Report of Independent Auditors in Accordance with Uniform Guidance and Financial Statements with Supplementary Information for

Transcription

1 Report of Independent Auditors in Accordance with Uniform Guidance and Financial Statements with Supplementary Information for American Samoa Medical Center Authority Lyndon B. Johnson Tropical Medical Center Pago Pago, American Samoa September 30, 2016 and 2015

2 CONTENTS REPORT OF INDEPENDENT AUDITORS 1 3 PAGE FINANCIAL STATEMENTS Statements of net position 4 Statements of revenues, expenses, and changes in net position 5 Statements of cash flows 6 7 Notes to financial statements 8 25 REQUIRED SUPPLEMENTARY INFORMATION Schedule of the Medical Center's proportionate share of the net pension liability 26 Schedule of the Medical Center's contributions 27 SUPPLEMENTARY INFORMATION Schedule of expenditures of federal awards 28 Notes to schedule of expenditures of federal awards 29 REPORT OF INDEPENDENT AUDITORS 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 AUDITORS ON COMPLIANCE FOR THE MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS SCHEDULE OF PRIOR AUDIT FINDINGS 42 45

3 To the Board of Directors American Samoa Medical Center Authority Lyndon B. Johnson Tropical Medical Center Pago Pago, American Samoa Report on the Financial Statements REPORT OF INDEPENDENT AUDITORS We have audited the accompanying financial statements of American Samoa Medical Center Authority Lyndon B. Johnson Tropical Medical Center ( LBJ or Medical Center ), a component unit of the American Samoa Government, as of and for the years ended September 30, 2016 and 2015, and the related notes to the financial statements, which collectively comprise LBJ'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 an opinion on these financial statements based on our audits. We conducted our audits 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 audits 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 Medical Center 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 qualified audit opinion. 1

4 Basis for Qualified Opinion We were unable to obtain sufficient appropriate audit evidence about the recorded amounts and related disclosures for patient accounts receivable and net patient services revenue as of and for the years ended September 30, 2016 and Consequently, we were unable to determine whether any adjustments to these amounts were necessary. Qualified Opinion In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of the Medical Center as of September 30, 2016 and 2015, and the changes in financial position and, where applicable, its cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of a Matter As discussed in Note 9 to the financial statements, in 2015, the Medical Center adopted Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27 and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an amendment of GASB Statements No. 68. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the schedule of the Medical Center's proportional share of the net pension liability on page 26 and the schedule of the Medical Center's contributions on page 27 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by GASB, 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. Management has omitted the management's discussion and analysis and budgetary comparison information that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by GASB, 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. Our opinion on the basic financial statements is not affected by this missing information. 2

5 Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise LBJ's basic financial statements. The schedule of expenditures of federal awards as required by Title 2, U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards is presented for purposes of additional analysis and is not a required part of the basic financial statements. The schedule of expenditures of federal awards is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic 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 basic 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 April 28, 2017 on our consideration of the Medical Center 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 on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Medical Center's internal control over financial reporting and compliance. Yakima, Washington April 28,

6 AMERICAN SAMOA MEDICAL CENTER AUTHORITY STATEMENTS OF NET POSITION SEPTEMBER 30, 2016 AND 2015 ASSETS CURRENT ASSETS Cash and cash equivalents $ 855,930 $ 1,012,884 Patient accounts receivable, net 7,928,329 4,559,458 Due from third party reimbursement programs 2,601,459 1,299,787 Other receivables 603, ,227 Related party receivables 7,326,402 7,949,601 Prepaid expenses 1,626,424 1,182,803 Inventories 3,100,132 2,059,419 Total current assets 24,041,806 19,023,179 CAPITAL ASSETS Construction in progress 4,725,279 8,297,625 Depreciable capital assets, net of accumulated depreciation 23,105,308 18,746,285 27,830,587 27,043,910 Total assets 51,872,393 46,067,089 DEFERRED OUTFLOWS OF RESOURCES Deferred outflows related to pension activity 14,278,770 4,308,784 TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES $ 66,151,163 $ 50,375,873 LIABILITIES AND NET POSITION CURRENT LIABILITIES Accounts payable $ 6,019,624 $ 7,201,994 Related party payable 1,412,739 1,814,226 Accrued liabilities 566,764 1,280,269 Compensated absences current portion 2,114,994 2,009,720 Current portion of long term debt 643, ,980 Total current liabilities 10,758,101 12,950,189 NONCURRENT LIABILITIES Compensated absences, net of current portion 1,050,456 1,028,087 Advance from American Samoa Government 5,000,000 5,000,000 Long term debt, net of current portion 1,069,635 1,659,951 Net pension liability 26,341,853 14,368,021 33,461,944 22,056,059 Total liabilities 44,220,045 35,006,248 NET POSITION Net investment in capital assets 26,116,972 24,739,979 Restricted 4,415,393 2,274,749 Unrestricted (8,601,247) (11,645,103) Total net position 21,931,118 15,369,625 TOTAL LIABILITIES AND NET POSITION $ 66,151,163 $ 50,375,873 See accompanying notes. 4

