CONTENTS. Independent Auditors Report Statements of Financial Position Statements of Activities... 4

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2 CONTENTS Independent Auditors Report Statements of Financial Position... 3 Statements of Activities... 4 Statements of Functional Expenses Statements of Cash Flows... 7 Notes to the Financial Statements Schedule of Expenditures of Federal Awards 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 for Each Major Program and on Internal Control Over Compliance Required by OMB Circular A Schedule of Findings and Questioned Costs... 29

3 111 West Ocean Blvd. Twenty-Second Floor Long Beach, CA Von Karman Ave. Suite 1060 Irvine, CA South Figueroa St. Suite 4950 Los Angeles, CA To the Board of Directors of Coastal Developmental Services Foundation Report on the Financial Statements INDEPENDENT AUDITORS REPORT We have audited the accompanying financial statements of Coastal Developmental Services Foundation (a California nonprofit corporation), which comprise the statements of financial position as of June 30, 2013 and 2012, and the related statements of activities, functional expenses, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 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 entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coastal Developmental Services Foundation as of June 30, 2013 and 2012, 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. Other Matters Other Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, is 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 audits 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 United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 5, 2014, on our consideration of Coastal Developmental Services 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 internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Coastal Developmental Services Foundation s internal control over financial reporting and compliance. Long Beach, California March 5,

5 STATEMENTS OF FINANCIAL POSITION ASSETS June 30, ASSETS Cash and cash equivalents $ 674,081 $ 1,843,646 Cash client trust funds 869,227 1,168,088 Contracts receivable state of California 13,574,939 11,335,446 Receivables from Intermediate Care Facility vendors 1,415,023 Other receivables 14, ,618 Prepaid expenses 436, ,717 Due from state accrued vacation, other leave, and other employee benefits 17,146,294 14,893,907 Deposits 138, ,790 TOTAL ASSETS $ 34,270,178 $ 29,828,212 LIABILITIES AND NET DEFICIT LIABILITIES Accounts payable $ 14,535,288 $ 12,807,821 Accrued salaries 380, ,221 Accrued vacation and other leave benefits 929, ,687 Line of credit 700,000 Post-retirement health care plan obligation 17,458,696 15,543,471 Due to state 432, ,797 Accrued unemployment insurance 225, ,718 Unexpended client support 490, ,285 35,151,028 30,939,000 COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 7) NET DEFICIT Unrestricted ( 880,850) ( 1,110,788) TOTAL LIABILITIES AND NET DEFICIT $ 34,270,178 $ 29,828,212 The accompanying notes are an integral part of these financial statements. 3

6 STATEMENTS OF ACTIVITIES CHANGE IN UNRESTRICTED NET DEFICIT For the Year Ended June 30, SUPPORT AND REVENUE Contracts state of California $ 144,037,786 $ 133,375,434 Intermediate Care Facility supplemental services income 2,054,453 Interest income 17,430 61,051 Other income 106,555 29,810 Total Support and Revenue 146,216, ,466,295 EXPENSES Program Services Direct client services 12,246,916 11,323,829 Residential care facilities 19,081,276 18,347,328 Day program 22,699,764 21,355,278 Other purchased services 85,820,202 75,992, ,848, ,018,467 Supporting Services General and administrative 6,411,616 6,415,970 Total Expenses 146,259, ,434,437 CHANGE IN NET DEFICIT BEFORE HEALTH PLAN-RELATED CHANGES OTHER THAN NET PERIODIC POST-RETIREMENT BENEFIT COST ( 43,550) 31,858 HEALTH PLAN-RELATED CHANGES OTHER THAN NET PERIODIC POST-RETIREMENT BENEFIT COST 273,488 1,263,004 CHANGE IN NET DEFICIT 229,938 1,294,862 NET DEFICIT AT BEGINNING OF YEAR ( 1,110,788) ( 2,405,650) NET DEFICIT AT END OF YEAR ( $ 880,850) ( $ 1,110,788) The accompanying notes are an integral part of these financial statements. 4

