of the estimated future payments to be made to beneficiaries. Estimated future payments to beneficiaries are discounted at a risk-adjusted rate. Liabilities are adjusted during the terms of the agreements to reflect payments to beneficiaries, returns on trust assets, accretion of discounts and other considerations that affect the estimates of future payments. Net adjustments to the liabilities are recorded as changes in the value of split-interest agreements.

Fair Value Measurements

Fair value measurements reflected in the consolidated financial statements conceptually represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Generally accepted accounting principles provide a hierarchy that prioritizes the inputs to fair value measurements based on the extent to which inputs to valuation techniques are observable in the marketplace. The hierarchy assigns a higher priority to observable inputs that reflect verifiable information obtained from independent sources, and a lower priority to unobservable inputs that would reflect the University’s assumptions about how market participants would value an asset or liability based on the best information available. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of the hierarchy of inputs used to measure fair value are described briefly as follows:

• Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.
• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
• Level 3 – Unobservable inputs for the asset or liability, used in situations in which little or no market activity exists for the asset or liability at the measurement date.

The categorization of fair value measurements by level of the hierarchy is based upon the lowest level input that is significant to the overall fair value measurement for a given asset or liability.

Fair value measurements of investment assets for which the measurement was based on NAV (or its equivalent) as provided by an external manager are categorized within Level 2 to the extent such investments were redeemable with the manager at the NAV (or its equivalent) at the reporting date or within the near term (defined by the University as within approximately 90 days of the reporting date). Measurements of any such investments that were not redeemable at the reporting date or within the near term, whether by nature of the investment or as a result of unexpired terms or conditions restricting redemption at the reporting date, are categorized within Level 3.

In the event that changes in the inputs used in the fair value measurement of an asset or liability results in a transfer of the fair value measurement to a different categorization (e.g., from Level 3 to Level 2), such transfers between fair value categories are recognized at the end of the reporting period.

Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Subsequent Events

The University has evaluated subsequent events through November 16, 2012, the date the financial statements were issued.

Tax Status

The University is exempt from federal income taxes under section 501(c)(3) of the Internal Revenue Code (“IRC”), except to the extent the University generates unrelated business income.

Reclassifications

Certain amounts within fiscal 2011 operating expenses were reclassified to conform to 2012 presentation.

Note 2.

Accounts Receivable

Accounts receivable are summarized as follows at June 30:

Activity within allowances for uncollectible amounts was insignificant during the years ended June 30, 2012 and 2011.

Note 3.

Deferred Charges and Other Assets

Deferred charges and other assets are summarized as follows at June 30:

Note 4.

Contributions Receivable

Contributions receivable are summarized as follows at June 30:

Contributions receivable are discounted at rates ranging from 0.51 percent to 6.91 percent and 0.62 percent to 6.91 percent at June 30, 2012 and 2011, respectively. Activity within allowances for uncollectible amounts was insignificant during the years ended June 30, 2012 and 2011.

Contributions receivable, net, are summarized by net asset classification as follows at June 30:

As of June 30, 2012, the University had received documented conditional pledges of $43,100, which are not reflected in the accompanying consolidated financial statements. Conditional promises to give are recognized when the conditions on which they depend are substantially met.

Note 5.

Notes Receivable

Notes receivable are summarized as follows at June 30:

Government advances to the University for student loan funding, primarily under the Perkins Loan program, totaled $29,186 and $29,582 at June 30, 2012 and 2011, respectively. Due to significant restrictions that apply to government sponsored student loans, determining the fair value of student notes receivable is not practicable.

Total balances on student notes receivable in past due status were $3,483 and $3,497 at June 30, 2012 and 2011, respectively. The delinquent portions of these balances were $1,888 and $1,084, respectively. Activity within allowances for uncollectible student notes was insignificant.

During the year ended June 30, 2011, the University made a loan of $39,753 to a property development firm in conjunction with the renovation of a building in London that the University had contracted to purchase to support its England-based international studies programs. The loan was fully repaid and the purchase of the building completed during the year ended June 30, 2012 (see also Note 7).

