Saint Paul School of Theology

Transcription

1 Independent Auditor s Report and Financial Statements

2 Contents Independent Auditor s Report... 1 Financial Statements Statements of Financial Position... 3 Statements of Activities... 4 Statements of Cash Flows

3 Independent Auditor s Report Board of Trustees and Resource Committee Saint Paul School of Theology Overland Park, Kansas We have audited the accompanying financial statements of Saint Paul School of Theology (the School ), which comprise the statements of financial position as of, 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. Auditor s 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 auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the School 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 School 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.

4 Board of Trustees and Resource Committee Saint Paul School of Theology Page 2 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Saint Paul School of Theology as of, 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. Kansas City, Missouri November 22, 2016

5 Statements of Financial Position Assets Cash and cash equivalents $ 381,755 $ 765,804 Student accounts and notes receivable, net 45, ,583 Prepaid expenses 156, ,443 Pledges receivable 2,279, ,999 Split-interest agreements 381, ,299 Investments 22,861,941 23,958,296 Investment assets held in trust by others 5,965,795 5,691,716 Property and equipment, net 1,042,866 1,454,261 Total assets $ 33,114,768 $ 32,932,401 Liabilities and Net Assets Liabilities Accounts payable and accrued liabilities $ 970,873 $ 1,212,903 Deferred income 41,739 20,000 Loans payable 38,524 49,808 Funds held in trust for others 3,821,732 3,921,055 Total liabilities 4,872,868 5,203,766 Net Assets Unrestricted 3,213,251 4,544,267 Temporarily restricted 3,637,013 2,381,957 Permanently restricted 21,391,636 20,802,411 Total net assets 28,241,900 27,728,635 Total liabilities and net assets $ 33,114,768 $ 32,932,401 See 3

6 Statement of Activities Year Ended June 30, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, Gains and Other Support Student tuition and fees $ 1,884,560 $ 1,884,560 Less institutional financial aid (800,585) (800,585) 1,083,975 1,083,975 Gifts and grants 1,759,786 $ 2,184,367 $ 599,966 4,544,119 Loss on split-interest agreements - (8,084) (10,741) (18,825) Investment gain (loss), net 20,855 (86,152) - (65,297) Gain (loss) on assets held in trusts by others (35,852) 21,663 - (14,189) Other 66, ,518 Appropriated endowment earnings ( see Note 10) 591,320 (591,320) - - Net assets released from restrictions (see Note 9 ) 207,218 (207,218) - - Total revenues, gains and other support 3,693,820 1,313, ,225 5,596,301 Expenses Instructional 1,526, ,526,401 Academic support 1,129, ,129,132 Student services 332, ,685 Institutional support 769, ,348 Plant operations and maintenance 705, ,112 Fundraising 562, ,158 Provision for uncollectible pledge - 58,200-58,200 Total expenses 5,024,836 58,200-5,083,036 Change in Net Assets (1,331,016) 1,255, , ,265 Net Assets, Beginning of Year 4,544,267 2,381,957 20,802,411 27,728,635 Net Assets, End of Year $ 3,213,251 $ 3,637,013 $ 21,391,636 $ 28,241,900 See 4

7 Statement of Activities Year Ended June 30, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, Gains and Other Support Student tuition and fees $ 2,083,941 $ 2,083,941 Less institutional financial aid (833,280) (833,280) 1,250,661 1,250,661 Gifts and grants 1,884,217 $ 118,212 $ 97,894 2,100,323 Gain (loss) on split-interest agreements - (19,575) 6,438 (13,137) Investment gain, net 112, , ,031 Loss on assets held in trusts by others (2,981) (6,520) - (9,501) Other 47, ,012 Appropriated endowment earnings (see Note 10 ) 667,873 (667,873) - - Net assets released from restrictions (see Note 9 ) 202,935 (202,935) - - Total revenues, gains and other support 4,161,733 (533,676) 104,332 3,732,389 Expenses Instructional 1,580, ,580,562 Academic support 1,092, ,092,688 Student services 401, ,223 Institutional support 903, ,829 Plant operations and maintenance 702, ,042 Fundraising 534, ,872 Provision for uncollectible pledge - 131, ,800 Total expenses 5,215, ,800-5,347,016 Change in Net Assets (1,053,483) (665,476) 104,332 (1,614,627) Net Assets, Beginning of Year 5,597,750 3,047,433 20,698,079 29,343,262 Net Assets, End of Year $ 4,544,267 $ 2,381,957 $ 20,802,411 $ 27,728,635 See 5