7 STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED JUNE 30, 2013 Program Services Direct Residential Other Client Care Day Purchased Services Facilities Program Services Total Salaries $ 6,926,632 $ 6,926,632 Employee health and retirement benefits 2,872,091 2,872,091 Payroll taxes 69,776 69,776 Total Salaries and Related Expenses 9,868,499 9,868,499 Purchase of services $ 19,081,276 $ 22,699,764 $ 85,820, ,601,242 Communication 103, ,688 General office expenses 169, ,700 Printing 16,567 16,567 Insurance 66,593 66,593 Facility rent 1,041,895 1,041,895 Equipment rental 66,052 66,052 Equipment and facility maintenance 197, ,938 Consultant fees 409, ,683 Equipment purchases 79,124 79,124 Accounting fees Board expenses 11,171 11,171 Legal fees 23,724 23,724 Staff travel 73,329 73,329 Dues 34,778 34,778 General expenses 84,175 84,175 TOTAL EXPENSES $ 12,246,916 $ 19,081,276 $ 22,699,764 $ 85,820,202 $ 139,848,158 The accompanying notes are an integral part of these financial statements. 5

8 Supporting Services General and Administrative Total Expenses $ 3,310,913 $ 10,237,545 1,892,804 4,764,895 64, ,312 5,268,253 15,136, ,601,242 49, ,251 52, ,482 7,716 24,283 31,832 98, ,023 1,539,918 31,572 97,624 94, , , ,510 37, ,945 67,117 67,117 5,340 16,511 11,340 35,064 7,944 81,273 16,624 51,402 35, ,421 $ 6,411,616 $ 146,259,774

9 STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED JUNE 30, 2012 Program Services Direct Residential Other Client Care Day Purchased Services Facilities Program Services Total Salaries $ 6,479,011 $ 6,479,011 Employee health and retirement benefits 2,499,020 2,499,020 Payroll taxes 76,479 76,479 Total Salaries and Related Expenses 9,054,510 9,054,510 Purchase of services $ 18,347,328 $ 21,355,278 $ 75,992, ,694,638 Communication 123, ,175 General office expenses 199, ,672 Printing 4,726 4,726 Insurance 63,064 63,064 Facility rent 1,004,999 1,004,999 Equipment rental 64,436 64,436 Equipment and facility maintenance 147, ,064 Consultant fees 323, ,621 Equipment purchases 146, ,769 Accounting fees Board expenses 8,523 8,523 Legal fees 1,642 1,642 Staff travel 72,183 72,183 Dues 33,811 33,811 General expenses 75,634 75,634 Interest expense TOTAL EXPENSES $ 11,323,829 $ 18,347,328 $ 21,355,278 $ 75,992,032 $ 127,018,467 The accompanying notes are an integral part of these financial statements. 6

10 Supporting Services General and Administrative Total Expenses $ 3,338,810 $ 9,817,821 1,877,938 4,376,958 66, ,236 5,283,505 14,338, ,694,638 63, ,131 60, ,554 2,393 7,119 31,222 94, ,730 1,504,729 32,152 96,588 74, , , ,112 76, ,183 52,501 52,501 4,437 12, ,497 7,500 79,683 17,604 51,415 38, ,924 1,410 1,410 $ 6,415,970 $ 133,434,437

11 STATEMENTS OF CASH FLOWS For the Year Ended June 30, CASH FLOWS FROM OPERATING ACTIVITIES Change in net deficit $ 229,938 $ 1,294,862 Adjustments to reconcile change in net deficit to net cash used in operating activities: (Increase) decrease in: Cash client trust funds 298,861 ( 215,035) Contracts receivable state of California ( 2,239,493) ( 2,476,565) Receivables from Intermediate Care Facility vendors ( 1,415,023) Other receivables 128, ,611 Prepaid expenses ( 132,134) 77,795 Due from state accrued vacation, other leave, and other employee benefits ( 2,252,387) ( 1,748,838) Increase (decrease) in: Accounts payable 1,727, ,580 Accrued salaries ( 42,008) 47,245 Accrued vacation and other leave benefits 63,674 ( 26,534) Post-retirement health care plan obligation 1,915, ,368 Due to state 131, ,000 Accrued unemployment insurance 335 ( 9,123) Unexpended client support ( 284,200) ( 191,082) Net Cash Used In Operating Activities ( 1,869,565) ( 1,659,716) CASH FLOWS FROM FINANCING ACTIVITIES Net change in short-term borrowings 700,000 Net Cash Provided By Financing Activities 700,000 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 1,169,565) ( 1,659,716) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,843,646 3,503,362 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 674,081 $ 1,843,646 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest during the year ended June 30, 2012 was $1,410. No interest was paid during the year ended June 30, The accompanying notes are an integral part of these financial statements. 7

