Thomas Jefferson University Reports on Federal Financial Assistance Programs in Accordance with the OMB Uniform Guidance For the Year Ended June 30,

Transcription

1 Reports on Federal Financial Assistance Programs in Accordance with the OMB Uniform Guidance For the Year Ended June 30, 2016 Federal Identification Number

2 Reports on Federal Awards in Accordance with the OMB Uniform Guidance Index June 30, 2016 Page(s) Part I Financial Statements Report of Independent Auditor Consolidated Financial Statements and Notes to Consolidated Financial Statements Part II Schedule of Expenditures of Federal Awards Schedule of Expenditures of Federal Awards Notes to Schedules of Expenditures of Federal Awards Part III Reports on Internal Control and Compliance Report of Independent Auditor on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Report of Independent Auditor on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with the OMB Uniform Guidance Part IV Findings Schedule of Findings and Questioned Costs Summary Schedule of Status of Prior Audit Findings Management s Views and Corrective Action Plans... 68

3 Report of Independent Auditors To the Board of Trustees Thomas Jefferson University: Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Thomas Jefferson University and its subsidiaries (the University ), which comprise the consolidated balance sheets as of June 30, 2016 and 2015, and the related consolidated statements of operations and changes in unrestricted net assets, of changes in net assets, and of cash flows for the year ended June 30, 2016, and the related notes to the financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the 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 the consolidated financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our 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, we consider internal control relevant to the University 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 University 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 Thomas Jefferson University and its subsidiaries as of, and the results of their operations, changes in net assets and their cash flows for the year ended June 30, 2016 in accordance with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA T: (267) , F: (267) ,

4 Other Matters Consolidating Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information on pages is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves and other additional procedures, in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated, in all material respects, in relation to the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual entities and is not a required part of the consolidated financial statements. Accordingly, we do not express an opinion on the financial position, results of operations and cash flows of the individual entities. Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 27, 2016 on our consideration of the University s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on internal control over financial reporting or compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the University s internal control over financial reporting and compliance. Philadelphia, Pennsylvania October 27,

5 Consolidated Balance Sheets (In Thousands) Assets Current assets: Cash and cash equivalents $301,743 $244,364 Short-term investments 1,055,436 1,029,742 Accounts receivable, less allowance for doubtful accounts of $63,825 in 2016 and $52,161 in , ,392 Inventory 38,750 37,921 Pledges receivable, current 29,720 18,226 Insurance recoverable 27,869 32,416 Assets whose use is limited, current 19,952 19,595 Other current assets 27,575 24,379 Total current assets 1,882,006 1,806,035 Long-term investments 895, ,205 Assets whose use is limited, noncurrent 152, ,925 Assets held by affiliated foundation 8,624 8,781 Pledges receivable, noncurrent 98,923 82,686 Goodwill 160,311 25,964 Insurance recoverable 144, ,544 Loans receivable from students, net 26,810 26,417 Land, buildings and equipment, net 1,468,987 1,389,913 Other noncurrent assets 28,671 18,011 Total assets $4,867,457 $4,567,481 Liabilities and Net Assets Current liabilities: Current portion of: Long-term obligations $23,595 $22,110 Accrued professional liability claims 42,674 51,459 Accrued workers' compensation claims 8,766 7,400 Deferred revenues 15,710 13,185 Accounts payable and accrued expenses 243, ,464 Accrued payroll and related costs 198, ,530 Grant and contract advances 16,412 17,844 Total current liabilities 548, ,992 Long-term obligations 1,060, ,550 Accrued pension liability 481, ,383 Federal student loan advances 15,651 18,247 Deferred revenues 7,339 8,040 Accrued professional liability claims 339, ,259 Accrued workers' compensation claims 19,821 22,856 Interest rate swap contracts 43,609 29,826 Other noncurrent liabilities 19,218 21,913 Total liabilities 2,536,115 2,253,066 Net assets: Unrestricted 1,663,397 1,745,968 Noncontrolling interest in joint venture 74,569 4,290 Temporarily restricted 302, ,446 Permanently restricted 291, ,711 Total net assets 2,331,342 2,314,415 Total liabilities and net assets $4,867,457 $4,567,481 The accompanying notes are an integral part of the consolidated financial statements. 3

6 Consolidated Statement of Operations and Changes in Unrestricted Net Assets For the Year Ended June 30, 2016 (In Thousands) Operating revenues, gains and other support: Net patient service revenue $2,773,060 Provision for bad debts (102,714) Net patient service revenue less provision for bad debts 2,670,346 Grants and contracts 91,589 Tuition and fees, net 122,689 Investment income 24,133 Contributions 3,862 Other revenue 188,464 Net assets released from restrictions 37,576 Total operating revenues, gains and other support 3,138,659 Operating expenses: Salaries and wages 1,380,462 Employee benefits 361,808 Supplies 536,418 Purchased services 186,154 Depreciation and amortization 158,972 Interest 35,914 Insurance 52,696 Utilities 38,356 Rent 45,696 Other 247,868 Total operating expenses 3,044,344 Income from operations 94,315 Nonoperating items and other changes in unrestricted net assets, net: Loss on investments, net (4,071) Investment income net of amounts classified as operating revenue 2,249 Gain on investment in ROSH acquisition 21,906 Interest rate swap contracts (17,546) Reclassification of net assets (173) Contributions and government grants for capital projects 4,088 Value of noncontrolling interest - ROSH acquistion 70,856 Net assets released from restrictions used for purchase of property and equipment 11,469 Donated capital received 799 Increase in pension liability (192,989) Distributions to noncontrolling interest (3,195) Decrease in unrestricted net assets from nonoperating items and other changes in net assets (106,607) Decrease in unrestricted net assets ($12,292) The accompanying notes are an integral part of the consolidated financial statements. 4

7 Consolidated Statement of Changes in Net Assets For the Year Ended June 30, 2016 (In Thousands) Unrestricted net assets: Revenues, gains and other support $3,138,659 Expenses (3,044,344) Nonoperating items and other changes in unrestricted net assets, net (106,607) Decrease in unrestricted net assets (12,292) Temporarily restricted net assets: Contributions 65,447 Gain on investments, net 527 Investment income 5,683 Net assets released from restrictions (49,045) Changes in net assets held by an affiliated foundation (157) Change in value of split interest agreements/annuities (716) Reclassification of net assets 142 Increase in temporarily restricted net assets 21,881 Permanently restricted net assets: Contributions 11,750 Net loss on externally held trusts (4,443) Reclassification of net assets 31 Increase in permanently restricted net assets 7,338 Increase in net assets 16,927 Net assets, beginning of year 2,314,415 Net assets, end of year $2,331,342 The accompanying notes are an integral part of the consolidated financial statements. 5

8 Consolidated Statement of Cash Flows For the Year Ended June 30, 2016 (In Thousands) Cash flows from operating activities: Increase in net assets $16,927 Adjustments to reconcile changes in net assets to net cash provided by operating activities: Increase in pension liability 192,989 Depreciation and amortization 158,972 Bond premium amortization (2,941) Provision for bad debts 102,714 Assets held by affiliated foundation 157 Gain on investments, net (24,750) Gain on sale of assets (3) Recognition of vesting in Premier stock (3,897) Donated capital received (799) Net loss on interest rate swap contracts 13,783 ROSH noncontrolling interest (70,856) Distribution to noncontrolling interest 3,195 Contributions and government grants designated for acquisition of long-term assets (17,974) Net change due to: Accounts receivable (77,508) Pledges receivable (27,731) Inventory 305 Other current and noncurrent assets (5,823) Accounts payable and accrued expenses (28,022) Accrued payroll and related costs (17,285) Grant and contract advances (1,432) Deferred revenues 253 Accrued pension liability (1,271) Insurance recoverable (5,373) Accrued professional liability claims 19,918 Accrued workers' compensation claims (1,669) Dividend received from Five Pointe Professional Liability Insurance Company 19,761 Other current and noncurrent liabilities (2,608) Net cash provided by operating activities 239,032 Cash flows from investing activities: Assets whose use is limited increase (115,953) Assets whose use is limited decrease 107,711 Acquisition of ROSH, net of cash acquired (62,686) Purchase of land, buildings and equipment (214,757) Purchases of investments (1,467,100) Sales of investments 1,461,453 Student loans issued (5,151) Student loans repaid 4,758 Net cash used in investing activities (291,725) Cash flows from financing activities: Distribution to noncontrolling interest (3,195) Proceeds from donated capital 799 Contributions and government grants designated for acquisition of long-term assets 17,974 Federal student loan advances (2,596) Proceeds from long-term obligations 119,580 Repayment of long-term obligations (22,490) Net cash provided by financing activities 110,072 Net increase in cash and cash equivalents 57,379 Cash and cash equivalents at beginning of period 244,364 Cash and cash equivalents at end of period $301,743 Supplemental disclosures: Interest paid (net of amount capitalized) $42,264 Accounts payable related to buildings and equipment $17,950 The accompanying notes are an integral part of the consolidated financial statements. 6

9 Notes to Consolidated Financial Statements 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements represent the consolidated financial position, results of operations, changes in net assets and cash flows of Thomas Jefferson University, TJUH System ( TJUHS ), and Abington Health ( AH ) collectively referred to as TJU. Thomas Jefferson University is an independent, non-profit corporation organized under the laws of the Commonwealth of Pennsylvania and recognized as a tax-exempt organization pursuant to Section 501(c)(3) of the Internal Revenue Code. Thomas Jefferson University has a tripartite mission of education, research, and patient care. Thomas Jefferson University conducts research and offers undergraduate and graduate instruction through the Sidney Kimmel Medical College, and the Jefferson Colleges of Nursing, Pharmacy, Health Professions, Population Health, and Biomedical Sciences. Thomas Jefferson University has approximately 3,700 students and is located in Philadelphia, Pennsylvania. TJUHS is an integrated healthcare organization that provides inpatient, outpatient, and emergency care services through acute care, ambulatory care, physician, and other primary care services for residents of the Greater Philadelphia Region. TJU is the sole corporate member of TJUHS. Effective, May 1, 2015 TJU and AH merged to form a new organization that will serve the greater Philadelphia area and further expand and enhance its tripartite mission of education, research and patient care. AH is a not for profit healthcare organization located in suburban Philadelphia and controlling entity of Abington Memorial Hospital, Lansdale Hospital Corporation and Abington Health Foundation. The merger of TJU and AH was effected by reconstituting the governing board of TJU to provide for equal representation by both TJU and AH, and designating TJU as sole corporate member of AH. Effective the date of the merger, TJU became a new entity for financial reporting purposes. TJU includes the accounts of subsidiaries of Thomas Jefferson University including 1100 Walnut Associates; 925 Walnut Corporation; and the accounts of subsidiaries of TJUHS, including Thomas Jefferson University Hospitals, Inc. (TJUH); Jefferson University Physicians ( JUP ); Jefferson Physician Services; the Atrium Corporation; Jeffex, Inc.; Methodist Associates in Healthcare, Inc.; JeffCare, Inc.; Jeffcare Alliance, LLC; Jefferson University Radiology Associates ( JURA, an 80% owned joint venture), Jefferson Comprehensive Concussion Center ( JCCC, a 66% owned joint venture), the Riverview Surgery Center at the Navy Yard, LP ( Riverview, a 51% owned joint venture), Rothman Orthopaedic Specialty Hospital, LLC ( ROSH a 54% owned joint venture), Accountable Care Organization ( the ACO a 40% owned joint venture), and Mount Laurel Risk Retention Group, Inc.( MLRRG ) and Five Pointe Insurance Componay ( Five Pointe ), (49% owned joint venture insurance entities). 7

10 Notes to Consolidated Financial Statements Subsequent Events On July 1, 2016, pursuant to the terms of an integration agreement, TJU became the sole corporate member of Aria Health System. Aria is a not for profit healthcare organization located in Philadelphia and Bucks County, Pennsylvania. TJU acquired all of the assets and liabilities of Aria and the TJU board was reconstituted to include 10 members designated by Aria. This business combination will be accounted for as an acquisition. The acquisition of Aria is intended to enhance access to high quality, cost effective care to the communities served by both organizations and to enhance the educational and research mission of TJU. On August 9, 2016, TJU and Kennedy Health System, Inc. signed an integration agreement related to a possible business combination. On September 9, 2016, TJU and Philadelphia University signed an integration agreement related to a possible business combination. TJU has performed an evaluation of subsequent events through October 27, 2016, which is the date the financial statements were issued. Principles of Consolidation The accompanying consolidated financial statements include the accounts of TJU. All significant intercompany accounts and transactions have been eliminated. Financial Statement Presentation The accompanying consolidated financial statements have been prepared on an accrual basis. TJU classifies net assets as follows: Unrestricted Net Assets are those assets that are available for the support of operations and whose use is not externally restricted, although their use may be limited by other factors such as by board designation. Temporarily Restricted Net Assets are subject to legal or donor imposed restrictions that will be met by actions of TJU and/or the passage of time. These net assets include gifts donated for specific purposes and capital appreciation on permanent endowment, which is restricted by Pennsylvania law on the amounts that may be expended in a given year. Permanently Restricted Net Assets are subject to donor-imposed restrictions that require the original contribution be maintained in perpetuity by TJU, but permits the use of the investment earnings for general or specific purposes. TJU s measure of operations in the consolidated statement of operations and changes in net assets includes revenues from patient services, grants and contracts, tuition and fees, unrestricted contributions, net assets released from restriction, distribution of investment returns based on the TJU s spending policy and other sources. 8

