REPORT OF INDEPENDENT ACCOUNTANT

Transcription

1 REPORT OF INDEPENDENT ACCOUNTANT Diocesan Finance Council Administrative Offices of the Diocese of Raleigh Raleigh, North Carolina We have examined the following assertion made by management: During the fiscal year ended June 30, 2013, no funds from the Bishop s Annual Appeal, Our Cathedral: One Faith, One People, or parish savings accounts in the Diocesan Deposit and Loan Program were used to pay any child sexual misconduct claims, legal fees, or counseling costs. If funds were paid, unrestricted reserves or the Diocesan selfinsurance fund would cover these and any other liability and casualty claims. No funds have been sent to any other dioceses in other states to help them pay for claims for child sexual misconduct. The management of the Administrative Offices of the Diocese of Raleigh is responsible for the assertion. Our responsibility is to express an opinion on management s assertion based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included examining, on a test basis, evidence supporting management s assertion and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. In our opinion, management s assertion referred to above is fairly stated, in all material respects, based on our examination of the accounting records and based on the nature of the Bishop's Annual Appeal, Our Cathedral: One Faith, One People Capital Campaign Fund, and the Diocesan Deposit and Loan Program as defined in the footnotes to the consolidated financial statements of the Administrative Offices of the Diocese of Raleigh as of and for the year ended June 30, This report is intended solely for the information and use of the Diocesan Finance Council and is not intended to be and should not be used by anyone other than this specified party. CHERRY BEKAERT LLP Raleigh, North Carolina December 9, 2013

2 ADMINISTRATIVE OFFICES OF THE DIOCESE OF RALEIGH CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION Year Ended June 30, 2013 And Report of Independent Auditor

3 TABLE OF CONTENTS REPORT OF INDEPENDENT AUDITOR CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position Consolidated Statement of Activities and Changes in Net Assets... 5 Consolidated Statement of Cash Flows... 6 Notes to Consolidated Financial Statements SUPPLEMENTARY INFORMATION Consolidated Schedule of Functional Expenses... 29

4 Report of Independent Auditor Diocesan Finance Council Administrative Offices of the Diocese of Raleigh Raleigh, North Carolina Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of the Administrative Offices of the Diocese of Raleigh and affiliate (the Diocese ), which comprise the consolidated statement of financial position as of June 30, 2013, and the related consolidated statements of activities and changes in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Diocese s preparation and fair presentation of the consolidated 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 Diocese 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 consolidated financial statements. We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Diocese as of June 30, 2013, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

5 Report on Summarized Comparative Information We previously audited the Diocese s 2012 consolidated financial statements and our report dated October 5, 2012, expressed an unmodified opinion on those consolidated financial statements. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2012, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. Other Matter Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements of the Diocese as a whole. The consolidated schedule of functional expenses is presented for purposes of additional analysis and is not a required part of the consolidated 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated 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 consolidated financial statements as a whole. Raleigh, North Carolina December 9, 2013

6 CONSOLIDATED STATEMENT OF FINANCIAL POSITION JUNE 30, ASSETS Cash and cash equivalents $ 44,033,959 $ 16,924,244 Investments 44,549,043 41,276,455 Accounts receivable: Cathedral Campus Campaign, net 25,437,088 16,306,632 Bishop's Annual Appeal, net 1,892,966 3,299,618 Assessments 1,965,964 1,283,046 Other, net 1,937,332 1,163,548 Prepaid expenses and other assets 500, ,888 Bond costs, net 104,088 - Loans receivable, parishes and institutions, less allowance for doubtful loans of $200,000 at June 30, 2013 and 2012: Interest bearing 46,264,400 42,770,690 Non-interest bearing 3,758,570 3,490,624 Interest rate swap asset 666,983 Licenses and rights 645, ,375 Property and equipment, net Operating properties 10,332,521 7,603,595 Other properties 9,723,277 8,876,189 Total assets $ 191,812,298 $ 144,111,904 The accompanying notes to financial statements are an integral part of these statements. 3

7 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED) JUNE 30, LIABILITIES AND NET ASSETS Liabilities: Accounts payable: Funds held for others $ 11,644,867 $ 10,489,941 Supplies and expenses 2,806,619 1,744,645 Accrued expenses 1,532,601 1,123,051 Split-interest obligations 857, ,989 Deferred revenue and support 95, ,412 Deposits payable: Parishes 44,123,473 47,893,700 Catholic Charities of the Diocese of Raleigh, Inc. 616, ,303 Obligations for post-retirement benefits: Health care plan - current portion 361, ,985 Health care plan - long-term portion 11,522,141 11,764,277 Long-term care plan - current portion 88,815 88,816 Long-term care plan - long-term portion 5,183,300 5,640,185 Notes payable: Notes payable - current portion 926,269 - Notes payable - long term portion 18,626,978 - Bonds payable: Bonds payable - current 1,087,666 - Bonds payable - long-term 11,462,334 - Total liabilities 110,936,795 80,831,304 Net Assets: Unrestricted: Invested accounts 2,739,193 2,790,708 Property and equipment accounts 20,701,173 17,019,570 Deposit and loan accounts (2,456,823) (3,606,716) Designated unrestricted 4,166, ,772 Total unrestricted 25,150,094 17,137,334 Temporarily restricted 53,010,748 43,439,453 Permanently restricted 2,714,661 2,703,813 Total net assets 80,875,503 63,280,600 Total liabilities and net assets $ 191,812,298 $ 144,111,904 The accompanying notes to financial statements are an integral part of these statements. 4

