The MGH Institute of Health Professions, Inc. Financial Statements June 30, 2012 and 2011

Transcription

1 The MGH Institute of Health Professions, Inc. Financial Statements

2 Index Page(s) Report of Independent Auditors... 1 Financial Statements Statements of Financial Position... 2 Statement of Activities and Changes in Net Assets... 3 Statements of Cash Flows

3 Report of Independent Auditors To the Board of Trustees of The MGH Institute of Health Professions, Inc. In our opinion, the accompanying statement of financial position and the related statements of activities and changes in net assets and cash flows present fairly, in all material respects, the financial position of The MGH Institute of Health Professions, Inc. at 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. These financial statements are the responsibility of The MGH Institute of Health Professions, Inc. s management. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year summarized comparative information has been derived from The MGH Institute of Health Professions, Inc s. fiscal 2011 financial statements, and in our report dated November 4, 2011, we expressed an unqualified opinion on those financial statements. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. November 12, 2012 PricewaterhouseCoopers LLP, 125 High Street, Boston, MA T: (617) , F: (617) ,

4 Statements of Financial Position Assets Cash and equivalents $ 4,058 $ 1,251 Student accounts receivable, net Pledges receivable, net and contributions receivable 2,423 4,016 Other assets Investments 21,237 19,636 Due from affiliates Assets under split interest agreements Investments held in trust 3,628 3,945 Interest in the net assets of The Massachusetts General Hospital 17,736 19,014 Property and equipment, net 25,199 22,254 Total assets $ 75,000 $ 71,889 Liabilities and Net Assets Accounts payable and accrued expenses $ 2,496 $ 2,658 Liabilities under split interest agreements Due to affiliates Deferred revenues and student deposits 5,912 4,446 Long-term obligations 21,526 19,587 Total liabilities 30,409 26,815 Commitments and contingencies Net assets Unrestricted 25,281 23,860 Temporarily restricted 8,179 10,697 Permanently restricted 11,131 10,517 Total net assets 44,591 45,074 Total liabilities and net assets $ 75,000 $ 71,889 The accompanying notes are an integral part of these financial statements. 2

5 Statement of Activities and Changes In Net Assets Year Ended June 30, 2012 (with summarized financial information for the year ended June 30, 2011) Temporarily Permanently Unrestricted Restricted Restricted Operating revenues Tuition and fees $ 31,882 $ - $ - $ 31,882 $ 27,074 Less: Financial aid 4, ,057 3,537 Tuition and fees, net 27, ,825 23,537 Grants and contracts Contributions used for operations ,072 1,207 Investment income Gains used for operations ,330 1,233 Other revenue Net assets released from restrictions 741 (741) Total operating revenues 31, ,739 27,961 Operating expenses Instruction 16, ,687 14,221 Institutional support 5, ,686 5,311 Research Student services 1, ,614 1,594 Academic support 4, ,041 3,725 Facilities Total operating expenses 28, ,838 25,614 Increase in net assets from operating activities 2, ,901 2,347 Nonoperating activities Contributions , Contributions used for operations (817) (255) - (1,072) (1,207) Net realized gains on investments ,385 Gains used for operations (782) (548) - (1,330) (1,233) Change in net unrealized appreciation on investments (949) (528) - (1,477) 3,008 Change in interest in the net assets of The Massachusetts General Hospital Change in investments held in trust - - (317) (317) 413 Impairment charge - (1,950) - (1,950) - Increase (decrease) in net assets from nonoperating activities (1,362) (2,636) 614 (3,384) 4,268 Increase (decrease) in net assets 1,421 (2,518) 614 (483) 6,615 Net assets, beginning of year 23,860 10,697 10,517 45,074 38,459 Net assets, end of year $ 25,281 $ 8,179 $ 11,131 $ 44,591 $ 45,074 The accompanying notes are an integral part of these financial statements. 3