The estimated fair value of non-student notes receivable approximated the carrying amount at June 30, 2012 and 2011.

Note 6.

Investments

Investments reflected in the consolidated statements of financial position are summarized as follows at June 30:

Liabilities associated with investments include the following at June 30:

The Notre Dame Endowment Pool (“NDEP”) represents the University’s primary investment portfolio. Certain investments, however, are held in specific instruments outside the NDEP to comply with donor requirements or other considerations. The pooled assets and liabilities of the NDEP are summarized as follows at June 30:

¹ Represents the fair value of derivative instrument liabilities.
² The University is the majority owner of an externally managed limited liability company, the assets and liabilities of which are reflected in the consolidated financial statements at cost. However, the estimated fair value of the University’s equity interest in the company, $15,693 and $15,500 at June 30, 2012 and 2011, respectively, is included in NDEP net assets for unitization purposes.

Transactions within participating funds that constitute additions to or withdrawals from the NDEP are unitized on a quarterly basis. The unitized net assets of the NDEP were attributable to the following at June 30:

³ NDEP holdings were redeemable by religious affiliates at $3,438.41 and $3,315.36 per unit (whole dollars) at June 30, 2012 and 2011, respectively.

The NDEP is comprised primarily of endowment-related holdings. As such, its investment objectives seek to preserve the real purchasing power of the endowment, while providing a stable source of financial support to its beneficiary programs. To satisfy its long-term rate of return objectives, the NDEP relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The NDEP maintains a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints.

Investment assets are summarized in the following tables by asset class at June 30, 2012 and 2011, respectively:

Short-term investments include cash and cash equivalents, money market funds, securities with short-term maturities (such as commercial paper and government securities held either directly or via commingled pools with daily liquidity) and the fair value of certain derivative instrument assets (see Note 12 for further information about derivative instruments). Public equities cover the U.S. as well as both developed and emerging markets overseas, and long/short hedge funds. Marketable alternatives encompass other hedge fund strategies less correlated with broad equities markets. This includes credit-oriented strategies, multi-strategy funds where the manager has a broad mandate to invest opportunistically, and event driven funds where managers seek opportunity in various forms of arbitrage strategies as well as in corporate activities such as mergers and acquisitions. Private equity primarily includes domestic and foreign buyout and venture capital funds. Other real assets represents investments in energy and commodities.

NDEP investments are primarily invested with external managers. The University is committed under contracts with certain external managers to periodically advance additional funding as capital calls are exercised. Capital calls are generally exercised over a period of years and are subject to fixed expiration dates or other means of termination. Uncalled commitments related to NDEP investments are summarized by investment class as follows at June 30:

The following tables reflect fair value measurements of investment assets (excluding defined benefit pension plan assets) at June 30, 2012 and 2011, respectively, as categorized by level of the fair value hierarchy according to the lowest level of inputs significant to each measurement:

Certain short-term investments and fixed income securities categorized within Level 2 are not traded in active markets but are measured using pricing sources such as broker quotes, or using models with externally verifiable inputs, such as relevant interest or exchange rates.
 
Other investments categorized within Levels 2 and 3 primarily reflect assets invested with external managers, the fair value measurements for which are generally based on NAV (or the equivalent) as provided to the University by the external managers. Investments in funds within public equities and marketable alternatives redeemable at NAV (or its equivalent) at the measurement date or within the near term are reflected in Level 2, while funds that are subject to restrictions that limit the University’s ability to withdraw capital within the near term are reflected in Level 3. Redemption terms for these funds generally restrict withdrawals of capital for a defined “lock-up” period after investment, and thereafter typically allow withdrawals on a quarterly or annual basis with notice periods ranging from 30 to 180 days. Lock-up periods for funds reflected in Level 3 generally expire during the period from six months to three years after the measurement date. In addition, investor capital in these funds attributable to illiquid investments, often referred to as “side pockets,” generally is not available for redemption until the investments are realized by the fund. Most funds within private equity, real estate and other real assets, as well as certain marketable alternatives funds, are not redeemable at the direction of the investor and are reflected in Level 3. These funds make distributions to investing partners as the underlying assets of the funds are liquidated. The University expects the underlying assets of these funds to be substantially liquidated over the next five to ten years, the timing of which would vary by fund and depend on market conditions as well as other factors.