8 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS Support and Revenue: Contributions: Temporarily Permanently Total Total Unrestricted Restricted Restricted All Funds All Funds Gifts and bequests $ 198,612 $ 397,149 $ 3,745 $ 599,506 $ 720,711 Bishop's Annual Appeal - 5,208,770-5,208,770 6,712,514 Capital campaigns - 14,765,384-14,765,384 17,289,932 Departmental and project fees 3,967, ,967,387 4,386,328 Diocesan assessments 3,729, ,729,000 3,620,482 Investment income - interest, dividends and rent 1,801, ,325 7,103 2,155,440 2,030,626 Interest on parish loans 2,506, ,506,635 2,567,312 Insurance department 3,049, ,049,664 3,022,884 Gain (loss) on sale of assets (245,562) 324,615-79, ,514 Unrealized gains (losses) on investments 825,828 1,260,315-2,086,143 (1,255,083) Total support and revenue before release of restrictions 15,832,576 22,303,558 10,848 38,146,982 39,402,220 Net assets released from restrictions 12,631,342 (12,631,342) Total support and revenues 28,463,918 9,672,216 10,848 38,146,982 39,402,220 Expenses: Offices of Bishop 1,720, ,720,250 1,874,373 Vicar General 2,636, ,636,963 2,487,731 Judicial Vicar/Chancellor 363, , ,099 Chief Financial Officer/Chief Operating Officer 5,135, ,135,744 4,438,594 Catholic Formation and Education 1,559, ,559,365 1,862,632 Catholic Charities Subsidies 1,180, ,180,932 1,154,904 Grants 549, , ,851 Deposits and Loans 2,108, ,108,145 1,673,997 Insurance 1,758, ,758,609 1,874,112 Priest Welfare 2,699, ,699,957 2,479,388 Capital Campaign 1,427, ,427,105 1,444,194 Rental Properties High School Tuition Assistance 497, , ,449 Parishes and Other Subsidies 11, , ,552 Diocesan Development Trust 42, ,294 53,976 Endowment for the Poor 90, ,403 90,581 Catholic Voice North Carolina 24, ,204 47,600 Total expenses 21,806, ,806,447 21,645,033 Increase (decrease) in net assets from operations 6,657,471 9,672,216 10,848 16,340,535 17,757,187 Change in fair value of interest rate swap 666, ,983 (156,881) Change in obligations for priest post-retirement benefits other than pensions 699, ,035 (5,370,957) Change in value of split-interest agreements (10,729) (100,921) - (111,650) (10,295) Change in net assets 8,012,760 9,571,295 10,848 17,594,903 12,219,054 Net assets at beginning of year 17,137,334 43,439,453 2,703,813 63,280,600 51,061,546 Net assets at end of year $ 25,150,094 $ 53,010,748 $ 2,714,661 $ 80,875,503 $ 63,280,600 The accompanying notes to financial statements are an integral part of these statements. 5

9 CONSOLIDATED STATEMENT OF CASH FLOWS Cash flows from operating activities Change in net assets $ 17,594,903 $ 12,219,054 Adjustments to reconcile increase in net assets to net cash provided from operating activities: Depreciation 567, ,937 Amortization of bond costs 9, ,159 Gain on sale of assets (79,053) (306,514) Unrealized (gains) losses on investments (2,086,143) 1,255,083 Dividends and interest reinvested (586,078) (548,358) Change in fair value of rate swap (666,983) 37,332 Change in reserve for doubtful accounts 1,336,001 (1,380,979) Discount on note receivable (15,336) (14,407) Discount on Cathedral Campus Campaign promises to give (357,331) (658,659) Obligations for post-retirement benefits other than pensions (699,035) 5,370,957 Change in assets and liabilities: Accounts receivable (10,143,826) (16,395,875) Prepaid expenses and other assets (28,844) (487,364) Accounts payable: supplies and expenses 1,061,974 (340,052) Accounts payable: funds held for others 326,873 (102,647) Accrued expenses 409, ,662 Split-interest obligations 35,854 (114,119) Deferred revenue and support (31,815) (177,271) Net cash from operating activities 6,647,869 (690,061) Cash flows from investing activities Proceeds from sale of investments 839,234 1,033,376 Purchase of investments (71,155) (426,160) Purchases of property and equipment (4,965,000) (5,446,264) Proceeds from sale of property and equipment 359, ,389 New loans funded (11,468,518) (5,037,405) Collections on loans 7,706,848 8,419,259 Net cash from investing activities (7,598,641) (1,284,805) Cash flows from financing activities Parish deposits and other deposits (3,929,210) (484,046) Termination of interest rate swaps - (3,485,750) Proceeds from issuance of debt 32,550,000 - Debt issuance costs (113,550) - Repayment of bonds payable (446,753) (23,615,000) Net cash from financing activities 28,060,487 (27,584,796) Net change in cash and cash equivalents 27,109,715 (29,559,662) Cash and cash equivalents at beginning of year 16,924,244 46,483,906 Cash and cash equivalents at end of year $ 44,033,959 $ 16,924,244 Supplemental disclosure of cash flow information Cash paid for interest $ 1,015,458 $ 1,245,543 The accompanying notes to financial statements are an integral part of these statements. 6

