KIPP, Inc. Financial Statements and Single Audit Reports for the year ended June 30, 2018

Transcription

1 KIPP, Inc. Financial Statements and Single Audit Reports for the year ended June 30, 2018

2 KIPP, Inc. Table of Contents Page Independent Auditors Report 1 Financial Statements: Statements of Financial Position as of June 30, 2018 and Statement of Activities for the year ended June 30, Statement of Activities for the year ended June 30, Statements of Cash Flows for the years ended June 30, 2018 and Notes to Financial Statements for the years ended June 30, 2018 and Supplementary Information: Supplemental Statements of Financial Position as of June 30, 2018 and Supplemental Statements of Activities for the years ended June 30, 2018 and Supplemental Statements of Cash Flows for the years ended June 30, 2018 and Schedules of Expenses for the years ended June 30, 2018 and Schedules of Capital Assets as of June 30, 2018 and Budgetary Comparison Schedule for the year ended June 30, Explanation for Budget Variances for the year ended June 30, 2018 (unaudited) 26 Schedule of Expenditures of Federal Awards for the year ended June 30, Note to Schedule of Expenditures of Federal Awards for the year ended June 30, Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 30 Independent Auditors Report on Compliance for Each Major Program and Report on Internal Control Over Compliance Required by the Uniform Guidance 32 Schedule of Findings and Questioned Costs for the year ended June 30, Summary Schedule of Prior Audit Findings 37

3 Blazek & Vetterling C ERTIFIED P UBLIC A CCOUNTANTS Independent Auditors Report To the Board of Directors of KIPP, Inc.: Report on the Financial Statements We have audited the accompanying financial statements of KIPP, Inc. (KIPP), which comprise the statements of financial position as of June 30, 2018 and 2017 and the related statements of activities and of cash flows for the years 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 accounting principles generally accepted in the United States of America; 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. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform our audits 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 auditors 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 entity 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 entity 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 financial position of KIPP as of June 30, 2018 and 2017 and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America Weslayan, Suite 200 Houston, Texas (713) Fax (713)

4 Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary information on pages 18 through 26 is presented for purposes of additional analysis as required by the Texas Education Agency and is not a required part of the financial statements. The accompanying supplementary information included in the schedule of expenditures of federal awards for the year ended June 30, 2018 as required by Title 2 U. S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards is presented for purposes of additional analysis and is not a required part 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. Unaudited Information Our audit was conducted for the purpose of forming an opinion on the basic financial statements as a whole. The explanation for budget variances on page 26 is presented for purposes of additional analysis as required by the Texas Education Agency and is not a required part of the basic financial statements. The explanation for budget variances has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it. Report Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 22, 2018 on our consideration of KIPP s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of KIPP s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering KIPP s internal control over financial reporting and compliance. October 22,

5 KIPP, Inc. Statements of Financial Position as of June 30, 2018 and ASSETS Current assets: Cash and cash equivalents $ 28,116,385 $ 26,026,534 Receivables: Government agencies 20,898,528 19,148,078 Pledges (Note 2) 433, ,996 Other 795, ,874 Prepaid expenses and other assets 407, ,603 Total current assets 50,652,184 47,408,085 Pledges receivable, net (Note 2) 61,446 41,315 Investments (Notes 3 and 4) 1,053, ,119 Cash restricted for capital projects 1,443,492 Bond proceeds held in trust (Notes 4 and 6) 4,590,581 4,326,262 Property and equipment, net (Note 5) 182,902, ,413,513 TOTAL ASSETS $ 240,703,994 $ 234,143,294 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and accrued expenses $ 7,740,935 $ 5,666,618 Accrued payroll expenses 9,037,818 8,849,071 Construction payable 2,336,981 2,442,618 Accrued interest 2,643,578 2,731,863 Deferred revenue 1,000,000 Current portion of bonds and notes payable (Note 6) 5,415,203 5,407,524 Total current liabilities 28,174,515 25,097,694 Bonds and notes payable, net (Note 6) 191,101, ,217,115 Total liabilities 219,276, ,314,809 Commitments (Note 11) Net assets (Note 8): Unrestricted 18,273,748 17,147,880 Temporarily restricted (Note 7) 2,963,820 2,490,605 Permanently restricted for scholarships 190, ,000 Total net assets 21,427,568 19,828,485 TOTAL LIABILITIES AND NET ASSETS $ 240,703,994 $ 234,143,294 See accompanying notes to financial statements. 3

6 KIPP, Inc. Statement of Activities for the year ended June 30, 2018 TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL OPERATING REVENUE: Government grants (Note 9) $ 147,964,630 $ 147,964,630 Contributions (Note 10) 4,152,588 $ 7,562,504 11,715,092 Program service fees 7,289,730 7,289,730 Special events 1,388,710 1,388,710 Cost of direct donor benefits (130,811) (130,811) Investment return, net (Note 3) 54,100 88, ,517 Other 158, ,987 Total operating revenue 160,877,934 7,650, ,528,855 Net assets released from restrictions: Program expenditures 7,105,191 (7,105,191) Expiration of time restrictions 72,515 (72,515) Total 168,055, , ,528,855 OPERATING EXPENSES: Program expenses: Instructional program 122,055, ,055,023 Auxiliary services 19,674,174 19,674,174 Total program expenses 141,729, ,729,197 General and administrative 19,266,188 19,266,188 Fundraising 5,934,387 5,934,387 Total operating expenses 166,929, ,929,772 CHANGES IN NET ASSETS 1,125, ,215 1,599,083 Net assets, beginning of year 17,147,880 2,490,605 $ 190,000 19,828,485 Net assets, end of year $ 18,273,748 $ 2,963,820 $ 190,000 $ 21,427,568 See accompanying notes to financial statements. 4

7 KIPP, Inc. Statement of Activities for the year ended June 30, 2017 TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL OPERATING REVENUE: Government grants (Note 9) $ 133,408,997 $ 133,408,997 Contributions (Note 10) 2,781,907 $ 2,145,106 4,927,013 Program service fees 8,976,326 8,976,326 Special events 1,686,000 1,686,000 Cost of direct donor benefits (111,456) (111,456) Investment return, net (Note 3) 11,326 91, ,914 Other 173, ,408 Total operating revenue 146,926,508 2,236, ,163,202 Net assets released from restrictions: Program expenditures 2,155,974 (2,155,974) Expiration of time restrictions 367,106 (367,106) Total 149,449,588 (286,386) 149,163,202 OPERATING EXPENSES: Program expenses: Instructional program 111,949, ,949,112 Auxiliary services 18,671,968 18,671,968 Total program expenses 130,621, ,621,080 General and administrative 16,325,752 16,325,752 Fundraising 2,249,770 2,249,770 Total operating expenses 149,196, ,196,602 CHANGES IN NET ASSETS 252,986 (286,386) (33,400) Net assets, beginning of year 16,894,894 2,776,991 $ 190,000 19,861,885 Net assets, end of year $ 17,147,880 $ 2,490,605 $ 190,000 $ 19,828,485 See accompanying notes to financial statements. 5