12 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 1 Summary of Significant Accounting Policies Basis of Presentation Coastal Developmental Services Foundation (the Foundation) was incorporated on January 3, 1983 as a nonprofit corporation in the state of California. 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, under the name Westside Regional Center, provides services to persons with substantial handicaps caused by mental retardation, cerebral palsy, epilepsy, autism and other neurological handicapping conditions. The geographical area served includes the two health districts of Inglewood and Santa Monica- West. The Act includes governance provisions regarding the composition of the Foundation s board of directors. 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% of the governing board be persons with developmental disabilities or their parents or legal guardians; and that no less than 25% 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 regional center purchases client services, shall serve as a member of the regional center board. To comply with the Act, the Foundation s board of directors 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 contracts with the State of California Department of Developmental Services (DDS) to operate a regional center for the developmentally disabled and their families. Under the terms of these contracts, funded expenditures are not to exceed $135,189,850 and $131,338,044 for the and contract years, respectively. As of June 30, 2013, actual net expenditures under the and contracts were $139,959,380 and $131,292,248, respectively. 8

13 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 1 Summary of Significant Accounting Policies (Continued) Basis of Presentation (Continued) As discussed above, the Foundation operates under contracts with the DDS. Contract revenue is funded on a cost reimbursement basis. The net deficit reported as of June 30, 2013 and 2012 on the statements of financial position is primarily the result of the implementation of an accounting standard regarding the reporting of the Foundation s postretirement health care plan. As further discussed in Notes 1 and 6, the accounting standard required the Foundation to recognize as a charge to net assets the actuarial losses and prior service cost which had not yet been recognized as components of periodic plan expenses. For purposes of reporting plan expenses, the unrecognized actuarial losses and prior service costs will continue to be amortized into plan expenses over future years. Plan expenses under the post-retirement health care plan are reimbursed under the DDS contract as the Foundation funds benefits and plan assets. Although the Foundation s management expects that the plan costs will ultimately be funded over future years, plan funding will depend on continued funding by the DDS. Financial Statement Presentation The Foundation is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. As of June 30, 2013 and 2012, the Foundation had no temporarily or permanently restricted net assets. Unrestricted Net Assets Net assets that are not subject to donor-imposed restrictions. Temporarily Restricted Net Assets Net assets subject to donor-imposed stipulations that may or will be met either by actions of the Foundation and/or the passage of time. As the restrictions are satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying statements of activities as net assets released from restrictions. Permanently Restricted Net Assets Net assets subject to donor-imposed restrictions that the corpus be invested in perpetuity and only the income be made available for program operations in accordance with donor restrictions. Such income generally includes interest, dividends, and realized and unrealized earnings from the corpus. 9

14 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 1 Summary of Significant Accounting Policies (Continued) Contributions The Foundation recognizes all contributions received as income in the period received. All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Contributions received that are designated for future periods or restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support that increases those net asset classes. When a donor s stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. Use of Estimates and Assumptions Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. Cash and Cash Equivalents and Concentration of Credit Risk For purposes of the statements of cash flows, the Foundation considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At June 30, 2013 and at various times during the year, the Foundation maintained cash balances in a financial institution in excess of the federally insured limits. Support and Contracts Receivable - State of California Contracts receivable and contract support are recorded on the accrual method as related expenses are incurred. 10

15 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 1 Summary of Significant Accounting Policies (Continued) Receivables from Intermediate Care Facility Vendors The Centers for Medicare and Medicaid Services (CMS) has approved federal financial participation in the funding of the day and transportation services related to the Center s Immediate Care Facility (ICF) services. The federal rules allow for only one provider of the ICF service, requiring all the Medicaid funding for the ICF resident to go through the applicable vendors. The Center receives a 1.5% administrative fee based on the funds received to cover the additional workload. Equipment Pursuant to the terms of the DDS contract, equipment purchases become the property of the state and, accordingly, are charged as expenses when incurred. For the years ended June 30, 2013 and 2012, equipment purchases totaled $116,945 and $223,183, respectively. Accrued Vacation, Other Leave, and Other Employee Benefits The Foundation has accrued a liability for leave benefits earned and for post-retirement health care as discussed in Note 6. However, such benefits are reimbursed under the DDS contract only when actually paid. The Foundation has also recorded a receivable from the DDS for the accrued leave and post-retirement health benefits to reflect the future reimbursement of such benefits. Allocation of Expenses The statements of functional expenses allocate expenses to the program and supporting service categories based on a direct-cost basis for purchase of services expenses, including salaries and related expenses. All other operating expenses are allocated based on a percentage of salaries per category to total salaries, except for travel, which is allocated on a direct-cost basis. Post-Retirement Health Care Plan The Foundation is required to recognize the funded status of a benefit plan in the statements of financial position, measured as the difference between plan assets at fair value and the benefit obligation, with an offsetting charge or credit to net assets. Gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost will be recognized each year as a separate charge or credit to net assets. 11

