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KENTUCKY STATE UNIVERSITY

FINANCIAL STATEMENTS June 30, 2010 and 2009

Crowe Horwath LLP Independent Member Crowe Horwath International

Board of Regents

Kentucky State University

Frankfort, Kentucky

We have audited the accompanying financial statements of the business-type activities of Kentucky State University (the “University”) as of June 30, 2010 and 2009, and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the University’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Kentucky State University Foundation, Inc. (the “Foundation”) an entity included as a component unit as required by Statement No. 39 of the Governmental Accounting Standards Board, as of June 30, 2010 and 2009 and for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Foundation, is based solely on the report of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities and discretely presented component unit of Kentucky State University as of June 30, 2010 and 2009, and the changes in its financial position and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

1.

The Management’s Discussion and Analysis (MD&A) on pages 3 through 15 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Louisville, Kentucky

November 5, 2010

Crowe Howard LLP

Crowe Horwath LLP

2.

Management’s Discussion and Analysis of Kentucky State University’s (the “University”) financial statements provide an overview of the financial position and activities of the University for the year ended June 30, 2010, with comparative information for the year ended June 30, 2009 and selected information for the year ended June 30, 2008. This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes thereto, which follow this section. The financial statements and related notes and this discussion and analysis are the responsibility of management.

Kentucky State University is a Commonwealth of Kentucky coeducational institution for higher education. The University's mission is to build on its legacy of achievement as a historically black, liberal arts, and 1890 land-grant university, afford access to and prepare a diverse student population of traditional and non-traditional students to compete in a multifaceted, ever-changing global society by providing student-centered learning while integrating teaching, research, and service through high-quality undergraduate and select graduate programs. Kentucky State University is committed to keeping relevant its legacy of service by proactively engaging the community in partnerships on civic projects driven by the objective of positively impacting the quality of life of the citizens of the Commonwealth.

The annual financial report and statements include the University and Kentucky State University Foundation, a component unit of the University. Kentucky State University Foundation, Inc. (the “Foundation”) is a not-for-profit Kentucky corporation, which was established to receive, invest and expend funds to promote and implement educational and developmental activities at Kentucky State University (the “University”). The Foundation is managed by a Board of Trustees independent from that of the University. The Foundation is supported primarily through contributions from alumni.

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The University’s Financial Statements consist of three financial statements: a Statement of Net Assets (Balance Sheet); a Statement of Revenues, Expenses and Changes in Net Assets (Income Statement); and a Statement of Cash Flows, along with the accompanying Notes to the Financial Statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) Statement No. 35, Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities.

Kentucky State University is a component unit of the Commonwealth of Kentucky.

The Statement of Net Assets presents the financial position of the University at the end of the fiscal year and includes all assets and liabilities. Net assets, the difference between total assets and total liabilities, are an important indicator of the current financial condition, while the change in net assets is an indicator of whether the overall financial position has improved or worsened during the year.

4.

Assets. As of June 30, 2010, total assets amounted to $123.4 million. Of this amount, investment in capital assets (net of depreciation) of $83.0 million, or 67.3% of total assets, represented the largest asset class. Investments amounted to $10.1 million or 8.2% of total assets. During the year, total assets increased by $9.4 million, primarily due to increases in student accounts, grant and loans receivables, capital assets and investments.

Liabilities. As of June 30, 2010, total liabilities amounted to $18.0 million. Long-term debt includes bonds payable for educational buildings, the housing and dining system, energy-related equipment and technology equipment purchased under a Master Lease Agreement. During the year, total liabilities decreased by $1.8 million, primarily due to a decrease in accounts payable, bonds and capital lease obligations.

Net Assets. Net assets of the University were $105.4 million at June 30, 2010 and were reported in four net asset categories: invested in capital assets, net of related debt $71.8 million (68.2%), restricted nonexpendable $8.0 million (7.6%), restricted expendable $5.1 million (4.8%), and unrestricted $20.5 million (19.4%).

2009 versus 2008. Total assets amounted to $113.9 million and $112.9 million in fiscal year 2009 and 2008 respectively. Total liabilities amount to $19.8 million in fiscal year 2009 and $19.5 million in fiscal year 2008. When compared to fiscal year 2008, the University's total assets for fiscal year 2009 increased $1 million primarily in the current asset category due to a decrease in student accounts, grant and loans receivables, reduced market value of investments, and increase in cash, cash equivalents and capital assets, net.

