Frontier Behavioral Health. Financial Report June 30, 2016

Transcription

1 Financial Report June 30, 2016

2 Table of Contents June 30, 2016 Report of Independent Auditor Page Financial Statements: Statements of Financial Position... 3 Statements of Activities and Changes in Net Assets... 4 Statements of Cash Flows... 5 Notes to Financial Statements Compliance Reports: Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Schedule of Expenditures of Federal Awards Note to Schedule of Expenditures of Federal Awards Independent Auditor s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Status of Prior Year Findings... 30

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5 Statements of Financial Position June 30, 2016 and 2015 ASSETS Current assets: Cash and cash equivalents (Notes 3 and 15) $ 7,854,528 $ 11,041,090 Investments (Note 4) 6,435,796 2,582,175 Accounts receivable, net of allowance for doubtful accounts of $205,985 and $174,851, respectively 1,767,946 4,433,052 Related party receivables (Note 5) 10,000 10,000 Prepaid expenses and other current assets 462, ,040 Assets held in trust (Note 6) 60,660 24,532 Deferred financing costs, to be amortized within one year (Note 9) 5,307 5,307 Total current assets 16,596,777 18,470,196 Noncurrent assets: Fixed assets, net of accumulated depreciation (Note 7) 14,086,986 12,756,388 Deferred financing costs, to be amortized after one year (Note 9) 43,659 48,966 Foundation endowment (Notes 4 and 12) 23,653 23,466 Total noncurrent assets 14,154,298 12,828,820 Total assets $ 30,751,075 $ 31,299,016 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and accrued expenses $ 978,888 $ 973,406 Accrued payroll-related liabilities 1,020,157 1,915,641 Accrued self-insurance liability 323, ,099 Accrued vacation liability 1,879,545 1,870,750 Accrued interest payable 4,854 5,074 Assets held in trust payable (Note 6) 60,660 24,532 Deferred contract revenue 200, ,902 Deferred grant revenue, to be amortized within one year (Note 10) 60,000 60,000 Long-term debt, due within one year (Note 9) 299, ,135 Total current liabilities 4,827,185 6,040,539 Noncurrent liabilities: Deferred grant revenue, to be amortized after one year (Note 10) 1,160,000 1,220,000 Long-term debt, due after one year (Note 9) 3,130,912 3,430,918 Commitments and contingencies (Notes 11, 13, 15 and 18) Total noncurrent liabilities 4,290,912 4,650,918 Total liabilities 9,118,097 10,691,457 Net assets (Note 17): Unrestricted: Unrestricted 19,960,237 18,876,501 Unrestricted, Board designated 1,637,650 1,696,166 Total unrestricted net assets 21,597,887 20,572,667 Temporarily restricted 11,438 11,426 Permanently restricted (Note 12) 23,653 23,466 Total net assets 21,632,978 20,607,559 Total liabilities and net assets $ 30,751,075 $ 31,299,016 The accompanying notes are an integral part of the financial statements. 3

6 Statements of Activities and Changes in Net Assets Years Ended June 30, 2016 and 2015 SUPPORT AND REVENUE Temporarily Permanently Unrestricted Restricted Restricted Total Total Federal, state and local grants and contracts $ 50,018,781 $ - $ - $ 50,018,781 $ 44,742,046 Patient service fees, net (Note 16) 755, , ,849 Other income 1,359, ,359,505 1,331,279 Investment income, net 120, ,128 93,361 EXPENSES (Note 14) Total support and revenue 52,254, ,254,570 46,780,535 Salaries and wages 31,609, ,609,527 27,947,605 Employee benefits 7,991, ,991,701 6,713,705 Other operating expenses 6,998, ,998,847 6,364,035 Professional services 1,444, ,444, ,926 Depreciation (Note 7) 1,171, ,171, ,521 Supplies 1,804, ,804,683 1,883,288 Interest expense (Note 9) 170, , ,112 Total expenses 51,190, ,190,807 44,961,192 Changes in net assets from operating activities 1,063, ,063,763 1,819,343 NON-OPERATING INCOME Net unrealized gains on investments 52, ,996 22,268 Loss on disposal of fixed assets (91,340) - - (91,340) - Total non-operating income, net (38,361) - 17 (38,344) 22,268 Changes in net assets 1,025, ,025,419 1,841,611 Net assets, beginning of year 20,572,667 11,426 23,466 20,607,559 18,765,948 Net assets, end of year $ 21,597,887 $ 11,438 $ 23,653 $ 21,632,978 $ 20,607,559 The accompanying notes are an integral part of the financial statements. 4