8 Statements of Cash Flows Years Ended Operating Activities Change in net assets $ 513,265 $ (1,614,627) Items not requiring (providing) cash Depreciation 407, ,759 Net realized and unrealized (gains) losses on investments 387,341 (92,295) Net change in assets held in trusts by others (636,335) (208,069) Loss on split-interest agreements 18,825 13,137 Provision for uncollectible pledge 58, ,800 Loss on disposal of property and equipment 3,768 - Contributions restricted for long-term purposes (2,699,966) (97,894) Changes in Student accounts and notes receivable 71,245 (5,889) Pledges receivable 165,274 95,211 Prepaid expenses (35,101) (22,435) Accounts payable and accrued liabilities (242,030) (256,335) Deferred income 21,739 (35,266) Refundable grant advances - (18,620) Net cash used in operating activities (1,966,148) (1,712,523) Investing Activities Purchase of property and equipment - (13,833) Proceeds from split-interest agreements 21,470 11,856 Purchases of investments (593,060) (258,793) Proceeds from dispositions of investments 1,302, ,209 Proceeds from assets held in trust by others 262, ,667 Net cash provided by investing activities 993, ,106 Financing Activities Proceeds from contributions restricted for long-term purposes 599,966 97,894 Loan payments (11,284) (304) Net cash provided by financing activities 588,682 97,590 Decrease in Cash and Cash Equivalents (384,049) (997,827) Cash and Cash Equivalents, Beginning of Year 765,804 1,763,631 Cash and Cash Equivalents, End of Year $ 381,755 $ 765,804 Supplemental Cash Flows Information Loan incurred for the purchase of equipment $ - $ 50,112 See 6

9 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Saint Paul School of Theology (the School ) is a theological seminary under the direction of the United Methodist Church through its Board of Higher Education and Ministry as authorized by the action of the General Conference of the Methodist Church of The School received $881,808 and $982,551 from the United Methodist Church for operations during the fiscal years ended, respectively. The School is accredited by the Association of Theological Schools in the United States and Canada as well as the Higher Learning Commission. 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, expenses, gains, losses and other changes in net assets during the reporting period. Actual results could differ from those estimates. Significant estimates in the School s financial statements for the years ended June 30, 2016 and 2015 include receivable reserves and investment valuations. Cash and Cash Equivalents The School considers all liquid investments with original maturities of three months or less to be cash equivalents. At, cash equivalents consisted primarily of money market accounts. At June 30, 2016, the School s cash accounts exceeded federally insured limits by approximately $207,000. However, management monitors the financial stability of these financial institutions and believes the risk of loss is minimal. Investments and Assets Held in Trusts by Others and Investment Return Investments in equity securities and mutual funds having a readily determinable fair value, all debt securities and funds held in trusts by others are carried at fair value. Investments in alternative investments are recorded at the estimated net asset value (NAV) per share, as a practical expedient, to determine fair value of the investments. Other investments are valued at the lower of cost (or fair value at time of donation, if acquired by contribution) or fair value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. 7

10 Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the statements of activities as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. The School maintains pooled investment accounts for its endowments. Investment income and realized and unrealized gains and losses from securities in the pooled investment accounts are allocated annually to the individual endowments based on the relationship of the fair value of the interest of each endowment to the total fair value of the pooled investments accounts, as adjusted for additions to or deductions from those accounts. Split-Interest Agreements The School has been named as a beneficiary in several split-interest agreements. When the School is notified of the existence of an agreement and assets are transferred, the agreement is recorded net of the fair value of the assets and the present value of the expected future payment to be made to others. Student Accounts and Notes Receivable Student accounts receivable are stated at the amounts billed to the students less applied scholarships and loan proceeds. The School provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Tuition is generally due at the beginning of the semester unless the student has signed a payment plan. Charges that are past due and have had no response to the due diligence process are assigned to third-party collection agencies. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the student. Notes receivable consist of amounts due from faculty and staff. The School would provide an allowance for doubtful notes as necessary, which would be based upon a review of outstanding loans, historical collection information and existing economic conditions. Interest income is recorded as received, which is not materially different from the amount that would have been recognized on the accrual basis. Loans that are delinquent continue to accrue interest. Loans that are past due for at least one payment are considered delinquent. Delinquent loans are written off based on individual credit evaluation and specific circumstances of the faculty and staff. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful life of each asset. Leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives. 8

