Notes to Financial Statements
June 30, 2002 and 2001

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(8) Refundable Advances from the United States Government
Funds provided by the United States Government under the Federal Perkins, Nursing and Health Professions Student Loan programs are loaned to qualified students and may be reloaned after collections. These funds are ultimately refundable to the government and are included in obligations under deferred compensation agreements and other long-term liabilities. These advances totaled approximately $30,810,000 and $30,352,000 at June 30, 2002 and 2001, respectively.

(9) Net Assets
Under accounting principles generally accepted in the United States of America for external financial reporting by not-for-profit organizations, unrestricted net assets are those which are not subject to donor-imposed restrictions. The practices used by the University for internal financial management and reporting purposes differ in certain respects from the practices prescribed for external financial reporting purposes, particularly with respect to the timing of recognition of the release of donor-imposed restrictions on contributions and related investment income and gains. In addition, certain net assets classified as unrestricted for external financial reporting purposes are designated for specific purposes or uses under various internal operating and administrative practices of the University. As a result, substantially all of the net assets classified as unrestricted as of June 30, 2002 and 2001 have been invested in property and equipment or are designated for specific uses.

Unrestricted net assets consist of the following at June 30 (in thousands):

	2002	2001
Net investment in property and equipment	$     449,319	397,411
APL stabilization, contingency and research fund, excluding net investment in property and equipment	113,399	113,591
Funds designated for divisional and departmental support	1,133,956	1,304,596
Student loan funds	12,120	12,926
	$1,708,794	1,828,524

Temporarily restricted net assets consist of the following at June 30 (in thousands):

	2002	2001
Contributions designated for departmental and divisional support or facilities	$  346,944	308,319
Split interest agreements	19,987	21,367
Land subject to time and purpose restrictions	13,188	13,188
	$380,119	342,874

Permanently restricted net assets consist of the following at June 30 (in thousands):

	2002	2001
Perpetual endowment funds	$  777,333	719,930
Interests in perpetual trusts	55,789	45,305
Split interest agreements	15,793	17,402
	$848,915	782,637

(10) Affiliated Organizations
The Johns Hopkins Health System Corporation (JHHS)
JHHS is incorporated and governed separately from the University and is the parent entity of an academically based health system which includes The Johns Hopkins Hospital, The Johns Hopkins Bayview Medical Center, Howard County General Hospital and other related organizations. The University and JHHS have established a Board of Johns Hopkins Medicine (JHM) to direct, integrate and coordinate the clinical activities of the two organizations. JHM does not have the authority to incur debt or issue guarantees and its annual budgets require the approval of the boards of trustees of both the University and JHHS.

The Johns Hopkins Hospital (Hospital)
The Hospital is a member of JHHS and serves as the primary teaching facility of the University’s School of Medicine. Because of the closely related nature of their operations, the University and Hospital share facilities and provide services to each other to fulfill their purposes more effectively. The sharing of facilities and services is negotiated annually and set forth in a Joint Administrative Agreement (JAA). Costs charged to the Hospital under the JAA, related primarily to the provision of professional medical services by the University, aggregated approximately $81,600,000 in 2002 and $68,000,000 in 2001. Costs charged to the University under the JAA, related primarily to rental of space in Hospital facilities under a renewable one-year lease, aggregated approximately $50,000,000 in 2002 and $43,600,000 in 2001.

(11) Pension and Postretirement Benefit Plans
The University has several pension plans, primarily defined contribution plans, that are available to substantially all full-time employees. The policy of the University is to fund pension costs as accrued. Pension expense was $70,954,000 in 2002 and $57,738,000 in 2001, including $25,179,000 and $22,210,000, respectively, related to pension plans for employees at APL.

The University has a retiree benefits plan that provides postretirement medical benefits to employees who meet specified minimum age and service requirements at the time they retire. The University pays a portion of the cost of participants’ medical insurance coverage. The University’s portion of the cost for an individual participant depends on various factors, including the age, years of service and time of retirement or retirement eligibility of the participant. The University has established a trust fund for its retiree benefits plan and intends to make contributions to the fund approximately equal to the annual net postretirement benefit cost, including amortization of the transition obligation over a period of 20 years from July 1, 1993.

Information relating to the obligations, assets and funded status of the plan at June 30, 2002 and 2001 and for the years then ended is summarized as follows (in thousands):

	2002	2001
Change in benefit obligation:
Benefit obligation at beginning of year	$   99,432	92,839
Service cost	3,359	2,391
Interest cost	9,952	7,171
Plan participant contributions	1,991	1,390
Actuarial loss	41,126	2,907
Benefits paid	(8,618)	(7,266)
Benefit obligation at end of year	147,242	99,432
Change in plan assets:
Fair value of plan assets at beginning of year	52,581	54,315
Actual return on plan assets	(3,765)	(4,336)
University contribution	11,689	8,478
Plan participant contributions	1,991	1,390
Benefits paid	(8,618)	(7,266)
Fair value of plan assets at end of year	53,878	52,581
Funded status	(93,364)	(46,851)
Unrecognized net actuarial loss	60,774	12,744
Unamortized prior service cost	464	541
Unrecognized transition obligation	28,178	30,740
Accrued postretirement benefit cost	$   (3,948)	(2,826)
Weighted-average assumptions at June 30:
Discount rate	7.25%	7.75%
Expected rate of return on plan assets	8.50%	8.50%
Rate of increase in health care costs for next year:
Participants over age 65	9.50-10.00%	6.50%
Participants under age 65	9.50-10.00%	6.50-8.00%

The plan assets consist primarily of investments in mutual funds managed by an independent investment management organization.

