Children s Hospital of Pittsburgh Foundation

Transcription

1 Children s Hospital of Pittsburgh Foundation Financial Statements as of and for the Years Ended June 30, 2009 and 2008, and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT To the Board of Trustees of Children s Hospital of Pittsburgh Foundation: We have audited the accompanying balance sheets of Children s Hospital of Pittsburgh Foundation (the Foundation ) as of June 30, 2009 and 2008, and the related statements of unrestricted revenues, expenses, and other changes in unrestricted net assets, changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the Foundation s management. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Foundation s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Foundation as of June 30, 2009 and 2008, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 4 to the financial statements, the financial statements include investments valued at $20,488,000 (8.3% of total assets) and $27,714,000 (8.6% of total assets) as of June 30, 2009 and 2008, respectively, whose fair values have been estimated by management in the absence of readily determinable fair values. Management s estimates are based on information provided by the fund managers or the general partners of these investments. September 16, 2009

3 CHILDREN S HOSPITAL OF PITTSBURGH FOUNDATION BALANCE SHEETS AS OF JUNE 30, 2009 AND 2008 (Amounts in thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,046 $ 1,677 Pledges receivable net 6,836 9,208 Assets limited as to use 11,065 9,431 Marketable securities 32,104 6,060 Beneficial interests in perpetual trust 6,769 Total current assets 57,820 26,376 ASSETS LIMITED AS TO USE Board designated 105, ,000 DONOR-RESTRICTED FUNDS 65, ,811 BENEFICIAL INTERESTS IN PERPETUAL TRUSTS 6,107 16,525 BENEFICIAL INTERESTS IN CHARITABLE REMAINDER TRUSTS PLEDGES RECEIVABLE DUE AFTER ONE YEAR 11,810 15,160 LEASEHOLD IMPROVEMENTS AND EQUIPMENT Net TOTAL $ 248,113 $ 324,002 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Due to Children s Hospital of Pittsburgh of the UPMC Health System: Operating funding $ 73 $ 888 Additional funding commitment 396 Return of investments & beneficial interests 35,163 35, DUE TO CHILDREN S HOSPITAL OF PITTSBURGH OF THE UPMC HEALTH SYSTEM: Return of investments & beneficial interests 45,850 Additional funding commitment 45,195 OTHER LONG-TERM LIABILITIES Total liabilities 80,939 46,856 NET ASSETS: Unrestricted 74, ,958 Temporarily restricted 38,161 61,239 Permanently restricted 54,596 55,949 Total net assets 167, ,146 TOTAL $ 248,113 $ 324,002 See notes to financial statements

4 CHILDREN S HOSPITAL OF PITTSBURGH FOUNDATION STATEMENTS OF UNRESTRICTED REVENUES, EXPENSES, AND OTHER CHANGES IN UNRESTRICTED NET ASSETS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008 (Amounts in thousands) UNRESTRICTED REVENUES AND GAINS: Gifts and bequests $ 3,096 $ 2,756 Less allowance for doubtful pledges and pledges written off (9) (7) Net gifts and bequests 3,087 2,749 Contributed services and supplies from Children s Hospital of Pittsburgh of the UPMC Health System: Operating expenses 4,781 3,975 Transfer of leasehold improvements and equipment 540 Transfer to Children s Hospital of Pittsburgh of the UPMC Health System 18 Net assets released from restrictions used for: Hospital operations 10,942 12,336 New Hospital Building Funding 7,359 14,935 Interest and dividend income net of fees 3,172 3,749 Total unrestricted revenues and gains 29,341 38,302 UNRESTRICTED EXPENSES AND LOSSES: General, administrative and fund-raising expense 4,977 4,135 Contributions to Children s Hospital of Pittsburgh of the UPMC Health System: Annual financial support 15,320 14,150 New Hospital Building Funding 16,249 14,935 Unfunded contribution to Children s Hospital of Pittsburgh of the UPMC Health System Additional Funding Commitment 45,195 Net unrealized and realized losses on investments 33,141 16,625 Total unrestricted expenses and losses 114,882 49,845 CHANGE IN UNRESTRICTED NET ASSETS $ (85,541) $ (11,543) See notes to financial statements

