Report of Independent Auditors and Consolidated Financial Statements. The Henry J. Kaiser Family Foundation

Transcription

1 Report of Independent Auditors and Consolidated Financial Statements The Henry J. Kaiser Family Foundation December 31, 2016 and 2015

2 CONTENTS PAGE REPORT OF INDEPENDENT AUDITORS...1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated statements of financial position...2 Consolidated statements of activities and changes in net assets...3 Consolidated statements of cash flows...4 Notes to consolidated financial statements...5

3 To the Board of Trustees The Henry J. Kaiser Family Foundation REPORT OF INDEPENDENT AUDITORS Report on Consolidated Financial Statements We have audited the accompanying consolidated financial statements of The Henry J. Kaiser Family Foundation (the Foundation ), which comprise the consolidated statements of financial position as of December 31, 2016 and 2015, and the related consolidated statements of activities and changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Henry J. Kaiser Family Foundation as of December 31, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. San Francisco, California June 8, 2017 Page 1

4 CONSOLIDATED FINANCIAL STATEMENTS

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, 2016 and 2015 ASSETS Cash and cash equivalents $ 46,119,324 $ 133,537,695 Receivable for unsettled investment transactions 20,557,025 Investment income receivable 1,019, ,404 Investments, at fair value 561,767, ,069,521 Contributions receivable 10,808,569 7,512,457 Accounts receivable, prepaid employee benefits, and other assets 369,468 2,363,436 Property and equipment, net 30,485,119 31,006,318 TOTAL ASSETS $ 671,126,702 $ 667,391,831 LIABILITIES AND NET ASSETS LIABILITIES Accounts payable, accrued benefits, and other liabilities $ 7,132,446 $ 6,254,398 Postretirement liability 31,344,432 24,048,403 Deferred federal excise taxes 3,377,948 2,926,023 Bonds payable 100,000, ,000,000 Note payable 8,000,000 TOTAL LIABILITIES 149,854, ,228,824 NET ASSETS Unrestricted 504,810, ,089,349 Temporarily restricted 16,461,006 10,073,658 TOTAL NET ASSETS 521,271, ,163,007 TOTAL LIABILITIES AND NET ASSETS $ 671,126,702 $ 667,391,831 Page 2 See accompanying notes.

6 CONSOLIDATED STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS Years Ended December 31, 2016 and 2015 CHANGES IN UNRESTRICTED NET ASSETS Investment income Interest $ 1,897,274 $ 882,193 Dividends 4,331 Net realized and unrealized gains on investments 29,717,554 53,485,112 Investment expense (5,022,413) (5,150,705) Net investment income 26,592,415 49,220,931 Net assets released from restrictions 8,501,656 7,775,713 Contributions and other income 595,313 Total investment income, net assets released from restrictions, contributions and other income 35,689,384 56,996,644 Expenses Program activities direct charitable expenses 41,922,804 46,045,021 Administrative expenses 5,413,070 6,118,693 Federal, state, and local tax expense (benefit) 3,027,055 (2,113,738) Total expenses 50,362,929 50,049,976 Change in postretirement liability Health care benefit plan (4,604,934) 5,267,172 Defined benefit pension plan 4,911,802 Total change in postretirement liability (4,604,934) 10,178,974 Change in unrestricted net assets (19,278,479) 17,125,642 Unrestricted net assets, beginning of year 524,089, ,963,707 Unrestricted net assets, end of year 504,810, ,089,349 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS Contributions 14,889,004 6,618,710 Net assets released from restrictions (8,501,656) (7,775,713) Change in temporarily restricted net assets 6,387,348 (1,157,003) Temporarily restricted net assets, beginning of year 10,073,658 11,230,661 Temporarily restricted net assets, end of year 16,461,006 10,073,658 CHANGE IN TOTAL NET ASSETS (12,891,131) 15,968,639 TOTAL NET ASSETS, beginning of year 534,163, ,194,368 TOTAL NET ASSETS, end of year $ 521,271,876 $ 534,163,007 See accompanying notes. Page 3