10 Note 1 Description of the organization Organization The Catholic Diocese of Raleigh serves the Catholic Church in eastern North Carolina. The Administrative Offices of the Catholic Diocese of Raleigh (the Diocese ) includes the Office of the Bishop as well as various ministerial and administrative offices and Domicile Property, Inc. The offices exist to help the mission of the Catholic Church to be a community of faith, a community of grace, a community of charity, and a community of missionary service. The accompanying consolidated financial statements exclude the financial transactions of the parishes and missions, schools, cemeteries, individual campus ministries, and residences of priests and religious clergy. These statements also exclude property beneficially owned by parishes and schools although the properties are titled to the Bishop and his successors in office. Note 2 Summary of significant accounting policies Basis of Accounting The consolidated financial statements of the Diocese have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ( GAAP ). Basis of Consolidation The accompanying consolidated financial statements include the accounts of Domicile Property, Inc. All significant interorganization transactions and balances have been eliminated in consolidation. Basis of Presentation As required by GAAP, the Diocese reports information regarding its financial position and activities in the following three net asset classes: Unrestricted net assets Net assets that are not subject to donor-imposed stipulations are classified as unrestricted net assets. Temporarily restricted net assets Net assets that are subject to donor-imposed stipulations that may or will be met either by action of the Diocese and/or the passage of time are classified as temporarily restricted net assets. Permanently restricted net assets Net assets that are required by donor-imposed stipulations to be maintained permanently by the Diocese are classified as permanently restricted net assets. Cash and Cash Equivalents The Diocese considers all short-term securities purchased with an original maturity of twelve months or less to be cash equivalents. Revenue Recognition Contributions are recognized when the donor makes an unconditional promise to transfer assets. Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. Amounts received that are designated for future periods or restricted by the donor for a specific purpose are reported as temporarily restricted or permanently restricted support and as an increase to the related net asset class. If a restriction is fulfilled in the same period in which the contribution is received, the Diocese reports the support as unrestricted. In the event that both temporarily restricted and unrestricted monies are available for use for activities that comply with donor restrictions, the Diocese will use temporarily restricted funds first. Promises to give that are expected to be collected within one year are recorded at net realizable value. Promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. 7

11 Note 2 Summary of significant accounting policies (continued) Property and Equipment Property and equipment acquisitions are capitalized at cost when purchased, or if received as a gift, acquisitions are capitalized at fair value on the date of donation, with a capitalization threshold of $1,000. Expenditures for maintenance and repairs are charged against operations. Renewals and betterments that materially extend the life of the assets are capitalized. In the absence of adequate cost records, certain land and buildings are stated at appraised values as of December 31, Proceeds from the sale of property and equipment, if unrestricted, are transferred to unrestricted net assets, or, if restricted, are transferred to temporarily or permanently restricted net assets. In accordance with Diocesan policy, property and equipment is included in unrestricted net assets. Depreciation on buildings and equipment is determined under the straight-line method based on the following estimated useful lives. Buildings and improvements Furniture and equipment Automobiles 5-41 years 3-8 years 3-5 years Derivative Instruments During the years ended June 30, 2013 and 2012, the Diocese s risk management strategy included the use of interest rate swap agreements to reduce the impact of changes on interest rates on its floating rate long-term debt. Interest rate swap agreements are derivatives and are accounted for in accordance with GAAP, which requires that an entity recognize its interest rate swap agreements at fair value in the financial statements. Contributed Services A substantial number of unpaid volunteers have made significant contributions of their time to develop the Diocese s programs. The value of this contributed time is not reflected in these consolidated statements as it is not susceptible to objective measurement or valuation. Compensated Absences Compensated absences such as vacation are not subject to carryover for employees of the Diocese except under special pre-approved situations. Accordingly, no accrual is provided for compensated absences as of June 30, 2013 or Income Taxes The Diocese is exempt from federal and state income tax under provisions of Section 501(c)(3) of the Internal Revenue Code and is not subject to the filing requirements of the Form 990. The Diocese may be subject to tax to the extent it has taxable unrelated business income. The Diocese has no unrelated business income and accordingly, no provision for income taxes has been reflected in the accompanying consolidated financial statements. The Diocese believes it has appropriate support for any tax positions taken, and as such, does not have any uncertain tax positions that are material to the consolidated financial statements. The tax years ending 2010, 2011 and 2012 are still open to audit for both federal and state purposes. The Diocese is not classified as a private foundation. Contingencies The Diocese is sometimes subject to litigation or the threat of litigation in the conduct of its operations. The Diocese s policy is to recognize such costs when it is both probable that a material liability has occurred and the amount can be reasonably estimated. Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results will differ from those estimates. 8

