Washington National Cathedral A Division of the Protestant Episcopal Cathedral Foundation of the District of Columbia

Transcription

1 A Division of the Protestant Episcopal Cathedral Foundation of the Financial Statements and Report of Independent Auditors For the years ended June 30, 2010 and 2009 The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee..

2 A Division of the Protestant Episcopal Cathedral Foundation of the Financial Statements and Report of Independent Auditors For the years ended June 30, 2010 and 2009

3 Contents Independent Auditors Report 3 Financial Statements Balance Sheets 4 Statements of Activities 5 Statements of Cash Flows 6 Summary of Accounting Policies

4

5 FINANCIAL STATEMENTS

6 A Division of the Protestant Episcopal Cathedral Foundation of the Balance Sheets June 30, Assets Cash and cash equivalents $ 5,563,649 $ 7,718,334 Accounts receivable, net 421, ,839 Contributions receivable, net 591, ,269 Trust and bequests receivable, net 2,823,933 2,781,579 Inventories and prepaid expenses 669, ,872 Investments and interests in trusts: Assets held for endowment 47,153,359 39,244,507 Beneficial interest in perpetual trusts 3,264,264 3,061,739 Other investments (98,512) 758,626 Total investments and interests in trusts 50,319,111 43,064,872 Property and equipment: Land and buildings (less accumulated depreciation $7,953,969 and $6,941,274 respectively) 87,840,089 88,374,474 Furniture and equipment (less accumulated depreciation $2,164,976 and $1,754,533 respectively) 1,637,154 1,925,828 Construction in progress 2,233,003 2,481,922 Net property and equipment 91,710,246 92,782,224 Total Assets $ 152,099,872 $ 147,961,989 Liabilities and Net assets Liabilities Accounts payable and accrued expenses $ 1,092,480 $ 1,670,669 Unfunded pension liability 1,177,480 1,230,601 Intercompany payables 188, ,137 Deferred revenue 47,478 48,845 Notes payable 12,042,134 12,042,134 Value of derivative instruments 1,798,716 1,184,162 Total liabilities 16,347,116 16,463,548 Net assets Unrestricted Undesignated (2,174,630) (1,751,878) Designated for endowment 13,112,146 11,793,807 Total unrestricted 10,937,516 10,041,929 Temporarily restricted Restricted for endowment 13,448,627 12,363,111 Net investment in land and buildings 6,000,231 6,485,497 Program, gift annuities and other 3,430,475 4,017,875 Gifts for plant expansion 3,303,700 3,344,115 Total temporarily restricted 26,183,033 26,210,598 Permanently restricted Net investment in land and buildings 69,754,482 69,754,482 Endowment and interest in perpetual trusts 28,877,725 25,491,432 Total permanently restricted 98,632,207 95,245,914 Total net assets 135,752, ,498,441 Total Liabilities and Net Assets $ 152,099,872 $ 147,961,989 The accompanying notes are an integral part of these financial statements. 4

7 A Division of the Protestant Episcopal Cathedral Foundation of the Statements of Activites Years ended June 30, Temporarily Permanently Unrestricted Restricted Restricted Total Total Operating Activities Revenue and support Contributions $ 6,578,258 $ - $ - $ 6,578,258 $ 4,926,687 Investment income 865, , ,963 Auxiliary operations 947, ,891 2,297,867 Other revenue 2,134, ,134,158 2,876,831 Transfer from non-operating funds 767, , ,994 Net assets released from restrictions 3,584, ,584,971 3,938,925 Total operating revenue and support 14,878, ,878,114 15,230,267 Expenses Cathedral programs 8,094, ,094,768 10,689,867 General and administrative 3,098, ,098,429 4,077,730 Auxiliary operations 631, ,789 3,077,166 Fundraising 2,276, ,276,142 2,720,212 Debt service 492, , ,154 Total operating expenses 14,593, ,593,638 21,052,129 Net operating actvities 284, ,476 (5,821,862) Funding of non-operating projects (284,476) - - (284,476) (1,246,176) Change in net assets from operating activities (7,068,038) Non-Operating Activities Non-operating revenues Investment income 711,007 3,176,588-3,887,595 (15,382,913) Contributions 1,458,280 2,018,067 3,150,248 6,626,595 2,968,500 Other income 13,063 2,744-15,807 16,630 Net change in value of derivative instruments (614,554) - - (614,554) (895,600) Change in value of split interest agreements - (36,212) 236, ,833 (1,358,172) Transfers to operating funds (187,496) (580,034) - (767,530) (437,994) Net assets released from restrictions 1,023,747 (4,608,718) - (3,584,971) (3,938,925) Transfers from (to) other institutions (172,602) Funding of non-operating projects 284, ,476 1,246,176 Total non-operating revenues 2,688,523 (27,565) 3,386,293 6,047,251 (17,954,900) Non-operating expenses Cathedral programs 1,334, ,334,118 2,834,431 General and administrative 129, , ,958 Auxiliary operations 328, ,965 - Total non-operating expenses 1,792, ,792,936 3,041,389 Change in net assets from non-operating activities 895,587 (27,565) 3,386,293 4,254,315 (20,996,289) Total change in net assets 895,587 (27,565) 3,386,293 4,254,315 (28,064,327) Net assets, beginning of year 10,041,929 26,210,598 95,245, ,498, ,562,768 Net assets, end of year $ 10,937,516 $ 26,183,033 $ 98,632,207 $ 135,752,756 $ 131,498,441 The accompanying notes are an integral part of these financial statements. 5

