Houghton County Medical Care Facility. Financial Report with Supplemental Information September 30, 2016

Transcription

1 Financial Report with Supplemental Information September 30, 2016

2 Contents Independent Auditor's Report 1-2 Management's Discussion and Analysis 3-5 Basic Financial Statements Proprietary Funds: Statement of Net Position 6 Statement of Revenue, Expenses, and Changes in Net Position 7 Statement of Cash Flows 8 Fiduciary Funds: Statement of Net Position 9 Statement of Changes in Net Position 10 Notes to Financial Statements Required Supplemental Information 23 Schedule of Changes in the Net Pension Liability and Related Ratios 24 Schedule of Contributions 25 Schedule of Investment Returns 26 Other Supplemental Information 27 Schedule of Operating Expenses 28

3 Independent Auditor's Report To the Houghton County Department of Human Services Board Houghton County Medical Care Facility Report on the Financial Statements We have audited the accompanying basic financial statements of Houghton County Medical Care Facility (the "Facility"), a component unit of the County of Houghton, as of and for the years ended September 30, 2016 and 2015 and the related notes to the financial statements, which collectively comprise Houghton County Medical Care Facility'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 basic financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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 Facility 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 Facility 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 opinions. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Houghton County Medical Care Facility as of September 30, 2016 and 2015 and the changes in its financial position and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter We draw attention to Note 1, which explains that these financial statements present only Houghton County Medical Care Facility, a component unit of the County of Houghton, and do not purport to, and do not, present fairly the financial position of Houghton County as of September 30, 2016 and 2015 and the changes in its net position and its cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. 1

4 To the Houghton County Department of Human Services Board Houghton County Medical Care Facility As discussed in Note 11 to the basic financial statements, Houghton County Medical Care Facility has elected to change its method of accounting for the estimated allowance for Medicaid accounts receivable expected to be collected through the Medicaid Interim Payment (MIP) settlement process in fiscal years ended September 30, 2016 and Our opinion is not modified with respect to this matter. Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require the management's discussion and analysis, schedule of changes in the net pension liability and related ratios, schedule of contributions, and schedule of investment returns, as listed in the table of contents, 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, which 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 supplemental 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. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise Houghton County Medical Care Facility's basic financial statements. The schedule of operating expenses is presented for the purpose of additional analysis and is not a required part of the basic financial statements. The schedule of operating expenses 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 operating expenses is fairly stated in all material respects in relation to the basic financial statements as a whole. February 9,

5 Management's Discussion and Analysis Our discussion and analysis of Houghton County Medical Care Facility's (the "Facility") financial performance provides an overview of the Facility's financial activities for the fiscal years ended September 30, 2016, 2015, and Please read it in conjunction with the Facility's financial statements, which begin on page 6. Financial Highlights The Facility's net position at September 30, 2016, 2015, and 2014 was $22,236,603, $18,889,570, and $21,385,278, respectively. The Facility had total operating revenue of $23,236,950, $21,447,280, and $20,474,959 in 2016, 2015, and 2014, respectively. The Facility reported nonoperating income of $2,152,350, $2,151,025, and $2,031,793 in 2016, 2015, and 2014, respectively. Using this Annual Report The Facility's financial statements consist of three statements - a statement of net position, a statement of revenue, expenses, and changes in net position, and a statement of cash flows. These financial statements and related notes provide information about the activities of the Facility, including resources held by the Facility but restricted for specific purposes by contributors, grantors, or enabling legislation. The Statement of Net Position and Statement of Revenue, Expenses, and Changes in Net Position One of the most important questions asked about the Facility's finances is, "Is the Facility as a whole better or worse off as a result of the year's activities?" The statement of net position and the statement of revenue, expenses, and changes in net position report information about the Facility's resources and its activities in a way that helps answer this question. These statements include all restricted and unrestricted assets and all liabilities using the accrual basis of accounting. All of the current year's revenue and expenses are taken into account regardless of when cash is received or paid. It will also be important to recognize the impact of the Governmental Account Standards Board (GASB) Statement No. 68 requirements on the Facility's net position. In the past, this unfunded pension liability was only included in the notes to the financial statements. Due to this major change in financial reporting, there is a onetime adjustment resulting in a significant decrease in the Facility's net asset position during the year ended September 30, This will be a common observation among various governmental organizations as they begin compliance with these new regulations. These two statements report the Facility's net position and the changes in net position. You can think of the Facility's net position - the difference between assets, deferred outflows of resources, liabilities, and deferred inflows of resources - as one way to measure the Facility's financial health, or financial position. Over time, increases or decreases in the Facility's net position are one indicator of whether its financial health is improving or deteriorating. You will need to consider other nonfinancial factors, however, such as changes in the Facility's resident mix and measures of the quality of service it provides to the community, as well as local economic factors to assess the overall health of the Facility. The Statement of Cash Flows The final required statement is the statement of cash flows. The statement reports cash receipts, cash payments, and net changes in cash resulting from operating, investing, and financing activities. It provides answers to such questions as "Where did cash come from?", "What was cash used for?", and "What was the change in cash balance during the reporting period?" The Facility's Net Position The Facility's net position is the difference between its assets, deferred outflows of resources, liabilities, and deferred inflows of resources reported in the statement of net position. 3