The rates of increase in health care costs were assumed to decrease to 5.5% in 2004 and to remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the reported postretirement benefit cost and obligation. A one-percentage point change in the assumed rates used at June 30, 2002 would have the following effects (in thousands):

	One-percent increase	One-percent decrease
Total service and interest cost components	$ 1,858	(1,488)
Postretirement benefit obligation	19,021	(14,459)

The postretirement benefit cost includes the following components for the years ended June 30 (in thousands):

	2002	2001
Service cost	$  3,359	2,391
Interest cost on accumulated benefit obligation	9,952	7,171
Amortization of transition obligation	2,562	2,562
Amortization of prior service cost	77	77
Amortization of actuarial loss (gain)	1,791	(86)
Expected return on plan assets	(4,734)	(4,724)
	$ 13,007	7,391

(12) Functional Expense Information
Operating expenses by function are summarized as follows for the years ended June 30 (in thousands):

	2002	2001
Instruction, research and clinical practice:
Academic and support divisions	$1,460,529	1,291,423
Applied Physics Laboratory contracts	519,556	451,310
Student services	41,674	35,521
Libraries	25,006	23,992
General services and administration	128,855	107,760
Auxiliary enterprises	55,901	54,826
	$2,231,521	1,964,832

Costs related to the operation and maintenance of physical plant, including depreciation of plant assets and interest on related debt, are allocated to program and supporting activities based upon periodic inventories of facilities. Fundraising costs were not significant in 2002 and 2001.

(13) Lease Commitments
As described in note 10, the University leases certain facilities from the Hospital under a renewable one-year lease which provides for a rent equal to the cost to the Hospital of providing and maintaining the facilities. This lease has been renewed for the year ending June 30, 2003.

The University leases certain other facilities used in its academic and research operations under long-term operating leases expiring at various dates to 2032, subject to renewal options in certain cases. Certain of these facilities are leased from Dome or other affiliated organizations. The aggregate annual minimum rents to be paid to the expiration of the initial terms of these leases are as follows at June 30 (in thousands):

	Affiliates	Others	Total
2003	$  16,455	16,842	33,297
2004	14,098	16,159	30,257
2005	13,882	14,734	28,616
2006	13,300	11,941	25,241
2007	12,561	10,274	22,835
After 2007	144,998	41,247	186,245
	$ 215,294	111,197	326,491

(14) Other Commitments and Contingencies
At June 30, 2002, the University had the following additional commitments and guarantees relating to affiliated organizations:

• The University has guaranteed payment of 50% of amounts borrowed by Johns Hopkins Home Care Group, Inc. under line of credit agreements with a commercial bank. The maximum amount available under these agreements is $8,500,000; the amount outstanding at June 30, 2002 was approximately $3,750,000.
• The University has guaranteed payment of a specified percentage of annual debt service payments (up to an annual maximum of approximately $385,000) due under a loan issued by MHHEFA to JHHS to finance the acquisition of Howard County General Hospital. This guarantee continues until maturity of the loan in 2033.
• The University has guaranteed payment of up to $1,400,000 of debt obligations of Dome under terms of a credit enhancement agreement relating to financing of certain properties and, together with JHHS, has agreed to provide Dome with funds required, if any, to meet its obligations under the agreement.

The University is subject to various claims, litigation, tax and other assessments in connection with its domestic and foreign operations. In the opinion of management, adequate provision has been made for possible losses on these matters, where material, and their ultimate resolution will not have a significant effect on the financial position of the University.

Amounts received and expended by the University under various federal and state programs are subject to audit by governmental agencies. In 1997, the Office of Inspector General, Department of Health and Human Services (OIG), advised the University that as part of its national program to determine compliance with Medicare guidelines, an audit would be performed of billings to Medicare for services of faculty teaching physicians in 1994. The audit began in 1998 and is in progress. Management believes the University has made a good faith effort to comply with Medicare billing guidelines, but that the guidelines were unclear, excessively detailed, lacking consistent application and, in some respects, contrary to published regulations. It is possible that the OIG’s interpretations of the guidelines with respect to the nature, extent and/or specific content of the records needed to support billings to Medicare may differ from the University’s. The independent auditors reviewing the University’s compliance with Medicare regulations found an extremely high level of compliance that is consistent with levels at other institutions where audits resulted in minimal or no claims for recoveries. The auditors identified variances, which even if sustained, would not have a material effect on the financial condition of the University and for which, in the opinion of management, adequate provision has been made.

On July 19, 2001, the Office of Human Research Protections (OHRP) suspended clinical trials conducted under the University’s OHRP “assurance.” Funding for federal research was not interrupted. On July 21, 2001, the University filed its plan of correction with OHRP and on July 22, 2001 OHRP accepted the University’s plan of correction, with conditions. The plan has been implemented, and OHRP has acknowledged that the University has put in place a satisfactory system for protection of human subjects and has completed all actions required by the agency.

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