HARBOR DEVELOPMENTAL DISABILITIES FOUNDATION, INC.

Transcription

1 HARBOR DEVELOPMENTAL DISABILITIES FOUNDATION, INC. AUDITORS REPORTS REQUIRED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS AND OFFICE OF MANAGEMENT AND BUDGET CIRCULAR A-133 AND RELATED INFORMATION Years Ended June 30, 2012 and 2011

2 TABLE OF CONTENTS Independent Auditors Report Financial Statements: Statements of Financial Position... 3 Statements of Activities... 4 Statements of Functional Expenses Statements of Cash Flows... 7 Notes to Financial Statements Supplementary Financial Information: Schedule of Expenditures of Federal Awards Schedule of Consolidated Statements of Activities 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 Independent Auditors Report on Compliance With Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A Schedule of Findings and Questioned Costs Schedule of Prior Year Audit Findings Page

3 INDEPENDENT AUDITORS REPORT Board of Trustees Harbor Developmental Disabilities Foundation, Inc. Torrance, California We have audited the accompanying statement of financial position of Harbor Developmental Disabilities Foundation, Inc. (the Foundation) as of June 30, 2012, and the related statements of activities, functional expenses, and cash flows for the year 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 audit. The financial statements of the Foundation as of June 30, 2011 and for the year then ended, were audited by other auditors whose report dated November 15, 2011, expressed an unqualified opinion on those statements. We conducted our audit 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 the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harbor Developmental Disabilities Foundation, Inc. as of June 30, 2012, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated November 13, 2012, on our consideration of the Foundation 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 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 internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

4 Board of Trustees Harbor Developmental Disabilities Foundation, Inc. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the financial statements. The accompanying schedule of consolidated statements of activities for the year ended June 30, 2011 is also 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 Unites States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements taken as a whole. San Francisco, California November 13,

5 STATEMENTS OF FINANCIAL POSITION June 30, ASSETS Cash and cash equivalents $ 1,362,181 $ 15,257,452 Cash - client trust funds (Note 3) 1,252,100 1,442,998 Certificates of deposit (Note 2) 67,379 67,379 Contract receivable (Note 4) 37,728,467 25,060,599 Receivable from Intermediate Care Facilities (Note 5) 7,500,941 7,656,987 Other receivables 64,329 63,918 Deferred costs for accrued vacation and other leave benefits 800, ,379 Deferred cost for rent liability 2,897,338 1,696,240 Total assets $ 51,673,183 $ 52,207,952 LIABILITIES AND NET ASSETS Liabilities: Accounts payable $ 12,123,071 $ 11,669,990 Accrued salaries 226, ,887 Contract advance (Note 7) 27,258,322 28,829,504 Payable to Department of Developmental Services (Note 5) 7,388,869 7,726,054 Accrued vacation and other leave benefits 800, ,379 Deferred rent 2,897,338 1,696,240 Unexpended client trust funds 847, ,598 Total liabilities 51,541,941 52,069,652 Commitments and contingencies (Notes 10 and 11) Unrestricted net assets 131, ,300 Total liabilities and net assets $ 51,673,183 $ 52,207,952 See notes to financial statements. 3

6 STATEMENTS OF ACTIVITIES Revenue and support: Years Ended June 30, (Consolidated) Federal awards $ 76,072,157 $ 72,179,228 Grants 57,328,151 54,700,742 Interest 35, ,436 Donations 31,377 29,930 Other income 311, ,471 Total revenue and support 133,777, ,205,807 Expenses: Program services: Direct client services 131,458, ,698,571 Supporting services: General and administrative 2,326,163 4,426,550 Total expenses 133,785, ,125,121 Change in net assets (7,058) ,080,686 Unrestricted net assets Beginning of year 138,300 18,704 Effect of deconsolidation of Del Harbor (Note 1) - (961,090) End of year $ 131,242 $ 138,300 See notes to financial statements. 4

