SIERRA CLUB FOUNDATION. Financial Statements. December 31, 2016 and (With Report of Independent Certified Public Accountants)

Transcription

1 Financial Statements and 2015 (With Report of Independent Certified Public Accountants)

2 Table of Contents Page(s) Report of Independent Certified Public Accountants 1 2 Balance sheet 3 Statement of activities 4 Statement of functional expenses 5 Statement of cash flows 6 Notes to financial statements 7 28

3 KPMG LLP Suite Second Street San Francisco, CA Independent Auditors Report Board of Directors Sierra Club Foundation: We have audited the accompanying financial statements of Sierra Club Foundation (the Foundation), which comprise the balance sheet as of, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the 2016 financial statements referred to above present fairly, in all material respects, the financial position of the Foundation as of, and the results of its operations and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Other Matter The Foundation s financial statements as of and for the year ended December 31, 2015 (not presented herein) were audited by other auditors whose report thereon dated May 2, 2016 expressed an unmodified audit opinion thereon. The accompanying summarized comparative information as of and for the year ended December 31, 2015 is consistent, in all material respects, with the audited financial statements from which it has been derived. San Francisco, California May 19,

5 Balance Sheet (with comparative totals as of December 31, 2015) Assets Cash and cash equivalents $ 19,364,595 15,299,493 Money market securities 22,072,528 11,615,397 Contributions receivable, pledges and bequests, net 9,299,550 19,248,886 Contributions receivable, other 3,825,789 2,010,902 Contributions receivable, charitable trusts, net 6,252,753 5,994,039 Investments 67,015,643 62,183,328 Assets held under split interest agreements 13,173,750 13,835,168 Other assets 2,980,713 1,516,361 Total assets $ 143,985, ,703,574 Liabilities and Net Assets Liabilities: Accounts payable $ 131, ,758 Grants payable 5,404,745 4,761,642 Software hosting obligation 579,400 Liabilities under split interest agreements 13,162,592 12,756,763 Total liabilities 18,698,533 18,474,563 Net assets: Unrestricted: Undesignated 17,054,976 15,750,012 Board designated 14,989,745 15,226,881 Total unrestricted 32,044,721 30,976,893 Temporarily restricted 65,933,081 68,563,020 Permanently restricted 27,308,986 13,689,098 Total net assets 125,286, ,229,011 Total liabilities and net assets $ 143,985, ,703,574 See accompanying notes to financial statements. 3

6 Statement of Activities Year ended (with summarized totals for the year ended December 31, 2015) Year ended Year ended December 31, Temporarily Permanently 2015 Unrestricted restricted Restricted Total Total Revenues, gains and other support: Contributions $ 10,564,578 46,849, ,631 57,673,640 77,756,532 Contributions related to split-interest agreements 463, , , ,253 Bequests 4,627,685 36,193 8,906,299 13,570,177 9,463,557 Total contributions 15,655,758 47,062,818 9,165,930 71,884,506 87,863,342 Net gains (losses) from investments 1,543, ,956 (34,303) 2,365,174 (913,463) Interest and dividends 762, ,722 1,033,190 1,153,324 Net change in value of split-interest agreements (239,919) 321, , ,753 (1,767,127) Other income 1,448, ,448,395 1,233,961 Net assets released from restrictions 47,137,884 (47,137,884) Total revenues, gains and other support 66,308,069 1,373,214 9,616,735 77,298,018 87,570,037 Expenses: Program services 54,027,347 54,027,347 54,312,411 Support services: Administrative 1,292,523 1,292,523 1,076,599 Fundraising 9,920,371 9,920,371 8,035,525 Total expenses 65,240,241 65,240,241 63,424,535 Transfer to endowment (63,867) 63,867 Change in net assets 1,067,828 1,373,214 9,616,735 12,057,777 24,145,502 Net assets, beginning of year 30,976,893 68,563,020 13,689, ,229,011 89,083,509 Classification correction (3,939,286) 3,939,286 Net assets, end of year $ 32,044,721 65,933,081 27,308, ,286, ,229,011 See accompanying notes to financial statements. 4