The Statement of Revenues, Expenses and Changes in Net Assets is prepared on the accrual basis of accounting, whereby revenues and assets are recognized when the service is provided and expenses and liabilities are recognized when others provide the service, regardless of when cash is exchanged. All items that increase or decrease net assets must appear on the Statement of Revenues, Expenses and Changes in Net Assets as revenues, expenses, gains or losses.

5.

Financial activities are reported as either operating or nonoperating. GASB Statement No. 35 requires state appropriations, gifts, investment income and endowment income to be classified as nonoperating revenues. Accordingly, the University reports an operating loss prior to the addition of nonoperating revenues. The utilization of long-lived capital assets is reflected in the financial statements as depreciation, which amortizes the cost of an asset over its expected useful life. Tuition revenue is reduced by gift scholarships and institutional aid, and is reported net of scholarship allowances in the financial statements. A summarized comparison of the University's revenues, expenses and changes in net assets for the years ended June 30, 2010, 2009 and 2008 is as follows.

6.

Total operating revenues were $45.4 million for the year ended June 30, 2010, an increase of $9,400,741. The primary components were federal, state and local grants and contracts of $14.6 million (32.2%), student tuition and fees of $16.5 million (36.4%), federal appropriations of $6.5 million (14.3%) and auxiliary services and other revenues of $7.8 million (17.1%). Student tuition and fees revenue increased $3,184,299 due to increased tuition fees and enrollment. Grants and contracts revenue increased $4,200,334 due to increased awards and spending. Federal appropriations increased $1,529,864. Auxiliary enterprises revenue increased $389,116. Refer to Figure 1 for the three-year trend of the operating revenues as a percent to total operating revenues.

Operating expenses totaled $67.6 million, an increase of $4,734,758 over last year due to an increase in depreciation, federal grants spending and bad debt. Of this amount, $39.2 million (57.9%) was expended directly for the primary mission of the University – instruction (20.4%), research (7.5%), student services (9.1%), student aid (14.1%), and public service (6.8%). Instruction is the main component of Primary Mission expenses amounting to $13.8 million in fiscal year 2010 or 20.4%. Refer to Figure 2 for the operating expenses categorized into the Primary Mission of the University.

7.

The University continued to invest in student aid and support services to provide students with opportunities to be successful in fiscal year 2010. For the year ended June 30, 2010, student aid related to tuition and fees totaled $14 million, with student aid expenses of $9.5 million and scholarship allowances of $4.5 million.

The University had an overall increase in institutional support of $1.5 million, along with a slight decrease in auxiliary enterprises of $34,817. The large expenditures in the primary areas of instruction, research and student services, in conjunction with minimal increases to fixed cost areas, confirms the University resource allocations are clearly aligned with the University's strategic priorities to support academic and student excellence.

The net loss from operations for the year amounted to $22.2 million. Nonoperating revenues, net of expenses, amounted to $31.8 million, resulting in an increase in income before other revenues, expenses, gains and losses of $9.5 million for the year. After capital appropriations, the increase in net assets was $11.3 million. Nonoperating revenues include state appropriations of $24.6 million, federal grants and contracts of $6.6 million, gifts and investment income, net of expenses.

Operating revenues in fiscal year 2008 were $34.3 million and operating expenditures were $59.5 million, resulting in a loss from operations of $25.2 million. Net nonoperating revenues were $30.6 million, including $27.5 million in state appropriations. Compared to fiscal year 2009, revenue increases are due to tuition and fee increases, grant and contracts increases, a decrease in federal appropriations and auxiliary enterprises. Operating expenses have increased due primarily to salary increases and cost of utilities.

8.

The Statement of Cash Flows presents information related to the University's cash inflows and outflows summarized by operating activities, noncapital financing activities, capital financing activities and investing activities. The primary purpose of the Statement of Cash Flows is to provide information about the cash receipts and cash payments made by the University during the year, to allow financial statement readers to assess the University's ability to generate future net cash flows, its ability to meet obligations as they become due and its possible need for external financing.

Major sources of cash received from operating activities are student tuition and fees of $17.6 million and grants and contracts of $19.5 million. Major uses of cash for operating activities were payments to employees for salaries and benefits of $35.3 million and to vendors and contractors of $18.9 million.

Noncapital financing activities included state appropriations from the Commonwealth of Kentucky of $24.6 million.

Capital and related financing activities included capital appropriations from the Commonwealth of Kentucky and other sources of $1.8 million. Cash of $9.5 million was expended for construction and acquisition of capital assets and for principal and interest payments on the retirement of the University's bonds and other capital related debt.

Net cash of $261,222 was used for conducting investing activities, including purchase and sales of investments, and interest and dividends earned on investments. Investment activity was primarily related to management of the University's endowments.