8 KIPP, Inc. Statements of Cash Flows for the years ended June 30, 2018 and CASH FLOWS FROM OPERATING ACTIVITIES: Changes in net assets $ 1,599,083 $ (33,400) Adjustments to reconcile changes in net assets to net cash provided by operating activities: Contributions restricted for expansion of facilities (1,443,492) (25,000) Net realized and unrealized gain on investments (83,921) (74,950) Depreciation 11,135,694 10,611,929 Amortization of bond issuance costs 73,879 73,876 Amortization of bond premiums (156,200) (156,200) Changes in operating assets and liabilities: Receivables (1,568,107) (188,242) Prepaid expenses and other assets 368,728 (265,109) Accounts payable and accrued expenses 2,263,064 (265,870) Accrued interest (88,285) (87,048) Deferred revenue 1,000,000 (14,097) Net cash provided by operating activities 13,100,443 9,575,889 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of investments 49, ,353 Purchases of investments (106,194) (292,596) Net change in cash held as investments 41, ,075 Purchases of property and equipment (12,730,535) (18,452,996) Net cash used by investing activities (12,746,069) (18,466,164) CASH FLOWS FROM FINANCING ACTIVITIES: Change in cash restricted for capital projects (1,443,492) Bond proceeds held in trust (264,319) Proceeds from notes payable 7,300,000 23,200,000 Principal repayments of bonds and notes payable (5,325,204) (5,245,196) Proceeds from contributions restricted for expansion of facilities 1,468,492 Net cash provided by financing activities 1,735,477 17,954,804 NET CHANGE IN CASH AND CASH EQUIVALENTS 2,089,851 9,064,529 Cash and cash equivalents, beginning of year 26,026,534 16,962,005 Cash and cash equivalents, end of year $ 28,116,385 $ 26,026,534 Supplemental disclosure of cash flow information: Interest payments $7,224,248 $7,457,511 Property and equipment acquired with bond proceeds $1,873,704 See accompanying notes to financial statements. 6

9 KIPP, Inc. Notes to Financial Statements for the years ended June 30, 2018 and 2017 NOTE 1 ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES Organization KIPP, Inc. (KIPP) operates twenty-eight Texas Open-Enrollment Charter Schools under one state charter. The schools are located in Houston, Texas and serve approximately 14,000 students from pre-kindergarten through 12 th grade. Additionally, KIPP operates a middle school within Spring Branch Independent School District on a contract basis. Federal income tax status KIPP is exempt from federal income tax under 501(c)(3) of the Internal Revenue Code and is classified as a public charity under 509(a)(1) and 170(b)(1)(A)(ii). Cash equivalents include highly liquid investments with original maturities of three months or less. Pledges receivable that are expected to be collected within one year are reported at net realizable value. Amounts that are expected to be collected in future years are discounted to estimate the present value of future cash flows. Investments are reported at fair value. Investment return is reported in the statement of activities as an increase in unrestricted net assets unless the use of income is limited by donor-imposed restrictions. Investment return whose use is restricted by the donor is reported as an increase in temporarily restricted net assets. Capitalized debt issuance costs represent costs incurred related to the issuance of bonds and notes payable and are amortized over the term of the bonds or notes. Property and equipment is reported at cost if purchased or at fair value at the date of gift if donated. KIPP recognizes depreciation using the straight-line method over the estimated useful lives of the assets, which range from 12 to 39 years for buildings and improvements and 3 to 12 years for furniture, equipment and vehicles. KIPP capitalizes additions and improvements that have a cost of more than $5,000. Net asset classification Contributions, interest income and the related net assets are classified based on the existence or absence of donor-imposed restrictions, as follows: Unrestricted net assets include those net assets whose use is not restricted by donor-imposed stipulations even though their use may be limited in other respects such as by contract or board designation. Temporarily restricted net assets include contributions and interest income restricted by the donor for specific purposes or time periods. When a purpose restriction is accomplished or a time restriction ends, temporarily restricted net assets are released to unrestricted net assets. Permanently restricted net assets include contributions that donors have restricted in perpetuity. Interest income may be used to support scholarships. Government grants are recognized as revenue in the period in which the services are provided. Amounts collected in advance are reported as deferred revenue. 7

10 Contributions are recognized at fair value when an unconditional commitment is received from the donor. Contributions received with donor stipulations that limit their use are classified as restricted support. Conditional contributions are included in contribution revenue when the conditions are substantially met. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted revenue. Absent explicit donor stipulations about how long those long-lived assets must be maintained, KIPP reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Program service fees are recognized in the period in which services are provided. Contributed services and facilities are recognized at fair value when an unconditional commitment is received from the donor. Contributions of services are recognized when services received (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Estimates Management must make estimates and assumptions to prepare financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, the amounts of reported revenue and expenses, and the allocation of expenses among various functions. Actual results could vary from the estimates that were used. Recent financial accounting pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers, which replaces most existing revenue recognition guidance for exchange transactions not specifically covered by other guidance. This ASU does not apply to non-exchange transactions such as contributions. The core principle of the new guidance is that an entity should recognize revenue in an amount that reflects the consideration to which it expects to be entitled in exchange for transferred goods or services and establishes a 5-step process to determine when performance obligations are satisfied and revenue is recognized. KIPP is required to adopt this ASU for fiscal year 2020 using an appropriate retrospective method. Management believes the adoption of this ASU will not have a material impact on the financial statements. In August 2016, the FASB issued ASU , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The amendments in this ASU are aimed at providing more useful information to users of not-for-profit financial statements. Under this ASU, net assets will be presented in two classes: net assets with donor restrictions and net assets without donor restrictions and underwater endowments will be grouped with net assets with donor restrictions. New or enhanced disclosures will be required about the nature and composition of net assets, and the liquidity and availability of resources for general operating expenditures within one year of the balance sheet date. Expenses will be required to be presented by both nature and function and investment return will be presented net of external and direct internal investment expenses. Absent explicit donor stipulations, restrictions on long-lived assets will expire when assets are placed in service. KIPP is required to adopt this ASU for fiscal year Adoption of this ASU will impact the presentation and disclosures of the financial statements. In June 2018, the FASB issued ASU , Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The amendments in this ASU clarify and improve current guidance about whether a transfer of assets (or the reduction, settlement, or cancellation of liabilities) is a contribution or an exchange transaction and provide 8