7 Statements of Cash Flows Years Ended June 30, 2016 and Cash flows from operating activities: Changes in net assets $ 1,025,419 $ 1,841,611 Adjustments to reconcile changes in net assets to net cash provided by operating activities: Depreciation 1,171, ,521 Amortization of deferred financing costs 5,307 5,307 Net unrealized (gains) on investments (52,996) (22,268) Loss on disposal of fixed assets 91,340 - Change in assets and liabilities: Accounts receivable, net 2,665,106 (3,178,255) Prepaid expenses and other current assets (88,500) (7,874) Assets held in trust (36,128) 23,457 Accounts payable and accrued expenses 5,482 58,466 Accrued payroll-related liabilities (895,484) 429,174 Accrued self-insurance liability 62,970 (52,810) Accrued vacation liability 8, ,942 Accrued interest payable (220) 66 Assets held in trust payable 36,128 (23,457) Deferred contract revenue (446,345) 187,210 Deferred grant revenue (60,000) (60,000) Net cash provided by operating activities 3,492, ,090 Cash flows from investing activities: Purchases of fixed assets (2,593,203) (1,904,157) Purchases and sales of investments, net (3,800,812) (202,694) Change in restricted cash and cash equivalents - 202,027 Net cash used by investing activities (6,394,015) (1,904,824) Cash flows from financing activities: Principal payments on long-term debt (284,686) (270,796) Net cash used by financing activities (284,686) (270,796) Net decrease in cash and cash equivalents (3,186,562) (1,896,530) Cash and cash equivalents, beginning of year 11,041,090 12,937,620 Cash and cash equivalents, end of year $ 7,854,528 $ 11,041,090 Supplemental disclosure: Interest paid $ 165,655 $ 181,739 The accompanying notes are an integral part of the financial statements. 5

8 Notes to Financial Statements June 30, 2016 and Organization and Operations Frontier Behavioral Health (the Organization), a Washington not-for-profit corporation, was incorporated effective July 1, 2011 as the result of a merger between Spokane Mental Health Coordinating Association and Family Service Spokane. The mission of Frontier Behavioral Health is to provide clinically and culturally appropriate behavioral healthcare and related services to people of all ages in collaboration with community partners. Major programs of the Organization include community-based treatment within its Psychiatric Services Program, Child and Family Services, Adult Services, Elder Services, Crisis Response Services, Psychology Services, and Training and Research. Services provided include: Community Support Services Outpatient Treatment Services Residential/Rehabilitation Services Community Outreach Services Specialist Services including Multicultural, Deaf and Hard of Hearing, and Geriatric and Children s Specialties Wraparound with Intensive Services Integrated Treatment for Co-Occurring Mental Illness and Substance Abuse Psychiatric Consultation, Outpatient Psychiatric Care, and Medication Management Psychology Assessments and Testing Program for Assertive Community Treatment and Intensive Outpatient Services Services for Other Underserved and/or Disabled Populations Information and Assistance for Crisis Hotline and General Public Information Assistance (WIN 211) Crisis Response Services, Crisis Intervention, Crisis Stabilization, Hospital Diversion Services for Children and Adults, and Evaluation and Treatment Services Mobile Crisis Assertive Team Elder specialty programs including Family Caregiver, Care Cars, and Case Management Nutritional monitoring for licensed home daycare providers Primary Care Integration Health Home School Based Counseling Program 2. Summary of Significant Accounting Policies Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and the American Institute of Certified Public Accountants Audit and Accounting Guide for Not-for-Profit Organizations. Under the accrual basis of accounting, revenues are recognized when they are earned and expenses are recognized as incurred. 6

9 Notes to Financial Statements, Continued June 30, 2016 and Summary of Significant Accounting Policies, Continued Basis of Accounting, Continued ASC Topic 605, Revenue Recognition, requires that unconditional promises to give (i.e., pledges) be recorded as receivables and revenue and requires the organization to distinguish between contributions received for each net asset category in accordance with donor-imposed restrictions. ASC Topic 958, Not-For-Profit Entities, establishes standards for external financial statements of not-forprofit organizations. These standards require classification of net assets and revenues, expenses, gains and losses into three categories, based on the existence or absence of donor-imposed restrictions. The categories are unrestricted, temporarily restricted, and permanently restricted (see Note 17). In addition, the Organization is required to present a statement of cash flows. Cash and Cash Equivalents Cash and cash equivalents are comprised of deposits and certificates of deposit in various federally-insured financial institutions and money market funds with high credit-quality brokerage institutions. All cash equivalents are recorded at cost, which approximates fair value. The Organization considers cash equivalents to be any highly liquid investment with an original maturity of three months or less at the time of purchase. Investments The Organization carries investments at fair market value based upon quoted market prices. Gains, losses and income on investments are reported in the Statements of Activities and Changes in Net Assets as increases or decreases in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations. These investment securities are exposed to various interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect total net assets and the amounts reported in the Statements of Financial Position. Accounts Receivable The Organization reports patient receivables at the estimated net realizable amount using the indirect writeoff method. Management reviews all delinquent receivable balances on a monthly basis and establishes an allowance for doubtful accounts, considering historical write-offs, review of specific past-due accounts, collections and current credit conditions. Generally, the Organization considers accounts receivable past due after 30 days. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Payments received subsequent to the time that an account is written off are considered bad debt recoveries, and are recorded as an offset to expenses. The Organization does not accrue interest on receivable balances. 7