5 CHILDREN S HOSPITAL OF PITTSBURGH FOUNDATION STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008 (Amounts in thousands) UNRESTRICTED NET ASSETS: Total unrestricted revenues and gains $ 29,341 $ 38,302 Total unrestricted expenses and losses (114,882) (49,845) Decrease in unrestricted net assets (85,541) (11,543) TEMPORARILY RESTRICTED NET ASSETS: Contributions and bequests 7,987 20,373 Transfer from permanently restricted due to change in donor intent 2,500 Grants from the state and state agencies for the New Hospital Building 1,339 1,108 Income from temporarily restricted investments 2,256 2,577 Change in due to Children s Hospital of Pittsburgh of the UPMC Health System 8,827 4,841 Change in value of beneficial interests in charitable remainder trusts (177) 35 Allowance for doubtful pledges and pledges written off (171) (37) Transfer to Children s Hospital of Pittsburgh of the UPMC Health System (18) Net assets released from restrictions used for: Operations (10,942) (12,336) New Hospital Building Funding (7,359) (14,935) Net unrealized and realized losses on investments (24,838) (13,036) Decrease in temporarily restricted net assets (23,078) (8,928) PERMANENTLY RESTRICTED NET ASSETS: Contributions and bequests 482 1,175 Transfer to temporarily restricted due to change in donor intent (2,500) Allowance for doubtful pledges and pledges written off (1) 1 Net unrealized and realized losses on investments (45) (23) Change in value of beneficial interests in perpetual trusts (3,649) (1,528) Change in due to Children s Hospital of Pittsburgh of the UPMC Health System 1, Decrease in permanently restricted net assets (1,353) (2,123) DECREASE IN NET ASSETS (109,972) (22,594) NET ASSETS Beginning of year 277, ,740 NET ASSETS End of year $ 167,174 $ 277,146 See notes to financial statements

6 CHILDREN S HOSPITAL OF PITTSBURGH FOUNDATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008 (Amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Decrease in net assets $ (109,972) $ (22,594) Adjustments to reconcile change in net assets to net cash provided by operating activities: Unfunded contribution to Children s Hospital of Pittsburgh of the UPMC Health System Additional Funding Commitment 45,195 Depreciation Transfer of leasehold improvements and equipment (540) Net unrealized and realized losses on investments 58,024 29,684 Increase in allowance for doubtful pledges and pledges written off Change in value of beneficial interests in perpetual trusts 3,649 1,528 Change in beneficial interests in charitable remainder trusts 177 (35) Change in permanently restricted net assets 1,354 2,123 Increase (decrease) from changes in: Pledges receivable 5,542 2,021 Other (7) (6) Net cash provided by operating activities 4,208 12,237 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities, assets limited to use and donor-restricted fund investments (410,677) (436,429) Sales and maturities of marketable securities, assets limited to use and donor-restricted fund investments 418, ,637 Cash provided by (used in) investing activities 7,621 (4,792) CASH FLOWS FROM FINANCING ACTIVITIES: Change in permanently restricted net assets (1,354) (2,123) Due to Children s Hospital of Pittsburgh of the UPMC Health System (11,106) (4,809) Cash used in financing activities (12,460) (6,932) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (631) 513 CASH AND CASH EQUIVALENTS Beginning of year 1,677 1,164 CASH AND CASH EQUIVALENTS End of year $ 1,046 $ 1,677 See notes to financial statements

