CENTRAL ADMINISTRATIVE OFFICE OF THE DIOCESE OF CLEVELAND FINANCIAL REPORT. JUNE 30, 2017 and 2016

Transcription

1 CENTRAL ADMINISTRATIVE OFFICE OF THE DIOCESE OF CLEVELAND FINANCIAL REPORT JUNE 30, 2017 and 2016

2 CONTENTS INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL STATEMENTS 1 FINANCIAL STATEMENTS Statements of Financial Position 2 Statements of Activities 3-4 Statements of Cash Flows 5 Notes to Financial Statements 6-15 Page

3 Independent Auditors' Report Most Reverend Nelson J. Perez Roman Catholic Bishop of The Catholic Diocese of Cleveland Cleveland, Ohio We have audited the accompanying financial statements of the Central Administrative Office of The Diocese of Cleveland ("CAO") (a nonprofit organization), which comprise the statements of financial position as of June 30, 2017 and 2016, and the related statements of activities and 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the 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 auditors consider 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 the CAO as of June 30, 2017 and 2016, 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. Cleveland, Ohio October 31,

4 STATEMENTS OF FINANCIAL POSITION June 30, 2017 and 2016 ASSETS Cash and cash equivalents $ 16,349,160 $ 14,170,939 Investments 103,746,637 94,931,893 Accounts receivable, net 669, ,609 Property, plant and equipment, net 5,244,894 5,315,485 Other assets 188, ,662 Assets held as custodian 3,321,826 3,684,877 Total assets $ 129,520,119 $ 118,814,465 LIABILITIES AND NET ASSETS Liabilities: Accounts payable $ 851,265 $ 525,200 Accrued expenses and other liabilities 441, ,577 Funds held for others 3,321,826 3,684,877 Total liabilities 4,614,283 4,611,654 Net assets: Unrestricted 21,400,393 19,497,313 Temporarily restricted 60,903,786 52,863,766 Permanently restricted 42,601,657 41,841,732 Total net assets 124,905, ,202,811 Total liabilities and net assets $ 129,520,119 $ 118,814,465 The accompanying notes are an integral part of these financial statements. -2-

5 STATEMENT OF ACTIVITIES Year Ended June 30, 2017 Temporarily Permanently Unrestricted Restricted Restricted Total REVENUES Assessments $ 15,259,570 $ 15,259,570 Endowment and other contributions $ 1,052,289 $ 759,925 1,812,214 Endowment and other investment income 27,497 1,699,768 1,727,265 Net realized and unrealized gains on investments 21,945 8,088,109 8,110,054 Royalties and lease income 896, ,198 Other operating revenues 2,269,736 2,269,736 Mission, ministry and other 807, ,452 Net assets released from restrictions 2,800,146 (2,800,146) - Total revenues 22,082,544 8,040, ,925 30,882,489 OPERATING EXPENDITURES Salaries and wages 6,307,945 6,307,945 Taxes and benefits 1,760,753 1,760,753 Mission, ministry and other 1,780,777 1,780,777 Priests - education and care 1,058,908 1,058,908 Occupancy, utilities and depreciation 943, ,763 Professional fees 952, ,830 Assessments and Holy See 461, ,533 Equipment, maintenance and technology 514, ,513 Parish and school carrying costs 19,648 19,648 Administrative 1,135,097 1,135,097 Total operating expenditures 14,935,767 14,935,767 DIRECT SUBSIDIES Seminaries and Center for Pastoral Leadership 2,950,697 2,950,697 Education 616, ,744 Catholic Community Foundation 874, ,000 Cathedral 223, ,136 Diocese of Cleveland Facilities Services 579, ,120 Total direct subsidies 5,243,697 5,243,697 Total operating expenditures and direct subsidies 20,179,464 20,179,464 CHANGE IN NET ASSETS 1,903,080 8,040, ,925 10,703,025 NET ASSETS AT BEGINNING OF YEAR 19,497,313 52,863,766 41,841, ,202,811 NET ASSETS AT END OF YEAR $ 21,400,393 $ 60,903,786 $ 42,601,657 $ 124,905,836 The accompanying notes are an integral part of these financial statements. -3-