7 STATEMENT OF FUNCTIONAL EXPENSES Year Ended June 30, 2012 Program Supporting Services Services Direct Client General and Total Services Administrative Expenses Salaries and related expenses: Salaries $ 11,146, $ 947,683 $ 12,094,364 Employee health and retirement benefits 2,578, ,183 2,797,222 Payroll taxes 151,991 12, ,913 Total salaries and related expenses 13,876,711 1,179,788 15,056,499 Purchase of services: Other purchased services 56,134,254-56,134,254 Residential care facilities 38,254,861-38,254,861 Day programs 15,400,145-15,400,145 Facility rent 4,063, ,489 4,409,141 Equipment and facility maintenance 1,483, ,128 1,609,654 Contract and consultant fee 1,105,501 93,989 1,199,490 General office expenses 432,335 36, ,113 Communication 282,955 24, ,012 Equipment purchases 163,379 13, ,269 Insurance 74,004 48, ,270 Staff travel 78, ,632 84,633 General 67, , ,952 Accounting fees - 52,500 52,500 Printing 42,299 3,596 45,895 Legal fees - 19,251 19,251 Board expenses - 18,083 18,083 Total expenses $ 131,458,859 $ 2,326,163 $ 133,785,022 See notes to financial statements. 5

8 STATEMENT OF FUNCTIONAL EXPENSES Year Ended June 30, 2011 Salaries and related expenses: Program Services Supporting Services Direct Client General and Total Services Administrative Expenses (Consolidated) Salaries $ 10,941,918 $ 940,298 $ 11,882,216 Employee health and retirement benefits 2,555, ,581 2,774,763 Payroll taxes 167,654 14, ,061 Total salaries and related expenses 13,664,754 1,174,286 14,839,040 Purchase of services: Other purchased services 52,008,874-52,008,874 Residential care facilities 36,251,495-36,251,495 Day programs 15,765,622-15,765,622 Interest expense - 2,085,476 2,085,476 Equipment and facility maintenance 1,485, ,623 1,612,732 Contract and consultant fee 658,777 90, ,346 Equipment purchases 470,495 40, ,927 General 445,790 38, ,099 Depreciation and amortization - 462, ,917 Communication 300,899 25, ,757 Facility rent 272,080 23, ,461 Insurance 83,931 90, ,613 General office expenses 48,890 87, ,523 Utilities 125,573 10, ,364 Staff travel 83,020 7,134 90,154 Accounting fees - 81,354 81,354 Legal fees - 64,871 64,871 Printing 33,262 2,858 36,120 Board expenses - 12,376 12,376 Total expenses $ 121,698,571 $ 4,426,550 $ 126,125,121 See notes to financial statements. 6

9 STATEMENTS OF CASH FLOWS Cash flows from operating activities: (Consolidated) Change in net assets $ (7,058) $ 1,080,686 Adjustments to reconcile change in net assets to net cash provided (used) by operating activities: Depreciation - 434,244 Amortization of bond issuance costs - 28,673 (Increase) decrease in assets: Contract receivable (Note 4) (12,667,868) 8,692,342 Other receivables (411) 68,415 Deferred cost for rent liability - (1,079,436) Increase (decrease) in liabilities: Accounts payable 453,081 1,503,235 Accrued salaries (55,425) (268,043) Payable to Department of Developmental Services (Note 5) (181,139) 69,067 Unexpended client trust funds (56,167) 118,480 Total adjustments (12,507,929) 9,566,977 Net cash provided (used) by operating activities (12,514,987) 10,647,663 Cash flows from investing activities: Deconsolidation of Del Harbor - (1,035,271) Purchase of land, building, and improvements - (607,966) Change in restricted cash - 356,265 Net cash used by investing activities - (1,286,972) Cash flows from financing activities: Proceeds from contract advance 31,147,422 32,373,929 Payment of contract advance (32,718,604) (32,217,441) Net cash provided (used) by financing activities (1,571,182) 156,488 Net increase (decrease) in cash Cash and cash equivalents: Years Ended June 30, and cash equivalents (14,086,169) 9,517,179 Beginning of year 16,700,450 7,183,271 End of year $ 2,614,281 $ 16,700,450 Cash and cash equivalents $ 1,362,181 $ 15,257,452 Cash - client trust funds (Note 3) 1,252,100 1,442,998 $ 2,614,281 $ 16,700,450 See notes to financial statements. 7