11 Notes to Consolidated Financial Statements Non-operating activities presented in the consolidated statement of operations and changes in net assets includes investment returns net of amounts classified as operating revenue in accordance with the TJU s spending policy, gains and losses on derivative financial instruments, contributions and governmental grants for capital projects, net assets released from restriction for capital purposes, gain on investment and value of noncontrolling interest of the ROSH acquisition, distributions to noncontrolling interests and the net actuarial loss of the defined benefit plan. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Management considers critical accounting policies to be those that require more significant judgments and estimates in the preparation of the financial statements including, but not limited to, recognition of net patient service revenue, which includes contractual allowances and provisions for bad debt; recognition of estimates for healthcare professional and general liabilities; determination of fair values of certain financial instruments; and assumptions for measurement of pension obligations. Management relies on historical experience and other assumptions believed to be reasonable relative to the circumstances in making judgments and estimates. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash and investments in highly liquid debt instruments with maturity of three months or less when purchased and are carried at cost, which approximates fair value, except that any such investments purchased with funds on deposit with bond trustees or with funds held in self-insurance trust arrangements are classified as assets whose use is limited or purchased by investment managers of TJU s long-term investment fund are classified as investments. Short-term investments Investments classified as short-term investments are available to fund current operations as needed and exclude quasi-endowment funds, donor restricted endowment funds (including beneficial interests in perpetual trusts administrered by third parties), investments held under split-interest agreements and investments subject to the equity method. Charitable Medical Care Provided TJU provides medically necessary services to all patients regardless of their ability to pay. Some patients qualify for charity care based on policies established by TJU and are therefore not responsible for payment for all or a part of their healthcare services. These policies allow for the provision of free or discounted care in circumstances where requiring payment would impose financial hardship on the patient. Charges for services rendered to patients who meet TJU s guidelines for charity care are not separately recorded in the accompanying consolidated financial statements. 9

12 Notes to Consolidated Financial Statements TJU maintains records to identify and monitor the level of charity care provided. These records include the amount of charges foregone for services and supplies furnished. Such amounts have been excluded from net patient service revenue. Management estimates that the cost of charity care provided by TJU was $21.8 million for the year ended June 30, These amounts do not include the provision for bad debts of $102.7 million in 2016 which are reflected as deductions in net patient service revenue. The estimated costs of providing charity services are based on a calculation which applies a ratio of costs to charges to the gross uncompensated charges associated with providing care to charity patients. The ratio of cost to charges is calculated based on the TJU total expenses divided by gross patient service revenue. Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and are adjusted in future periods as final settlements are determined. Revenue from the Medicare and Medicaid fee-for-service programs accounted for approximately 24.1% and 3.3%, respectively, of net patient service revenue in Most payments to TJU from the Medicare and Pennsylvania Medicaid programs for inpatient hospital services are made on a prospective basis. Under these programs, payments are made at a pre-determined specific rate for each discharge based on a patient s diagnosis. Additional payments are made to TJU as a teaching and disproportionate share hospital, as well as for cases that have an extremely long length-of-stay or unusually high costs. Laws governing the Medicare and Medicaid programs are complex and subject to interpretation. Services billed to the Medicare program are subject to external review for both medical necessity and billing compliance. Medicare cost reports for all years, except 2011, 2014, 2015 and 2016 have been audited and final settled as of June 30, No significant adjustments are expected. In addition, TJU received funds from the Philadelphia Hospital Assessment program and the Medical Assistance Modernization Act-Quality Care Assessment program in the amount of $93.5 million in 2016 and are recorded in net patient service revenue. TJU paid taxes in respect to these programs amounting to $78.9 million in 2016 and are recorded in other operating expenses. Both programs were designed to provide supplemental funding for licensed acute care hospitals with the Philadelphia Hospital Assessment program specifically designated for hospital emergency services. TJU has also entered into agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to TJU under these agreements includes prospectively determined rates per discharge, discounts from established charges, prospectively determined daily rates and capitated rates. Revenue from Blue Cross and Aetna USHC amounted to 30.9% and 9.4% of TJU net patient service revenue in

13 Notes to Consolidated Financial Statements Accounts Receivable, Allowance for Doubtful Accounts, Provision for Bad Debt TJU records an allowance for doubtful accounts and bad debt expense for estimated losses resulting from non-payment for accounts receivable for services from patients. TJU accounts for uncollectible accounts receivable balances from third-party commercial insurers as reductions to net patient service revenue rather than bad debt expense. Management routinely evaluates account collection history, economic conditions, and trends in health care coverage in determining the sufficiency of the allowance for doubtful accounts and provision for bad debts. Accounts receivable are written off against the allowance for doubtful accounts when management determines that recovery is unlikely and collection efforts cease. The allowance for doubtful accounts increased by the bad debt expense and other adjustments of $114.1 million and decreased due to writeoffs of $102.5 million in Grants and Contracts Grant and contract revenue primarily represents research activity sponsored by governmental and private sources. TJU recognized operating revenues based on direct expenditures and related facilities and administrative cost rate (F&A) as follows for the year ended June 30, 2016 (in thousands): Direct Expenditures F&A Cost Total Federal agencies $43,939 $18,821 $62,760 Non-federal agencies 24,394 4,435 28,829 Total $68,333 $23,256 $91,589 TJU s primary source of federal sponsored support is the Department of Health and Human Services. Facilities and administrative costs recovered on federally sponsored programs are generally based on predetermined rates negotiated with the Federal Government while recovery on all other sponsored projects is based on rates negotiated with the respective sponsor. Funds received for sponsored research activity are subject to audit. Based upon information currently available, management believes that any liability resulting from such audits will not materially affect the financial position or operations of TJU. Tuition and Fees TJU provides financial aid to eligible students in the form of direct grants, loans and employment during the academic year. Tuition and fees have been reduced by certain grants and scholarships in the amount of $9.4 million in Contributions Contributions, including unconditional promises to donate cash and other assets, are recognized at fair value on the date of receipt, recognized as revenue in the period received and are reported as increases in the appropriate net asset category based on donor restrictions. All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Pledges received which are to be paid in future periods, and contributions restricted by the donor for specific purposes are reported as temporarily 11

14 Notes to Consolidated Financial Statements restricted or permanently restricted support that increases those net asset classes. When a donor restriction expires, that is, when a time restriction ends or stipulated purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets. Collections TJU capitalizes works of art, historical treasures, or similar assets (collectively, Collections). Collections are recorded at fair value at the date of the contribution. Collections of approximately $5.7 million and $5.6 million are included in other noncurrent assets on the consolidated balance sheets at. Investments Investments are stated at fair value. The fair value of all debt and equity securities with a readily determinable fair value are based on quotations obtained from national securities exchanges. The alternative investments, which are not readily marketable, are carried at estimated fair values as provided by the investment managers. As a practical expedient, TJU is permitted under the Fair Value Measurement standard to estimate the fair value of an investment in an investment company at the measurement date using the reported net asset value (NAV). Adjustment is required if TJU expects to sell the investment at a value other than NAV or if the NAV is not calculated in accordance with US generally accepted accounting principles (US GAAP). TJU s investments are valued based on the most current NAV adjusted for cash flows when the reported NAV is not at the measurement date. This amount represents fair value of these investments at June 30, TJU performs additional procedures including due diligence reviews on its alternative investments and other procedures with respect to the capital account or NAV provided to ensure conformity and compliance with valuation procedures in place, the ability to redeem at NAV at the TJU measurement date and existence of certain redemption restrictions at the measurement date. TJU reviews the values as provided by the investment managers and believes that the carrying amount of these investments is a reasonable estimate of fair value. Because alternative investments are not readily marketable, their estimated values are subject to uncertainty and therefore may differ from the value that would have been used had a ready market for such investments existed. The Commonwealth of Pennsylvania has not adopted the Uniform Management of Institutional Funds Act (UMIFA) or the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Rather, the Pennsylvania Act governs the investment, use and management of TJU s endowment funds. The Pennsylvania Act allows a nonprofit to elect to appropriate for expenditure an investment policy that seeks the long-term preservation of the real value of the investments. In accordance with the Pennsylvania Act, the objectives of TJU s investment policy is to provide a level of spendable income which is sufficient to meet the current and future budgetary requirements of TJU and which is consistent with the goal of protecting the purchasing power of the investments. The calculation of the spendable income for endowment funds of TJU is based on 75% of the prior year spendable income and 25% of the calculated two year average of the endowment market value multiplied by 4.75%; the sum of which is adjusted by an inflation factor. The calculation of the spendable income for endowment funds of AH is based on 6% of the calculated three year average of the endowment market value. 12

15 Notes to Consolidated Financial Statements TJU s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and investments. These funds are held in various high-quality financial institutions managed by TJU personnel and outside advisors. TJU maintains its cash and cash equivalents in financial institutions, which at times exceed federally insured limits. Investment in Assets of Affiliated Foundation The Methodist Hospital Foundation (the Foundation ), a separate corporation not under the control of TJU, accepts gifts and bequests and engages in fundraising activities for the benefit of Methodist Hospital. The Board of Trustees of the Foundation, at its sole discretion, is authorized to contribute Foundation funds to Methodist Hospital. Underlying investments held by the Foundation with restrictions benefiting only Methodist Hospital amounting to $8.6 million and $8.8 million at, respectively, are presented in the consolidated balance sheets. While the sole purpose of the Foundation is to support Methodist Hospital, this accounting treatment does not imply that the Foundation s assets or investment income are those of TJU. The consolidated balance sheets do not reflect or establish the legal relationship, agency or otherwise, between the Foundation and TJU, or any right to assets owned by the Foundation. The by-laws of the Foundation provide that all assets held by it shall not be subject to attachments, execution, or sequestration for any debt, obligation or liability of TJU or any other person or entity. In particular, the Foundation is not party to or obligated by any debt instrument of TJU, and assets owned by the Foundation are not subject to the lien of any such debt instrument. Split Interest Agreements TJU s split-interest agreements consist of charitable gift annuities, pooled income funds, charitable remainder trusts and a charitable lead trust. Contribution revenue for charitable gift annuities and charitable remainder trusts is recognized at the date the agreement is established, net of the liability recorded for the present value of the estimated future payments. Contribution revenue for pooled income funds is recognized upon establishment of the agreement at the fair value of the estimated future receipts discounted for the estimated time period to complete the agreement. Loans Receivable from Students Many students receive financial aid that consists of scholarship grants, work-study opportunities and student loans. TJU participates in various federal revolving loan programs, in addition to administering institutional loan programs. Student loan programs are funded by donor contributions, other institutional sources, and governmental programs, primarily the Federal Perkins Loan Program. The amounts received from the federal government s portion of federal loan programs are ultimately refundable to the federal government and are reported as a liability on TJU s consolidated balance sheets as federal student loan advances. Determination of the fair value of student loans receivable is not practicable. 13

16 Notes to Consolidated Financial Statements Student loans receivable, net of allowance for doubtful accounts, consists of the following at (in thousands): Direct student loans $20,663 $20,476 Allowance for doubtful accounts (3,896) (3,796) Net 16,767 16,680 Federally-sponsored student loans 10,043 9,737 Total $26,810 $26,417 TJU assesses the adequacy of the allowance for doubtful accounts related to direct student loans receivable by performing evaluations of the student loan portfolio, including a review of the aging of the student loan receivable balances and of the default rate by loan program in comparison to prior years. The level of allowance is adjusted based on the results of this analysis. The federally-sponsored student loans receivable represents amounts due from current and former students under various Federal Government loan programs. For direct student loans it is TJU s policy to reserve 100% of a loan when the loan is delinquent 2 years or more; a reserve of 85% is recorded for loans delinquent more than 270 days and less than 2 years. TJU considers the allowance recorded at June 30, 2016 to be reasonable and adequate to absorb potential credit losses inherent in the student loan portfolio. Land, Buildings, and Equipment, net Land, buildings, and equipment are carried at cost on the date of acquisition or fair value on the date of donation in the case of gifts. Depreciation expense is computed on a straight-line basis over the estimated useful lives of the assets, excluding land. All gifts of land, buildings, and equipment are recorded as unrestricted nonoperating activities unless explicit donor stipulations specify how the donated assets must be used. Interest expense on borrowed funds used for construction, net of interest income earned on unexpended amounts, is capitalized during the construction period. 14