10 Notes to Financial Statements, Continued June 30, 2016 and Summary of Significant Accounting Policies, Continued Fixed Assets Purchased fixed assets are stated at cost. Donated fixed assets, if any, are recorded at their estimated fair value at the date of donation. Such donations are reported as unrestricted support unless the donor has restricted the donated asset for a specific purpose. Assets donated with explicit restrictions regarding their use, and contributions of cash that must be used to acquire fixed assets, are reported as restricted support. Absent donor stipulations regarding how long those donated assets must be maintained, the Organization reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. Expenditures for repairs and maintenance that represent betterments or substantially prolong the useful lives of assets are also capitalized. Only assets with a cost or value of $5,000 or greater are capitalized as fixed assets. Normal maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the Statements of Activities and Changes in Net Assets. Depreciation is computed using the straight-line method over the estimated useful lives of the associated assets, ranging from 3 to 40 years. Valuation of Long-Lived Assets Management of the Organization periodically reviews the net carrying value of its assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. These reviews consider the net realizable value of each asset to determine whether an impairment in value has occurred, and whether there is a need for any asset impairment write-down. Impaired assets are reported at the lower of cost or fair value. At June 30, 2016 and 2015, no assets were considered to be impaired. Deferred Financing Costs Financing costs associated with the issuance of tax-exempt bond obligations and other long-term debt are deferred and amortized over the term of the related debt. Self-Insurance Liability The Organization is self-insured for state unemployment claims. Additionally, during 2012, the Organization implemented a self-insured group health medical plan. The Organization records claim expenditures and liabilities when it is probable that a loss or claim has been incurred and the amount of that loss or claim can be reasonably estimated. The reported liability includes an estimate of claims that have been incurred but not reported. 8

11 Notes to Financial Statements, Continued June 30, 2016 and Summary of Significant Accounting Policies, Continued Deferred Revenue The Organization records payments received under grants and contracts as deferred revenue until the amounts are expended for the purpose of the grant or contract agreement, at which time the amount earned is recognized as revenue. The balances in deferred contract revenue represent amounts received under cost reimbursement contracts that will be expended or returned to the grant or contract agency during the next fiscal year in accordance with the grant or contract terms (see Note 13). Financial Instruments ASC Topic 825, Financial Instruments, permits entities to choose to measure many financial assets and liabilities at fair value. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced liquidation sale. At June 30, 2016 and 2015, the carrying value of financial instruments, such as receivables, accounts payable and accrued liabilities, approximated their fair values based on the short-term maturities of these instruments. Fair Value Measurements ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those assets and liabilities measured at fair value, that distinguishes between assumptions based on market data (observable inputs) and the organization s own assumptions (unobservable inputs). The hierarchy consists of: Level 1 quoted market prices in active markets for identical instruments; Level 2 inputs other than Level 1 inputs that are observable; and Level 3 unobservable inputs developed using estimates and assumptions determined by the organization. At June 30, 2016 and 2015, the only assets or liabilities of the Organization that are measured at fair value on a recurring basis are investments of $6,459,449 and $2,605,641, respectively, including investments held in the Foundation endowment, which are measured based on Level 1 inputs. Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The Organization had no assets measured at fair value on a nonrecurring basis during 2016 and Grants and Contracts Revenue The Organization must perform services or meet specific conditions to receive grant and contract funds. When the conditions are met or the required services have been provided, the government agency is billed and the support is recognized. Generally, there are no significant remaining restrictions associated with the grants or contracts when the support is recognized. However, if there are restrictions, the amount is recorded as deferred revenue in the current liability section of the Statements of Financial Position. Once the requirements have been satisfied, the Organization removes the amount from deferred revenue and recognizes the amount as grants and contracts revenue in the Statements of Activities and Changes in Net Assets. 9