12 Note 2 Summary of significant accounting policies (continued) Reclassifications Certain immaterial reclassifications have been made to prior year financial statement amounts and disclosures to conform with current year presentation. These reclassifications had no impact on current or total assets, current or total liabilities and net assets nor did they have any impact on the change in net assets. Prior Year Summarized Financial Information - The consolidated financial statements include certain prioryear summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with GAAP. Accordingly, such information should be read in conjunction with the consolidated financial statements for the year ended June 30, 2012, from which the summarized information was derived. Note 3 Financial instruments Financial instruments which potentially subject the Diocese to a concentration of credit risk consist principally of cash and cash equivalents, accounts receivable, and loans receivable. The activity of the Diocese is primarily with the parishes within the Diocese. Both the accounts receivable and promises to give receivable are associated with the parishes or other Diocesan activities. Any off-balance sheet risk or credit risk is dependent on the financial support of the parishioners to their local parish and the parish s subsequent support of the Diocese. The Diocese places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation ( FDIC ) covers $250,000 for substantially all depository accounts. In addition, the FDIC provided unlimited coverage for certain qualifying and participating non-interest bearing transaction accounts through December 31, 2012; however, effective January 1, 2013, the FDIC discontinued the additional unlimited coverage. During the year, the Diocese from time to time may have had amounts on deposit in excess of the insured limits. The cash balances are maintained at financial institutions with high credit quality ratings and the Diocese believes no significant risk of loss exists with respect to those balances. At June 30, 2013 and 2012, the Diocese also held $26,932,573 and $6,899,412, respectively, of fully insured funds in the Certificate of Deposit Account Registry Service network and the Insured Cash Sweep network. Note 4 Fair value measurements GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels of inputs that may be used to measure fair value are as follows: Level 1 Inputs to the valuation methodology are quoted prices available in active markets for identical assets and are given the highest priority; Level 2 Inputs consist of observable inputs other than quoted prices for identical assets; and Level 3 Inputs consist of unobservable inputs and are given the lowest priority. 9

13 Note 4 Fair value measurements (continued) Below are the Diocese s financial instruments carried at fair value on a recurring basis by the fair value hierarchy levels: Quoted Prices in Active Markets for Identical Assets As of June 30, 2013 Significant Observable Inputs Significant Unobservable Inputs Total (Level 1) (Level 2) (Level 3) Fair Value Assets: Investments: Equity securities - domestic $ 3,888,793 $ - $ - $ 3,888,793 Equity securities - international 5,106, ,106,014 Mutual funds - domestic 12,978, ,978,436 Mutual funds - international 5,880, ,880,818 Alternative investments - - 4,226,670 4,226,670 Bond funds 11,892, ,892,284 Cash and cash equivalents 576, ,028 Total investments $ 40,322,373 $ - $ 4,226,670 $ 44,549,043 Interest rate swap $ - $ 666,983 $ - $ 666,983 Liabilities: Split-interest obligations $ - $ - $ 857,843 $ 857,843 Obligations for post retirement benefits other than pensions: Health Care Plan $ - $ - $ 11,884,113 $ 11,884,113 Long Term Care Plan $ - $ - $ 5,272,115 $ 5,272,115 10

14 Note 4 Fair value measurements (continued) Assets: Investments: Quoted Prices in Active Markets for Identical Assets As of June 30, 2012 Significant Observable Inputs Significant Unobservable Inputs Total (Level 1) (Level 2) (Level 3) Fair Value Equity securities - domestic $ 3,668,058 $ - $ - $ 3,668,058 Equity securities - international 3,560, ,560,271 Mutual funds - domestic 11,372, ,372,905 Mutual funds - international 7,302, ,302,917 Alternative investments - - 4,118,619 4,118,619 Bond funds 10,036, ,036,053 Cash and cash equivalents 1,217, ,217,632 Total investments $ 37,157,836 $ - $ 4,118,619 $ 41,276,455 Liabilities: Split-interest obligations $ - $ - $ 821,989 $ 821,989 Obligations for post retirement benefits other than pensions: Health Care Plan $ - $ - $ 12,126,262 $ 12,126,262 Long Term Care Plan $ - $ - $ 5,729,001 $ 5,729,001 The Diocese uses appropriate valuation techniques based on the available inputs. When available, the Diocese measures fair value using Level 1 inputs as they generally provide the most reliable evidence of fair value. Level 2 and Level 3 inputs were only used when Level 1 inputs were not available. The market approach was used for assets and liabilities classified as Level 1 and Level 2 while the income approach was used for those classified as Level 3. The Diocese relies on fair value measurement calculations performed by third party pricing services for those instruments reported in Level 2 and Level 3. Inputs include the credit risk of the issuer, maturity, current yield, and other terms and conditions of each instrument. There were no changes to valuation techniques during the year ended June 30,