7 AMERICAN SAMOA MEDICAL CENTER AUTHORITY STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION YEARS ENDED SEPTEMBER 30, 2016 AND OPERATING REVENUES Net patient service revenue (net of provision for bad $ 11,846,658 $ 10,226,567 debts of $11,838,243 in 2016 and $7,627,798 in 2015) Medicaid reimbursements 19,352,936 18,821,804 Cafeteria and other 947,409 1,375,348 Total operating revenues 32,147,003 30,423,719 OPERATING EXPENSES Salaries, wages, and employee benefits 28,113,529 27,202,195 Services, professional fees, and general administration 2,781,319 2,834,261 Supplies and pharmaceuticals 11,741,498 12,850,462 Utilities 1,500,397 2,277,145 Depreciation 3,311,313 2,225,811 Other 3,439,909 3,342,132 Total operating expenses 50,887,965 50,732,006 OPERATING LOSS (18,740,962) (20,308,287) NONOPERATING REVENUE AND EXPENSES Government appropriations 6,000,000 6,000,000 Federal and local grants 10,526,236 11,022,872 Wage tax revenue 4,760,100 5,906,422 Interest expense (23,882) (76,055) Other nonoperating revenue 474, ,632 Total nonoperating revenue and expenses 21,737,286 23,373,871 EXCESS OF REVENUE OVER EXPENSES BEFORE CAPITAL GRANTS 2,996,324 3,065,584 CAPITAL GRANTS 3,565,169 3,837,968 INCREASE IN NET POSITION 6,561,493 6,903,552 NET POSITION, beginning of year 15,369,625 8,466,073 NET POSITION, end of year $ 21,931,118 $ 15,369,625 See accompanying notes. 5

8 AMERICAN SAMOA MEDICAL CENTER AUTHORITY STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2016 AND CASH FLOWS FROM OPERATING ACTIVITIES Receipts from patient and third party payors $ 7,176,115 $ 7,862,938 Receipts from Medicaid reimbursements 19,709,033 18,673,610 Receipts from cafeteria and other 947,409 1,375,348 Payments to suppliers and for other services (22,176,509) (20,816,864) Payments to employees (27,281,407) (26,150,336) Net cash from operating activities (21,625,359) (19,055,304) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Government appropriations 6,000,000 6,000,000 Federal and local grants 10,526,236 11,022,872 Nonoperating revenue 474, ,632 Interest payments (23,882) (76,055) Wage tax revenue 5,383,299 1,690,077 Net cash from noncapital financing activities 22,360,485 19,157,526 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital grants 3,565,169 3,837,968 Acquisition of capital assets (3,866,933) (4,888,530) Payments on long term debt (590,316) (864,053) Net cash from capital and related financing activities (892,080) (1,914,615) NET DECREASE IN CASH AND CASH EQUIVALENTS (156,954) (1,812,393) CASH AND CASH EQUIVALENTS, beginning of year 1,012,884 2,825,277 CASH AND CASH EQUIVALENTS, end of year $ 855,930 $ 1,012,884 6 See accompanying notes.

9 AMERICAN SAMOA MEDICAL CENTER AUTHORITY STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2016 AND RECONCILIATION OF OPERATING LOSS TO NET CASH FROM OPERATING ACTIVITIES Operating loss $ (18,740,962) $ (20,308,287) Adjustments to reconcile operating loss to net cash flows from operating activities Depreciation 3,311,313 2,225,811 Provision for bad debt 11,838,243 7,628,196 Increase in pension expense 2,003, ,237 Increase (decrease) in cash due to changes in assets and liabilities Patient accounts receivable (15,207,114) (8,771,079) Due from third party reimbursement programs (1,301,672) (1,220,746) Other receivable 356,097 (148,194) Prepaid expenses (443,621) (364,940) Inventories (1,040,713) (634,809) Accounts payable (1,814,914) 1,743,196 Accrued salaries, wages, and benefits (713,505) 20,307 Compensated absences 127, ,004 Total adjustments (2,884,397) 1,252,983 NET CASH FROM OPERATING ACTIVITIES $ (21,625,359) $ (19,055,304) SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended September 30, 2016, the Medical Center reduced the retainage payable by $231,057, which is included in construction in progress. See accompanying notes. 7

