Report of Independent Auditors and Financial Statements for. Tehachapi Valley Health Care District

Transcription

1 Report of Independent Auditors and Financial Statements for Tehachapi Valley Health Care District June 30, 2015

2 CONTENTS REPORT OF INDEPENDENT AUDITORS 1 2 MANAGEMENT S DISCUSSION AND ANALYSIS (Required supplementary information) 3 8 PAGE FINANCIAL STATEMENTS Statements of net position 9 Statements of revenues, expenses and changes in net position 10 Statements of cash flows Notes to financial statements 13 27

3 The Board of Directors Tehachapi Valley Health Care District Report on the Financial Statements REPORT OF INDEPENDENT AUDITORS We have audited the accompanying financial statements of Tehachapi Valley Health Care District (the District ) as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the District s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the California Code of Regulations, Title 2, Section , State Controller s Minimum Audit Requirements for California Special Districts. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tehachapi Valley Health Care District as of June 30, 2015, and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. 1

4 Other Matters Prior Year Comparative Information The prior year comparative information presented in the statements of net position; revenues, expenses and changes in net position; and cash flows was derived from the prior year financial statements of Tehachapi Valley Healthcare District, as of and for the year ended June 30, These 2014 financial statements were audited by other auditors whose report dated April 3, 2015, expressed an unmodified opinion on those statements. Required Supplementary Information Accounting principles generally accepted in the United States of America require that management s discussion and analysis on pages 3 through 8 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Los Angeles, California February 2,

5 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2015 This section of Tehachapi Valley Health Care District s (the District) financial statements presents management s discussion and analysis of the financial activities of the District for the fiscal years ended June 30, 2015 and We encourage the reader to consider the information presented here in conjunction with the financial statements as a whole. Introduction to the Financial Statements This discussion and analysis is intended to serve as an introduction to the District s audited financial statements. This annual report is prepared in accordance with the Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements - and Management s Discussion and Analysis - for State and Local Governments. The required financial statements include the Statement of Net Position; the Statement of Revenues, Expenses, and Changes in Net Position; and the Statement of Cash Flows. Notes to the financial statements, supplementary detail and/or statistical information, and this summary support these statements. All sections must be considered together to obtain a complete understanding of the financial picture of the District. Statement of Net Position This statement includes all assets and liabilities using the accrual basis of accounting as of the statement date. The difference between the two classifications is represented as Net Position ; this section of the statement identifies major categories of restrictions on these assets and reflects the overall financial position of the District as a whole. Statement of Revenues, Expenses, and Changes in Net Position This statement presents the revenues earned and the expenses incurred during the year using the accrual basis of accounting. Under the accrual basis, all increases or decreases in net position are reported as soon as the underlying event occurs, regardless of the timing of the cash flow. Consequently revenues and/or expenditures reported during this fiscal year may result in changes to cash flows in a future period. Statement of Cash Flow This statement reflects inflows and outflows of cash, summarized by operating, capital, financing, and investing activities. The direct method was used to prepare this information, which means gross rather than net amounts were presented for the year s activities. Notes to the Financial Statements This additional information is essential to a full understanding of the data reported in the financial statements. The District is a political subdivision of the state of California organized and existing under the provisions of the Local Health Care District Law of the state of California. The District is located in Tehachapi, California, and is governed by a five-member Board of Directors elected by voters within the District. 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2015 The District s Net Position The District s net position represents the difference between its assets and liabilities reported in the statements of net position. The District s net position increased by approximately $5,653,000 or 35.7%, in 2015 over Table 1: Assets, Liabilities and Net Position as of June 30: June 30, ASSETS Patient accounts receivable, net $ 4,374,241 $ 2,281,888 Other current assets 14,134,742 7,811,092 Capital assets, net 65,805,548 40,645,380 Other noncurrent assets 15,267,162 37,284,729 Total assets 99,581,693 88,023,089 DEFERRED OUTFLOWS OF RESOURCES Deferred charges on debt refunding, net 503, ,249 Total assets and deferred outflows of resources $ 100,084,802 $ 88,598,338 LIABILITIES Long-term debt (including current portion) $ 66,693,122 $ 67,155,720 Other current and noncurrent liabilities 11,920,700 5,624,337 Total liabilities 78,613,822 72,780,057 NET POSITION Net investment in capital assets 17,382,582 13,940,394 Unrestricted 4,088,398 1,877,887 Total net position 21,470,980 15,818,281 Total liabilities and net position $ 100,084,802 $ 88,598,338 The following is an explanation of the significant fluctuations between fiscal years 2014 and 2015 as shown in Table 1: Patient accounts receivable, net increased approximately $2,092,000 from 2014 to 2015, or 91.7%, mainly due to the increase in volume of services and higher collection rates during 2015, which resulted in lower contractual allowance adjustments in estimating future collections. Other current assets increased by approximately $6,324,000 from 2014 to 2015, or 81.0%, due to increases in cash and cash equivalents, short term investments, and restricted cash held by trustees to meet current obligations. 4 Cash and cash equivalents and short term investments primarily increased due to the increase in volume of services in addition to lump sum interim per diem reimbursements from Medicare.