8 A Division of the Protestant Episcopal Cathedral Foundation of the Statements of Cash Flows Years ended June 30, Cash flows from operating activities Change in net assets $ 4,254,315 $ (28,064,327) Adjustments to reconcile change in net assets to net cash used in operating activities: Net realized and unrealized (gains) losses on investments and interests in trusts (4,060,874) 17,142,674 Depreciation 1,422,688 1,473,498 Losses on disposal of property and equipment - 169,587 Change in value of derivative instruments 614, ,600 Accretion of discounts to present value 103,861 (258,686) Restricted contributions (5,168,315) (1,821,036) Loss on impaired inventory - 151,888 (Increase) decrease in assets: Accounts receivable, net (97,030) (203,642) Contributions receivable, net (217,482) 390,221 Trusts and bequests receivable, net (158,601) 1,960,681 Inventories and prepaid expenses 258, ,699 Increase (decrease) in liabilities: Accounts payable and accrued expenses (661,505) (735,190) Unfunded pension liability (53,121) 184,189 Intercompany payables (98,309) (4,009) Deferred revenue (1,367) (154,679) Net cash used in operating activities (3,862,241) (7,999,532) Cash flows from investing activities Proceeds from sale of investments 30,759,848 55,242,928 Purchases of investments (33,953,213) (43,821,925) Purchases of property and equipment (267,394) (586,832) Net cash (used in) provided by investing activities (3,460,759) 10,834,171 Cash flows from financing activities Proceeds from contributions restricted for: Investment in endowment 3,150, ,508 Investment in plant 2,018,067 1,394,528 Net cash provided by financing activities 5,168,315 1,821,036 Net (decrease) increase in cash and cash equivalents (2,154,685) 4,655,675 Cash and cash equivalents, beginning of year 7,718,334 3,062,659 Cash and cash equivalents, end of year $ 5,563,649 $ 7,718,334 Supplemental Disclosures of Cash Flows Information: Interest paid $ 496,134 $ 480,641 Property and equipment included in accounts payable $ 83,316 $ 23,910 Non-cash investing and financing activities Transfer of net assets to other institutions $ - $ 293,702 Transfer of property and equipment from other Foundation institutions $ - $ 121,100 The accompanying notes are an integral part of these financial statements. 6

9 Summary of Accounting Policies Organization The Washington National Cathedral (the Cathedral) was established by the Protestant Episcopal Cathedral Foundation of the (the Foundation). The Board of Trustees of the Foundation is responsible for the overall operation of the Foundation, including the Cathedral. Title to all assets is held by the Foundation. Under the Bylaws of the Foundation, the responsibility for the operation and management of the Cathedral is vested in its Chapter and the Dean of the Cathedral, acting in accordance with the Cathedral s Bylaws adopted by its Chapter and approved by the Foundation s Board of Trustees. The Foundation, of which the Cathedral is a division, is a not-for-profit, religious organization and is generally exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code of 1986, except for income derived from unrelated business sources. The Foundation provides certain services to its institutions, including the Cathedral, on a shared basis. At times the Cathedral and other Foundation institutions have transferred cash to each other to support shared operations. The balances resulting from these transfers and other transfers between the Cathedral and other Foundation institutions are netted and shown on the balance sheets as intercompany payables. Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting. Classification of Activities The statements of activities classify the Cathedral s changes in net assets as either operating or non-operating. The Cathedral s operating activities include budgeted regularly recurring activities. Non-operating activities include those activities that do not occur regularly, are non-recurring, or are ancillary to the Cathedral s mission. Examples of such activities include endowment and facilities fundraising, major projects, and endowment fund investment activity in excess of investment earnings designated for operations by the Cathedral s governing board. Contributions The Cathedral reports contributions and unconditional promises to give as revenues in the period received. Contributions received with donor stipulations that limit the use of the donated assets are reported as restricted support. When a donor restriction expires, that is, when the stipulated time restriction ends, or when the purpose of the 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. 7