Compared to fiscal year 2008, the amount of cash used to fund operations has been reduced primarily due to operational efficiencies that have been implemented. Net cash for noncapital financing activities and investment activities remains constant. Capital and related financing has been reduced due to the completion of capital projects.

9.

State appropriations represent approximately 31.4% of all operating and non-operating revenues. The level of state support is a key factor influencing the University's overall financial condition. State appropriation is unrestricted to revenue and is included as non-operating revenue. State appropriation is used to support payroll and benefits for University employees.

The following details the net Commonwealth appropriations received by the University for fiscal years ending June 30, 2010, 2009 and 2008.

The University faces financial challenges to maintain and upgrade its capital assets including its infrastructure, buildings and grounds. A combination of revenue sources funds the University's investment in capital improvements, including appropriations provided by the Commonwealth of Kentucky. In fiscal year 2010, the Commonwealth provided $1.8 million in capital appropriations to the University. State capital appropriations plus federal sources plays an important role in the University's efforts to address deferred maintenance projects.

The following table details the University's grant and contract revenue for fiscal years ended June 30, 2010, 2009 and 2008.

10.

In early 2009, the University submitted its Six Year Capital Plan to the Kentucky General Assembly to be acted upon during the 2010 regular session of the General Assembly. This plan included projects separated into three biennia beginning in 2010 and ending 2016. The execution of the University's capital plan is contingent upon sufficient funding from the Commonwealth.

The $200 million request for the first biennium (2010-2012) is comprised of new construction projects, maintenance projects and information technology projects. The University primarily funds its projects from four sources: state general fund appropriations, federal USDA funds, agency funds, and private funding. University-issued bond funding is also available.

New construction projects proposed include: $7.8 million to expand or build a new Betty White Nursing Building, which will provide 24,000 square feet of new classroom space to accommodate enrollment into the nursing program; $2.1 million to construct a pedestrian bridge across U.S. Highway 60 to allow students, faculty and staff safe passage across a heavily traveled highway which bisects campus; $24.5 million to construct a centralized boiler plant, to replace the existing seventy year old plant. Maintenance projects included: $1.5 million in a Capital Renewal & Maintenance Pool; over $4.2 million to replace boilers and mitigate pollution control; and $1.8 million for roof replacements. Information technology projects are the last major category in the 2010-2012 Capital Plan and include: $5.5 million to upgrade information technology infrastructure; $6.8 million to renovate the central computing facility; and $1.0 million to upgrade computer hardware campus-wide.

In the tables below, expenses have been categorized into designated or nondesignated spending categories. The designated spending category includes funds expended by function from contracts and grants, land grant, auxiliary and depreciation. These funds must be expended for the purposes for which the funds were received or budgeted. This category also includes funds for student aid. All other spending is categorized as nondesignated spending. Expenses for nondesignated fund categories in 2010 increased for instruction, research, public service, student services, institutional support and student aid over the prior year and decreased for academic support, and plant operations and maintenance. Total spending for all functions in the nondesignated category increased by $3.6 million in 2010.

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12.

Capital assets, net of accumulated depreciation, totaled $83 million at June 30, 2010, an increase of $2.4 million. Capital assets as of June 30, 2010 and significant changes in capital assets during the year are as follows (in millions):

At June 30, 2010, the University has capital construction projects in progress totaling $3.3 million in scope.

At June 30, 2010, bonds and lease payable amounted to $11.1 million, as summarized below:

University management continues its strategic mission to uniquely position Kentucky State University as an institution of excellence for the citizens of the Commonwealth and for advancing higher education in Kentucky by inspiring innovation, growing leaders and advancing Kentucky. Executive management continues to work with the Council on Postsecondary Education to address the needs of the Commonwealth and believes that it has well-positioned the University for becoming a strong, financially viable and efficient institution of higher learning as funding issues continue to be decided.

13.

Future economic factors impacting Kentucky State University include the following known facts:

The overall financial position of the University strengthened during fiscal year 2010. Revenue streams remain secure and steady. As the University adapts to present economic environments, new opportunities for funding will be explored to complement state support. Executive management's goal is to deliver exceptional programs and services to students and constituents while maintaining financial integrity. Management believes Kentucky State University is able to sustain its sound financial position and solidify its progress toward becoming a regional university of excellence.

Figure 4 illustrates the ratios comprising the composite financial index. The graph depicts a graphic view of Kentucky State University's financial profile that identifies the financial strengths and weaknesses that may exist. Based on the illustration, Kentucky State University has relatively strong operating results. The primary reserve ratio is reduced primarily resulting in a reduction in state funding for capital expansion. The viability ratio is plotted slightly within the inner bounds, but shows that Kentucky State University has significant net assets to satisfy its debt obligations.