11 additional guidance on determining whether a contribution is conditional or unconditional. This ASU could impact the timing of revenue recognition and the financial statement disclosures related to such transactions. KIPP is required to apply the amendments in its fiscal year 2020 financial statements. The amendments should be applied on a modified prospective basis, but retrospective application also is permitted. Management has not determined the eventual method of adoption of the ASU or the impact on the financial statements. NOTE 2 PLEDGES RECEIVABLE Pledges receivable are comprised of the following: Pledges receivable $ 503,600 $ 994,996 Discount to net present value at 0.15% to 5.00% (8,554) (38,685) Pledges receivable, net $ 495,046 $ 956,311 Pledges receivable at June 30, 2018 are expected to be collected as follows: Due within one year $ 433,600 Due in one to five years 70,000 Total pledges receivable $ 503,600 NOTE 3 INVESTMENTS AND INVESTMENT RETURN KIPP invests in private funds which consist of the following: Equity securities $ 813,251 $ 723,516 Mortgage-backed securities 227, ,351 Cash 13,158 54,252 Total investments $ 1,053,574 $ 954,119 Investment return includes earnings on cash and cash equivalents and consists of the following: Interest and dividends $ 58,596 $ 27,964 Net realized and unrealized gain 83,921 74,950 Investment return, net $ 142,517 $ 102,914 9

12 NOTE 4 FAIR VALUE MEASUREMENTS Generally accepted accounting principles require that certain assets and liabilities be reported at fair value and establish a hierarchy that prioritizes inputs used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of the fair value hierarchy are as follows: Level 1 Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date. Level 2 Inputs are other than quoted prices included in Level 1, which are either directly observable or can be derived from or corroborated by observable market data at the reporting date. Level 3 Inputs are not observable and are based on the reporting entity s assumptions about the inputs market participants would use in pricing the asset or liability. Assets measured at fair value at June 30, 2018 are as follows: LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Bond proceeds held in trust: U. S. Treasury mutual fund $ 4,590,581 $ 4,590,581 Investments: Equity securities: Domestic large cap 721, ,732 International large cap 91,519 91,519 Mortgage-backed securities $ 227, ,165 Total investments 813, ,165 1,040,416 Total assets measured at fair value $ 5,403,832 $ 227,165 $ 0 $ 5,630,997 Assets measured at fair value at June 30, 2017 are as follows: LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Bond proceeds held in trust: U. S. Treasury mutual fund $ 4,326,262 $ 4,326,262 Investments: Equity securities: Domestic large cap 633, ,771 International large cap 89,745 89,745 Mortgage-backed securities $ 176, ,351 Total investments 723, , ,867 Total assets measured at fair value $ 5,049,778 $ 176,351 $ 0 $ 5,226,129 10

13 Valuation methods for assets measured at fair value are as follows: Mutual funds are valued at the reported net asset value of shares held. Equity securities are valued at the closing price reported on the active market on which the individual securities are traded. Mortgage-backed securities are valued using prices obtained from independent quotation bureaus that use computerized valuation formulas which may include market-corroborated inputs for credit risk factors, interest rate and yield curves and broker quotes to calculate fair values. These valuation methods may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while KIPP believes its valuation methods are appropriate, the use of different methods or assumptions could result in a different fair value measurement at the reporting date. Investments are exposed to various risks such as interest rate, market, and credit risks. Because of these risks, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and such changes could materially affect the amounts reported in the statement of financial position and statement of activities. NOTE 5 PROPERTY AND EQUIPMENT Property and equipment is comprised of the following: Land $ 43,446,270 $ 38,110,154 Buildings and improvements 186,090, ,833,239 Furniture and equipment 13,897,900 12,943,116 Vehicles 661, ,616 Construction in progress 7,346,272 10,750,235 Total property and equipment, at cost 251,442, ,289,360 Accumulated depreciation (68,539,744) (57,875,847) Property and equipment, net $ 182,902,717 $ 181,413,513 11

14 NOTE 6 BONDS AND NOTES PAYABLE Bonds and notes payable consist of the following: Series 2015A bonds payable, issued by the City of Houston Higher Education Finance Corporation, including an unamortized premium of $2,570,800 and $2,669,676 and unamortized debt issuance costs of $516,887 and $536,767 at June 30, 2018 and 2017, respectively. The bonds bear interest at rates from 4% to 5% and are due in installments through August 15, The proceeds were used to defease a portion of the 2006A and the 2009A Series bonds. The bonds are secured by pledged revenues and future operating revenue. $ 75,258,913 $ 76,262,909 Series 2014A bonds payable, issued by the City of Houston Higher Education Finance Corporation, including an unamortized premium of $1,514,164 and $1,573,543 and unamortized debt issuance costs of $496,706 and $516,184 at June 30, 2018 and 2017, respectively. The bonds bear interest at rates from 2% to 5% and are due in installments through February 15, The proceeds were used to defease a portion of the 2006A Series bonds, as well as to fund construction. The bonds are secured by real property. 41,887,458 43,222,359 Promissory note entered into with PHILO Finance Corporation on July 1, The maturity date for the note is August 15, 2021 and total available on the note is $60,000,000. Interest is payable semi-annually in February and August at 0.0%. The note is unsecured. 30,500,000 23,200,000 Qualified Zone Academy Bond, Taxable Series 2012, issued by the City of Houston Higher Education Finance Corporation, including unamortized debt issuance costs of $279,474 and $295,914 at June 30, 2018 and 2017, respectively. The Laura and John Arnold Foundation is the third party in the bond agreement, having loaned the funds to the City of Houston Higher Education Finance Corporation. Interest on the bond of 4.19% is paid every six months to the bondholder by the Federal government as part of a federal tax credit bond program. The bond is due August 15, The proceeds are being used to rehabilitate or repair specified campus facilities and provide school program course materials and training and are secured by pledged revenue. 19,121,525 20,228,974 Qualified Zone Academy Bond, Taxable Series 2010, issued by the City of Houston Higher Education Finance Corporation, including debt issuance costs of $82,744 and $90,267 at June 30, 2018 and 2017, respectively. PHILO Finance Corporation is the third party in the bond agreement, having loaned the funds to the City of Houston Higher Education Finance Corporation. In December 2012, this bond was sold to The Laura and John Arnold Foundation. Interest on the bond of 5.42% is paid every six months to the bondholder by the Federal government as part of a federal tax credit bond program. The bond is due August 15, The proceeds are being used to rehabilitate or repair specified campus facilities and provide school program course materials and training and are secured by pledged revenue. 10,057,792 10,932,056 12