11 Long-lived Asset Impairment The School evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value. No asset impairment was recognized during the years ended. Net Assets Unrestricted net assets represent those net assets whose use is not restricted by donor-imposed stipulations. Temporarily restricted net assets are those whose use by the School has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the School in perpetuity. Gifts and Grants Gifts of cash and other assets received without donor stipulations are reported as unrestricted revenue and net assets. Gifts received with a donor stipulation that limits their use are reported as temporarily or permanently restricted revenue and net assets. When a donor stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Gifts having donor stipulations that are satisfied in the period the gift is received are reported as unrestricted revenue and net assets. Gifts of land, buildings, equipment and other long-lived assets are reported as unrestricted revenue and net assets unless explicit donor stipulations specify how such assets must be used, in which case the gifts are reported as temporarily or permanently restricted revenue and net assets. Absent explicit donor stipulations for the time long-lived assets must be held, expirations of restrictions resulting in reclassification of temporarily restricted net assets as unrestricted net assets are reported when the long-lived assets are placed in service. Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. Conditional gifts depend on the occurrence of a specified future and uncertain event to bind the potential donor and are recognized as assets and revenue when the conditions are substantially met and the gift becomes unconditional. 9

12 Deferred Income Tuition revenue and fees are recognized over the periods to which the tuition and fees relate. Income Taxes The School is a not-for-profit organization that is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code, except for income taxes pertaining to unrelated business income. In addition, the School qualifies for the charitable contribution deduction under Section 170(b)(A) and has been classified as an organization that is not a private foundation under Section 509(a)(1). The School does not file a Federal Form 990 since the School is included in a group exemption as an affiliate with the United Methodist Church. The School is required to file a Federal Form 990-T for any unrelated business income. Functional Allocation of Expenses The costs of supporting the various programs and other activities have been summarized on a functional basis in the statements of activities. Certain costs have been allocated among the educational and general and auxiliary enterprises. Transfers Between Fair Value Hierarchy Levels Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs), if any, are recognized on the period beginning date. Reclassifications Certain reclassifications have been made to the 2015 financial statements to conform to the 2016 financial statement presentation. These reclassifications had no effect on the change in net assets. 10

13 Note 2: Investments and Investment Return Investments at June 30 consisted of the following: Marketable securities Money market funds $ 463,938 $ 1,018,990 Mutual funds Vanguard dividend growth investor CL 2,590,512 2,217,055 Other mutual funds 9,098,301 9,676,369 Common stocks 3,672,056 3,069,791 U.S. Government securities 104, ,783 Corporate bonds 104, ,283 Total marketable securities 16,033,455 16,243,271 Alternative investments Offshore hedge funds Morgan Creek BRIC Plus Private Fund, Ltd. 288, ,203 Commonfund Global 977,941 1,013,904 Other 38,998 71,658 Total offshore hedge funds 1,305,457 1,449,765 Private equity investment partnerships Morgan Creek Partners II, LP 2,037,370 2,530,330 Morgan Creek Partners III, LP 1,804,078 2,024,208 Other 1,681,581 1,710,722 Total private equity investment partnerships 5,523,029 6,265,260 Total alternative investments 6,828,486 7,715,025 $ 22,861,941 $ 23,958,296 The School s temporarily and permanently restricted net assets include various endowment funds established by donors. The fair value of the assets of some of these funds was $853,791 and $723,259 less than the level required by donor stipulation or law at, respectively, (see Note 10). 11