10 Summary of Accounting Policies Unconditional promises to give are discounted to the estimated present value of future cash flows using a risk-free rate applied to the periods in which the promises are received. Amortization of the discount is included in contributions revenue. An allowance for uncollectible pledges is provided based on management s evaluation of potential uncollectible contributions receivable at year end. Split-interest Agreements The Cathedral also receives contributions in the form of irrevocable split-interest agreements. These agreements include charitable lead trusts, charitable remainder trusts, beneficial interests in perpetual trusts, and charitable gift annuities. The estimated fair value of these agreements is recognized when the Cathedral is notified in writing of the existence of the agreements. When the Cathedral has the information necessary to estimate the value of an agreement, it is included in trusts and bequests receivable and beneficial interest in perpetual trusts, as appropriate. On behalf of the Cathedral, the Foundation entered into an agreement with the Episcopal Church Foundation (ECF) and the State Street Bank and Trust Company whereby ECF was appointed as an agent of the Foundation to maintain custody of assets received in the form of gift annuities, and to make payments to annuitants in accordance with the terms of the gift annuity contracts. Changes in values of these assets based on estimated receipt dates and amortization of the related discounts are recognized as change in value of split-interest agreements in the period in which they occur. The estimated discounted liability to donors for charitable gift annuities included in accounts payable and accrued expenses was $213,830 and $214,444 as of June 30, 2010 and 2009, respectively. Cash and Cash Equivalents The Cathedral considers all short-term investments with an original maturity of three months or less to be cash equivalents, except for amounts included in the Cathedral s investment portfolio and categorized as investments in the balance sheets. Concentration of Credit Risk Financial instruments, which potentially subject the Cathedral to concentrations of credit risk, consist primarily of cash and cash equivalents and investments. The Cathedral maintains cash and cash equivalents and short and long-term investments with high quality institutions and has established diversification and maturity guidelines to reduce risk and maintain liquidity. The Foundation maintains separate cash accounts for the Cathedral and each of the other Foundation institutions in banks that combine the balances of all Foundation accounts to determine the amounts insured by the Federal Deposit Insurance Corporation (FDIC). The 8

11 Summary of Accounting Policies Cathedral has not incurred any losses due to the credit risk on these instruments. Credit risk with respect to contributions receivable is limited because amounts are due from a large number of individual donors. Accounts Receivable Accounts receivable consist principally of fees charged for Cathedral programs. The Cathedral records an allowance for doubtful amounts to state accounts receivable at their net realizable value. The allowance is based on prior years experience and management s analysis of specific accounts. Inventories Inventories consist principally of books and souvenirs that are stated at the lower of cost or net realizable value determined using the average cost method of inventory valuation, which approximates the first-in first-out method. A provision has been made for obsolete inventory. Investments Marketable equity and debt securities are stated at fair value. The fair value of marketable securities is based on quoted market prices and dealer quotes. Mutual funds are recorded based on quoted market prices and dealer quotes. Limited partnership interests of each partnership are reported at fair value, as determined by the general partners. Corporate interests of each corporation are reported at fair value, as determined by the corporation. Certain limited partnerships and corporate investments have no readily determined market value and are valued at fair value as estimated by the general partners and corporations. Because of the inherent uncertainty of valuation, it is reasonably possible that estimated values may differ from the values that would have been used had a ready market for the securities existed, and the differences could be material. A limited partnership s ability to liquidate certain of its investments may be inhibited because issuers may be privately held or the limited partnership may own a relatively large portion of an issuer s equity securities. Purchases and sales of marketable securities are recorded on a trade-date basis. Realized gains and losses are computed on the "first-in, first-out" basis. 9

12 Summary of Accounting Policies Fair Value Measurement The Cathedral follows the Accounting Standards Codification (ASC) 820 (formerly Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 157, Fair Value Measurements). ASC 820 establishes a common definition for fair value to be applied under generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price ) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Cathedral. Unobservable inputs are inputs that reflect the Cathedral s estimates about the assumptions market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Cathedral has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Property and Equipment The Cathedral capitalizes property and equipment with a value of $2,500 or greater. Capitalized items of property and equipment are depreciated over their estimated useful lives on a straight-line basis, as follows: Buildings and improvements Furniture and equipment 10 to 50 years 3 to 10 years Depreciation expense for the years ended June 30, 2010 and 2009 was $1,422,688 and $1,473,498, respectively. 10

13 Summary of Accounting Policies The Cathedral does not recognize depreciation on the Cathedral building and certain works of art and sacred vessels maintained in the Cathedral, as these assets are national heritage assets and considered to have indefinite useful lives. The net investment in these assets is classified as permanently restricted net assets in the accompanying financial statements. The appraised value of works of art such as paintings, tapestries, stained glass windows and rare books was approximately $16,483,000 and $16,268,000 at June 30, 2010 and 2009, respectively. The Cathedral s policy is to apply a time restriction that expires over the useful life of longlived assets acquired with gifts of cash or other assets restricted for those acquisitions. Therefore, net investment in land and buildings acquired from restricted contributions, except the amount related to assets that are considered to have unlimited useful lives, is classified as temporarily restricted net assets in the accompanying financial statements. The restricted net assets are reclassified to unrestricted net assets as the property is depreciated. Net asset amounts related to assets considered to have an indefinite useful life are classified as permanently restricted. 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 certain 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 that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Functional Allocation of Expenses The costs of providing various programs and supporting services have been summarized in the statements of activities based on their respective functions. Certain costs have been allocated to the programs and supporting services benefited. Functional costs are defined by their purpose: Cathedral programs relate to worship and other religious programs provided by the Cathedral. General and administrative expenses include activities of the office of the Dean of the Cathedral, the business office, human resources, security, information management services, and the public affairs and communications offices. Auxiliary operations include the Cathedral s retail operations and bus lane expenses. Fundraising activities relate to direct costs to solicit gifts to the Cathedral. Debt service expenses relate to interest incurred on loans. 11