Changes in investments (excluding defined benefit pension plan assets) for which fair value is measured based on Level 3 inputs are summarized below for the year ended June 30, 2012:

During the year ended June 30, 2012, the University recognized net unrealized losses of $120,741 on investments still held at June 30, 2012 for which fair value is measured using Level 3 inputs. Transfers in and out of Levels 2 and 3 primarily reflect the migration of assets measured at fair value based on NAV (or its equivalent) that were eligible for redemption at the reporting date or within the near term, or became non-redeemable during the year. There were no transfers between Levels 1 and 2 during the year ended June 30, 2012.

Changes in investments (excluding defined benefit pension plan assets) for which fair value is measured based on Level 3 inputs are summarized below for the year ended June 30, 2011:

During the year ended June 30, 2011, the University recognized net unrealized appreciation of $645,508 on investments still held at June 30, 2011, for which fair value is measured using Level 3 inputs. Transfers out of Level 3 primarily reflect the migration to Level 2 of assets measured at fair value based on NAV (or its equivalent) that were eligible for redemption at the reporting date or within the near term. Transfers between Levels 1 and 2 were insignificant during the year ended June 30, 2011.

Due to the pooled nature of assets held in the NDEP, a portion of any unrealized gains or losses is attributed to NDEP holdings of split-interest agreements and the University’s religious affiliates.

Investment Return

Investment return as reflected in the consolidated statements of changes in net assets is summarized as follows for the years ended June 30:

Investment income is reported net of related expenses of $22,588 and $24,294 for the years ended June 30, 2012 and 2011, respectively. Investment-related expenses consist of fees paid to external investment managers, as well as expenses related to internal investment office operations.

A portion of accumulated investment returns is distributed annually to beneficiary programs under the University’s endowment spending policy. In addition, a portion of unrestricted returns accumulated on working capital and other assets is distributed to supplement the University’s general operating needs and other initiatives. Accumulated investment return distributed is summarized by source as follows for the years ended June 30:

Note 7.

Land, Buildings and Equipment

The following is a summary of land, buildings and equipment at June 30:

Depreciation expense was $52,706 and $49,934 for the years ended June 30, 2012 and 2011, respectively.

The University recorded accounts payable associated with construction in progress costs of $8,126 and $9,038 at June 30, 2012 and 2011, respectively.

The University completed its purchase of a building in London during the year ended June 30, 2012 for which it was under contract at June 30, 2011. The building will serve to support the University’s international studies programs in England.

Changes in conditional asset retirement obligations are summarized as follows for the years ended June 30:

Note 8.

Short-Term Borrowing

The University maintains a $200,000 commercial paper program under which it may issue either standard or extendible municipal commercial paper through St. Joseph County, Indiana on behalf of the University. Standard municipal commercial paper issues are supported by a $200,000 standby credit facility with a major commercial bank. Interest on commercial paper may be either taxable or tax-exempt to investors, depending on the University’s intended use of the proceeds. Generally, tax-exempt commercial paper is issued to finance the purchase of equipment and improvements to educational facilities, while taxable commercial paper is issued to provide funding for general uses.

The University also maintains unsecured lines of credit with commercial banks in the aggregate amount of $300,000 to be utilized primarily for working capital purposes. Termination dates on lines of credit available at June 30, 2012 ranged from January 2013 to April 2015.

Total outstanding balances on short-term borrowing are summarized below at June 30:

Total interest costs incurred on short-term borrowing were approximately $226 and $301 for the years ended June 30, 2012 and 2011, respectively.

Note 9.

Deferred Revenue and Refundable Advances

Deferred revenue and refundable advances are summarized as follows at June 30:

Note 10.

Deposits and Other Liabilities

Deposits and other liabilities are summarized as follows at June 30:

Note 11.