7 CHILDREN S HOSPITAL OF PITTSBURGH FOUNDATION NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 2009 AND 2008 (Amounts in thousands) 1. ORGANIZATION Children s Hospital of Pittsburgh Foundation (the Foundation ) was created by Children s Hospital of Pittsburgh (the Hospital ) on July 1, 2000, primarily to support the fund-raising and development efforts of the Hospital. The Foundation is a non-profit organization as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code. 2. CERTAIN TRANSACTIONS AND COMMITMENTS On October 31, 2001, Children s Hospital of Pittsburgh ( Hospital ) consummated an affiliation with UPMC/University of Pittsburgh Medical Center ( UPMC Health System or UPMC ) pursuant to the terms of the Integration and Affiliation Agreement (the Affiliation Agreement ) by and among the Hospital, Children s Hospital of Pittsburgh Foundation (the Foundation ), and UPMC Health System (collectively, the Parties ). As a result of the Affiliation Agreement, the Foundation was reorganized such that the Hospital was no longer the sole corporate member of the Foundation and the Foundation has no corporate member. The Foundation is structured as a supporting organization of the Hospital. The terms of the Affiliation Agreement provide that UPMC Health System would construct a new pediatric hospital (the New Children s Hospital of Pittsburgh or New CHP ) for the Hospital. Pursuant to an amendment entered into by the Parties on September 28, 2004 (the Second Amendment ), the Foundation is required to provide funding for the New CHP in the amount of $50,000 (the Foundation Base Commitment, of which $50,000 and $34,930 has been recognized as of June 30, 2009 and 2008, respectively) and was charged to use its best efforts (as defined in the Affiliation Agreement) to raise an additional $43,000. Progress payments were to be made to UPMC Health System based on a certain percentage of project invoiced costs as such costs are paid by UPMC Health System. The balance of the Foundation Base Commitment was payable by the Foundation to UPMC Health System on the Completion Date (as defined in the Second Amendment). The projected cost for the design and construction of the New CHP, including a research facility, was $575,000 per the fourth amendment to the Affiliation Agreement. In January 2007, the Affiliation Oversight Committee approved an increase to the projected cost for the design and construction of the New CHP of $46,800 and the Foundation agreed in September 2007 to fund the $46,800 increased project costs (Additional Funding Commitment ). A subsequent agreement with UPMC Health System resulted in the removal of the $43,000 best efforts commitment. Payment of the Additional Funding Commitment is due to the UPMC Health System on or before five years from May 2, The New Children s Facilities opened in fiscal As of June 30, 2009, UPMC s commitment to construct the New CHP had been fulfilled. The parties agreed that the Completion Date occurred on May 2,

8 The completion of New CHP has resulted in the following transactions: The Foundation funded the remaining amount of $50,000 commitment from cash restricted to the New CHP of $5,819, provided $361 of qualifying equipment funding as part of its annual support to the Hospital and a transfer from the current portion of the Foundation s unrestricted assets of $8,890. Pursuant to the Affiliation Agreement, the Foundation maintained a mortgage and security interest in the Hospital s existing land, buildings, and equipment until the New CHP was completed. As UPMC s obligations with respect to the mortgage and security interest have been satisfied, the Foundation has released the abovementioned mortgage and security interest. Due to the completion of New CHP the Additional Funding Commitment of $46,800 is no longer contingent and has been recorded as a liability and an unrestricted expense. As of June 30, 2009, the Foundation has paid $809 of restricted cash, provided $65 of qualifying equipment funding as part of its annual support to the Hospital, provided $335 of eligible government funding and has received $396 restricted cash that is recorded as a current liability to UPMC. Additionally, the Affiliation Agreement requires that the Foundation transfer certain beneficial interests and investments back to the Hospital six months after the Completion Date. The related liability was recorded as Due to Children s Hospital of Pittsburgh of the UPMC Health System Long-term on the balance sheet as of June 30, As of June 30, 2009, the liability and the underlying investments and beneficial interests have been classified as current assets and liabilities, as management expects such transfer to occur in November The Affiliation Agreement required the Hospital, after receiving Orphan s Court and regulatory approval, to transfer to the Foundation certain permanently and temporarily restricted and unrestricted funds and the Hospital s beneficial interests in certain perpetual trusts. The Affiliation Agreement requires that the Foundation, for a minimum of 20 years, will provide annual financial support equal to 5% of the rolling average corpus of such transferred investments, beneficial interests in certain perpetual trusts and donations received thereafter, unless the original donor specified a different spending provision. The 5% Annual Funding is conditional upon the Hospital delivering to the Foundation a broad range of funding requests, and to meet certain standards selected by the Parties as indicators of the Hospital s continued or improved performance (the Key Indicators ). 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents are composed of highly liquid investments with an original maturity of three months or less at the date of purchase. Marketable Securities, Investments, and Investment Income Marketable securities and investments consist of cash equivalent securities, pooled equity and bond funds principally invested in domestic companies and alternative investments. In accordance with Statement of Financial Accounting Standards (SFAS) No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, all of the above investments, other than alternative investments, are carried at quoted market value. Investments are recognized based on the trade date

