CALIFORNIA-PACIFIC ANNUAL CONFERENCE OF THE UNITED METHODIST CHURCH

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1 Financial Statements and Supplementary Information And For The Year Then Ended Together with Independent Auditor s Report

2 Table of Contents PAGE INDEPENDENT AUDITOR S REPORT 1 FINANCIAL STATEMENTS: Statement of Assets, Liabilities, and Net Assets Modified-Cash Basis 2 Statement of Revenues and Expenses Modified-Cash Basis 3 Statement of Cash Flows SUPPLEMENTARY INFORMATION: The Los Angeles Episcopal Area Office: Statement of Assets, Liabilities, and Net Assets Modified-Cash Basis 25 Statement of Revenues and Expenses Modified-Cash Basis 26 Statement of Cash Flows 27

3 Voice: Fax: N. Lake Avenue Suite 900 Pasadena, CA INDEPENDENT AUDITOR S REPORT The Council on Financial Resources California-Pacific Annual Conference of the United Methodist Church We have audited the accompanying financial statements of the California-Pacific Annual Conference of the United Methodist Church (the Conference), which comprise of the statement of assets, liabilities, and net assets - modified cash basis as of, and the related statements of statements of revenue and expenses and cash flows modified-cash basis for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the modified-cash basis of accounting as described in Note 2; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Conference s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Conference s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities and net assets of the Conference as of, and the changes in the net assets and the cash flows for the year then ended in accordance with the modified-cash basis of accounting as described in Note 2. Member of: American Institute of Certified Public Accountants Division of CPA Firms/Private Companies Practice Section California Society of Certified Public Accountants

4 Basis of Accounting The Conference applies modified-cash basis of accounting (See Note 2). Accordingly, the financial statements are prepared on the modified-cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Emphasis of Matter As discussed in Note 15 to the financial statements, net assets at the beginning of 2014 have been restated to recognize certain prior period adjustments. Other Matter Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The supplementary information as listed in the accompanying table of content is presented for purposes of additional analysis and are not required parts of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. STANISLAWSKI & HARRISON May 20, 2015

5 Statement of Assets, Liabilities and Net Assets- Modified-Cash Basis 3 ASSETS Cash and cash equivalents $ 11,606,780 Accounts and other receivables 2,281,443 Loans receivable due from local churches, net (Note 4) 2,595,114 Investments (Note 5) 14,220,666 Prepaid expenses and other assets 23,214 Beneficial interest in charitable trusts (Note 6) 10,166,402 Endowment investments (Notes 5 and 12) 5,485,890 Property and equipment, net (Note 7) 2,464,348 Total assets $ 48,843,857 LIABILITIES Accounts payable and accrued expenses $ 2,336,836 Unearned revenue 184,097 Note payable (Note 8) 145,294 Reserve and other designated accounts (Note 9) 4,745,282 Unfunded postretirement benefit (Note 11) 25,650,000 Total liabilities 33,061,509 NET ASSETS Unrestricted net assets: Available for operations (deficit) (4,929,406) Investment in plant 2,464,348 Designated for loans receivable due from local churches 2,595,114 Restricted net assets (Note 12) 15,652,292 Total net assets 15,782,348 Total liabilities and net assets $ 48,843,857 See Independent Auditor s Report The Accompanying Notes Are An Integral Part of These Financial Statements

6 Statement of Revenues and Expenses Modified-Cash Basis For the Year Ended 4 OPERATING REVENUES: Apportionment General Church $ 2,345,229 Western Jurisdiction 65,544 Conference apportionment and benevolence: Administration 2,328,565 Ministerial support 1,937,190 World service fund 1,659,544 Retiree health 1,185,328 Ministerial education fund 118,965 Other 87,825 Health insurance premium income 6,112,170 Property and liability insurance premium income 3,932,322 Pension collection 3,695,835 Camp operations (Note 14) 2,484,632 Other income 872,740 Total operating revenues 26,825,889 OPERATING EXPENSES: Apportionment General Church 2,345,229 Western Jurisdiction 65,544 Conference apportionment and benevolence: Administration 1,825,664 Ministerial support 1,846,703 World service fund 1,414,529 Ministerial education fund 118,965 Other 38,158 Health insurance premium expense 7,345,208 Property and liability insurance premium expense 4,146,400 Pension remittance 3,635,605 Camp operations (Note 14) 2,495,490 Other expenses 396,808 Total operating expenses 25,674,303 Operating revenues, net of operating expenses 1,151,586 NON-OPERATING REVENUES: Investment income (Note 5) 158,156 Change in value of charitable remainder trusts (Note 6) 183,400 Change in value of postretirement benefits 1,712,000 Total non-operating revenues 2,053,556 CHANGE IN NET ASSETS 3,205,142 NET ASSETS - January 1, 2014 (As restated - Note 15) 12,577,206 NET ASSETS - $ 15,782,348 See Independent Auditor s Report The Accompanying Notes Are An Integral Part of These Financial Statements