7 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2015 Restricted cash held by trustees to meet current obligations increased due to the increase in current obligations at year end and due to semi-annual tax collections submitted to the trustee to pay the bondholders. Capital assets, net increased approximately $25,160,000, or 61.9%, from 2014 to Substantially all of this net increase related to the construction of the new hospital. Long-term debt decreased by approximately $463,000, or 0.7%, from 2014 to Substantially all of this net decrease related to the retirement of bonds. Other current and noncurrent liabilities increased by approximately $6,296,000, or 111.9%, from 2014 to Substantially all of this net increase related to estimates on cost report settlements due to overpayments by the Medicare program. Operating Results and Changes in the District s Net Position Table 2: Operating Results and Changes in Net Position for the years ended June 30: For the years ended June 30, OPERATING REVENUE Net patient service revenue $ 22,967,327 $ 19,161,491 Other 571, ,217 Total operating revenue 23,538,674 19,379,708 OPERATING EXPENSES Salaries and wages and employee benefits 12,890,350 14,031,933 Purchased services and professional fees 5,093,277 4,623,724 Other operating expenses 3,546,399 3,163,851 Depreciation and amortization 599, ,190 Total operating expenses 22,129,592 22,398,698 OPERATING INCOME (LOSS) 1,409,082 (3,018,990) NONOPERATING REVENUES District tax revenue 4,233,204 3,612,803 Investment income 10,413 9,191 Other - 344,763 Total nonoperating revenues 4,243,617 3,966,757 Change in net position $ 5,652,699 $ 947,767 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2015 The following is an explanation of the significant changes between fiscal years 2015 and 2014 as shown in Table 2: Operating results Net patient service revenue improved by approximately $3,806,000, or 19.9%, in This was partially as a result of an increase in inpatient days of 15.1% from 4,737 in 2014 to 5,451 in 2015 and reduced slightly by a decrease in rural clinic visits of 3.9% from 17,011 in 2014 to 16,371 in Referred outpatient visits increased by 19.5% from 8,869 in 2014 to 10,600 in Additionally, net patient service revenue increased approximately $1,206,000 during 2015 as a result of the following: a) collection of approximately $459,000 of additional patient accounts receivable during 2015 in excess of amounts estimated at June 30, 2014; and b) changes in estimates on prior year cost report settlements of approximately $747,000. Other operating revenue increased by approximately $353,000 or 161.8%. Conversely, operating expenses increased by approximately $269,000, or 1.2%, from 2014 to 2015 resulting in an overall change in operating income of approximately $4,428,000. District tax revenue increased by approximately $620,000, or 17.2%, from 2014 to Kern County s contributions to support the hospital s operations increased by approximately $72,000. Collection of property taxes to fund debt service requirements in excess of 2015 requirements accounted for the remainder of the increase. Formatting Differences to Consider When Comparing the District s Statement of Revenues, Expenses, and Changes in Net Position to Other Nongovernment Hospitals The Governmental Accounting Standards Board ( GASB ) requires a grouping on the statements of revenues, expenses, and changes in net position, which differs from other non-governmental hospitals as follows: non-operating revenues, net includes interest expense, which in non-governmental hospitals, is grouped as an operating expense. This GASB grouping requirement makes District hospitals conform to other government entities, such as cities and counties. Because of this difference, the District s published statements of revenues, expenses, and changes in net position is not readily comparable to other non-governmental hospitals because the GASB grouping requirement does not apply to nongovernmental hospitals. This must be considered in order to compare the District to other nongovernmental hospitals. The District s Cash Flows Cash flows from operating activities increased in 2015 principally as the result of a significant increase in inpatient days from 4,737 in 2014 to 5,451 in Cash flows from capital financing and investment activities principally relate to the construction of the new hospital. The funds are held by a trustee and are disbursed to fund the cost of construction. Cash flows used in the acquisition and construction of capital assets in 2015 were approximately $22,337,000, including approximately $2,884,000 of capitalized interest. 6