12 Notes to Financial Statements, Continued June 30, 2016 and Summary of Significant Accounting Policies, Continued Patient Service Fees The Organization provides services to individuals regardless of their ability to pay. Patients who meet certain criteria are provided services in compliance with the Organization s financial assistance guidelines, which are developed in accordance with federal poverty guidelines. Revenues are reported at the estimated net realizable amounts from patients and third-party payers. Contributions and Recognition of Donor Restrictions All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Contributions of cash and other assets with donor-imposed temporary restrictions, where the restrictions have been satisfied in the same reporting period as received, are reported as increases in unrestricted net assets. Amounts received that are designated for future periods or restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support, which increases those net asset classes. When a temporary restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Statements of Activities and Changes in Net Assets as net assets released from restrictions. Donated Services and Supplies Donated services are recognized as contributions if the services either create or enhance non-financial assets or require specialized skills, which are performed by people with those skills, and would otherwise be purchased by the Organization. Donated supplies are recorded at their estimated fair value when received. Donated services of $19,440 and $33,590 are included in other income and professional services in the Statements of Activities and Changes in Net Assets for the years ended June 30, 2016 and 2015, respectively. Advertising Expenses The Organization expenses advertising costs as incurred. Advertising expenses for the years ended June 30, 2016 and 2015 were $62,960 and $91,306, respectively. Income Taxes The Organization is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code and therefore has made no provision for federal income taxes in the accompanying financial statements. However, the Organization is subject to tax on unrelated business income, if any. During 2016 and 2015, the Organization had no unrelated business income. The Organization s tax returns are subject to possible examination by taxing authorities. With few exceptions, the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns. 10

13 Notes to Financial Statements, Continued June 30, 2016 and Summary of Significant Accounting Policies, Continued Credit Risk Financial instruments which potentially subject the Organization to concentration of credit risk consist principally of cash and cash equivalents and receivables. The Organization maintains its cash and cash equivalents with high credit quality financial institutions and generally limits the amount of exposure to any one financial institution. The Organization s cash in bank deposit accounts, at times, may exceed federally insured limits. The Organization has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk on cash and cash equivalents. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management of the Organization to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. The use of estimates is employed in determining the allowance for doubtful accounts, the amount for depreciation expense, and the estimated self-insurance liability. These estimates can be affected by changes in economic circumstances and, accordingly, actual results could differ from the estimates reflected in the financial statements. Subsequent Events The Organization has evaluated subsequent events through November 30, 2016, the date as of which these financial statements were available to be issued. No material subsequent events have occurred since June 30, 2016 that required recognition or disclosure in these financial statements. 3. Cash and Cash Equivalents Cash and cash equivalents consist of deposits held in checking, savings and money market accounts with local banks and non-bank brokerage institutions. Deposits at each bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. A portion of the Organization s cash and cash equivalents is backed by government securities. Balances at non-bank brokerage institutions may be protected up to $500,000 by the Securities Investor Protection Corporation (SIPC). The carrying amount of cash and cash equivalents on the Organization s books at June 30, 2016 was $7,854,528 (including restricted cash and cash equivalents, if any) and bank and brokerage institutions account balances totaled $8,106,517. The differences between the carrying amount of cash and cash equivalents on the Organization s books and the bank and brokerage institutions account balances consisted of outstanding checks and deposits not processed by the banks and brokerage institutions as of June 30,

14 Notes to Financial Statements, Continued June 30, 2016 and Cash and Cash Equivalents, Continued A summary of the bank and brokerage institutions account balances at June 30, 2016 is as follows: Portion insured by the FDIC $ 364,322 Portion backed by government securities 7,268,476 Balances subject to SIPC protection 277,865 Uninsured 195,854 Total bank and brokerage institutions account balances $ 8,106, Investments Investments at June 30, 2016 and 2015 are summarized as follows: Fixed income $ 3,740,706 $ -- Certificates of deposit (interest from 0.50% to 1.35%, maturing through October 2018) 1,360,388 1,369,347 Mutual funds 795, ,493 Equities 539, ,335 Foundation endowment (see Note 12) 23,653 23, Related Party Receivables $ 6,459,449 $ 2,605,641 The Organization sponsors various housing projects that are ultimately funded by the U.S. Department of Housing and Urban Development (HUD) under the Section 811 program, Supportive Housing for Persons with Disabilities (HUD-811). Once a project is funded by HUD, a separate 501(c)(3) owner corporation is formed, which reimburses the Organization for most of the development expenses advanced by the Organization. Because certain members of the Organization s Board of Directors are also members of the Boards of Directors of the owner corporations, the Organization considers the amounts due from the owner corporations to be related party receivables. At June 30, 2016 and 2015, the combined amounts due from the owner corporations were $10,000 for both years. 6. Assets Held in Trust The Organization is an agent for the Social Security Administration in connection with its protective payee program. The program distributes cash to the Organization which, in turn, agrees to use the assets on behalf of the beneficiary or to distribute the funds to the beneficiary. The Organization is also the trustee for funds held for the benefit of certain of its consumers, including members of the Evergreen Club. The Organization maintains a checking account on behalf of these beneficiaries, and has elected to include the amount and the corresponding liability in the Statements of Financial Position in order to reflect its fiduciary responsibility for these funds. 12