6 Statements of Cash Flows Years Ended Cash flows from operating activities Change in net assets $ (483) $ 6,615 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation 1,898 1,672 Receipt of contributed securities (470) (179) Contribution receivable impairment charge 1,950 - Net realized and change in unrealized appreciation on investments 772 (5,079) Change in investments held in trust 317 (413) Change in interest in the net assets of The Massachusetts General Hospital Change in value of split interest agreements 171 (48) Increase (decrease) in cash resulting from a change in Student accounts receivable, net 218 (172) Other assets (25) 31 Due to affiliates 1,041 (2,699) Pledges receivable, net and contributions receivable (357) 311 Accounts payable and accrued expenses (162) 61 Deferred revenues and student deposits 1, Net cash provided by operating activities 6, Cash flows from investing activities Purchase of property and equipment (4,843) (354) Purchase of investments (3,560) (6,640) Proceeds from sales of investments 2,865 4,130 Net cash used for investing activities (5,538) (2,864) Cash flows from financing activities Proceeds from debt issuance 3,000 - Payments on long-term obligations (1,061) (927) Net cash provided by (used for) financing activities 1,939 (927) Net increase (decrease) in cash and equivalents 2,807 (2,805) Cash and equivalents Beginning of year 1,251 4,056 End of year $ 4,058 $ 1,251 Supplemental disclosure Contributed securities $ 470 $ 179 The accompanying notes are an integral part of these financial statements. 4

7 1. Summary of Significant Accounting Policies Organization The MGH Institute of Health Professions, Inc. (Institute) offers doctorate, master s, bachelor s degree and/or certificate programs in communication sciences disorders, medical imaging, nursing, and physical therapy. The Massachusetts General Hospital (MGH) is the sole member of the Institute. Partners HealthCare System, Inc. (PHS) is the sole member of MGH, Brigham and Women s Health Care, Inc., NSMC HealthCare, Inc., Newton-Wellesley HealthCare System, Inc., Neighborhood Health Plan, Inc., Partners Continuing Care, Inc. and Partners International Medical Services, LLC. PHS appoints the two physicians who are the members of Partners Community HealthCare, Inc. The individual serving as the PHS President and Chief Executive Officer is the sole member of Partners Harvard Medical International, Inc. PHS, together with all of its affiliates, is referred to as Partners HealthCare. The Institute is a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting. The financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Institute s financial statements for the year ended June 30, 2011, from which the summarized information was derived. The Institute follows the accounting policies and practices of PHS and these statements should be read in conjunction with the consolidated financial statements of Partners HealthCare. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made in the areas of investments (Note 2), contributions receivable (Note 4), due to affiliates (Note 9) and accounts payable and accrued expenses. Fair Value of Financial Instruments The fair value of financial instruments approximates the carrying amount reported in the statement of financial position for cash and equivalents, investments, assets under split interest agreements, investments held in trust, interest in the net assets of MGH, student accounts receivable, pledges receivable, contributions receivable, and accounts payable. Long-term obligations approximate fair value based on estimates using current interest rates available with equivalent maturities. More information can be found in Note 3, Fair Value Measurements. Cash and Equivalents Cash and equivalents represent money market and highly liquid debt instruments with a maturity at the date of purchase of three months or less. 5

8 Nurse Faculty Loan Program The Institute has an agreement with the U.S. Department of Health and Human Services (HHS) to participate in a Nurse Faculty Loan Program (NFLP), the objective of which is to increase the number of qualified nursing faculty in the United States. Subject to the availability of funds, amounts are awarded by HHS to the Institute and then loaned to eligible students. Following graduation, students meeting predetermined criteria are eligible for forgiveness of up to 85% of the loan over a period up to four years. Under the terms of the award the Institute is required to establish an account to be used only for making loans to eligible students and to cover the costs associated with the collection of these loans. As of, the NFLP Fund amounted to $19 and $94, respectively, and is reported as a component of cash and equivalents. Student Accounts Receivable Student accounts receivable consists of amounts due from students for tuition and fees. The receivable balance is net of allowances for uncollectible accounts of approximately $19 and $33 at, respectively. Investments The Institute holds investments which represent units in a partnership (Note 2) and are recorded at fair value. Investments whose cost exceeds fair value are reviewed each quarter to determine whether these investments are other-than-temporarily impaired. This review considers factors including the anticipated holding period for the investments and the extent and duration of below cost valuation. Investment income or loss (including interest, dividends and endowment income distributions) is included in the change in net assets from operating activities unless the income or loss is restricted by donor or law. Investment income or loss is reported net of investment related expenses. The changes in net unrealized appreciation on investments and net realized gains and losses (excluding distributed endowment gains) are excluded from the change in net assets from operating activities. Endowment Income Spending and Distribution Policy Investments include the interest in the net assets of MGH as well as donor-restricted and boarddesignated funds. The Institute follows Partners HealthCare s endowment spending policy for pooled endowment funds. Annually, the PHS Board of Directors establishes the endowment distribution rate based on the recommendations of the PHS Investment and Finance Committees. The endowment policy fixes the spending rate to an amount between 4.5% and 5.0% of a trailing four- to five-year moving average unit market value. A fixed distribution rate is determined each year for spending which may utilize either current year income from interest and dividends and/or net accumulated gains in fair value. The rate may also be adjusted for significant market fluctuations. Investments Held In Trust Investments held in trust include investments neither in the possession nor under the control of the Institute, but administered by outside trustees, with the Institute deriving income from the assets of such funds. These assets are estimated using the fair value of the assets held in the irrevocable trusts. 6