9 Economic Factors on the Fiscal Year 2015 Budget and Beyond MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2015 The next year will see continued significant capital expenditures related to the construction of the new hospital, which is expected to be completed by the end of The replacement facility is needed in order to meet California s seismic requirements and expand services. The total project cost is estimated to be $91,688,000, and as of June 30, 2015, the remaining cost of construction and equipment is estimated to be $36,685,000. As the remaining project funds total $16,911,000, an additional $19,774,000 in funding will be required to complete the full project scope. The District is negotiating with Adventist Health (Adventist) to manage both the existing and new hospitals and to provide sufficient funding to make the new hospital operational. Once negotiated the Agreement requires approval by a majority of the registered voters of the District before it can be implemented. The existing Hospital can only be used until the year 2020 even if the seismic upgrades approved by the recent HAZUS study for that building are completed. External funding sources are necessary to complete the new building and permit a continuation of the District s patient care services. In addition, cash flow projections indicate that the District will exhaust its bond monies in February 2016, and other sources of cash for continued construction will need to be available by that date or shortly after, as only an additional $1,000,000 is restricted or designated for construction of the new Hospital. The challenge of meeting these capital needs becomes more difficult as reimbursement for services continues to decline. On the federal level, the provisions of the Affordable Care Act began in fiscal 2013 resulting from cuts in sequestration. Penalties and loss of Medicare reimbursement for re admissions and value based purchasing will continue to increase each year. Other penalties and loss of reimbursement for poor quality measures and patient experience are on the horizon. On the state level, the California legislature continues to change reimbursement laws and regulations to create continued uncertainty over future health care reimbursement. Medi Cal reimbursement has been reduced significantly with across the board rate cuts, and the State is moving to several new methods of reimbursement which will further reduce reimbursement on a go forward basis. As expected, the Affordable Care Act has dramatically increased coverage for the Medi-Cal population. It comes with significant cost due to the onslaught of newly insured patients coming through the emergency room. Given the rapid rise in the number of insured patients, and as a result of the Affordable Care Act, many State and Federal programs have threatened to reduce supplemental payments that were derived based on the number of uncompensated patient days. The State and CMS are working on adjustments to the program; however, there is no assurance that funding will remain at previous levels. A long-standing challenge for the District is a weak local economy and challenging payer mix. Unfunded legislation, mandated by the state of California relative to staffing ratios, and increased clinical quality and safety standards that are tied to government reimbursement contribute to higher staffing costs, increased uncompensated care expense, and lower reimbursement. 7

10 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2015 Statutory regulations applied to workers compensation insurance benefits in the state of California over the past few years continue to adversely affect the District s workers compensation costs despite the District s continued focus on overall employee health and safety. Growing medical costs have resulted in increased employee medical insurance expense. Contacting the District s Financial Management This financial report is designed to provide the District s patients, suppliers, community members and creditors with a general overview of the District s finances and to show the District s accountability for the money it receives. Questions about this report and requests for additional financial information should be directed to the District s administration by telephoning

11 STATEMENTS OF NET POSITION (WITH 2014 COMPARATIVE INFORMATION) ASSETS June 30, CURRENT ASSETS Cash and cash equivalents $ 5,498,840 $ 2,791,571 Short-term investments 4,001, ,116 Restricted cash held by trustee to meet current obligations 3,964,683 3,522,243 Patient accounts receivable, less allowance for doubtful accounts of approximately $2,806,000 in 2015 and $3,560,000 in ,374,241 2,281,888 Estimated third-party payor settlements - 178,888 Inventories of drugs and supplies 296, ,469 Prepaid expenses and deposits 373, ,805 Total current assets 18,508,983 10,092,980 NONCURRENT RESTRICTED CASH Held by trustees for debt service and construction 19,231,845 40,806,972 Less amounts required to meet current obligations 3,964,683 3,522,243 Total noncurrent cash 15,267,162 37,284,729 CAPITAL ASSETS, net 65,805,548 40,645,380 Total noncurrent assets 81,072,710 77,930,109 Total assets 99,581,693 88,023,089 DEFERRED OUTFLOWS OF RESOURCES DEFERRED CHARGES ON DEBT REFUNDING, net 503, ,249 Total deferred outflows of resources 503, ,249 Total assets and deferred outflows of resources $ 100,084,802 $ 88,598,338 LIABILITIES AND NET POSITION CURRENT LIABILITIES Accounts payable and accrued expenses $ 3,474,686 $ 3,877,749 Accrued construction retention 1,684, ,191 Accrued payroll and related liabilities 1,413,528 1,062,397 Estimated third-party payor settlements 5,347,676 - Current maturities of long-term debt 916, ,060 Total current liabilities 12,837,072 6,342,397 LONG-TERM DEBT, net of current portion 65,776,750 66,437,660 Total liabilities 78,613,822 72,780,057 NET POSITION Net investment in capital assets 17,382,582 13,940,394 Unrestricted 4,088,398 1,877,887 Total net position 21,470,980 15,818,281 Total liabilities and net position $ 100,084,802 $ 88,598,338 See accompanying notes. 9