7 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2016 and 2015 CASH FLOWS FROM OPERATING ACTIVITIES Change in total net assets $ (12,891,131) $ 15,968,639 Adjustments to reconcile change in total net assets to net cash used in operating activities Net realized and unrealized gains on investments (29,717,554) (53,485,112) Depreciation 1,132,485 1,121,439 Loss on disposal of fixed assets 226 2,190 Changes in operating assets and liabilities Contributions receivable (3,296,112) 626,570 Accounts receivable, prepaid employee benefits, and other assets 1,993, ,642 Accounts payable, accrued benefits, and other liabilities 878, ,435 Postretirement liability 7,296,029 (8,610,082) Deferred federal excise taxes 451,925 (1,584,157) Net cash used in operating activities (34,152,116) (45,240,436) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments (111,541,590) (98,312,424) Proceeds from sales and maturities of investments 71,561, ,569,310 (Increase) decrease in investment and investment income receivables (20,674,321) 4,739,904 Purchases of property and equipment (611,512) (82,362) Net cash (used in) provided by investing activities (61,266,255) 144,914,428 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from new bond issue 100,000,000 Payment to retire DC Bonds (42,000,000) Proceeds from note payable 8,000,000 Payment to retire note payable (31,500,000) Proceeds from line of credit 38,839,050 35,000,000 Payments on line of credit (38,839,050) (35,000,000) Net cash provided by financing activities 8,000,000 26,500,000 Increase (decrease) in cash and equivalents (87,418,371) 126,173,992 Cash and cash equivalents beginning of year 133,537,695 7,363,703 Cash and cash equivalents end of year $ 46,119,324 $ 133,537,695 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 6,039,869 $ 4,308,232 Page 4 See accompanying notes.

8 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization The Henry J. Kaiser Family Foundation (the Foundation ) is a highly specialized health policy research and health communications organization that provides timely information on health issues to policymakers, the media, and the public in the United States and globally. Principles of consolidation The accompanying consolidated financial statements include the Foundation and several wholly owned subsidiaries, including Darrin Capital Management and KF Fintech LLC, both founded in Darrin Capital Management is located in Mauritius and holds private equity investments in India. KF Fintech LLC is a Delaware limited liability company, and is the sole trustee of KF PS Trust, a Delaware statutory trust that was founded in KF PS Trust invests in fixed income investments. All significant intercompany accounts and transactions among these entities have been eliminated. Basis of presentation The consolidated financial statements are presented on the basis of unrestricted, temporarily restricted, and permanently restricted net assets in accordance with accounting principles generally accepted in the United States of America ( U.S. GAAP ). As of December 31, 2016 and 2015, there were no permanently restricted net assets. Cash and cash equivalents Cash and cash equivalents consist primarily of cash and money market funds. The Foundation considers investments with maturities of three months or less at the time of purchase to be cash equivalents. Estimated fair value of financial instruments The carrying amounts of cash and cash equivalents, accounts receivable, prepaid employee benefits, and other assets, contributions receivable, accounts payable, accrued benefits, and other liabilities approximate fair value because of the short maturity of these items. Investments and derivative financial instruments are reflected at estimated fair value as described below. The carrying amount of the note payable at December 31, 2016, approximates fair value due to the variable interest rate and term, which was consistent with those currently available to the Foundation at that date. The carrying amount of the bonds payable at December 31, 2016, approximates fair value due to minimal changes in borrowing rates between issuance date and year end Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) Topic 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value, and requires enhanced disclosures about fair value measurements. Fair value is the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the exit price). Market price observability is impacted by a number of factors, including the type of instrument, the characteristics specific to the instrument, and the state of the marketplace (including the existence and transparency of transactions between market participants). Instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Instruments measured and reported at fair value are classified and disclosed in one of the following categories based on inputs: Level 1 Quoted prices are available in active markets for identical instruments as of the reporting date. The type of instruments that would generally be included in Level I include listed equity securities. As required by ASC Topic 820, the Foundation, to the extent that it holds such instruments, does not adjust the quoted price for these instruments, even in situations where the Foundation holds a large position and a sale could reasonably impact the quoted price. Level 2 Pricing inputs are observable for the instruments, either directly or indirectly, as of the reporting date. Some are quoted prices in markets with limited activity and some are not the same as those used in Level 1. In the case of the latter, fair value is determined through the use of models or other valuation methodologies. The types of instruments that would generally be included in this category include unlisted derivative financial instruments and certain investment funds valued based upon net asset value or publicly traded securities with limited trading activity. Level 3 Pricing inputs are unobservable for the instrument and include situations where there is little, if any, market activity for the instrument. The inputs into the determination of fair value require significant judgment or estimation by the Foundation. The types of instruments that would generally be included in this category include equity securities issued by private entities. Page 5