10 Note 1 Description of Operations AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS American Samoa Medical Center Authority Lyndon B. Johnson Tropical Medical Center (the Medical Center or LBJ) is a 128 bed general acute care hospital which provides health care to the Territory of American Samoa. LBJ is a component unit of the American Samoa Government (ASG), and the results of LBJ s operations are included in ASG s basic financial statements. The criteria used to determine inclusion in the financial reporting entity includes financial interdependency, selection of governing authority, designation of management, and accountability for fiscal matters. LBJ was opened in 1968 to provide patient focused, comprehensive, high quality, and cost effective health care and related services that address the health needs of the people of American Samoa. The facility is funded through federal appropriations, patient service revenue, and Medicaid reimbursements. LBJ was formally granted semiautonomous status as an independent agency of the Executive Branch of the American Samoan Government through an Executive Order on September 22, 1997, and then by Legislative Act on February 26, 1998, in order to satisfy federal requirements. LBJ is governed by a five member Board of Directors. The Board members are appointed by the Governor of American Samoa and must receive approval of the Legislature to serve the two year term. Note 2 Summary of Significant Accounting Policies Basis of accounting The accompanying financial statements have been prepared on the accrual basis of accounting using the economic resources measurement focus. Under this method of accounting, revenues are recognized when earned and expenses are recorded when liabilities are incurred without regard to receipt or disbursement of cash. Accounting standards The operations of the Medical Center are presented in the accompanying basic financial statements as a single proprietary fund. The Medical Center has no component units. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as prescribed by the Government Accounting Standards Board (GASB). Net position Net position of the Medical Center represents the residual interest in assets and deferred outflows of resources after liabilities are deducted and are classified into three components. The net investment in capital assets component of net position consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of related debt that is attributable to the acquisition, construction, or improvement of those assets. Net position is reported as restricted when constraints are imposed by third parties or enabling legislation. The accounts shown as restricted net position are amounts that can be spent only for the specific purposes stipulated by constitutional provisions or enabling legislation, or imposed by creditors, grantors, or other external resource providers. All other net position is unrestricted. 8

11 Note 2 Summary of Significant Accounting Policies (continued) AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Recent accounting pronouncement The following pronouncements have been issued by the GASB and implemented by the Medical Center: Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68 and Amendments to Certain Provisions of GASB Statements 67 and 68, establishes requirements for pensions and pension plans that are not administered through a trust meeting specified criteria. This Statement is effective for the fiscal year ending September 30, Statement No. 72, Fair Value Measurement and Application, addresses accounting and financial reporting issues related to fair value measurements. This Statement provides guidance for determining fair value measurements for financial reporting purposes and provides guidance for applying fair value to certain investments and disclosures related to fair value measurements. This Statement is effective for the fiscal year ending September 30, Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, identifies the hierarchy of GAAP for governmental financial reporting. This Statement reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and nonauthoritative literature in the event that the accounting treatment for a transaction is not specified with a source of authoritative GAAP. This Statement is effective for the fiscal year ending September 30, The following pronouncements have been issued by the GASB but have not yet been implemented by the Medical Center. Management is evaluating the effect that the implementation of these Statements will have on the Medical Center s financial statements. Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, replaces Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and addresses the financial reports of defined benefit postemployment benefits (OPEB) plans that are administered through trusts that meet specified criteria. This Statement requires more extensive note disclosures and required supplementary information related to the measurement of OPEB liabilities for which assets have been accumulated, including information about the annual money weighted rate of return on plan investments. This Statement is effective for the fiscal year ending September 30, Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, replaces Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefit Plans Other Than Pensions, and requires governments to report a liability on the financial statements for the OPEB they provide. This Statement also requires governments to present more extensive note disclosures and required supplementary information about their OPEB liabilities. This Statement is effective for the fiscal year ending September 30,