14 Summary of Accounting Policies New Accounting Pronouncements In September 2009, the FASB issued ASU , Fair Value Measurements and Disclosures- Investment in Certain Entities that Calculate Net Asset Value per Share (or its equivalent). ASU permits the use of net asset value per share, without further adjustment, to estimate the fair value of investments in investment companies that do not have readily determinable fair values. This guidance also required additional disclosure of the investments within the scope of the ASU. This guidance is effective for periods ending after December 15, The adoption did not impact the amounts reported in the Cathedral s financial statements, but does require additional footnote disclosures about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the accompanying financial statements. In January 2010, the FASB issued ASU No , Fair Value Measurements and Disclosures (ASU No ), which amends ASC 820 (formerly SFAS No. 157, Fair Value Measurements), adding new disclosure requirements for Levels 1 and 2; separate disclosures of purchase, sales, issuances, and settlements relating to Level 3 measurements; and clarification of existing fair value disclosures. ASU No is effective for periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, The application of this guidance will only affect disclosures and therefore will not impact the Cathedral s financial statements. Comparative Financial Information The financial statements include certain prior year summarized comparative information. Such information does not include sufficient detail to constitute a presentation in accordance with the accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Cathedral s financial statements for the year ended June 30, 2009, from which the summarized information was derived. Funding of Non-Operating Projects During 2010 and 2009, the Cathedral paid $284,476 and $1,246,176, respectively, for corporate restructuring purposes. These costs are recorded as a separate line item on the Cathedral s statement of activities in order to differentiate them from normal and usual operating activities. 12

15 1. Investments and Interests in Trusts The composition of investments and interests in trusts at June 30, 2010 and 2009, stated at fair value, is set forth in the following table: Domestic equity securities $ 20,120,611 $ 17,364,846 Mortgage-backed securities 1,740,494 6,487,581 International equity securities 7,230,132 4,240,290 U.S. government obligations 7,215,178 3,278,926 Corporate debt securities 4,249,092 2,573,788 Real property 6,049,689 5,791,899 Foreign government debt securities 1,414, ,702 Other 207,774 92,627 Cash and cash equivalents (1,172,274) (427,526) 47,054,847 40,003,133 Beneficial interest in perpetual trusts 3,264,264 3,061,739 Total investments and interests in trusts $ 50,319,111 $ 43,064,872 Cash and cash equivalents includes unsettled trades and net liabilities which resulted in a negative balance. Investment income and net realized and unrealized losses for the years ended June 30, 2010 and 2009, consisted of the following: Investment income $ 894,553 $ 1,524,508 Net realized and unrealized gains (losses) 3,858,348 (16,155,458) Net investment income $ 4,752,901 $ (14,630,950) Beneficial interest in perpetual trusts represents the fair value of the Cathedral s right to receive income earned on trust assets held by third parties in perpetuity. This fair value is initially recorded at the fair value of the assets contributed to the trusts. Cash received from these trusts of $41,850 in both years was included in unrestricted investment income, and $110,168 and $109,385 was included in temporarily restricted investment income, for the years ended June 30, 2010 and 2009, respectively. Gains of $202,526 and losses of $987,216 included in the value of these trusts for the years ended June 30, 2010 and 2009, respectively, were presented as permanently restricted changes in the value of split interest agreements. 13

16 2. Net Asset Value (NAV) Per Share In accordance with ASU , Fair Value Measurements and Disclosures (Topic 820) Investment in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent), the Cathedral expanded disclosures to include the type, fair value, unfunded commitments, redemption frequency, and redemption notice period for those assets whose fair value is estimated using the net asset value per share or its equivalent for which fair value is not readily determinable as of June 30, For the Cathedral, such assets include the assets of the Cathedral s defined benefit pension plan and interests in hedge funds employed by the Cathedral in the form of partnerships. The following table sets forth a summary of the Cathedral s investments with a reported NAV as of June 30, 2010: Notice Investment Type Fair Value Unfunded Commitments Redemption Frequency Period (Days) Pension investments mutual Close of funds** $ 7,825,166 $ - Daily Business Fund partnerships equity 2,793,526 - Annually 75 Fund partnerships equity 3,032,153 - Monthly 10 Private equity partnership 116,422 - Upon dissolution of N/A partnership Fund partnerships fixed income 1,998,516 - Monthly 10 Fund partnerships - equity 1,546,297 - Annually 60 $ 17,312,080 $ - ** These assets are jointly held with the Foundation and are in the custody of the pension Plan trustee 3. Employee Benefit Plans Defined benefit pension plan The Foundation sponsors a noncontributory defined benefit pension plan (the Plan) that covers principally the employees of the Washington National Cathedral and Corporate Staff and Services. The Foundation allocates the accrued pension costs to the Cathedral and other corporate divisions based on annual employment levels. The figures in this disclosure represent the combined plan activity and funding status of the Plan for all entities. At its June 2009 meeting, the Board of Trustees resolved to freeze future benefit accruals of the pension plan effective August 31, As a result of the freeze, a curtailment gain of $1,546,186 was recorded at June 30, 2009 to reverse the previously recorded liability. The net periodic pension cost for the years ended June 30, 2010 and 2009, consisted of the following: 14