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Reporting Entity: Kentucky State University (the “University”) is a component unit of the Commonwealth of Kentucky and is included in the general-purpose financial statements of the Commonwealth. The Kentucky State University Foundation, Inc. (the “Foundation”) is a legally separate, tax-exempt organization supporting the University. The Foundation acts primarily as a fund-raising organization to supplement the resources that are available to the University in support of its programs. The Foundation’s Board of Directors is self-perpetuating and consists of graduates and friends of the University. Although the University does not control the timing or amount of receipts from the Foundation, the majority of resources or income thereon that the Foundation holds and invests is restricted by the donors to the activities of the University. Because these restricted resources held by the Foundation can only be used by, or for the benefit of, the University, the Foundation is considered a component unit of the University and is discretely presented in the University’s financial statements.

Basis of Presentation: The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB), including Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments, and Statement No. 35, Basic Financial Statements and Management's Discussion and Analysis of Public College and Universities, issued in June and November, 1999, respectively. The University reports as a Business Type Activity (BTA), as defined by GASB Statement No. 35. BTA's are those activities that are financed in whole or in part by fees charged to external parties for goods and services. The University's reports are based on all applicable Government Accounting Standards Board (GASB) pronouncements as well as applicable Financial Accounting Standards Board (FASB) pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with GASB pronouncements. The College has elected to not apply FASB pronouncements issued after the applicable date.

Basis of Accounting: The financial statements have been prepared on the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when an obligation has been incurred.

GASB Statement No. 35 establishes standards for external financial reporting for public colleges and universities and requires that resources be classified for accounting and reporting purposes into the following net assets categories:

Nonexpendable – Net assets subject to externally imposed stipulations that they be maintained permanently by the University. Such assets include the University's permanent endowment funds.

23.

Expendable – Net assets whose use by the University is subject to externally imposed stipulations that can be fulfilled by actions of the University pursuant to those stipulations or that expire by the passage of time.

The financial statement presentation required by GASB Statement No. 35 is intended to provide a comprehensive, entity-wide perspective of the University's assets, liabilities, net assets, revenues, expenses, changes in net assets and cash flows.

Cash Equivalents: For the statement of cash flows, the University considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Investments: Investments are valued at fair value based on quoted market prices. Short-term investments are investments that are not cash equivalents but mature within the next fiscal year and are classified as current assets.

Accounts Receivable, Net: Accounts receivables consist of tuition and fee charges, loans to students and amounts due from federal and state governments, non-governmental sources, in connection with reimbursements of allowable expenses made pursuant to grants and contracts. Accounts receivables are recorded net of allowance for doubtful accounts.

Allowance for Doubtful Accounts: The allowance for doubtful accounts is established through a provision for doubtful accounts charged to expense. The allowance represents an amount, which, in management's judgment, will be adequate to absorb probable losses on existing accounts that may become uncollectible.

Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of physical plant items. Inventories consist of physical plant, postage and printing supplies.

Capital Assets: Capital assets are stated at cost at date of acquisition or, in the case of gifts, at fair value at date of gift. Equipment with a unit cost of $2,000 or more and having an estimated useful life of greater than one year is capitalized. Renovations to buildings and infrastructure and land improvements that significantly increase the value or extend the useful life of the structure are capitalized. Routine repairs and maintenance are charged to operating expense in the year in which the expense is incurred.

24.

Depreciation of capital assets is computed on a straight-line basis over the estimated useful lives of the respective assets. The University capitalizes, but does not depreciate, works of art and historical treasures that are held for exhibition, education, research and public service. Estimated lives used for depreciation purposes are as follows:

Compensated Absences: The liability and expense incurred for employee vacation and sick pay are recorded as accrued compensated absences in the statement of net assets and as a component of compensation and benefit expense in the statement of revenues, expenses and changes in net assets.

Deferred Revenue: Deferred revenue includes amounts received for tuition and fees prior to the end of the fiscal year but related to the subsequent reporting period. Deferred revenues also include amounts received from grant and contract sponsors and state deferred maintenance funds that have not yet been earned.

Restricted Asset Spending Policy: The University's policy is that restrictions on assets cannot be fulfilled by the expenditure of unrestricted funds for similar purposes. The determination on whether restricted or unrestricted funds are expended for a particular purpose is made on a case-by-case basis. Restricted funds remain restricted until spent for the intended purpose.