12 Note 2 Summary of Significant Accounting Policies (continued) AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Statement No. 77, Tax Abatement Disclosures, requires new financial statement disclosures about tax abatement agreements between a government and an individual or entity in which the government promises to forgo tax revenues and the individual or entity promises to take a specific action that contributes to the economic development or otherwise benefits the government or its citizens. This Statement requires disclosure of tax abatement information of the reporting government s own tax abatement agreements and agreements entered into by other governments that reduce the reporting government s tax revenues. This Statement is effective for the fiscal year ending September 30, Statement No. 78, Pensions Provided through Certain Multiple Employer Defined Benefit Pension Plans, amends the scope and applicability of Statement No. 68 to exclude pensions provided to employees of state or local governmental employers through cost sharing multiple employer defined benefit plans that are not state or local governmental pension plans, are used to provide benefits to both governmental and non governmental employers, and have no predominant state or local governmental employer. This Statement also establishes new requirements for the recognition of pension expenditures and liabilities and additional footnote disclosures and required supplementary information for pensions that have these characteristics. This Statement is effective for the fiscal year ending September 30, Statement No. 79, Certain External Investment Pools and Pool Participants, establishes criteria for an external investment pool to qualify for making the election to measure all of its investments at amortized cost for financial reporting purposes and additional footnote disclosures requirements for governments that participate in those pools. If the external investment pool does not meet the criteria of this Statement, the pool s participants should measure their investments in the pool at fair value, as provided in Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, as amended. This Statement is effective for the fiscal year ending September 30, Statement No. 80, Blending Requirements for Certain Component Units An Amendment of GASB Statement No. 14, amends the blending requirements for the financial statement presentation of component units of state and local governments. The additional criteria require blending of a component unit incorporated as a not for profit corporation in which the primary government is the sole corporate member. This Statement is effective for the fiscal year ending September 30, Statement No. 81, Irrevocable Split Interest Agreements, provides recognition and measurement guidance for situations in which a government is a beneficiary of an irrevocable split interest agreement, a giving arrangement used by donors to provide resources to two or more beneficiaries. This Statement is effective for the fiscal year ending September 30, Statement No. 83, Certain Asset Retirement Obligations, will enhance comparability of financial statements among governments by establishing uniform criteria for governments to recognize and measure certain AROs, including obligations that may not have been previously reported. This Statement also will enhance the decision usefulness of the information provided to financial statement users by requiring disclosures related to those AROs. This Statement is effective for the fiscal year ending September 30,

13 Note 2 Summary of Significant Accounting Policies (continued) AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Use of estimates The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. Cash and cash equivalents LBJ considers all highly liquid investment instruments with an original maturity of three months or less to be cash equivalents. Deposits GASB Statement No. 40 requires disclosures for deposits that have exposure to custodial credit risk. Custodial credit risk is the risk that in the event of a bank failure, LBJ s deposits may not be returned to it. Such deposits are not covered by depository insurance and are either uncollateralized, or collateralized with securities held by the pledging financial institution or held by the pledging financial institution but not in the depositor government s name. LBJ does not have a deposit policy for custodial credit risk. As of September 30, 2016, the carrying amount of LBJ s total cash and cash equivalents was $855,930 and the corresponding bank balances were $1,316,333. As of September 30, 2016, bank deposits in the amount of $726,412 were Federal Deposit Insurance Corporation (FDIC) insured. LBJ does not require collateralization of its cash deposits; therefore, deposit levels in excess of FDIC insurance coverage are uncollateralized. Accordingly, these deposits are exposed to custodial credit risk. LBJ has not experienced any losses on such accounts and management believes it is not exposed to any significant credit risk on its deposits. Patient accounts receivable Accounts receivable are uncollateralized patient obligations, most of whom are local residents insured under Medicaid agreements, and are stated at the amount management expects to collect from outstanding balances. LBJ bills third party payors on the patients behalf, or if a patient is uninsured, the patient is billed directly. Once claims are settled with the primary payor, any secondary insurance is billed, and patients are billed for copay and deductible amounts that are the patients responsibility. Payments on patient accounts receivable are applied to the specific claim identified on the remittance advice or statement. LBJ does not have a policy to charge interest on past due accounts. The carrying amounts of patient accounts receivable are reduced by allowances that reflect management s best estimate of the amounts that will not be collected. Management provides for contractual adjustments under terms of third party reimbursement agreements through a reduction of gross revenue and a credit to patient receivables. In addition, management provides for probable uncollectible amounts, primarily uninsured patients and amounts patients are personally responsible for, through a charge to operations and a credit to a valuation allowance based on its assessment of historical collection likelihood and the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the provision for bad debt and a credit to patient accounts receivable. Patient accounts receivable are recorded in the accompanying statement of net position net of allowance for contractual adjustments for doubtful accounts. 11