9 The Foundation has certain alternative investments that include hedge funds and investment partnerships, which are carried at the estimated fair value provided. Because alternative investments are not readily marketable, the estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market for the investments existed and such differences could be material. The investments are reported in the following two categories: Assets Limited as to Use Board designated: These investments represent funds where the Board restricted use over the corpus, over which the Board retains control and may at its discretion subsequently use for other purposes. The investment income is unrestricted. Donor-Restricted Funds These investments represent primarily endowed funds for which the corpus is restricted and the related investment income is restricted for specifically designated expenditures. Investment Income Investment income (including realized and unrealized gains and losses on investments, interest, and dividends) is recognized as earned. Investment income is included in unrestricted net assets unless the income is restricted by donor. Interest and dividend income is shown net of fees. Contributions and Donor-Imposed Restrictions The Affiliation Agreement provides that all contributions from donors received to the benefit of the Hospital will be recorded and maintained by the Foundation. 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 temporarily restricted or permanently restricted support that increases those net asset classes. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of unrestricted revenues, expenses, and other changes in unrestricted net assets as net assets released from restrictions. Pledges Receivable Unconditional promises to give cash and other assets are reported at estimated fair value at the date the promise is received. Unconditional promises to give that are expected to be collected within one year are recorded at their net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of estimated net realizable future cash flows. The discount rate used at June 30, 2009 and 2008, was 1.64% and 2.91%, respectively. Amortization of the discount is included in contribution revenue. Conditional promises to give are not included as support until such time as the conditions are substantially met. The Foundation annually evaluates the collectability of its pledge receivables and either reserves for or writes off uncollectible pledges when it determines the pledge is uncollectible. Write offs of uncollectible pledges for the years ended June 30, 2009 and 2008, are shown on the statements of unrestricted revenues, expenses, and other changes in unrestricted net assets and the statements of changes in net assets. Beneficial Interests in Perpetual Trusts The Hospital has been designated as the beneficiary of various perpetual trusts created by donors and held by entities other than the Hospital or the Foundation Under the terms of the trusts, the Hospital has an irrevocable right to receive all, or a portion of, the income earned on the trust assets in perpetuity, but never receives the assets held in trust. After receiving regulatory approval, the Hospital transferred its interests in these perpetual trusts to the Foundation, which will hold and maintain them until the completion of construction of the New Hospital Building. These arrangements represent the receipt of an unconditional promise to give and are recognized by the Foundation as contribution revenue and beneficial interests in perpetual trusts when the Foundation is notified of the existence of such trusts. The estimated fair value of the contributions are measured at the - 8 -