7 Statement of Cash Flows For the Year Ended 5 Cash flows from operating activities Change in net assets $ 3,205,142 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 149,743 Realized and unrealized gains on investments, net (43,083) Accounts and other receivables, net 759,365 Loans receivable from local churches, net 809,714 Prepaid expenses and other assets (19,723) Beneficial interest in charitable trusts 183,400 Accounts payable and accrued expenses 478,555 Unearned revenue 22,242 Reserve and designated accounts 751,113 Unfunded postretirement benefit (1,712,000) Total adjustments 1,379,326 Net cash provided by operating activities 4,584,468 Cash flows from investing activities Proceeds from sale of investments 4,801,323 Purchases of investments (8,754,934) Purchases of property and equipment (97,148) Net cash used in investing activities (4,050,759) Cash flows from financing activities Principal payments on note payable (87,022) Net change in cash and cash equivalents 446,687 Cash and cash equivalents, beginning of year 11,160,093 Cash and cash equivalents, end of year $ 11,606,780 Supplemental Cash Flow Information: Cash paid during the year for interest $ 4,392 See Independent Auditor s Report The Accompanying Notes Are An Integral Part of These Financial Statements

8 6 (1) ORGANIZATION The California-Pacific Annual Conference of the United Methodist Church (the Conference) is a regional body of the United Methodist Church, made up of some 77,000 members in almost 360 local churches throughout Southern California, parts of Central California, Hawaii, the Pacific Islands, Guam and Saipan. The Conference, a California nonprofit, religious corporation, provides programs and support services to, and on behalf of, the member churches. The mission of the United Methodist Church is to make disciples of Jesus Christ for the transformation of the world. Following the Book of Discipline and the connectional structure of the United Methodist Church, all assets and equity of the Conference are held in trust, such that they shall be kept, maintained, and disposed of for the benefit of The United Methodist Church and subject to the usages and the Discipline of The United Methodist Church. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Statement Presentation The accompanying financial statements are presented using the modified-cash basis of accounting. Generally, revenue is recognized when cash is received (rather than earned) and expenses are recognized when paid (rather than incurred). The cash basis accounting is modified by the recognition of certain receivables, liabilities and depreciation. The financial statements of the Conference include the accounts of the funds of its Essential Ministry Teams that provide programs and supporting services to, and on behalf of, the member churches of the Conference. These programs and supporting services are considered Conference activities by the Book of Discipline. Unrestricted net assets Net assets not subject to donor-imposed stipulations; donor-restricted contributions whose restrictions are met in the same reporting period; and net assets designated by the Council on Financial Resources or management for specific purposes. Restricted net assets Net assets subject to donor-imposed stipulations that may or will be met by actions of the Conference and/or the passage of time or net assets subject to donor-imposed stipulations that they be maintained permanently by the Conference. Generally, the donors of these assets permit the Conference to use all or part of the income earned on related investments for general or specific purposes.