6 Management's Discussion and Analysis (Continued) Table 1 - Assets and Deferred Outflow, Liabilities and Deferred Inflow, and Net Position as of September 30, 2016, 2015, and Assets Current assets $ 22,277,917 $ 19,852,033 $ 17,658,225 Property and equipment - Net 5,233,645 5,343,436 5,736,713 Deferred Outflows 1,656,619 1,372,764 - Total assets and deferred outflows 29,168,181 26,568,233 23,394,938 Liabilities Current liabilities 1,999,625 1,969,228 1,705,913 Noncurrent liabilities 4,701,143 5,430, ,747 Total liabilities 6,700,768 7,399,866 2,009,660 Deferred Inflows 230, ,797 - Net Position Net investment in capital assets 5,233,645 5,343,436 5,736,713 Unrestricted 17,002,958 13,546,134 15,648,565 Total net position $ 22,236,603 $ 18,889,570 $ 21,385,278 Note: GASB Statement No. 68 was implemented in fiscal year 2015; however, implementation has not been reflected retroactively in the table above. 4

7 Management's Discussion and Analysis (Continued) Table 2: Operating Results and Changes in Net Position The following table shows the changes in net position during the fiscal years ended September 30, 2016, 2015, and 2014: Operating Revenue Net service revenue $ 23,216,333 $ 21,421,639 $ 20,450,877 Other operating revenue 20,617 25,641 24,082 Total operating revenue 23,236,950 21,447,280 20,474,959 Operating Expenses Salaries 11,151,729 10,909,506 10,634,383 Other expenses 10,890,538 10,505,227 11,546,674 Total operating expenses 22,042,267 21,414,733 22,181,057 Operating Income 1,194,683 32,547 (1,706,098) Nonoperating Income Contributions 2,310 10,400 7,030 Tax revenue 2,150,040 2,140,625 2,024,763 Total nonoperating income 2,152,350 2,151,025 2,031,793 Increase in Net Position 3,347,033 2,183, ,695 Net Position - Beginning of year 18,889,570 16,705,998 21,059,583 Net Position - End of Year $ 22,236,603 $ 18,889,570 $ 21,385,278 Note: GASB Statement No. 68 was implemented in fiscal year 2015, but is not reflected retrospectively in the table above. The 2014 end of year net position differs from the 2015 beginning of year net position. This difference of $4,679,280 is the unfunded pension liability that was incorporated into our statement of net position by charging it against the Facility's beginning net position. Capital Assets Administration The Facility began a feasibility study to determine future long-term care needs in the county and the potential impact on future plans for the Facility. The study was presented to and approved by the Department of Human Services Board and county commissioners. The proposed project is currently in progress as of September 30, Contacting the Facility's Financial Management This financial report is designed to provide our residents, suppliers, taxpayers, and creditors with a general overview of the Facility's finances and to show the Facility's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the administrator's office at Houghton County Medical Care Facility, 1100 Quincy St., Hancock, MI