10 present value of the estimated future cash receipts from the trusts assets, which approximates the fair value of the trusts assets. The contributions are classified as permanently restricted support, as the trusts are similar to donor-restricted permanent endowments that the Foundation does not control. Annual distributions from the trusts are reported as investment income that increases temporarily restricted or unrestricted net assets, depending on the nature of the donor restrictions on distributions. Adjustments to the amounts reported as assets, based on an annual review of the Foundation s estimated present value of future cash receipts from the trusts assets, are recognized as permanently restricted gains and losses. Upon completion of the New CHP, certain beneficial interests will revert back to the Hospital and the related liabilities are included in the Due to Children s Hospital of Pittsburgh of the UPMC Health System, for $6,769 and $8,644 as of June 30, 2009 and 2008, respectively. Management expects such transfer to occur in November Beneficial Interests in Charitable Remainder Trusts The Foundation has been designated as the beneficiary of certain charitable remainder trusts created by donors and held by entities other than the Hospital or the Foundation. Under the terms of the trusts, the Foundation will receive a portion of the assets that remain in the trusts when they are terminated. Termination typically occurs upon the death of the current beneficiary. The assets held in trusts for the Foundation are recorded at fair value and the beneficial interests recorded by the Foundation is measured at the present value of the estimated future cash payments to be distributed to the Foundation. The contributions are classified as temporarily restricted support, as the trusts are restricted as to passage of time and future events. Grants From State and State Agencies The grant revenue represents the benefit from reimbursable expenses incurred under the grant contracts with the state and state agencies that is temporarily restricted for use on the New CHP. Leasehold Improvements and Equipment Leasehold improvements and equipment are comprised of contributed assets used in fund-raising activities. The contributed assets were given without restriction as to use or duration and the Foundation maintains title to the leasehold improvements and equipment. Leasehold improvements and equipment is stated at fair value at the time of contribution less accumulated depreciation of $519 and $453 at June 30, 2009 and 2008, respectively (including accumulated depreciation of $303 transferred from Children s Hospital of Pittsburgh of the UPMC Health System during the year ended June 30, 2008). Depreciation is computed and recorded on a straight-line basis over the lesser of the asset s estimated useful life or the lease term. Depreciation expense was $66 and $13 for the years ended June 30, 2009 and 2008, respectively. As required by the Affiliation Agreement, UPMC Health System has agreed to reimburse the Foundation for the cost of the underlying lease. Such costs are reflected both as contributed services and supplies from Children s Hospital of Pittsburgh of the UPMC Health System and as general, administrative and fundraising expenses. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by the donors to be maintained in perpetuity. Services and Supplies Contributed From Children s Hospital of Pittsburgh of the UPMC Health System Contributed services and supplies represent administrative services and supplies contributed to the Foundation from the Hospital. Contributed services are also included in general, administrative, and fund-raising expense in the statements of unrestricted revenues, expenses, and other changes in unrestricted net assets

11 Contributions to Children s Hospital of Pittsburgh of the UPMC Health System Contributions to the Hospital consists of the following: Annual Financial Support The Annual Financial Support for the years ended June 30, 2009 and 2008, primarily consisted of the 5% Annual Funding of $13,566 and $12,318, respectively, and funding for free care provided by the Hospital of $1,754 and $1,832, respectively. The 5% Annual Funding is required by the Affiliation Agreement (see Note 2) and is calculated as 5% of the rolling average corpus of certain investments, donor restricted funds on hand and proceeds of certain perpetual trusts. New Hospital Building Funding In accordance with the Affiliation Agreement, the Foundation provides the Hospital with all funds raised for the New Hospital Building Funding, as such amounts are collected and the donor intent has been met. Due to Children s Hospital of Pittsburgh of the UPMC Health System Return of Investments and Beneficial Interests Amounts due to the Hospital primarily represent certain investments and certain beneficial interests in perpetual trusts, amounting to $35,163 and $45,850 at June 30, 2009 and 2008, respectively, which are due to be returned to the Hospital by the Foundation effective November 2, 2009, which represents a date six months after the Completion Date of the New Hospital Building as required by the Affiliation Agreement. Additionally, other current amounts due to the Hospital represents funding and intercompany transfers for which the Hospital has met the requirements to receive funding, but the funds have not been transferred at the balance sheet date. Due to Children s Hospital of Pittsburgh of the UPMC Health System Additional Funding Commitment Amounts due to the Hospital primarily represents the unfunded liability under the Affiliation Agreement for New CHP as discussed in Note 2. The balances will be paid as restricted funds are received in cash or on November 2, Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates relate primarily to the allowance for doubtful pledge receivables. Recent Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes An Interpretation of FASB Standard No FIN No. 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. On February 1, 2008, the FASB issued FASB Staff Position FIN 48-3, Effective Date of FASB Interpretation No. 48 For Certain Nonpublic Enterprises, which deferred the implementation date for the Foundation. FIN No. 48, as amended, is effective for fiscal years beginning after December 15, The Foundation does not expect the provisions of FIN No. 48 to have a material impact on the Foundation s financial statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to measure certain financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, The Foundation did not apply SFAS No. 159 to any of its assets or liabilities. Accordingly, there was no material impact