15 Qualified School Construction Bond, Taxable Series 2010, issued by the City of Houston Higher Education Finance Corporation, including debt issuance costs of $80,925 and $88,281 at June 30, 2018 and 2017, respectively. PHILO Finance Corporation is the third party in the bond agreement, having loaned the funds to the City of Houston Higher Education Finance Corporation. In December 2012, this bond was sold to The Laura and John Arnold Foundation. Interest on the bond of 5.42% is paid every six months to the bondholder by the Federal government as part of a federal tax credit bond program. The bond is due August 15, The proceeds are being used for building construction on specified campuses and are secured by pledged revenue. 8,692,754 9,448,327 Qualified School Construction Bond, Taxable Series 2012, issued by the City of Houston Higher Education Finance Corporation, including debt issuance costs of $2,861 and $3,800 at June 30, 2018 and 2017, respectively. The Laura and John Arnold Foundation is the third party in the bond agreement, having loaned the funds to the City of Houston Higher Education Finance Corporation. Interest on the bond of 4.19% is paid every six months to the bondholder by the Federal government as part of a federal tax credit bond program. The bond is due August 15, The proceeds are being used for building construction on specified campuses and are secured by pledged revenue. 5,887,639 6,224,071 Qualified School Construction Bond, Taxable Series 2014Q, issued by the City of Houston Higher Education Finance Corporation, net of an unamortized discount of $33,930 and $35,987 and unamortized debt issuance costs of $50,037 and $53,070 at June 30, 2018 and 2017, respectively. Interest on the bond of 4.509% is paid every six months to the bondholder by the Federal government as part of a federal tax credit bond program. The bond is due February 15, The proceeds are being used for building construction on specified campuses and are secured by assets of KIPP. 5,111,033 5,105,943 Total bonds and notes payable $ 196,517,114 $ 194,624,639 KIPP capitalized interest of approximately $401,000 in 2018 and $601,000 in Interest recognized as expense totaled approximately $6,735,000 and $6,769,000 in 2018 and 2017, respectively. Discounts or premiums on bonds and capitalized bond issuance costs are amortized over the lives of the bonds. The Series 2015A, Series 2014A, and Series 2014Q bonds are guaranteed by the Permanent School Fund of the State of Texas under the Charter District Bond Guarantee Program. 13

16 Maturities of bonds and notes payable at June 30, 2018 are as follows: 2019 $ 5,415, ,505, ,620, ,240, ,855,203 Thereafter 135,339,698 Total principal payments due 193,975,713 Unamortized bond premium 4,051,035 Unamortized debt issuance costs (1,509,634) Total $ 196,517,114 Bond proceeds held in trust are held primarily in money market mutual funds and include the following: Escrowed for debt service $ 4,306,235 $ 4,024,027 Bond funds available for projects 284, ,235 Total bond proceeds held in trust $ 4,590,581 $ 4,326,262 KIPP had a $9,000,000 line of credit with a financial institution that expired in June 2018, and has a $1,500,000 line of credit with Charter School Growth Fund that expires in December There were no draws on these lines of credit during the years ended June 30, 2018 and There were no amounts outstanding under these lines of credit at June 30, NOTE 7 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are available for the following purposes: KIPPing Point growth campaign $ 1,443,492 KIPP scholarships 755,117 $ 732,607 KIPP future operations 186, ,493 Hurricane Harvey relief and recovery 137,729 Administrative costs Government Affairs Grant 105, ,100 KIPP Nexus 50,000 40,000 Athletics 46,852 46,252 STEM programs 46,691 21,691 Professional and curriculum development 34,698 34,698 KIPP through college 8, ,420 KIPP Climb Academy 247,211 Teacher recruitment 222,140 Wellness 108,834 Drop-out prevention 80,000 Family assistance 27,607 Other 148,948 84,552 Total temporarily restricted net assets $ 2,963,820 $ 2,490,605 14

17 NOTE 8 ENDOWMENT FUNDS KIPP is subject to the Texas Uniform Prudent Management of Institutional Funds Act (TUPMIFA). The Board of Directors of KIPP has interpreted TUPMIFA 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, KIPP classifies the original value of gifts donated to the permanent endowment as permanently restricted net assets. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by KIPP in a manner consistent with the standard of prudence prescribed by TUPMIFA. In accordance with TUPMIFA, KIPP considers the following factors in making a determination to appropriate accumulated donor-restricted endowment funds: The duration and preservation of the endowment fund The purposes of KIPP and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of KIPP The investment policies of KIPP Changes in endowment net assets are as follows: TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL Endowment net assets, June 30, 2016 $ 0 $ 356,705 $ 190,000 $ 546,705 Interest and dividends 16,638 16,638 Unrealized gain 74,950 74,950 Appropriation for distribution (24,037) (24,037) Endowment net assets, June 30, , , ,256 Interest and dividends 17,083 17,083 Unrealized gain 71,334 71,334 Appropriation for distribution (18,268) (18,268) Endowment net assets, June 30, 2018 $ 0 $ 494,405 $ 190,000 $ 684,405 Investment and Spending Policies KIPP has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by the endowment in such a manner as to preserve and enhance the net asset value. The endowment funds consist of contributions that are permanently restricted by the donor, as well as temporarily restricted by the donor. Distributions are determined annually by the Superintendent. 15