7 Statement of Functional Expenses Year ended (with summarized totals for the year ended December 31, 2015) Year ended Year ended Support services December 31, Program 2015 services Administrative Fundraising Subtotal Total Total Grants $ 53,658,378 53,658,378 54,013,133 Reimbursement for fundraising services 6,336,504 6,336,504 6,336,504 5,500,000 Fundraising other 2,533,741 2,533,741 2,533,741 1,650,983 Salaries 178, ,367 29, , , ,252 Employee benefits and taxes 48, ,195 8, , , ,937 Professional services 62, , , , ,071 Rent 21,043 63,485 1,884 65,369 86,412 73,117 Board of directors meetings 23,838 23,838 23,838 30,150 Office equipment and supplies 7,637 13, ,788 21,425 21,877 Software and hosting services 1,005,044 1,005,044 1,005, ,159 Depreciation 3,719 11, ,552 15,271 8,463 Travel 7,108 21, ,082 29,190 18,132 Insurance 6,087 18, ,910 24,997 22,177 Bank charges 10 12,169 12,169 12,179 12,302 Printing and copying 2,172 6, ,747 8,919 5,728 Regulatory compliance fees 14,475 14,475 14,475 14,496 Postage and shipping 509 1, ,582 2,091 4,039 Publications 6,208 6,208 6,208 11,321 Miscellaneous 30, ,591 2, , ,952 29,198 $ 54,027,347 1,292,523 9,920,371 11,212,894 65,240,241 63,424,535 See accompanying notes to financial statements. 5

8 Statement of Cash Flows Year ended Cash flows from operating activities: Change in net assets $ 12,057,777 24,145,502 Adjustments to reconcile change in net assets to net cash (used in) provided by operating activities: Depreciation 15,271 8,463 Contributions of investment securities and noncash gifts (10,880,778) (2,102,127) Contributions for restricted for long-term investment (9,165,930) (162,435) Net (gain) loss on investments (2,365,174) 913,465 Change in in-kind contribution receivable (2,010,902) (753,217) Changes in operating assets and liabilities: Contribution receivable, net 9,886,636 (11,416,600) Other assets (1,399,591) (106,245) Accounts payable (245,562) (247,575) Grants payable 643,103 (848,431) Liabilities under split-interest agreements 376,489 66,932 Net cash (used in) provided by operating activities (3,088,661) 9,497,732 Cash flows from investing activities: Proceeds from sale of investments 19,425,369 9,480,999 Purchase of investments (11,023,528) (10,143,706) Proceeds from sale of money market funds 9,619,261 4,458,797 Purchase of money market funds (20,076,391) (11,367,408) Purchase of property and equipment (80,031) (6,423) Change in other assets - software hosting services 127,200 Change in assets held under split-interest agreements 702, ,929 Net cash used in investing activities (1,432,767) (6,461,612) Cash flows from financing activities: Payments of software hosting services obligations (579,400) (706,600) Software hosting services obligation 579,400 Contributions restricted for long-term investment 9,165, ,435 Net cash provided by financing activities 8,586,530 35,235 Net change in cash and cash equivalents 4,065,102 3,071,355 Cash and cash equivalents, beginning of year 15,299,493 12,228,138 Cash and cash equivalents, end of year $ 19,364,595 15,299,493 See accompanying notes to financial statements. 6

9 (1) Nature of operations The mission of Sierra Club Foundation (the Foundation) is to promote efforts to educate and empower people to protect and improve the natural and human environment. Sierra Club, including its state and local affiliates, is the primary vehicle through which the Foundation fulfills its charitable mission. The Sierra Club Foundation retains variance power, as defined by accounting principles generally accepted in the United States of America (US GAAP), over all charitable funds it receives and, as such, directs grants to Sierra Club and other organizations that will best fulfill the Foundation s charitable mission. For grants to Sierra Club, the Foundation acts as fiscal sponsor and exercises control and discretion over reimbursement of project expenditures as defined in IRS regulations. Grants are provided to organizations to support charitable, educational, scientific, and legal endeavors. The Foundation provides limited support for lobbying activities as permitted by Section 501(h) of the Internal Revenue Code. No support is provided for political activities. (2) Basis of presentation and summary of significant accounting policies These financial statements, which are presented on the accrual basis of accounting in accordance with US GAAP, have been prepared to focus on the Foundation as a whole and to present balances and transactions according to the existence or absence of donor imposed restrictions. Net assets and changes therein are classified as follows: Unrestricted net assets Net assets not subject to donor imposed stipulations. Temporarily restricted net assets Net assets subject to donor imposed stipulations that will be met by actions of the Foundation and/or the passage of time. When a donor stipulated time restriction ends or a purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Permanently restricted net assets Net assets subject to donor imposed stipulations requiring that they be maintained permanently by the Foundation. The income from these assets is available for either general operations or specific programs as specified by the donor. Revenue is reported as increases in unrestricted net assets unless use of the related assets is limited by donor imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Expirations of temporary restrictions on net assets (i.e., the donor stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications between the applicable classes of net assets. Contributions, including unconditional promises to give, are recognized as revenue in the period received. Conditional promises to give are not recognized until they become unconditional, that is when the conditions on which they depend are substantially met. Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the risks involved. Amortization of the discount is recorded as additional contribution revenue in accordance with donor imposed restrictions, if any, on the contributions. 7