9 Interest in the Net Assets of the Massachusetts General Hospital MGH holds investment assets for the benefit of the Institute. Since MGH is the sole member of the Institute, these organizations are financially interrelated. Accordingly, the Institute recognizes its interest in the net assets of MGH and adjusts that interest for its share of the change in the net assets of MGH. Changes due to gifts, investment income (including realized gains and losses) and unrealized appreciation are recognized in nonoperating activities. Split Interest Agreements Assets recorded under split interest agreements are recorded at fair value and in the appropriate net asset category based on donor stipulation. Contributions related to the split interest agreement are recognized as contribution revenue in an amount equal to the present value of future benefits less the liability for income payable to the donor or the donor s designee. Liabilities have been established for those split interest agreements for which the Institute is a trustee. During the term of these agreements, changes in the value of split interest agreements are recognized in the statement of activities and changes in net assets based on reevaluations of the expected future benefit to be received by the Institute and reevaluations of the expected future payments to beneficiaries, based on changes in life expectancy and other actuarial assumptions. Discount rates ranging from 1.2% to 3.0% in 2012 and from 2.8% to 3.0% in 2011 were used in these calculations. Property and Equipment Property and equipment is reported on the basis of cost less accumulated depreciation. Donated items, exclusive of transfers from related organizations, are recorded at fair value at the date of contribution. Property and equipment is reviewed for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Depreciation of property and equipment is calculated by use of the straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives of forty years for buildings, fifteen to forty years for building improvements, shorter of asset life or lease term for leasehold improvements, and a range of five to twenty years for furniture and equipment. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized, net of any interest earned, as a component of the cost of acquiring those assets. Compensated Absences In accordance with formal policies concerning vacation and other compensated absences, accruals of $520 and $364 were recorded at, respectively. Net Assets Permanently restricted net assets include the historical dollar amounts of gifts, and income and gains, which are required by donors to be permanently retained as well as investments held in trust. Temporarily restricted net assets include gifts, and income and gains on permanently restricted net assets which can be expended but for which restrictions have not yet been met. Such restrictions include purpose restrictions where donors have specified the purpose for which the net assets are to be spent, or time restrictions imposed by donors or implied by the nature of the gift (capital projects, pledges to be paid in the future, life income funds) or by interpretations of law (gains available for appropriation but not appropriated in the current period). Unrestricted net assets include all the remaining net assets of the Institute. See Note 10 for further information on the composition of restricted net assets. 7

10 Realized gains and losses are classified as unrestricted net assets unless they are restricted by the donor or law. Unless permanently restricted by the donor, realized and net unrealized appreciation on permanently restricted gifts are classified as temporarily restricted until appropriated for spending by the Institute in accordance with policies established by Partners HealthCare and the Uniform Prudent Management of Institutional Funds Act (UPMIFA) enacted by The Commonwealth of Massachusetts. Net losses on permanently restricted endowment funds are classified as a reduction to unrestricted net assets until such time as the fair value of these funds exceeds historical cost. Operations The Institute s operations include tuition and fees, grants and contracts, contributions used for operations, investment income, gains used for operations and other revenue, and operating expenses. Nonoperating activities include all realized gains on investments, excluding gains used for operations, donor contributions received in the current year and not used for operations, change in net unrealized appreciation on investments, change in investments held in trust, and change in interest in the net assets of MGH. All other activity is classified as operating revenues and expenses. Contributions Unconditional promises to give cash and other assets to the Institute are reported at fair value at the date the promise is received. Conditional promises to give are recognized when the conditions are substantially met. Contributions are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. 2. Investments Investments are included in pooled investment funds. The Partners HealthCare System Pooled Investment Accounts (Partnership) is structured as a single general partnership composed of four investment pools, with PHS and substantially all of its affiliates participating in the pools as partners. Each partner s interest in the Partnership is based on its underlying investments in one or more of the four separate pools. Amounts included in the investment pools are accounted for using the fair value method whereby each partner is assigned a number of units based on the fair value of the assets of a pool at the time of entry of the funds into the pool. Current fair value is used to determine the number of units allocated to additional amounts placed in a pool and to value withdrawals from a pool. Income from investments of the pools, including realized gains and losses, is allocated on a unitized basis to a partner based on the partner s share of units in a pool. 8