18 NOTE 9 GOVERNMENT GRANTS KIPP is the recipient of government grants from various federal, state and local agencies. Government grants include the following: State grants: Texas Education Agency Foundation School Program Act $ 124,198,697 $ 111,969,604 Textbook and Kindergarten Materials 1,316,734 1,566,797 Pre-Kindergarten 66, ,309 School Lunch Matching 36,807 38,428 Total state grants 125,619, ,206,138 Federal grants: U. S. Department of Education 8,928,188 8,081,340 U. S. Department of Agriculture 11,199,612 8,769,657 Total federal grants 20,127,800 16,850,997 Other federal: Subsidized interest on qualified bonds 2,217,770 2,351,862 Total government grants $ 147,964,630 $ 133,408,997 The grants from government funding sources require fulfillment of certain conditions as set forth in the grant contracts and are subject to review and audit by the awarding agencies. Such reviews and audits could result in the discovery of unallowable activities and unallowable costs. Consequently, any of the funding sources may, at their discretion, request reimbursement for expenses or return of funds as a result of non-compliance by KIPP with the terms of the contracts. Management believes such disallowances, if any, would not be material to KIPP s financial position or changes in net assets. NOTE 10 PHILO FINANCE CORPORATION PHILO Finance Corporation (PHILO) is a separate, independent 501(c)(3) nonprofit organization organized to assist public charter schools with obtaining financing, including providing below-market loans. KIPP participated in several transactions with PHILO related to the financing of KIPP s capital expansion programs. In 2018 and 2017, PHILO contributed a total of $2,800,000 and $1,355,000, respectively, to KIPP for unrestricted purposes. These amounts are included in unrestricted contributions in the statements of activities and represent 22% and 21% of total contributions in 2018 and 2017, respectively. Additionally, as reported in Note 6, PHILO made a $23,200,000 unsecured, non-interest bearing loan to KIPP during An additional $7,300,000 was drawn on this loan in NOTE 11 COMMITMENTS Construction commitments In 2018 and 2017, KIPP entered into several contracts totaling approximately $10 million and $8 million, respectively, for construction projects at certain schools. As of June 30, 2018, outstanding commitments totaled approximately $873,

19 NOTE 12 EMPLOYEE BENEFIT PLANS KIPP offers a 403(b) retirement plan and a 457 deferred compensation plan to all employees in their third school year of employment. KIPP matches 100% of employee contributions to the plan up to a maximum of $1,200 per employee, per year. KIPP also makes deferred compensation payments into the plan for senior employees. KIPP contributed approximately $457,000 to the plans in 2018 and $472,000 in Health benefits KIPP is self-insured for health benefits. Under this plan, health benefit claims are the responsibility of KIPP subject to a maximum on a per-employee and aggregate basis based on the number of employees currently covered. KIPP maintains a stop-loss policy (up to $1 million) that becomes effective when claims aggregate to a predetermined amount based on 125% of expected claims. KIPP has recorded an accrued liability of approximately $575,000 and $762,000 in the accompanying statements of financial position for its share of claims arising from incidents occurring on or before June 30, 2018 and 2017, respectively. NOTE 13 MULTIEMPLOYER PENSION PLAN KIPP s full-time employees participate in the Teacher Retirement System of Texas (TRS), a public employee retirement system. TRS is a cost-sharing, multiemployer, defined benefit pension plan. All risks and costs are not shared by KIPP, but are the liability of the State of Texas. For 2018, plan members contribute 7.7% of their annual covered salary. KIPP contributes 6.8% for new TRS members the first 90 days of employment and the State of Texas contributes 6.8%. Additionally, KIPP makes a 1.5% non- OASDI payment on all TRS eligible employees. KIPP s contributions do not represent more than 5% of the pension plan s total contributions. KIPP contributed $2,702,580 and $2,274,219 to the plan during fiscal years 2018 and 2017, respectively, equal to the required contribution for each year. The risks of participating in a multiemployer, defined benefit plan are different from single-employer plans because (a) amounts contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers and (b) if an employer stops contributing to TRS, unfunded obligations of TRS may be required to be borne by the remaining employers. There is no withdrawal penalty for leaving TRS. Total TRS plan assets as of August 31, 2017 and 2016 were $146.3 billion and $138.8 billion, respectively. Accumulated benefit obligations as of August 31, 2017 and 2016 were $181.8 billion and $174.2 billion, respectively. The plan was 80.50% funded at August 31, 2017 and 79.70% funded at August 31, NOTE 14 SUBSEQUENT EVENTS Effective July 1, 2018, KIPP, along with the KIPP organizations located in San Antonio and Dallas/Fort Worth, merged with and into KIPP Austin Public Schools to form KIPP Texas, Inc. KIPP returned its charter to the Texas Education Agency effective June 30, Management has evaluated subsequent events through October 22, 2018, which is the date that the financial statements were available for issuance. As a result of this evaluation, no other events were identified that are required to be disclosed or would have a material impact on reported net assets or changes in net assets. 17

20 KIPP, Inc. Charter # Supplemental Statements of Financial Position as of June 30, 2018 and ASSETS Current assets: Cash and cash equivalents $ 28,533,007 $ 27,170,204 Receivables: Government agencies 20,898,528 19,148,078 Pledges 458, ,996 Other 768, ,088 Prepaid expenses and other assets 407, ,032 Total current assets 51,066,352 48,564,398 Pledges receivable, net 61,446 41,315 Investments 1,053, ,119 Cash restricted for capital projects 1,443,492 Bond proceeds held in trust 4,590,581 4,326,262 Property and equipment, net 182,901, ,411,898 TOTAL ASSETS $ 241,116,547 $ 235,297,992 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and accrued expenses $ 7,710,984 $ 4,937,174 Accrued payroll expenses 8,181,382 8,575,080 Transfers from Partnership 5,557,315 6,569,670 Construction payable 2,336,981 2,442,618 Accrued interest 2,643,578 2,731,863 Deferred revenue 1,000,000 Current portion of bonds and notes payable 5,415,203 5,407,524 Total current liabilities 32,845,443 30,663,929 Bonds and notes payable 191,101, ,217,115 Total liabilities 223,947, ,881,044 Net assets: Unrestricted 14,015,373 12,736,343 Temporarily restricted 2,963,820 2,490,605 Permanently restricted 190, ,000 Total net assets 17,169,193 15,416,948 TOTAL LIABILITIES AND NET ASSETS $ 241,116,547 $ 235,297,992 18

21 KIPP, Inc. Charter # Supplemental Statements of Activities for the years ended June 30, 2018 and 2017 TEMPORARILY PERMANENTLY TOTALS UNRESTRICTED RESTRICTED RESTRICTED REVENUE: Local program revenue: 5740 Other revenue from local sources $ 9,068,226 $ 7,562,504 $ 16,630,730 $ 11,321, Co-curriculum/enterprising 1,536,340 1,536,340 1,952,381 Total local support 10,604,566 7,562,504 18,167,070 13,274,370 State program revenue: 5810 Foundation School Program Act Revenue 124,198, ,198, ,833, State program revenue distributed by Texas Education Agency 1,420,363 1,420,363 2,372,764 Total state program revenues 125,619, ,619, ,206,138 Federal program revenue: 5910 Federal distributed revenue 100, , , Federal revenue distributed by the State of Texas Education Agency 19,566,016 19,566,016 16,305, Federal revenue distributed directly from the Federal government 2,679,554 2,679,554 2,779,354 Total federal program revenues 22,345,570 22,345,570 19,202,859 Total revenue 10,604, ,527, ,131, ,683,367 Net assets released from restrictions: Program expenditures 154,981,404 (154,981,404) Expiration of time restrictions 72,515 (72,515) Total 165,658, , ,131, ,683,367 (continued) 19