14 Total investment return during the years ended is comprised of the following: Interest and dividend income $ 465,725 $ 409,125 Realized and unrealized gains (losses) (387,341) 92,295 Investment fees (143,681) (144,389) $ (65,297) $ 357,031 Note 3: Student Accounts and Notes Receivable Student accounts and notes receivable at June 30 consisted of the following: Student accounts receivable $ 52,322 $ 42,873 Loans receivable faculty/staff 14,001 19,378 Other 9,215 98,332 75, ,583 Less allowance for doubtful accounts (30,200) (44,000) $ 45,338 $ 116,583 Note 4: Pledges Receivable Pledges receivable are all temporarily restricted at June 30 and consisted of the following: Due within one year $ 2,442,948 $ 406,637 Due within one to five years 107, ,000 2,550, ,637 Less unamortized discount (5,923) (11,838) Less allowance for uncollectible pledges (265,000) (206,800) $ 2,279,525 $ 402,999 Pledge receivables were discounted at 5.83% for 2016 and

15 Note 5: Property and Equipment Property and equipment at June 30 consisted of: Leasehold improvements $ 495,472 $ 495,472 Equipment 846, ,423 Books 935, ,716 2,277,843 2,281,611 Less accumulated depreciation 1,234, ,350 $ 1,042,866 $ 1,454,261 Note 6: Split-Interest Agreements The School is a beneficiary of various split-interest agreements with donors. The value of each of the agreements was calculated as follows: Charitable remainder unitrust, fair value at of $843,908 and $859,307, respectively, estimated based on the School s beneficial interest in the trust (25%) which represents the present value of the future distributions expected to be received over the term of the agreement. $ 210,977 $ 214,827 Charitable gift annuities, maintained by the Missouri Methodist Foundation and California Pacific United Methodist Foundation, Inc., fair value at of $104,833 and $134,323, respectively, discounted at 5.25% net of beneficiary distributions over varying life expectancies per the Internal Revenue Code. 34,789 61,852 Various other charitable gift annuities, maintained by the School, discounted at 5.25% net of beneficiary distributions over varying life expectancies per the Internal Revenue Code single life expectancy. 135, ,620 $ 381,004 $ 421,299 13

16 Note 7: Investment Assets Held in Trust by Others Interest in assets held in trust by others at June 30 consisted of the following: Donor advised fund (A) $ 3,821,732 $ 3,921,055 United Methodist Higher Education Foundation (B) 827, ,514 Missouri United Methodist Foundation (C) 62,838 62,649 Oklahoma United Methodist Foundation (D) 483,087 - Other 771, ,498 $ 5,965,795 $ 5,691,716 (A) During December 1998, the School entered into a donor-advised fund agreement with an outside donor. Under this fund agreement, distributions are made from earnings and/or principal based on the direction of the donors or their designated spokesperson(s). Under this agreement, distributions will be made to various not-for-profit charitable organizations, including, but not limited to, the School. This fund will terminate when either the School is not advised on the distribution of funds for three consecutive years or upon the death of the donors. At the termination of the fund agreement, all assets of the fund will be distributed to the School or other designated charities. Currently, this fund has not been terminated; therefore, the School has recorded the net assets of this fund at their fair value along with a corresponding liability that is included in funds held in trust. (B) The School has transferred assets to the United Methodist Higher Education Foundation ( UMHEF ) and retained a beneficial interest in those assets. The School is to receive 5% of the fair market value of the Fund on the last day of the fiscal year. Principal may not be distributed. The School did not grant variance power to UMHEF. Funds held at the foundation are board-designated and, therefore, unrestricted. (C) The School has transferred assets to the Missouri United Methodist Foundation ( MUMF ) and retained a beneficial interest in those assets. The School is to receive 5% of the fair market value based on a three year average. The School did not grant variance power to MUMF. Under the terms of the agreement, the School may withdraw the entire original amount transferred, any appreciation on those transferred assets or both, provided written notice is provided to MUMF. Funds held at the foundation are board-designated and, therefore, unrestricted. (D) Upon receiving a contribution to fund an endowment, the School transferred assets to The Oklahoma Methodist Foundation, Inc. ( OKMF ) and retained a beneficial interest in those assets. The School is to receive 5% of the investment return on an annual basis. The School did not grant variance power to OKMF. Under the terms of the agreement, the School may withdraw the entire original amount transferred, any appreciation on those transferred assets or both, provided written notice is provided to OKMF. The corpus of the funds held at the foundation are permanently restricted and earnings are temporarily restricted. 14