17 Notes to Consolidated Financial Statements Goodwill Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. The determination of the estimated fair value of net assets acquired requires managements s judgment and often involves the use of significant estimates and assumptions. When necessary, TJU consults with external advisors to assist in the determination of fair value. The change in the carrying amount of goodwill for the year ended June 30, 2016 is as follows: Balance as of July 1, 2015 Goodwill $26,244 Accumulated impairment losses (280) 25,964 Goodwill acquired during ,512 Impairment losses (165) Balance as of June 30, 2016 Goodwill 160,756 Accumulated impairment losses (445) $160,311 Conditional Asset Retirement Obligation A conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. TJU has asset retirement obligations arising from regulatory requirements to perform certain asset retirement activities at the time that certain buildings and equipment are disposed of or renovated. A conditional asset retirement obligation of $5.2 million and $5.4 million as of, respectively, is included within other noncurrent liabilities in the consolidated balance sheets. Reclassifications Certain amounts in the prior year have been reclassified to conform to the current year presentation. New Accounting Standards The Financial Accounting Standards Board ("FASB") issued an accounting standard update in May 2014 regarding the accounting for and disclosure of revenue recognition. Specifically, the update outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance was effective for annual periods beginning after December 15, 2016, which allowed for full retrospective adoption of prior period data or a modified retrospective adoption. Early adoption was not permitted. In July 2015, the FASB issued an update to delay the effective date of the new revenue standard by 15

18 Notes to Consolidated Financial Statements one year, or, in other words, to be effective for annual and interim periods beginning after December 15, Entities will be permitted to adopt the new revenue standard early, but not before the original public organization effective date. TJU is currently evaluating the effects of this guidance. The FASB issued an accounting standard update in May 2015 regarding the required disclosures for entities that elect to measure the fair value of certain investments using the net asset value per share (or its equivalent) practical expedient in accordance with the fair value measurement authoritative guidance. The update removes the requirement to categorize within the fair value hierarchy investments using the NAV as a practical expedient, and also, limits the requirement to make certain other disclosures, for all such investments. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and should be applied on a retrospective basis for the periods presented. Early adoption is permitted. TJU adopted this standard in 2016 and separately reports these investments within the fair value hierarchy footnote disclosure. The FASB issued an accounting standard update in February 2016 regarding the accounting for leases. The update requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting guidance. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. TJU is currently evaluating the effects of this guidance. The FASB issued an accounting standard update in August 2016 regarding the presentation of net asset classifications and information presented in financial statements and notes about a not-for-profit entity s liquidity, financial performance, and cash flows. The main provisions of this update include reducing the presentation of net asset classes from three to two, without donor restrictions and with donor restrictions, enhanced disclosures on net assets, qualitative information on the management of liquid resources and quantitative information on financial assets to meet cash needs. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. TJU is currently evaluating the effects of this guidance. 2. BUSINESS COMBINATION On June 30, 2016 TJUH acquired a controlling interest in ROSH, a surgical specialty hospital located in Bensalem, Pennsylvania. At June 30, 2015, TJUH held a 15% noncontrolling interest. On June 30, 2016 TJUH acquired an additional 39% ownership interest for $66.7 million. The purchase included cash acquired of $4.1 million and assumed debt of $1.2 million. The acquisition of ROSH is an effort by the various healthcare organizations of TJU to increase access to high quality care to patients in the most cost effective, clinically appropriate setting. The accompanying consolidated balance sheet at June 30, 2016 includes the accounts of ROSH. TJU allocated $9.0 million of the purchase price to a tradename, which was assigned an indefinite life. The goodwill of $132.6 million arising from the acquisition consists of the excess of the estimated aggregate value of ROSH over the 16

19 Notes to Consolidated Financial Statements estimated fair value of the identifiable net assets, noncontrolling interest and existing TJUH equity interest. The enterprise value of ROSH was estimated using the income approach under a controlling premise of value. The valuation of the acquisition date fair value of TJUH s previously held 15% noncontrolling interest and other noncontrolling interests is based upon their proportionate share of the value of the aggregate equity less a discount for lack of control and marketability. The determination of the applicable discounts related to noncontrolling interests considered premiums paid to acquire control of comparable public companies. As of June 30, 2016, the allocation of the purchase price for the ROSH acquisition has not been finalized and the one-year measurement period has not ended. Further adjustments may be necessary as a result of TJU s assessment of additional information related to the fair value of assets acquired and liabilities assumed. The following table summarizes the consideration paid for ROSH and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the noncontrolling interest in ROSH (in thousands): Consideration: Cash $66,749 Fair value of equity interest in ROSH held before the acquisition 23,106 $89,855 Recognized amounts of identifiable asets acquired and liabilities assumed: Cash and cash equivalents $4,062 Accounts receivable 6,774 Inventory 1,134 Other assets 1,131 Equipment and leasehold improvements 11,369 Tradename 9,000 Liabilities (5,391) 28,079 Noncontrolling interest (70,856) Goodwill 132,632 $89,855 Acquisition related costs included in consolidated statement of operations $410 17

20 Notes to Consolidated Financial Statements 3. NET ASSETS Restricted net assets as of are categorized as follows (in thousands): Temporarily restricted Pledges Gifts restricted for operating or capital purposes and loan funds Undistributed net gains on permanently restricted Assets $92,957 $67, , ,790 94, ,431 Total Temporarily restricted 302, ,446 Permanently restricted assets 291, ,711 Total restricted net assets $593,376 $564,157 Temporarily restricted net assets are available for the following purposes at June 30, 2016 and 2015 (in thousands): University operations $14,218 $12,245 Clinical operations 90,183 96,098 Education and research 197, ,103 Total temporarily restricted net assets $302,327 $280,446 Permanently restricted net assets are restricted to investment in perpetuity, the income from which is expendable to support the following at (in thousands): University operations $9,053 $8,550 Clinical operations 88,658 88,919 Education and research 193, ,242 Total permanently restricted net assets $291,049 $283,711 18

21 Notes to Consolidated Financial Statements 4. ASSETS WHOSE USE IS LIMITED Assets whose use is limited are presented in the consolidated balance sheets at June 30, 2016 and 2015 consist of the following (in thousands): Board designated funds for plant replacement and expansion $128,153 $126,113 Board designated funds for self-insurance arrangements 19,617 19,252 Debt service funds Women s Board and Medical Staff funds Restricted for capital purposes 12,274 7,100 Deferred compensation fund 1,454 1,054 Escrow account physician practice acquisition Escrow account-inspira Health Network collaboration 10,034 10,008 Total $172,762 $164,520 Less current portion (19,952) (19,595) Noncurrent portion $152,810 $144, INVESTMENTS Investments are presented in the consolidated balance sheets under the following classifications (in thousands): Short-term investments $1,055,436 $1,029,742 Assets whose use is limited, current 19,952 19,595 Long-term investments 895, ,205 Assets whose use is limited, noncurrent 152, ,925 $2,124,049 $2,124,467 19

22 Notes to Consolidated Financial Statements A summary of investments at is as follows (in thousands): Cash and cash equivalents $36,740 $55,380 Equity securities 5,876 5,992 Fixed income securities 719, ,224 Funds: Global equity 225, ,961 Fixed income 236, ,067 Real estate 11,118 10,050 Other mutual funds 434, ,193 Private equity 111,053 87,139 Real estate 23,143 22,537 Hedge funds 162, ,398 External trusts 97, ,512 Investments subject to equity method and other 60,186 71,014 $2,124,049 $2,124,467 Most private investment funds (private equity, real asset funds) are structured as closed-end, commitment-based investment funds where TJU commits a specified amount of capital upon inception of the fund (i.e., committed capital) which is then drawn down over a specified period of the fund's life. Such funds generally do not provide redemption options for investors and, subsequent to final closing, do not permit subscriptions by new or existing investors. Accordingly, TJU generally holds interests in such funds for which there is no active market, although in some situations, a transaction may occur in the "secondary market" where an investor purchases a limited partner s existing interest and remaining commitment. The fund managers may value the underlying private investment based on an appraised value, discounted cash flow, industry comparable or some other method. TJU values these limited partnerships at NAV. Unlike private investment funds, hedge funds are generally open-end funds as they typically offer subscription and redemption options to investors. The frequency of such subscriptions or redemptions is dictated by such fund's governing documents. The amount of liquidity provided to investors in a particular fund is generally consistent with the liquidity and risk associated with the underlying portfolio (i.e., the more liquid the investments in the portfolio, the greater the liquidity provided to the investors). The fund managers invest in a variety of securities which may not be quoted in an active market. Illiquid investments may be valued based on appraised value, discounted cash flow, industry comparable or some other method. The methods described above may produce a fair value calculation that may not be indicative of a net realized value or reflective of future fair values. Furthermore, while TJU believes its 20

23 Notes to Consolidated Financial Statements valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to demine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. TJU s direct investments in equity and fixed income securities are considered liquid assets because they are traded on established markets with enough participants to absorb sale transactions without materially impacting the current price of the asset. The underlying assets in TJU s investments in equity and fixed income funds are traded on established markets with enough participants to absorb sale transactions without materially impacting the current price. The funds are priced daily and provide next day availability on all transaction requests. TJU s investment in real asset funds provide for monthly liquidity on transaction requests. Private equity investments have limited liquidity or redemption options. Liquidity for private investments can be accomplished via a secondary sale transaction. When available, distributions typically take place on a quarterly basis. TJU has made commitments to various private equity and real asset limited partnerships. The total amount of unfunded commitments is $113.1 million and $112.8 million at, respectively. TJU expects these funds to be called over the next 3 to 5 years Private equity $110,858 $109,605 Real estate 2,283 3,173 $113,141 $112,778 Hedge funds provide quarterly liquidity with 60 to 90 days notice prior to the quarter s end limiting TJU s ability to respond quickly to changes in market conditions. Liquidity of individual hedge funds vary based on various factors and may include "gates", "holdbacks" and "side pockets" imposed by the manager of the hedge fund, as well as redemption fees which may also apply. Depending on the redemption options available, it may be possible that the reported NAV represents fair value based on observable data such as ongoing redemption and/or subscription activity. In the cases of a holdback, TJU considers the significance of the holdback, its impact on the overall valuation and the associated risk that the holdback amount will not be fully realized based on a prior history of adjustments to the initially reported NAV. For those private equity, real estate limited partnerships, or hedge-fund of fund transactions where valuations dated on the last business day of the calendar year are available, the valuations will be based on the most recent capital account statement (monthly/quarterly), adjusted for interim cash flow activity (contributions, distributions, fees). Investments subject to the equity method and other includes $43.8 million and $54.5 million for TJU s investment in Five Pointe Insurance Company at, respectively. 21

24 Notes to Consolidated Financial Statements Beneficial interests in perpetual trusts, which are administered by independent trustees, are mainly comprised of domestic and international equity securities and domestic fixed income securities. A summary of investments held under split-interest agreements is as follows at June 30, 2016 and 2015 (in thousands): Charitable gift annuities $13,380 $14,338 Pooled income funds Charitable lead trust 1,091 1,251 Charitable remainder trusts 9,982 10,492 $24,463 $26,092 Investment income, realized gains and unrealized gains included in the consolidated statements of operations and changes in net assets are comprised of the following in 2016: Investment income included in operating income: Interest and dividends $9,218 Endowment payout 13,632 Net realized gains on sales of investments 1,913 Bucks County Specialty Hospital, LLC 1,823 Delaware Valley Accountable Care Organization (2,453) $24,133 Investment income included in nonoperating income: Interest and dividends $15,701 Endowment payout (13,632) Gain on investment in ROSH acquisition 21,906 Net realized and unrealized losses (3,891) $20,084 Total $44,217 22

25 Notes to Consolidated Financial Statements 6. ENDOWMENT FUNDS TJU s endowments consist of 840 individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with each of these groups of funds are classified and reported based upon the existence or absence of donor-imposed restrictions. At June 30, 2016, the endowment net asset composition by type of fund consisted of the following (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted funds ($2,444) $145,550 $286,281 $429,387 Quasi-endowment funds 358, ,039 Total funds $355,595 $145,550 $286,281 $787,426 Changes in endowment net assets for the fiscal year ended June 30, 2016, consisted of the following (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets, beginning of year $271,151 $156,519 $280,363 $708,033 Investment return: Investment income 392 1,139 1,531 Net appreciation (depreciation) (realized and unrealized) 1,614 3,313 (4,455) 472 Total investment gain (loss) 2,006 4,452 (4,455) 2,003 Contributions 588 1,625 10,380 12,593 Appropriation of endowment assets for expenditure (13,633) (12,876) - (26,509) Transfers of University resources and matching gifts 95,483 (4,170) (7) 91,306 Endowment net assets, end of year $355,595 $145,550 $286,281 $787,426 23