6 STATEMENT OF ACTIVITIES Year Ended June 30, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total REVENUES Assessments $ 15,054,235 $ 15,054,235 Endowment and other contributions $ 2,088,029 $ 1,879,828 3,967,857 Endowment and other investment income 7,450 1,434,461 1,441,911 Net realized and unrealized losses on investments (3,708) (1,339,573) (1,343,281) Royalties and lease income 915, ,004 Other operating revenues 1,483,607 1,483,607 Mission, ministry and other 845, ,158 Net assets released from restrictions 3,000,831 (3,000,831) - Total revenues 21,302,577 (817,914) 1,879,828 22,364,491 OPERATING EXPENDITURES Salaries and wages 6,306,758 6,306,758 Taxes and benefits 1,775,649 1,775,649 Mission, ministry and other 1,722,333 1,722,333 Priests - education and care 995, ,281 Occupancy, utilities and depreciation 929, ,788 Professional fees 906, ,712 Assessments and Holy See 469, ,462 Equipment, maintenance and technology 413, ,880 Parish and school carrying costs 216, ,515 Administrative 1,256,507 1,256,507 Total operating expenditures 14,992,885 14,992,885 DIRECT SUBSIDIES Seminaries and Center for Pastoral Leadership 3,238,657 3,238,657 Education 535, ,000 Catholic Community Foundation 997, ,500 Cathedral 370, ,000 Diocese of Cleveland Facilities Services 579, ,120 Total direct subsidies 5,720,277 5,720,277 Total operating expenditures and direct subsidies 20,713,162 20,713,162 CHANGE IN NET ASSETS 589,415 (817,914) 1,879,828 1,651,329 NET ASSETS AT BEGINNING OF YEAR 18,907,898 53,681,680 39,961, ,551,482 NET ASSETS AT END OF YEAR $ 19,497,313 $ 52,863,766 $ 41,841,732 $ 114,202,811 The accompanying notes are an integral part of these financial statements. -4-

7 STATEMENTS OF CASH FLOWS Years Ended June 30, 2017 and CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 10,703,025 $ 1,651,329 Adjustments to reconcile change in net assets to net cash provided by operating activities: Net realized and unrealized (gains) losses on investments (8,110,054) 1,343,281 Depreciation 251, ,618 Contributions restricted for long-term investment (759,925) (1,879,828) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (141,639) 1,786,982 (Increase) decrease in other assets (4,692) 24,450 Increase (decrease) in accounts payable 326,065 (354,305) Increase (decrease) in accrued expenses and other liabilities 39,615 (31,959) Net cash provided by operating activities 2,303,648 2,756,568 CASH FLOWS FROM INVESTING ACTIVITIES Increase in investments, net (704,690) (2,405,323) Additions to property, plant and equipment (180,662) (386,863) Net cash used in investing activities (885,352) (2,792,186) CASH FLOWS FROM FINANCING ACTIVITIES Contributions restricted for long-term investment 759,925 1,879,828 Principal payments on note payable - (191,563) Net cash provided by financing activities 759,925 1,688,265 INCREASE IN CASH AND EQUIVALENTS 2,178,221 1,652,647 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 14,170,939 12,518,292 CASH AND EQUIVALENTS AT END OF YEAR $ 16,349,160 $ 14,170,939 The accompanying notes are an integral part of these financial statements. -5-