17 Note 8: Retirement Plan The School has a defined contribution retirement plan covering substantially all of its employees who meet eligibility requirements and who elect to participate. Eligible employees may contribute their compensation subject to applicable maximum contributions as established by the Internal Revenue Service. At the discretion of the Board of Trustees, the School may match participants contributions. Employer matching contributions totaled $214,319 and $167,444 for the years ended, respectively. The School also has a tax deferred annuity plan covering substantially all its employees who meet eligibility requirements and who elect to participate. The Plan allows participating employees to defer a portion of their compensation up to the maximum allowed by law. Such deferrals accumulate on a tax-deferred basis until the employee withdraws the funds. The School is not obligated to contribute to the Plan. At, assets held and payable to current and former employees totaled $197,583 and $209,138, respectively. The School discontinued additional participation in the Plan during Note 9: Net Assets Temporarily Restricted Net Assets Temporarily restricted net assets at June 30 were available for the following purposes or periods: Split-interest agreements $ 135,238 $ 144,620 Pledges receivable, time restriction 2,279, ,999 Unappropriated endowment earnings 1,149,659 1,805,468 Scholarships and grants 72,591 28,870 $ 3,637,013 $ 2,381,957 Permanently Restricted Net Assets Permanently restricted net assets at June 30 were restricted to: Endowment funds $ 21,145,870 $ 20,525,732 Split-interest agreements 245, ,679 $ 21,391,636 $ 20,802,411 15

18 Net Assets Released from Restrictions Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors Oklahoma Campus expenses $ 181,190 $ 202,935 Scholarships and other 26,028 - $ 207,218 $ 202,935 Note 10: Endowment The School s endowment consists of approximately 100 individual funds established for a variety of purposes. The endowment includes donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments (board-designated endowment funds). As required by accounting principles generally accepted in the United States of America (GAAP), net assets associated with endowment funds, including board-designated endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. The School s Board of Trustees has interpreted the State of Missouri Prudent Management of Institutional Funds Act (SPMIFA) as requiring preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the School classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of donor-restricted endowment funds is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the School in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the School considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. Duration and preservation of the fund 2. Purposes of the School and the fund 3. General economic conditions 4. Possible effect of inflation and deflation 5. Expected total return from investment income and appreciation or depreciation of investments 6. Other resources of the School 7. Investment policies of the School 16

19 The composition of net assets by type of endowment fund at was: Temporarily Restricted 2016 Permanently Restricted Unrestricted Total Donor-restricted endowment funds $ (853,791) $ 1,149,659 $ 21,145,870 $ 21,441,738 Board-designated endowment fund 889, ,886 Total endowment funds $ 36,095 $ 1,149,659 $ 21,145,870 $ 22,331,624 Temporarily Restricted 2015 Permanently Restricted Unrestricted Total Donor-restricted endowment funds $ (723,259) $ 1,805,468 $ 20,525,732 $ 21,607,941 Board-designated endowment fund 971, ,163 Total endowment funds $ 247,904 $ 1,805,468 $ 20,525,732 $ 22,579,104 17

20 Changes in endowment net assets for the years ended were: Unrestricted Temporarily Restricted 2016 Permanently Restricted Total Endowment net assets, beginning of year $ 247,904 $ 1,805,468 $ 20,525,732 $ 22,579,104 Investment loss (6,831) (64,489) - (71,320) Gifts and grants , ,138 Appropriation of endowment assets for expenditure (204,978) (591,320) - (796,298) Endowment net assets, end of year $ 36,095 $ 1,149,659 $ 21,145,870 $ 22,331,624 Unrestricted Temporarily Restricted 2015 Permanently Restricted Total Endowment net assets, beginning of year $ 236,505 $ 2,241,372 $ 20,427,838 $ 22,905,715 Investment return 60, , ,365 Gifts and grants ,894 97,894 Appropriation of endowment assets for expenditure (48,997) (667,873) - (716,870) Endowment net assets, end of year $ 247,904 $ 1,805,468 $ 20,525,732 $ 22,579,104 The permanently restricted split-interest agreements discussed in Note 6 are not included in the above figures as these assets are not subject to the School s investment and spending policies. From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level the School is required to retain as a fund or perpetual duration pursuant to donor stipulation or SPMIFA. In accordance with accounting principles generally accepted in the United States of America, deficiencies of this nature are reported in unrestricted net assets and aggregated $853,791 and $723,259 at, respectively. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after investment of new permanently restricted contributions and continued appropriation for certain purposes that was deemed prudent by the governing body. 18