26 Notes to Consolidated Financial Statements At June 30, 2015, the endowment net asset composition by type of fund consisted of the following (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted funds ($1,520) $156,519 $280,363 $435,362 Quasi-endowment funds 272, ,671 Total funds $271,151 $156,519 $280,363 $708,033 From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor requires TJU to retain as a fund of perpetual duration. Shortfalls of this nature, which are reported in unrestricted net assets, were $2.4 million and $1.5 million as of, respectively. These shortfalls resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by TJU. 7. FAIR VALUE MEASUREMENT The fair value hierarchy 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 unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that TJU has the ability to access at the measurement date; Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; Level 3 Inputs that are not currently observable. Inputs are used in applying the various valuations techniques and broadly refer to the assumption that market participants use to make valuation decisions. An investments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes observable requires significant judgment. The categorization of an investment within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to TJU s perceived risk of that instrument. 24

27 Notes to Consolidated Financial Statements Level 1 - Investments whose values are based on quoted market prices in active markets, are therefore classified within Level 1. Typically, securities traded on the NYSE, AMEX, NASDAQ and other major exchanges will be classified as Level 1. These assets include active listed equities, certain U.S. government obligations, mutual funds and certain money market securities. For investments regularly traded on any recognized securities or commodities exchange, the closing price on such exchange (or, if applicable, as reported on the consolidated transactions reporting system) on the last trading date at the end of the fiscal year is used. In the case of securities regularly traded in the over-the-counter market, the closing bid quotations for long positions and the closing asked quotation for short positions on the trading date ending on or preceding the end of the fiscal year is used. Level 1 Liquidity Daily based on quoted market value at time of transaction or at daily NAV. Level 2 - Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. They include investment- common trust equity and fixed income funds, corporate grade bonds, high yield bonds and certain mortgage products. These assets are valued based on quoted market prices in active markets or dealer quotations and are categorized as Level 2. There were no transfers between Levels 1 and 2 during Level 2 Liquidity Daily based on quoted market value at time of transaction or at daily NAV. Level 3- Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently or not at all. Level 3 instruments include externally held trust funds. Level 3 Liquidity No liquidity available as the assets are mainly comprised of donor restricted externally held trust funds of which TJU has a perpetual interest in the annual income stream. The fair value of TJU s interest rate swaps related to its debt obligations are based on thirdparty valuations independent of the counterparties. As the fair values of interest rate swaps are determined based on inputs that are readily available or can be derived from information available in public markets, TJU has categorized interest rate swaps as Level 2. The following table presents the short term and long term investments, and assets whose use is limited carried on the consolidated balance sheet by level within the valuation hierarchy or NAV as of June 30, 2016 (in thousands): 25

28 Notes to Consolidated Financial Statements Level 1 Level 2 Level 3 NAV Total Cash and cash equivalents $36,740 $0 $0 $0 $36,740 Equity securities 3, ,500 5,876 Fixed income securities 156, , ,467 Funds: Global equity , ,216 Fixed income - 118, , ,746 Real asset - 11, ,118 Other mutual funds 341,318 7,861-84, ,059 Private equity , ,053 Real estate ,143 23,143 Hedge funds , ,915 External trusts ,530-97,530 Total $537,962 $925,705 $97,530 $502,666 $2,063,863 Investments not subject to fair value leveling or fair value at NAV at June 30, 2016 totaled $60.2 million. The following table presents the other liabilities carried on the consolidated balance sheet by level within the valuation hierarchy as of June 30, 2016 (in thousands): Level 1 Level 2 Level 3 Total Interest rate swaps - $43,609 - $43,609 The following table presents the short term and long term investments, and assets whose use is limited carried on the consolidated balance sheet by level within the valuation hierarchy or NAV as of June 30, 2015 (in thousands). Certain amounts have been reclassified to conform to the current year presentation. Level 1 Level 2 Level 3 NAV Total Cash and cash equivalents $55,380 $0 $0 $0 $55,380 Equity securities 3, ,500 5,992 Fixed income securities 181, , ,224 Funds: Global equity - 248, ,961 Fixed income - 108, , ,067 Real asset - 10, ,050 Other mutual funds 342,244 7,392-85, ,193 Private equity ,139 87,139 Real estate ,537 22,537 Hedge funds , ,398 External trusts - 2, , ,512 Total $582,559 $887,370 $100,225 $483,299 $2,053,453 26

29 Notes to Consolidated Financial Statements Investments not subject to fair value leveling or fair value at NAV at June 30, 2015 totaled $71.0 million. The following table presents the other liabilities carried on the consolidated balance sheet by level within the valuation hierarchy as of June 30, 2015 (in thousands): Level 1 Level 2 Level 3 Total Interest rate swaps - $29,826 - $29,826 The following table include a roll-forward of the amounts for the year ended June 30, 2016 (in thousands) for investments classified within Level 3. The classification of an investment within Level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement. External Trusts Balance at July 1, 2015 $100,225 Acquisitions - Dispositions - Realized gain/(loss), net - Unrealized gain/(loss), net (4,982) Transfers in 2,287 Balance at June 30, 2016 $97, PLEDGES RECEIVABLE A summary of pledges receivable is as follows at, respectively (in thousands): Unconditional promises expected to be collected in: Less than one year $29,720 $18,226 One year to five years 67,249 45,147 Over five years 71,600 78, , ,373 Less: unamortized discount and allowance for doubtful accounts (39,926) (40,458) $128,643 $100,915 27

30 Notes to Consolidated Financial Statements The discount rate ranges from 0.9% to 5.5%. TJU s largest pledge comprises 55% and 72% of the pledge receivable at, respectively. At June 30, 2016 TJU was the recipient of a conditional pledge of $2.6 million for the expansion of a clinical program. 9. LAND, BUILDINGS AND EQUIPMENT Land and land improvements $116,724 $115,848 Buildings and building improvements 1,779,815 1,731,186 Equipment 1,378,811 1,285,717 Leasehold improvements 98,997 65,962 Construction in progress 92,674 33,473 Less: accumulated depreciation (1,998,034) (1,842,273) Total land, buildings and equipment, net $1,468,987 $1,389,913 TJU uses straight-line depreciation over the assets estimated lives, which are as follows: Land improvements Buildings and building improvements Equipment Leasehold improvements years years 3-15 years 5-20 years 28

31 Notes to Consolidated Financial Statements 10. LONG-TERM OBLIGATIONS Interest Rate at Final Maturity June 30, TJU Fixed rate obligations: 2006 Series A Revenue Bonds % $25,500 $25,500 Unamortized premium and issue costs Series B Revenue Bonds % % 35,510 40,405 Unamortized premium and issue costs Series Revenue Bonds % % 75,000 75,000 Unamortized premium and issue costs (256) (270) 2012 Series Revenue Bonds % % 40,950 41,320 Unamortized premium and issue costs 2,281 2, Series A Revenue Bonds %-5.25% 301, ,805 Unamortized premium and issue costs 23,025 23,928 Total fixed rate obligations 505, ,508 Variable rate obligations: 2015 Series B Revenue Bonds % 60,000 60,000 Unamortized issue costs (563) (582) 2015 Series C Revenue Bonds % 35,125 8,885 Unamortized issue costs (144) (157) 2015 Series D Revenue Bonds % 34,875 8,820 Unamortized issue costs (143) (156) 2015 Series E Revenue Bonds % 35,125 8,880 Unamortized issue costs (144) (157) 2015 Series F Revenue Bonds % 34,875 8,820 Unamortized issue costs (143) (156) 2015 Series G Revenue Bonds % 20,950 5,965 Unamortized issue costs (86) (94) 2015 Series H Revenue Bonds % 29,050 29,050 Unamortized issue costs (123) (130) Total variable rate obligation 248, ,988 Total Revenue Bonds 753, ,496 Capital lease obligations ,947 7,812 Other , Total TJU 769, ,348 Abington Health Fixed rate obligations: 1993 Series A Revenue Bonds % % 5,930 8,790 Unamortized premium and issue costs (114) (134) 2009 Series A Revenue Bonds % % 110, ,280 Unamortized premium and issue costs (537) (600) 2012 Series A Revenue Bonds % % 138, ,415 Unamortized premium and issue costs 9,976 11, , ,071 Variable rate obligations: 2012 Series B Revenue Bonds % 50,000 50,000 Total Revenue Bonds 314, ,071 Other Total Abington Health 314, ,312 Total $1,084,520 $977,660 29

32 Notes to Consolidated Financial Statements All Revenue bonds were issued by certain financing authorities as limited obligations of the authorities payable from amounts received under loan agreements with TJU and AH, respectively. The bonds are subject to optional redemption prior to maturity on specified dates at a price equal to 100% of the principal amount, plus any accrued interest. The bond agreements contain certain covenants, including financial covenants that require TJU to generate net revenue (as defined) at least equal to 110% of maximum annual debt service requirements. TJU was in compliance with this financial covenant requirement at June 30, The Series 2015 A through H Revenue Bonds were issued in February The proceeds provided funds to refinance the Series 2008 A and B Revenue Bonds, Series 2014 A and B Notes and to provide funds for certain capital projects. The Series 2015 C through G Revenue Bonds were structured as drawdown bonds and purchased by certain financial institutions. These financial institutions agreed to advance funds available to be drawn through September 1, 2016 up to the maximum principal amount. At June 30, 2016, the maximum principal amount of each of the Series 2015 C through G Revenue Bonds has been drawn. Maturities for long-term debt for each of the next five years are as follows (in thousands): 2017 $22, , , , ,179 Thereafter $939,370 TJU had available unsecured lines of credit from various banks of $45.0 million and $47.0 million at, respectively, under which there were no borrowings at, respectively. No compensating balances are required or maintained. 30

33 Notes to Consolidated Financial Statements 11. DERIVATIVE FINANCIAL INSTRUMENTS TJU entered into derivative transactions for the purpose of reducing the impact of fluctuations in interest rates under the terms of various interest rate swap contracts. The fair value of these derivative instruments at in the consolidated balance sheets is as follows (in thousands): Amended / Expiration Date TJU Receives TJU Pays Expiration 2/1/34 67% of United States Dollar LIBOR (one Month) Notional Amount at June 30, 2016 Notional Amount at June 30, % $67,260 $67,260 Balance Sheet Location Fair Value at June 30, 2016 Fair Value at June 30, 2015 Noncurrent liability $10,749 $7,634 Expiration 5/1/18 67% of United States Dollar LIBOR (one Month) 4.542% $15,540 $15,415 Noncurrent liability $999 $1,527 Expiration 9/1/45 67% of United States Dollar LIBOR (one Month) 3.925% $5,103 $5,103 Noncurrent liability $23,726 $14,977 Expiration 5/1/27 68% of United States Dollar LIBOR (one Month) 3.980% $42,200 $42,325 Noncurrent liability $9,174 $8,022 Expiration 5/1/27 Expiration 5/1/27 68% of United States LIBOR (Five Year minus 0.293%) 68% of United States LIBOR (Five Year minus 0.325%) 68% of United States Dollar LIBOR (one Month) 68% of United States Dollar LIBOR (one Month) $73,475 $73,700 $42,200 - Noncurrent liability Noncurrent liability ($719) ($1,777) ($320) ($557) The London InterBank Offered Rate ( LIBOR ) with a one month maturity ranged from 0.19% to 0.45% (average rate of 0.33%) in The LIBOR rate with a the five year maturity ranged from 0.96% to 1.83% (average rate of 1.43%) in A nonoperating loss of $17.6 million is included in the consolidated statement of operations and changes in net assets for the valuation of interest rate swap contracts ($13.8 million) and net settlement payments to counterparties ($3.8 million) in Accumulated losses on interest rate swap contracts of $43.6 million and $29.8 million at, respectively, are reflected in the consolidated balance sheets. 31