9 7 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Contributions All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts received that are designated for future periods or restricted by the donor for specific purposes are reported as restricted support that increases that net asset class. When a donor restriction expires, restricted net assets are reclassified to unrestricted net assets. Expiring donor restrictions can be donor-imposed stipulations that either expire by the passage of time or purpose, or can be fulfilled and removed by actions of the Conference pursuant to those stipulations. Unconditional promises to give that are expected to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at amounts approximating fair value, and measured using the present value of future cash flows. The discounts on those amounts are computed using risk-adjusted interest rates applicable to the years in which the promises are received. Amortization of the discounts is included in contribution revenue. The Conference recognizes conditional promises to give when the conditions stipulated by the donor are substantially met. A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. Cash and Cash Equivalents For the purpose of the statement of cash flows, the Conference considers short-term investments with original maturities of less than three months to be cash equivalents. Accounts, Loans, and Other Receivables The Conference periodically reviews its receivable accounts for uncollectible amounts and management establishes reserves as necessary. Assets Held in Investment Pool and Other Funds The Conference reports its assets held in investment pools and other funds at fair value, when available, or at estimates of fair value. Gains and losses are included in the accompanying statements of activities. Endowment Investments Investments restricted for long-term purposes consist of endowment funds with donorimposed restrictions that limit their use on retiree benefits and other donor-restricted purposes.

10 8 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Endowment - Return Objectives, Risk Parameters, and Spending Policy The Conference s Endowment consists of assets restricted for permanent endowment and related endowment earnings. The Conference s endowment assets and certain other assets are held by the California-Pacific United Methodist Foundation (the Foundation), a California nonprofit organization. The executive director of the Foundation is a member of the Conference s Board of Trustees and the Conference s Council on Financial Resources as an ex-officio member without voting rights. The Foundation charges a management fee for managing the investments. Investments held by the Foundation consist of equity securities, debt securities, mutual funds, money market funds and cash equivalents. Overall, the investment policy of the Foundation seeks to invest the Foundation s assets in accordance with sound investment practices that emphasize long-term investment fundamentals. Consistent with this, the investment of the assets is guided by the following underlying principles: To achieve a positive rate of return over the long-term that would significantly contribute to the cash flow needs of the California-Pacific United Methodist Foundation for on-going operations and capital projects. To provide for asset growth at a rate in excess of the rate of inflation. To diversify the assets in order to reduce the risk of wide swings in market value from year-to-year, or of incurring large losses that could occur from concentrated positions. To achieve investment results over the long-term that compare favorably with those of other endowments and foundations, professionally managed portfolios and of appropriate market indexes. On an annual basis, the Foundation makes available for spending an amount equal to approximately 5% of the ending market value of the preceding year of the Fund. The distributions may come from any combination of income, earnings or principal at the end of the previous fiscal year. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and deferred revenue approximate fair value due to the short-term nature of the items. The carrying amount of the beneficial interest in charitable trusts is based on the discounted net present value of the expected future cash receipts, and approximates fair value. Loans receivable approximate the fair value based on interest rates and terms. The carrying amount of bank loan payable approximates fair value based on rates currently available to the Conference for debt with similar terms and maturities. Credit Concentration Financial instruments that potentially subject the Conference to concentration of credit risk are cash, investments, and receivables.

11 9 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash is held by recognized financial institutions and investment assets by the Foundation. The Federal Deposit Insurance Corporation insures accounts held in banks up to statutory limits. At times, such cash may be in excess of the insured limit. At, cash held in one financial institution totaled $10,933,655. The Conference s investments are principally comprised of equity and fixed-income instruments held by others (see Note 5). Investment holdings are not insured. Concentration of credit risk for accounts receivable and other receivables are generally limited due to the dispersion of these items over several hundred churches and other payees. The Conference continually monitors its receivables and establishes valuation reserves as considered appropriate. Fair Value Measurements Fair Value Standards (ASC ) establish a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring fair value. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 Quoted market prices are available in active market for identical assets or liabilities as of the reporting date. Level 2 Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 Pricing inputs are unobservable and are used to measure fair value to the extent that observable inputs are not available. The inputs into the determination of fair value are based upon the best information available and require significant management judgment or estimation. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Beneficial Interest in Charitable Trusts The Conference has beneficial interests in two charitable remainder trusts, which are administered by third-party trustees. The Conference s beneficial interest in the trusts is reported at fair value. Income distributions and changes in the fair value of the beneficial interests are reported in the statement of activities. The assets of the trusts will be distributed upon demise of the last living primary beneficiary.