17 Service cost $ 113,408 $ 704,198 Interest cost 581, ,217 Expected return on plan assets (481,022) (558,303) Recognized net actuarial loss 45, Net periodic pension cost $ 259,115 $ 827,297 The following table presents the Plan's funded status as of June 30, 2010 (the latest actuarial valuation date) and 2009, and the amount of accrued pension cost for the years ended June 30, 2010 and 2009: Accumulated benefit obligation $ 10,292,758 $ 9,485,090 Change in projected benefit obligation: Projected benefit obligation, beginning of year $ 9,485,090 $ 10,194,170 Service cost 113, ,198 Interest cost 581, ,217 Plan assumptions discount rate - 761,844 Plan assumptions salary growth - (453,397) Settlements/curtailments - (1,546,186) Actuarial loss (gain) 618,950 (469,165) Benefits and expenses paid (505,929) (387,591) Projected benefit obligation, end of year 10,292,758 9,485,090 Change in plan assets: Plan assets at fair value at beginning of year $ 6,853,689 7,796,860 Actual return on plan assets 1,167,766 (1,584,238) Employer contributions 309,640 1,028,658 Benefits and expenses paid (505,929) (387,591) Plan assets at fair value at end of year 7,825,166 6,853,689 Funded status, end of year $ (2,467,592) $ (2,631,401) 15

18 Expected future annual benefit payments to retirees are as follows: Years ending June 30, 2011 $ 480, , , , ,395 Thereafter 3,303,472 Total estimated future payments reflecting expected future service $ 5,913,323 The assumptions used to determine the above benefit obligations and fair value of plan assets at June 30, 2010 and 2009, include: Discount rate for year end disclosures 5.24% 6.27% Expected rate of long term return on plan assets 7.00% 7.00% Rate of compensation increase N/A 4.00% All of the plan assets are invested in the general account of the Massachusetts Mutual Life Insurance Company and are valued according to the stated contract or book value. The Foundation has established a funding policy for the pension plan equal to the normal cost plus a 15-year amortization of the unfunded actuarial accrued liability. Contributions to the plan for the years ended June 30, 2010 and 2009 were approximately $309,600 and $1,028,700 respectively. Other retirement plans The Cathedral also contributes to a plan that covers some clergy and that is sponsored by the Church Pension Fund. The Cathedral contributed $150,700 and $167,200 to this plan during the years ended June 30, 2010 and 2009, respectively. The Cathedral is not a sponsor of the Church Pension Fund and is not liable for payments to retirees; therefore the Cathedral has not established a liability related to this plan. Certain executives participate in a supplemental retirement plan approved by the Foundation s Board of Trustees. The Cathedral contributed $31,500 to this plan for each of the years ended June 30, 2010 and 2009, respectively. In addition, the Cathedral made contributions of approximately $5,900 and $64,100 to a 401(k) retirement plan covering its employees for the years ended June 30, 2010 and 2009, respectively. 16

19 4. Contributions Receivable Contributions receivable as of June 30, 2010 and 2009, were due as follows: Less than one year $ 622,960 $ 449,146 One to five years 55,780 46, , ,496 Less allowance to discount balance to present value (discounted at rates between 2.0% and 5.4%) (20,856) (12,812) 657, ,684 Less reserve for uncollectible pledges receivable (66,747) (121,415) Total $ 591,137 $ 361, Trusts and Bequests Receivable Trusts and bequests receivable as of June 30, 2010 and 2009, were due as follows: Less than one year $ 2,245,400 $ - One to five years 183, ,145 More than five years 1,496,858 3,035,648 3,925,329 3,800,793 Less allowance to discount balance to present value (discounted at rates between 3.2% and 5%) (975,204) (947,786) 2,950,125 2,853,007 Less reserve for uncollectible trusts and bequests receivable (126,192) (71,428) Total $ 2,823,933 $ 2,781,579 Trusts and bequests have been recorded at the present value of their future estimated cash flows. The amounts above include estimated fair value of charitable lead trusts, charitable remainder trusts, charitable gift annuities, simple trusts, and bequests that have gone through probate in which the Cathedral has been given a beneficial interest. The fair value of the remainder and lead trusts is measured by considering the fair value of the invested assets, expected cash flows, estimated dates of receipt, and terms of the agreements. The fair value of marketable securities held in trust is based on market values provided by trustees. Life expectancy actuarial tables from the Internal Revenue Service are used to estimate dates of receipts from these agreements. 17