15 Note 4 Fair value measurements (continued) Alternative investments identified as level 3 consist of investments in two hedge funds, Pinehurst Institutional Ltd. Class B ( Pinehurst ) and AlphaMosaic (US) LLC Cell No. 41 ( Alpha ), whose strategies seek to achieve capital appreciation with limited volatility through an actively managed, opportunistic multi-strategy portfolio of hedge fund investments. The Diocese does not have any unfunded commitments related to investments in either fund. The Diocese s investment in Alpha can be redeemed, with two business days notice, as of the 15 th calendar day or the last business day of the month. The investment in Pinehurst may be redeemed, with 100 days prior written notice, as of the last day of any calendar year, provided, that if redemption requests for a redemption date are received representing, in the aggregate, more than 25% of the fund s net assets, requests may be reduced on a pro rata basis among all of the investors requesting redemptions so that no more than 25% of the fund s net assets will be paid out. In addition, the Diocese may request, with 100 days written notice, to redeem up to 25% of the investment held as of January 1 st of the calendar year, on March 31, June 30 and September 30. The Diocese may not redeem less than all of its shares in Pinehurst if the remaining net asset value of the shares held are less than $1,000,000 without obtaining a waiver from the investment manager. On November 1, 2013, prior to the issuance of the financial statements, the Diocese was notified that Alpha intended to cease trading as of October 31, 2013 and enter into an orderly liquidation. The Diocese received a payout of $2,343,757, representing 90% of the value of its investment, on November 19, 2013 and the remaining 10% is expected to be received after the final audit of the fund is performed. The Diocese has been informed by the custodian that it expects full redemption of the Diocese s investment. The preceding methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The Diocese recognizes transfers between levels in the fair value hierarchy at the end of the reporting period, if applicable. Beginning and ending assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are reconciled as follows: Alternative Investments Split Interest Obligations Health Care Plan Long Term Care Plan Assets/ Liability at June 30, 2011 $ 4,173,560 $ 936,108 $ 8,844,322 $ 3,639,984 Purchases, sales, issuances and settlements, net (54,941) (114,119) 3,281,940 2,089,017 Assets/ Liability at June 30, ,118, ,989 12,126,262 5,729,001 Purchases, sales, issuances and settlements, net 108,051 35,854 (242,149) (456,886) Assets/ Liability at June 30, 2013 $ 4,226,670 $ 857,843 $ 11,884,113 $ 5,272,115 12

16 Note 4 Fair value measurements (continued) The related realized and unrealized losses are reported in the consolidated statement of activities and changes in net assets as change in value of gains on sale of assets, unrealized gains on investments, split-interest agreements, priest welfare program expenses, as well as change in obligations for priest post-retirement benefits other than pensions. Investment activity related to custodial assets held on behalf of others at June 30, 2013 and 2012, of $11,125,431 and $10,297,378, respectively, are not recorded within the consolidated statement of activities and instead are recorded as a payable to the owners of those assets in the consolidated statement of financial position. Note 5 Investments The Diocese maintains investments in equity and debt securities. Investment income, realized gains and losses, and unrealized gains and losses from these securities are allocated to the various unrestricted, temporarily restricted, and permanently restricted funds based on each fund s percentage ownership of total invested assets. Investments are stated at their readily determinable fair value and are summarized by major type as follows as of June 30: Cost Fair Value Cost Fair Value Equity securities - domestic $ 2,551,880 $ 3,888,793 $ 2,840,205 $ 3,668,058 Equity securities - international 4,118,964 5,106,014 3,184,845 3,560,271 Mutual funds - domestic 9,196,722 12,978,436 9,215,222 11,372,905 Mutual funds - international 4,795,197 5,880,818 6,583,840 7,302,917 Alternative investments 4,000,000 4,226,670 4,000,000 4,118,619 Bond funds 11,848,993 11,892,284 9,558,736 10,036,053 Cash and cash equivalents 576, ,028 1,217,632 1,217,632 Total Assets $ 37,087,784 $ 44,549,043 $ 36,600,480 $ 41,276,455 Investment revenues are reported net of investment fees of $147,746 and $157,919 for the years ended June 30, 2013 and 2012, respectively. Diocesan endowments consist of approximately 40 individual funds established for a variety of purposes. The endowments include donor-restricted endowment funds, funds designated by the Diocesan Finance Council to function as endowments, and funds held in custody on behalf of related organizations. As required by GAAP, net assets associated with Diocesan endowment funds, including funds designated by the Diocesan Finance Council to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions in the accompanying consolidated statements of financial position and activities and changes in net assets. 13