10 Contributions of gifts in-kind, including investment securities, are recorded as revenue at their estimated fair value in the period received. Contributions are recorded as unrestricted support unless the donor has stipulated the period the asset is to be used, in which case, the contribution is recorded as restricted support. (a) Cash and cash equivalents Cash and cash equivalents consist of funds in checking accounts and money market demand accounts with an original maturity of three months or less. These accounts are at financial institutions that are FDIC insured up to $250,000. The balances in excess of insurance limits at and 2015 are $18,544,081 and $14,288,191, respectively. The Foundation may draw on these deposits and funds at any time. (b) Money market mutual funds Money market mutual funds are based on quoted prices in active markets and are classified as Level 1 assets as of and (c) Investments Investments in marketable equity securities and all debt securities are reported at fair value. Investments in hedge funds, limited liability companies, and limited partnerships are also reported at fair value as estimated by management based upon information provided by the general partner. (d) Split interest agreements The Foundation enters into split interest agreements in the form of gift annuities, trusts, and pooled income funds. The donated assets are held by the Foundation and invested. Payments are made to the donor or the donor s designee for a specified period of time or until the beneficiary s death, after which time the Foundation may use the remaining funds for operations or a restricted use specified by the donor. The donated trust asset investments are recorded at current fair value or at an estimated fair value based on the latest available information. The Foundation utilizes an IRS-approved annuity table to actuarially calculate the liability associated with the estimated donor payments under these arrangements. The present value of the actuarially determined liability resulting from these gifts is recorded at the date of gift and adjusted annually thereafter. The resulting liability is reported in the balance sheet as liabilities held under split-interest agreements and the net change is reported in the statement of activities as net change in the value of split interest agreements. (e) Fair value of financial instruments The carrying amounts of cash and cash equivalents, contribution receivable, and accounts payable approximate fair value because of the short-term maturity of these financial instruments. Contributions receivable are recorded with payments due in excess of one year discounted using risk-adjusted rates to approximate fair value. Charitable trusts receivable are held at fair value using the income approach employing present value techniques that maximize the use of observable inputs for interest rates, yield curves, and life expectancy tables, and are adjusted annually. The carrying amounts of the annuity and life income payable are based on life expectancies, quoted market prices, discounted at risk-adjusted rates. The values recorded for contributions and charitable trusts receivable and for annuity and life 8

11 income payable based on the above valuation methodologies approximate fair values at December 31, 2016 and (f) Property and equipment, net Property and equipment are recorded at cost at the date of acquisition or fair value at the date of donation in the case of gifts. Depreciation and amortization are computed on the straight-line method. The estimated useful lives are 30 years for buildings, three to seven years for office furniture and equipment, and three to five years for computer hardware and software. (g) Grants Grants are made by the Foundation for programs preapproved by the Board of Directors and are not recorded as expense until prescribed conditions are substantially met. (h) Functional expense allocation The allocation between program and support expenses is based on the assignment of payroll, related personnel costs, occupancy, and other office expenses using estimates of time spent on program versus fundraising or administrative activities, as well as direct assignment of certain expenses to relevant activities. (i) Use of estimates Management of the Foundation has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with US GAAP. Actual results could differ from those estimates. (j) Tax exempt status The Foundation has been recognized by the Internal Revenue Service as an organization that is tax exempt under Section 501(c)(3) of the Internal Revenue Code and has been recognized by the California Franchise Tax Board as an organization that is tax exempt under Section 23701(d) of the Revenue and Taxation Code of the State of California and is not generally subject to state or federal taxes on income. In addition, the Internal Revenue Service has determined that the Foundation is a public charitable organization as defined in Sections 509(a)(1) and 170(b)(1)(A)(vi) of the Internal Revenue Code and thus the Foundation is exempt from the excise tax on investment income. (k) Uncertainty in income taxes The Foundation is subject to income taxes in the United States and California on unrelated business income. The Foundation has identified and evaluated its significant tax positions for which the statute of limitations remains open and determined there is no material unrecognized benefit or liability to be recorded. The Foundation s federal returns are currently open under the statute of limitations for the year ended December 31, 2013 and subsequent years and California returns are open for the year ended December 31, 2012 and subsequent years. The Foundation does not anticipate that there will be any material changes in the unrecognized tax positions over the next 12 months. There have been no related tax penalties or interest classified as a tax expense in the statement of activities. 9