12 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION (WITH 2014 COMPARATIVE INFORMATION) For the years ended June 30, OPERATING REVENUES Net patient service revenue, net of provision for uncollectible accounts of approximately $2,695,000 in 2015 and $2,151,000 in 2014 $ 22,967,327 $ 19,161,491 Other revenue 571, ,217 Total operating revenue 23,538,674 19,379,708 OPERATING EXPENSES Salaries and wages 9,159,608 9,423,648 Employee benefits 3,730,742 4,608,285 Professional fees 4,208,080 3,120,458 Supplies 867,592 1,050,620 Purchased services 885,197 1,503,266 Utilities 367, ,000 Insurance 265, ,476 Building and equipment rent 302, ,490 Repairs and maintenance 224, ,334 Depreciation and amortization 599, ,190 Other operating expenses 1,518, ,931 Total operating expenses 22,129,592 22,398,698 OPERATING INCOME (LOSS) 1,409,082 (3,018,990) NONOPERATING REVENUES District tax revenue for operations 794, ,901 District tax revenue for debt service 3,438,851 2,890,902 Investment income 10,413 9,191 Contributions - 344,763 Total nonoperating revenues 4,243,617 3,966,757 Change in net position 5,652, ,767 NET POSITION, Beginning of the year 15,818,281 14,870,514 NET POSITION, End of year $ 21,470,980 $ 15,818, See accompanying notes.

13 STATEMENTS OF CASH FLOWS (WITH 2014 COMPARATIVE INFORMATION) For the years ended, June Cash flows from operating activities: Receipts from and on behalf of patients $ 26,401,538 $ 21,206,428 Receipts from operations, other than patient services 571, ,516 Payments to vendors (11,020,022) (8,227,201) Payments for salaries, wages, and related benefits (12,539,219) (13,291,775) Net cash provided by (used in) operating activities 3,413,644 (36,032) Cash flows from noncapital financing activities: District tax revenues 794, ,082 Receipt of other nonoperating revenues - 361,618 Net cash provided by noncapital financing activities 794,353 1,034,700 Cash flows from capital and related financing activities: Acquisition and construction of capital assets (19,452,771) (19,880,066) District tax revenues to meet principal payments 3,438,851 2,890,902 Interest payments on long-term debt (2,925,595) (2,885,066) Principal repayments on long-term debt (674,715) (645,278) Net cash used in capital and related financing activities (19,614,230) (20,519,508) Cash flows from investing activities: Released from trustee for construction and debt service payment 21,575,127 19,678,765 Net purchase of short-term investments (3,472,038) (3,036) Interest and dividends received on investments 10,413 9,261 Net cash provided by investing activities 18,113,502 19,684,990 Net increase in cash and cash equivalents 2,707, ,150 Cash and cash equivalents at beginning of year 2,791,571 2,627,421 Cash and cash equivalents at end of year $ 5,498,840 $ 2,791,571 See accompanying notes. 11

14 STATEMENTS OF CASH FLOWS (CONTINUED) (WITH 2014 COMPARATIVE INFORMATION) For the years ended, June Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) $ 1,409,082 $ (3,018,990) Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Provision for bad debts 2,694,906 2,150,521 Depreciation and amortization 599, ,190 Changes in assets, deferred outflows of resources and liabilities: Patient accounts receivable, net (4,787,259) (1,925,602) Grants and other receivables - (31,307) Estimated third-party payor settlements 5,526,564 1,773,693 Inventories of drugs and supplies (11,460) 158,395 Prepaid expenses and deposits 130,669 (10,306) Accounts payable and accrued expenses (2,499,555) 104,684 Accrued payroll and related liabilities 351, ,690 Net cash provided by (used in) operating activities $ 3,413,644 $ (36,032) NONCASH INVESTING, CAPITAL, AND FINANCING ACTIVITIES Accrued construction retention $ 1,000,619 $ 419,770 Accreted interest $ 144,911 $ 184,160 Amortization of bond premium, included in construction in progress $ 177,794 $ 179,935 Amortization on deferred charges on refunding $ 72,140 $ 73,164 Capital assets acquired through capital leases $ 286,703 $ - 12 See accompanying notes.