Bonds and Notes Payable

Bonds and notes payable consist of the following at June 30:

¹ Includes the unamortized Series 2009 bond premium of $7,022 and $7,178 at June 30, 2012 and 2011, respectively.

The estimated fair value of bond and note obligations was $903,748 and $732,464 at June 30, 2012 and 2011, respectively. Fair value measurements of bonds and notes are based on observable interest rates and maturity schedules that fall within Level 2 of the hierarchy of fair value inputs. The aggregate scheduled maturities of bonds and notes payable are summarized by fiscal year as follows:

The Series 2012 Taxable Fixed Rate Bonds bear interest at a fixed rate of 3.72 percent and are due March 1, 2043. Issuance costs of $364 paid out of proceeds received are reflected within operating expenses for the year ended June 30, 2012.

The Series 2010 Taxable Fixed Rate Bonds bear interest at a fixed rate of 4.90 percent and are due March 1, 2041. Proceeds received were net of issuance costs of $1,323, which are reflected within operating expenses for the year ended June 30, 2011.

The Series 2009 Taxable Fixed Rate Notes bear interest at a fixed rate of 4.141 percent and are due September 1, 2013.

Taxable Fixed Rate Bonds and Notes constitute unsecured general obligations of the University and the associated interest is taxable to investors. Interest costs incurred on Taxable Fixed Rate Bonds and Notes were $14,299 and $11,677 during the years ended June 30, 2012 and 2011, respectively.

Mortgage notes in the amount of $15,435 bear interest at a fixed rate of 1.103 percent and are due on July 1, 2042. These notes are collateralized by the facilities to which they relate. The University incurred interest costs of $173 on the notes during the years ended June 30, 2012 and 2011.

The University is the majority owner of an externally managed limited liability company, the activities of which are reflected in the University’s consolidated financial statements. The company’s assets consist primarily of real estate, the acquisition of which was financed in part with a note payable bearing interest at 5.68 percent, due on February 1, 2016. The note is not a general obligation of the University and is fully collateralized by the property acquired. Interest costs of $2,182 and $2,203 related to the note are reflected within non-operating changes in unrestricted net assets for the years ended June 30, 2012 and 2011, respectively.

St. Joseph County (Indiana) Educational Facilities Revenue Bonds

St. Joseph County (Indiana) Educational Facilities Revenue Bonds (“SJC bonds”) represent general obligations of the University and are not collateralized by any facilities. The following issues were outstanding at June 30:

¹ Variable rates reset weekly. Represents annual percentage rate in effect at June 30, 2012.
² Rate fixed at 3.875% through February 2012, variable thereafter.
³ Carrying amount includes the unamortized premium of $7,022 and $7,178 at June 30, 2012 and 2011, respectively.

The University maintains standby credit facilities with commercial banks to provide alternative liquidity to support the repurchase of tendered variable rate SJC bonds in the event they are unable to be remarketed. Financing obtained through standby credit facilities to fund the repurchase of such bonds would bear interest rates different from those associated with the original bond issues, and mature over the five year period following repurchase. The standby credit facilities in effect at June 30, 2012 expire in February and May 2015.

The University utilizes interest rate swap agreements (see also Note 12) as a strategy for managing interest rate risk associated with variable rate SJC bond issues. Under the terms of swap agreements in effect at June 30, 2012, the University pays fixed rates ranging from 2.01 percent to 4.97 percent and receives variable rates equal to 67 percent or 70 percent of the one-month or three-month London Interbank Offered Rate (“LIBOR”) on total notional amounts of $196,095. The estimated fair value of interest rate swaps was a net unrealized loss position of $26,906 and a net unrealized gain position of $3,056 at June 30, 2012 and 2011, respectively.

Interest costs incurred on SJC bonds and periodic net settlements paid to counterparties pursuant to associated interest rate swaps are summarized below for the years ended June 30:

¹ Includes amortization of Series 2009 premium of $156 and $150 for the years ended June 30, 2012 and 2011, respectively. The premium is amortized using the effective interest method over the period the bonds are outstanding.

Note 12.