8 NOTES TO FINANCIAL STATEMENTS Note 1. Organization and Operations The Central Administrative Office ("CAO") is organized under the stewardship of the Bishop of The Diocese of Cleveland (the "Diocese"). The CAO serves parishes and other Diocesan organizations by providing assistance in the administration of pastoral, education, and vocational services; providing funding for religious education and vocation development, community and human development, Diocesan schools, and charitable activities; and providing administrative support in areas of finance, legal matters, human resources, facilities management, and technology. The CAO is also responsible for all financial, investment, and real estate transactions at the Diocesan level as delegated to the CAO by the Bishop. The Diocese is an ecclesiastical territory which encompasses eight counties in Northern Ohio. Title to all parish, parish school, and church properties in the Diocese is held in the name of the Bishop and his successors. The Bishop has ecclesiastical responsibility for approximately 185 parishes and several other institutions including Diocesan schools, seminaries, cemeteries, Catholic Charities, Facilities Services, Catholic Community Foundation, and related entities. Each of these activities, as well as parishes and schools, are an operating entity distinct from the CAO and are not included in the accompanying audited financial statements. Each entity maintains separate financial records and carries out its own services and programs. Note 2. Summary of Significant Accounting Policies Accrual Basis: The accompanying financial statements have been prepared on the accrual basis of accounting and, accordingly, reflect all significant receivables, payables, and other liabilities. Basis of Presentation: The CAO's financial statements are presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The CAO is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. A description of these categories follows: Unrestricted Net Assets Includes the net assets that are free of donor-imposed restrictions and are neither permanently restricted nor temporarily restricted. Temporarily Restricted Net Assets Includes the net assets from contributions or other inflows where the use is limited by donor-imposed restrictions that either expire by the passage of time or can be fulfilled and removed by the actions of the CAO. Permanently Restricted Net Assets Includes the net assets from contributions or other inflows where the use is limited by donor-imposed restrictions that neither expire by the passage of time nor can be fulfilled or removed by actions of the CAO. -6-

9 Note 2. Summary of Significant Accounting Policies (Continued) Contributions and Grants: Contributions and grants received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. Support that is restricted by the donor is reported as an increase in unrestricted net assets if the restriction expires in the reporting period in which the support is recognized. All other donor-restricted support is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. Revenues: The principal source of operating revenue for the CAO is parish and school assessments. The amount levied against each parish is determined by applying a specific formula to parish revenues as defined by the Diocese. The amount levied against each school is determined by the number of students enrolled. Assessments from parishes and schools are recorded as revenues when received. All other revenues are recorded when earned. Cash and Equivalents: The CAO considers all highly liquid investments, with initial maturities of three months or less, to be cash equivalents. These investments are carried at cost, which approximates market value. At June 30, 2017 the CAO also owns a high-yield certificate of deposit that matures on April 27, The certificate of deposit includes a feature that permits the CAO to put the deposit back to the bank with thirty days advance notice and with no interest penalty. Accordingly, the deposit is recorded as a cash equivalent. Accounts Receivable: Accounts receivable represent advances to charitable institutions (primarily parishes and schools) associated with or controlled by the Diocese, as well as the Catholic Community Foundation in support of the Rooted in Faith capital campaign. Significant advances have been made over several years in support of parish and school operations and capital repair needs and in support of closed facilities held for current or future sale. Repayment is generally made when parish cash flow permits or upon sale of a closed facility as cash flow permits. The CAO provides for uncollectible accounts receivable using the specific identification method. Management estimates an allowance of $5,332,326 and $7,558,260 as of June 30, 2017 and 2016, respectively. The estimate is based on management's review of individual accounts receivable and an assessment of the CAO's historical evidence of collections and evaluation of the parishes', schools' or other entity's financial condition. Bad debt expense, net of recoveries for the years ended June 30, 2017 and 2016 totaled $15,038 and $184,708, respectively, and is recorded in parish and school carrying costs. -7-

10 Note 2. Summary of Significant Accounting Policies (Continued) Concentration of Credit Risk: Financial instruments which potentially subject the CAO to concentration of credit risk consist principally of temporary cash investments, receivables, and marketable securities. The CAO places its temporary cash and other investments with national financial institutions and securities dealers, which may exceed federally and privately insured amounts at times. Cash accounts with financial institutions are insured by the Federal Deposit Insurance Corporation up to federally insured limits. Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Risks, Uncertainties and Contingencies: The CAO maintains investments in U.S. Government obligations, corporate bonds, equities, and mortgage backed securities. These investment securities are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statement of financial position. The Diocese is a co-borrower or guarantor on bank loans where several individual parishes or schools are the primary borrowers. The aggregate exposure to the Diocese at June 30, 2017 is $5.6 million. The Diocese deems it unlikely that any of the amounts of guarantee will be called by the lending institution. Property, Plant, and Equipment: Property, plant, and equipment are stated at cost or fair market value at the date of donation. Depreciation is computed over the estimated useful life of the asset using the straight-line method. Maintenance, repairs, and minor renewals are charged to expense when incurred, while additions and major betterments are capitalized. Accrued Compensation Obligations: Certain eligible employees of age 55 or older, with a minimum of ten years' experience, are entitled to accumulated sick pay compensation upon retirement from the CAO. The accrued compensation obligation at June 30, 2017 and 2016 was $360,426 and $320,811, respectively, and represents those employees who have reached both the required eligible age and years of service. The obligation is based on the total compensation due to each employee based upon current salary, years of service, and eligible sick days. -8-