17 Note 5 Investments (continued) The Diocesan Finance Council has implemented policies requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of these policies, the Diocese classifies the following as permanently restricted assets: (a) the original value of gifts donated to the permanent endowment; (b) the original value of subsequent gifts to the permanent endowment; and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Diocese. The Diocese considers the following factors in making decisions related to appropriations for expenditures or accumulations of donor-restricted endowment funds: (1) the duration and preservation of the various funds; (2) the purposes of the donor-restricted endowment funds; (3) general economic conditions; (4) the possible effect of inflation and deflation; (5) the expected total return from income and the appreciation of investments; (6) other resources of the Diocese; and (7) the Diocese s investment policies. Investment Return Objectives, Risk Parameters and Strategies: The Diocese has adopted investment policies, approved by the Diocesan Finance Council, that attempt to emphasize total return. While shorter-term investment results are monitored, adherence to the sound long-term investment policy balancing short-term spending needs with the preservation of the real inflation-adjusted value of assets is of primary importance. The Diocese expects to attain an inflationadjusted minimum average annual return, net of fees, over a rolling ten-year period. This real return is defined as the sum of capital appreciation (loss) and current income (interest and dividends) adjusted for inflation as measured by the Consumer Price Index. Investment policies are based on principles of responsible financial stewardship, as well as ethical and social stewardship. The Diocese is committed to a diversified asset allocation strategy, consisting primarily of domestic equities, international equities, domestic fixed income, international fixed income, and alternative investments. Spending Policy The Diocesan policy is that the annual income distribution available from endowment funds is a maximum of 4.5% of the three-year average fair value of the endowment, measured at December 31 of the prior fiscal year. 14

18 Note 5 Investments (continued) Endowment composition by type of fund is as follows as of June 30: Unrestricted Custodial Endowments Held on Behalf of Others Unrestricted Temporarily Restricted Permanently Restricted Donor-restricted endowment funds $ - $ (1,963) $ 16,948,552 $ 2,714,661 $ 19,661,250 Board-restricted endowment and other funds 11,125,431 13,762, ,887,793 Total $ 11,125,431 $ 13,760,399 $ 16,948,552 $ 2,714,661 $ 44,549,043 Unrestricted Custodial Endowments Held on Behalf of Others Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted endowment funds $ - $ 65,366 $ 15,616,110 $ 2,703,813 $ 18,385,289 Board-restricted endowment and other funds 10,297,378 12,593, ,891,166 Total $ 10,297,378 $ 12,659,154 $ 15,616,110 $ 2,703,813 $ 41,276,455 Changes in endowment for the years ended June 30: Total Unrestricted Custodial Endowments Held on Behalf of Others Unrestricted Temporarily Restricted Permanently Restricted Endowment beginning of year $ 10,297,378 $ 12,659,154 $ 15,616,110 $ 2,703,813 $ 41,276,455 Contributions 285,578-67,100 3, ,423 Investment income 201, , ,354 7, ,493 Realized gain on disposal of securities 172, , , ,193 Net appreciation of securities 699, ,828 1,260,315-2,785,769 Amounts expended (531,051) (176,297) (666,942) - (1,374,290) Total $ 11,125,431 $ 13,760,399 $ 16,948,552 $ 2,714,661 $ 44,549, Total 15

19 Note 5 Investments (continued) Unrestricted Custodial Endowments Held on Behalf of Others Unrestricted Temporarily Restricted Permanently Restricted Endowment beginning of year $ 10,578,321 $ 12,682,762 $ 16,227,124 $ 2,670,960 $ 42,159,167 Contributions 499, , ,180 Investment income 193, , ,954 32, ,898 Realized gain on disposal of securities 95, , , ,589 Net depreciation of securities (414,037) (192,885) (852,717) - (1,459,639) Amounts expended (655,509) (284,161) (647,070) - (1,586,740) Total $ 10,297,378 $ 12,659,154 $ 15,616,110 $ 2,703,813 $ 41,276,455 The activity of custodial endowments held on behalf of others are reported for informational purposes only and are not reported in the consolidated statement of activities and changes in net assets. Amounts owed to related organizations for these custodial endowments are reported as accounts payable - funds held for others in the accompanying consolidated statement of financial position Total 16

20 Note 6 Nature and amount of restricted net assets Temporarily restricted net assets are as follows at June 30: Undistributed Bishop's Annual Appeal $ 5,208,770 $ 7,617,614 Cathedral Campus Campaign 26,474,228 15,414,740 Horne Memorial Revolving Fund 3,693,605 3,573,846 Land Trust 737,800 1,542,064 Seminarian Endowments 2,124,671 2,009,608 Miscellaneous Endowment 900, ,757 Miscellaneous Other 928, ,908 Charitable Trust 86,927 64,502 Catholic School Endowments 74,463 69,714 God's Work ~ Our Challenge: Endowment for the Poor 504, ,371 Tuition Assistance 1,900,406 1,794,697 Parish Assistance 1,056, ,020 Seminarian Education 1,784,348 1,687,982 Hispanic Ministry 2,323,151 2,197,817 Lay Leadership Formation 994, ,272 Mary Dowling Endowment 955, ,122 Diocesan Development Trust 2,710,693 2,457,868 Small Campus Assistance Fund 552, ,551 Total temporarily restricted net assets $ 53,010,748 $ 43,439,453 Permanently restricted net assets are as follows at June 30: Campus Ministry Endowments $ 976,678 $ 976,678 Seminarian Education Funds 102, ,308 Miscellaneous Endowments 1,635,675 1,624,827 Total permanently restricted net assets $ 2,714,661 $ 2,703,813 17