22 KIPP, Inc. Charter # Supplemental Statements of Activities for the years ended June 30, 2018 and 2017 (continued) TEMPORARILY PERMANENTLY TOTALS UNRESTRICTED RESTRICTED RESTRICTED EXPENSES: 11 Instruction 64,804,252 64,804,252 60,321, Instructional resources and media services 86,372 86,372 72, Curriculum development and instructional staff development 8,208,567 8,208,567 7,338, Instructional leadership 255, , , School leadership 16,422,819 16,422,819 14,706, Guidance counseling and evaluation services 5,498,559 5,498,559 4,422, Social work services 335, , , Health services 552, , , Student transportation 6,741,931 6,741,931 5,569, Food services 9,751,111 9,751,111 9,015, Co-curricular and extracurricular activities 1,563,372 1,563,372 1,482, General administration 10,096,105 10,096,105 8,700, Plant maintenance and operations 21,573,779 21,573,779 19,539, Security and monitoring services 1,484,677 1,484,677 1,409, Data processing services 3,562,577 3,562,577 3,227, Community services 798, , , Debt service 6,664,807 6,664,807 6,692, Fundraising 5,977,962 5,977,962 2,282,779 Total expenses 164,379, ,379, ,683,615 CHANGES IN NET ASSETS 1,279, ,215 1,752,245 (248) Net assets, beginning of year 12,736,343 2,490,605 $ 190,000 15,416,948 15,417,196 Net assets, end of year $ 14,015,373 $ 2,963,820 $ 190,000 $ 17,169,193 $ 15,416,948 Note: Expenses include special event direct donor benefit costs of $130,811 in 2018 and $111,456 in 2017 that are reported as reductions from special events revenue on the Statements of Activities. 20

23 KIPP, Inc. Charter # Supplemental Statements of Cash Flows for the years ended June 30, 2018 and CASH FLOWS FROM OPERATING ACTIVITIES: Changes in net assets $ 1,752,245 $ (248) Adjustments to reconcile changes in net assets to net cash provided by operating activities: Contributions restricted for expansion of facilities (1,443,492) (25,000) Net realized and unrealized gain on investments (83,921) (74,950) Depreciation 11,135,694 10,611,929 Amortization of bond issuance costs 73,879 73,876 Amortization of bond issuance premiums (156,200) (156,200) Changes in operating assets and liabilities: Receivables (1,541,439) (186,167) Prepaid expenses and other assets 357,157 (258,095) Accounts payable and accrued expenses 1,367, ,935 Accrued interest (88,285) (87,048) Deferred revenue 1,000,000 (14,097) Net cash provided by operating activities 12,373,395 10,734,935 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of investments 49, ,353 Purchases of investments (106,194) (292,596) Net change in cash held as investments 41, ,075 Purchases of property and equipment (12,730,535) (18,452,996) Net cash used by investing activities (12,746,069) (18,466,164) CASH FLOWS FROM FINANCING ACTIVITIES: Change in cash restricted for capital projects (1,443,492) Bond proceeds held in trust (264,319) Proceeds from notes payable 7,300,000 23,200,000 Principal repayments on bonds and notes payable (5,325,204) (5,245,196) Proceeds from contributions restricted for expansion of facilities 1,468,492 Net cash provided by financing activities 1,735,477 17,954,804 NET CHANGE IN CASH AND CASH EQUIVALENTS 1,362,803 10,223,575 Cash and cash equivalents, beginning of year 27,170,204 16,946,629 Cash and cash equivalents, end of year $ 28,533,007 $ 27,170,204 21

24 KIPP, Inc. Charter # Schedules of Expenses for the years ended June 30, 2018 and Payroll costs $ 93,212,978 $ 84,906, Professional and contracted services 22,682,080 19,665, Supplies and materials 17,806,926 16,411, Other operating costs 24,025,272 19,013, Interest expense 6,652,199 6,686,919 Total $ 164,379,455 $ 146,683,615 Note: Expenses include special event direct donor benefit costs of $130,811 in 2018 and $111,456 in 2017 that are reported as reductions from special events revenue on the Statements of Activities. 22

25 KIPP, Inc. Charter # Schedules of Capital Assets as of June 30, 2018 and OWNERSHIP INTEREST LOCAL STATE FEDERAL 1510 Land and improvements $ 43,437,263 $ 9, Buildings and improvements 184,385,727 1,437,238 $ 267, Vehicles and equipment 427, ,524 48, Furniture and equipment 6,453,671 1,358, , Library books and media 31,771 59, Other capital assets 12,528, ,088 Total charter capital assets 247,264,940 $ 3,582,543 $ 578,831 Partnership furniture and equipment 16,147 Total capital assets $ 247,281, OWNERSHIP INTEREST LOCAL STATE FEDERAL 1510 Land and improvements $ 38,101,148 $ 9, Buildings and improvements 175,495,531 1,070,099 $ 267, Vehicles and equipment 419, ,524 48, Furniture and equipment 6,195,251 1,358, , Library books and media 31,771 59, Other capital assets 15,373, ,088 Total charter capital assets 235,616,608 $ 3,215,404 $ 441,201 Partnership furniture and equipment 16,147 Total capital assets $ 235,632,755 23

26 KIPP, Inc. Charter # Budgetary Comparison Schedule for the year ended June 30, 2018 VARIANCE BUDGETED AMOUNTS ACTUAL FROM FINAL ORIGINAL FINAL AMOUNTS BUDGET REVENUE: Federal program revenue: 5910 Federal distributed revenue $ 100,000 $ 100,000 $ Federal revenue distributed by the State of Texas Education Agency $ 14,769,405 19,591,852 19,566,016 (25,836) 5940 Federal revenue distributed directly from the Federal government 2,226,575 2,675,205 2,679,554 4,349 State program revenue: 5810 Foundation School Program Act Revenue 121,168, ,171, ,198,697 1,026, State program revenue distributed by Texas Education Agency 1,228,633 1,359,115 1,420,363 61,248 Local program revenue: 5740 Other revenue from local sources 7,822,007 18,786,516 16,630,730 (2,155,786) (1) 5750 Co-curriculum/enterprising 4,579,917 1,684,108 1,536,340 (147,768) Total revenue 151,795, ,368, ,131,700 (1,236,946) EXPENSES: 11 Instruction 68,799,172 65,207,650 64,804,252 (403,398) 12 Instructional resources and media services 103,323 98,447 86,372 (12,075) (2) 13 Curriculum development and instructional staff development 5,710,364 7,619,731 8,208, , Instructional leadership 156, , ,243 (15,681) (continued) 24