16 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 1 Summary of Significant Accounting Policies (Continued) Tax Status The Foundation has received tax-exempt status from the Internal Revenue Service and California Franchise Tax Board under Section 501(c)(3) of the Internal Revenue Code and Section 23701(d) of the Revenue and Taxation Code, respectively. The Foundation recognizes the financial statement benefit of tax positions, such as its filing status as tax-exempt, only after determining that the relevant tax authority would more likely than not sustain the position following an audit. The Foundation is subject to potential income tax audits on open tax years by any taxing jurisdiction in which it operates. The statute of limitations for federal and California purposes is generally three and four years, respectively. Subsequent Events The Foundation s management has evaluated subsequent events from the statement of financial position date through March 5, 2014, the date at which the financial statements were available to be issued for the year ended June 30, 2013, and determined there are no other items to disclose. NOTE 2 Cash - Client Trust Funds and Unexpended Client Support The Foundation functions as custodian for the receipt of certain governmental payments and resulting disbursements made on behalf of regional center clients. These cash balances are segregated from the operating cash accounts of the Foundation and are restricted for client support. The following is a summary of operating activity not reported in the statements of activities: For the Year Ended June 30, Support: Social Security and other client support $ 6,843,335 $ 6,968,035 Disbursements: Living out of own home $ 4,661,327 $ 4,561,666 Other disbursements 2,182,008 2,406, $ 6,843,335 $ 6,968,035

17 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 3 Contracts Receivable State of California As of June 30, 2013 and 2012, the DDS had advanced the Foundation $23,406,252 and $27,761,064, respectively, under the regional center contracts. For financial statement presentation, to the extent there are claims receivable, these advances have been offset against the claims receivable from the DDS as follows: June 30, Contracts receivable $ 36,981,191 $ 39,096,510 Contract advances ( 23,406,252) ( 27,761,064) Net contracts receivable $ 13,574,939 $ 11,335,446 NOTE 4 Short-Term Borrowings The Foundation has a revolving note with a bank whereby it may borrow up to $15,000,000 until June 30, 2013, and then up to $33,000,000 until the earlier date of October 1, 2013 or the effective date of a state of California budget with respect to the State General Fund for the fiscal year commencing July 1, 2013, then $15,000,000 until the maturity date of June 30, Interest is payable monthly at the greater of 2% or 1% below the bank s prime rate, with an effective rate of 2.25% as of June 30, There was no balance outstanding as of June 30, The balance outstanding as of June 30, 2013 totaled $700,000. NOTE 5 Retirement Plan The Foundation contributes to the California Public Employees Retirement Systems (PERS), an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for participating public entities within the state of California. Substantially all of the Foundation s employees participate in PERS. PERS uses the Entry Age Normal Cost Method to fund benefits. Under this method, projected benefits are determined for all members and the associated liabilities are spread in a manner that produces level annual cost as a percent of pay in each year from the age of hire to the assumed retirement age. 13