Operating Activities: The University defines operating activities, as reported on the statement of revenues, expenses and changes in net assets, as those that generally result from exchange transactions, such as payments received for providing goods and services and payments made for services and goods received. Nearly all of the University's expenses are from exchange transactions. Certain significant revenues relied upon for operations, such as state and certain federal appropriations, gifts and investment income, are recorded as non-operating revenues, in accordance with GASB Statement No. 35.

Scholarship Discounts and Allowances: Financial aid to students is reported in the financial statements under the alternative method as prescribed by the National Association of College and University Business Officers (NACUBO). Certain aid, such as loans and funds provided to students awarded by third parties, is accounted for as third party payments (credited to the Student's account as if the student made the payment). All other aid is reflected in the financial statements as operating expenses, or scholarship allowances, which reduce revenues. The amount reported as operating expenses represents the portion of aid that was provided to the student in the form of cash. Scholarship allowances represent the portion of aid provided to the student in the form of reduced tuition. Under the alternative method, these amounts are computed by allocating the cash payments to students, excluding payments for services, on the ratio of total aid to the aid not considered to be third party aid.

25.

Federal Grants and Contracts: Per GASB Statement No. 24, pass-through grants should be reported as revenues and expenses in the financial statements if that entity has any administrative or direct financial involvement in the program. An entity has administrative involvement if it determines eligible secondary recipients or projects, even if using grantor-established criteria. Therefore, Pell Grants are considered nonexchange transactions and are recorded as nonoperating revenues in the accompanying financial statements.

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

Component Unit Disclosure: The accompanying financial statements of the Foundation have been prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the FASB. As such, certain revenue recognition criteria and presentation features are different from GASB revenue recognition criteria and presentation features.

During the year ended June 30, 2010 and 2009, the Foundation made distributions of $166,843 and $116,032, respectively, or on behalf of the University for both restricted and unrestricted purposes. Complete financial statements for the Foundation can be obtained from the Kentucky State University Foundation, Inc. at P.O. Box 4210, Frankfort, KY 40604.

New Pronouncements: In June 2007, the GASB issued Statement No. 51, Accounting and Financial Reporting for Intangible Assets. This statement requires that all intangible assets not specifically excluded by its scope provisions be classified as capital assets. Accordingly, existing authoritative guidance related to the accounting and financial reporting for capital assets should be applied to these intangible assets, as applicable. The statement also provides authoritative guidance that specifically addresses the nature of these intangible assets. The provisions of this statement are effective for financial statements for fiscal periods beginning after June 15, 2009. The adoption of this statement resulted in the capitalization of new software purchased in the current year, which is reflected on the University's financial statements.

In June 2008, the GASB issued Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. This statement addresses the recognition, measurement and disclosure of information regarding derivative instruments entered into by governments. The provisions of this statement are effective for fiscal periods beginning after June 15, 2009. The adoption of this statement had no impact on the University's financial statements.

26.

In December 2009, the GASB issued Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. This Statement amends Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, to permit an agent employer that has an individual employer OPEB plan with fewer than 100 total plan members to use the alternative measurement method, at its option, regardless of the number of total plan members in the agent multiple employer OPEB plan in which it participates. This Statement also amends a Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, requirement that a defined benefit OPEB plan obtain an actuarial valuation. The amendment permits the requirement to be satisfied for an agent multiple-employer OPEB plan by reporting an aggregation of results of actuarial valuations of the individual-employer OPEB plans or measurements resulting from use of the alternative measurement method for individual-employer OPEB plans that are eligible. In addition, this Statement clarifies that when actuarially determined OPEB measures are reported by an agent multiple-employer OPEB plan and its participating employers. The provisions related to the use and reporting of the alternative method are effective immediately. The provisions related to the frequency and timing of measurements are effective for actuarial valuations first used to report funded status information in OPEB plans financial statements for financial periods beginning after June 15, 2011. Management has not determined the impact these statements will have on the financial statements of the University.

In June 2010, the Governmental Accounting Standards Board (GASB) issued Statement No. 59, Financial Instruments Omnibus. The Statement updates and improves existing standards regarding financial reporting of certain financial instruments and external investment pools. Statement No. 59 emphasizes the applicability of U.S. Securities and Exchange Commission requirements to certain external investment pools—known as 2a7-like pools—to provide users more consistent information on qualifying pools; addresses the applicability of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, to certain financial instruments to clarify which financial instruments are within the scope of that pronouncement and to provide greater consistency in financial reporting; and applies the reporting provisions for interest-earning investment contracts of Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, to unallocated insurance contracts to improve the consistency of reporting by pension and OPEB plans. Statement No. 59 is effective for fiscal years beginning after June 15, 2010, with earlier application encouraged. Management has not determined the impact these statements will have on the financial statements of the University.