12 10 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Conference has interpreted the income received from the trust agreements to be restricted for retiree health care (See Note 10). Also, the Conference has interpreted the future final distribution of the net assets of the trust to be unrestricted and it intends to treat the funds as board-designated for retiree health care. Property and Equipment Property and equipment purchases are stated at cost. Major additions and improvements are capitalized; maintenance and repairs are charged to expense as incurred. The cost of property and equipment is depreciated over the estimated useful lives of the related assets using the straight-line method over the estimated useful lives of the assets. The following represents the estimated useful lives: Buildings and improvements 7 to 20 years Furniture and fixture 7 years Vehicles 3 years Equipment 5 years Impairment of Long-Lived Assets The Conference reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment losses, if any, are recognized when estimated future cash flows (undiscounted and without interest charges) derived from such assets are less than their carrying values. Reserve and Other Designated Accounts Reserves and other designated accounts consist of funds that are held for the benefit of third-parties or affiliates, or for specific spending purposes established by the Council on Financial Resources. Conditional Grants Conditional grants are provided by the Conference to local churches for real estate improvements. The local church is not required to repay the conditional grant, unless and until the local congregation ceases to exist as a United Methodist Church. As of, approximately $10.6 million in conditional grants made by the Conference were not reflected in the Statement of Assets, Liabilities and Net Assets. Further, as of, Reserve and Other Designated Accounts includes a Conditional Grants Fund totaling $788,301, which is available for future conditional grants. Apportionment Revenue As part of its connectional ministry and mission, The United Methodist Church follows an apportionment process that is based on financial abilities and involves member churches and congregations in mission at every level.

13 11 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Unearned Revenue Dues billed or received in one year, which are applicable to the following year, are reflected as deferred revenue. Health Insurance Premium Income Premiums are collected from local churches for health insurance coverage for those covered under the active plan. For those on the retiree plan, a premium cost share is collected from participants. Contribution rates are set by the Conference Board of Pension and Health Benefits. The Conference pays the cost of insurance to the insurance providers and bills the local churches and retiree participants. For participants who work on Conference staff, income for premiums comes from apportionments. Property and Liability Insurance Premium Income Premiums are collected on behalf of local churches for property and liability insurance coverage. The Conference pays the cost of insurance to the insurance providers and bills the local churches. Pension Collection Retirement plan contributions are collected from local churches. The Conference forwards the retirement plan contributions to the General Board of Pension and Health Benefits. For participants who work on Conference staff, income for retirement plan contributions comes from apportionments. Postretirement Health Care Benefits The funded status of the Conference s postretirement health benefit plan is measured as the difference between the fair value of plan assets and the accumulated postretirement benefit obligation. The overfunded or underfunded status of the plan is fully recognized as an asset or liability in the accompanying statement of financial position. Changes in the funded status of the plans are recognized in the year they occur as changes in unrestricted net assets. Income Taxes The Conference is a California nonprofit organization, exempt from federal income tax under Section 501(c)(3) of the United States Internal Revenue Code and exempt from California state income tax under Section 23701(d) of the California Revenue and Taxation Code. However, the Conference is subject to unrelated business income taxes on any net income that is derived from a trade or business regularly carried on, and not in furtherance of the purpose for which it was granted exemption. Generally accepted accounting principles provide accounting and disclosure guidance about positions taken by an organization in its tax returns that might be uncertain. Management has considered its tax positions and believes all of the positions taken by the Conference are more likely than not to be sustained upon examination.

14 12 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events Subsequent events have been evaluated through May 20, 2015, the date that these financial statements were available to be issued. There were no subsequent events that would require adjustments or disclosures in these financial statements. (3) ACCOUNTS AND OTHER RECEIVABLES At, accounts and other receivables are as follows: Apportionment receivables from local churches $ 1,110,936 Receivables from local churches (insurance premiums) 657,031 Receivables from local churches (pension collection) 329,743 Other receivables 183,733 Total: $ 2,281,443 Apportionment receivables from local churches were subsequently collected in January (4) LOANS RECEIVABLE DUE FROM LOCAL CHURCHES The Conference has nine loans receivable due from member churches under a Church Facility Loans process. The loans are generally collateralized by trust deeds on real property and bear interest at rates ranging from 2-7%. At, loans receivable are as follows: Loans receivable from churches $ 2,746,368 Less: allowance for uncollectible loans (151,254) Total $ 2,595,114