12 (l) Summarized financial information The financial statements include certain prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with US GAAP. Accordingly, such information should be read in conjunction with the Foundation s financial statements for the year ended December 31, 2015, from which the summarized information is derived. (m) Recent Accounting pronouncements In April, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Intangibles Goodwill and Other Internal-use Software (Subtopic ), to provide more explicit guidance with respect to accounting for fees paid in a cloud computing arrangement. The Foundation adopted this guidance prospectively in In June 2015, the FASB issued ASU No , Technical Corrections and Improvements, which clarified the conditions under which an equity security has a readily determinable fair value. The Foundation adopted this ASU in 2016 retrospectively. The impact was that one investment was characterized as an investment with a readily determinable fair value rather than an alternative investment in the 2016 and 2015 footnote disclosures. In February, 2016, the FASB issued ASU No , Leases (Topic 842). The standard introduces new requirements to increase transparency and comparability amongst organizations for leasing transactions for both lessees and lessors. ASU requires a lessee to record right-of-use asset and a lease liability for all leases with terms longer than 12 months. The leases will be either financing or operating, with classification affecting the pattern of expense recognition. The new standard is effective for the Foundation on January 1, The standard requires the application of the modified retrospective transition method. Management is in the process of determining the effect of the standard on its ongoing financial reporting. 10

13 (3) Contributions receivable, pledges, and bequests Contributions receivable, pledges, and bequests, net consist of the following as of December 31: Receivable due in less than one year $ 9,154,222 12,907,781 Receivable due in one to five years 232,500 6,382,700 Total contributions receivable 9,386,722 19,290,481 Less: Allowance for doubtful accounts (38,042) Amount representing discount (3.75% in 2016 and 0.25% in 2015) (49,130) (41,595) Contributions receivable, pledges, and bequests, net $ 9,299,550 19,248,886 (4) Contributions receivable, charitable trusts, and other Contributions receivable, other consists of the following as of December 31: Receivable due in less than one year $ 3,825,789 1,747,902 Receivable due in one to five years 263,000 Contributions receivable, other $ 3,825,789 2,010,902 11

14 Contributions receivable, charitable trusts, net consist of the following as of December 31: Receivable due in less than one year $ 38,381 38,381 Receivable due in one to five years 71, ,694 Receivable due in greater than five years 6,142,918 5,852,964 Contributions receivable, charitable trusts, net $ 6,252,753 5,994,039 For the years ended and 2015, the changes in beneficial interest in trusts held by third parties classified as Level 3 fair value measurements are as follows: 2016 Charitable Charitable remainder trusts lead trusts Total Beginning balance $ 5,827, ,000 5,994,039 Change in value of beneficial interest 290, ,420 Distributions (32,706) (32,706) Ending balance 6,117, ,988 6,252,753 Change in value of beneficial interest for the period included in changes in net assets for assets still held at the end of the reporting period $ 290, , Charitable Charitable remainder trusts lead trusts Total Beginning balance $ 6,627, ,266 6,814,307 Change in value of beneficial interest (800,002) 15,359 (784,643) Distributions (35,625) (35,625) Ending balance 5,827, ,000 5,994,039 Change in value of beneficial interest for the period included in changes in net assets for assets still held at the end of the reporting period. $ (800,002) 15,359 (784,643) 12

15 The Foundation values trusts using a discounted cash flows technique. The following table summarizes the significant unobservable inputs the Foundation used to value trusts categorized as Level 3 assets as of. Fair value of beneficial Unobservable Quantitative Trust name interest inputs data Remainder Trust A $ 5,383,533 Discount rate 7% Life expectancy 24.6% Payout rate 5% All other trusts 869,220 Discount rate 7% Life expectancy 1-53 years Payout rate 4.5-9% $ 6,252,753 The following table summarizes the significant unobservable inputs the Foundation used to value trusts categorized as Level 3 assets as of December 31, Fair value of beneficial Unobservable Quantitative Trust name interest inputs data Remainder Trust A $ 5,201,189 Discount rate 7% Life expectancy 25.4% Payout rate 5% All other trusts 792,850 Discount rate 7% Life expectancy 2-53 years Payout rate 4.5-9% $ 5,994,039 13