The statement of net assets classification "cash and cash equivalents" includes all readily available sources of cash such as petty cash, demand deposits, certificates of deposit and temporary investments in marketable securities with original maturities less than three months.

27.

At June 30, 2010 and 2009, the University had petty cash funds totaling zero, and deposits as reflected by bank balances as follows:

2010 2009

Insured, commercial banks $ 100,000 $ 100,000

Uninsured, commercial banks; collateral held by pledging institution's agent in the University's name 7,255,846 2,754,500

Maintained by Commonwealth of Kentucky 16,699,628 14,858,960

$ 24,055,474 $ 17,713,460

The difference in the cash-carrying amount per the statement of net assets and the above bank balances represented items in transit.

At June 30, 2010 and 2009, the University had no cash and cash equivalents that are restricted for capital expenditures.

The following schedule reports the fair values and maturities (using the segmented time distribution method) for the University's investments at June 30, 2010:

Investment Type Fair Value Investment Maturities (in years)

Bonds $ 3,260,944 $ 228,949 $ 1,180,402 $ 1,519,511 $ 332,082

Bond Mutual Funds 910,273 - 910,273 - -

Money Market Funds 708,992 708,992 - - -

Real Estate Investments 104,663 - 104,663 - -

4,984,872 $ 937,941 $ 2,195,338 $ 1,519,511 $ 332,082

Equities and Equity

Mutual Funds 5,140,327

< 1 1-5 6-10 Over 11

$ 10,125,199

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The following schedule reports the fair values and maturities (using the segmented time distribution method) for the University's investments at June 30, 2009:

Investment Type Fair Value Investment Maturities (in years)

Bonds $ 2,133,131 $- $ 397,529 $ 1,374,377 $ 361,225

Bond Mutual Funds 791,719 - - 791,719 -

Money Market Funds 752,833 752,833 - - -

3,677,683 $ 752,833 $ 397,529 $ 2,166,096 $ 361,225

Equities and Equity

Mutual Funds 5,667,083

< 1 1-5 6-10 Over 11

$ 9,344,766

The University has an investment management agreement with Fifth Third Bank ("Fifth Third"). Fifth Third serves individual and institutional clients.

Credit Risk: The University's average credit quality rating according to Moody's is AA2.

Interest Rate Risk: Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The University does not have a formal policy to specifically limit investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates.

Concentration of Credit Risk: Concentration of credit risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer. The University does not have a formal policy for concentration of credit risk.

Custodial Credit Risk: For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the University will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The University does not have a formal policy for custodial credit risk.

29.

Accounts, grants and loans receivable consist of the following as of June 30, 2010 and 2009:

Capital assets as of June 30, 2010, are summarized as follows:

30.

Capital assets as of June 30, 2009, are summarized as follows:

Accounts payable and accrued liabilities as of June 30, 2010 and 2009, are as follows:

2010 2009

Payable to vendors and contractors $ 27,653 $ 262,433

Accrued salaries and other liabilities $ 1,608,134 $ 1,806,430

$ 1,635,787 $ 2,068,863

Deferred revenue consists of the following as of June 30, 2010 and 2009:

2010 2009

Unearned summer school tuition and fees $ 899,992 $ 421,583

Unearned grants and contracts 1,236,072 1,311,726

$ 2,136,064 $ 1,733,309

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Long-term liabilities as of June 30, 2010, are summarized as follows:

Long-term liabilities as of June 30, 2009, are summarized as follows:

The outstanding Consolidated Educational Buildings Revenue Bonds Series are Series I and have interest rates ranging from 2.0 percent to 3.2 percent. The bonds mature in 2011. The reserve requirement for this issue has been fully funded as of June 30, 2006.

The outstanding General Receipts Bonds Series A Bonds have an interest rate of 3.625%. The bonds mature in 2027. The reserve requirements for these issues have been fully funded as of June 30, 2006.

All bonds are collateralized by University property and the pledge of certain revenues, tuition and fees.

32.

The principal and interest repayment requirements relating to the outstanding bonds payable at June 30, 2010, are as follows:

During 2005, the University entered into a capital lease for an energy management project. The lease obligations have an interest rate of 4.29% and require annual payments of principal and interest through 2021. The lease obligation will be paid with guaranteed energy savings.