8 Proprietary Funds Statement of Net Position September 30, 2016 and Assets and Deferred Outflows of Resources Current Assets Cash and cash equivalents (Note 3) $ 9,458,739 $ 9,236,295 Resident accounts receivable (Note 4) 1,465,167 1,559,645 Estimated third-party payor settlements 126,617 - Assets limited as to use (Note 3) 10,782,603 8,663,775 Other current assets 444, ,318 Total current assets 22,277,917 19,852,033 Property and Equipment - Net (Note 5) 5,233,645 5,343,436 Deferred Outflows of Resources - Pension (Note 10) 1,656,619 1,372,764 Total assets and deferred outflows of resources $ 29,168,181 $ 26,568,233 Liabilities, Deferred Inflows of Resources, and Net Position Current Liabilities Accounts payable $ 504,962 $ 363,092 Resident trust funds 4,144 4,354 Estimated third-party payor settlements - 114,273 Accrued liabilities and other 1,490,519 1,487,509 Total current liabilities 1,999,625 1,969,228 Noncurrent Liabilities Other postretirement obligations (Note 9) 394, ,167 Pension liability - Net (Note 10) 4,306,948 5,056,471 Total noncurrent liabilities 4,701,143 5,430,638 Total liabilities 6,700,768 7,399,866 Deferred Inflows of Resources - Pension (Note 10) 230, ,797 Net Position Net investment in capital assets 5,233,645 5,343,436 Unrestricted 17,002,958 13,546,134 Total net position 22,236,603 18,889,570 Total liabilities, deferred inflows of resources, and net position $ 29,168,181 $ 26,568,233 See notes to financial statements. 6

9 Proprietary Funds Statement of Revenue, Expenses, and Changes in Net Position Years Ended September 30, 2016 and Operating Revenue Net service revenue $ 23,216,333 $ 21,421,639 Other operating revenue 20,617 25,641 Total operating revenue 23,236,950 21,447,280 Operating Expenses Salaries 11,151,729 10,909,506 Fringe benefits 4,454,738 4,319,204 Operating supplies and expenses 2,312,504 2,250,359 Professional services 1,240, ,993 Repairs and maintenance 102,598 73,533 Travel 46,830 40,591 Utilities 642, ,189 Maintenance of effort 352, ,906 Depreciation 622, ,947 Other 1,116,048 1,080,505 Total operating expenses 22,042,267 21,414,733 Operating Income 1,194,683 32,547 Nonoperating Income Contributions 2,310 10,400 Tax revenue (Note 7) 2,150,040 2,140,625 Total nonoperating income 2,152,350 2,151,025 Increase in Net Position 3,347,033 2,183,572 Net Position - Beginning of year 18,889,570 16,705,998 Net Position - End of Year $ 22,236,603 $ 18,889,570 See notes to financial statements. 7