34 Notes to Consolidated Financial Statements 12. OPERATING LEASES TJU has lease obligations for buildings, equipment and ambulatory facilities under various operating leases. Lease expenses charged to operations were $45.7 million in At June 30, 2016 the minimum future non-cancelable rental lease commitments are as follows (in thousands): 13. PENSION PLANS 2017 $28, , , , ,485 Thereafter 101,252 $212,394 Retirement benefits are provided to certain employees through direct payments to various funds. Employees not subject to TJU s defined benefit plans may be eligible to participate in one of the following defined contribution arrangements. TJU s share of the cost of these benefits for the year ended June 30, 2016 was as follows (in thousands): Plan Description 2016 TJU faculty and senior 9% to 13% of eligible compensation based administrators upon age $20,104 TJU non-faculty and non-union JUP Abington Health 4.5% of eligible compensation, plus matching contribution of 25% of the first 6% of employee contributions 18,068 10% of eligible compensation for physicians and 3.5% to 5.5% of eligible compensation for non-physicians based upon years of service 14,873 2% to 5% of eligible compensation based upon years of services, plus matching contribution of 50% of the first $2,000 of employee contributions 2,918 $55,963 TJU also has non-contributory defined benefit pension plans for certain full-time employees. The TJU and AH plans are frozen to new entrants. Commensurate with the freeze of each of these plans to new entrants, existing employees that met certain age and years of service 32

35 Notes to Consolidated Financial Statements thresholds were eligible to remain in the plans and continue to earn benefits. Benefits under the non-contributory defined benefit plans are based on the employee s years of service and compensation during the years preceding retirement. Contributions to the plan are designed to meet the minimum funding requirements of the Employee Retirement Income Security Act of The accounting guidance for defined benefit pension plans requires employers to recognize the overfunded or underfunded projected benefit obligation ( PBO ) of a defined benefit pension plan as an asset or liability in the balance sheet. The PBO represents the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. The accounting guidance also requires employers to recognize annual changes in gains or losses, prior service costs, or other credits that have not been recognized as a component of net periodic pension cost through unrestricted net assets.effective beginning with the fiscal year ending June 30, 2017, TJU is changing the method used to calculate service cost and interest cost. The calculation of service cost and projected benefit obligation will utilize a split discount rate approach, where separate discount rates are calculated for determining each based on their respective expected cash flows. Additionally, the calculation of the interest cost will begin to utilize an approach that applies the individual spot rates from the full yield curve against the expected benefit payments for each year rather than using the single equivalent discount rate applied to all future years. This change will be accounted for as a change in accounting estimate that is reflected prospectively. These changes do not impact the calculation of the projected benefit obligation or the discount rate. Gains or losses arising from this change will be deferred into future accounting periods. The components of the net pension plan financial position on the consolidated balance sheets are as follows (in thousands): Change in projected benefit obligation: Benefit obligation, beginning of year $1,271,828 $1,196,082 Service cost 35,428 36,390 Interest cost 57,945 53,021 Net experience loss 157,495 14,725 Benefits paid (52,230) (28,390) Projected benefit obligation, end of year $1,470,466 $1,271,828 Change in plan assets: Fair value of plan assets, beginning of year $982,445 $919,983 Actual return of plan assets 20,087 38,716 Employer contributions 39,063 52,136 Benefit payments (52,230) (28,390) Fair value of plan assets, end of year $989,365 $982,445 Plan funded status ($481,101) ($289,383) 33

36 Notes to Consolidated Financial Statements Amounts recognized in unrestricted net assets consist of: Net actuarial loss $522,608 $329,619 The accumulated benefit obligation at was as follows: Accumulated benefit obligation $1,307,075 $1,136,683 The components of pension expense for the plans for the year ended June 30, 2016 were as follows (in thousands): Service cost $35,428 Interest cost 57,945 Expected return on plan assets (73,501) Amortization of net actuarial loss 17,920 Net periodic benefit cost 37,792 Other changes in plan assets and benefit obligations recognized in unrestricted net assets: Net actuarial loss 210,909 Amortization of net actuarial loss (17,920) Total recognized in unrestricted net assets 192,989 Total recognized in net periodic benefit cost and unrestricted net assets $230,781 The estimated actuarial loss that will be amortized from unrestricted net assets during the upcoming fiscal year is $23.1 million. The average assumptions used to estimate the June 30 pension obligation were as follows: Discount rate 3.86% 4.62% Rate of compensation increase 3.71% 3.78% Expected return on plan assets 7.43% 7.43% 34

37 Notes to Consolidated Financial Statements The average assumptions used to determine periodic benefit costs were as follows: Discount rate 4.63% 4.49% Rate of compensation increase 3.78% 3.07% Expected return on plan assets 7.43% 7.42% A summary of the plans targeted and actual asset allocations are as follows: Targeted Range Percentage of Plan Assets June 30, 2016 Percentage of Plan Assets June 30, 2015 Cash 0-5% 2% 2% Bonds 25-45% 31% 28% Global equity Real estate and other 45-65% 5-10% 62% 5% 64% 6% 100% 100% The portfolios utilize a long-term asset allocation strategy that allows management to rebalance the asset allocation back to target levels on a monthly basis. Short-term compliance with the target ranges can be impacted by the severity of market conditions. The expected long-term rate of return for the plan s assets are based on the historical return of each of the above categories, weighted based on the target allocations for each class. The assets of the defined benefit pension plan are invested in a manner that is intended to preserve the purchasing power of the plan s assets and provide payments to beneficiaries. Thus, a rate of return objective of inflation plus 5% is targeted. TJU expects to contribute $33.8 million during fiscal year Projected benefit payments for the next five years are as follows (in thousands): 2017 $39, , , , ,398 35

38 Notes to Consolidated Financial Statements The following table presents the plan assets by level within the valuation hierarchy, as discussed in Note 6, as of June 30, 2016 (in thousands): Level 1 Level 2 Level 3 NAV Total Cash and cash equivalents $9,275 $6,415 $0 $0 $15,690 Equity securities 310, , ,628 Fixed income securities 1,268 69, , ,570 Funds: Global equity - 224, ,730 Fixed income - 89, ,242 Private equity ,184 2,886 Real estate ,069 1,069 Hedge funds ,550 48,550 Total $321,311 $389,615 $0 $278,439 $989,365 The following table presents the plan assets by level within the valuation hierarchy, as discussed in Note 6, as of June 30, 2015 (in thousands). Certain amounts have been reclassified to conform to the current year presentation. Level 1 Level 2 Level 3 NAV Total Cash and cash equivalents $15,033 $4,161 $0 $0 $19,194 Equity securities 301, , ,665 Fixed income securities , , ,043 Funds: Global equity - 249, ,636 Fixed income - 74, ,783 Private equity 2, ,604 4,697 Real estate ,154 1,154 Hedge funds ,273 55,273 Total $319,017 $387,834 $0 $ 275,594 $982,445 Participation in Multiemployer Defined Benefit Pension Plan TJU is a participating employer in The Pension Fund for Hospital and Health Care Employees Philadelphia and Vicinity (the Pension Fund), a jointly-trusted multiemployer defined benefit pension plan. The Pension Fund is operated for the benefit of Chapter 1199C of the American Federation of State, County and Municipal Employees (the Union). Information about the Pension Fund and the University s participation is summarized as follows. The employer identification number for the Pension Fund is At the date the financial statements were issued Form 5500 was not available for the plan years ending in TJU s contribution to the Pension Fund was $6.2 million for the year ended June 30, 36

39 Notes to Consolidated Financial Statements The contributions represent approximately 28% of the contributions to the Pension Fund. A six year collective-bargaining agreement was approved by the Union effective July 1, TJU contributions as a percentage of covered payroll to the Pension Fund over the remaining term of the agreement is as follows: % % For the Plan Years beginning January 1, 2014 and January 1, 2015, the Pension Fund was determined to be in endangered status (also referred to as yellow zone status) under the Pension Protection Act of Accordingly, the Pension Fund is subject to a funding improvement plan. The zone status is based on information that TJU received from the plan and is certified by the plan s actuary. Among other factors, plans in the yellow zone are generally less than 80 percent funding. At January 1, 2015, the most recent date for which such information is available, the projected benefit obligation of the Pension Fund exceeded the plan assets by $214.6 million. 14. PROFESSIONAL LIABILITY CLAIMS TJU, TJUHS and AH maintain professional liability insurance under both self-insured and alternative risk financing insurance programs for the distinct services each provides. For all self-insured programs TJU, TJUHS and AH accrue for estimated retained risk liability arising from both asserted and unasserted claims. The estimate of liability is based upon an analysis of historical claims data as prepared by independent actuaries. The professional liability insurance program for TJU and TJUHS is administered through a policyholder-owned, Vermont-domiciled, risk retention group, the MLRRG. For the professional liability coverage only, the MLRRG is 100% reinsured by a non-profit captive protected cell insurance company, Five Pointe, domiciled in Delaware. TJU holds a 49% ownership interest in MLRRG and TJUHS holds a 49% ownership interest in Five Pointe. The remaining ownership interest in each entity is held by other regional non-profit hospitals and/or health systems. The professional liability insurance program for AH is administered through a policyholderowned, Vermont-domiciled, risk retention group, Cassatt RRG ( CRRG ). CRRG is owned by various regional non-profit hospitals including AH. AH holds a 16.7% ownership interest in CRRG. CRRG reinsures with Cassatt Insurance Company, LTD which is owned by the other regional non-profit hospitals, including AH, and incorporated as an insurance company under the laws of Bermuda. For both TJUHS and AH the first ( primary ) layer of coverage is claims-made coverage with limits of $500,000 per medical incident and $2,500,000 annual aggregate per hospital and $500,000 per medical incident and $1,500,000 annual aggregate per physician. The limits for 37

40 Notes to Consolidated Financial Statements this primary coverage layer are statutorily prescribed in Pennsylvania. In addition for TJUHS, a $1,000,000 per medical incident and $3,000,000 annual aggregate limit is provided for scheduled dentists, as well as physicians and residents practicing in Delaware and New Jersey. At June 30, 2016, TJUHS non-healthcare provider entities are provided with a shared $1,000,000 per incident and $3,000,000 annual aggregate limit of liability. The second layer of professional liability coverage for TJUHS and AH is provided through Pennsylvania s Medical Care Availability and Reduction of Error Fund (the MCARE Fund ). This second layer, required by statute, consists of coverage with limits of $500,000 per claim and $1,500,000 annual aggregate per hospital and per employed physician/resident at June 30, The annual assessments for MCARE Fund coverage are based on the schedule of occurrence rates approved by the Insurance Commissioner of Pennsylvania for the Pennsylvania Professional Liability Joint Underwriting Association multiplied by an annual assessment percentage. This assessment is recognized as an expense in the period incurred. No provision has been made for future MCARE Fund assessments as the unfunded portion of the MCARE Fund liability cannot be reasonably estimated. For TJUHS, liabilities for potential losses in excess of the primary and MCARE layers up to $5,000,000 each medical incident and $5,000,000 aggregate retention excess of a $7,000,000 each and every medical incident retention are based on actuarially-determined estimates, which reflect a 65% confidence level and a 3% discount rate for 2016 and These estimates are based on historical information along with certain assumptions about future events. Changes in assumptions for such considerations as medical costs and actual experience could cause these estimates to change. TJUHS maintains claims-made excess catastrophic professional liability insurance coverage through Five Pointe in the amount of $95,000,000 per medical incident and $95,000,000 annual aggregate attaches excess of a $12,000,000 each and every medical incident retention. The attachment point of the excess professional liability insurance coverage decreases to $7,000,000 each and every medical incident after a $5,000,000 aggregate retention is exhausted excess of the $7,000,000 each and every medical incident retention. The retention amounts are inclusive of the primary and MCARE layers of coverage. For TJU s miscellaneous professional liability exposure the excess professional liability insurance coverage attaches excess of $1,000,000 per claim and $3,000,000 annual aggregate. Five Pointe reinsured 100% of this risk to seven currently A-rated insurers (ACE, XL, Lloyd s Syndicates, Berkley, Zurich, Endurance, and Swiss Re). A separate limit of $95,000,000 per occurrence and $95,000,000 aggregate is also maintained to provide liability insurance coverage excess of the primary general, auto, employers and aviation liability coverages. For AH, liabilities for potential professional liability losses in excess of the primary and MCARE layers, Cassatt Insurance Company provides coverage up to a $4,000,000 claim limit and through reinsurance provides layered excess professional liability coverage of 38