15 13 (4) LOANS RECEIVABLE DUE FROM LOCAL CHURCHES (Continued) Future collections of loans receivable at, are expected as follows: Year Ending December $ 1,792, , ,987 $ 2,746,368 (5) ASSETS HELD IN INVESTMENT POOL AND OTHER FUNDS Investments held by the Foundation The Conference has placed most of its investible assets in an investment pool with the California-Pacific United Methodist Foundation (the Foundation). The Foundation operates under an Investment Policy Statement and provides a variety of investment instruments that offer optimum management, protection and enhancement of financial assets. The Foundation follows socially responsible investment practices, following the guidelines set forth in the Social Principles of the United Methodist Church. The Conference s ownership interest in the common equity investment pool (Pool) is based on its percentage of the fair value of the Pool s assets, recalculated each time a contribution or withdrawal is made. The marketable securities in the Pool are managed by outside investment counselors and the securities are held be a third-party custodian. The funds invested with the Foundation are considered Level 3 assets under the fair value hierarchy explained at Note 2, and at, were invested in a balanced portfolio of domestic equity, fixed-income securities, international equity, and cash and cash equivalents, as follows: Domestic Equity 55% Fixed Income 24% International Equity 18% Cash and Cash Equivalents 3%

16 14 (5) ASSETS HELD IN INVESTMENT POOL AND OTHER FUNDS (Continued) Investments held by the General Board of Pension and Health Benefits The Conference has investments held by the General Board of Pension and Health Benefits of the United Methodist Church ("GBOP") which are considered Level 3 assets under the fair value hierarchy explained at Note 2 and are invested in the Multiple Asset Fund ( MAF ) of Wespath Investment Management. MAF is a "fund of funds," managed by more than 40 different investment managers. These managers provide the fund with broad diversification of holdings in a variety of U.S. and non-u.s. securities. These include stocks, traditional bonds, inflation-linked bonds, real estate investment trusts, securities, commodities, and interests in private equity and private real estate partnerships. The investment allocation target range of the Multiple Asset Fund is as follows: U.S Equity Fund 37%-43% International Equity Fund 23%-27% Fixed Income Fund 23%-27% Inflation Protection Fund 8%-12% Cash 0%-2% Term Investments The Conference has additional funds held by the United Methodist Development Fund (UMDF). Under its arrangement with the UMDF, the Conference s funds are handled like money market funds and certificates of deposit. As of, the funds bear interest at rates ranging from 0.75% to 3.50% and the investments mature at various maturities through March 13, At, the investment assets are reported as follows: Investments $ 14,220,666 Endowment investments 5,485,890 Total $ 19,706,556 At, the investment assets are classified based on the hierarchy of fair valuation inputs explained in Note 2 and consisted of the following: Level 1 Level 2 Level 3 Total Investments held by the Foundation $ - $ - $ 11,202,436 $ 11,202,436 Investments held by GBOP - - 5,059,780 5,059,780 Term investments - 3,444,340-3,444,340 Total $ - $ 3,444,340 $ 16,262,216 $ 19,706,556

17 15 (5) ASSETS HELD IN INVESTMENT POOL AND OTHER FUNDS (Continued) The following is the activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended : Investments held by the Foundation Investments held by GBOP Total Beginning balance $ 8,693,320 $ 4,950,761 $ 13,644,081 Purchases 2,927,285 3,720,423 6,647,708 Withdrawals (453,292) (3,996,864) (4,450,156) Income 232, , ,501 Total realized and unrealized gains (197,466) 240,548 43,082 Ending balance $ 11,202,436 $ 5,059,780 $ 16,262,216 Total investment income for the year ended, is as follows: Interest and dividends $ 43,613 Realized gains 717,442 Unrealized loss (602,899) Total $ 158,156 (6) BENEFICIAL INTEREST IN CHARITABLE TRUSTS The Conference has a beneficial interest in two charitable remainder trusts established by a husband and wife in the 1930s. Upon the demise of the last living primary beneficiary, now in his 90s, a portion of the remaining net assets will distributed to the Conference and the other income beneficiaries. The Conference has beneficial interests of % and a % in the two trusts, respectively. The composition of beneficial interest in the charitable trust agreements, stated at fair value at, is as follows: Frank Lynch Trust Georgia Lynch Trust Total Estimated future cash flows from trustee $ 10,821,552 $ 1,918,198 $ 12,739,750 Less: Discount to present value at 6% (2,144,630) (428,718) (2,573,348) Total $ 8,676,922 $ 1,489,480 $ 10,166,402 The beneficial interests of the Conference in the charitable trusts are considered to be Level 2 assets under the fair value hierarchy disclosed in Note 2.