12 In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 does not materially change the existing guidance, but introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were available to be issued. This disclosure is intended to alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS No. 165 is effective for fiscal years ending after June 15, The Foundation has adopted SFAS No. 165 for the fiscal year ending June 30, The Foundation has considered subsequent events through September 16, 2009, the date the financial statements were available for issuance. 4. MARKETABLE SECURITIES, ASSETS LIMITED AS TO USE BOARD DESIGNATED, AND DONOR-RESTRICTED FUND INVESTMENTS Marketable Securities, Assets Limited as to Use Board designated, and donor-restricted fund investments are stated at fair value. Amounts expected to be transferred to the Hospital in the next year are classified as current assets. A summary of the components of marketable securities, assets limited as to use Board designated, and donor-restricted fund investments at June 30, 2009 and 2008, is as follows: Cash and cash equivalents $ 21,537 $ 23,430 Master trusts held with Mellon Bank: Equity master trust 129, ,731 Bond master trust 64,077 63,141 Total $ 214,658 $ 280,302 Included in the above master trusts are alternative investments in an absolute return fund of funds with a value of $5,222 and $15,266 and investments in investment partnerships of $16,457 and $12,448 as of June 30, 2009 and 2008, respectively, whose fair values have been estimated by management in the absence of readily determinable fair values. Management s estimates are based on information provided by the fund managers or the general partners of these investments. The Foundation is obligated under certain limited partnership investment fund agreements to advance funding periodically up to specified levels. At June 30, 2009, the Foundation had unfunded commitments of $21,276 to a variety of private equity, natural resources, venture capital and international funds. The Foundation expects these commitments to be funded over approximately the next 8 years, depending on market conditions. Concentration of Credit Risks The Foundation uses a number of investment managers to manage its investments. The underlying investments are however widely diversified and management does not believe that a significant concentration of credit risks exists

13 5. FAIR VALUE MEASUREMENTS The Foundation adopted SFAS No. 157 effective June 1, This statement defines fair value, establishes a framework for measuring fair value, and expands the related disclosure requirements. This statement is applicable to other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS No. 157 defines fair value based upon an exit price model. SFAS No. 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Foundation s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The financial assets and liabilities of the Foundation that are reported at fair value on a recurring basis as of June 30, 2009, are as follows: Fair Value Measurements at Reporting Date Using Active Markets for Observable Unobservable Identical Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Marketable securities, assets limited as to use and long-term investments: Cash and cash equivalents $ 8,364 $ 8,364 $ - $ - Mutual funds equity based 95,975 95,975 Equities common and preferred stock 24,564 24,564 Fixed income corporate and government obligations 64,076 64,076 Alternative investments: Absolute return fund 5,222 5,222 Private investment partnerships 3,284 3,284 Long-short strategy fund 13,173 13,173 Total 214, ,979-21,679 Beneficial interests in perpetual trusts 12,875 12,875 Beneficial interests in charitable remainder trusts Total $ 227,946 $ 192,979 $ - $ 34,