15 Note 1 Organization and Summary of Significant Accounting Policies Reporting entity Tehachapi Valley Health Care District (the District ) is a public entity organized under Local Hospital Law as set forth in the Health and Safety Code of the State of California. The District is a political subdivision of the State of California and is generally not subject to federal and state income taxes. The District is located in Tehachapi, California, and is governed by a five-member Board of Directors elected by voters within the District. The District owns a hospital, licensed for 28 beds, located in Tehachapi, California. The District operates an acute care and long-term care facility under the critical access hospital designation. The District also operates family health centers in Tehachapi, California City and Mojave, California. The District provides inpatient and outpatient services primarily to residents in the local geographic area. Basis of accounting and presentation The accompanying financial statements have been prepared using the economic resource measurement focus and the accrual basis of accounting, in accordance with U.S. generally accepted accounting principles for health care organizations and the State Controller s Minimum Audit Requirements and Reporting Guidelines, and are presented in accordance with the reporting model as prescribed in Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No. 37, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments: Omnibus; and GASB Statement No. 38, Certain Financial Statement Note Disclosures; and GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflow of Resource, and Net Position. The District follows the business type activities requirements of GASB Statement No. 34 and No. 63. This approach requires the following components of the District s financial statements: Management s discussion and analysis Basic financial statements, including statements of net position, statements of revenues, expenses, and changes in net position, and statements of cash flows using the direct method for the District as a whole. Net Position Net position represents the difference between assets and deferred outflows of resources less liabilities and deferred inflows of resources. For the year ended June 30, 2015, the District did not report any deferred inflows of resources. GASB Statement No. 34 and subsequent amendments including GASB Statement No. 63 as discussed below, established standards for external financial reporting and requires that resources be classified for accounting and reporting purposes into the following net position categories: Net investment in capital assets Capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. Unrestricted net position This represents the portion of net position that is not subject to externally imposed constraints. Unrestricted net position may be designated for specific purposes by action of the Board of Directors or may otherwise be limited by contractual agreements with outside parties. 13

16 Note 1 Organization and Summary of Significant Accounting Policies (continued) Cash and cash equivalents Cash equivalents consist of amounts held in a bank s cash money market funds and in Kern County s investment portfolio. These amounts, held by the bond fund trustee and Kern County, are included in restricted cash. Interest income from these investments is included in investment income in nonoperating revenues. Patient accounts receivable Patient accounts receivable consist of amounts owed by various governmental agencies, insurance companies and private patients. The District manages its receivables by regularly reviewing the accounts, inquiring with respective payors as to collectability and providing for allowances on its accounting records for estimated contractual adjustments and uncollectible accounts. Significant concentrations of patient accounts receivable are discussed in Note 4. Inventories Inventories are consistently reported from year to year at cost determined by average costs and replacement values which are not in excess of market. The District does not maintain levels of inventory values such as those under a first-in, first out or last-in, first out method. Restricted cash Restricted cash includes contributor restricted funds, amounts designated by the Board of Directors for replacement or purchases of capital assets, and other specific purposes, and amounts held by trustees under specified agreements. Amounts consist primarily of funds held by banks, investment institutions and bond trustees. Amounts required to pay for current liabilities are classified as current assets. Capital assets Capital assets consist of property and equipment and are reported on the basis of cost at the date of acquisition, or in the case of donated items, on the basis of fair market value at the date of donation. Routine maintenance and repairs are charged to expense as incurred. Expenditures which increase values, change capacities, or extend useful lives are capitalized. Depreciation of property and equipment are computed using the straight-line method for both financial reporting and cost reimbursement purposes over the estimated useful lives of the assets, which range from 10 to 30 years for buildings and improvements, and 3 to 10 years for equipment. The District periodically reviews its capital assets for value impairment, and as of June 30, 2015, has determined that no capital assets are significantly impaired. The District capitalizes interest expense as a component of construction in progress, based on interest payments associated with applicable long-term borrowings. Total interest expense incurred and capitalized during the fiscal year ended June 30, 2015 was approximately $2,923,000. Costs incurred in obtaining computer software for internal use, which include costs of configuration, installation and testing, are capitalized by the District. Costs incurred during the preliminary project along with post-implementation stages of internal use software are expensed as incurred. Capitalized development costs are amortized over a period of three years. The capitalization and ongoing assessment of recoverability of computer software costs require considerable judgment with respect to external factors, including, but not limited to, technological and economic feasibility and estimated economic life. 14