16 (5) Investments Accounting Standards Codification (ASC) Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 Inputs are quoted prices in active markets for identical investments that the Foundation has the ability to access at the measurement date. Level 2 Inputs are inputs other than quoted prices within Level 1 that are observable for the investment, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates, and similar data. Level 3 Unobservable inputs for the investment, including estimates by partnership managers based on the best information available. The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. For the valuation of mutual funds and publicly traded equity investments, the Foundation used quoted prices in principal active markets for identical assets as of the valuation date. For the valuation of U.S. government/agency securities, domestic and foreign fixed income investments, and certain limited partnership and limited liability company investments the Foundation used significant other observable inputs, particularly dealer or quoted market prices for comparable investments as of the valuation date as well as net asset value as a practical expedient to estimate fair value. For the valuation of hedge funds, certain limited partnerships, certain limited liability companies, and real estate investments, the Foundation used net asset value as a practical expedient to estimate the fair value. Investments in partnerships and limited liability companies that do not have readily available market values are stated at estimated fair value. These investments include a diverse range of vehicles, including private equity, long-short equity funds, absolute return funds, and real estate. The valuation of these investments is based on the most recent net asset value (NAV) provided by the general partner, usually as of December 31, which corresponds to the Foundation s year-end. To evaluate the overall reasonableness of the valuation carrying value, management obtains and considers the audited financial statements of such investments. Management believes this method provides a reasonable estimate of fair value. However, the recorded value may differ from the market value had a readily available market existed for such investments, and those differences could be material. Investment transactions are recorded on trade date, which may result in both investment receivables and payables on unsettled investment trades; however, there were no such transactions as of December 31, 2016 and Gains and losses on investments resulting from market fluctuations are recorded in the statement of activities in the period that such fluctuations occur. Realized gains or losses on sales of investments are calculated on an adjusted cost basis. 14

17 The following tables present investments that are measured at fair value on a recurring basis: Fair value measurements at Quoted prices in active Significant other Significant markets for observable unobservable December 31, identical assets inputs inputs Description 2016 (Level 1) (Level 2) (Level 3) Mutual funds: Domestic equity $ 4,775,868 4,775,868 International equity 4,952,975 4,952,975 Real estate 4,805,927 4,805,927 Bonds 6,695,959 6,428, ,620 U.S. government and government agency securities 2,952,595 2,952,595 Municipal bonds 3,384,285 3,384,285 Domestic fixed income 4,959,039 4,959,039 Domestic equity 13,478,313 13,478,313 International equity 7,499,456 7,499,456 Subtotal investments 53,504,417 42,353,056 11,151,361 Alternative investments valued at NAV 13,511,226 Total $ 67,015,643 15

18 Fair value measurements at December 31, 2015 Quoted prices in active Significant other Significant markets for observable unobservable December 31, identical assets inputs inputs Description 2015 (Level 1) (Level 2) (Level 3) Mutual funds: Domestic equity $ 3,907,262 3,907,262 International equity 3,830,591 3,830,591 Real estate 5,329,947 5,329,947 Bonds 5,774,224 5,632, ,545 U.S. government and government agency securities 2,308,025 2,308,025 Municipal bonds 5,547,074 5,547,074 Domestic fixed income 3,344,993 3,344,993 Domestic equity 11,290,075 11,290,075 International equity 7,637,018 7,637,018 Subtotal investments 48,969,209 35,643,572 13,325,637 Alternative investments valued at NAV 13,214,119 Total $ 62,183,328 It is the Foundation s policy to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no such transfers in the years ended and

19 The following tables present the Foundation s investments measured at net asset value as of and 2015: Balance as of December 31, Unfunded Redemption Redemption Description 2016 commitments frequency notice period Hedge fund (i) $ 2,835,696 Quarterly 65 days Limited partnership (ii) 6,017,992 Quarterly 30 days Limited partnership (iii) 1,307, ,372 Nonredeemable Quarterly up to 45 days Hedge fund (iv) 3,292,567 25% or or Annually 100% 30 days Other 57,391 Nonredeemable Total $ 13,511, ,372 Balance as of December 31, Unfunded Redemption Redemption Description 2015 commitments frequency notice period Hedge fund (i) $ 2,808,060 Quarterly 65 days Limited partnership (ii) 5,489,431 Quarterly 30 days Limited partnership (iii) 1,793, ,822 Nonredeemable Quarterly up to 45 days Hedge fund (iv) 2,979,416 25% or or Annually 100% 30 days Other 143,470 Nonredeemable Total $ 13,214, ,822 (i) This hedge fund is a fund of funds that invests in equity long/short, event driven relative value, and global asset allocation strategies. 17