Derivative Instruments

The University utilizes a variety of derivative instruments within the NDEP, including certain options contracts, forward currency contracts and futures contracts. As described in Note 11, the University also utilizes interest rate swap agreements to manage interest rate risk associated with its variable rate bond obligations.

Derivative instruments by their nature bear, to varying degrees, elements of market risk and credit risk that are not reflected in the amounts recorded in financial statements. Market risk in this context represents the potential for changes in the value of derivative instruments due to levels of volatility and liquidity or other events affecting the underlying asset, reference rate, or index, including those embodied in interest and foreign exchange rate movements and fluctuations in commodity or security prices. Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The University’s risk of loss in the event of counterparty default is typically limited to the amounts recognized in the consolidated statements of financial position, not the notional amounts of the instruments, and is further limited by the collateral arrangements as specified for specific instruments.

Collateral associated with NDEP derivatives is moved as required by market fluctuations, and is generally in the form of cash or cash equivalents. Interest rate swaps associated with the University’s variable rate bonds have credit-risk-related contingent features that could require the University to post collateral on instruments in net liability positions in the event of a downgrade to the rating on the University’s debt. The aggregate fair value of interest rate swaps with credit-risk-related contingent features that were in liability positions was $26,906 and $13,670 at June 30, 2012 and 2011, respectively. If the credit-risk-related contingent features associated with these instruments had been triggered, the University would have been required to post collateral to its counterparties in an amount up to the full liability position of the instruments, depending on the level of the University’s credit rating. Based on the quality of its credit rating, the University had posted no collateral associated with these instruments at June 30, 2012.

The estimated fair value of derivative instrument assets and liabilities, certain of which are reflected on a net-by-counterparty basis within the consolidated statements of financial position, are summarized in the table below at June 30, 2012, along with the net gains and losses for the year then ended:

¹ Includes interest rate and commodities options with notional amounts of $511,024 and $168,551 at June 30, 2012.
² Fair value measurements of over-the-counter derivative instruments are based on observable inputs, such as relevant interest rates and commodity prices, that fall within Level 2 of the hierarchy of fair value inputs.
³ Futures contracts are exchange-traded. Fair value is based on quoted prices that fall within Level 1 of the hierarchy of fair value inputs. Notional amount on futures at June 30, 2012 represents long exposures.

The estimated fair value of derivative instrument assets and liabilities, certain of which are reflected on a net-by-counterparty basis within the consolidated statements of financial position, are summarized in the table below at June 30, 2011, along with the net gains and losses for the year then ended:

¹ Includes interest rate and commodities options with notional amounts of $1,173,448 and $620,201 at June 30, 2011.
² Fair value measurements of over-the-counter derivative instruments are based on observable inputs, such as relevant interest rates and commodity prices, that fall within Level 2 of the hierarchy of fair value inputs.
³ Futures contracts are exchange-traded. Fair value is based on quoted prices that fall within Level 1 of the hierarchy of fair value inputs. Notional amount on futures at June 30, 2011 reflect $667,963 and $67,960 in long and short exposures, respectively.

Derivative instrument assets and liabilities are reflected within the following lines of the consolidated statements of financial position at June 30:

¹ Reflected within the “Short-term investments” investment class in Note 6.

Certain options contracts are employed within the NDEP as a strategy for protecting the investment portfolio against significant fluctuations in interest rates and commodity prices. Options contracts held in the NDEP are fully collateralized at June 30, 2012. Forward currency contracts are utilized to settle planned purchases or sales, for investment purposes, and to mitigate the impact of exchange rate fluctuations on the U.S. dollar value of NDEP international holdings. A variety of currency, interest rate, equity, bond and commodities futures contracts are also employed in the NDEP to manage exposure to various financial markets.

Gains and losses on derivative instruments held in the NDEP are primarily included in the net gain or loss on investments as reflected in the financial statements. However, due to the pooled nature of the NDEP, a minor portion of these gains and losses is attributed to NDEP holdings of split-interest agreements and the University’s religious affiliates. The net gain or loss on debt-related derivatives (interest rate swaps associated with the University’s variable rate bonds) is reported as such within non-operating changes in unrestricted net assets.