20 6. Fair Value Disclosure of Financial Instruments The estimated fair values of the financial instruments of the Cathedral are as follows at June 30: Carrying Amount Carrying Fair Value Amount Fair Value Assets Cash and cash equivalents $ 5,563,649 $ 5,563,649 $ 7,718,334 $ 7,718,334 Contributions receivable, net 591, , , ,043 Trusts and bequests receivable, net 2,823,933 2,974,740 2,781,579 3,186,902 Investments, including beneficial interest in trusts 50,319,111 50,319,111 43,064,872 43,064,872 Pension plan assets* 7,825,166 7,825,166 6,853,689 6,853,689 Liabilities Notes payable 12,042,134 12,646,321 12,042,134 11,760,382 Value of derivative instruments 1,798,716 1,798,716 1,184,162 1,184,162 Annuity payable on charitable remainder trusts 213, , , ,474 *These assets are jointly held with the Foundation and are in the custody of the pension plan trustee. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying value is a reasonable estimate of fair value. Contributions receivable: Contributions receivable are recorded at fair value when the notice of intent is received. The fair value of contributions receivable at the balance sheet date is estimated by discounting the estimated future cash flows to their present values, using the risk free rates of interest at that date. Trusts and bequests receivable: The Cathedral has interests in several irrevocable trusts for which it does not act as the trustee. The fair value of these trusts receivable is estimated by discounting the future cash flows to their present values, using the risk free rates of interest at the balance sheet date. These have been categorized as level 3 in the fair value hierarchy. Investments and beneficial interests in perpetual trusts: Fair value is based on quoted market prices and dealer quotes. Those investments for which fair values have been based on quoted prices in active markets for identical assets have been categorized as Level 1 in the fair value hierarchy. 18

21 Some of the Cathedral s investments are considered alterative investments for which a readily determinable fair value does not exist. These have been categorized as Level 3 in the fair value hierarchy. Beneficial interests in perpetual trusts are included in the Cathedral s investments and have been categorized as Level 3 in the fair value hierarchy. Pension plan assets: The Plan assets consist of investments in fixed income and equity securities. Those investments for which fair values have been based on quoted prices in active markets for identical assets have been categorized as Level 1 in the fair value hierarchy. Notes payable: There is currently no discernable market for notes payable similar to the Cathedral s 30-year notes payable; therefore, the Cathedral has estimated the fair value of its long-term notes payable based on the present value of the cash outflows using a discount rate of 3.91% and 4.50% at June 30, 2010 and 2009, respectively. Derivative instruments: The fair values of the interest rate swap arrangements entered into by the Cathedral are the estimated mark-to-market value of the swap arrangements as of June 30, The mark-to-market value has been arrived at by taking into account the agreed interest rates and the net cash flows related to the swap arrangement through the period of the underlying notes payable. This value is based on quotes from the swap counterparties. Annuity payable on charitable remainder trusts: The Cathedral has entered into an agreement with various donors, either directly or through the Episcopal Church Foundation (ECF) to maintain custody of assets received in the form of gift annuities and to make payments to annuitants in accordance with the terms of the gift annuity contracts. The estimated discounted liability to donors for these charitable gift annuities are included in accounts payable and the fair values of these liabilities are deemed to approximate the net present value of cumulative future cash payments. The following table sets forth the fair values of those financial assets and liabilities that are recorded at fair value on a recurring basis according to the hierarchy described in ASC 820, as of June 30, 2010: Level 1 Level 2 Level 3 Total Assets Investments including beneficial interests in perpetual trusts $ 36,929,040 $ 53,157 $ 13,336,914 $ 50,319,111 Trusts receivable - - 2,470,987 2,470,987 Pension plan assets 7,825, ,825,166 $ 44,754,206 $ 53,157 $ 15,807,901 $ 60,615,264 Liabilities Interest rate swap agreements $ - $ (1,798,716) $ - $ (1,798,716) 19

22 The following table sets forth the fair values of those financial assets and liabilities that are recorded at fair value on a recurring basis according to the hierarchy described in ASC 820, as of June 30, 2009: Level 1 Level 2 Level 3 Total Assets Investments including beneficial interests in perpetual trusts $ 35,131,692 $ - $ 7,933,180 $ 43,064,872 Trusts receivable 2,213,154 2,213,154 Pension plan assets 6,853, ,853,689 $ 41,985,381 $ - $ 10,146,334 $ 52,131,715 Liabilities Interest rate swap agreements $ - $ (1,184,162) $ - $ (1,184,162) The following sets forth the reconciliation of beginning and ending balances related to fair value measurements using significant unobservable inputs (Level 3), as of June 30, 2010 and 2009: Beginning balance $ 10,146,334 $ 11,738,351 Additions 9,414,133 (52,129) Distributions received (25,608) (66,643) Unrealized losses relating to instruments still held at the balance sheet date (3,726,958) (1,473,245) Ending balance $ 15,807,901 $ 10,146,334 Unrealized gains and losses for the years ended June 30, 2010 and 2009 are included in investment income under non-operating activities in the statements of activities. 7. Notes Payable In June 2005, the Foundation issued 30-year tax exempt bonds with a principal amount of $31,280,000 to finance the construction of a parking garage and bus lane and to pay for certain issuance costs. The balance outstanding on this loan at June 30, 2010 and 2009 was $31,280,000, of which $12,042,134 has been allocated to the Cathedral, representing the portion of the debt attributable to the financing of the Cathedral s bus lane. The interest rate on these floating rate bonds is computed at 65% of the sum of 30 day LIBOR plus 1.25%. The interest rate was 1.04% and 1.03% at June 30, 2010 and 2009, respectively. The Cathedral s share of the interest paid on this loan for the year ended June 30, 2010 and 2009 was approximately $492,500 and $481,000, respectively. Principal repayments will begin in 13 years from issuance, followed by 17 years of payments of principal and interest. The tax exempt bonds are secured by the gross receipts of the Foundation. 20