11 Investment income and gains (losses) from cash and equivalents, investments, interest in the net assets of MGH and investments held in trust are comprised of the following: Years Ended June 30, Unrestricted Dividends and interest income $ 318 $ 282 Net realized gains on investments 719 1,442 Change in net unrealized appreciation on investments (949) 1,954 Total unrestricted 88 3,678 Temporarily restricted Dividends and interest income Net realized gains on investments Change in net unrealized appreciation on investments (528) 1,054 Total temporarily restricted (202) 2,082 Permanently restricted Change in investments held in trust (317) 413 $ (431) $ 6,173 MGH holds investment assets from which income distributions have been designated by votes of the MGH Board to benefit the Institute. These investment assets are not included in the interest in the net assets of MGH which is recorded on the Institute s statements of financial position. These investments totaled $11,381 and $12,195 at, respectively. Income distributions received by the Institute from these investments were $461 and $427 for the years ended, respectively. 3. Fair Value Measurements Fair value is defined as 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 (also referred to as exit price ). Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. In determining fair value, the use of various valuation approaches, including market, income and cost approaches, is permitted. Fair Value Hierarchy A fair value hierarchy has been established based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the reporting entity s assumptions about the inputs market participants would use. The fair value hierarchy requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 9

12 The hierarchy is described below. Level 1 - Valuations using quoted prices in active markets for identical assets or liabilities. Valuations of these products do not require a significant degree of judgment. Level 2 - Valuations using observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; broker or dealer quotations; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Valuations using unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Valuation Techniques The Institute s investment in the Partnership is classified based on the nature of the underlying investments within the pools in which the Institute has an interest. Investments in the Partnership classified within Level 1 or Level 2 of the fair value hierarchy are valued using quoted market prices, broker or dealer quotations, or other observable pricing sources. Investments in the Partnership classified within Level 3 of the fair value hierarchy represent underlying investments that trade infrequently and therefore have little or no observable inputs with which to measure fair value. In addition, assets under split interest agreements and investments held in trust are also Level 3 because, for hierarchy classification purposes, the Institute cannot look through to the underlying securities held in the trust. The following tables summarize fair value measurements at for financial assets measured at fair value on a recurring basis. Fair Value Measurements Using Quoted Prices in Active Markets Significant Other Significant Fair Value at for Identical Observable Unobservable June 30, 2012 Items (Level 1) Inputs (Level 2) Inputs (Level 3) Assets Investment in the Partnership $ 21,237 $ 6,702 $ 5,673 $ 8,862 Assets under split interest agreements Investments held in trust 3, ,628 Interest in the net assets of MGH 17,736 5,331 1,859 10,546 $ 42,613 $ 12,033 $ 7,532 $ 23,048 10

13 Fair Value Measurements Using Quoted Prices in Active Markets Significant Other Significant Fair Value at for Identical Observable Unobservable June 30, 2011 Items (Level 1) Inputs (Level 2) Inputs (Level 3) Assets Investment in the Partnership $ 19,636 $ 2,874 $ 7,831 $ 8,931 Assets under split interest agreements Investments held in trust 3, ,945 Interest in the net assets of MGH 19,014 4,740 3,063 11,211 $ 42,894 $ 7,614 $ 10,894 $ 24,386 For the years ended, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following: Balance at beginning of year $ 24,386 $ 21,334 Total gains (losses) Dividends and interest income Net realized (losses) gains on investments (205) 1,108 Change in unrealized appreciation on investments (299) 1,940 Purchases 2,017 1,461 Sales (1,460) (1,595) Transfer out of Level 3 (1,440) - Balance at end of year $ 23,048 $ 24,386 The net unrealized gain on Level 3 investments held at June 30, 2012 was $5, Pledges Receivable and Contributions Receivable Pledges receivable represent unconditional promises to give and are net of allowances for uncollectible amounts. Pledges are recorded at the present value of their estimated future cash flows. Estimated cash flows due after one year are discounted using published treasury bond and note yields that are commensurate with estimated collection risks. The blended discount rate was 0% for 2012 and The allowance for uncollectibles was $0 for 2012 and Pledges are expected to be collected as follows: June 30, Pledges due within one year $ 402 $ 311 Contributions receivable 2,021 3,705 $ 2,423 $ 4,016 11