18 16 (6) BENEFICIAL INTEREST IN CHARITABLE TRUSTS (Continued) At, future annual distributions are anticipated as follows: Year Ending December 31 Frank Lynch Trust Georgia Lynch Trust Total 2015 $ 400,000 $ 38,000 $ 438, ,000 38, , ,000 38, , ,000 38, , ,221,552 1,766,198 10,987,750 Total $ 10,821,552 $ 1,918,198 $ 12,739,750 During the year ended, the change in valuations was as follows: Frank Lynch Trust Georgia Lynch Trust Total Gain on beneficial interest in charitable trusts $ 164,456 $ 18,944 $ 183,400 (7) PROPERTY AND EQUIPMENT Property and equipment at, consisted of the following: Land $ 1,151,262 Buildings and improvements 8,284,717 Furniture, fixtures and equipment 1,336,360 Vehicles 342,032 11,114,371 Less: accumulated depreciation (9,000,023) 2,114,348 Property held for development 350,000 Total $ 2,464,348 Depreciation expense for the year ended, was $200,864.

19 17 (8) NOTE PAYABLE The Conference has a variable-rate note payable to a bank, which is payable in monthly installments of $7,849 and secured by deed of trust. At, the variable rate was 2.26%. At, future principal payments on the note payable to bank are due as follows: Year Ending December $ 80, ,294 $ 145,294 (9) RESERVE AND OTHER DESIGNATED ACCOUNTS At, the reserve and other designated accounts consist of the following: New Ministries Essential Ministry Team $ 1,989,122 Youth and Young Adults Essential Ministry Team 155,031 Board of Ordained Ministry 229,946 Justice and Compassion Essential Ministry Team 313,533 Navigation Essential Ministry Team 34,832 Camping 109,110 Conditional Grants Fund (see Note 2) 788,301 Other Reserve Funds: Latino/Hispanic Staffing and Programming 314,007 Capital Fund 208,932 Youth Ministry Sunday Fund 122,395 Clergy Convocation 11,368 Imagine No Malaria 242,411 Student Day Scholarship 362 Episcopacy Ministry Fund 15,561 Aids Ministry 85,547 Christian Education 124,824 Total $ 4,745,282

20 18 (10) RETIREMENT PLANS In 2004, the General Conference of the United Methodist Church adopted the Clergy Retirement Security Program (CRSP) consisting of a multi-employer defined benefit plan and a defined contribution plan covering eligible clergy and administered by the GBOP. CRSP is intended to meet the requirements of a "church plan" as defined and to be exempt from ERISA regulations. Under the defined benefit component of the CRSP, retired clergy receive benefits based on a formula using the Denominational Average Compensation, as defined, and years of credited service. The actuarially-determined liability for this benefit is the responsibility of the GBOP. The Conference makes annual contributions to the CRSP defined benefit component based on the Conference's share of the overall annual obligation for the denomination as determined by GBOP actuaries. In order to fund the Conference's share of the annual obligation, each church is billed on a pro-rata basis, using a formula relating to the plan compensation of their current pastor. The income from these billings is sent on a monthly basis to the Conference's deposit account at the GBOP, where it earns interest and is used to pay the entire obligation on the last day of the year. Actuarial information for the CRSP defined benefit plan as of, indicates that it is in compliance with ERISA regulations regarding funding. The CRSP defined benefit plan contribution expense for the year ended December 31, 2014 was $2,087,406. Under the defined contribution plan of the CRSP, the Conference remits 3% of each minister s eligible compensation to the GBOP. These remittances are placed in the respective minister s pension account. The CRSP defined contribution plan expense for the year ended was $668,613. All lay employees of the Conference are eligible to participate in the United Methodist Personal Investment Plan (UMPIP). UMPIP is a defined contribution plan administered by the General Board. Under the UMPIP, the Conference contributes 7% of each participant s compensation. For the year ended, the Conference contributed $128,013 to the UMPIP.