17 Note 1 Organization and Summary of Significant Accounting Policies (continued) Compensated absences District policies permit most employees to accumulate vacation and sick leave benefits that may be recognized as paid time off or, in limited circumstances, as a cash payment. Expense and the related liability are recognized as benefits and are earned when the employee is expected to realize the benefit as time off or in cash. Compensated absence liabilities are computed using the regular pay and termination rates in effect at the statement of net position date. Deferred outflows and deferred inflows of resources When applicable, the statement of net position will report a separate section for deferred outflows of resources. Deferred outflows of resources represent outflows of resources (consumption of net position) that apply to future periods and that therefore will not be recognized as an expense until that time. The District reports deferred charges resulting from the difference between the reacquisition price and the refunding bond proceeds as deferred outflows of resources. These charges are being recognized in future years over the shorter period of the remaining maturity of the original bonds or the new bonds. For the year ended June 30, 2015, the District capitalized approximately $72,000 of amortization of the deferred charges to the hospital construction project. When applicable, the statement of net position will report a separate section for deferred inflows of resources. Deferred inflows of resources represent inflows of resources (acquisition of net position) that apply to future periods and that therefore are not recognized as an inflow of resources (revenue) until that time. At June 30, 2015 the District did not report any deferred inflows of resources. Concentrations of credit risk Financial instruments which potentially subject the District to concentrations of credit risk consist primarily of investments and accounts receivable. The investment portfolios are managed by outside investment firms and Kern County within established guidelines which, as a matter of policies, limit the amounts which may be invested in any one issuer. Concentration of credit risk with respect to accounts receivable, other than from government programs, is limited due to the large number of payors comprising the District s patient base. Risk management The District is exposed to various risks of loss from torts; theft of, damage to, and destructions of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters; and medical malpractice. Commercial insurance coverage is purchased for claims arising from such matters. 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts were reclassified to conform to the current year presentation. 15

18 Note 1 Organization and Summary of Significant Accounting Policies (continued) Net patient service revenue Net patient service revenue is initially reported at estimated net realizable amounts from patients, third-party payors and others for services rendered during the period in which such services were provided. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Adjustments in the recognition of revenue on an estimated basis occur in future periods as the adjustments become known. The District recognized income of approximately $459,000 in 2015 related to services provided in prior years. To ensure accurate payments to providers, the Tax Relief and Health Care Act of 2006 mandated the Centers for Medicare & Medicaid Services (CMS) to implement a Recovery Audit Contractor (RAC) program on a permanent and nationwide basis no later than The program uses RAC to search for potentially improper Medicare payments that may have been made to health care providers that were not detected through existing CMS program integrity efforts, which have occurred at least one year ago but not longer than three years ago. RAC assessments against the District have not been significant. Charity care The District provides care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the District does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient service revenue. The District maintains records to identify and monitor the level of charity care it provides. Grants and contributions From time to time, the District receives grants from various governmental agencies, private organizations including related organizations, and individuals. Unconditional pledges to give cash and other assets are reported at fair value at the date the pledge is received, which is then treated as its cost basis. Grants and contributions may be restricted for either specific operating purposes or capital acquisitions. District tax revenue The District receives financial support from property taxes. For the year ended June 30, 2015, the District recognized approximately $794,000 to support operations and approximately $3,439,000 to fund debt service obligations based on collections received by the County. These receipts are classified as nonoperating revenue as the revenue is not directly linked to patient care. Property taxes are levied by the County on the District s behalf during the year and are intended to help finance the District s activities during the same year. Amounts are levied on the basis of the most current property values on record with the County. The District recognizes revenues when collections are received by the County and records these as restricted cash and investments on the statement of net position. Property taxes are considered delinquent on the day following each payment date. A summary of the property tax calendar is as follows: 16 Lien date January 1 Due dates November 1 and February 1 Delinquent dates December 10 and April 10

19 Note 1 Organization and Summary of Significant Accounting Policies (continued) Operating revenue and expenses The District s statements of revenues, expenses and changes in net position distinguishes between operating and nonoperating revenues and expenses. Operating revenues result from exchange transactions associated with providing health care services, which is the District s principal activity. Operating expenses are all expenses incurred to provide health care services, other than financing costs. Nonoperating revenues and expenses are those transactions not considered directly linked to providing health care services. Comparative financial information The statements of net position; revenues, expenses and changes in net position; and cash flows include certain prior-year comparative information. Such comparative information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the District s financial statements for the year ended June 30, 2014, from which the comparative information was derived. Note 2 Cash and Cash Equivalents At June 30, 2015, the District had deposits at various financial institutions in the form of operating cash and cash equivalents. All of these funds were held in deposits which are collateralized in accordance with the California Government Code (CGC) except for $250,000 per financial institution that is federally insured. Under the provisions of the CGC, California banks and savings and loan associations are required to secure the District s deposits by pledging government securities as collateral. The market value of pledged assets must equal at least 110% of the District s deposits. California law also allows financial institutions to secure the District deposits by pledging first trust deed mortgage notes that have a value of 150% of the District s total deposits. The pledged securities are held by the pledging financial institution s trust department in the name of the District. Note 3 Investments Authorized investments Under provisions of the District s investment policy, and in accordance with the California Government Code Section 53601, the District may invest or deposit in the following types of investments: Max Max Investment Maturity % of Portfolio Local Agency Investment Fund n/a 100% Negotiable certificates of deposit 5 years 30% Securities of the U.S. Government and its sponsored agencies 5 years n/a 17