Note 13.

Pension And Other Postretirement Benefits

Defined Contribution Retirement Savings Plans

Faculty and exempt staff participate in the University of Notre Dame 403(b) Retirement Plan, a defined contribution retirement plan, upon meeting eligibility requirements. The plan, operated under section 403(b) of the Internal Revenue Code, is funded by mandatory employee contributions and University contributions. All faculty and staff may also participate in the plan on a voluntary basis by making voluntary employee contributions up to the annual limit established by the Internal Revenue Service. Participants are immediately vested in the plan, and may direct their contributions and the University’s contributions on their behalf to any of the fund sponsors: Fidelity, TIAA-CREF and Vanguard. The University’s share of the cost of these benefits was $26,007 and $25,039 for the years ended June 30, 2012 and 2011, respectively.

Defined Benefit Pension Plan and Postretirement Medical Insurance Benefits

Retirement benefits are provided for University staff under a defined benefit pension plan, for which the University serves as trustee and administrator. This plan provides benefits for certain non-exempt staff after one year of qualifying service. Retirement benefits are based on the employee’s total years of service and final average pay as defined by the plan. Plan participants are fully vested after five years of service. The University funds the plan with annual contributions that meet minimum requirements under the Employee Retirement Income Security Act of 1974 and Pension Protection Act of 2006.

Other postretirement benefit plans offered by the University provide medical insurance benefits for retirees and their spouses. Employees are eligible for such benefits if they retire after attaining specified age and service requirements while employed by the University. The plans hold no assets and are funded by the University as claims are paid. During the year ended June 30, 2011, the University amended certain features of its postretirement benefit plans, replacing supplemental group medical insurance for Medicare-eligible retirees with Health Reimbursement Accounts upon which retirees may draw to purchase individual supplemental medical coverage.

The University recognizes the full funded status of its defined benefit pension and other postretirement benefit plans in the consolidated statements of financial position. Accordingly, the liability for pension benefits as recognized in the statement of financial position represents the excess of the actuarially determined projected benefit obligation (“PBO”) over the fair value of plan assets at year end. The liability for other postretirement benefits as recognized in the consolidated statements of financial position represents the actuarially determined accumulated postretirement benefit obligation (“APBO”) at year end. The following table summarizes the liabilities for pension and other postretirement benefits reflected in the consolidated statements of financial position at June 30:

Changes in the actuarially determined benefit obligations are summarized below for the years ended June 30:

The accumulated benefit obligation associated with pension benefits was $173,579 and $141,371 at June 30, 2012 and 2011, respectively.

The change in the fair value of pension plan assets is summarized below for the years ended June 30:

The components of net periodic benefit cost recognized within operating expenses in the consolidated statements of changes in unrestricted net assets are summarized as follows for the years ended June 30:

The amortization of any prior service cost or credit is determined using straight-line amortization over the average remaining service period of employees expected to receive benefits under the respective plans.

Gains or losses and other changes in the actuarially determined benefit obligations arising in the current period, but not included in net periodic benefit cost, are recognized as non-operating changes in the consolidated statements of changes in unrestricted net assets. These changes are reflected net of a contra-expense adjustment for amounts recognized previously, but included as components of net periodic benefit cost in the current period. Accordingly, the net non-operating increase (decrease) in unrestricted net assets related to pension and other postretirement benefits is summarized as follows for the years ended June 30:

Cumulative amounts recognized as non-operating changes in unrestricted net assets that had not yet been reflected within net periodic benefit cost are summarized as follows at June 30:

The University expects to amortize the following as components of net periodic benefit cost during the year ending June 30, 2013:

The following weighted-average assumptions were used in measuring the actuarially determined benefit obligations (PBO for pension benefits and APBO for other postretirement benefits) at June 30:

The following weighted-average assumptions were used in measuring the actuarially determined net periodic benefit costs for the years ended June 30:

The expected long-term rate of return on pension plan assets is based on the consideration of both historical and forecasted investment performance, given the targeted allocation of the plan’s assets to various investment classes.