21 19 (11) POSTRETIREMENT HEALTHCARE BENEFITS The Conference provides postretirement healthcare coverage to retired clergy, surviving spouses of clergy and retired lay employees under a defined benefit plan. To be eligible, employees must have at least ten years of service with the Conference during the last 15 years prior to retirement and are eligible to receive the healthcare subsidy after twenty years of service or upon attainment of age 62. The following table sets forth the postretirement plan's funded status that is reported in the statement of financial position as of : Change in benefit obligation: Benefit obligation, beginning of year $ 27,362,000 Service cost, excluding assumed administration expenses 723,000 Interest cost 1,068,000 Actuarial (gain)/loss (2,173,000) Benefit payments (1,330,000) Assumption changes - Amendments - Benefit obligation, end of year $ 25,650,000 Change in plan assets: Fair value, beginning of year $ - Actual return on plan assets - Employer contributions 1,330,000 Plan participants' contributions 607,000 Benefits paid (1,937,000) Fair value, end of year - Unfunded status $ (25,650,000) The benefit obligation represents the actuarial present value of future payments to plan participants for services rendered prior to that date, based on the health benefit formula.

22 20 (11) POSTRETIREMENT HEALTHCARE BENEFITS (Continued) Net periodic benefit cost for the postretirement healthcare plan includes the following components: Service cost $ 723,000 Interest cost 1,068,000 Expected return on plan assets - Amortization of transition obligation 2,451,000 Net (gain)/loss (1,598,000) Net periodic benefit cost $ 2,644,000 Assumptions used in determining the net periodic benefit cost of the postretirement plan are: Weighted-average discount rate 4% Expected long-term rate of return 4% Retirement age 65 Health care cost increase % Ultimate trend rate 5% Year ultimate trend rate is achieved 2018 Mortality RP-2000 Mortality Table (12) RESTRICTED NET ASSETS At, the Conference has an endowment fund and other restricted net assets consisting of the following: Endowment funds Conference Endowment $ 4,993,798 Hough Fund 424,026 The D.A. Crowell Fund 68,066 5,485,890 Beneficial interest in charitable remainder trusts 10,166,402 Total restricted net assets $ 15,652,292

23 21 (12) RESTRICTED NET ASSETS (Continued) Conference Endowment Fund - Although the Endowment Fund predates available records, it is considered to be a true endowment restricted to benefit the retired clergy of the Conference. Distributions are used to fund the pension program and pay health care premiums for retired clergy. The Hough Fund - Dating from the 1800s, the Hough Fund is considered a true endowment restricted for the use of superannuated preachers of the Conference and the widows and children of the deceased preachers of the Conference. The D.A. Crowell Fund The fund is considered to be a true endowment for the widows of clergy of the Conference. Interpretation of Relevant Law - Endowment The Conference s Council on Financial Resource has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), as adopted by the State of California, as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Conference classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Conference in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Conference considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the Conference and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Conference (7) The investment policies of the Conference

24 22 (12) RESTRICTED NET ASSETS (Continued) The Conference s endowment by net asset class and changes in endowment assets at and for the year then ended, are as follows: Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets, January 1, 2014 $ - $ 2,629,349 $ 3,218,706 $ 5,848,055 Investment return (during the year): Investment Income - 128, ,508 Net gain (realized and unrealized) - (84,012) - (84,012) Total investment return - 44,496-44,496 Appropriation of endowment assets for expenditure - (406,661) * - (406,661) Endowment net assets, $ - $ 2,267,184 $ 3,218,706 $ 5,485,890 * During the year ended, the Conference made endowment distributions totaling $406,661, consisting of a 2014 distribution of $268,013 (approximately 5% of ending market value of the Fund) and a prior year catch-up distribution of $138,648. (13) CONTINGENCIES Various claims, generally incident to the conduct of the Conference s normal business, are pending or threatened against the Conference from time to time. The ultimate liability related to such claims is indeterminable; however, in the opinion of management, the ultimate resolution of such claims will not have a material adverse effect on the financial condition or results of operation of the Conference.