21 Note 7 Bishop s Annual Appeal The Bishop s Annual Appeal ( BAA ) is an annual campaign, conducted in the parishes, which raises operating funds for use by the Diocese in its upcoming fiscal year to support numerous evangelization, worship and charitable programs. As the funds can only be used to support these programs beginning in the next fiscal year, they are considered temporarily restricted until the time and purpose restrictions have been met. Each parish is assigned a designated funding goal based on its pro-rata share of total offertory income within the Diocese. Parishes with elementary or middle schools receive a 100% rebate for funds collected in excess of their BAA goal. All others receive an 80% rebate for funds collected in excess of their goal. However, during fiscal year 2012, the BAA campaign was combined with the Cathedral Campus Campaign. Each parish fully funded its BAA goal then applied excess funds to its Cathedral Campus Campaign goal. As such, no BAA rebates were payable in 2012 nor was a reserve for doubtful promises established. During fiscal year 2013, the BAA and Cathedral Campus campaigns were again separated, though four parishes opted to continue with combined campaigns that included their 2013 BAA. As of June 30, 2013, the Diocese had net pledges receivable directly from those four parishes related to 2013 BAA of $700,052, which is included in Accounts receivable- BAA, net on the accompanying consolidated statement of financial position. The following unconditional promises to give were outstanding as of June 30: Bishop's Annual Appeal: Promises to give receivable in less than one year $ 2,163,681 $ 3,299,618 Less: rebates to parishes (32,710) - Less: allowance for doubtful promises (238,005) - Total $ 1,892,966 $ 3,299,618 Note 8 Cathedral Campus Campaign In January 2010, the Diocese commissioned a Feasibility Study to gauge the support of a capital campaign to develop a new Cathedral Campus to meet the needs of a growing Catholic Community. Based on these results, the Diocese announced plans in September 2011 to move forward with a campaign to build a Cathedral Campus. From January through July 2012, the first phase of the parish portion of the Our Cathedral: One Faith, One People campaign began with 41 parishes taking part in Block 1. In August 2012, the second phase of the parish portion of the Our Cathedral: One Faith, One People campaign began with 49 parishes taking part in Block 2. The majority of these parishes conducted their campaigns until December. Because of delays in the timing of their campaigns, 4 parishes began in the spring of 2013 and are considered to be in Block 3. Parish financial goals were determined using a formula based on their 2011 fiscal calendar year offertory and part of each parish s financial target included its portion of the Bishop s Annual Appeal for The campaign split the 94 Diocese parishes into 3 blocks. The four parishes included in Block 3 of the campaign also included their portion of the BAA for

22 Note 8 Cathedral Campus Campaign (continued) Parishes were permitted to pick one of two following campaign options: A Good Faith Effort or a Combined Campaign. A parish selecting the Good Faith Effort campaign guaranteed its 2012 BAA Goal and is receiving 20% of the net funds collected up to its Total Campaign Goal. If a parish exceeds its Total Campaign Goal, it will then receive 50% of funds raised above and beyond its Total Campaign Goal. A parish selecting the Combined Campaign will guarantee the 2012 and 2013 BAA, as applicable, and 80% of the Cathedral Project Goal. The Parish will retain everything raised over the guaranteed amount. Promises to give are receivable over four years. As of June 30, 2013 and 2012, the Diocese had net pledges receivable directly from parishes who are participating in the combined campaigns of $9,415,413 and $3,214,867, respectively, which are included in the accompanying consolidated statement of financial position. The following unconditional promises to give were outstanding as of June 30: Cathedral Campus Campaign Promises to give receivable over four years $ 31,549,134 $ 18,693,193 Less: discount at 0.72% (1,015,990) (658,659) Less: rebates to parishes (2,474,441) (167,323) Less: allowance for doubtful promises (2,621,615) (1,560,579) Total $ 25,437,088 $ 16,306,632 Note 9 Intentions to give and conditional promises to give During the year ended June 30, 2012, the Diocese received indications of a gift in the form of a bequest which is revocable during the donor s lifetime. Due to the uncertain nature of this intention, the Diocese has not recognized an asset or contribution revenue for this gift. The estimated total intention to give was $1,000,000 as of June 30, 2013 and During the year ended June 30, 2012, the Diocese received a promise to give totaling $700,000 that contained donor conditions. Since this promise represents a conditional promise to give, it is not recorded as contribution revenue until donor conditions are met. No funds have been received for this promise as of June 30, 2013 and Note 10 Parish deposit and loan program The Diocese sponsors a deposit and loan program whereby diocesan parishes, schools, and other entities deposit excess funds and diocesan parishes can obtain loans for approved construction or operating needs. Interest rates for deposits and loans are reviewed semi-annually and adjusted as necessary. At June 30, 2013 and 2012, Parish deposits earned interest at a rate of 0.75% and 1.00%, respectively, and can be withdrawn as requested. At June 30, 2013 and 2012, parish loans bore an interest rate of 5.50% and 5.75%, respectively, with the exception of loans used for the purchase of land, and certain other loans, which are non-interest bearing. The Diocese reviews loans receivable on a recurring basis and based on an assessment of credit worthiness, estimates the portion, if any, of the balance that will not be collected. Such amounts are recorded as an allowance, if necessary. As of June 30, 2013 and 2012, the allowance totaled $200,