10 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Purpose and Organization Harbor Developmental Disabilities Foundation, Inc. (the Foundation), doing business as Harbor Regional Center, was incorporated on May 3, 1977 as a California nonprofit corporation for the purpose of operating Harbor Regional Center and related activities. Prior to incorporation, the Foundation was operated by a medical association. The Foundation was organized in accordance with the provisions of the Lanterman Developmental Disabilities Services Act (the Act) of the Welfare and Institutions Code of the State of California. In accordance with the Act, the Foundation provides diagnostic evaluations, client service coordination, and lifelong planning services for persons with developmental disabilities and their families. The Foundation is one of 21 regional centers within the State of California system and serves the Los Angeles County Health Districts of Bellflower, Harbor, Long Beach, and Torrance. The Act includes governance provisions regarding the composition of the Regional Center s Board of Trustees. The Act states that the Board shall be comprised of individuals with demonstrated interest in, or knowledge of, developmental disabilities, and other relevant characteristics, and requires that a minimum of 50 percent of the governing Board be persons with developmental disabilities or their parents or legal guardians; and that no less than 25 percent of the members of the governing Board shall be persons with developmental disabilities. In addition, a member of a required advisory committee composed of persons representing the various categories of providers from which the Foundation purchases client services, shall serve as a member of the Foundation s Board. To comply with the Act, the Board of Trustees includes persons with developmental disabilities, or their parents or legal guardians, who receive services from the Foundation and a client service provider of the Foundation. The Foundation s mission statement is as follows: The Foundation provides quality services, support, information and choices for people with developmental disabilities and their families, to promote their participation as valued neighbors in our communities. State of California Contract The Foundation operates under an annual cost-reimbursement contract with the Department of Developmental Services (DDS) of the State of California under the Act. Maximum expenditures under the contract are limited to the contract amount plus interest earned. The Foundation is required to have DDS approval for certain expenses. The Foundation is required to maintain accounting records in accordance with the Regional Center Fiscal Manual issued by DDS. In the event of termination or nonrenewal of the contract, the State of California maintains the right to assume control of the Foundation s operation and the obligation of its liabilities. Under the terms of these contracts, funded expenditures are not to exceed $133,838,189, $134,414,372 and $129,512,716 for the , and contract years, respectively, and are subject to budget amendments. As of June 30, 2012, actual net expenditures under the , and contracts were $126,266,672, $122,823,554 and $125,025,991 respectively. 8

11 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Principles of Consolidation and Change in Reporting Entity Prior to the year ended June 30, 2011, the Foundation produced consolidated financial statements that included the accounts of Harbor Developmental Disabilities Foundation, Inc. and the Del Harbor Foundation (Del Harbor). Del Harbor is a separately incorporated California nonprofit corporation over which the Foundation exercised significant influence and the Trustees of the Foundation appointed the Directors of Del Harbor. Del Harbor was formed to facilitate and augment the coordination of services and programs of the Foundation or those which benefit clients of the Foundation. Del Harbor began operations in December During the year ended June 30, 2011, the bylaws of Del Harbor were amended to eliminate the Foundation s ability to exercise significant influence and appoint directors of Del Harbor. This qualifying triggering event (change in Del Harbor s bylaws) resulted in reconsideration of such consolidation. As a result, management determined Del Harbor was no longer under the control of the Foundation. The Foundation deconsolidated Del Harbor from its financial statements as of June 30, Accordingly, the statements of financial position as of June 30, 2012 and 2011 are not consolidated and the statement of activities, functional expenses, and cash flows for the year ended June 30, 2011 are consolidated. The impact of deconsolidating Del Harbor, effective June 30, 2011, was removal of the following: Assets Cash and cash equivalents $ 1,035,271 Restricted cash 2,547,086 Other assets 52,874 Deferred rent 1,696,240 Land, building, and improvements, net 20,790,458 Bond issuance costs, net 812,489 Total assets $ 26,934,418 Liabilities Accounts payable $ 8,957 Accrued interest 347,567 Bonds payable 25,000,000 Total liabilities 25,356,524 Unrestricted net assets 1,577,894 Total liabilities and net assets $ 26,934,418 9