9 In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given instrument is based on the lowest level of input that is significant to the fair value measurement. The Foundation s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the instrument. A Valuation Committee (the Committee ), led by the Chief Investment Officer/Chief Financial Officer, and including Investment Staff, is responsible for establishing valuation policy, reviewing ongoing compliance, and overseeing valuation procedures. The Committee meets at least annually to review the valuation policy and make decisions on any valuations requiring the Committee s attention. Investments Investments are reflected on the consolidated statements of financial position at fair value with changes in unrealized gains and losses resulting from changes in fair value reflected in the consolidated statements of activities and changes in net assets as net realized and unrealized gains on investments. Equity and fixed income securities that are classified as Level 1 are publicly traded investments in active markets and are reported at the market closing price as determined in good faith by the Foundation. Investments in managers investing in equity and fixed income securities, hedge funds, private equity, and real assets (the Investee Funds ) are reported at fair value. Fair value is based on the information provided by the Investee Funds, which reflects the Foundation s share of the fair value of the net assets of the Investee Fund. If the Foundation determines, based on its own due diligence and investment valuation procedures, that the valuation for any Investee Fund based on information provided by the management of such Investee Fund does not represent fair value, the Foundation will estimate the fair value of the Investee Fund in good faith and in a manner that it reasonably chooses in accordance with the Foundation s valuation policy as determined by the Committee. In addition, the Foundation invests directly into fixed income and equity securities of public and private companies ( Internally Managed ). These investments are valued by the Committee (see Notes 2 and 3). The values assigned to investments are based upon available information and do not necessarily represent amounts that might ultimately be realized, since such amounts depend on future circumstances and cannot be reasonably determined until the individual positions are liquidated. Investment transactions are recorded on a trade date basis for publicly traded investments or upon closing of the transaction for private investments. Derivative financial instruments The Foundation utilizes derivative financial instruments ( derivatives ) in order to gain tactical exposure to equity, foreign exchange, and fixed income factors. Derivative financial instruments are recorded at their estimated fair value in the accompanying consolidated statements of financial position (see Note 3). Changes in the underlying value of derivative financial instruments are recorded in net realized and unrealized gains on investments. Contributions receivable Contributions receivable consist of unconditional promises to give. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. Management believes the contributions receivable as of December 31, 2016 and 2015 approximate their net present value. Contributions receivable of approximately $10,809,000 as of December 31, 2016 are expected to be received as follows: $8,852,000 in 2017 and $1,957,000 in An allowance for uncollectible contributions receivable is established based upon estimated losses related to specific accounts. As of December 31, 2016 and 2015, the Foundation had no allowances on the contributions receivable. Property and equipment, net Property and equipment is recorded at cost, less any accumulated depreciation and amortization. The Foundation s policy is to capitalize all property and equipment additions over $5,000. Depreciation and amortization are provided on the straight line method over the estimated useful lives of the assets, which range from 3 to 40 years. Long lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. No such impairment was recorded during 2016 or Unrestricted net assets The Foundation reports gifts of cash and other assets as unrestricted support, as they are not subject to donor stipulations that limit the use of the donated assets. Temporarily restricted net assets Temporarily restricted net assets represent contributions whose use by the Foundation is limited by donor imposed stipulations that can be fulfilled and removed by actions of the Foundation pursuant to those stipulations (see Note 8). Page 6

10 Revenue recognition Contributions are recognized as revenue when received or unconditionally promised. The Foundation reports contributions as restricted support if such contributions are received with donor stipulations that limit the use of the donated assets. When a donor restriction ends or is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restrictions. Temporarily restricted contributions are reported as temporarily restricted support and net assets released from restrictions when the restriction is met. Tax exempt status The Foundation is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code (the Code ) and from California franchise and income taxes under Section 23701d of the Revenue and Taxation Code. The Foundation has received an advance ruling from the Internal Revenue Services ( IRS ) of public charity status for a 60 month period beginning January 1, Previously, the Foundation had been a private operating foundation. As a public charity, the Foundation is no longer subject to federal excise tax on net investment income. Single member LLCs owned by the Foundation and doing business in California are subject to the California minimum tax and gross receipts fee. KF PS Trust is a Delaware statutory trust and is disregarded for both federal and state purposes. Income taxes The Foundation adopted ASC Topic 740, Income Taxes, in As of December 31, 2016, the Foundation analyzed the inventory of tax positions taken with respect to all applicable income tax issues for all open tax years (in each respective jurisdiction), including December 31, 2016 and 2015, and concluded that no reserve for uncertain tax positions was required. Concentrations of credit risk Financial instruments that potentially subject the Foundation to credit risk consist primarily of cash and cash equivalents, accounts receivable, contributions receivable, and investments. The Foundation maintains cash and cash equivalents with major financial institutions. At times, such amounts may exceed Federal Deposit Insurance Corporation limits. The Foundation s investments have been placed with high quality counterparties. The Foundation closely monitors these investments and has not experienced significant credit losses. The Foundation s management monitors credit levels and the financial condition of its accounts receivable and contributions receivable and believes that an adequate provision for credit losses has been made in the accompanying consolidated financial statements. Functional expense allocations Expenses, such as salaries and payroll taxes, travel and meeting expense, rent, and interest are allocated among direct charitable expenses, administrative expenses, and investment expenses based on employee headcount/payroll ratios and estimates made by the Foundation s management. Use of estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the 2015 financial statements to conform to the 2016 consolidated financial statement presentation. These reclassifications had no impact on the change in net assets or net asset balances. Recent accounting pronouncements In August 2014, the FASB issued Accounting Standards Update ( ASU ) No , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. ASU No is intended to define management s responsibility to evaluate whether there is substantial doubt about an entity s ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for annual periods ending after December 15, The Foundation adopted the provisions of this ASU during the year ended December 31, The adoption of this update did not have an impact on the Foundation s consolidated financial statements. In May 2015, the FASB issued ASU No , Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). Pursuant to ASU No , investments for which fair value is measured at net asset value, or its equivalent, using the practical expedient will no longer be categorized in the fair value hierarchy. Removing such investments from the fair value hierarchy thereby ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. ASU No also removes the requirement that certain disclosures be made for all investments that are eligible to be measured at fair value using the net asset value practical expedient. Instead, such disclosures are limited to investments for which the entity has elected to estimate the fair value using the practical expedient. The adoption is effective for the Foundation for calendar year ending December 31, Management is currently evaluating the impact of the provisions of ASU No on the consolidated financial statements. Page 7