15 Notes to Financial Statements, Continued June 30, 2016 and Fixed Assets Fixed assets at June 30, 2016 and 2015 are summarized as follows: Land $ 1,263,128 $ 1,263,128 Buildings 4,442,285 4,442,285 Buildings and leasehold improvements 13,394,450 13,257,523 Furniture and equipment 3,795,545 6,612,528 22,895,408 25,575,464 Less accumulated depreciation (9,250,450) (13,393,189) Fixed assets in service 13,644,958 12,182,275 Construction in progress 442, ,113 $ 14,086,986 $ 12,756,388 Depreciation expense for the years ended June 30, 2016 and 2015 was $1,171,265 and $879,521, respectively. 8. Line of Credit The Organization has a $750,000 revolving line of credit with Washington Trust Bank, which matures in February The line of credit, which bears interest at the Washington Trust Bank Index Rate plus.5% (4.50% at June 30, 2016), is secured by the Organization s accounts receivable. The line of credit had no outstanding balance at June 30, 2016 and 2015, nor were there any advances or repayments during 2016 and Long-term Debt During 2011, the Organization borrowed $4.3 million under a Series 2010 Revenue Bond, issued through the Washington Health Care Facilities Authority (WHCFA). The proceeds from the Series 2010 Revenue Bond were used to retire the outstanding principal balances of previously-issued WHCFA Revenue Bonds. In addition, during 2014, the Organization obtained financing from Washington Trust Bank (WTB), totaling $560,000, to assist with the purchase of a new building. In connection with the issuance of the Series 2010 WHCFA Revenue Bond and the note with WTB, the Organization recorded deferred financing costs totaling $75,595 and $4,013, respectively, which are being amortized over the lives of the debt. Amortization of the deferred financing costs was $5,307 for both of the years ended June 30, 2016 and 2015, which is included in interest expense in the Statements of Activities and Changes in Net Assets. 13

16 Notes to Financial Statements, Continued June 30, 2016 and Long-term Debt, Continued At June 30, 2014, the Organization had restricted cash of $202,027. The restricted cash represented the unexpended proceeds of the Series 2010 and Series 2008 Revenue Bonds. The use of this cash was restricted to pay for remodeling, make improvements to and acquire healthcare facilities, acquire technology improvements, and pay the Bond insurance premium and costs of issuance of the Bond. During 2015, the remaining proceeds were expended in accordance with the restrictions, resulting in a zero balance for restricted cash at both June 30, 2016 and Long-term debt at June 30, 2016 and 2015 is summarized as follows: Series 2010 Revenue Bond, issued through the WHCFA, payable in monthly installments of $33,313, including interest at 4.65%, maturing in July 2025 $ 2,957,779 $ 3,212,759 Note payable to WTB, payable in monthly installments of $4,202, including interest at 4.15% through June 2020, then increasing to 4.47%, maturing in June , ,294 3,430,367 3,715,053 Less amounts due within one year (299,455) (284,135) Amounts due after one year $ 3,130,912 $ 3,430,918 Principal maturities of long-term debt are summarized as follows: Year Ending June 30, 2017 $ 299, , , , ,287 Thereafter 1,788,567 $ 3,430,367 As a condition of the issuance of the Series 2010 Revenue Bond, the Organization agreed to certain restrictive covenants for the protection of the bond owner. Additionally, the bond and the note are collateralized by a Deed of Trust on real property. At June 30, 2016, the Organization was in compliance with all restrictive bond covenants. 14