18 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 5 Retirement Plan (Continued) The actuarial accrued liability for active members is then calculated as the portion of the total cost of the plan allocated to prior years. The actuarial accrued liability for members currently receiving benefits, for active members beyond the assumed retirement age, and for members entitled to deferred benefits, is equal to the present value of the benefits expected to be paid. No normal costs are applicable for these participants. The excess of the total actuarial accrued liability over the actuarial value of plan assets is called the unfunded actuarial accrued liability. Funding requirements are determined by adding the normal cost and an amortization of the unfunded liability as a level percentage of assumed future payrolls. Plan amendments are amortized as a level percentage of pay over a closed 20-year period. Gains and losses that occur in the operation of the plan are amortized over a 30-year rolling period, which results in an amortization of about 6% of unamortized gains and losses each year. Finally, if the plan s accrued liability exceeds the actuarial value of plan assets, the annual amortization payment on the total unfunded liability may not be lower than the payment calculated over a 30-year amortization period. A summary of principal actuarial assumptions used are as follows: Valuation Date June 30, 2012 Actuarial Cost Method Entry Age Normal Cost Method Amortization Method Level percent of payroll Average Remaining Period 32 years as of the valuation date Asset Valuation Method 15-year smoothed market Actuarial Assumptions Discount Rate 7.50% (net of administrative expense) Projected Salary Increases 3.30% to 14.20% depending on age, service, and type of employment Inflation 2.75% Payroll Growth 3.00% Individual Salary Growth A merit scale varying by duration of employment coupled with an assumed annual inflation growth of 2.75% and an annual production growth of 0.25% 14

19 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 5 Retirement Plan (Continued) The asset allocation shown below reflects the PERS fund in total as of June 30, The assets of the Foundation s plan are part of the PERS fund and are invested accordingly. Current Target Asset Class Allocation Allocation Public equity 48.3 % 50.0 % Private equity Fixed income Cash equivalents Real assets Inflation assets Absolute Return Strategy % % The Schedule of Funding Progress below shows the recent history of the actuarial value of assets, actuarial accrued liability, their relationship, and the relationship of the unfunded actuarial accrued liability to payroll. Actuarial Value of Unfunded Funded Ratios Annual UL as a Valuation Accrued Assets Liability Market Covered Percentage Date Liability (AVA) (UL) AVA Value Payroll of Payroll 6/30/09 $ 30,320,116 $ 29,271,350 $ 1,048, % 70.9% $ 9,839, % 6/30/10 $ 32,216,071 $ 32,078,826 $ 137, % 79.2% $ 9,865, % 6/30/11 $ 34,656,161 $ 35,318,178 ( $ 662,017) % 92.2% $ 9,765,049 ( 6.8)% 6/30/12 $ 37,042,168 $ 38,303,461 ( $ 1,261,293) % 88.0% $ 9,810,015 ( 12.9)% Employee contributions are approximately 7% of salary and wages. The Foundation is required to contribute the remaining amounts necessary to fund the benefits for its employees, using the actuarial basis adopted by the PERS Board of Administration. Total retirement expense for the years ended June 30, 2013 and 2012, was $694,707 and $715,842, respectively. 15

20 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 6 Post-Retirement Health Care Plan The Foundation provides noncontributory post-retirement health care benefits for its employees. The Foundation uses a June 30 measurement date for its plan. Reconciliation of Benefit Obligations The following tables provide a reconciliation of the changes in the plan s benefit obligations and a statement of the funded status: June 30, Change in benefit obligation Benefit obligation at beginning of year $ 17,022,025 $ 16,276,681 Service cost 1,186,491 1,059,530 Interest cost 936, ,217 Actuarial gain ( 50,931) ( 1,040,447) Benefits paid ( 154,243) ( 168,956) Obligation at end of year 18,939,553 17,022,025 Change in plan assets Fair value of plan assets at beginning of year 1,478,554 1,245,578 Actual return on plan assets 2,303 2,976 Employer contributions 230,000 Fair value of plan assets at end of year 1,480,857 1,478,554 Net amount recognized in the statements of financial position $ 17,458,696 $ 15,543,471 16

21 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 6 Post-Retirement Health Care Plan (Continued) Reconciliation of Benefit Obligations (Continued) The following table provides the components of the net periodic benefit cost for the plan: For the Year Ended June 30, Service cost $ 1,186,491 $ 1,059,530 Interest cost 936, ,217 Return on assets ( 2,303) ( 2,976) Net asset gain ( 53,143) ( 43,732) Amortization of unrecognized past service cost 222, ,557 Net periodic benefit cost $ 2,289,813 $ 2,130,596 All previously unrecognized actuarial gains or losses are reflected in the statements of financial position. The plan items not yet recognized as a component of periodic plan expenses, but included as a separate charge to net assets, are: June 30, Prior service cost $ 1,557,901 $ 1,780,458 Actuarial gain ( 316,138) ( 265,207) $ 1,241,763 $ 1,515,251 17