23 Note 11 Licenses and rights During the year ended June 30, 2002, the Diocese acquired the perpetual use of eight living units at Saint Joseph of the Pines, Inc. ( Saint Joseph ) to serve as residential facilities for retired priests. Although legal title to the units and all improvements thereon remains with Saint Joseph, the Diocese is responsible for all major repairs and replacements to the units. Note 12 Property and equipment Property and equipment consisted of the following as of June 30: Land, buildings, and improvements $ 18,338,568 $ 17,252,589 Furniture and equipment 3,323,100 3,245,441 Automobiles 580, ,943 22,242,127 21,117,973 Less: accumulated depreciation (4,350,416) (5,955,188) 17,891,711 15,162,785 Construction in progress 2,164,087 1,316,999 Property and equipment, net $ 20,055,798 $ 16,479,784 Property and equipment are included in the accompanying consolidated statement of financial position under the following captions at June 30: Operating properties $ 10,332,521 $ 7,603,595 Other properties 9,723,277 8,876,189 Property and equipment, net $ 20,055,798 $ 16,479,784 Depreciation expense for the years ended June 30, 2013 and 2012 totaled $567,696 and $421,937, respectively. Note 13 Life annuities and charitable remainder unitrust The Diocese is the trustee and beneficiary of several one-life and two-life annuities under which $50,000 of contribution revenue was recognized for restricted use during the year ended June 30, No contribution revenue was recognized for restricted use during the year ended June 30, Under terms of the splitinterest agreements, the Diocese is required to pay the various donors an annuity until the donors death at which time the remaining assets are to be distributed to the Diocese. Actuarial assumptions published by the Department of Health and Human Services and a discount rate of 6.5% were used in calculating the present value of the amounts to be received upon termination of the individual annuities. 20

24 Note 13 Life annuities and charitable remainder unitrust (continued) The Diocese is the trustee and beneficiary of a charitable remainder unitrust. Under the agreement, the Diocese is to pay the donor an amount equal to 7.5% of the trust value as of the first day of the trust year. A discount rate of 6.5% and actuarial assumptions published by the Department of Health and Human Services were used in calculating the present value of the amount to be received upon termination of the trust. The fair value of assets held in trust, including investments in the accompanying consolidated statement of financial position, and corresponding liability to the donors, included in split-interest obligations, is as follows as of June 30: Assets Held in Trust 2013 Liability to Donors Net Asset (Liability) Life Annuities $ 680,143 $ 691,286 $ (11,143) Charitable Remainder Trust 253, ,557 86,927 $ 933,627 $ 857,843 $ 75,784 Assets Held in Trust 2012 Liability to Donors Net Asset (Liability) Life Annuities $ 637,548 $ 662,024 $ (24,476) Charitable Remainder Trust 224, ,965 64,502 $ 862,015 $ 821,989 $ 40,026 Note 14 Post retirement benefits other than pensions The Diocese sponsors two single-employer, noncontributory, defined benefit health plans providing postretirement health care benefits and long-term care benefits for its retired diocesan priests. In accordance with GAAP, the Diocese records a provision each year for future obligations under the plans. 21

25 Note 14 Post retirement benefits other than pensions (continued) The accumulated post-retirement benefit obligations associated with the health care plan and long-term care plan as of June 30, 2013 and 2012, included in the statement of financial position are calculated as follows: Long Term Health Care Care Benefit obligation at June 30, 2011 $ 8,844,322 $ 3,639,984 Service cost 220,980 91,006 Interest cost 489, ,272 Actuarial loss 2,892,488 1,830,026 Benefit payments (321,287) (36,287) Benefit obligation at June 30, ,126,262 5,729,001 Service cost 376, ,632 Interest cost 495, ,544 Actuarial gain (781,900) (730,011) Benefit payments (331,461) (79,051) Benefit obligation at June 30, 2013 $ 11,884,113 $ 5,272,115 The related net periodic post-retirement benefit costs are reported in the consolidated statement of activities and changes in net assets as priest welfare program expenses as well as change in obligations for priest postretirement benefits other than pensions. Amounts recognized in the consolidated statement of activities and changes in net assets related to the health care plan and long-term care plan for the year ended June 30, 2013 and 2012 consist of: Health Care Long Term Care Health Care Long Term Care Service cost $ 376,046 $ 116,632 $ 220,980 $ 91,006 Interest cost 495, , , ,272 Actuarial loss (gain) (781,900) (730,011) 2,892,488 1,830,026 Net periodic post-retirement cost (income) $ 89,312 $ (377,835) $ 3,603,227 $ 2,125,304 Assumed health care cost trend rates significantly impact reported amounts. The assumed health care cost trend rate used to measure the expected cost of benefits for the health care plan was assumed to increase by 8.50% and 7.50% for the years ended June 30, 2013 and 2012, respectively. Thereafter, the rate was assumed to gradually decrease to a rate of 5.00% in 2020 and 2018 for the fiscal years ending June 30, 2013 and 2012, respectively. The assumed health care cost trend rate used to measure the expected cost of benefits for the long-term care plan was assumed to increase by 5.00% for the years ended June 30, 2013 and 2012, respectively, and remain at 5.00% on an ongoing basis. 22