20 (ii) (iii) (iv) Limited partnership includes a long-only investment management strategy to generate excess returns with integration of sustainability research within a rigorous fundamental equity analysis framework. All of the investments in this portfolio are traded on active markets. Limited partnerships in this category are long term, multi-manager investment partnerships employing globally diversified private investment strategies, including buy out, growth capital, and secondary market interests. The partnerships will terminate 2017 to 2018 or one year after all holdings are liquidated, but no later than 15 years after the start of the partnerships ( ). This hedge fund invests in long/short equity with a focus on renewable energy solutions. Investment management fees and performance allocations of $221,368 and $232,491 for the years ended and 2015, respectively, have been included as a reduction of interest and dividend revenue in the statements of activities or, in the case of a hedge fund performance allocation, as a reduction in net gains. (6) Assets held under split-interest agreements The fair value of assets held under split-interest agreements consists of the following as of December 31, 2016: In active Significant Significant other markets other unobservable identical assets observable inputs inputs Description Total (Level 1) (Level 2) (Level 3) Cash and cash equivalents $ 411, ,955 Mutual funds: Domestic equity mutual funds 4,301,594 4,301,594 International equity mutual funds 2,369,464 2,369,464 Real estate mutual funds 1,414,106 1,414,106 Domestic bonds mutual funds 2,814,391 2,814,391 International bond mutual funds 621, ,803 U.S. government and government agency securities 188, ,914 Promissory note 140, ,000 Interest in perpetual trusts 878, ,531 Cash surrender value of life insurance policies 32,992 32,992 Total $ 13,173,750 12,122,227 32,992 1,018,531 18

21 The fair value of assets held under split-interest agreements consists of the following as of December 31, 2015: In active Significant Significant other markets other unobservable identical assets observable inputs inputs Description Total (Level 1) (Level 2) (Level 3) Cash and cash equivalents $ 575, ,634 Mutual funds: Equity mutual funds 8,081,420 8,081,420 Bond mutual funds 4,093,188 4,093,188 Promissory note 140, ,000 Interest in perpetual trusts 912, ,834 Cash surrender value of life insurance policies 32,092 32,092 Total $ 13,835,168 12,750,242 32,092 1,052,834 It is the Foundation s policy to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no such transfers in the years ended and For the valuation of mutual funds, the Foundation used quoted prices in principal active markets for identical assets as of the valuation date. For the valuation of cash surrender value of life insurance policies, the Foundation used significant other observable inputs, including dealer market prices for comparable investments and life insurance company surrender value estimates as of the valuation date. For the valuation of interests in perpetual trusts, the Foundation used significant other unobservable inputs, primarily trustee valuations. 19

22 The following tables present the Foundation s activities for assets held under split-interest agreements measured at fair value on a recurring basis, all of which are valued using significant unobservable inputs (Level 3) for the years ended and 2015: 2016 Interest in Interest in promissory perpetual trusts note Total Beginning balance $ 912, ,000 1,052,834 Total gains included in changes in net assets (34,303) (34,303) $ 878, ,000 1,018, Interest in Interest in promissory perpetual trusts note Total Beginning balance $ 939, ,000 1,079,641 Total gains included in changes in net assets (26,807) (26,807) $ 912, ,000 1,052,834 (7) Liabilities under split-interest agreements The Foundation has liabilities associated with a variety of gift agreements including pooled income funds, annuities, and charitable remainder trusts. The Foundation has recorded its estimated remainder interest in the value of the split-interest agreements, discounted at various rates, as contribution revenue in the year of the gift. The difference between the fair value of trust assets and the contribution revenue is recorded as a liability under split interest agreements and is updated annually based life expectancies and quoted market prices, discounted at risk-adjusted rates. For charitable gift annuities payable, a liability, which is a general obligation of the Foundation, is recorded for the present value of estimated annuity payments, discounted at various rates ranging from 2% to 7%, and is updated annually. 20

23 (8) Temporarily restricted net assets Temporarily restricted net assets consist of the following as of December 31: Term and quasi-endowments $ 3,955,093 7,944,432 Trusts 10,234,424 9,748,535 Life insurance policies 32,992 32,092 In-kind contribution receivable 2,010,902 Pledges receivable 8,090,573 14,817,434 Total time restrictions 22,313,082 34,553,395 Program restrictions: National climate recovery programs 27,224,656 19,552,754 Outings and outdoor environment education 2,813,719 1,876,544 Environmental law 2,228,519 2,351,570 Global population 2,896,028 3,625,419 Geographic and other 8,457,077 6,603,338 Total program restrictions 43,619,999 34,009,625 Total temporarily restricted net assets $ 65,933,081 68,563,020 Temporarily restricted net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by the donor Purpose restrictions fulfilled $ 43,943,163 46,417,506 Time restrictions expired: Amortization of in-kind donation 2,024,102 1,544,917 Endowment spending allocation 1,159, ,496 Terminated trusts 11,296 80,084 3,194,721 2,240,497 $ 47,137,884 48,658,003 21