41 Notes to Consolidated Financial Statements $15,000,000 per claim with a $45,000,000 annual aggregate. In addition, CRRG provides an umbrella liability policy with limits of $49,000,000 per occurrence and $49,000,000 annual aggregate for the general, auto, employers and aviation liability exposures. The excess professional and umbrella policies coverage limits are shared with the various regional nonprofit hospital owners of CRRG and Cassatt Insurance Company Ltd. The MLRRG provides a $2,000,000 per occurrence and $4,000,000 annual aggregate general liability coverage limit for TJU and TJUHS. The MLRRG retains 100% of the general liability coverage exposure. CRRG provides a $1,000,000 per occurrence and $2,000,000 annual aggregate general liability coverage limit for AH. For MLRRG the premiums charged for the primary professional and general liability layers of coverage are determined by an independent actuary, based on loss and loss adjustment expense experience and other factors, at a 65% confidence level and a 3% discount rate for 2016 and 2015 and include a charge for premium tax and operating expenses. For CRRG the premiums charged for the primary professional and general liability layers of coverage are determined by an independent actuary, based on loss and loss adjustment expense experience and other factors, at an expected level and a 3.5% discount rate for 2016 and TJU has accrued professional liability claims of $382.6 million and $362.7 million at June 30, 2016 and 2015, respectively, of which $42.7 million and $51.5 million were current. The interest rates used to discount malpractice claims ranged from 3.0% to 3.5% at June 30, 2016 and Anticipated insurance recoveries associated with these liabilities for June 30, 2016 and 2015 is $169.4 and $166.0 million, respectively. 15. WORKERS COMPENSATION CLAIMS TJU is self-insured for its workers compensation exposures. TJU accrues for its workers compensation liability based upon actuarial estimates using discount rates ranging from 3% to 3.5%. Accrued workers compensation liabilities were $28.6 million and $30.3 million at, respectively. These amounts are presented in the accompanying consolidated balance sheets. 16. COMMITMENTS AND CONTINGENCIES Letters of Credit TJU had open letters of credit aggregating $28.6 million and $25.8 million at June 30, 2016 and 2015, respectively, primarily related to self-insurance arrangements for workers compensation. The letters of credit expire between December 31, 2016 and February 20,

42 Notes to Consolidated Financial Statements Litigation TJU is involved in litigation and regulatory investigations arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by commercial insurance or by accruals, and if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position or results of operations of TJU. 17. FUNCTIONAL CLASSIFICATION Research and Clinical Other Sponsored Auxiliary Academic Student Institutional Operations Instruction Programs Activities Support Services Support Total Salaries and wages $1,134,247 $65,229 $67,910 $7,911 $3,110 $3,430 $98,625 $1,380,462 Employee benefits 293,817 18,043 17, ,038 29, ,808 Supplies 512,876 3,086 12, , ,418 Purchased services 176,229 4,129 2,318 3, ,154 Insurance 50, ,157 52,696 Utilities 27,114 3,549 4,821 1, ,152 38,356 Interest 26,059 5,950-3, ,914 Depreciation and amortization 131,675 9,893 11,802 5, ,972 Rent 33,055 2,869 2, ,676 45,696 Other expenses 152,971 11,638 18,484 16,961 1, , ,868 Total $2,538,204 $124,711 $138,468 $40,288 $5,911 $5,885 $190,877 $3,044, NONCONTROLLING INTEREST TJU has a controlling interest in certain joint ventures in healthcare related organizations. The amount not owned by TJU is shown as a noncontrolling interest. The following table presents the changes in consolidated unrestricted net assets attributable to the controlling financial interest of TJU and the noncontrolling interest (in thousands): Noncontrolling Interests Controlling Consolidated Interest Riverview JURA JCCC ROSH Total Total Balance June 30, 2015 $1,745,968 $3,372 $459 $459 $0 $4,290 $1,750,258 Income from operations 91,697 2, ,618 94,315 Distributions to NCI - (2,695) (500) - - (3,195) (3,195) ROSH acquisition ,856 70,856 70,856 Other changes, net (174,268) (174,268) Balance June 30, 2016 $1,663,397 $2,872 $362 $479 $70,856 $74,569 $1,737,966 40

43 Supplemental Information Thomas Jefferson University Unaudited Pro Forma Information (in thousands) TJU's operating revenues, gains and other support, changes in unrestricted net assets, temporarily restricted net assets and permanently restricted net assets for the year ended June 30, 2016, as if the acquisition of the controlling interest in Rothman Orthopaedic Specialty Hospital, LLC by Thomas Jefferson University Hospital had occurred at July 1, 2015, are: Change in Change in Operating Change in Temporarily Permanently Revenues, Gains Unrestricted Net Restricted Net Restricted Net & Other Support Assets Assets Assets Supplemental pro forma information for 7/1/2015 to 6/30/2016 $3,187,904 ($931) $21,881 $7,338 41

44 TJU AH Eliminations Consolidated TJU AH Consolidated Assets Current assets: Cash and cash equivalents $119,747 $181,996 - $301,743 $108,854 $135,510 $244,364 Short-term investments 413, ,503-1,055, , ,691 1,029,742 Accounts receivable, less allowance for doubtful accounts of $63,825 in 2016 $52,161 in ,077 90,423 (539) 380, ,944 95, ,392 Inventory 34,854 3,896-38,750 33,990 3,931 37,921 Pledges receivable 21,554 8,166-29,720 18,226-18,226 Insurance recoverable 15,376 12,493-27,869 19,054 13,362 32,416 Assets whose use is limited, current 19, ,952 19, ,595 Other current assets 19,163 8,412-27,575 17,391 6,988 24,379 Total current assets 935, ,889 (539) 1,882, , ,930 1,806,035 Long-term investments 763, , , , , ,205 Assets whose use is limited, noncurrent 140,423 12, , ,339 7, ,925 Assets held by affiliated foundation 8, ,624 8,781-8,781 Pledges receivable 92,961 5,962-98,923 72,447 10,239 82,686 Goodwill, net 146,483 13, ,311 11,971 13,993 25,964 Insurance recoverable 111,538 32, ,464 99,886 34, ,544 Loans receivable from students, net 26, ,810 26,417-26,417 Land, buildings and equipment, net 999, ,831-1,468, , ,401 1,389,913 Other noncurrent assets 23,331 5,340-28,671 14,613 3,398 18,011 Total assets $3,248,801 $1,619,195 ($539) $4,867,457 $2,988,580 $1,578,901 $4,567,481 Liabilities and Net Assets Thomas Jefferson University Unaudited Consolidating Balance Sheets (In Thousands) Current liabilities: Current portion of: Long-term obligations 12,517 11,078-23,595 8,697 13,413 22,110 Accrued professional liability claims 30,566 12,108-42,674 38,332 13,127 51,459 Accrued workers' compensation claims 8, ,766 7, ,400 Deferred revenues 15, ,710 11,949 1,236 13,185 Accounts payable and accrued expenses 174,759 68,986 (539) 243, ,006 67, ,464 Accrued payroll and related costs 135,300 62, , ,744 50, ,530 Grant and contract advances 16, ,412 17,844-17,844 Total current liabilities 393, ,383 (539) 548, , , ,992 Long-term obligations 757, ,587-1,060, , , ,550 Accrued pension liability 191, , , , , ,383 Federal student loan advances 15, ,651 18,247-18,247 Deferred revenues 7, ,339 8,040-8,040 Accrued professional liability claims 294,690 45, , ,275 45, ,259 Accrued workers' compensation claims 12,823 6,998-19,821 15,978 6,878 22,856 Interest rate swap contracts 43, ,609 29,826-29,826 Other noncurrent liabilities 5,863 13,355-19,218 5,811 16,102 21,913 Total liabilities 1,722, ,011 (539) 2,536,115 1,578, ,005 2,253,066 Net assets: Unrestricted 1,001, ,425-1,663, , ,512 1,745,968 Noncontrolling interest in joint venture 74, ,569 4,290-4,290 Temporarily restricted 234,000 68, , ,609 68, ,446 Permanently restricted 215,617 75, , ,164 76, ,711 Total net assets 1,526, ,184-2,331,342 1,410, ,896 2,314,415 Total liabilities and net assets $3,248,801 $1,619,195 ($539) $4,867,457 $2,988,580 $1,578,901 $4,567,481 42

45 Unaudited Consolidating Statement of Operations and Changes in Unrestricted Net Assets For the Year Ended June 30, 2016 (In Thousands) TJU AH Eliminations Consolidated Operating revenues, gains and other support: Net patient service revenue $1,928,441 $844,619 - $2,773,060 Provision for bad debts (77,596) (25,118) - (102,714) Net patient service revenue less provision for bad debts 1,850, ,501-2,670,346 Grants and contracts 91, ,589 Tuition and fees, net 119,871 2, ,689 Investment income 23, ,133 Contributions 3, ,862 Other revenue 163,345 25,399 (280) 188,464 Net assets released from restrictions 24,485 13,091-37,576 Total operating revenues, gains and other support 2,277, ,370 (280) 3,138,659 Operating expenses: Salaries and wages 998, , ,380,462 Employee benefits 261, , ,808 Supplies 404, , ,418 Purchased services 90,269 95, ,154 Depreciation and amortization 110,654 48, ,972 Interest 23,454 12,460-35,914 Insurance 45,567 7,129-52,696 Utilities 30,370 7,986-38,356 Rent 37,512 8,184-45,696 Other 220,886 27,463 (481) 247,868 Total operating expenses 2,223, ,543 (280) 3,044,344 Income from operations 54,488 39,827-94,315 Nonoperating items and other changes in unrestricted net assets, net: Gain (loss) on investments, net 2,778 (6,849) - (4,071) Investment income (loss) net of amounts classified as operating revenue (13,083) 15,332-2,249 Gain on investment in ROSH acquisition 21, ,906 Interest rate swap contracts (17,546) - - (17,546) Reclassification of net assets (173) - - (173) Contributions and government grants for capital projects 4, ,088 Change in noncontrolling interest in joint venture 70, ,856 Net assets released from restrictions used for purchase of property and equipment 8,494 2,975-11,469 Donated capital received Increase in pension liability (44,617) (148,372) - (192,989) Distributions to noncontrolling interest (3,195) - - (3,195) Increase (decrease) in unrestricted net assets from nonoperating items and other changes in net assets 30,307 (136,914) - (106,607) Increase (decrease) in unrestricted net assets $84,795 ($97,087) $0 ($12,292) 43

46 Schedule of Expenditures of Federal Awards

47 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Student Financial Assistance Cluster DEPARTMENT OF HEALTH AND HUMAN SERVICES Scholarships for Health Professions Students from Disadvantaged Backgrounds $ 300,000 $ - $ 300,000 $ - Nursing Student Loans Outstanding loans as of July 1, ,314,988-1,314,988 - New loans issued during , ,000 - Health Professions Student Loans, Including Primary Care Loans/Loans for Disadvantaged Students Outstanding loans as of July 1, ,063,175-1,063,175 - New loans issued during ,000-65,000-2,979,163-2,979,163 - DEPARTMENT OF EDUCATION Federal Supplemental Educational Opportunity Grants , ,233 - Federal Work-Study Program , ,954 - Administrative cost allowance , ,051 - Federal Pell Grant Program ,152,107-1,152,107 - Federal Perkins Loans Outstanding loans as of July 1, ,358,731-7,358,731 - New loans issued during ,870,750-1,870,750 - Administrative cost allowance ,848-21,848 - Federal Direct Student Loans ,133,178-70,133,178-81,385,852-81,385,852 - Total Student Financial Assistance Cluster 84,365,015-84,365,015 - The accompanying notes are an integral part of this schedule. 44

48 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health Federal Award 93.RD - 10,062 Mayo Clinic HHSN ,062 - Federal Award 93.RD - 15,241 Mayo Clinic HHSN I 15,241 - Federal Award 93.RD - (16,027) Cynvenio Biosystems HHSN C (16,027) - Federal Award 93.RD - 76,926 Mayo Clinic HHSN ,926 - Sloan-Kettering Institute for Federal Award 93.RD - 56 Cancer Research NCI # Federal Award - HHSN C 93.RD 15,580-15,580 - Environmental Health ,114,555-1,114,555 13,211 Environmental Health ,221 University of Rochester R01ES ,221 - Oral Diseases and Disorders Research ,774 Trustees of Boston University R21DE ,774 - Research Related to Deafness and Communication Disorders ,439 Monell Chemical Senses Center R01DC ,439 - Research Related to Deafness and Communication Disorders ,652 Ohio State University R01DC ,652 - Research and Training in Complementary and Integrative Health ,097-4,097 - Research and Training in Complementary and Integrative Health ,596 Palmer College R25AT ,596 - Mental Health Research Grants , ,607 35,959 Mental Health Research Grants (4,419) University of Pennsylvania R01MH (4,419) - Mental Health Research Grants ,482 University of Pennsylvania R01MH ,482 - Mental Health Research Grants ,206 Pathways to Housing PA R01MH ,206 - The accompanying notes are an integral part of this schedule. 45