The following is a schedule of future minimum payments required for the capital lease obligation at June 30, 2010:

Year ending June 30,

2011 $ 655,697

2012 616,792

2013 616,792

2014 616,792

2015 616,792

Thereafter 3,700,753

Total minimum lease payments 6,823,618

Less: amounts representing interest 1,421,289

Present value of minimum lease payment $ 5,402,329

Kentucky Teachers Retirement System: All faculty and exempt employees required to hold a degree and occupying full-time positions, defined as seven-tenths (7/10) of normal full-time service on a daily or weekly basis, are required by state law to participate either in the Kentucky Teachers Retirement System (KTRS) or the Optional Retirement Plan (ORP). KTRS, a cost sharing, multiple-employer, public employee retirement system, provides retirement benefits based on an employee's final average salary and number of years of service. Benefits are subject to certain reductions if the employee retires before reaching age sixty, unless the employee has twenty-seven or more years of participation in the plan. The plan also provides for disability retirement, death and survivor benefits, and medical insurance.

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The Kentucky Teachers Retirement System issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to Kentucky Teachers Retirement System, 479 Versailles Road, Frankfort, Kentucky 40601-3868 or by calling (502) 848-8500.

Funding for the plan is provided from eligible employees hired on or before June 30, 2008 who contribute 6.16% of their salary through payroll deductions and the Commonwealth of Kentucky, which also indirectly contributes 13.84% of current eligible employees' salaries to the KTRS through appropriations to the University. Employees hired on or after July 1, 2008 contribute 7.16% of their salary through payroll deductions and the Commonwealth of Kentucky, which also indirectly contributes 14.84% to the KTRS through appropriations to the University. Contribution requirements of the plan members and the University are established by Kentucky Revised Statute and the KTRS Board of Trustees. The University's contributions to KTRS for the year ending June 30, 2010, 2009 and 2008 were $2,009,627, $1,988,376 and $1,896,953, respectively, and equaled the required contribution for that year.

Kentucky Employees Retirement System: Substantially all other full-time University employees are required by law to participate in the Kentucky Employees Retirement System (KERS), a cost sharing multiple-employer, public employee retirement system. KERS provides retirement benefits based on an employee's final average salary and number of years of service. Benefits are subject to certain reductions if the employee retires before reaching age sixty-five, or has less than twenty-seven years of service. The plan also provides for disability retirement, death and survivor benefits and medical insurance.

The Kentucky Employees Retirement System issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to Kentucky Employees Retirement System, 1260 Louisville Road, Perimeter Park West, Frankfort, Kentucky 40601 or by calling (502) 564-4646.

Funding for the plan is provided from eligible employees who contribute 5.00% of their salary through payroll deductions and the Commonwealth of Kentucky, which also indirectly contributes 11.61% of current eligible employees' salaries to the KERS through appropriations to the University. Employees hired on or after July 1, 2008 contribute 6.0% of their salary through payroll deductions and the Commonwealth of Kentucky, which also indirectly contributes 11.61% to the KERS through appropriations to the University. University contribution rates are determined by the Kentucky Revised Statute and the Board of Trustees of the Kentucky Retirement System each biennium. The University's contributions to KERS for the year ending June 30, 2010, 2009 and 2008 were $647,378, $552,332, and $468,947, respectively, and equaled the required contribution for that year.

Optional Retirement Plan: All faculty and exempt employees who are eligible to participate in the KTRS retirement plan may elect to participate in the Optional Retirement Plan (ORP) instead of KTRS. In doing so, the employee may choose both Teachers Insurance and Annuity Associations on America, (TIAA-CREF) or The Variable Annuity Life Insurance Company (VALIC). Both offer a defined contribution, 403b plan.

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Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA -CREF), is one of the largest and most respected financial service providers in the world. TIAA -CREF Individual & Institutional Services, Inc. distributes CREF and TIAA Real Estate Account variable annuities. Teachers Personal Investors Services, Inc. distributes Personal Annuity variable annuities, TIAA -CREF Mutual Funds, TIAA-CREF Institutional Mutual Funds, and TIAA-CREF Tuition Financing, Inc. products. TIAA-CREF Trust Company, FSB, provides trust services. Located in New York, NY, Teachers Insurance and Annuity Association of America (TIAA) and TIAA-CREF Life Insurance Company issue insurance and annuities. Financial statements are available on the website, www.tiaa-cref.com.

AIG VALIC is the marketing name for the family of companies comprising VALIC Financial Advisors, Inc.; VALIC Retirement Services Company; VALIC Trust Company; and The Variable Annuity Life Insurance Company (VALIC); all members of American International Group, Inc. Complete information about VALIC's variable annuities, including financial statements, fees, charges, expenses and contract limitations, can be obtained by visiting the website or by calling 1-800-428-2542.