12 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Accounting In accordance with the Regional Center Fiscal Manual, the Foundation expenses the cost of furniture and equipment purchased with funds from the DDS contract. This departure from accounting principles generally accepted in the United States of America does not have a material impact on the financial statements. Basis of Presentation Classification of Net Assets Accounting principles generally accepted in the United States of America require that the Foundation report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. Accordingly, the net assets of the Foundation are classified and reported as described below: Unrestricted: Those net assets and activities which represent expendable funds for operations related to the DDS contract. Temporarily Restricted: Those net assets and activities which are donor-restricted for (a) support of specific operating activities; or (b) use in a specified future period. Permanently Restricted: Those net assets and activities which are permanently donor-restricted for holdings of (a) assets donated with stipulations that they be used for a specified purpose, be preserved, and not be sold; or (b) assets donated with stipulations that they be invested to provide a permanent source of income. As of June 30, 2012 and 2011 and for the years then ended, the Foundation did not have any temporarily or permanently restricted net assets or activities. Unrestricted Net Assets The unrestricted net asset group is comprised of the Operating Fund, Client Trust Funds, and the Donation Fund. Operating Fund: These accounts are used to record primary activities of the Foundation which are carried out under the DDS contract. These accounts also record the activities of the Community Placement Plan (CPP) and federallyfunded programs. 10

13 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Presentation (Continued) Unrestricted Net Assets (continued) Client Trust Fund: The Foundation serves as representative payee for a portion of its clients. In this fiduciary capacity, it receives social security benefits and other sources of income and makes payments on behalf of certain developmentally disabled clients who are deemed unable to administer the funds themselves. Client trust transactions are not considered revenue or expenses of the Foundation. The cash that is received and outstanding receivables, net of interfund liabilities, are reported as assets and a liability, unexpended client trust funds, until it is distributed. Donation Fund: The Donation Fund is used to record solicited and unsolicited support received by the Foundation for the benefit of its clients. 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. Cash and Cash Equivalents The Foundation considers all financial instruments with a maturity of three months or less when purchased to be cash equivalents. Contract and Other Receivables The majority of the Foundation s receivables represent or relate to the cost-reimbursement contract with DDS. Management believes that the receivables are fully collectible and, therefore, has not provided an allowance for doubtful accounts. State Equipment Pursuant to the terms of the state of California contract, equipment purchases become the property of the State of California and, accordingly, are charged as expenses when incurred. The Foundation is required to track acquisitions of furniture and equipment with a cost value in excess of $5,000 and with an estimated useful life beyond one year. For the years ended June 30, 2012 and 2011, equipment purchases totaled approximately $484,000 and $533,000, respectively. 11

14 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Accrued Vacation and Other Leave Benefits The Foundation has accrued a liability for accrued vacation and other leave benefits earned. However, such benefits are reimbursed under the DDS contract only when actually paid. The Foundation has also recorded deferred costs for accrued vacation and other leave benefits to reflect the future reimbursement of such benefits. Deferred Rent The Foundation leases office facilities under lease agreements that are subject to scheduled rent increases. The scheduled rent increases are amortized evenly over the term of the lease. The deferred rent liability represents the difference between the cash payments made and the amount expensed since inception of the lease. According to the DDS contract, DDS reimburses the Foundation for rent after it is paid. The Foundation has recorded deferred costs for deferred rent to reflect the future reimbursement of the additional rent expense recognized. Revenue Recognition Revenue is recognized in the year the claim is filed with DDS. Depending on the date of service, claims are classified and charged to the appropriate contract as follows: Current year Prior year Second prior year Contributions The Foundation recognizes all contributions in the year of receipt, regardless of compliance with restrictions. Contributions without donor-imposed restrictions are reported as unrestricted support. Contributions with donor-imposed restrictions are reported as temporarily restricted or permanently restricted support, depending upon the type of restriction. Satisfaction of a donor-imposed restriction on a contribution is recognized in the period in which the restriction expires. This occurs by increasing one class of net assets and decreasing another in the statement of activities. These transactions are reported as net assets released from restrictions and are reported separately from other transactions. Federal Grants The Foundation is a sub-recipient to DDS with regard to the following grants: 12