23 Under the terms of this loan agreement the Foundation is required to achieve, among other covenants, a liquidity ratio (calculated as the sum of net assets net of long term indebtedness less net property plant and equipment divided by long-term indebtedness) of 1.5:1.0 and a loan to value ratio (calculated as unsecured long term indebtedness to the value of unencumbered net property plant and equipment) not greater than 75%. At June 30, 2010 and 2009 the Foundation s liquidity ratio stood at 1.71:1 and1.65:1, respectively, and its loan to value ratios were 42% and 44%, respectively. The Foundation has entered into a swap agreement with a third party to fix the rate of interest on this outstanding loan. The Cathedral s share of the liability on account of the swap agreement was $1,798,716 and $1,184,162, at June 30, 2010 and 2009, respectively. 8. Self Insured Medical Program During 2007, the Foundation created a self insurance program to provide medical and dental health insurance benefits for its employees, including those of the Cathedral. Expected employer costs of the program are charged to operations and allocated to functions based on the classification of participating employees. Employer and employee contributions, equal to the expected plan costs, are credited to the Foundation s unrestricted non-operating activities and offset by actual claims and other expenses incurred. These claims and other plan expenses are included in general and administrative expenses on the Foundation s combined statements of activities. The difference between expected costs and actual claims expenses incurred are designated by Foundation management as a reserve for unexpected claims. During 2010, the Foundation discontinued the self insurance medical and dental program. The Foundation is liable for claims incurred through December 31, 2009, and medical providers have until December 31, 2010 to submit claims for payment. As of June 30, 2010, the Foundation estimates no additional claims will be incurred and therefore has not recorded a liability at June 30, An estimate of claims incurred but not paid at June 30, 2009 in the amount of $322,123, was recorded as an accrued liability on the Foundation s combined balances sheets. A portion of this is attributable to the Cathedral. This accrual is based on actual claim payments after year end and estimates of additional claims incurred but not reported. During 2009 when the program was still in effect, the Foundation had limited its financial exposure by purchasing stop loss insurance from a third-party insurance company that limited the amounts of claims payable by the Foundation to $100,000 per claim. The maximum specific benefit provided per covered person by this insurance was $2,000,000. Management believed that the net assets designated for unexpected claims were sufficient to cover the difference between the stop loss limits and the expected claims. 21

24 9. Allocation of Plant Maintenance Plant and ground maintenance expenses have been allocated to the programmatic and supporting functions to which they relate. The allocation, based on management s estimate of the usage of such expenses by each function, is as follows: Cathedral programs $ 3,489,920 $ 3,267,412 General and administrative 629, ,513 Fundraising 129, ,575 Auxiliary services 91,151 85,877 Total $ 4,340,525 $ 4,089, Temporarily Restricted Net Assets As of June 30, 2010 and 2009, net assets were temporarily restricted for the following purposes: Program, gift annuities and other: Worship $ 484,598 $ 926,564 Social outreach 144, ,519 Music and performing arts 113,228 95,009 Educational 58,381 52,513 Other 365, ,248 Restricted only as to time 2,264,546 2,436,022 3,430,475 4,017,875 Restricted for endowment purposes 13,448,627 12,363,111 Net investment in land and buildings 6,000,231 6,485,497 Gifts for plant expansion 3,303,700 3,344,115 Total $ 26,183,033 $ 26,210,598 22

25 11. Permanently Restricted Net Assets As of June 30, 2010 and 2009, net assets were permanently restricted for the following purposes: Endowment and interest in perpetual trusts: General $ 10,958,815 $ 10,867,747 Worship 2,846,928 3,693,158 Educational 608,206 1,410,819 Plant 6,088,985 4,207,029 Music 8,374,791 5,312,679 28,877,725 25,491,432 Net investment in land and buildings 69,754,482 69,754,482 Total $ 98,632,207 $ 95,245, Endowments The Cathedral maintains endowment funds to be held in perpetuity in accordance with donor instructions. Such funds are recorded as permanently restricted net assets. The institutional governing boards have designated certain other funds for endowment purposes. As required by generally accepted accounting principles, net assets associated with endowment funds are classified and reported based on the existence or absence of donor and board imposed restrictions and designations, and applicable law. Interpretation of Relevant Law In August 2008 FASB issued ASC (formerly Staff Position No (FSP FAS 117-1), Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and Enhanced Disclosures for All Endowment Funds). In accordance with the FASB Staff Position, the Cathedral has continued to treat all donor restricted endowment funds as permanently restricted net assets. In the years when there is a deficit return on investments related to these permanently restricted endowment assets, the deficit is reported in unrestricted net assets. The deficit was $2,766,912 for the year ended June 30, In the years when there is a net surplus on the endowment s investments, such returns are included in temporarily restricted net assets (after offsetting any previously accumulated losses in unrestricted net assets). The Cathedral s previously accumulated deficit was partially offset by a net surplus on the endowment s investments amounting to $599,031 for the year ended June 30,