49 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health (continued) Mental Health Research Grants ,259 Temple University R01MH ,259 - Mental Health Research Grants ,744 Temple University R01MH ,744 - Alcohol Research Programs ,095,346-1,095,346 (6,019) Alcohol Research Programs ,979 Temple University R21AA ,979 - Drug Abuse and Addiction Research Programs , , ,718 Discovery and Applied Research for Technological Innovations to Improve Human Health ,389-57,389 40,108 Discovery and Applied Research for Technological Innovations to Improve Human Health ,585 University of Delaware R01EB ,585 - Minority Health and Health Disparities Research , , ,083 Minority Health and Health Disparities Research ,661 University of Pennsylvania P60MD ,661 - Trans-NIH Research Support ,679 University of Michigan R21GM ,679 - Research Infrastructure Programs ,438-78,438 - Research Infrastructure Programs ,328 University of Pittsburgh P50OD ,328 - Cancer Cause and Prevention Research , ,273 9,711 Cancer Cause and Prevention Research ,493 University of Pennsylvania R01CA ,493 - Cancer Detection and Diagnosis Research ,665,706-1,665, ,760 Cancer Detection and Diagnosis Research (33) University of Pittsburgh U01CA (33) - Cancer Detection and Diagnosis Research ,729 JBS Science, Inc. R44CA ,729 - Cancer Detection and Diagnosis Research ,788 ImCare Biotech, LLC R44CA ,788 - Cancer Treatment Research ,428,948-1,428,948 63,426 Cancer Treatment Research ,043 Wistar Institute P01CA ,043 - Washington University of St. Cancer Treatment Research ,747 Louis U10CA ,747 - Cancer Treatment Research ,514 NRG Oncology Foundation Inc. U10CA ,514 - Cancer Treatment Research ,128 American College of Radiology U24CA ,128 - The accompanying notes are an integral part of this schedule. 46

50 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health (continued) Cancer Treatment Research ,249 American College of Radiology Imaging Network U10CA ,249 - Cancer Treatment Research ,420 American College of Radiology Imaging Network UG1CA ,420 - Cancer Treatment Research ,361 American College of Radiology Imaging Network U10CA ,361 - Cancer Treatment Research ,223 RTOG Foundation, Inc. U10CA ,223 - Cancer Treatment Research John Wayne Cancer Institute P01CA Sloan-Kettering Institute for Cancer Treatment Research Cancer Research U10 CA Cancer Biology Research ,355,286-4,355, ,840 Cancer Biology Research (137) University of Pennsylvania R01CA (137) - Lankenau Institute for Medical Cancer Biology Research ,153 Research R01CA ,153 - Cancer Centers Support Grants ,719,901-2,719,901 64,887 Cancer Research Manpower , ,602 - Cancer Control ,981-36,981 - Cancer Control ,285 Frontier Science & Technology PSATJU00 87,285 - Research Foundation, Inc. Cardiovascular Diseases Research ,273,670-4,273, ,617 Cardiovascular Diseases Research ,632 University of Washington R01HL ,632 - Cardiovascular Diseases Research ,474 Duke University R01HL ,474 - Cardiovascular Diseases Research ,104 Duke University U10HL ,104 - Cardiovascular Diseases Research (3,946) Yale University R01HL (3,946) - Oregon Health Sciences Cardiovascular Diseases Research ,649 University R01HL ,649 - Lung Diseases Research , , ,410 Lung Diseases Research ,277 University of Pennsylvania P01HL , ,697 Lung Diseases Research ,943 Rutgers University P01HL ,943 21,665 The accompanying notes are an integral part of this schedule. 47

51 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health (continued) Lung Diseases Research ,000 University of Maryland R01HL ,000 - Blood Diseases and Resources Research ,831,597-1,831, ,977 Blood Diseases and Resources Research University of North Carolina R01HL Blood Diseases and Resources Research ,265 Children's Hospital of Philadelphia P01HL , ,275 Arthritis, Musculoskeletal and Skin Diseases Research ,652,001-3,652, ,062 Arthritis, Musculoskeletal and Skin Diseases Research ,761 Drexel University R21AR ,761 - Diabetes, Digestive, and Kidney Diseases Extramural Research ,857,582-2,857, ,530 Diabetes, Digestive, and Kidney Diseases Extramural Research (20) Albert Einstein Healthcare Network U01K (20) - Diabetes, Digestive, and Kidney Diseases Extramural Research ,919 George Washington University U01DK ,919 - Diabetes, Digestive, and Kidney Diseases Extramural Research ,990 University of Pennsylvania P30DK ,990 - Diabetes, Digestive, and Kidney Diseases Extramural Research ,020 Northwestern University R01DK ,020 - Extramural Research Programs in the Neurosciences and Neurological Disorders ,885,001-5,885, ,691 Extramural Research Programs in the Neurosciences and Neurological Disorders ,343 Rutgers University R01NS ,343 - Extramural Research Programs in the Neurosciences and Neurological Disorders (583) Johns Hopkins University U01NS (583) - Extramural Research Programs in the Neurosciences and Neurological Disorders ,038 Johns Hopkins University U01NS ,038 - The accompanying notes are an integral part of this schedule. 48

52 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health (continued) Extramural Research Programs in the Neurosciences and Neurological Disorders ,379 Temple University R01NS ,379 - Extramural Research Programs in the Neurosciences and Neurological Disorders ,288 Temple University U01NS ,288 - Extramural Research Programs in the Neurosciences and Neurological Disorders ,170 University of Pennsylvania U01NS ,170 - Extramural Research Programs in the Neurosciences and Neurological Disorders ,010 Case Western Reserve University U01NS ,010 - Allergy, Immunology and Transplantation Research ,109,080-6,109,080 1,455,233 Allergy, Immunology and Transplantation Molecular Targeting Research ,098 Technologies, Inc. R42AI ,098 - Allergy, Immunology and Transplantation Research ,062 Molecular Targeting Technologies, Inc. R42AI ,062 - Allergy, Immunology and Transplantation Research ,715 New York Blood Center R01AI ,715 - Allergy, Immunology and Transplantation Research ,085 University of Pennsylvania R33AI ,085 - Allergy, Immunology and Transplantation Research ,475 University of Pennsylvania R01AI ,475 - Allergy, Immunology and Transplantation Research (5,043) Georgia Regents University U01AI (5,043) - Allergy, Immunology and Transplantation Research ,180 Duke University R01AI ,180 - Allergy, Immunology and Transplantation Research ,542 University of Alabama R01AI ,542 - Biomedical Research and Research Training ,447,039-4,447, ,376 Biomedical Research and Research Training ,454 University of Pennsylvania RGM ,454 - Biomedical Research and Research Training ,703 University of Pennsylvania P01GM ,703 - Biomedical Research and Research Training ,363 University of Minnesota R01GM ,363 - Biomedical Research and Research Training ,122 Health Research Inc. R01GM ,122 - The accompanying notes are an integral part of this schedule. 49

53 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health (continued) Child Health and Human Development Extramural Research , ,740 66,110 Child Health and Human Development Extramural Research ,945 University of Alabama U01HD ,945 - Child Health and Human Development Extramural Research ,631 University of Delaware R01HD ,631 - Child Health and Human Development Extramural University of California, San Research ,037 Diego R24HD ,037 - Child Health and Human Development Extramural Research ,731 Yeshiva University R01HD ,731 - Aging Research ,104,509 1,104, ,005 Aging Research ,862 Johns Hopkins University R01AG ,862 - Aging Research ,636 Johns Hopkins University R01AG ,636 - Aging Research ,431 Wake Forest University R01AG ,431 36,257 Aging Research ,665 University of Connecticut R01AG ,665 - Aging Research ,063 University of Michigan R01AG ,063 - Oregon Health Sciences Aging Research ,976 University R21AG ,976 - Vision Research ,563,684 1,563, ,760 Vision Research ,678 University of Pennsylvania R01EY ,678-48,064,586 6,241,999 54,306,585 4,551,349 Centers for Disease Control Children's Hospital of Disabilities Prevention ,668 Philadelphia U27DD ,668 - Centers for Disease Control and Prevention Investigations and Technical Assistance ,321-83,321 22,786 Centers for Disease Control and Prevention National Association of Chronic Investigations and Technical Assistance ,826 Disease Directors U58DP ,826 - Centers for Disease Control and Prevention Investigations and Technical Assistance ,832 Wills Eye Hospital U01DP ,832 - The accompanying notes are an integral part of this schedule. 50

54 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Disease Control (continued) Centers for Disease Control and Prevention Investigations and Technical Assistance ,853 Nationalities Service U50CK ,853 - Surveillance for Diseases Among Immigrants and Refugees financed in part by Prevention and Public Health Funds (PPHF) ,646-30,646 13,384 Preventive Health and Health Services Block Grant funded solely with Prevention and Public Health Funds (PPHF) ,106 Preventive Health and Health Services Block Grant funded solely with Prevention and Public Health Funds (PPHF) ,309 Health Care Improvement Foundation SAP # ,106 - Health Care Improvement Foundation SAP # ,309 - Preventive Health and Health Services Block Grant (485) Health Care Improvement Foundation SAP # (485) - Assistance Programs for Chronic Disease Prevention and Control ,663 Wills Eye Hospital U58DP , , , ,739 36,170 Administration for Community Living Special Programs for the Aging_Title III, Part D_Disease Prevention and Health Promotion Services ,135 Philadelphia Corporation on Aging ,135 - ACL National Institute on Disability, Independent Living, and Rehabilitation Research , , , ,230 1, , ,866 The accompanying notes are an integral part of this schedule. 51

55 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Agency for Healthcare Research and Quality Research on Healthcare Costs, Quality and Outcomes ,747 Dartmouth College R01HS ,747 - Research on Healthcare Costs, Quality and Outcomes ,589 University of Pennsylvania R01HS , ,336 47,336 - Health Resources and Services Administration Maternal and Child Health Federal Consolidated Programs ,286-2,286 - Maternal and Child Health Federal Consolidated Programs ,209 Children's Hospital of Philadelphia H30MC ,209 - Maternal and Child Health Federal Consolidated Programs ,996 Florida State University R40MC ,996 - Coordinated Services and Access to Research for Women, Infants, Children, and Youth ,904 Mazzoni Center H12HA ,904 - Advanced Nursing Education Grant Program (9,094) - (9,094) - Geriatric Academic Career Awards ,497-22,497 - Nurse Education, Practice Quality and Retention Lewis and Clark Community Grants ,269 College UD7HP ,269 - ARRA Grants for Training in Primary Care Medicine and Dentistry Training and Enhancement ,250-59,250 7,684 Grants for Primary Care Training and Enhancement , ,809 - PPHF Geriatric Education Centers ,110-38,110 28,360 1,029, ,378 1,260,236 36,044 Administration for Children and Families Abandoned Infants ,373 Nemours Foundation #90CB , , ,373 - The accompanying notes are an integral part of this schedule. 52

56 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Office of the Secretary Hospital Preparedness Program (HPP) Ebola Preparedness and Response Activities ,047 Commonwealth of Pennsylvania SAP# ,047 - National Bioterrorism Hospital Preparedness Program , ,538 - National Bioterrorism Hospital Preparedness Program ,692 Commonwealth of Pennsylvania SAP# ,692 - National Bioterrorism Hospital Preparedness Program ,546 Commonwealth of Pennsylvania SAP# , , ,285 1,056,823 - Centers for Medicare and Medicaid Services Federal Award 93.RD - 52,176 Quality Insights of Pennsylvania HHSM C 52,176 - Federal Award 93.RD - 13,706 Quality Insights of Pennsylvania HHSM ,706 - Health Care Innovation Awards (HCIA) ,311 Nemours Foundation 1C1CMS , ,193 67,193 - Substance Abuse and Mental Health Services Administration Substance Abuse and Mental Health Services Projects of Regional and National Significance ,454-87,454 - Substance Abuse and Mental Health Services Projects of Regional and National Significance ,593 Commonwealth of Pennsylvania CONTRACT #SM ,593 - Substance Abuse and Mental Health Services Projects of Regional and National Significance ,474 Commonwealth of Pennsylvania U79-SM ,474 - Drug Free Communities Support Programs Grant ,173 United Communities Southeast Philadelphia SP ,173-87, , ,694-50,092,633 8,074,711 58,167,344 4,725,429 The accompanying notes are an integral part of this schedule. 53