15 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Federal Grants (Continued) U.S. Department of Health and Human Services The Medicaid Waiver grant provides funding for a broad range of medical assistance, which includes home and community based services, to certain persons of need as authorized by Title XIX of the Social Security Act of This grant also funds Targeted Case Management. U.S. Department of Education The Special Education Grants for Infants and Families with Disabilities provides funding for early intervention services for infants and toddlers, through age 3, as authorized by Public Law Income Taxes The Foundation is a qualified organization exempt from federal income taxes under 501(c)(3) of the Internal Revenue Code (IRC) and franchise taxes under 23701d of the California Revenue and Taxation Code. Accordingly, it is exempt from federal and California income taxes and is not liable for federal unemployment taxes. The Foundation has adopted the accounting standard on accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return and requires the affirmative evaluation that is more-likely-than-not, based on the technical merits of a tax position, that an organization is entitled to economic benefits resulting from tax positions taken in income tax returns. For tax-exempt entities, favorable tax status itself is deemed to be an uncertainty, as events could potentially occur to jeopardize their tax-exempt status. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The Foundation s evaluation on June 30, 2012 revealed no tax positions that would have a material impact on the financial statements. The 2008 through 2011 tax years remain subject to examination by the Internal Revenue Service. In addition, the 2007 through 2011 tax years remain subject to examination by the California Franchise Tax Board. The Foundation does not believe that any reasonably possible changes will occur within the next twelve months that will have a material impact on the financial statements. Concentrations of Risk Credit Risk Financial instruments, which potentially subject the Foundation to a concentration of credit risk, principally consist of cash and cash equivalents, contract receivables, and receivables from vendors. The Foundation invests cash in money market accounts, which may at times, exceed the federally-insured limit. Through its contract with DDS, the Foundation is reimbursed for its expenses. The ability of DDS to honor its obligations and to continue funding, is dependent upon the overall economic well-being of the State of California. Although the State of California is experiencing budgetary issues, the Foundation has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk. 13

16 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentrations of Risk (Continued) Concentration The Foundation retains approximately 80 percent of its labor force through Social Services Union, Local 721 Services Employees International Union, AFL-CIO. This labor force is subject to collective bargaining agreements and, as such, renegotiation of such agreements could expose the Foundation to an increase in hourly costs and or work stoppages. The current agreements are generally effective through March 24, The Foundation has not experienced any disruptions in its service due to this concentration. Functional Allocation of Expenses The statements of functional expenses allocate expenses for all funds to the program and supporting service categories based on a direct cost basis for purchase of services and salaries and related expenses. Operating expenses are allocated based on a percentage of salaries and related expenses per category to total salaries and related expenses, except for certain expenses that are designated as program or supporting services. Reclassifications Certain amounts in the totals for 2011 financial statements have been reclassified to conform to the 2012 presentation. These reclassifications have no effect on previously reported net assets or change in net assets. Recent Accounting Pronouncements In May 2011, the Financial Accounting Standards Board (FASB) issued ASU No , Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU provides guidance which is expected to result in common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. It changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for ASU to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the FASB s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU No is to be applied prospectively and is effective for annual periods beginning after December 15, The adoption of this guidance is not expected to have a material impact on the Foundation s financial statements. 14

17 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements (Continued) In January 2010, the FASB issued guidance that clarifies existing disclosures and requires new disclosures about fair value measurements. The clarifications and the requirement to disclose the amounts and reasons for significant transfers between Level 1 and Level 2 and significant transfers into and out of Level 3 of the fair value hierarchy are effective for periods beginning after December 15, The new requirement that purchases, sales, issuances, and settlements be presented gross in the Level 3 reconciliation is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years, with early adoption permitted. Since this new guidance only amends the disclosure requirements, the adoption of this pronouncement did not have any impact on the Foundation s financial statements. 2. FAIR VALUE MEASUREMENTS The Foundation s financial assets and liabilities carried at fair value have been classified, for disclosure purposes, based on a hierarchy that gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset s or a liability s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows: Level 1 Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date. Level 2 Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves. Level 3 Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Foundation s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date. The following is a description of the valuation methodology used for assets measured at fair value. Fixed Income Securities: The fair value of fixed income securities is estimated using recently executed transactions or market price quotations (where observable). These securities are classified within Level 2 of the fair value hierarchy. At June 30, 2012 and 2011, all of the Foundation s investments are in fixed income securities certificates of deposit and are classified as Level 2. 15