11 In January 2016, the FASB issued ASU No , Recognition and Measurement of Financial Assets and Financial Liabilities, Financial Instruments Overall (Subtopic ), which enhances the reporting model for financial instruments to provide users of financial statements with more decision useful information. The update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendment is effective for fiscal years beginning after December 15, 2018, with earlier adoption for fiscal years beginning after December 15, The adoption is effective for the Foundation for calendar year ending December 31, Management is currently evaluating the impact of the provisions of ASU No on the consolidated financial statements. In February 2016, the FASB issued ASU No , Leases (Topic 842), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the statement of financial position and disclosing key information about leasing arrangements in the financial statements of lessees. This update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption is effective for the Foundation for calendar year ending December 31, Management is currently evaluating the impact of the provisions of ASU No on the consolidated financial statements. In August 2016, the FASB issued ASU No , Not for Profit Entities (Topic 958): Presentation of Financial Statements of Notfor Profit Entities, which improves the current net asset classification requirements and the information presented in financial statements and notes about an entity s liquidity, financial performance, and cash flows. The update replaces the requirement to present three classes of net assets with two classes, net assets with donor restrictions and net assets without donor restrictions. The update also removes the requirement to present or disclose the indirect method (reconciliation) if using the direct method for the statement of cash flows as well as added several additional enhanced disclosures to the notes. The amendments in this update are effective for fiscal years beginning after December 15, 2017 and interim periods beginning after December 15, 2018, with application to interim financial statements permitted but not required in the initial year of application. The adoption is effective for the Foundation for the calendar year ending December 31, Management is currently evaluating the impact of the provisions of ASU No on the consolidated financial statements. In August 2016, the FASB issued ASU No , Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues including: debt repayment or debt extinguishment costs, settlement of zero coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, proceeds from the settlement of corporate owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption is effective for the Foundation for calendar year ending December 31, Management is currently evaluating the impact of the provisions of ASU No on the consolidated financial statements. In November 2016, the FASB issued ASU No , Statement of Cash Flows (Topic 230): Restricted Cash, which requires the statement of cash flows to explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments in this update are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption is effective for the Foundation for fiscal year ending December 31, Management is currently evaluating the impact of the provisions of ASU No on the consolidated financial statements. NOTE 2 INVESTMENTS As of December 31, 2016 and 2015, the Foundation s investments consisted of the following: Internally Internally Investee Managed Investee Managed Funds Funds Total Funds Funds Total Equity securities $ 111,859,791 $ $ 111,859,791 $ 104,367,368 $ $ 104,367,368 Fixed income securities 74,675,392 36,791, ,466,486 68,971,002 15,322,579 84,293,581 Hedge funds 100,286, ,286, ,171, ,171,295 Private equity 181,187,110 31,069, ,256, ,130,884 22,215, ,346,548 Options and derivatives (14,343,091) (14,343,091) (15,994,187) (15,994,187) Real assets 40,242,119 40,242,119 23,884,916 23,884,916 $ 508,250,491 $ 53,517,006 $ 561,767,497 $ 470,525,465 $ 21,544,056 $ 492,069,521 Page 8