10 Statement of Cash Flows Years Ended September 30, 2016 and Cash Flows from Operating Activities Cash received from patients and third-party payors $ 20,719,841 $ 20,559,853 Cash payments to employees and suppliers (21,381,625) (20,295,623) Cash received from quality assurance supplement 2,352,043 2,208,425 Cash paid for quality assurance provider tax (1,007,373) (970,816) Other operating receipts 20,617 25,641 Net cash and cash equivalents provided by operating activities 703,503 1,527,480 Cash Flows from Noncapital Financing Activities Cash received from property and other taxes 2,150,040 2,140,625 Cash received from contributions 2,310 10,400 Net cash and cash equivalents provided by noncapital financing activities 2,152,350 2,151,025 Cash Flows Used in Financing Activities - Purchase of property and equipment (514,581) (278,670) Net Increase in Cash and Cash Equivalents 2,341,272 3,399,835 Cash and Cash Equivalents - Beginning of year 17,900,070 14,500,235 Cash and Cash Equivalent - End of year $ 20,241,342 $ 17,900,070 Statement of Net Position Classification of Cash Current assets $ 9,458,739 $ 9,236,295 Assets limited as to use 10,782,603 8,663,775 Total cash and cash equivalents $ 20,241,342 $ 17,900,070 Reconciliation of Operating Income to Net Cash from Operating Activities Operating income $ 1,194,683 $ 32,547 Adjustments to reconcile operating income to net cash from operating activities: Depreciation 622, ,947 Provision for bad debts 486, ,804 Amortization of deferred outflows and inflows of resources 19,483 (47,986) Loss on disposal of assets 1,963 - Change in assets, deferred outflows of resources, liabilities, and deferred inflows of resources: Deferred outflows of resources - Pension (351,325) 183,088 Deferred inflows of resources - Pension - 326,783 Pension liability - Net (749,523) (1,178,661) Resident accounts receivable (392,372) (852,745) Estimated third-party payor settlements (240,890) 1,970,580 Other current assets (52,473) (26,339) Accounts payable 141,870 41,392 Accrued liabilities and other 2, ,650 Other postretirement obligations 20,028 70,420 Net cash provided by operating activities $ 703,503 $ 1,527,480 See notes to financial statements. 8

11 Fiduciary Funds Statement of Net Position September 30, 2016 and Assets - Investments - MetLife contract $ 30,525,217 $ 28,434,038 Net Position - Held in trust for pension benefits $ 30,525,217 $ 28,434,038 See notes to financial statements. 9

12 Fiduciary Funds Statement of Changes in Net Position Years Ended September 30, 2016 and Additions Investment income $ 1,152,160 $ 1,355,182 Employer contributions 2,216,672 2,086,090 Total additions 3,368,832 3,441,272 Deductions Benefit payments 1,208,590 1,155,612 Administrative expenses 69,063 67,865 Total deductions 1,277,653 1,223,477 Net Increase 2,091,179 2,217,795 Net Position Held in Trust for Pension Benefits - Beginning of year 28,434,038 26,216,243 Net Position Held in Trust for Pension Benefits - End of year $ 30,525,217 $ 28,434,038 See notes to financial statements. 10

13 Notes to Financial Statements Note 1 - Nature of Business September 30, 2016 and 2015 Houghton County Medical Care Facility (the Facility ) is a component unit of Houghton County (the County ). It is governed by the Houghton County Department of Human Services Board. This board consists of three members, two of whom are appointed by the County Board of Commissioners and one appointed by the Michigan governor. Furthermore, the County Department of Human Services Board approves the Facility's budget and submits a copy to the County Board of Commissioners. Note 2 - Significant Accounting Policies Basis of Presentation The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB) in Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, issued in June The Facility follows the business-type activities reporting requirements of GASB Statement No. 34, which provide a comprehensive look at the Facility's financial activities. No component units are required to be reported in the Facility's financial statements. Proprietary Fund Accounting The Facility utilizes the proprietary fund method whereby accounting revenue and expenses are recognized on the full accrual basis. Fiduciary Fund Accounting The fiduciary fund is used to account for the assets held by the Facility in a trustee capacity. This fund includes the Houghton County Medical Care Facility Retirement Plan (the "Plan"). The Plan is reported within the basic financial statements even though its resources cannot be used to fund the Facility's operations because of the fiduciary responsibility that the Facility retains relative to the operations of the pension plan. Cash and Cash Equivalents Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less, excluding those amounts included in assets limited as to use. For the purpose of the statement of cash flows, amounts qualifying as cash equivalents included in assets limited as to use are included in cash and cash equivalents. Accounts Receivable Accounts receivable for residents, insurance companies, and governmental agencies are based on net charges. An allowance for uncollectible accounts is established based on the Facility's assessment of the current status of individual accounts. Uncollectible amounts are written off against the allowance for doubtful accounts in the period they are determined to be uncollectible. Property and Equipment Property and equipment amounts are recorded at cost. Depreciation is computed principally on the straight-line basis over the estimated useful lives of the assets. Costs of maintenance and repairs are charged to expense when incurred. Compensated Absences Compensated absences are charged to operations when earned. Unused benefits are recorded as a current liability in the financial statements. 11