22 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 6 Post-Retirement Health Care Plan (Continued) Reconciliation of Benefit Obligations (Continued) The Foundation has accrued a receivable as of June 30, 2013 and 2012 from the DDS totaling $16,216,933 and $14,028,220, respectively, representing the portion of the postretirement health care plan obligation which has been recognized as plan expense. The receivables are included in due from state-accrued vacation, other leave, and other employee benefits on the statements of financial position. The accumulated benefit obligation as of June 30, 2001 of $4,228,585 is being considered an unrecognized prior service cost and is being amortized on a straight-line basis over 19 years. Estimated amounts to be amortized into net period benefit cost during the following year is as follows: Prior service cost $ 222,557 Assumptions Weighted-average assumptions used to determine benefit obligations at June 30: Discount rate 5.50% 5.50% General inflation 2.50% 2.50% Long-term rate of return on plan assets 3.75% 3.75% Weighted-average assumptions used to determine net periodic benefit cost for years ended June 30: Discount rate 5.50% 5.50% General inflation 2.50% 2.50% Long-term rate of return on plan assets 3.75% 3.75% 18

23 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 6 Post-Retirement Health Care Plan (Continued) Assumptions (Continued) Assumed health care cost trend at June 30: Net Periodic Benefit Cost: Health care cost trend rate assumed for next year 7.30% 7.30% Rate to which the cost trend is assumed to decline (the ultimate trend rate) 4.50% 4.50% Year that the rate reaches the ultimate trend rate Accumulated Post-Retirement Benefit Obligation: Health care cost trend rate assumed for next year 7.30% 7.30% Rate to which the cost trend is assumed to decline (the ultimate trend rate) 4.50% 4.50% Year that the rate reaches the ultimate trend rate Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A 1% change in assumed health care cost trend rates would have the following effects for the year ended June 30, 2013: 1% Increase 1% Decrease Effect on the accumulated post-retirement benefit obligation $ 1,713,619 ( $ 1,290,928) Contributions The Foundation expects to contribute $212,000 to its post-retirement health care plan for the year ending June 30,

24 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 6 Post-Retirement Health Care Plan (Continued) Plan Assets The plan s assets are reported at fair value. 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. A recent accounting standard has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Foundation has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The following table sets forth by level, with the fair value hierarchy, the plan s assets at fair value as of June 30, 2013: Total Level 1 Level 2 Level 3 Asset category: Money market $ 740,525 $ 740,525 Mutual funds 740, ,332 Total $ 1,480,857 $ 1,480,857 None None The following table sets forth by level, with the fair value hierarchy, the plan s assets at fair value as of June 30, 2012: Total Level 1 Level 2 Level 3 Asset category: Money market $ 1,478,554 $ 1,478,554 Total $ 1,478,554 $ 1,478,554 None None 20

25 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 6 Post-Retirement Health Care Plan (Continued) Estimated Future Benefit Payments The following benefit payments, which reflect expected future services, as appropriate, are expected to be paid: For the Year Ending June 30, 2014 $ 212, , , , , ,375,000 $ 5,216,000 NOTE 7 Commitments and Contingencies Commitments The Foundation leases its office facilities and certain equipment under operating leases expiring through April The terms of the office lease provide for payment of minimum annual rentals, with adjustment for a pro rata share of the lessor s increase in operating costs. The Foundation subleases office facilities to various tenants under noncancelable operating leases that expire at various dates through The lease agreements provide for specific monthly payments plus reimbursement of a percentage share of common operating expenses. 21

26 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 7 Commitments and Contingencies (Continued) Commitments (Continued) Future minimum lease commitments are as follows: For the Year Ending Lease Sublease Net Lease June 30, Commitments Income Commitments 2014 $ 1,771,458 $ 148,123 $ 1,623, ,638,564 1,638, ,663,415 1,663, ,643,293 1,643, ,690,932 1,690,932 Thereafter 15,121,545 15,121,545 $ 23,529,207 $ 148,123 $ 23,381,084 Total facility and equipment rental expense for the years ended June 30, 2013 and 2012 was $1,637,542 and $1,601,317, respectively. Contingencies 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 DDS 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, 2013 and 2012, and for the years then ended. The Foundation is dependent on continued funding provided by the DDS to operate and provide services for its clients. The Foundation s contract with the DDS provides funding for services under the Lanterman Act. In the event that the operations of the Foundation result in a deficit position at the end of any contract year, which has occurred for the year ended June 30, 2013, the DDS may reallocate surplus funds within the state of California system to supplement the Foundation s funding. Should a system-wide deficit occur, the 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 s recommendations are subsequently reviewed by the Governor and the Legislature and a decision is made with regard to specific actions. 22