14 Note 2 Summary of Significant Accounting Policies (continued) AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Related party receivable The related party receivable represents an amount owed from the American Samoa Government (ASG) as reimbursement for grant related expenses, 2% wage tax, and other amounts due from ASG. LBJ considers the receivable at September 30, 2016 and 2015 to be fully collectible; accordingly, no allowance for doubtful accounts is required. Prepaid expenses Prepaid expenses consist primarily of advanced payments made by LBJ for patient care and medical supplies. Inventories Inventories, comprised primarily of medical supplies and pharmaceuticals, are stated at the lower of cost or market (net realizable value). Cost is determined using the first in, first out method. Capital assets and depreciation Capital assets are stated at cost or estimated historical cost, if purchased, or, if donated, at estimated fair value at date of donation. All items with a minimum unit cost of $5,000 and a useful life of at least three years are considered capital assets. Maintenance and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the statement of revenues, expenses, and changes in net position. Capital assets, with the exception of construction work in progress, are depreciated on a straight line basis over their estimated useful lives, which range from three to 30 years as follows: Building structures Fixtures and fixed equipment Machinery and equipment Vehicles years 5 15 years 3 20 years 3 5 years Capital assets are reviewed for impairment when events or changes in circumstances suggest that the service utility of the capital asset may have significantly and unexpectedly declined. Capital assets are considered impaired if both the decline in service utility of the capital asset is large in magnitude and the event or change in circumstance is outside the normal life cycle of the capital asset. Such events or changes in circumstances that may be indicative of impairment include evidence of physical damage, enactment or approval of laws or regulations or other changes in environmental factors, technological changes or evidence of obsolescence, changes in the manner or duration of use of a capital asset, and construction stoppage. The determination of the impairment loss is dependent upon the event or circumstance in which the impairment occurred. Impairment losses, if any, are recorded in the statements of revenue, expenses, and changes in net position. There were no impairment losses recorded in the years ended September 30, 2016 and Pensions For purposes of measuring the net pension liability, deferred outflows of resources and pension expense, information about the fiduciary net position of the American Samoa Government Employees Retirement Fund (the Fund) and additions to/deductions from the Fund's fiduciary net position have been determined on the same basis as they are reported by the Fund. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. 12

15 Note 2 Summary of Significant Accounting Policies (continued) AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Compensated absences It is the policy of LBJ to permit employees to accumulate earned but unused vacation benefits, which will be paid to the employees upon separation from service. Vacation leave is fully vested when earned, but accumulated leave cannot exceed 60 days at the beginning of any calendar year. Sick leave is vested when earned and the accumulation is not limited. Employees separated from service are compensated for unused accrued sick leave at the rate of 50 percent of sick leave in excess of 239 hours. Retiring employees with less than 30 years of service may apply accumulated sick leave for additional service credits. Net pension liability Net pension liability has been recognized in accordance with GASB No. 68 and the most recent Fund actuarial measurement date (see Note 9). The net pension liability is measured as a portion of the present value of projected benefits to be provided through the Fund to current active and inactive employees attributed to those employees past periods of service less the Fund s fiduciary net position as of the measurement date. Net patient service revenue Net patient service revenue and Medicaid reimbursements are reported at the estimated realizable amounts from patients, third party payors, and others for services rendered including estimated settlements under reimbursement agreements. The Medical Center has agreements with third party payors that provide for payments to the Medical Center at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Retroactive adjustments are accrued on an estimated basis in the period the services are rendered and adjusted in future periods as final settlements are determined. Differences between the estimated amounts accrued and interim and final settlements are reported in operations in the year of settlement. Estimated third party payor settlement amounts included in the accompanying statement of net position approximate fair value. Operating revenue and expenses LBJ s statements of revenue, expenses, and changes in net position distinguishes between operating and nonoperating revenue and expenses. Operating revenue results from exchange transactions associated with providing health care services LBJ s principal activity. Nonexchange revenue, including taxes, grants, and contributions received for purposes other than capital asset acquisition, are reported as nonoperating revenue. Operating expenses are all expenses incurred to provide health care services. Donated services and goods A substantial number of volunteers have donated hours to the Medical Center's program services and fund raising campaigns during the year; however, these donated services are not reflected in the financial statements since the services do not require specialized skills. Materials and other assets received as donations are recorded and reflected in the accompanying financial statements at their fair values at the date of receipt. Income taxes LBJ is a component unit of the ASG and is exempt from federal income taxes on operations or activities under Section 115 of the Internal Revenue Code. 13