12 The Foundation s Internally Managed portfolio consists of private debt facilities and private equity investments that are illiquid and internally valued. In addition, the Foundation s derivative exposure, which consists of equity, foreign exchange, and fixed income options and contracts, is included in the above table. Please see Note 3 for more information on the Foundation s derivative exposure. The Foundation had commitments under partnership agreements to make additional capital contributions to alternative investments of approximately $80,558,000 and $96,003,000 as of December 31, 2016 and 2015, respectively. Total realized and unrealized gains recorded for Level 3 investments are reported in net realized and unrealized gains from investments in the consolidated statements of activities and changes in net assets. During calendar year 2015, the Foundation sold interests in a variety of private equity and real asset partnerships resulting in net realized cash proceeds of $178,460,000 and substantial cash and cash equivalents balance at December 31, Certain of the Foundation s investments are denominated in foreign currencies that may be negatively affected by movements in the rate of exchange between the U.S. dollar and such foreign currencies. There may also be risk associated with the concentration of investments in one geographic region or in certain industries. NOTE 3 FAIR VALUE MEASUREMENTS The levels in the ASC Topic 820 fair value hierarchy into which the Foundation s investments fall as of December 31, 2016 and 2015, are as follows: Level 1 Equities and fixed income securities $ 376,728 $ 416,535 Level 2 Equities and fixed income securities 154,851, ,513,560 Hedge funds 75,104,164 76,025,604 Options and derivatives 17,223 (186,911) Total Level 2 229,972, ,352,253 Level 3 Equities and fixed income securities 68,098,015 42,730,854 Hedge funds 25,181,915 41,145,691 Private equity 212,256, ,346,548 Options and derivatives (14,360,314) (15,807,276) Real assets 40,242,119 23,884,916 Total Level 3 331,417, ,300,733 Total investments $ 561,767,497 $ 492,069,521 The equities and fixed income securities category represents investments with managers investing in a diversified pool of publicly traded small, medium, and large capitalization global equities and fixed income securities. The hedge funds category represents investments with managers investing across the globe, both long and short, in a variety of asset classes including, but not limited to debt and equity securities, real estate, structured products, and foreign exchange instruments. Pending market conditions, managers have latitude to shift investment strategies and security types to exploit market inefficiencies, as well as employ leverage. The fair values of investments in this category have been determined using the net asset value per share of the Investee Funds. Page 9

13 The private equity category represents investments with managers investing in a broad range of foreign and domestic privatelyowned companies. Underlying strategies within this category include venture capital, leveraged buyouts, and distressed debt. Post investment, managers work closely with portfolio companies to create value within the businesses through a variety of strategies. Investment periods range from three to six years, with initial distributions expected in years five and six. Managers generally attempt to fully liquidate the portfolio of investments within ten years, although managers may extend the time to liquidate if necessary to benefit the portfolio. The options and derivatives category is comprised of equity and foreign exchange options, and interest rate swap agreements. The fair values of these instruments are based on quotes from the market makers for similar instruments. The real assets category is comprised of the Foundation s investments in real estate, forestland, and energy related private partnerships. The fair values of investments in this category have been determined using the net asset value per share of the investment funds ( NAV ), or in cases where a NAV is not available, recent appraisal information. The Committee valued the fixed income securities and private equity portion of the Internally Managed portfolio at a fair market value of approximately $67,860,000 and on a cost basis of approximately $60,534,000. All of these investments are categorized as Level 3 investments. The Committee did not recommend any deviations from the fair value assessments of its Investee Funds or its options and derivatives portfolio. The changes in investments classified as Level 3 for the years ended December 31, 2016 and 2015, are as follows: Fixed Income Equities and Fixed Options & Income Securities Hedge Funds Private Equity Derivatives Real Assets Total Level 3 Balance, January 1, 2015 $ 31,372,400 $ 40,695,592 $ 176,574,927 $ $ 112,964,638 $ 361,607,557 Reclass options and derivatives (15,705,261) (15,705,261) Purchases and other acquisitions 8,715,000 62,344,534 12,810,252 83,869,786 Sales and other dispositions (403,537) (74,166,712) (138,000,031) (212,570,280) Realized appreciation 351,765 18,142, ,660, ,154,581 Unrealized (depreciation) appreciation 2,695, ,099 (4,548,773) (102,015) (76,550,187) (78,055,650) Balance, December 31, ,730,854 41,145, ,346,548 (15,807,276) 23,884, ,300,733 Purchases and other acquisitions 25,927,573 58,641,349 9,845,150 94,414,072 Sales and other dispositions (6,690,831) (11,856,133) (21,953,238) (2,273,555) (42,773,757) Realized (depreciation) appreciation 1,838, ,133 (190,307) 868,327 3,372,313 Unrealized (depreciation) appreciation 4,292,259 (4,963,776) (2,588,239) 1,446,962 7,917,281 6,104,487 Balance, December 31, 2016 $ 68,098,015 $ 25,181,915 $ 212,256,113 $ (14,360,314) $ 40,242,119 $ 331,417,848 Transfers of investments between different levels of the fair value hierarchy are recorded as of the end of the reporting period. Changes in the unrealized gains in the investments included on the consolidated statements of activities and changes in net assets relating to Level 3 investments still held at December 31, 2016 and 2015, were approximately $5,054,000 and $26,700,000, respectively. Page 10