A one-percentage-point increase in the assumed health care cost trend rate would have increased aggregate service and interest costs and the APBO associated with postretirement medical benefits by approximately $132 and $749, respectively. A one-percentage-point decrease in the assumed health care cost trend rate would have decreased aggregate service and interest costs and the APBO by approximately $118 and $688, respectively.

The projected payments to beneficiaries under the respective plans for each of the five fiscal years subsequent to June 30, 2012 are as follows:

Projected aggregate payments for pension benefits and other postretirement benefits for the five year period ending June 30, 2022 are $53,865 and $14,306, respectively. The University’s estimated contributions to the defined benefit pension plan for the year subsequent to June 30, 2012 are $7,300.

Defined Benefit Pension Plan Assets

The defined benefit pension plan’s assets are summarized as follows at June 30:

Contributions receivable from the University in the amount of $11,000 at June 30, 2011 were received on September 29, 2011.

The plan’s assets are invested in a manner that is intended to preserve the purchasing power of the plan’s assets and provide payments to beneficiaries. Thus, a rate of return objective of inflation plus 5.0 percent is targeted.

The investment portfolio of the plan, which is invested with external investment managers, is diversified in a manner that is intended to achieve the return objective and reduce the volatility of returns. The plan relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends) over a long-term time horizon.

Actual and targeted allocations of the plan’s investments by asset class were as follows at June 30:

Asset allocation targets reflect the need for a modestly higher weighting in equity-based investments to achieve the return objective. Decisions regarding allocations among asset classes are made when such actions are expected to produce incremental return, reduce risk, or both. The investment characteristics of an asset class—including expected return, risk, correlation, and its overall role in the portfolio—are analyzed when making such decisions.

The role of each asset class within the overall asset allocation of the plan is described as follows:

Public equities – Provides access to liquid markets and serves as a long-term hedge against inflation.

Fixed income securities – Provides a stable income stream and greater certainty of nominal cash flow relative to the other asset classes. Given the low correlation to other asset classes, fixed income assets also enhance diversification and serve as a hedge against financial turmoil or periods of deflation.

Marketable alternatives – Enhances diversification and provides opportunities to benefit from short-term inefficiencies in global capital markets.

Private equity – Provides attractive long-term, risk-adjusted returns by investing in inefficient markets.

Real assets – Provides attractive return prospects, further diversification and a hedge against inflation.

Fair value measurements of plan investments at June 30, 2012 are categorized below by level of the fair value hierarchy according to the lowest level of inputs significant to each measurement:

Fair value measurements of plan investments at June 30, 2011 are categorized below by level of the fair value hierarchy according to the lowest level of inputs significant to each measurement:

Changes in plan investments for which fair value is measured based on Level 3 inputs are summarized below for the year ended June 30, 2012:

¹ Included in the actual return on plan assets for the year ended June 30, 2012.

Changes in plan investments for which fair value is measured based on Level 3 inputs are summarized below for the year ended June 30, 2011:

¹ Included in the actual return on plan assets for the year ended June 30, 2011.

Transfers out of Level 3 primarily reflect the migration to Level 2 of assets measured at fair value based on NAV per share (or its equivalent) that were eligible for redemption at the reporting date or in the near term. Transfers between Levels 1 and 2 were insignificant during the years ended June 30, 2012 and 2011.

The plan is committed under contracts with certain investment managers to periodically advance additional funding as capital calls are exercised. Capital calls are generally exercised over a period of years and are subject to fixed expiration dates or other means of termination. Total commitments of $8,998 and $9,232 were uncalled at June 30, 2012 and 2011, respectively.

Note 14.

Temporarily Restricted Net Assets

Temporarily restricted net assets are summarized as follows at June 30:

As described in Note 4, temporarily restricted net assets include contributions receivable of $85,491 and $96,316 at June 30, 2012 and 2011, respectively.

Net assets released from restrictions for operations are summarized below for the years ended June 30:

Non-operating net assets released from restrictions reflect expenditures for land, buildings and equipment of $41,619 and $42,314 for the years ended June 30, 2012 and 2011, respectively.