16 Note 2 Summary of Significant Accounting Policies (continued) AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Contributions, government appropriations, and grants Contributions, government appropriations, and grants are considered available for unrestricted use unless specifically restricted by the donor or government agency. Revenues from contributions, government appropriations, and grants (including contributions of capital assets) are recognized when all eligibility requirements, including time requirements, are met. Contributions, government appropriations, and grants may be restricted for either specific operating purposes or for capital purposes. Funds that are unrestricted or that are restricted to a specific purpose are reported as nonoperating revenue. Amounts restricted to capital acquisitions are reported after nonoperating revenue and expenses. Risk management LBJ is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; business interruption; employee injuries and illnesses; natural disasters; medical malpractice; and employee health, dental, and accident benefits. LBJ carries commercial insurance for these risks of loss. Settled claims resulting from these risks have not exceeded the commercial insurance coverage in any of the past three years. Restricted resources When LBJ has both restricted and unrestricted resources available to finance a particular program, it is LBJ's policy to use restricted resources before unrestricted resources. Deferred outflows of resources Deferred outflows of resources represent consumption of net position that applies to future periods as the result of pension activity and will not be recognized as an outflow of resources (expense) until those future periods. Reclassification Certain amounts reported in the September 30, 2015 financial statements have been reclassified to conform to the September 30, 2016 financial statement presentation. Subsequent events Subsequent events are events or transactions that occur after the statement of net position date but before financial statements are available to be issued. LBJ recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the statement of net position, including the estimates inherent in the process of preparing the financial statements. LBJ s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the statement of net position but arose after the statement of net position date and before financial statements are issued. LBJ has evaluated subsequent events through April 28, 2017, which is the date the financial statements are issued, and concluded that there were no events or transactions that need to be disclosed. 14

17 Note 3 Patient Accounts Receivable, net AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Patient accounts receivable, net, consisted of the following at September 30: Patient accounts receivable Medicare $ 2,772,570 $ 17,239,329 Medicaid 4,044,132 9,652,818 Patients and other third party payors 107,620,011 12,415, ,436,713 39,308,073 Less: Allowance for contractual adjustments 98,599,535 26,822,281 Allowance for doubtful accounts 7,908,849 7,926,334 Patients accounts receivable, net $ 7,928,329 $ 4,559,458 Note 4 Inventories Inventories consisted of the following at September 30: Medical supplies and other $ 1,129,947 $ 814,510 Pharmacy 1,806,755 1,136,411 Other 163, ,498 Total inventories $ 3,100,132 $ 2,059,419 15

18 AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Note 5 Capital Assets A summary of capital asset activity for the year ended September 30, 2016 is as follows: Balance at Balance at September 30, September 30, 2015 Additions Retirements Transfers 2016 Nondepreciable capital assets Construction in progress $ 8,297,625 $ 3,242,115 $ $ (6,814,461) $ 4,725,279 Depreciable capital assets Building structures 25,127, ,907 6,307,517 31,992,940 Fixtures and fixed equipment 412, ,253 Machinery and equipment 17,093, , ,944 17,844,133 Vehicles 447,411 53, ,261 43,080, ,875 6,814,461 50,750,587 Total capital assets before depreciation 51,377,876 4,097,990 55,475,866 Less accumulated depreciation for Building structures 15,549,400 1,015,511 16,564,911 Fixtures and fixed equipment 220,553 30, ,637 Machinery and equipment 8,260,123 2,208,725 10,468,848 Vehicles 303,890 56, ,883 24,333,966 3,311,313 27,645,279 Total capital assets, net $ 27,043,910 $ 786,677 $ $ $ 27,830,587 A summary of capital asset activity for the year ended September 30, 2015 is as follows: Balance at Balance at September 30, September 30, 2014 Additions Retirements Transfers 2015 Nondepreciable capital assets Construction in progress $ 4,620,202 $ 4,457,810 $ $ (780,387) $ 8,297,625 Depreciable capital assets Building structures 25,127,516 25,127,516 Fixtures and fixed equipment 412, ,253 Machinery and equipment 12,184,007 4,128, ,387 17,093,071 Vehicles 447, ,411 38,171,187 4,128, ,387 43,080,251 Total capital assets before depreciation 42,791,389 8,586,487 51,377,876 Less accumulated depreciation for Building structures 14,677, ,284 15,549,400 Fixtures and fixed equipment 190,386 30, ,553 Machinery and equipment 6,988,371 1,271,752 8,260,123 Vehicles 252,282 51, ,890 22,108,155 2,225,811 24,333,966 Total capital assets, net $ 20,683,234 $ 6,360,676 $ $ $ 27,043,910 16