14 Investment strategy and redemption information The following table summarizes the investment strategy types, unfunded commitments, and redemption features of the investment portfolio classified as Level 2 or 3 as of December 31, The table does not include any option or derivative investments which are held directly by the Foundation. The Foundation has commitments under the associated investment agreements to make additional capital contributions as noted. Redemption Frequency (if Unfunded Currently Redemption Commitments Eligible) Notice Period Level 2 Equities and fixed income securities $ 7,000,000 Monthly, quarterly, days notice semi annually Hedge funds Quarterly days notice Level 3 Equities and fixed income securities Biennially, triennially 90 days notice Hedge funds Quarterly 60 days notice Private equity 71,938,000 Illiquid Real assets 1,620,000 Illiquid The levels in the ASC Topic 820 fair value hierarchy into which the Foundation s receivable for unsettled investment transactions fell as of December 31, 2016, are as follows: 2016 Level 1 Equities and fixed income securities $ Level 2 Hedge funds 5,000,000 Options and derivatives 470,000 Total Level 2 5,470,000 Level 3 Equity securities 1,000,000 Hedge funds 8,059,390 Private equity 6,027,635 Total Level 3 15,087,025 $ 20,557,025 There were no unsettled investment transactions at December 31, Derivatives The Foundation uses derivative instruments to manage its exposure to market risks, for income enhancement and to provide equity exposure without actual ownership of the underlying asset. The Foundation s management believes the use of such instruments in its investment management program is appropriate in providing for the long term and short term financial needs of the Foundation. Though the use of these instruments reduces certain investment risks and generally adds value to the portfolio, the instruments themselves do involve some investment and counterparty risk. The Foundation has internal policies to manage its counterparty exposure and actively monitors its margin exposure to any counterparty on a daily basis. Page 11

15 As of December 31, 2016 and 2015, the fair values of derivatives consisted of the following: Options and derivatives $ (936,113) $ (996,830) Fixed income options and derivatives (14,360,314) (15,807,276) FX options and derivatives 953, ,919 $ (14,343,091) $ (15,994,187) Prior to 2015, the Foundation categorized its interest rate swaps as a derivative liability associated with its District of Columbia Revenue Bonds and Northern Trust Loan. With the Foundation s 2015 Bond issue and subsequent repayment of its District of Columbia Revenue Bonds and Northern Trust Loan, the fair value of the interest rate swaps is included in investments (see Notes 5 and 6). The estimated fair values of the equity options and the interest rate swap agreements are based on quotes from the market makers for similar instruments and, therefore, are classified as Level 2 or Level 3, under the ASC Topic 820 fair value hierarchy. NOTE 4 PROPERTY AND EQUIPMENT, NET As of December 31, 2016 and 2015, property and equipment consisted of the following: Land $ 7,463,063 $ 7,463,063 Buildings and improvements 33,478,253 33,409,193 Office furniture and equipment 6,637,120 7,098,401 47,578,436 47,970,657 Accumulated depreciation (17,461,004) (16,964,339) 30,117,432 31,006,318 Construction in progress 367,687 Property and equipment net $ 30,485,119 $ 31,006,318 Depreciation expense was $1,132,485 and $1,121,439 for the years ended December 31, 2016 and 2015, respectively. NOTE 5 BONDS PAYABLE In June 2001, the District of Columbia issued $42,000,000 in variable rate tax exempt revenue bonds (District of Columbia Revenue Bonds The Henry J. Kaiser Family Foundation Issue Series 2001) (the DC Bonds ) on behalf of the Foundation. The DC Bonds were repaid in 2015 with the proceeds from the issuance of taxable fixed rate bonds (see below). The DC Bonds bore interest, payable monthly in arrears, at various weekly rates, as defined, which ranged from 0.05% to 0.14% during The DC Bonds represented an unsecured general obligation of the Foundation. Interest expense for the DC Bonds was approximately $18,000 for the year ended December 31, In June 2015, the Foundation issued $100,000,000 in interest only taxable fixed rate bonds: $65,000,000 of Henry J. Kaiser Family Foundation Bond 3.356% 12/1/2025 (the 2025 Bonds ) and $35,000,000 of Henry J. Kaiser Foundation Bond 4.407% 12/1/2045 (the 2045 Bonds ). Interest expense for the years ended December 31, 2016 and 2015, was as follows: Henry J. Kaiser Family Foundation Bond 3.356% 12/1/2025 $65 million $ 2,181,400 $ 1,048,884 Henry J. Kaiser Family Foundation Bond 4.407% 12/1/2045 $35 million 1,542, ,784 $ 3,723,850 $ 1,613,668 Page 12