14 Conditional Pledge During 2009, the Institute was named as the remainder interest beneficiary in a life estate trust. As part of the life estate contract between the donor and the Institute, the donor conveyed to the Institute certain real estate, but reserved the right to use the property as his primary residence. According to the contract, if both parties mutually agree to sell the property, the proceeds from the sale would be split between the donor s life estate interest and the Institute s remainder interest in accordance with the applicable sections of the Internal Revenue Code (IRC). As of June 30, 2012 and 2011, the donor s life estate interest was valued at $279 and $545, respectively, and represents a conditional contribution to the Institute. In future years, the Institute s remainder interest will increase, and the conditional contribution will decrease, in accordance with the applicable sections of the IRC. 5. Property and Equipment Property and equipment consists of the following: June 30, Buildings and building improvements $ 25,268 $ 25,255 Leasehold improvements 5,957 2,682 Equipment 4,314 3,186 Construction in progress ,616 31,139 Accumulated depreciation (10,417) (8,885) Property and equipment, net $ 25,199 $ 22,254 For the years ended, fully depreciated assets with an original cost of $366 and $424, respectively, were written off. 6. Long-Term Obligations Long-term obligations consist of the following: June 30, Partners HealthCare Loan, variable interest rate of 0.18% and 0.09% at, respectively, final maturity on June 30, 2031 $ 17,040 $ 17,590 Partners HealthCare Capital Framework Loan, variable interest rate of 4.12% and 4.31% at, respectively, final maturity on March 15, ,486 1,997 Total long-term obligations $ 21,526 $ 19,587 12

15 The Partners HealthCare Loan which matures on June 30, 2031 bears interest at a variable rate equivalent to the Securities Industry and Financial Markets Association Municipal Swap Index. This loan is collateralized by the Catherine Filene Shouse Building. The Partners HealthCare Capital Framework Loan bears interest at a variable rate based upon the weighted average cost of Partners HealthCare s debt, reset annually, effective October 1. Under the existing Framework Loan, the Institute borrowed an additional $3,000 in Long-term obligations of the Institute have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying amount for this debt is a reasonable estimate of its fair value. Total principal amounts due on the loans during the next five years and thereafter are as follows: 2013 $ 1, , , , Thereafter 15,408 Total $ 21,526 Interest paid during the years ended was $157 and $140, respectively. No interest was capitalized in 2012 or Leases The Institute leases the land upon which the Catherine Filene Shouse Building is located from the Boston Redevelopment Authority under a ground lease expiring in Rent expense under this lease for 2012 and 2011 was $147 and $144, respectively. The future minimum payments are $149 annually. The Institute also entered into noncancelable operating leases for office and administrative space within certain buildings in the Charlestown Navy Yard (CNY). Minimum future lease commitments under all of the Institute s noncancelable leases for the next five years and thereafter are as follows: 2013 $ 1, , , , ,357 Thereafter 3,464 Total lease payments $ 9,908 Rent expense under operating leases approximated $836 and $553 in 2012 and 2011, respectively. 13

16 8. Pension Plans Certain professional staff employed by MGH and its affiliates, including the Institute, participate in the MGH Academic Annuity Plan, which is a defined contribution plan. MGH and its affiliates contribute to the plan a percentage, as defined by the plan agreement, of each participant s annual compensation. Nonprofessional staff employed by the Institute are covered under a noncontributory defined benefit plan administered by MGH. Pension expense allocated to the Institute under both plans was $853 and $688 for the years ended, respectively. 9. Transactions with Affiliates On behalf of the Institute, the General Hospital Corporation (General), MGH, and PHS deposit cash receipts such as grant income and investment income and make payments for amounts owed to employee and vendors. The Institute receives certain administrative and support services from affiliates as follows: Years Ended June 30, PHS $ 719 $ 652 General MGH 4 4 $ 1,033 $ 886 In addition, the General receives Medicare reimbursement for the graduate education of the Institute s students and transfers some of this benefit to the Institute. For the years ended, other revenue includes $289 and $181, respectively, related to education reimbursement. These amounts vary from year to year depending on allowable costs incurred and changes in reimbursement regulations and include changes in prior year estimates. Changes in prior year estimates increased revenue by $97 for the year ended June 30, 2012 and decreased revenue by $6 for the year ended June 30,