20 Note 3 Investments (continued) In accordance with the policy, the District may invest moneys not required for expenditure in other types of investments after securing further approval from the Board. Investments of debt proceeds held by bond trustee are governed by provisions of the debt agreements rather than general provisions of the District s investment policy, but also require that investments be limited to the provisions set out in the California Government Code Section The District is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section under the oversight of the Treasurer of the State of California. The fair value of the District s investment in this pool is reported in the accompanying financial statements at amounts based upon the District s pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. A separate financial report for the LAIF is prepared by the Treasurer in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Copies of the report can be obtained from the California State Treasurer, 915 Capitol Mall, Room 106, Sacramento, California Interest rate risk As a means of limiting its exposure to fair value losses arising from rising interest rates, the District s investment policy generally limits its investment portfolio to maturities of less than five years unless approved by the Board of Directors. The external investment pool is presented as an investment with a maturity of less than one year because such investments are redeemable in full immediately. Information about the sensitivity of the District s investments to market interest rate fluctuations is provided by the following table that shows the distribution of the District s investments by maturity: Remaining Maturity Less than More than Investment Type Total 1 year 3 to 5 years 5 years Local Agency Investment Fund $ 4,001,154 4,001, Total $ 4,001,154 4,001, Credit risk Credit risk is the risk that the issuer or other counterparty to an investment will not fulfill its obligations. The District s investment policy generally limits its investments to a credit rating of A or the equivalent by a nationally recognized statistical rating organization. At June 30, 2015, the District s investments consisted of the Local Agency Investment Fund which is not rated. Custodial credit risk For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the District will not be able to recover the value of its investment or collateral securities that are in the possession of an outside party. All of the District s investments, as disclosed in the table above at June 30, 2015, are held by custodians in names other than the District s. The District s investment policy for custodial credit risk requires compliance with the provisions of state law. 18

21 Note 4 Net Patient Service Revenues Net patient service revenues summarized by payor for the year ended June 30, 2015 consist of the following: Medicare 29 % Medi-Cal 45 Other third-party payors 21 Self pay % The District has agreements with third-party payors that provide for payments to the District at amounts different from its established rates. A summary of the payment arrangements with major thirdparty payors is as follows: Medicare As a designated critical access hospital, Medicare reimbursement is generally settled with the District on cost-based formulas. Interim payments for inpatient and outpatient care services rendered to Medicare program beneficiaries are based on estimated determined rates throughout the year. After year-end and the submission of an annual cost report, program expenses are audited by the Medicare fiscal intermediary and settlements are reached to finalize the reimbursement of Medicare program expenses for the year. At June 30, 2015, cost reports through June 30, 2012 have been audited or otherwise settled. The District recognized income of approximately $747,000 in 2015 related to changes in estimates on prior year settlements. Medi-Cal For traditional Medi-Cal (non-hmo) services, payments for inpatient services rendered to patients are made based on reasonable costs, while outpatient payments are based on pre-determined charge screens. The District is paid for cost reimbursement services at an interim rate with final settlement determined after submission of annual cost reports and audits thereof by Medi-Cal. At June 30, 2015, cost reports through June 30, 2011 have been audited or otherwise settled. Other Payments for services rendered to other than Medicare and traditional Medi-Cal patients are based on established rates or on agreements with certain commercial insurance companies, health maintenance organizations and preferred provider organizations which provide various discounts from established rates. The District grants credit without collateral to its patients, many of whom are area residents and are insured under third-party payer agreements. 19