21 The School has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs and other items supported by its endowment while seeking to maintain the purchasing power of the endowment. Endowment assets include those assets of donor-restricted endowment funds the School must hold in perpetuity or for donor-specified periods, as well as those of board-designated endowment funds. Under the School s policies endowment assets are invested in a manner that is intended to produce results that exceed the Standard & Poor s index or other appropriate benchmark indices while assuming a moderate level of investment risk. The School expects its endowment funds to provide an average rate of return of the total of its spending policy rate (see below), plus 0.5% for investment expenses, plus the annual inflation rate. Actual returns in any given year may vary from this amount. To satisfy its long-term rate of return objectives, the School relies on a total return strategy in which investment returns are achieved through both current yield (investment income such as dividends and interest) and capital appreciation (both realized and unrealized). The School previously targeted an asset allocation that placed a greater emphasis on hedge-fund investments to achieve its long-term objectives within prudent risk constraints. The School s investment policy has current target levels in the investment portfolio at 30% fixed income, 50% equities and 20% alternative investments. The School s spending policy appropriates for expenditure each year a percentage of its endowment fund s market value. The Board of Trustees establishes this spending percentage annually. During 2016 and 2015, the percentage was approximately 5%. In establishing this policy, the School considered the long-term expected return on its endowment. Accordingly, over the long term, the School expects the current spending policy to allow its endowment to grow at the annual inflation rate. This is consistent with the School s objective to maintain the purchasing power of endowment assets held in perpetuity or for a specified term, as well as to provide additional real growth through new gifts and investment return. Note 11: Disclosures About Fair Value of Assets and Liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities 19

22 Recurring Measurements The following table presents the fair value measurements of assets and liabilities recognized in the accompanying statements of financial position measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2016 and Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) June 30, 2016 Investments Marketable securities Money market funds $ 463,938 $ 463,938 $ - $ - Mutual funds 11,688,813 11,688, Common stock 3,672,056 3,672, Government securities 104, ,158 - Corporate bonds 104, ,490 - Alternative Investments Offshore hedge funds measured at net asset value (A) 1,305, Private equity investment partnerships measured at net asset value (A) 5,523, Total investments 22,861,941 15,824, ,648 - Assets Held by Others 5,965,795-5,965,795 - Split-interest Agreements 381, ,004 - Total fair value of recurring measurements $29,208,740 $ 15,824,807 $ 6,555,447 $ - 20

23 Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) June 30, 2015 Investments Marketable securities Money market funds $ 1,018,990 $ 1,018,990 $ - $ - Mutual funds 11,893,424 11,893, Common stock 3,069,791 3,069, Government securities 158, ,783 - Corporate bonds 102, ,283 - Alternative Investments Offshore hedge funds measured at net asset value (A) 1,449, Private equity investment partnerships measured at net asset value (A) 6,265, Total investments 23,958,296 15,982, ,066 - Assets Held by Others 5,691,716-5,691,716 - Split-interest Agreements 421, ,299 - Total fair value of recurring measurements $30,071,311 $ 15,982,205 $ 6,374,081 $ - (A) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts included above are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statements of financial position. 21

24 Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying statements of financial position, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the year ended June 30, Investments Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. Investment Assets Held in Trusts by Others Fair value is estimated at the present value of the future distributions expected to be received over the term of the agreement, which is equivalent to the fair value of the trust assets. Due to the School s inability to redeem a majority of the trust assets, the interest is classified within Level 2 of the valuation hierarchy. Split-Interest Agreements Fair value is estimated at the present value of the future distributions expected to be received over the term of the agreement. These interests are classified within Level 2 of the hierarchy. 22