57 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF DEFENSE Department of Defense Military Medical Research and Development ,570,442-1,570,442 28,630 Military Medical Research and Development ,314 Wills Eye Hospital W81XWH ,314 - Military Medical Research and Development ,321 University of California, Davis W81XWH ,321 - Sloan-Kettering Institute for Cancer Military Medical Research and Development ,198 Research W81XWH ,198 - Military Medical Research and Development ,222 Duke University W81XWH ,222 - Research and Technology Development ,000 University of Pennsylvania #N ,000 - Research and Technology Development ,199 Creatv MicroTech, Inc. W911NF-14-C ,199 - Federal Award 12.RD - 33,274 Luna Innovations FA M ,274 - Federal Award 12.RD - 3,995 Christopher Reeve Foundation W81XWH ,995-1,570, ,523 2,099,965 - NATIONAL SCIENCE FOUNDATION National Science Foundation Biological Sciences , ,057 - Engineering Grants ,040 Rensselaer Polytechnic Institute EEC ,040 - Federal Award 47.RD - 12,271 Rensselaer Polytechnic Institute Data Sharing Project 12, , , ,368 - NATIONAL AERONAUTICS AND SPACE ADMINISTRATION National Aeronautics and Space Administration Exploration , ,156 42,787 Federal Award 43.RD - 2,712 Wyle Laboratories, Inc. NNJI4ZSA001N-OMNIBUS 2,712 - Federal Award 43.RD - 6,687 Wyle Laboratories, Inc. NNJ15HK11B 6, ,156 9, ,555 42,787 The accompanying notes are an integral part of this schedule. 54

58 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Research and Development Cluster DEPARTMENT OF VETERANS AFFAIRS Department of Veterans Affairs Intergovernmental Personnel Act 64.RD 11,075-11,075 - Federal Award - VA C RD 4,383-4,383-15,458-15,458 - Total Research and Development Cluster 52,176,746 8,841,944 61,018,690 4,796,846 Other Sponsored Programs DEPARTMENT OF JUSTICE U.S. District Court Federal Award UO1 11,991-11,991 - Federal Award UO1 12,390-12,390-24,381-24,381 - DEPARTMENT OF HEALTH AND HUMAN SERVICES Health Resources and Services Administration HIV Emergency Relief Project Grants ,681 City of Philadelphia R ,681 - HIV Emergency Relief Project Grants ,840 City of Philadelphia R ,840 - Maternal and Child Health Services Block Grant to the States ,604 Access Matters , , ,125 - Centers for Disease Control Centers for Disease Control and Prevention Investigations and Technical Assistance ,326 Access Matters ,326 - Centers for Disease Control and Prevention Investigations and Technical Assistance ,496 Access Matters ,496 - Centers for Disease Control and Prevention Investigations and Technical Assistance ,817 Access Matters ,817 - HIV Prevention Activities Health Department Based ,441 City of Philadelphia CPB ,441 - HIV Prevention Activities Health Department Based ,362 City of Philadelphia CPB ,362 - Preventive Health Services Sexually Transmitted Diseases Control Grants Access Matters , ,596 - The accompanying notes are an integral part of this schedule. 55

59 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Pass- Pass-Through Entity Total Passed to Federal Program CFDA Direct Through Pass-Through Entity Sponsor Number Expenditures Subrecipients Other Sponsored Programs DEPARTMENT OF HEALTH AND HUMAN SERVICES Office of Population Affairs Family Planning Services ,050 Access Matters ,050 - Family Planning Services ,284 Access Matters ,284 - Family Planning Services ,958 Access Matters ,958 - Family Planning Services ,189 Access Matters ,189 - Family Planning Services ,293 Access Matters , , ,774 - Administrations for Children and Families Social Services Block Grant ,026 Access Matters , ,026 5,026 - Substance Abuse and Mental Health Services Administration Block Grants for Prevention and Treatment of Substance Abuse ,276 City of Philadelphia ,276 - Block Grants for Prevention and Treatment of Substance Abuse ,991 City of Philadelphia ,991 - Block Grants for Prevention and Treatment of Substance Abuse ,970 City of Philadelphia , , ,237 - Total Other Sponsored Programs 24,381 1,228,758 1,253,139 - Total Federal Award Expenditures $ 136,566,142 $ 10,070,702 $ 146,636,844 $ 4,796,846 The accompanying notes are an integral part of this schedule. 56

60 Notes to Schedules of Expenditures of Federal Awards June 30, Reporting Entity Thomas Jefferson University (the University ) is an independent, non-profit corporation organized under the laws of the Commonwealth of Pennsylvania and recognized as a tax-exempt organization pursuant to Section 501(c)(3) of the Internal Revenue Code. Thomas Jefferson University has a tripartite mission of education, research, and patient care. Thomas Jefferson University conducts research and offers undergraduate and graduate instruction through the Sidney Kimmel Medical College, and the Jefferson Colleges of Nursing, Pharmacy, Health Professions, Population Health, and Biomedical Sciences. TJU has approximately 3,700 students and is located in Philadelphia, Pennsylvania. Thomas Jefferson University provides patient care through an integrated healthcare organization providing inpatient, outpatient, and emergency care services through acute care, ambulatory care, physician, and other primary care services for residents of the Greater Philadelphia Region. For the year ended June 30, 2016, the integrated healthcare organization included TJUH System (TJUHS) and Abington Health (AH). Federal Identification Numbers for reporting entities included in this report are for TJU, for Thomas Jefferson University Hospital, and for Abington Memorial Hospital. 2. Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards (the Schedule ) presents a summary of those activities of the University for the year ended June 30, Negative amounts represent current year adjustments of amounts reported in prior years. CFDA and pass through entity numbers are included when available. The information in this schedule is presented in accordance with the Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (the Uniform Guidance ). Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic consolidated financial statements of the University. For purposes of the Schedule, federal awards include all grants, contracts and similar agreements entered into directly by the University with agencies and departments of the federal government and all sub awards to the University by nonfederal organizations pursuant to federal grants, contract and similar agreements. 3. Summary of Significant Accounting Policies Expenditures reported in the Schedule are reported on the accrual basis of accounting. Expenditures include a portion of costs associated with general university activities which are allocated to awards under negotiated formulas commonly referred to as facilities and administrative cost rates. Expenditures for federal student financial aid programs are recognized as incurred and include Federal Pell program grants to students, the federal share of students FSEOG program grants, Federal Work-Study program earnings, loans to students under federally guaranteed programs and certain other federal financial assistance grants for students and administrative cost allowances, where applicable. 57

61 Notes to Schedules of Expenditures of Federal Awards June 30, 2016 Expenditures for other federal awards of the University are determined using the cost accounting principles and procedures set forth in the Uniform Guidance. Under these cost principles, certain expenditures are not allowable or are limited as to reimbursement. Expenditures for certain non-student financial aid awards include indirect costs. The University applies its predetermined approved facilities and administrative rate when charging indirect costs to federal awards rather than the 10% de minimis cost rate as described in Section of the Uniform Guidance. 4. Student Loan Programs The Federal student loan programs listed below are administered directly by the University and balances and transactions relating to these programs are included in the University s consolidated financial statements. Loans outstanding at the beginning of the year, the administrative cost allowance and loans made during the year are included in the federal expenditures presented in the Schedule. The balance of loans outstanding at June 30, 2016 consists of: CFDA # Loan Balance Health Professions Student Loans, Including Primary Care $ 911,142 Loans/Loans for Disadvantaged Students Nursing Student Loans ,325,515 Perkins Loan Programs ,806, Federal Direct Loan Program (FDLP) During the fiscal year ended June 30, 2016 the University processed new loans to students under the Direct Student Loan Program CFDA # , which includes subsidized and unsubsidized Stafford Loans and Supplemental Loans for Students. The University is responsible only for the performance of certain administrative duties with respect to the FDLP and, accordingly, these loans are not included in the University's basic combined financial statements. Loans made during the year are included in the federal expenditures presented in the Schedule. It is not practical to determine the balance of loans outstanding under these programs at June 30,

62 Report of Independent Auditor on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards To the Board of Trustees Thomas Jefferson University: We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of Thomas Jefferson University and its subsidiaries (the University ), which comprise the consolidated balance sheets as of, and the related consolidated statements of operations and changes in unrestricted net assets, of changes in net assets, and of cash flows for the year ended June 30, 2016, and the related notes to the consolidated financial statements, and have issued our report thereon dated October 27, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the University s internal control over financial reporting ( internal control ) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control. Accordingly, we do not express an opinion on the effectiveness of the University s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA T: (267) , F: (267) ,

63 Compliance and Other Matters As part of obtaining reasonable assurance about whether the University s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Philadelphia, Pennsylvania October 27,

64 Report of Independent Auditor on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control over Compliance in Accordance with the OMB Uniform Guidance To the Board of Trustees Thomas Jefferson University: Report on Compliance for Each Major Federal Program We have audited Thomas Jefferson University and its subsidiaries (the University ) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the University s major federal programs for the year ended June 30, The University s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the University s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the University s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the University s compliance. Opinion on Each Major Federal Program In our opinion, the University complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA T: (267) , F: (267) ,

65 Other Matters The results of our auditing procedures disclosed instances of noncompliance, which are required to be reported in accordance with the Uniform Guidance and which are described in the accompanying schedule of findings and questioned costs as item Our opinion on each major federal program is not modified with respect to this matter. The University's response to the noncompliance findings identified in our audit is described in the accompanying Management s Views and Corrective Action Plans. The University's response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control over Compliance Management of the University is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the University s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the University s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 62

66 The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Philadelphia, Pennsylvania March 31,

67 Schedule of Findings and Questioned Costs Year Ended June 30, 2016 Section I Summary of Auditor s Results Financial Statements Type of auditor s report issued: Unmodified Internal control over financial reporting: Material weakness(es) identified? yes X no Significant deficiency(ies) identified that are not yes X none noted considered to be material weaknesses? Non-compliance material to financial statements noted? yes X no Federal Awards Internal control over major programs: Material weakness(es) identified? yes X no Significant deficiency(ies) identified that are not yes X none reported considered to be material weaknesses? Type of auditor s report issued on compliance for major programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? _X_ yes no Identification of major programs CFDA Number(s): Various Various Name of Federal and City Program or Cluster Research and Development Cluster Student Financial Aid Cluster Block Grants for Prevention & Treatment of Substance Abuse Dollar threshold used to distinguish between type A and type B programs: $3,000,000 Auditee qualified as low-risk auditee? X yes no Section II Financial Statement Findings There are no matters to report. 64

68 Schedule of Findings and Questioned Costs Year Ended June 30, 2016 Section III Federal Award Findings and Questioned Costs Finding : Loan Disbursement Notification Grantor: Department of Education Program: Student Financial Aid Cluster CFDA#: Title: Federal Direct Student Loans Award Year: 07/ /2016 Condition For the Student Financial Aid Cluster, the University is required to provide each student a written notification regarding Direct Loan disbursements to the student s account, informing the student of the anticipated date and amount of the disbursement. Because the University does not obtain affirmative confirmation of the student s acceptance of the loan, the notice must be sent no earlier than 30 days before and no later than 7 days after crediting the student s account. PwC selected a sample of 25 students for testing covering both the fall 2015 and spring 2016 semesters. We noted the following with respect to the sample selected for testing: For seven of the 25 students selected, the University was unable to provide the notifications sent to the students. Therefore, it could not be determined whether the loan notification communication was sent timely to those selected students. One of the seven students was missing notification for both the fall 2015 and spring 2016 semesters. One of the other seven students was missing notification for the spring 2016 semester. The remaining five students were missing notifications for the spring 2016 semester. For the remaining 18 students, we were able to observe that the notifications were sent in a timely manner, either as a result of communications from the student or other related correspondence in management s files. For ten of the 25 students selected, loan notifications were not made between 30 days before or 7 days after the loan disbursement. Each of these related to the spring 2016 semester. Criteria Per 34 CFR (a) - Except in the case of a post-withdrawal disbursement made in accordance with (a)(5), if an institution credits a student's account at the institution with Direct Loan, FFEL, Federal Perkins Loan, or TEACH Grant Program funds, the institution must notify the student or parent of the anticipated date and amount of the disbursement. The institution must provide the notice no earlier than 30 days before, and no later than 7 days after, crediting the student account at the institution, if the institution does not obtain affirmative confirmation from the student under paragraph (a)(6)(i) of this section. Cause At the time the notifications were sent, the methodology for creating the notifications from the student accounts system did not result in an automatic back-up of such s. In addition, the process was manually launched, resulting in the potential for notifications that did not comply with the required timeline. Effect The students may not have been properly or timely notified of the disbursements as required by the Department of Education requirements criteria above. Questioned Costs None 65

69 Schedule of Findings and Questioned Costs Year Ended June 30, 2016 Recommendation We recommend the University implement a process to ensure the retention of all notifications sent to each student, including the date the notification was sent. In addition, we recommend the University establish procedures that ensure the notifications are made within the timelines indicated in 34 CFR (a). Management s Views and Corrective Action Plan Following these findings are management s views and corrective action plan. 66

70 Summary Schedule of Status of Prior Audit Findings Year Ended June 30, 2016 Status of Prior Year Findings There are no findings from prior year that require an update in this report. 67

71 68