22 Note 5 Capital Assets Capital assets at June 30, 2015 and 2014 consist of the following: Balance at Balance at June 30, 2014 Additions Retirements Other June 30, 2015 Capital assets not being depreciated: Land $ 1,651, ,000 $ - $ 250,000 $ 2,071,702 Construction in progress 37,551,550 25,242,612 - (250,000) 62,544,162 Total capital assets not being depreciated 39,203,252 25,412, ,615,864 Capital assets being depreciated: Land improvements 82, ,626 Buildings and improvements 1,344, ,344,758 Equipment and software 6,490, , ,837,539 Total capital assets being depreciated 7,917, , ,264,923 Less accumulated depreciation for: Land improvements (82,826) (82,826) Buildings and improvements (1,262,366) (12,094) - - (1,274,460) Equipment and software (5,130,481) (587,472) - - (5,717,953) Total accumulated depreciation (6,475,673) (599,566) - - (7,075,239) Capital assets, net $ 40,645,380 $ 25,160,168 $ - $ - $ 65,805,548 Construction commitments for various construction projects totaled approximately $18,918,000 as of June 30, Note 6 Long-Term Debt Long-term debt at June 30, 2015 and 2014 consists of the following: Balance at Balance at Due Within June 30, 2014 Additions Redemptions June 30, Year 2004 Election, 2004 Series A $ 689,988 $ - $ (315,000) $ 374,988 $ Election, 2006 Series B 2,324,991 - (125,000) 2,199, , Election, 2009 Series C 2,156,113 - (54,715) 2,101,398 51, Election, 2013 Series A Refunding Bonds 7,865,000 - (80,000) 7,785, , Election, Series ,000,000 - (100,000) 49,900,000 50,000 Capital lease - 286,703 (41,703) 245,000 38,871 Unamortized bond premiums 3,025,816 - (177,794) 2,848, ,501 Accreted interest 1,093, ,196 (45,285) 1,238,723 53,821 Total long-term debt $ 67,155,720 $ 476,899 $ (939,497) $ 66,693,122 $ 916,372 General obligation bonds, 2004 Election, 2004 Series A The 2004 Series A bonds were issued by the District in August 2004 and consisted of current interest bonds in the aggregate of $9,350,000 and capital appreciation bonds in the aggregate of $374,

23 Note 6 Long-Term Debt (continued) In March 2013, the District offered for sale $8,055,000 of General Obligation Refunding Bonds, 2004 Election 2013 Series A. The bonds were issued to advance refund the 2004 Series A current interest bonds (2004 CIB). The proceeds associated with the refunding were deposited in an irrevocable escrow account for future payment. The outstanding balance of the defeased debt was paid by the escrow agent in November The cash flow savings from the refunding amounted to approximately $452,000, and the present value of the economic gain to the District and the taxpayers was approximately $368,000 at the time of the refunding. The refunded bonds are considered in-substance defeased and are not recorded on the financial statements. The first principal maturity of the 2004 Series A capital appreciation bonds (2004 CAB) will commence on November 1, 2027 and mature annually through The 2004 CAB will accrete in value on a basis of a constant interest rate ranging from 5.72% to 5.76% compounded and commencing on May 1, 2005 and semiannually on May 1 and November 1. The principal and accrued interest balances outstanding on the 2004 CAB at June 30, 2015 are approximately $375,000 and $566,000, respectively. The 2004 CAB are not subject to optional redemption prior to their scheduled maturities. General obligation bonds, 2004 Election, 2006 Series B The 2006 Series B bonds were issued by the District in June 2006 and consist of current interest bonds in the aggregate of $2,340,000 and capital appreciation bonds in the aggregate of $659,991. The 2006 Series B current interest bonds (2006 CIB) bear interest at rates ranging from 4.00% to 4.25% and are payable semiannually on May 1 and November 1. The principal matures annually on November 1 through 2014 and then every three years through The 2006 CIB maturing on or before November 1, 2016 are not subject to optional redemption prior to scheduled maturity dates; however, the 2006 CIB maturing on or after November 1, 2017 are subject to optional redemption prior to their stated maturity dates. The principal and accrued interest balances outstanding on the 2006 CIB at June 30, 2015 are approximately $1,540,000 and $10,000, respectively. The first principal maturity of the 2006 Series B capital appreciation bonds (2006 CAB) will commence on November 1, 2030 and mature annually through The 2006 CAB will accrete in value on a basis of a constant interest rate ranging from 4.83% to 4.85% compounded and commencing on November 1, 2006 and semiannually on May 1 and November 1. The principal and accrued interest balances outstanding on the 2006 CAB at June 30, 2015 are approximately $660,000 and $526,000, respectively. The 2006 CAB are not subject to optional redemption prior to their scheduled maturities. General obligation bonds, 2004 Election, 2009 Series C The 2009 Series C bonds were issued by the District in July 2009 and consist of current interest bonds in the aggregate of $1,950,000 and capital appreciation bonds in the aggregate of $323,