19 AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Note 6 Compensated Absences Compensated absences of vacation and sick leave benefits are as follows: Balance at Balance at Current October 1 Additions Reductions September 30 Portion 2016 $ 3,037,807 $ 2,621,806 $ (2,494,163) $ 3,165,450 $ 2,114, ,801,803 2,647,107 (2,411,103) 3,037,807 2,009,720 Note 7 Advance from ASG During fiscal year 2003, ASG advanced LBJ $5,000,000 to be used for operations. Formal repayment terms were not established, and LBJ does not anticipate repaying the loan/advance in the next fiscal year. Note 8 Long Term Debt 2016 Note payable to Medsphere Systems Corporation in monthly payments of $53,665, maturing March $ 1,713,615 1,713,615 Less current portion 643,980 $ 1,069,635 Maturities of long term debt are as follows: 2017 $ 643, , ,655 $ 1,713,615 17

20 AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Note 9 Net Pension Liability and Related Deferred Outflows of Resources General Information about the Defined Benefit Pension Plan (ASG Employees Retirement Fund): Plan description The American Samoa Government Employees Retirement Fund (the Fund), a blended component unit of the American Samoa Government, is a cost sharing, multiple employer, contributory defined benefit retirement plan established in 1971 to provide retirement benefits to the employees of the government. LBJ is a sponsoring employer of the plan. All full time career service LBJ employees are covered by the Fund. The Fund issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information. This report may be obtained by contacting: ASG Employees Retirement Fund P.O. Box 2448 Pago Pago, American Samoa Retirement benefits The Fund s retirement eligibility provisions are as follows: Normal retirement age 65 with five years of service or age 55 with 30 years of service Early retirement age 55 with ten years of service (reduced benefits) Medical retirement member qualifies after five years of service with a physician report and LBJ Board approval The annual retirement benefit, payable monthly for life, equals 2% of the highest average annual salary for three consecutive years, multiplied by the number of years of service to a maximum of 30 years (from 10% to 60%, based on years of service). The minimum annual benefit is $600. The member s retirement benefit is payable at the member s option in one of the following methods: A single life annuity A qualified joint and survivor annuity (actuarially reduced) Death benefits A surviving spouse of an active member who dies before retirement but after attaining eligibility for retirement may receive either a refund of employee contributions with interest or a life annuity equal to one half the retirement annuity that would have been paid to the deceased member. An additional lump sum death benefit of $2,500 to $10,000, based on years of service, is also payable to survivors of active members of the Fund. A lump sum death benefit of $1,500 is payable to survivors of retired members of the Fund. 18

21 AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Note 9 Net Pension Liability and Related Deferred Outflows of Resources (continued) Contributions Each member of the Fund contributes 3% of regular earnings and earns interest at 1.5% compounded annually. Employee contributions are made through payroll deductions. Employee contributions and the related interest earned are refunded in full to members whose employment is terminated for any reason other than retirement and as a death benefit to the survivors of deceased employees not yet eligible for retirement. Employees are fully vested in the employer portion after ten years of participation in the fund. An employer contribution of 8% of employees earnings is funded by LBJ and is included as an expense in the statements of revenue, expenses, and changes in net position. The contributions are remitted to the retirement office, which administers the retirement fund. Contributions made in the fiscal years ended September 30, 2016 and 2015, were $996,046 and $944,216, respectively, and were equal to the annual required contribution amounts. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources Related to Pensions: LBJ adopted GASB No. 68 during the year ended September 30, These standards establish new financial reporting requirements for LBJ s sponsorship of the Fund and require the Medical Center to recognize its long term obligation for pension benefits and more comprehensively measure the annual cost of pension benefits for its employees. At September 30, 2016, LBJ reported a net pension liability of $26,341,853 for its proportionate share of the Fund s net pension liability. The net pension liability was measured as of September 30, 2015, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of October 1, 2014 and rolled forward to the September 30, 2015 measurement date. LBJ's proportion of the net pension liability was based on LBJ s share of contributions to the Fund for fiscal year As of the measurement date of September 30, 2015, LBJ s proportion was 12.46%, which was an increase of 0.76% from its proportion measured as of October 1,