18 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and FAIR VALUE MEASUREMENTS (CONTINUED) The Foundation s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstance that caused the transfer. The Foundation had no transfers into or out of levels of the fair value hierarchy during the years ended June 30, 2012 and As of June 30, 2012, the Foundation does not have any financial instruments valued at Level 1 or Level CASH - CLIENT TRUST FUNDS The Foundation functions as custodian for the receipt of certain governmental payments and resulting disbursements made on behalf of a portion of the Foundation s clients. During the year ending June 30, 2012, the Foundation transferred custodianship for some of those clients to a third party agency that provides representative payee services. At June 30, 2012 and 2011, the Foundation acted as custodian for 478 and 781 clients, respectively. The following is a summary of operating cash activity: Social Security and other client support received $ 5,816,132 $ 8,000,019 Residential care and other disbursements 6,342,779 7,871,583 Support over (under) disbursements (526,647) 128,436 Changes to reconcile support over (under) disbursements to net cash provided by (used in) support and cash activities: Increase in receivable from state and federal agencies 334, ,940 (Increase) decrease in amounts due to the Foundation 1,181 (12,005) Net cash provided by (used in) support and cash activities (190,898) 276,371 Cash at beginning year 1,442,998 1,166,627 Cash at end of year $ 1,252,100 $ 1,442,998 16

19 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and CONTRACT RECEIVABLE Contract receivable consists of the following at June 30: Current year $ 35,842,627 $ 12,125,854 Prior year 311,341 2,204,757 Second prior year 1,574,499 10,729,988 $ 37,728,467 $ 25,060, INTERMEDIATE CARE FACILITIES - STATE PLAN AMENDMENT During the year ended June 30, 2011, various legislative changes were made to the California Welfare and Institutions Code retroactive to July 1, 2007, making Intermediate Care Facility (ICF) providers responsible for providing day treatment and transportation services; and ultimately, making such services eligible for reimbursement under California s Home and Community Based Services (HCBS) Program, which is funded by the Medicaid Waiver grant (Medicaid). Previously, such services provided to the residents were not reimbursable by Medicaid because the funds were not directly billed and received by the ICFs. The legislative changes allow for DDS to bill these services to Medicaid and capture federal funds. During the years ended June 30, 2012 and 2011, DDS directed the Foundation to prepare billings for these services on behalf of the ICFs for the period from July 1, 2009 to June 30, 2011 and July 1, 2007 to June 30, 2009 respectively. The billings included a 5.5% Quality Assurance fee for the State Department of Health Care Services (DHCS), a 1.5% administrative fee for the ICFs and a 1.5% administration fee for the Foundation. During the years ended June 30, 2012 and 2011, DDS advanced the amounts billed to the ICFs. The ICFs are directed to remit to the Foundation the amount billed less its administration fee and the Quality Assurance fee, which it must remit to DHCS. After the Foundation receives the net payment from the ICFs, the Foundation is directed to remit the amount to DDS, net of its administration fee. DDS has instituted protocols should the ICFs not remit the net amounts due to the Foundation. 17

20 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and INTERMEDIATE CARE FACILITIES - STATE PLAN AMENDMENT (CONTINUED) Beginning balance $ 7,656,987 $ - Total billed from vendors for years ended June 30, 2008 and ,841,944 Total billed from vendors for years ended June 30, 2010 and ,499,697 - Amount remitted by vendors (7,562,696) (184,957) Write off of uncollectible balance (93,047) - Total receivable from ICF $ 7,500,941 $ 7,656,987 Payable to DDS $ 7,388,869 $ 7,726,054 Amount remitted by vendors but unpaid to DDS at June 30, (184,957) Deferred administrative fee 112, ,890 $ 7,500,941 $ 7,656, LINE OF CREDIT The Foundation has a revolving line of credit with City National Bank whereby it may borrow up to $11,000,000 until June 30, 2012, then up to $33,000,000 until the earlier date of October 3, 2012 or the effective date of a State of California budget with respect to the State General Fund for the fiscal year commencing July 1, 2011, then $12,000,000 until the maturity date of June 30, Interest is payable monthly at a greater of 3.5% or 1% below the bank s prime rate. The line of credit is unsecured and requires the Foundation to comply with certain reporting covenants. The Foundation did not use this line of credit during the years ended June 30, 2012 and CONTRACT ADVANCE The contract advance balance represents monies DDS advances to the Foundation at the beginning of each fiscal year to provide interest-free working capital. DDS uses its discretion in determining the balance on a month-to-month basis. If DDS so chooses, the advance can be paid by off-setting claim reimbursements partially or in full. 18