16 The proceeds of the new bond issue were used to retire the DC Bonds and the Northern Trust Loan (see Note 6). The new issuance is unsecured and rated AAA by Standard and Poors at issuance. Interest rate swap agreements Prior to 2015, interest rate swap agreements ( Swaps ) were used by the Foundation to mitigate the risk of changes in interest rates associated with variable interest rate indebtedness. Under such arrangements, variable rate indebtedness was converted to fixed rates based on a notional principal amount. The Swaps related to the DC Bonds effectively fixed the interest rate on a notional amount of $42,000,000 at 3.46% for the remaining term of the DC Bonds (see Note 3). As the Foundation retired its variable interest rate indebtedness and did not retire its Swaps, these Swaps no longer mitigate an operational risk, but instead reflect an investment thesis predicated on rising interest rates. As such, the Swaps have been reclassified to investment within the Foundation s investment portfolio in Interest expense related to these Swaps was approximately $1,309,000 and $1,403,000 for the years ended December 31, 2016 and 2015, respectively. NOTE 6 NOTE PAYABLE In February 2011, the Foundation secured a $35,000,000, six year, variable rate, interest only loan with its custodial bank, The Northern Trust Company (the Northern Trust Loan ), of which $31,500,000 had been drawn as of December 31, The Northern Trust Loan was secured by the Foundation s Level 1 equity and fixed income securities and cash and cash equivalents, and was repaid in 2015 with proceeds from the issuance of the $100,000,000 taxable fixed rate bonds (see Note 5). Interest expense for the Northern Trust Loan was approximately $138,000 for the year ended December 31, In conjunction with the Northern Trust Loan borrowing, the Foundation also entered into an interest rate swap agreement with Northern Trust effectively fixing the interest rate of the $31,500,000 loan at 2.94%. This swap agreement was not retired in conjunction with the loan repayment and will expire in February of The Swaps have been reclassified to investment within the Foundation s investment portfolio in 2015 (see Notes 3 and 5). Interest expense related to this swap agreement was approximately $787,000 and $879,000 for the years ended December 31, 2016 and 2015, respectively. In November 2016, KF PS Trust entered into a $10,000,000 Revolving Line of Credit and Term Loan Agreement ( Agreement ) with Western Alliance Bank, guaranteed by KF Fintech LLC, and collateralized by KF PS Trust s fixed income investments and trust bank account with U.S. Bank, with a backstop provided by the Foundation for any fraud, gross negligence or willful misconduct committed by KF PS Trust. The Agreement also requires the Foundation to maintain a $250,000 compensating balance in its Western Alliance bank account. On December 30, 2016, KF PS Trust borrowed $8,000,000 against the Agreement at a variable rate of the greater of 4.50% or 4% over LIBOR. The Agreement requires an unused line fee of twenty five (25) basis points during any quarter in which advances against the facility fall below $5,000,000. The $8,000,000 note is due November 22, 2018 and may be converted into a term loan with a maturity date of November 22, Interest expense for the borrowings against the revolving line of credit was approximately $2,000 for the year ended December 31, Line of credit In December 2015, the Foundation renewed a $35,000,000 revolving line of credit agreement with Bank of America for operational purposes, and amended the agreement in August 2016 to increase the line to $40,000,000. The outstanding balance accrues interest at the annual rate of LIBOR Daily Floating rate plus fifty (50) basis points and is paid on a monthly basis in arrears on amounts drawn. Additionally, all undrawn amounts are subject to a commitment fee of ten (10) basis points annually, also paid on a monthly basis in arrears. The Foundation repaid all outstanding principal in December The $40,000,000 revolving line of credit was renewed on December 23, 2016 with the same terms and conditions for calendar 2017 and an expiration date of January 2, Interest expense for the revolving line of credit was approximately $173,000 and $247,000 for the years ended December 31, 2016 and 2015, respectively. Page 13