27 KIPP, Inc. Charter # Budgetary Comparison Schedule for the year ended June 30, 2018 (continued) VARIANCE BUDGETED AMOUNTS ACTUAL FROM FINAL ORIGINAL FINAL AMOUNTS BUDGET 23 School leadership 13,528,092 16,609,347 16,422,819 (186,528) 31 Guidance counseling and evaluation services 3,416,013 5,361,917 5,498, , Social work services 367, , ,924 3, Health services 584, , ,671 (23,452) 34 Student transportation 5,976,349 6,678,702 6,741,931 63, Food services 10,390,622 9,782,568 9,751,111 (31,457) 36 Co-curricular and extracurricular activities 1,249,994 1,457,604 1,563, , General administration 10,763,755 10,052,594 10,096,105 43, Plant maintenance and operations 22,163,266 21,030,714 21,573, , Security and monitoring services 1,092,227 1,405,190 1,484,677 79, Data processing services 4,618,352 3,534,554 3,562,577 28, Community services 851, , ,727 (22,602) 71 Debt service 7,135,959 7,135,959 6,664,807 (471,152) 81 Fundraising 1,539,048 6,868,070 5,977,962 (890,108) (3) Total expenses 158,446, ,844, ,379,455 (464,720) CHANGES IN NET ASSETS (6,651,480) 2,524,471 1,752,245 (772,226) Net assets, beginning of year 15,416,948 15,416,948 15,416,948 0 Net assets, end of year $ 8,765,468 $ 17,941,419 $ 17,169,193 $ (772,226) Note: Expenses include special event direct donor benefit costs of $130,811 that are reported as reductions from special events revenue on the Statement of Activities. 25

28 KIPP, Inc. Charter # Budgetary Comparison Schedule for the year ended June 30, 2018 Explanation for Budget Variances (unaudited) (1) A fundraising goal of $5 million for the fiscal year ended June 30, 2018 was not met by $800,000. In addition, school-based revenue was lower than budget by $1.2 million due to discontinued uniform sales. (2) Schools spent less on media services than anticipated. (3) Schools made fewer chocolate purchases for fundraising purposes. 26

29 KIPP, Inc. Schedule of Expenditures of Federal Awards for the year ended June 30, 2018 FEDERAL GRANTOR Pass-through Grantor CFDA Grant Award Federal Program Title & Period Number Number Amount Revenue Expenditures U. S. DEPARTMENT OF AGRICULTURE Passed through Texas Education Agency: #1 School Breakfast Program 10/01/16 09/30/ N/A $ 196,934 $ 196,934 #2 School Breakfast Program 10/01/17 09/30/ N/A 1,269,021 1,269,021 #3 National School Lunch Program 10/01/16 09/30/ N/A 552, ,999 #4 National School Lunch Program 10/01/17 09/30/ N/A 3,850,119 3,850,119 Passed through Sodexo: #5 National School Lunch Program (Food Commodities) 07/01/17 09/30/ N/A $489, , ,632 Passed through the Texas Department of Agriculture: #6 Child and Adult Care Food Program 10/01/17 09/30/ TX332N1099 N/A 4,813,907 4,813,907 Total U. S. Department of Agriculture 11,199,612 11,199,612 U. S. DEPARTMENT OF EDUCATION Direct Federal Funding: #7 School Safety National Activities 07/01/17 06/30/ $19,019 19,019 19,019 #8 Fund for the Improvement of Education 10/01/16 09/30/ U215H $476, , ,647 #9 Fund for the Improvement of Education 10/01/17 09/30/ U215H $476, , ,118 Passed through Texas Education Agency: #10 Title I, Grants to Local Education Agencies, Improving Basic Programs 07/01/17 06/30/ $5,361,527 5,311,699 5,311,699 #11 Title I, Grants to Local Education Agencies, Priority and Focus School Grant 07/01/17 06/30/ $20,000 16,678 16,678 (continued) 27

30 KIPP, Inc. Schedule of Expenditures of Federal Awards for the year ended June 30, 2018 (continued) FEDERAL GRANTOR Pass-through Grantor CFDA Grant Award Federal Program Title & Period Number Number Amount Revenue Expenditures U. S. DEPARTMENT OF EDUCATION (continued) #12 Special Education Grants to States 07/01/17 06/30/ A $2,056,086 1,880,332 1,880,332 #13 Special Education Preschool Grants 07/01/17 09/30/ A $43,306 14,846 14,846 #14 Title III, Part A, English Language Acquisition State Grants 07/01/17 06/30/ A $483, , ,626 #15 Title II, Part A, Supporting Effective Instruction State Grants 07/01/17 09/30/ A $585, , ,602 #16 Title IV, Part A, Student Support and Academic Enrichment Program 07/01/17 06/30/ $98,804 86,621 86,621 Passed through KIPP Foundation: #17 Supporting Effective Instruction State Grants 07/01/17 06/30/ D U367D $100, , ,000 Total U. S. Department of Education 8,928,188 8,928,188 TOTAL FEDERAL EXPENDITURES $20,127,800 $20,127,800 Federal funds expended by KIPP, by CFDA number or CFDA cluster, are summarized as follows: CFDA Number(s) Name of Program or Cluster Amount , Child Nutrition Cluster $ 6,385, Child and Adult Care Food Program 4,813, Title I, Grants to Local Education Agencies 5,328, A/84.173A Special Education Cluster 1,895, School Safety National Activities 19, Fund for Improvement in Education 442, A Title III, Part A, English Language Acquisition State Grants 474, A Title II, Part A, Supporting Effective Instruction State Grants 581, D Supporting Effective Instruction State Grants 100, Title IV, Part A, Student Support and Academic Enrichment Program 86,621 Total $20,127,800 See accompanying notes to schedule of expenditures of federal awards. 28