17 Notes to Financial Statements, Continued June 30, 2016 and Deferred Grant Revenue During 2011, the Organization entered into a grant agreement for the establishment and operation of a new 16-bed licensed facility. The facility provides evaluation, treatment, emergency, inpatient, outpatient and specialized mental health services for individuals experiencing an acute crisis, without the use of long-term hospitalization. During 2011, the Organization received funding from DSHS totaling $1,500,000, in accordance with the terms of the grant agreement. As part of the grant agreement, the Organization is required to operate the facility for a period of 25 years from the time the facility opened. In addition, the agreement is secured by a Deed of Trust on real property in which DSHS has a priority lien position with respect to the property. In accordance with the terms of the grant agreement, after the facility has been operated for 25 years, DSHS will release the Deed of Trust. If the Organization fails to operate the facility for the required period, the Organization will be required to repay DSHS a portion of the grant based on the number of months remaining on the term of the agreement at the time of termination. Accordingly, the Organization recorded the entire amount received from DSHS as deferred grant revenue at June 30, This amount is being amortized on a monthly basis over the term of the agreement. During 2012, the project was completed and the facility began operations. The Organization recognized revenue totaling $60,000 related to this grant during both 2016 and The amount that the Organization anticipates will be amortized during the upcoming fiscal year is recorded as a current liability in the Statements of Financial Position. 11. Retirement Fund Contributions The Organization provides a 403(b) plan for all eligible employees. Historically, the Organization has not contributed to this plan. Through December 31, 2014, the Organization also provided a money purchase pension (defined contribution) plan for all eligible employees. Through December 31, 2014, the Organization made contributions to the money purchase pension plan equal to 5% of participating employees gross compensation. Effective January 1, 2015, the Organization s Board of Directors approved the merger of the money purchase pension plan into the 403(b) plan (the Plan). Beginning January 1, 2015, the Organization makes contributions to the Plan for all eligible participants, equal to 3% of participating employees gross compensation. In addition, the Organization offers matching contributions of employee deferrals, up to 3% of participating employee s gross compensation to all participating employees. The Organization s contributions to both plans for the years ended June 30, 2016 and 2015 were $1,433,562 and $1,129,145, respectively. 12. Foundation Endowment The Organization s endowment consists of two funds established for the benefit of providing income for the operations of the Organization. The endowment includes donor-restricted endowment funds, which totaled $23,653 and $23,466 at June 30, 2016 and 2015, respectively. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds as endowments, are classified and reported based on the existence of donor-imposed restrictions. 15

18 Notes to Financial Statements, Continued June 30, 2016 and Foundation Endowment, Continued The Organization has interpreted the Washington Uniform Prudent Management of Institutional Funds Act (WUPMIFA) as requiring the presentation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Organization classifies as permanently restricted net assets (a) the original 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 donorrestricted 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 organization in a manner consistent with the standard of prudence prescribed by WUPMIFA. In accordance with WUPMIFA, the Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: The duration and preservation of the fund; The purposes of the organization and the donor-restricted endowment fund; General economic conditions; The possible effect of inflation and deflation; The expected total return from income and the appreciation of investments; Other resources of the organization; and The investment policies of the organization. 13. Commitments and Contingencies Operating Leases The Organization conducts a portion of its operations from leased facilities. Additionally, the Organization has entered into certain office equipment leases, which are accounted for as operating leases. Future minimum rental payments required under real property and personal property operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 2016 are as follows: Year Ending June 30, 2017 $ 471, , , , ,813 The leases require monthly and quarterly payments ranging from $55 to $11,214 and have remaining terms of one to five years. Rental expense for the years ended June 30, 2016 and 2015 was $600,262 and $567,039, respectively. 16

19 Notes to Financial Statements, Continued June 30, 2016 and Commitments and Contingencies, Continued Professional Liability Insurance The Organization is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; and natural disasters. The Organization maintains professional liability insurance coverage through a policy with a commercial insurance carrier, which provides protection on a claims-made basis. Any settled claims did not exceed coverage during any of the past three fiscal years. Additionally, management has determined there are no significant liabilities as of June 30, 2016 and Industry Regulations The healthcare industry is subject to the numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditations, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuses. Additionally, government investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers exist. Violations of these laws and regulations by the Organization, if they should exist, could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes the Organization is in compliance with fraud and abuse statutes, as well as other applicable government laws and regulations. While no regulatory inquiries have been made, compliance with such laws can be subject to future government review and interpretation, as well as regulatory actions known or unasserted at this time. Grant Programs The Organization receives significant financial assistance from governmental agencies in the form of grants, which are governed by various rules and regulations of the grantor agencies. The expenditure of funds received under grant programs generally requires compliance with the terms and conditions specified in the grant agreements and is subject to audit by the Organization s independent auditors and other governmental auditors. Therefore, to the extent that the Organization has not complied with the terms and conditions governing the grants, refunds of any money received may be required, and the collectability of any related receivables at June 30, 2016 may be impaired. Based on its understanding of the grant agreements, management of the Organization believes such amounts, if any, would be immaterial. As discussed in Note 15, a significant portion of the Organization s revenue is funded through contracts with the Spokane County Behavioral Health Organization (SCBHO, formerly Spokane County Regional Support Network or SCRSN), which are generally segregated into Medicaid and Non-Medicaid funds. The SCBHO has changed the Medicaid funding for Outpatient Services from a cost reimbursement-based contract to a fixed performance-based contract, effective January 1, This change potentially puts the Organization at risk for any expenditures in excess of future contract revenues. 17