17 NOTE 7 FEDERAL, STATE, AND LOCAL TAXES The provision for current and deferred taxes for the years ended December 31, 2016 and 2015, was as follows: Provision for federal taxes Current $ 172,996 $ 2,106 Deferred 2,335,995 (2,131,798) 2,508,991 (2,129,692) Other state and local taxes 518,064 15,954 $ 3,027,055 $ (2,113,738) The Foundation has been a private operating foundation exempt from federal income tax under the Code Section 501(c)(3) and, as such, subject to a federal excise tax on net investment income at a rate of 2%, or 1% if certain distribution criteria are met. The Foundation received an advance ruling from the IRS of public charity status for a 60 month period beginning January 1, If the Foundation satisfies the requirements of Section 507(b)(1)(B) of the Code, the Foundation will no longer be subject to the federal excise tax on net investment income. The Foundation records deferred excise taxes, which arise primarily from unrealized taxbasis gains on investments. For the year ended December 31, 2016, deferred taxes have been calculated at an effective rate of 2%, which is the maximum rate possible to be paid by the Foundation on such amounts. NOTE 8 TEMPORARILY RESTRICTED NET ASSETS AND NET ASSETS RELEASED FROM RESTRICTIONS As of December 31, 2016 and 2015, temporarily restricted net assets consisted of the following: U.S. health policy analysis and reporting $ 12,323,084 $ 7,345,490 U.S. role in global health 2,857, ,355 Public education partnerships 1,280,090 1,790,813 Net assets released from restrictions for the years ended December 31, 2016 and 2015, were as follows: $ 16,461,006 $ 10,073,658 U.S. health policy analysis and reporting $ 4,805,246 $ 2,739,787 U.S. role in global health 1,679,960 2,601,183 Public education partnerships 2,016,450 2,434,743 $ 8,501,656 $ 7,775,713 NOTE 9 EMPLOYEE RETIREMENT AND OTHER ACCRUED BENEFITS The Foundation sponsored a qualified defined benefit pension plan for substantially all of its employees, based on years of service and average compensation (compensation of a participant averaged over the three consecutive plan years that produce the highest yearly average). Employees vested in their benefits under the following schedule: 20% after three years of service, 40% after four years of service, and 100% after five years of service. Page 14

18 The defined benefit pension plan was amended on January 7, 2013, to cease all future benefit accruals effective February 28, 2013, and to fully vest all active employees with service through December 31, As a result, the pension benefit formula did not reflect future salary increases or benefit service after February 28, The Foundation received an IRS determination letter dated April 14, 2015, approving termination of the defined benefit pension plan as of September 30, Benefits and plan assets were distributed prior to December 31, As such, the projected benefit obligation, fair value of plan assets and funded status at December 31, 2015 were all zero. Benefit cost, employer contributions, and benefits paid were $4,752,355, $6,865,000, and $19,524,902, respectively, for the year ended December 31, For the year ended December 31, 2015, $4,911,802 gain was reflected in the consolidated statement of activities and changes in net assets other than net periodic benefit cost, consisting of amortization of gain of $4,788,315 and net gain of $123,487. In addition, the Foundation provides certain postretirement health care benefits to eligible employees. Estimated cost is accrued over periods of employee service on an actuarially determined basis. The Foundation has determined that prescription drug benefits included in its postretirement health care plan are actuarially equivalent to Part D of the Medicare Prescription Drug Improvement and Modernization Act of However, as the amount of subsidy the Foundation is eligible for is not material, no reduction has been made to the postretirement obligations included in the accompanying consolidated financial statements. The Foundation used a December 31 measurement date for its postretirement health care benefit plan. The Foundation also sponsors a qualified defined contribution plan covering substantially all of its employees. The plan is funded by employee and employer contributions. The Foundation contributes an amount based upon eligible compensation as defined in the plan. Pension expense related to this plan was approximately $2,870,000 and $2,544,000 for the years ended December 31, 2016 and 2015, respectively. In addition, accounts payable, accrued benefits, and other liabilities on the consolidated statements of financial position included approximately $819,000 and $714,000 of accrued employee benefits associated with certain unfunded executive compensation plans, and approximately $3,606,000 and $3,589,000 of accrued flexible time off and sabbatical leave as of December 31, 2016 and 2015, respectively. Obligations and funded status For the years ended December 31, 2016 and 2015, the benefit obligations, fair value of assets, and funded status for the postretirement health care benefit plan are as follows: Projected benefit obligation as of January 1 $ 28,788,264 $ 30,289,301 Service cost 1,701,623 2,087,591 Interest cost 1,290,761 1,350,382 Benefits paid (388,347) (331,578) Actuarial loss (gain) 4,906,796 (4,607,432) Projected benefit obligation as of December 31 36,299,097 28,788,264 Less: Fair value of plan assets as of December 31 4,954,665 4,739,861 Funded status $ 31,344,432 $ 24,048,403 The costs, contributions, expenses paid and benefits paid for the years ended December 31, 2016 and 2015, for the postretirement health care benefit plan are as follows: Benefit cost $ 2,981,095 $ 3,931,537 Employer contribution 290, ,000 Expenses paid Benefits paid (388,347) (331,578) Page 15