24 (9) Permanently restricted net assets Permanently restricted net assets consist of the following as of December 31: Endowments $ 25,952,721 11,360,677 Charitable trusts and gift annuities 1,356,265 2,328,421 Total permanently restricted net assets $ 27,308,986 13,689,098 (10) Endowments The Board of Directors of the Foundation has interpreted the California Uniform Prudent Management of Institutional Funds Act (UPMIFA) as 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 this interpretation, the Foundation classifies as permanently restricted net 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 organization in a manner consistent with the standard of prudence prescribed by UPMIFA. The Foundation has a policy of appropriating for distribution each year 5% of its endowment funds average fair value over the prior three years (excluding those funds with deficiencies due to unfavorable market fluctuations). In establishing this policy, the Foundation considered the long-term expected return on its endowment. Accordingly, over the long-term, the Foundation expects the current spending policy to allow its endowment to grow at a rate exceeding expected inflation. This is consistent with the organization s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return. The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of endowment assets. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for a donor-specified period(s) as well as board-designated funds. Under this policy, as approved by the Board of Directors, the endowment assets are invested in a manner that is intended to provide investment growth in excess of annual payments. Actual returns in any given year may vary from this goal. To satisfy its long-term rate-of-return objectives, the Foundation relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Foundation targets a diversified asset allocation that places a greater emphasis on equity based investments to achieve its long-term return objectives within prudent risk constraints. 22

25 The Foundation s endowment consists of approximately 58 individual funds established for a variety of purposes. Its endowment includes both unrestricted and donor-restricted endowment funds, and funds designated by its Board of Directors to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The Foundation conducted a legal review of one endowment during 2016, which resulted in the endowment being reclassified as a true endowment rather than a quasi-endowment. This resulted in a decrease of $3,939,286 in temporarily restricted net assets, with a corresponding increase in permanently restricted net assets. Endowment net asset composition by type of fund as of : Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ (274) 3,798,391 25,952,721 29,750,838 Board-designated endowment funds 1,562, ,702 1,718,795 Total endowment funds $ 1,561,819 3,955,093 25,952,721 31,469,633 Endowment net asset composition by type of fund as of December 31, 2015: Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ (1,127) 3,417,115 11,360,677 14,776,665 Board-designated endowment funds 1,572,462 4,527,317 6,099,779 Total endowment funds $ 1,571,335 7,944,432 11,360,677 20,876,444 23

26 Changes in endowment net assets for the year ended : Temporarily Permanently Unrestricted restricted restricted Total Endowment net assets, beginning of year $ 1,571,335 7,944,432 11,360,677 20,876,444 Classification correction (3,939,286) 3,939,286 Investment return: Investment income 15, , ,152 Net appreciation 55, , ,554 Total investment return 71,435 1,109,271 1,180,706 Contributions 100 9,165,930 9,166,030 Appropriation of endowment assets for expenditure (81,051) (1,159,324) (1,240,375) Transfer to create endowment per donor intent 63,867 63,867 Transfers from terminated trusts 1,422,961 1,422,961 Endowment net assets, end of year $ 1,561,819 3,955,093 25,952,721 31,469,633 Changes in endowment net assets for the year ended December 31, 2015: Temporarily Permanently Unrestricted restricted restricted Total Endowment net assets, beginning of year $ 1,647,221 8,823,342 11,198,241 21,668,804 Investment return: Investment income 22, , ,368 Net appreciation (15,911) (187,169) (203,080) Total investment return 6, , ,288 Contributions 162, ,436 Appropriation of endowment assets for expenditure (82,606) (983,478) (1,066,084) Endowment net assets, end of year $ 1,571,335 7,944,432 11,360,677 20,876,444 24

27 Description of amounts classified as permanently restricted net assets and temporarily restricted net assets (endowment only) as of December 31: Permanently restricted net assets (1) The portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation of by UPMIFA $ 25,952,721 11,360,677 Temporarily restricted net assets: (1) Term endowment funds $ 603, ,771 (2) Quasi-endowment with purpose restriction 156,703 4,527,317 (3) The portion of perpetual endowment funds subject to a time restriction under UPMIFA: Without purpose restrictions 462, ,987 With purpose restrictions 2,731,986 2,339,357 Total endowment funds classified as temporarily restricted net assets $ 3,955,093 7,944,432 From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Foundation to retain as a fund of perpetual duration. There was a deficiency of $274 and $1,127 as of and 2015, respectively. (11) Lease obligations The Foundation had an operating lease for real property that expired in the fiscal year Rental expense, under the operating lease for the years ended and 2015 was $23,884 and $73,117, respectively. The Foundation committed to a sublease with Sierra Club in Oakland, California, effective May 1, Rental expense under the new operating sub-lease for the year ended December 31, 2016 was $62,