Note 15.

Permanently Restricted Net Assets

Permanently restricted net assets consist of the following at June 30:

As reflected in Notes 4 and 16, permanently restricted endowment funds include $106,234 and $118,444 in contributions receivable at June 30, 2012 and 2011, respectively.

Note 16.

Endowment

The University’s endowment consists of individual funds established for a variety of purposes. Net assets associated with endowment funds, including funds functioning as endowment, are classified and reported in accordance with any donor-imposed restrictions.

Endowment and funds functioning as endowment at June 30, 2012 are summarized below:

Endowment and funds functioning as endowment at June 30, 2011 are summarized below:

The fair value of assets associated with individual donor-restricted endowment funds may fall below the level required by donor stipulations when the timing of contributions coincides with unfavorable market fluctuations. Unrealized depreciation of this nature amounted to $578 and $964 at June 30, 2012 and 2011, respectively, as reflected in the preceding tables.

Endowment and funds functioning as endowment are invested primarily in the NDEP, described in Note 6. However, certain funds are invested outside of the NDEP in accordance with donor requirements and other considerations.

Changes in endowment and funds functioning as endowment are summarized below for the year ended June 30, 2012:

During the year ended June 30, 2012, the University designated more than $80,000 in unrestricted net assets as funds functioning as endowment, primarily as general University reserves.

Changes in endowment and funds functioning as endowment are summarized below for the year ended June 30, 2011:

During the year ended June 30, 2011, the University designated more than $60,000 in unrestricted net assets as funds functioning as endowment for a variety of purposes.

The University has adopted an endowment spending policy that attempts to meet three objectives: (1) provide a predictable, stable stream of earnings to fund participants; (2) ensure the purchasing power of this revenue stream does not decline over time; and (3) ensure the purchasing power of the endowment assets does not decline over time. Under this policy, as approved by the Board of Trustees, investment income, as well as a prudent portion of appreciation, may be appropriated to support the operational needs of fund participants.

Accumulated investment return distributed (i.e., appropriated) under the University’s endowment spending policy to meet operational needs is summarized below by the purposes associated with applicable funds for the years ended June 30:

Note 17.

Split-Interest Agreements

The University’s split-interest agreements consist principally of charitable gift annuities and irrevocable charitable remainder trusts for which the University serves as trustee. Split-interest agreement net assets consisted of the following at June 30:

¹ Represents the present value of estimated future payments to beneficiaries.

Assets contributed pursuant to the University’s charitable gift annuity program are not held in trust, and based on the nature of the agreements, are designated as funds functioning as endowment. The aggregate fair value of these assets was $19,392 and $13,730 at June 30, 2012 and 2011, respectively.

Changes in split-interest agreement net assets are summarized below for the years ended June 30:

¹ Represents the present value of estimated future payments to beneficiaries.

Note 18.

Grants and Contracts

The University recognized operating revenues based on direct expenditures and related indirect costs funded by grants and contracts as follows for the years ended June 30:

Funding for federally sponsored research and other programs is received from the U.S. government, as well as from other universities and private organizations that subcontract sponsored research to the University. The University’s primary sources of federal research support are the Department of Health and Human Services and the National Science Foundation.

The University also administers certain federally sponsored programs, primarily related to student financial aid, for which it recognizes neither revenues nor expenses. Receipts and disbursements for such programs totaled $13,493 and $13,742 for the years ended June 30, 2012 and 2011, respectively.

Note 19.

Contingencies and Commitments

The University is a defendant in various legal actions arising out of the normal course of its operations. Although the final outcome of such actions cannot currently be determined, the University believes that eventual liability, if any, will not have a material effect on the University’s financial position.

All funds expended in conjunction with government grants and contracts are subject to audit by government agencies. In the opinion of management, any liability resulting from these audits will not have a material effect on the University’s financial position.

The University leases space for academic and administrative purposes under noncancelable operating leases. Minimum future payments under these lease agreements are summarized by fiscal year as follows:

At June 30, 2012, the University also has commitments to expend approximately $56,810 to complete various construction projects.