26 Return Objectives and Risk Parameters The Cathedral has invested its endowment assets in a manner that attempts to provide a predictable stream of funding to programs supported by its endowments while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Cathedral must hold in perpetuity or for a donorspecified period, as well as board-designated funds. The Cathedral s investment funds include unrestricted and restricted net assets. For the purposes of managing investment risk and to optimize investment returns within acceptable risk parameters, all investments are held in the same long-term investment pool. The Cathedral has investment guidelines and limitations and all investments are made in accordance with the specified guidelines. The Cathedral has a basis for evaluating the portfolio s investment performance and the Cathedral s assets are protected by prudent management, defined procedures, and approved investment alternatives appropriate to the funds being invested. 24

27 Change in Endowment Net Assets The following tables represent the composition of and changes in endowment net assets for the year ended June 30, 2010: Temporarily Restricted Permanently Restricted Unrestricted Total Endowment net assets, beginning of year $11,793,807 $12,363,111 $22,429,693 $46,586,611 Investment return 1,616,583 3,055,096-4,671,679 Change in value of split interest agreements ,520 33,520 Contributions 4,268-3,150,248 3,154,516 Amounts appropriated for expenses (901,543) (1,370,549) - (2,272,092) Transfer for deficiencies 599,031 (599,031) - - Endowment net assets, end of year $13,112,146 $13,448,627 $25,613,461 $52,174,234 The following tables represent the composition of and changes in endowment net assets for the year ended June 30, 2009: Temporarily Restricted Permanently Restricted Unrestricted Total Endowment net assets, beginning of year $ 20,477,603 $ 20,225,051 $ 22,162,149 $ 62,864,803 Investment return (5,168,951) (9,537,673) - (14,706,624) Change in value of split interest agreements - - (158,964) (158,964) Contributions , ,508 Amounts appropriated for expenses (747,933) (1,091,179) - (1,839,112) Transfer for deficiencies (2,766,912) 2,766, Endowment net assets, end of year $11,793,807 $ 12,363,111 $ 22,429,693 $ 46,586,611 25

28 Endowment assets and net assets consist of the following at: June 30, Endowment assets Cash and cash equivalents $ 4,550,789 $ 6,839,081 Contributions receivable 5,234 45,450 Trusts and bequests receivable 464, ,878 Investments 47,153,359 39,244,507 Accrued interest Total $ 52,174,234 $ 46,586,611 Endowment net assets Unrestricted board designated $ 13,112,146 $ 11,793,807 Temporarily restricted 13,448,627 12,363,111 Permanently restricted 25,613,461 22,429,693 Total $ 52,174,234 $ 46,586,611 Spending Policies of the Endowments The Cathedral allocates the investment income generated by the endowment each year based on the purpose of the endowment specified by the donor. In accordance with the Foundation s policy, spending rates may not exceed 7% of the prior 3-year average endowment investment balance as measured on June 30. For the years ended June 30, 2010 and 2009, the spending rates approved by the Cathedral s governing board were 4.0% and 2.8%, respectively, and the investment returns on those assets designated as endowment investments were 2.80% and (25.0%), respectively. Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor requires the Cathedral to retain as a fund of perpetual duration. In accordance with generally accepted accounting principles, deficiencies of that nature are reported as unrestricted net assets. 13. Related Party Transactions During the years ended June 30, 2010 and 2009, related parties, including trustees and governing board members, made cash contributions of $1,282,806 and $906,732, respectively. Receivables from pledges made by these related parties totaled $369,841 and $35,550 at June 30, 2010 and at June 30,

29 14. Subsequent Events The Cathedral has evaluated subsequent events through December 20, 2010, which is the date the financial statements were available to be issued. 15. Uncertain Tax Positions The Cathedral adopted ASC (FASB Interpretation No. 48 (FIN 48)), Accounting for Uncertainty in Income Taxes, on July 1, Under ASC , the Cathedral must recognize the tax benefit associated with tax positions taken for tax return purposes when it is morelikely than not that the position will be sustained. The implementation of ASC had no impact on the Cathedral s financial statements. The Cathedral does not believe there are any unrecognized tax benefits that will need to be recorded. No interest or penalties were accrued as of July 1, 2009 as a result of the adoption of ASC For the year ended June 30, 2010, there were no interest or penalties recorded or included in the Cathedral s statements of activities. The Cathedral is still open to examination by taxing authorizes from 2007 forward. 27