21 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and EMPLOYEE BENEFIT PLANS Effective July 1, 2004, the Foundation restated its retirement plan and adopted a prototype profit-sharing plan with an IRC 401(k) feature. All employees are eligible to enter the plan immediately upon employment. Participants can contribute up to the federal maximum limit. The Foundation is not required to match a participant s contribution. The Foundation may make discretionary contributions to the plan allocated in direct proportion to the participant s pay. Loans are permitted, subject to the terms of the plan document and applicant contract. The total employer retirement expense for the years ended June 30, 2012 and 2011 was $1,289,526 and $1,355,395, respectively. In addition, effective June 1, 2005, the Foundation established an IRC 457(b) deferred compensation plan. Loans are not permitted under this plan. 9. RELATED PARTY TRANSACTIONS As discussed in Note 1, during the year ended June 30, 2011, Del Harbor was deemed to no longer be under the control of the Foundation and Del Harbor was deconsolidated from the Foundation s financial statements. However the two entities remain related as they share common management. During the year ended June 30, 2012, the Foundation paid rent and maintenance expenses to Del Harbor amounting to $2,664, OPERATING LEASES The Foundation is obligated under operating leases expiring through November 30, 2039 for office space in Torrance and Long Beach, California. All leases are operating leases and contain rent escalation clauses based on changes in the Consumer Price Index or contract stipulated annual rate increases. Rent expense, not including the deferred rent, for the years ended June 30, 2012 and 2011 was $3,204,202 and $2,990,282, respectively. One of the leases included above is a thirty year lease agreement which the Foundation entered into with Del Harbor (Note 9) for its facilities at and Hawthorne Boulevard, in Torrance that commenced December 1, The monthly rent ranges from $166,428 to $369,685 for the remainder of the lease. In addition, the Foundation is subject to its share of utilities, certain operating expenses, and real estate taxes in excess of base rent. The lease expires on October 31, The Foundation subleases a portion of its facilities in Torrance and receives sublease income from various tenants, with sublease terms up until May Sublease income received is used to offset the future minimum lease commitments. Sublease income for the years ended June 30, 2012 and 2011 was $193,244 and $155,428, respectively. 19

22 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and OPERATING LEASES (CONTINUED) Future minimum lease payments for the Foundation under noncancellable operating leases that have initial or remaining lease terms in excess of one year as of June 30, 2012 are as follows: Years Ending Less: Sublease June 30, Del Harbor Other Income Total 2013 $ 2,057,051 $ 591,210 $ (179,529) $ 2,468, ,118, ,913 (125,605) 2,602, ,182, ,188 (108,586) 2,700, ,247, ,004 (37,268) 2,856, ,315, ,397 (35,099) 2,945,527 Thereafter 74,299,382 18,454,900-92,754,282 $ 85,220,547 $ 21,593,612 $ (486,087) $ 106,328, COMMITMENTS AND CONTINGENCIES Litigation The Foundation is currently a defendant in several litigious actions, in addition to threats of litigation arising out of the normal course of operations. The Foundation intends to vigorously defend its position. These matters have been referred to the Foundation s attorneys and/or insurance carriers. In management s opinion, a material unfavorable outcome is remote. Funding The majority of the Foundation s funding is provided under annual grants and contracts with federal and California agencies. If a significant reduction in the level of funding provided by these governmental agencies were to occur, it may have an effect on the Foundation s programs and activities. The Foundation s revenue, which is derived from restricted funding provided by government grants and contracts, is subject to audit by the governmental agencies. The Foundation s contract with DDS provides funding for services under the Act. In the event that the operations of the Foundation result in a deficit position at the end of the contract year, DDS may reallocate surplus funds within the State of California system to supplement the Foundation s funding. Should a system-wide deficit occur, DDS is required to report to the Governor of California and the appropriate fiscal committee of the State Legislature and recommend actions to secure additional funds or reduce expenditures. The DDS recommendations are subsequently reviewed by the Governor and the Legislature and a decision is made with regard to specific actions, including the possible suspension of the entitlement. In accordance with the terms of the DDS contract, an audit may be performed by an authorized DDS representative. Should such an audit disclose any unallowable costs, the Foundation may be liable to the State of California for reimbursement of such costs. In the opinion of the Foundation s management, the effect of any disallowed costs would be immaterial to the financial statements as of June 30, 2012 and 2011, and for the years then ended. 20