14 The following table presents the net change in the assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category for the year ended June 30, 2009: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Beneficial Investments Investments Beneficial Interests in Absolute in Private Investments Interests in Charitable Return Investment in Long-Short in Perpetual Remaining Fund Partnerships Strategies Trusts Trusts Total Balance July 1, 2008 $ 15,266 $ 2,050 $ 10,398 $ 16,525 $ 590 $ 44,829 Total gains or losses (realized/unrealized) included in changes in net assets (1,960) (889) (4,225) (7,074) Purchases, issuances, and settlements (8,084) 2,123 7,000 1,039 Net change in valuation estimate (3,650) (177) (3,827) Balance a June 30, 2009 $ 5,222 $ 3,284 $ 13,173 $ 12,875 $ 413 $ 34,967 The amount of total gains or losses and changes in valuation estimates for the period included in changes in net assets that are attributable to the change in unrealized gains or losses relating to assets still held at the reporting date $ (1,960) $ (889) $ (4,225) $ (3,650) $ (177) $ (10,901) Gains and losses (realized and unrealized) included in changes in net assets for 2009 are reported in the consolidated statement of activities as follows: Gain (Loss) Total gains or losses included in changes in net assets for 2009: Unrestricted $ (4,041) Temporary restricted (3,028) Restricted (5) 6. PLEDGES RECEIVABLE $ (7,074) Pledges receivable consist of pledges for unrestricted, temporarily restricted, and permanently restricted purposes received by the Foundation on behalf of the Hospital. Temporarily restricted pledges are restricted to capital additions, research and other restricted programs. Permanently restricted pledges are restricted to research and other restricted endowments. Total pledges receivable as of June 30, 2009, consist of the following: Current Noncurrent Permanently restricted $ 243 $ 3,926 Temporarily restricted 6,545 7,857 Unrestricted Total pledges receivable $ 6,836 $ 11,

15 Total pledges receivable as of June 30, 2008, consist of the following: Current Noncurrent Permanently restricted $ 2,474 $ 5,130 Temporarily restricted 6,691 10,030 Unrestricted 43 Total pledges receivable $ 9,208 $ 15,160 Total pledges receivable as of June 30, 2009, are expected to be received as follows: Less Than One to Five More Than One Year Years Five Years Total Permanently restricted $ 243 $ 3,745 $ 181 $ 4,169 Temporarily restricted 6,545 7, ,402 Unrestricted Total pledges receivable $ 6,836 $ 10,906 $ 904 $ 18,646 Total pledges receivable as of June 30, 2008, are expected to be received as follows: Less Than One to Five More Than One Year Years Five Years Total Permanently restricted $ 2,474 $ 5,010 $ 120 $ 7,604 Temporarily restricted 6,691 9, ,721 Unrestricted Total pledges receivable $ 9,208 $ 14,714 $ 446 $ 24, TEMPORARILY AND PERMANENTLY RESTRICTED NET ASSETS Temporarily restricted net assets are available at June 30, 2009 and 2008, for the following purposes: Research $ 17,811 $ 30,425 Health care services and programs 20,350 30,814 $ 38,161 $ 61,

16 Permanently restricted net assets at June 30, 2009 and 2008, are restricted to: Investments to be held in perpetuity, the income from which is expendable to primarily support research $ 44,320 $ 40,464 Beneficial interests in perpetual trusts, the income from which is primarily unrestricted 6,107 7,881 Pledges receivable, the principal of which is to be held in perpetuity 4,168 7, ENDOWMENTS $ 54,596 $ 55,949 The Foundation s endowment consists of certain individual funds established for a variety of purposes. The endowment represents donor-restricted endowment funds. As required by generally accepted accounting principles (GAAP), net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. The Foundation adopted Financial Accounting Standards Board Staff Position (FSP) No , Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds, effective July 1, This FSP provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA), which serves as a model act approved by the Uniform Law Commission and which serves as a model act for states to use in enacting legislation. This FSP also improves disclosures about an organization s endowment funds. The enhanced disclosures required as a result of the adoption of this FSP have been incorporated within this footnote. Interpretation of Relevant Law The Foundation interprets the Commonwealth of Pennsylvania Act 141 ( PA Act 141 ) 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. Further it is also the Foundation s interpretation that the PA Act 141 allows for the use of 5% of the fair value of the gift to the extent that the investment return was not sufficient to fund the purpose of the gift during the year. As a result of this interpretation, the Foundation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, and (b) the original value of subsequent gifts to the permanent endowment. 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 Foundation in a manner consistent with the standard of prudence prescribed by PA Act