11 Note 2. Summary of Significant Accounting Policies (Continued) Investments and Fair Value of Financial Instruments: GAAP requires that investments in equity securities with readily determinable fair values and all investments in debt securities be reported at fair value with realized and unrealized gains and losses included in the statements of activities. Investment income has been recognized in the statements of activities in accordance with the terms of any endowment restrictions. Investments traded on a national securities exchange are valued at the last reported sales price on the last business day of the fiscal year; investments traded on a national securities exchange for which no sale was reported on that date and investments traded on the overthe-counter market are valued at the last reported bid prices; and investments not having an established market are valued at fair value based upon the advice of the investment advisor. The carrying values of receivables, accounts payable, and accrued expenses approximate fair value because of the short maturity of these financial instruments. The CAO estimates the fair value of financial instruments using available market information and other generally accepted valuation methodologies. Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are classified into three levels: Level 1 Quoted market prices in active markets for identical assets and liabilities Level 2 Observable market-based inputs or unobservable inputs that are corroborated by market data Level 3 Unobservable inputs in which little or no market data exists The asset's or liability's fair value measurement level is based on the lowest level of any input that is significant to the fair value measurement. The methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, while the CAO believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following tables set forth by level within the fair value hierarchy the CAO's financial assets and liabilities that were accounted for at a fair value on a recurring basis as of June 30, 2017 and The CAO's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and their placement within the fair value hierarchy levels. The tables do not include cash on hand or other assets and liabilities that are measured at historical cost or any basis other than fair value; for these items, their carrying value estimates fair value. -9-

12 Note 2. Summary of Significant Accounting Policies (Continued) Investments and Fair Value of Financial Instruments (Continued): June 30, 2017 Level 1 Level 2 Level 3 Total Assets Assets held as custodian $ 2,436,808 $ 884,204 $ 814 $ 3,321,826 Investments 7,828,872 93,333,122 2,584, ,746,637 June 30, 2016 Level 1 Level 2 Level 3 Total Assets Assets held as custodian $ 2,868,143 $ 808,529 $ 8,205 $ 3,684,877 Investments 7,549,119 84,696,004 2,686,770 94,931,893 The CAO invests in cash and cash equivalents, equities, fixed income securities, and other securities with quoted prices in active markets that are considered to be Level 1 inputs. Level 2 inputs consist primarily of collective pooled investments and certificates of deposit, further detailed in Note 3. The fair values of investments in the collective pooled investments are valued based on their reported Net Asset Value ("NAV"). The NAV is based on the market value of the underlying investments, adjusted for charges and expenses, and is classified as Level 2 of the fair value hierarchy. Level 3 inputs consist primarily of land held as investments (endowment investments) and notes receivable (assets held as custodian). The land held for investment is based on a historical valuation of the land. The note receivable valuation is generally based upon data that includes the amount due from a buyer in a seller financing agreement between a Diocesan organization and an outside party. The following table summarizes changes of the CAO's Level 3 inputs: Assets Held as Custodian Endowment Investments ` Beginning balance July 1, 2015 $ 202,376 $ 2,184,993 Additions - 555,827 Payments (194,171) (54,050) Ending balance June 30, 2016 $ 8,205 $ 2,686,770 Beginning balance July 1, 2016 $ 8,205 $ 2,686,770 Additions - 239,173 Payments (7,391) (341,300) Ending balance June 30, 2017 $ 814 $ 2,584,