23 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and COMMITMENTS AND CONTINGENCIES (CONTINUED) Unemployment Insurance The Foundation has elected to finance its unemployment insurance using the prorated cost-of-benefits method. Under this method, the Foundation is required to reimburse the State of California for benefits paid to its former employees. 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During the years ended June 30, 2012 and 2011, the Foundation paid interest amounting to $0 and Del Harbor paid interest amounting to $2,085,476, respectively. 13. SUBSEQUENT EVENTS The Foundation has evaluated all subsequent events through November 13, 2012, the date the financial statements were available to be issued. 21

24 SUPPLEMENTARY FINANCIAL INFORMATION Years Ended June 30, 2012 and 2011

25 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2012 Federal Agency or Federal Federal Grantor/ CFDA Pass-Through Disbursements/ Pass-Through Grantor / Program or Cluster Title Number Number Expenditures Centers for Medicare and Medicaid Services of the U.S. Department of Health and Human Services passed-through the State of California Department of Developmental Services: Medical Assistance Program (Medicaid; Title XIX) HD $ 63,739,105 * Targeted Case Management HD ,978,433 * 74,717,538 Office of Special Education and Rehabilitative Services of the U.S. Department of Education passed-through the State of California Department of Developmental Services: Special Education - Grants for Infants and Families HD ,354,619 $ 76,072,157 * Major program. Basis of Presentation The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the financial statements. 23

26 SCHEDULE OF CONSOLIDATED STATEMENTS OF ACTIVITIES Year Ended June 30, 2011 Elimination Consolidated Foundation Del Harbor Entries Balance Revenue and Support: Federal awards $ 72,179,228 $ - $ - $ 72,179,228 Grants 54,700, ,700,742 Interest 68,827 40, ,436 Donations 29, ,930 Rental income - 4,141,859 (4,141,859) - Other income 186, ,471 Total revenue and support 127,165,198 4,182,468 (4,141,859) 127,205,807 Expenses: Program services: Direct client services 122,103,094 3,064,891 (3,469,414) 121,698,571 Supporting services: General and administrative 5,063,054 35,941 (672,445) 4,426,550 Total expenses 127,166,148 3,100,832 (4,141,859) 126,125,121 Change in net assets (950) 1,081,636-1,080,686 Net assets Beginning of year 139,250 (120,546) - 18,704 Effect of deconsolidation of Del Harbor - (961,090) - (961,090) End of year $ 138,300 $ - $ - $ 138,300 24

27 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 Board of Trustees Harbor Developmental Disabilities Foundation, Inc. Torrance, California We have audited the financial statements of Harbor Developmental Disabilities Foundation, Inc. (the Foundation) as of and for the year ended June 30, 2012, and have issued our report thereon dated November 13, We conducted our audit 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. Internal Control Over Financial Reporting Management of the Foundation is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the Foundation s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Foundation s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Foundation s internal control over financial reporting. 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. Our consideration of internal control over financial reporting 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 financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above.

28 Board of Trustees Harbor Developmental Disabilities Foundation, Inc. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Foundation s financial statements are free of 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. We noted certain matters that we reported to management of the Foundation in a separate letter dated November 13, This report is intended solely for the information and use of the management, Board of Trustees and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. San Francisco, California November 13,

29 INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 Board of Trustees Harbor Developmental Disabilities Foundation, Inc. Torrance, California Compliance We have audited Harbor Developmental Disabilities Foundation, Inc. (the Foundation) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on each of the Foundation s major federal programs for the year ended June 30, The Foundation s major federal programs are identified in the summary of auditors results section of the accompanying Schedule of Findings and Questioned Costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of the Foundation s management. Our responsibility is to express an opinion on the Foundation s compliance based on our audit. 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 OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 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 the Foundation 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. Our audit does not provide a legal determination of the Foundation s compliance with those requirements. In our opinion, the Foundation complied, in all material respects, with the 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, However, the results of our auditing procedures disclosed instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying Schedule of Findings and Questioned Costs, as item