17 10. Restricted Net Assets Restricted net assets are available for the following purposes: June 30, Temporarily restricted Scholarships $ 2,988 $ 3,693 Professorships 2,676 2,808 Capital Education and other 2,459 4,148 Total temporarily restricted net assets $ 8,179 $ 10,697 Permanently restricted Scholarships $ 5,671 $ 4,816 Professorships 1,242 1,242 Capital Education and other 3,968 4,209 Total permanently restricted net assets $ 11,131 $ 10,517 Endowment The Institute s endowment consists of individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the Board to function as endowments. As required by generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board to function as endowments, are classified and reported as restricted or unrestricted based on the existence or absence of donor-imposed restrictions. The Institute has interpreted UPMIFA as requiring the preservation of the value of the original gift of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Institute classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts donated 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 the donor-restricted endowment that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Institute in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Institute considers several factors in making a determination to appropriate or accumulate donor-restricted endowment funds. These factors include: the duration and preservation of the fund; the purposes of the organization and the donor-restricted endowment fund; general economic conditions; the possible effect of inflation and deflation; the expected total return from income and the appreciation of investments; other resources of the organization; and the investment policies of the organization. 15

18 Endowment Funds with Deficits From time to time, the value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts. When such endowment deficits exist, they are classified as a reduction to unrestricted net assets. Deficits of this nature reported in unrestricted net assets were $78 and $26 as of, respectively. These deficits resulted from unfavorable market fluctuations that occurred after the investment of new permanently restricted contributions or subsequent endowment additions. The following presents the endowment net asset composition by type of fund as of June 30, 2012 and 2011 and the changes in endowment assets for the years ended : Endowment Net Asset Composition by Type of Fund as of Temporarily Permanently June 30, 2012 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (78) $ 5,063 $ 7,311 $ 12,296 Board-designated endowment funds 9, ,994 Total funds $ 9,916 $ 5,063 $ 7,311 $ 22,290 Changes in Endowment Net Assets for the Year Ended Temporarily Permanently June 30, 2012 Unrestricted Restricted Restricted Total Endowment net assets at June 30, 2011 $ 10,727 $ 5,870 $ 6,350 $ 22,947 Investment return Investment income Net realized and unrealized appreciation (depreciation) (405) (344) - (749) Total investment return (363) (297) - (660) Contributions Other Appropriation of endowment assets for expenditure (453) (510) - (963) Total changes (811) (807) 961 (657) Endowment net assets at June 30, 2012 $ 9,916 $ 5,063 $ 7,311 $ 22,290 Endowment Net Asset Composition by Type of Fund as of Temporarily Permanently June 30, 2011 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (26) $ 5,870 $ 6,350 $ 12,194 Board-designated endowment funds 10, ,753 Total funds $ 10,727 $ 5,870 $ 6,350 $ 22,947 16

19 Changes in Endowment Net Assets for the Year Ended Temporarily Permanently June 30, 2011 Unrestricted Restricted Restricted Total Endowment net assets at July 1, 2010 $ 9,234 $ 4,466 $ 6,289 $ 19,989 Investment return Investment income Net realized and unrealized appreciation (depreciation) 1,860 1,806-3,666 Total investment return 1,912 1,864-3,776 Contributions Appropriation of endowment assets for expenditure (420) (460) - (880) Total changes 1,493 1, ,958 Endowment net assets at June 30, 2011 $ 10,727 $ 5,870 $ 6,350 $ 22, Operating Expenses Total operating expenses by natural classification are as follows: Years Ended June 30, Employee compensation and benefits $ 20,180 $ 18,148 Supplies and other expenses 6,602 5,654 Depreciation 1,898 1,672 Interest Total operating expenses $ 28,838 $ 25, Subsequent Events The Institute has assessed the impact of subsequent events through November 12, 2012, the date the audited financial statements were issued, and has concluded that there were no such events, that require adjustment to the audited financial statements or disclosure in the notes to the audited financial statements. 17