28 Future minimum lease payments under operating leases having remaining terms in excess of one year were as follows as of : Fiscal year: 2017 $ 77, , , , , , , , , ,755 $ 848,352 (12) Transactions with related parties The Foundation considers members of the Board of Directors, corporate officers, key employees, and their immediate family members to be related parties. Included in revenue for the years ended and 2015, contributions from related parties totaled $2,048,427 and $4,166,227, respectively. Contributions receivable from related parties included in contributions as of and 2015 were $200,000 and $798,753, respectively. Included in investments is a fund valued at $7,499,456 and $7,637,018 as of and 2015, respectively, which is managed by a registered investment adviser whose founder and CEO is a member of the Board of Directors. (13) Transactions with the Sierra Club and its Chapters The Foundation had the following transactions with the Sierra Club and its Chapters: In accordance with a contract between the Foundation and the Sierra Club, the Foundation incurred $6,336,504 and $5,500,000 to reimburse Sierra Club for fundraising expenses for the years ended and 2015, respectively. Of the preceding amounts, $0 and $275,000 is included in accounts payable as of and 2015, respectively. In accordance with the terms of the fiscal sponsorship relationship and an agreement between the Foundation and Sierra Club regarding the use of software hosting services, the two organizations share the use of the software hosting services and Sierra Club reimburses the Foundation for the portion of the use that is not for qualified charitable expenditures. During the years ended and 2015, respectively, Sierra Club paid $1,386,785 and $1,168,038, for the software services. See note 16. The Foundation receives certain gifts and makes grants on an advisory basis to the Sierra Club and its Chapters and groups. The Foundation made grants to the Sierra Club National Programs of $45,279,825 and $47,429,009 for the years ended and 2015, respectively, and to 26

29 the Sierra Club Chapters of $7,556,515 and $6,005,324 for the years ended and 2015, respectively. Accounts receivable from the Sierra Club are $1,449,130 and $814,754 as of and 2015, respectively, included in other assets on the balance sheet. Grants payable to the Sierra Club were $5,251,945 and $4,761,642 as of and 2015, respectively, which are all due within one year from the respective year-end. Foundation employees who started prior to April 1, 2013 participate in Sierra Club s Employee Benefit Plan, a contributory defined benefit plan that covers substantially all of its employees. The benefits are based on years of service and the employee s compensation history. Employees are eligible to participate and become vested after two years of service. Employee benefit plan expense was $35,836 and $22,881 for the years ended and 2015, respectively. Substantially all Foundation employees are eligible to participate in Sierra Club s health, dental and vision benefits plans. The Foundation paid $119,928 and $122,812 for the years ended and 2015, respectively, for these benefits on behalf of its employees. (14) Gift annuities The Foundation maintains a separate account as a reserve fund adequate to meet the future payments under all outstanding gift annuity agreements. The funds, recorded in investments on the balance sheet, are held by a broker custodian and are managed by professional investment managers. Investments are made in securities with readily determinable fair values and debt securities, all of which are measured at fair value. (15) 403(b) Defined contribution plan The Foundation has a 403(b) defined contribution plan, which covers substantially all employees who meet certain minimum requirements. The Foundation matches 100% of employee contributions up to 2% of eligible compensation and provides a non-elective contribution for employees hired after April 1, Foundation contributions to the plan totaled $12,709 and $13,039, respectively, for the years ended and (16) Software hosting services The Foundation has entered into agreements for software hosting services with third parties. The first, for the period from November 1, 2013 through October 31, 2016, was at a total cost of $1,421,000. The second agreement, for the period January 1, 2015 through September 20, 2018 was at a total cost of $963,460. The fair market value of the software hosting services in the 2013 and 2015 agreements is estimated to be $5,000,000 and $1,755,160, respectively. In 2015, the Foundation recorded an in-kind contribution of $791,700. In-kind expense related to the two agreements for the years ended December 31, 2016 and 2015, respectively, was $2,010,902 and $1,544,917. Software hosting service fees of $579,400 are included in other assets and accrued software hosting services as of December 31, The software hosting services agreements entered into prior to 2016 were terminated and replaced with two new three-year agreements in October, 2016, at a total cost of $2,721,771. The 2016 agreements are accounted for in accordance with ASU , Intangibles Goodwill and Other Internal-use Software (Subtopic ). Under the terms of the fiscal sponsorship relationship with Sierra Club, they will share 27

30 the use of the software hosting services and will reimburse the Foundation at fair value for the portion of the use that is not for qualified charitable expenditures. The reimbursement from Sierra Club was $1,386,785 and $1,168,038 during 2016 and 2015, respectively. Expenses relating to the hosting services have been categorized as fund-raising expense within the statement of functional expenses. (17) Subsequent events The Foundation has evaluated subsequent events from the balance sheet date through May 19, 2017, the date at which the financial statements were available to be issued. 28