25 23 (14) CAMP OPERATIONS At, summary of income and expenses from each camp are as follows: Camp Net Surplus Name Income Expenses (Deficit) Aldersgate $ 314,070 $ 323,311 $ (9,241) Arroyo Grande 175, ,520 (43,339) Cedar Glen 652, ,667 29,481 Colby 170, ,337 (74,786) Lazy W. 731, ,534 96,270 Sturevant 5,893 18,122 (12,229) WrightWood 367, ,032 2,987 Share Cost 67,967 67,967 - Total $ 2,484,632 $ 2,495,490 $ (10,858) At, revenues breakdown and percentage usage from camp operations are as follows: United Methodist income $ 279,828 11% School contract income 341,849 14% Other denomination income 718,995 29% Other non-profit contract income 641,090 26% Non-lodging income 82,246 3% Registration revenue 312,733 13% Other camp income 107,891 4% $ 2,484, %

26 24 (15) RESTATEMENT OF NET ASSETS Net assets as of January 1, 2014, have been increased by $381,316 to recognize the following: Adjustment to record an investment with the General Board of Pension not reflected in the accounting records at December 31, 2013 and discovered during $ 1,499,563 Adjustment to reclassify certain balances to designated funds from net assets dating from 2011 and prior (Board of Ordained Ministry, Christian Education Sunday, Aids Ministry, Youth Ministry Sunday, and other reserve funds) (504,063) Adjustment to increase the liability for GCFA apportionments at December 31, 2013 (393,212) Adjustment to acknowledge a loan payable to former Santa Barbara District for renovation of Episcopal Residence. (80,000) Adjustment to reflect additional accrued liabilities at December 31, 2013 (Lynch Fund distribution and other expenses) (71,089) Adjustment to decrease accounts receivable for retirees' healthcare at December 31, 2013 (69,883) Increase in beginning net assets $ 381,316 Accordingly, the Conference has restated its beginning net assets to reflect the adjustments as follows: As previously reported Increase As restated Unrestricted net assets $ 12,195,890 $ 381,316 $ 12,577,206

27 THE LOS ANGELES EPISCOPAL AREA OFFICE- UNITED METHODIST CHURCH Statement of Assets, Liabilities, and Net Assets Modified-Cash Basis 25 ASSETS: Cash $ 891 LIABILITIES: Accounts payable 891 Due to Conference 619 Total liabilities 1,510 NET ASSETS (619) Total liabilities and net assets $ 891 See Independent Auditor s Report The Accompanying Notes Are An Integral Part of These Financial Statements

28 THE LOS ANGELES EPISCOPAL AREA OFFICE- UNITED METHODIST CHURCH Statement of Revenues and Expenses Modified-Cash Basis For the Year Ended 26 REVENUE: Apportionment $ 63,371 GCFA grant 80,000 Total revenue 143,371 EXPENSES: Personnel expenses 76,590 Health insurance premium expense 35,938 Office and program expenses 2,116 Utilities 2,048 Events 1,768 Special grant and other expenses 1,580 Travel - conference staff 1,577 Consultants and temporary help 859 Lease 837 Staff development 500 Special needs and misc 477 Equipment and software 223 Travel - non conference 205 Repair and maintenance 180 Additional contribution toward Episcopal Fund 18,473 Total expenses 143,371 Change in net assets - NET DEFICIT - Beginning of Year (619) NET DEFICIT - End of Year $ (619) See Independent Auditor s Report The Accompanying Notes Are An Integral Part of These Financial Statements

29 THE LOS ANGELES EPISCOPAL AREA OFFICE- UNITED METHODIST CHURCH Statement of Cash Flows For the Year Ended 27 Cash flows from operating activities: Change in net assets $ - Adjustments to reconcile change in net assets to net cash provided by operating activities: Accounts payable 891 Net cash provided by operating activities 891 Cash, beginning of year - Cash, end of year $ 891 See Independent Auditor s Report The Accompanying Notes Are An Integral Part of These Financial Statements