31 KIPP, Inc. Note to Schedule of Expenditures of Federal Awards for the year ended June 30, 2018 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The schedule of expenditures of federal awards is prepared on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U. S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Federal expenditures include allowable costs funded by federal awards. Allowable costs are subject to the cost principles of the Uniform Guidance and include costs that are recognized in KIPP s financial statements in conformity with generally accepted accounting principles. KIPP has elected not to use the 10% de mimimis rate but has elected to use a rate of 2.862% for indirect costs, as approved by the Texas Education Agency. Because the schedule presents only a selected portion of the operations of KIPP, it is not intended to and does not present the financial position, changes in net assets, or cash flows of KIPP. 29

32 Blazek & Vetterling C ERTIFIED P UBLIC A CCOUNTANTS Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards To the Board of Directors of KIPP, Inc.: We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of KIPP, Inc. (KIPP), which comprise the statement of financial position as of June 30, 2018 and the related statements of activities and of cash flows for the year then ended, and the related notes to the financial statements and have issued our report thereon dated October 22, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered KIPP s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of KIPP s internal control. Accordingly, we do not express an opinion on the effectiveness of KIPP s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether KIPP s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards Weslayan, Suite 200 Houston, Texas (713) Fax (713)

33 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. October 22,

34 Blazek & Vetterling C ERTIFIED P UBLIC A CCOUNTANTS Independent Auditors Report on Compliance for Each Major Program and Report on Internal Control Over Compliance Required by the Uniform Guidance To the Board of Directors of KIPP, Inc.: Report on Compliance for Each Major Federal Program We have audited KIPP, Inc. s (KIPP) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of KIPP s major federal programs for the year ended June 30, KIPP s major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of KIPP s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U. S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about KIPP s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of KIPP s compliance. Opinion on Each Major Federal Program In our opinion, KIPP complied, in all material respects, with the type of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, Weslayan, Suite 200 Houston, Texas (713) Fax (713)

35 Other Matters The results of our auditing procedures disclosed instances of noncompliance, which are required to be reported in accordance with the Uniform Guidance and which are described in the accompanying schedule of findings and questioned costs as finding # Our opinion on each major federal program is not modified with respect to this matter. KIPP s response to the noncompliance finding identified in our audit is described in the accompanying Corrective Action Plan. KIPP s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control Over Compliance Management of KIPP is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered KIPP s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of KIPP s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. October 22,

36 KIPP, Inc. Schedule of Findings and Questioned Costs for the year ended June 30, 2018 Section I Summary of Auditors Results Financial Statements Type of auditors report issued: unmodified qualified adverse disclaimer Internal control over financial reporting: Material weakness(es) identified? yes no Significant deficiency(ies) identified that are not considered to be material weakness(es)? yes none reported Noncompliance material to the financial statements noted? yes no Federal Awards Internal control over major programs: Material weakness(es) identified? yes no Significant deficiency(ies) identified that are not considered to be material weakness(es)? yes none reported Type of auditors report issued on compliance for major programs: unmodified qualified adverse disclaimer Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? yes no Identification of major programs: CFDA Number(s) Name of Program or Cluster Title I, Grants to Local Education Agencies A/84.173A Special Education Cluster Fund for Improvement in Education A Title III, Part A, English Language Acquisition State Grants Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as a low-risk auditee? yes no Section II Financial Statement Findings There were no findings related to the financial statements which are required to be reported in accordance with Government Auditing Standards. 34

37 Section III Federal Award Findings and Questioned Costs Finding # Other Non-Compliance Applicable federal programs: U. S. Department of Education Fund for the Improvement of Education CFDA # Contract No.: U215H Contract Year: 10/01/16 09/30/17 and 10/01/17 09/30/18 U. S. Department of Education Title III, Part A, English Language Acquisition State Grants CFDA #84.365A Passed through Texas Education Agency Contract No.: Contract Year: 07/01/17 06/30/18 Criteria: Allowable Costs Title 2 U. S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, Subpart E, requires that payroll systems be based on records that accurately reflect the work performed and provide reasonable assurances that charges are accurate, allowable and reasonable, and properly allocated. Condition and context: During our testing of 36 employees charged to federal programs, we noted that five employees did not have contemporaneous time and effort records to support the work performed on the federal programs they were charged to. Cause: KIPP s internal time and effort certification procedures were not properly followed due, in part, to lack of training of KIPP personnel. Effect: Without timely records that properly reflect the time and effort that staff spend on federal programs, unallowable payroll costs could be charged to these programs. Questioned costs: Unknown Recommendation: Emphasize to KIPP personnel the time and effort certification procedures and adherence to federal cost principles. Views of responsible officials and planned corrective actions: Management agrees with the finding. See the Corrective Action Plan. 35

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39 Summary Schedule of Prior Audit Findings The following audit findings for the year ended June 30, 2017, are required to be reported in accordance with 2 CFR Section II Financial Statement Findings There were no findings related to the financial statements which are required to be reported in accordance with Government Auditing Standards. Section III Federal Award Findings and Questioned Costs Finding # Other Non-Compliance Applicable federal program: U. S. Department of Education IDEA-B Formula CFDA #84.027A Passed through Texas Education Agency Contract No.: Contract Year: 07/01/16 09/30/17 Criteria: Procurement Nonprofit organizations are required to have written procurement procedures that conform to federal and state laws and regulations as identified in the Uniform Guidance, Subtitle III Procurement Standards and the State of Texas Uniform Grant Management Standards and other specific contractual requirements. Condition and context: Federal and state laws and regulations require public notice for proposal requests over the simplified acquisition threshold of $150,000. During our testing of 11 transactions requiring procurement, we noted that the procurement for special education professional services required public notice, but was procured without a public notice for the proposal requests. Cause: KIPP s procurement policies do not incorporate federal laws and regulations related to the definition of professional services under federal procurement law. This lack of clarity resulted in a lack of compliance with procurement laws and regulations. Effect and questioned costs: As a result of not following federal procurement law, the procurement may not have been conducted in a manner to provide full and open competition. Recommendation: Clarify KIPP s procurement policies to conform to both state and federal laws. Emphasize to KIPP procurement personnel the procurement process and adherence to state and federal laws. Views of responsible officials and planned corrective actions: KIPP notes that an employee did not follow our existing Board Policy, which would have prevented the error and is compliant with Federal procurement rules. KIPP is implementing a Procure-To-Pay system in fiscal year 2018 that will require all contract requests to be entered into the system and reviewed by the KIPP procurement team. This second level of review will ensure that all contracts needing public procurement will be properly addressed. KIPP emphasizes that it publicly procured IDEA-B services for fiscal year 2018 meeting all Federal requirements in fiscal year