25 Alternative Investments at Net Asset Value The fair values of alternative investments have been estimated using the net asset value per share as a practical expedient for the alternative investments. Alternative investments consisted of the following at June 30: Unfunded Commitments 2016 Redemption Frequency Redemption Notice Period Fair Value Offshore hedge funds Commonfund Global hedge funds (B) $ 977,941 $ - Semi-Annually 95 days Multi-strategy hedge funds (C) 327,516 - Annually 95 days Private equity investment partnerships (D) 4,791, ,000 Private equity investment partnerships (E) 731,398 - Monthly 30 days Unfunded Commitments 2015 Redemption Frequency Redemption Notice Period Fair Value Offshore hedge funds Dislocation hedge funds (A) $ 21,516 $ - Commonfund Global hedge funds (B) 1,013,904 - Semi-Annually 95 days Multi-strategy hedge funds (C) 414,345 - Annually 95 days Private equity investment partnerships (D) 5,664, ,500 Private equity investment partnerships (E) 601,152 - Monthly 30 days (A) This category includes investments in a series of hedge funds, private equity funds, special purpose vehicles, co-investments and direct securities that can quickly take advantage of one or more of the dislocations in the credit, fixed income, real estate and equity securities market, as well as the related structured securities and derivatives markets. Management of the funds has the ability to shift investments among differing investment strategies. One hundred percent of these investments are subject to a lockup period of five years with an option of an additional two years and are closed to new 23

26 investors. Subsequent to year end, the articles of the corporation were amended to extend the lock-up period for as long as necessary to complete the orderly liquidation of the investments. As such, no voluntary redemptions are allowed. It is estimated the underlying assets of the fund will be liquidated over two to three years. (B) This category seeks to provide investors with a marketable alternative strategies investment program capable of producing consistently positive returns regardless of the direction of the broader markets. The long-term return objective is to outperform 3-month Treasury bills by more than 400 basis points annually, net of fees and expenses. The goal of the fund is to offer access to a moderate volatility investment program with little or no net market exposure, yielding consistent returns independent of market direction. The fund allocates assets to investment funds managed by third party investment managers in four broad investment categories: event-driven, credit, equity market neutral and absolute return multi-strategy managers. Some or all of the marketable alternative strategies may be deployed across U.S. and non-u.s. markets. (C) This category includes investments in hedge funds that pursue multiple strategies to diversify risks and reduce volatility. These funds employ absolute return strategies, which are non-traditional investment strategies that utilize a variety of securities and financial instruments in sophisticated trading and portfolio management techniques. Specific strategies utilized by these funds include hedged directional and equities, distressed securities and debt relative-value and convertible arbitrage, event-driven and tactical trading and derivative instruments among others. The funds investment portfolios may include long and short positions in both U.S. and international securities. These investments and the underlying investment strategies are specialized, leveraged investments, managed by various portfolio managers selected by the funds sponsors, which involve substantial risk. (D) This category includes several private equity funds that invest primarily in technology communications, energy and real estate markets. A portion of these funds is also invested in foreign operations. These investments do not have redemption features. Instead, the nature of the investments in this category is that distributions are received through the liquidation of underlying assets of the fund. If these investments were held, it is estimated the underlying assets of the fund would be liquidated over five to eight years. (E) This category includes a partnership that invests primarily in debt (and debt-like preferred) securities, of primarily energy infrastructure-related companies, including energy master limited partnerships ( MLPs ), MLP affiliates and other midstream energy or energy infrastructure companies. The partnership seeks to generate high income by investing in below investment-grade debt issued by energy infrastructure companies, with an emphasis on the bonds issued by MLPs, and to a lesser extent the bonds issued by upstream energy companies. It is believed that the debt securities of these companies offer a stable and significant current income component with the potential for capital appreciation as these companies improve their credit quality. 24