17 Reconciliation of net asset composition by type of fund as of June 30, 2009 and 2008: Temporarily Permanently 2009 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 25,699 $ 62,121 $ 87,820 Non-endowment funds: Unrestricted funds 116, ,919 Other donor restricted funds 9, ,919 Total $ 116,919 $ 35,457 $ 62,282 $ 214, Donor-restricted endowment funds $ - $ 53,109 $ 58,200 $ 111,309 Non-endowment funds: Unrestricted funds 159, ,432 Other donor restricted funds 9, ,561 Changes in endowment net assets for the years ended June 30, 2009 and 2008: 2009 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets beginning of year $ - $ 53,109 $ 58,200 $ 111,309 Investment return (21,179) (21,179) Contributions 3,921 3,921 Use of endowment assets for expenditures Annual transfer for operations (6,231) (6,231) Endowment net assets end of year $ - $ 25,699 $ 62,121 $ 87, Endowment net assets beginning of year $ - $ 67,850 $ 54,916 $ 122,766 Investment return (9,597) (9,597) Contributions 3,284 3,284 Use of endowment assets for expenditures Annual transfer for operations (5,144) (5,144) Endowment net assets end of year $ - $ 53,109 $ 58,200 $ 111,

18 Funds With Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or PA Act 141 requires the Foundation to retain as a fund of perpetual duration. In accordance with generally accepted accounting principles, deficiencies of this nature that are reported in temporarily restricted net assets were $2,796 as of June 30, These deficiencies resulted from unfavorable market fluctuations that occurred over the past 18 months. There were no such deficiencies as of June 30, Return Objectives and Risk Parameters The investment philosophy of the Foundation is based on a disciplined, consistent, and diversified approach utilizing multiple asset classes and multiple managers. The Foundation s intent is to accommodate styles and strategies considered reasonable and prudent. Assets are invested with investment managers who invest in mutual funds, equity instruments, governmental and corporate debt instruments. Additionally, a portion of the funds are invested in alternative investments which include an investment in an absolute return fund, investments in investment partnerships and investments in long/short strategies partnerships. The primary objective is to grow the assets to ensure the Foundation can continue to support the Hospital s operations. Strategies Employed for Achieving Objectives To satisfy its long-term rate of return objectives, the Foundation relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Foundation targets a diversified asset allocation that is set by the Foundation s Finance and Investment Committee. The investment assets are invested according to the following asset allocation guideline: Current Targets Long-Term Future Target Range Domestic large equity % 15% 25% Domestic small cap equity International equity Emerging markets Intermediate term bonds Hedge funds Private equity Spending Policy and How the Investment Objectives Relate to Spending Policy PA Act 141 states that provided an organization adopts and follows an investment policy seeking a total return for the assets held, the organization may annually select a spending percentage between 2% and 7% of the three year average fair market value of the assets held by an organization. The Affiliation Agreement requires that the Foundation, for a minimum of 20 years, will provide annual financial support equal to 5% of the rolling 12 quarter average of the corpus (defined as the value of all of the Foundation s assets less any funds held by the Foundation where the donor has directed a different spending provision). Such calculation includes the endowment funds. Any shortfalls of earnings may be made from excess earnings in prior years

19 9. FUNCTIONAL EXPENSES The functional expenses for the years ended June 30, 2009 and 2008, were as follows: General and administrative expenses $ 1,159 $ 1,200 Fund-raising expenses 3,818 2,935 ****** $ 4,977 $ 4,