Funding for the plan is provided from eligible employees who contribute 6.16% of their salary through payroll deductions and the Commonwealth of Kentucky, which also indirectly contributes 8.7% of current eligible employees' salaries to the ORP through appropriations to the University. The University's contributions to ORP for the years ending June 30, 2010, 2009 and 2008 were $393,650, $237,031, and $298,002, respectively, and equaled the required contribution for the year.

Health care and life insurance benefits are provided for eligible retired employees through the above pension plans.

Expenditures for all employee benefits are included as expenditures within the appropriate functional areas.

The University is a party to various litigations and other claims in the ordinary course of business. University officials are of the opinion, based upon the advice of legal counsel, that the ultimate resolution of these matters will not have a material effect on the financial statements of the University.

The University receives financial assistance from federal and state agencies in the form of grants and awards. The expenditure of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the applicable fund. In the opinion of management, such potential disallowed claims, if any, would not have a material adverse effect on the overall financial position of the University at June 30, 2010.

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The University is exposed to various risks of loss from torts; theft of, damage to, destruction of assets; business interruption; employee injuries and illnesses; natural disasters; and employee health and accident benefits. Commercial insurance coverage is purchased for claims arising from these risks. Settled claims have not exceeded this commercial coverage in any of the three preceding years. As a sovereign entity of the Commonwealth of Kentucky, the Kentucky Board of Claims handles tort claims on behalf of the University.

The Commonwealth of Kentucky operates a public entity risk pool operating as a common risk management and insurance program for its members. The University pays an annual premium to the pool for its workers' compensation insurance coverage. The pool's governing agreement specifies that the pool will be self-sustaining through member premiums and will reinsure through commercial carriers for claims in excess of specified stop loss amounts.

In the Statement of Revenues, Expenses and Changes in Net Assets, operating expenses are presented by functional expense purpose. Functional expense purpose is classified below by natural classification, such as salaries, benefits, and goods and services.

Depreciation is allocated below based on functional classification as required by IPEDS for Fiscal Year 2010. The graphs and tables below summarize operating expenses by functional purpose for the years ended June 30, 2010 and 2009:

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Kentucky State University Foundation, Inc. (the “Foundation”) is a not-for-profit Kentucky corporation, which was established to receive, invest and expend funds to promote and implement educational and developmental activities at Kentucky State University (the “University”). The Foundation is managed by a Board of Trustees independent from that of the University. The Foundation is supported primarily through contributions from alumni.

The financial statements of the Foundation have been prepared on the accrual basis of accounting and include the assets, liabilities and results of operations of the Foundation.

For purposes of the statement of cash flows, the Foundation considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Depreciation is computed by the straight-line method over the estimated useful life of the respective asset. Accumulated depreciation at June 30, 2010 and 2009 was $89,125 and $71,407, respectively.

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Contributions are generally recognized when received. However, pledges are recognized when the donor makes a promise to give to the Foundation that is, in substance, unconditional. Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire in the fiscal year in which the contributions are recognized. All other donor-restricted contributions are reported as increases in temporarily or permanently restricted net assets depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Marketable securities are composed of publicly traded U.S. Government obligations, corporate bonds and notes, and equity securities and are carried at fair value.

Marketable securities as of June 30, 2010 and 2009 are as follows:

Notes payable as of June 30, 2009 consisted of a mortgage note payable. The mortgage was paid off in the year ended 2010.

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The Foundation is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code.

The financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Foundation's financial statements for the year ended June 30, 2009 from which the summarized information was derived.

Temporarily restricted net assets are available primarily for scholarships and University and student support.

For the years ended June 30, 2010 and 2009, net assets were released from donor restrictions by incurring expenses satisfying the purpose of the restrictions specified by donors as follows:

Net assets are permanently restricted primarily for scholarships and University support.

For the years ended June 30, 2010 and 2009, net assets were released from donor restrictions by incurring expenses satisfying the purpose of the restrictions by donors as follows:

(Continued)

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The Foundation has a defined contribution profit sharing plan, which covers all employees who meet certain requirements. Foundation contributions are discretionary. No contribution was made for the year ended June 30, 2010.

Cash paid for interest was $125 and $2,519, respectively, for the years ended June 30, 2010 and 2009.

The fair value of the Foundation's marketable securities is based on quoted market prices for those specific or identical instruments. On a recurring basis, all assets were classified as Level 1 in the fair value hierarchy for financial assets measured at fair value.

The Company has evaluated events through September 10, 2010, the date management's review of the financial statements was completed. There were no events that would impact the results of operations or financial position as of that date.

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