20 Notes to Financial Statements, Continued June 30, 2016 and Commitments and Contingencies, Continued Grant Programs, Continued For the contractual periods ended September 30, 2015 and March 31, 2016, the SCRSN informed the Organization that they would be required to return any unexpended Non-Medicaid funds. Based on these revised contractual terms, the Organization returned funds to the SCRSN totaling approximately $1,211,000 during the fiscal year ended June 30, 2016, which related to the contractual periods ended September 30, 2015 and March 31, Each subsequent contract period will be reviewed by the SCBHO and they may request the return of certain unexpended Medicaid or Non-Medicaid funds. Amounts that the SCBHO may require to be returned for the contractual period ending June 30, 2017, if any, are not yet known. At June 30, 2016, the Organization has recorded approximately $184,000 as deferred contract revenue related to the SCBHO contract for the period ending June 30, Management of the Organization believes that any difference between amounts recorded as deferred contract revenue in the Statements of Financial Position as of June 30, 2016 and the amounts that the SCBHO may require to be returned, if any, would not have a material effect on the Organization s financial results. 14. Functional Expenses The costs of providing the various mental health services and other activities have been summarized below on a functional basis. Accordingly, certain costs have been allocated among the program and supportive services benefited. Expenditures related to providing services for the years ended June 30, 2016 and 2015 are as follows: Direct patient care $ 47,796,409 $ 42,066,850 General and administrative 3,394,398 2,894,342 Total expenditures $ 51,190,807 $ 44,961,192 There were no significant fund-raising costs for the years ended June 30, 2016 and Concentration of Risk The Organization maintained funding contracts with the SCBHO, as the lead services provider for Spokane County, for the 24 months ending September 30, Operating revenue recognized under these contracts was 83.8% and 82.4% of total support and revenue recognized for the years ended June 30, 2016 and 2015, respectively. Accounts receivable from the SCBHO represented 23.3% and 69.2% of total accounts receivable at June 30, 2016 and 2015, respectively. Continuation of operating revenue funding is contingent upon state and federal funding passed through to the SCBHO. The Organization also maintains an interestbearing account containing earned SCBHO contract funds. The balance of the account as of June 30, 2016 and 2015 was $1,577,484 and $2,238,393, respectively, and can only be used to support the public mental health system. 18

21 Notes to Financial Statements, Continued June 30, 2016 and Concentration of Risk, Continued The Organization s operations are funded primarily by federal, state and local grants and contracts received from various agencies. For the years ended June 30, 2016 and 2015, approximately 95.7% and 95.6%, respectively, of the Organization s funding was received from these sources. The amounts of funding received each year from grants and contracts are dependent on competition for a limited amount of government funding. 16. Net Patient Service Fees Net patient service fees for the years ended June 30, 2016 and 2015 were comprised of the following: Gross patient service fees $ 12,041,816 $ 12,092,807 Deductions from revenue for contractual and other adjustments (11,286,660) (11,478,958) $ 755,156 $ 613,849 Consumer and patient fees are reported at gross, with offsets for various contractual allowances and adjustments, consistent with the billing and payment agreements with its payers. 17. Net Assets Unrestricted Net Assets Unrestricted net assets include assets not subject to donor-imposed restrictions, either temporary or permanent, and consist of net assets received that are general in nature as to use and operating purposes. Gifts of long-lived assets without donor-imposed stipulations about how long the assets must be used are classified as unrestricted net assets. Temporarily Restricted Net Assets Temporarily restricted net assets include assets subject to contract and donor-imposed time or use restrictions that have not been met at the reporting date. Temporarily restricted net assets at June 30, 2016 and 2015 are available for the purposes of the Evergreen Club. Permanently Restricted Net Assets Permanently restricted net assets include assets subject to donor-imposed restrictions whereby the principal assets or amounts must be maintained in perpetuity. Permanently restricted net assets at June 30, 2016 and 2015 consist of amounts originally contributed to the Foundation endowment (see Note 12). Board-Designated Net Assets The Organization s Board of Directors has designated certain unrestricted net assets during the years ended June 30, 2016 and These funds are reserved for discretionary purposes and represent tentative plans for future use of financial resources that are subject to change by action of the Board. 19

22 Notes to Financial Statements, Continued June 30, 2016 and Accounting for Uncertain Tax Positions Accounting principles generally accepted in the United States of America provide guidance related to uncertainties in income taxes recognized in an organization s financial statements and provide guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Organization has evaluated state, federal and foreign tax positions taken in the current year, for which the statute of limitations is still open, and determined that it is more-likely-than-not that each position would be sustained upon examination. Accordingly, management has determined that it does not have any unrecognized tax liabilities or benefits for the years ended June 30, 2016 and 2015 that need to be recognized in the financial statements. 20