13 Note 2. Summary of Significant Accounting Policies (Continued) Subsequent Events: The CAO has evaluated all events subsequent to the statement of financial position date of June 30, 2017, through October 31, 2017, which is the date these financial statements were available to be issued. Note 3. Investments and Endowment Funds At June 30, 2017 and 2016, the following is the composition of investments at fair value: Assets held as custodian: Cash and money market $ 2,436,808 $ 2,868,143 Certificates of deposit 205, ,998 Collective pooled investments 678, ,531 Notes receivable 814 8,205 $ 3,321,826 $ 3,684,877 Custodial assets and liabilities include funds held by the CAO for endowment or long-term investments on behalf of other Diocesan organizations, as well as assets from closed parishes which are held pending distribution. The notes receivable represent parish receivables related to financing that was granted to buyers of closed parish assets that are being held and serviced by the CAO on behalf of the parishes. Investments at fair value: Investments $ 7,828,872 $ 7,549,119 Certificates of deposit 1,000,000 1,000,000 Collective pooled investments 92,333,122 83,696,004 Loan receivable 603, ,627 Land held as investments 1,981,143 1,981,143 $ 103,746,637 $ 94,931,893 The CAO places great importance on risk reduction through diversification by asset class and management style. Investment results are measured using a five year period or a market cycle. Shorter time periods may be used to determine the trend of our performance or deficiencies. The basic investment performance objective for the portfolio is to obtain a total return, net of all investment related fees, over a five year moving average that exceeds the total return of the respective index or benchmark for each asset class in the portfolio. In addition, each manager's performance should be at or above the median of their peer universe. -11-

14 Note 3. Investments and Endowment Funds (Continued) The investment strategy for asset allocation targets 60% equity and 40% fixed income investments and also provides for the holding of cash to provide liquidity and miscellaneous land investments. The collective pooled investments actual allocation approximates the 60% equity and 40% fixed income target. The policy provides for further diversification by various investment segments within the basic asset allocation to recognize that a variety of management styles are appropriate to mitigate risk and achieve targeted returns. Market value fluctuations may cause variations from the basic strategic asset allocation policy. Rebalancing of the portfolio is done on a periodic basis generally when the asset allocation percentages vary from the policy percentages by approximately 5% or more. The CAO does not deem it acceptable to time the market with tactical allocation shifts. The intention of this policy is to avoid short-term judgments that introduce significant unplanned risk. The investment policy mandates moral and social investment responsibility consistent with the Socially Responsible Investment Guidelines of the United States Conference of Catholic Bishops. Distributions from endowment funds are spent in compliance with the donor's restrictions applicable to the funds being distributed. Annual distributions from endowment funds are available from endowment interest, dividends, and capital appreciation, which are generally recognized as unrestricted and temporarily restricted endowment assets. The distribution policy permits annual distributions equal to 4% of the endowment fund's twelve quarter average market value calculated as of the December 31 date that precedes the beginning of the fiscal year. Investment assets for the years ended June 30, 2017 and 2016 were as follows: 2017 Temporarily Permanently Unrestricted Restricted Restricted Total Investment assets, beginning of year $ 226,395 $ 52,863,766 $ 41,841,732 $ 94,931,893 Investment return: Endowment and other investment income 2,874 1,699,768-1,702,642 Net appreciation (realized and unrealized) 11,925 8,088,109-8,100,034 Total investment return 14,799 9,787,877-9,802,676 Endowment and other contributions - 1,052, ,925 1,812,214 Appropriations of endowment assets for expenditure - (2,800,146) - (2,800,146) Investment assets, end of year $ 241,194 $ 60,903,786 $ 42,601,657 $ 103,746,

15 Note 3. Investments and Endowment Funds (Continued) 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Investment assets, beginning of year $ 226,267 $ 53,681,680 $ 39,961,904 $ 93,869,851 Investment return: Endowment and other investment income 2,143 1,434,461-1,436,604 Net depreciation (realized and unrealized) (2,015) (1,339,573) - (1,341,588) Total investment return ,888-95,016 Endowment and other contributions - 2,088,029 1,879,828 3,967,857 Appropriations of endowment assets for expenditure - (3,000,831) - (3,000,831) Investment assets, end of year $ 226,395 $ 52,863,766 $ 41,841,732 $ 94,931,893 Note 4. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets consist primarily of funds distributed at the discretion of the Bishop. Permanently restricted net assets are endowment assets that are invested with the income available for distributions. June 30, 2017 June 30, 2016 Temporarily Permanently Temporarily Permanently Restricted Restricted Restricted Restricted Bishop's Fund $ 13,229,360 $ - $ 12,163,071 $ - Parish Assistance Fund 4,179,568-4,253,838 - Clergy Health & Senior Priest Funds 2,188,009-1,523,641 - Seminary Fund 1,534,537-1,374,374 - Communications Funds 612, ,800 - Worship Fund 2,035,088-1,823,636 - Diaconate Fund 410, ,574 - Media & Technology 622, ,006 - Connecting to the People Fund 2,880,701-2,600,389 - Education of Priests 2,348,587 3,591,044 1,881,436 3,429,501 Priestly Formation 25,424,156 29,973,071 21,378,497 29,779,735 Sustaining Catholic Presence 762,077 4,207, ,678 3,803,453 Retired Priests Support 110, ,293 1, ,293 Other 4,565,781 3,887,750 3,991,705 3,886,750 $ 60,903,786 $ 42,601,657 $ 52,863,766 $ 41,841,