22 AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Note 9 Net Pension Liability and Related Deferred Outflows of Resources (continued) For the year ended September 30, 2016, LBJ recognized pension expense totaling $2,003,846. At September 30, 2016, LBJ reported deferred outflows of resources related to pensions from the following sources: Deferred Outflows of Resources Beginning balance $ 4,308,784 Differences between expected and actual experience 1,312,605 Changes of assumptions 4,905,920 Net difference between projected and actual earnings on pension plan investments 3,118,664 Changes in proportion and differences between LBJ contributions and proportionate share of contributions (363,249) District contributions subsequent to the measurement date 996,046 $ 14,278,770 LBJ s employer contributions related to fiscal year 2016 have been reported as deferred outflows of resources and will be recognized as a reduction of the net pension liability in fiscal year Other amounts reported as deferred outflows of resources related to pensions will be recognized in pension expense as follows: Fiscal Years Ended September 30, Thereafter $ 1,929,712 1,929,712 1,929,712 1,888,145 1,108,479 4,551,665 20

23 AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Note 9 Net Pension Liability and Related Deferred Outflows of Resources (continued) Actuarial assumptions The total pension liability was determined as part of an actuarial valuation as of October 1, 2015 and rolled forward to the measurement date as of September 30, 2016, using the following actuarial assumptions: Actuarial cost method Entry age normal cost Inflation 3.01% Salary increases Investment rate of return Mortality 4.00% 15.00%, based on attained age, including inflation 8.00%, net of pension plan investment fees, including inflation RP 2000 Combined Mortality Table set forward six years Actuarial valuations of an ongoing plan involve estimates of the value of projected benefits and assumptions about the probability of events far into the future. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. The methods and assumptions shown above are based on an experience study conducted for the five year period ended September 30, Long term expected rate of return The long term expected rate of return on the Fund s investments was determined using a building block method in which best estimate ranges of expected future real rates of return (expected returns, net of investment fees and inflation) are developed for each major asset class. These ranges are combined to produce the long term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. As of September 30, 2015, measurement date, the geometric mean rates of return of benchmarks for each major investment class in the Fund s portfolio are as follows: Asset Class Domestic equity International equity Fixed income Emerging markets Real estate Loans to ASG Long Term Expected Real Rate of Return 6.8% 3.0% 4.6% 4.3% 6.7% 7.5% 21

24 AMERICAN SAMOA MEDICAL CENTER AUTHORITY NOTES TO FINANCIAL STATEMENTS Note 9 Net Pension Liability and Related Deferred Outflows of Resources (continued) Discount rate As of September 30, 2015, the blended discount rate used to calculate the Fund s total pension liability is comprised of (a) the single equivalent rate that results in the same actuarial present value as the long term expected rate of return applied to benefit payments through fiscal year 2034, the period for which the Fund s fiduciary net position is projected to be sufficient to make projected benefit payments and (b) the 20 year AA municipal bond index rate applied to benefit payments for periods beyond fiscal year 2034, for which the Fund s fiduciary net position is not projected to be sufficient. As of September 30, 2015, the rates used to measure the Fund s total pension liability are as follows: Discount rate 4.98% Long term expected rate of return, net of investment expenses 8.00% 20 year AA municipal bond index 3.75% The projection of cash flows used to determine the Fund s discount rate assumes that member and sponsor contributions will continue at current statutory levels. Additionally, cost of living adjustments will be applied to projected benefits at the rate of 0.5% annually after expected retirement dates. Sensitivity of the net pension liability to changes in the discount rate The following presents LBJ's proportionate share of the net pension liability calculated using the discount rate of 4.98%, as well as what LBJ s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (3.98%) or 1 percentage point higher (5.98%) than the current rate: 1% Decrease Current Discount 1% Increase (3.98%) Rate (4.98%) (5.98%) Medical Center's proportional share of the net pension liability $ 32,076,510 $ 26,341,853 $ 21,451,522 Pension plan fiduciary net position Detailed information about the pension plan's fiduciary net position is available in the separately issued Fund financial report. Note 10 Net Patient Service Revenue and Medicaid Reimbursement LBJ has agreements with third party payors that provide for reimbursement to LBJ at amounts that vary from its established rates. A summary of the basis of reimbursement with major third party payors is as follows: Medicare Reimbursement for these services, depending on the type of program, is based on a cost methodology as defined in the regulations and principles prescribed by the Center for Medicare and Medicaid Services. 22