27 Note 12: United Methodist Church of Resurrection Agreements On January 2, 2013, the School entered into an Agreement for Building Occupancy and Commitment to Collaboration between Saint Paul School of Theology and the United Methodist Church of the Resurrection (the Agreement ) with the United Methodist Church of the Resurrection ( COR ). Under the Agreement, the School will utilize COR s facilities for classroom, worship and library space beginning August 1, As part of the Agreement, the School allowed representatives of COR to join the School s Board of Trustees (the Board ). Representatives of COR will not at any time comprise more than 25% of the School s Board. The Personnel and Trustee Search and Development Committee of the Board will identify and nominate representatives of COR to serve on the Board. The School will pay a mutually agreed upon fee, determined annually, to COR for each academic year of building occupancy. The fee will be payable in two equal installments on or before September 1 and March 1 of each academic year. The fees for both years ended were both $80,000 and are included in plant operations and maintenance within the statements of activities. The initial term of the Agreement ends July 31, 2018, and in the absence of a notice of termination by either party, will automatically renew for five-year terms each thereafter. The Agreement provides for termination by either party effective July 31 of each year with notice given at least 18 months in advance of the effective termination date. In addition, the Agreement may be terminated by the nonbreaching party for a material breach by the other party that is not cured within 60 days after giving written notice. If a breach is not cured, the termination for material breach shall take effect 30 days after the end of the time to cure. In connection with the Agreement, on June 26, 2013, the parties entered into an IT Services Agreement Addendum (the IT Services Agreement ) whereby COR will provide the School information technology services such as installing the School s information technology equipment, ensuring network services are provided on an uninterrupted basis to the School and making backups of the data on the School s equipment located at COR (collectively, the Services ). The School paid monthly fees to COR for its Services totaling $260,105 and $284,105 for years ended June 30, 2016 and 2015, respectively, which are included in plant operations and maintenance within the statements of activities. Subsequent to the initial term, the parties will negotiate the amount of fees at each renewal term. The initial term of the IT Services Agreement ended June 30, 2014 and renewed thereafter automatically for a period of one year. In April 2015, with an effective date of July 1, 2015, the parties amended the agreement to extend the term until June 30, 2016 and renewed thereafter automatically for a period of one year. The IT Services Agreement provides for termination by either party by written notice to the other party at least 90 days prior to the expiration of the then current term or if the parties are unable to agree on the fees. Related to the campus move, the School has also executed an agreement with an unrelated university to house approximately 20,000 volumes of its library collection. Equal monthly fees are payable to this university totaling $40,000 annually. The initial term of the agreement ended August 15, 2014 and renews automatically each year thereafter, unless either party gives termination notice 90 days prior to the anniversary date. 25

28 Note 13: Operating Leases Noncancellable operating lease for office space expires in This lease requires the School to pay a portion of executor costs (property taxes, maintenance and insurance). The School leases certain other office equipment expiring in In accordance with ASC Topic 840, Leases, rental agreements with escalating lease payments and rental incentives are recognized in the statements of activities on a straight-line basis. The landlord paid for $424,855 in leasehold improvements for the leased office space. Additionally, the lease agreement includes annual escalation of rents based on a fixed schedule that range from $172,300 to $266,390, annually, through Deferred rent liability and deferred lease incentive totaled $345,881 and $398,997, respectively, as of and is included in accounts payable and accrued liabilities on the statements of financial position. Rental expense for all operating leases amounted to $202,521 and $207,132 for the years ended, respectively. The future minimum lease payments under non-cancelable lease agreements as of June 30, 2016 are as follows: 2017 $ 260, , , , ,520 Thereafter 77,947 $ 1,407,504 Note 14: U.S. Department of Education s Program Review In November 2012, the Department of Education (DOE) conducted a program review of the School s Federal Direct Loan Program for the years ended June 30, 2013 and 2012 and issued a Program Review Report in September The DOE s report contained multiple findings, some of which indicated that certain students may have not been eligible to receive Federal Direct Loans. Management has conducted a review of its Federal Direct Loan Programs and the DOE findings and does not believe these findings will have a direct material impact on the School s financial statements. Management has determined that no accrual regarding the potential payback of Federal funds is necessary for the financial statements. Management believes any potential loss to the Federal Direct Loan Program would not be material since the School maintains a low cohort default rate for its Federal Direct Loan Program. The School s most recently issued cohort default rate is 7.8%. 26

29 As of the date of this report, the DOE has not issued a final determination letter regarding these findings and has not provided any instructions for payback of Federal funds. The pending DOE final determination letter could ultimately result in material payments due back to the DOE. Note 15: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following: Contributions Approximately 80% and 56% of all gifts and grants were received from three and two donors for the years ended, respectively. Pledge Receivables The entire pledges receivable balance was due from two donors and one donor for the years ended, respectively. Allowance for Uncollectible Receivables Significant estimates used in determining the allowance for uncollectible receivables are described in Note 1. Management believes the remaining net outstanding receivable balances are collectible as of June 30, This estimate could materially change in future periods due to unforeseen events and circumstances. Investments The School invests in various investment securities. 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 change could materially affect the amounts reported in the accompanying statements of financial position. Note 16: Subsequent Events Subsequent events have been evaluated through the date of the Independent Auditor s Report, which is the date the financial statements were available to be issued. 27