16 Note 5. Property, Plant, and Equipment Property, plant, and equipment at June 30, 2017 and 2016 consist of the following: Land $ 1,726,905 $ 1,726,905 Land held for future use 209, ,729 Buildings 3,273,095 3,273,095 Building improvements 2,095,334 1,997,520 Tenant improvements 974, ,303 8,279,214 8,098,552 Less: accumulated depreciation 3,034,320 2,783,067 Property, plant and equipment, net of accumulated depreciation $ 5,244,894 $ 5,315,485 Depreciation expense $ 251,253 $ 216,618 Note 6. Royalties, Lease, Endowment, Net Assets Released, and Other Revenues During the past seven years the Diocese of Cleveland conducted a diocesan-wide capital campaign, known as Rooted in Faith, Forward in Hope ("RIF"), through the Catholic Community Foundation which generally included a two-year pledge program and five year redemption period. Receipts from that campaign that are primarily related to the formation/education of priests and evangelization/outreach in the Diocese are contributed to the CAO and recorded as temporarily or permanently restricted income, as applicable, and added to the appropriate restricted accounts or endowments. Total RIF income received by the CAO in the years ended June 30, 2017 and 2016 was $1,615,805 and $2,299,834, respectively. The Diocese leases certain land to an unrelated party under a lease agreement until Minimum annual rentals of $348,000 were received for the years ended June 30, 2017 and In accordance with the terms of the lease, the annual rent will be $348,000 for the period August 1, 2012 through July 31, 2017 and $393,126 for the period August 1, 2017 through July 31, 2022, at which time the annual rent will be recalculated. At the termination of the lease, any land improvements and buildings will transfer to the Diocese. Other unrestricted revenue includes receipts from various Diocesan benefit and insurance plans as a fee for administrative services provided by the CAO to those plans, which totaled $422,673 and $432,834 in 2017 and 2016, respectively as well as contributions and advertising revenue related to the Diocesan magazine which totaled $720,724 and $560,653 in 2017 and 2016, respectively. In the years ended June 30, 2017 and 2016, $0 and $192,293, respectively, in estate gifts were received for the support of retired priests. In 2017, the sale of the former Chanel High School netted a gain of $631,000 and is recorded in other operating revenues. -14-

17 Note 6. Royalties, Lease, Endowment, Net Assets Released, and Other Revenues (Continued) Net assets released were $2,800,146 and $3,000,831 for the years ended June 30, 2017 and 2016, respectively. Net assets released consist primarily of endowment earnings used in support of the seminaries, education and care of priests, and various Rooted in Faith initiatives. Note 7. Employee Benefits Employees of the CAO are covered by the Group Life, Unemployment, Workers' Compensation, and Healthcare plans of the Diocese of Cleveland. The expense recorded related to these items was $851,095 and $843,024 for the years ended June 30, 2017 and 2016, respectively. Employees are participants of the Diocese of Cleveland Pension Plan, the Diocese of Cleveland Priests' Retirement Plan, or the Catholic Charities Defined Contribution Plan. The expense related to these items was $509,040 and $520,344 for the years ended June 30, 2017 and 2016, respectively. Note 8. Income Taxes The Diocese is a tax-exempt organization under provisions of Section 501(c)(3) of the Internal Revenue Code and similar provisions of the State Code. Therefore, no provision for income taxes has been made. -15-