23 Compliance Reports

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26 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Subrecipient Award Federal Federal Grantor/Pass-Through Grantor/Program Title CFDA Number Award Number Period Expenditures U.S. Department of Health and Human Services - Alcohol, Drug Abuse, and Mental Health Services: Pass-through funds from Aging & Long Term Care of Eastern Washington: Federal COPES - Core Services Case Management :42,43:09(12) 07/01/15-12/31/15 $ 321,470 Federal COPES - Core Services Case Management :43.1:09 01/01/16-06/30/16 373,601 Information and Assistance Medicaid Administration Claiming :42,43:09(12) 07/01/15-12/31/15 9,060 Pass-through funds from Spokane County Behavioral Health Organization: Projects in Assist for Transitional Housing (PATH) MH /01/14-09/30/15 40,485 Projects in Assist for Transitional Housing (PATH) MH /01/15-03/31/16 102,328 Projects in Assist for Transitional Housing (PATH) BHO /01/16-09/30/16 56,154 Clubhouse Services MHBG /01/15-06/30/16 83,736 Clubhouse Services BHO /01/16-06/30/17 31,524 In-Home Residential MHBG /01/15-03/31/16 60,000 Community Support Services BHO /01/16-06/30/17 65, , , ,642 See accompanying Report of Independent Auditor and Note to Schedule of Expenditures of Federal Awards. 23

27 Schedule of Expenditures of Federal Awards, Continued Year Ended June 30, 2016 Federal Subrecipient Award Federal Federal Grantor/Pass-Through Grantor/Program Title CFDA Number Award Number Period Expenditures U.S. Department of Health and Human Services - Special Programs for Aging: Pass-through funds from Aging & Long Term Care of Eastern Washington: Title III-E Family Caregiver :78.1,78.2,79:09(13) 01/01/15-12/31/15 $ 76,716 Title III-E Family Caregiver : ,79:09 01/01/16-12/31/16 80,692 Title III-B Case Management :42,43.09(14) 01/01/15-12/31/15 127,187 U.S. Department of Agriculture: 157, ,187 Total U.S. Department of Health and Human Services 1,428,335 Pass-through funds from the State of Washington Office of Superintendent of Public Instruction: Child and Adult Care Food Program /01/14-09/30/15 84,864 Child and Adult Care Food Program /01/15-09/30/16 210,660 Child and Adult Care Food Program /01/14-09/30/15 635,340 Child and Adult Care Food Program /01/15-09/30/16 1,667,852 Total U.S. Department of Agriculture 2,598,716 Total Expenditures of Federal Awards $ 4,027,051 See accompanying Report of Independent Auditor and Note to Schedule of Expenditures of Federal Awards. 24

28 Note to Schedule of Expenditures of Federal Awards Year Ended June 30, Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards includes the federal grant activity of Frontier Behavioral Health and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. 25

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31 Schedule of Findings and Questioned Costs Year Ended June 30, 2016 Section I Summary of Auditor s Results: Financial Statements The report of independent auditor expressed an unqualified opinion on the basic financial statements of Frontier Behavioral Health. The audit of the financial statements of Frontier Behavioral Health disclosed no material weaknesses in internal control over financial reporting. The audit disclosed no compliance findings material to the financial statements of Frontier Behavioral Health. Federal Awards The report of independent auditor expressed an unqualified opinion on compliance for major programs. The audit identified no material weaknesses in internal control over compliance. The audit disclosed no compliance findings that are required to be reported in accordance with the Uniform Guidance. Identification of Major Programs: CFDA Number Name of Federal Program USDA Child and Adult Care Food Program The dollar threshold used to distinguish type A and B programs was $750,000. The auditee qualified as a low-risk auditee. 28

32 Schedule of Findings and Questioned Costs, Continued Year Ended June 30, 2016 Section II Financial Statement Findings: This section identifies the significant deficiencies, material weaknesses, and instances of non-compliance related to the financial statements that are required to be reported in accordance with Government Auditing Standards. There were no matters reported for the year ended June 30, Section III Federal Award Findings and Questioned Costs: This section identifies the audit findings (significant deficiencies, material weaknesses, and instances of non-compliance, including questioned costs) related to federal awards that are required to be reported in accordance with the Uniform Guidance. There were no matters reported for the year ended June 30,

33 Status of Prior Year Findings Year Ended June 30, 2016 There were no matters reported in the prior year. 30