27 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012 NOTE 7 Commitments and Contingencies (Continued) Contingencies (Continued) The Foundation has elected to finance its unemployment insurance using the prorated costof-benefits method. Under this method, the Foundation is required to directly reimburse the state of California for benefits paid to its former employees. At June 30, 2013 and 2012, the Foundation had $225,053 and $224,718, respectively, in a reserve savings account to pay for any potential unemployment claims. The Foundation is involved in various claims and lawsuits arising in the normal conduct of its operations. The Foundation s management believes it has adequate defenses and insurance coverage for these actions and, thus, has made no provision in the financial statements for any costs relating to the settlement of such claims. NOTE 8 Transactions with Affiliates The Foundation provides administrative services at no charge for The Achievable Foundation. The Achievable Foundation is a not-for-profit corporation organized to support activities that enhance the lives of people with developmental disabilities and their families. Grants to The Achievable Foundation for the year ended June 30, 2013 totaled $100,000. There were no such grants during the year ended June 30, During the year ended June 30, 2013, The Achievable Foundation entered into an agreement to lease office space from the Foundation through The Foundation received rental income from The Achievable Foundation for the year ended June 30, 2013 totaling $19,560. The Foundation has an affiliate known as Home Ownership Made Easy (H.O.M.E.) which provides housing for the Foundation s consumers. The Foundation has advanced non-state contract funds to H.O.M.E. and the amount receivable at June 30, 2012 was $28,756, which is included in other receivables. The balance was paid in full during the fiscal year H.O.M.E. also leased office space from the Foundation through January The Foundation received rental income of $36,468 from H.O.M.E. for the year ended June 30,

28 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2013 Federal Grantor/Federal Federal Grant Pass-Through Grantor/ CFDA Identification Federal Program Title Number Number Expenditures U.S. Department of Education Passed through State of California Department of Developmental Services Early Intervention Services (IDEA) Cluster: Special Education Grants for Infants and Families HD $ 945,604 Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of Coastal Developmental Services Foundation and is presented based on state contract budget allocations. 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 basic financial statements. 24

29 111 West Ocean Blvd. Twenty-Second Floor Long Beach, CA Von Karman Ave. Suite 1060 Irvine, CA South Figueroa St. Suite 4950 Los Angeles, CA 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 To the Board of Directors of Coastal Developmental Services Foundation We have audited, in accordance with the 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, the financial statements of Coastal Developmental Services Foundation (a nonprofit corporation), which comprise the statement of financial position as of June 30, 2013, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements, and we have issued our report thereon dated March 5, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Coastal Developmental Services Foundation s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Coastal Developmental Services Foundation s internal control. Accordingly, we do not express an opinion on the effectiveness of the Foundation s internal control. 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. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 25

30 Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Coastal Developmental Services Foundation s financial statements are free from 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. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Foundation s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Foundation s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Long Beach, California March 5,

31 111 West Ocean Blvd. Twenty-Second Floor Long Beach, CA Von Karman Ave. Suite 1060 Irvine, CA South Figueroa St. Suite 4950 Los Angeles, CA INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY OMB CIRCULAR A-133 To the Board of Directors of Coastal Developmental Services Foundation Report on Compliance for Each Major Federal Program We have audited Coastal Developmental Services Foundation s compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of Coastal Developmental Services Foundation s major federal programs for the year ended June 30, Coastal Developmental Services Foundation s major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of Coastal Developmental Services Foundation s major federal programs based on our audit of the types of compliance requirements referred to above. 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 Coastal Developmental Services 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 on compliance for each major federal program. However, our audit does not provide a legal determination of Coastal Developmental Services Foundation s compliance. 27

32 Opinion on Each Major Federal Program In our opinion, Coastal Developmental Services Foundation complied, in all material respects, with the types of 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, Report on Internal Control over Compliance Management of Coastal Developmental Services Foundation is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Coastal Developmental Services Foundation s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Coastal Developmental Services Foundation s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance 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 compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. Long Beach, California March 5,