14 Notes to Financial Statements Note 2 - Significant Accounting Policies (Continued) Net Position September 30, 2016 and 2015 Net position of the Facility is classified in two components. The net investment in capital assets classification consists of capital assets net of accumulated depreciation and is reduced by the current balances of any outstanding borrowings used to finance the purchase or construction of those assets. The unrestricted net position classification includes the remaining amounts which do not meet the definition of net investment in capital assets or restricted net position. Operating Revenue and Expenses The statement 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 healthcare services - the Facility's principal activity. Nonoperating activity, including donations and tax revenue, is reported as nonoperating. Operating expenses are all expenses incurred to provide healthcare services other than financing costs. Service Revenue The Facility's principal activity is operating a long-term healthcare facility for the elderly. Revenue is derived from participation in the Medicaid and Medicare programs as well as from private-pay residents and insurance companies. Revenue is recorded at standard billing rates and differences between billing rates and amounts paid under these programs are recorded as contractual adjustments. Amounts earned under the Medicaid and Medicare programs make up a significant portion of revenue earned during each year as follows: Percent of revenue: Medicaid 76 % 79 % Medicare The payment methodology and amounts earned related to these programs are based on cost and clinical assessments that are subject to review and final approval by Medicaid and Medicare. Any adjustment that is a result of this final review and approval will be recorded in the period in which the adjustment is made. In the opinion of management, adequate provision has been made for any adjustments that may result from such third-party review. Services rendered to Medicare program beneficiaries are paid at prospectively determined rates based upon clinical assessments completed by the Facility that are subject to review and final approval by Medicare. Medicaid reimburses the Facility for resident routine service costs, on a per-diem basis, prospectively determined. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoings. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs. Quality Assurance Assessment Program The Facility's Medicaid revenue has been partially funded by a program called the Quality Assurance Assessment Program (QAAP). 12

15 Notes to Financial Statements Note 2 - Significant Accounting Policies (Continued) September 30, 2016 and 2015 The Facility received Medicaid revenue related to the QAAP of approximately $2,352,000 and $2,209,000 based on the number of Medicaid resident days of service provided during the years ended September 30, 2016 and 2015, respectively. The State pays facilities based on an estimated number of days of service provided monthly, with settlements provided annually based on actual Medicaid resident days of service. The Facility was assessed a "provider tax" based on the historical number of non-medicare resident days of service provided of approximately $1,007,000 and $971,000 during the years ended September 30, 2016 and 2015, respectively. The State bills for the tax on a monthly basis throughout the year without settlement to the actual number of non-medicare resident days. Maintenance of Effort Maintenance of effort (MOE) is a County obligation to the State of Michigan. Every month, the County receives a bill from the State of Michigan for each Medicaid resident day approved by the State during that month. The Facility pays the monthly MOE expense. During the years ended September 30, 2016 and 2015, MOE expense amounting to approximately $353,000 and $393,000, respectively, was paid by the Facility and is included in operating expenses. Defined Benefit Pension The Facility has in effect a defined benefit noncontributory retirement plan, which is a single-employer pension plan, with MetLife Insurance Company covering substantially all full-time employees hired before April 20, The Facility records a net pension liability for the difference between the total pension liability calculated by the actuary and the pension plan s fiduciary net position. For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the pension plan and additions to/deductions from the pension plan s fiduciary net position have been determined on the same basis as they are reported by the pension plan. 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. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period and so will not be recognized as an outflow of resources (expense/expenditure) until then. The Facility has three items which qualify for reporting in this category; see Note 10 for further details. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (revenue) until that time. The Facility has two items which qualify for reporting in this category; see Note 10 for further details. 13

16 Notes to Financial Statements Note 3 - Deposits and Investments Cash - County Treasurer September 30, 2016 and 2015 These funds were under the control of the county treasurer, who deposited these funds with a bank. It is impractical to determine the amount covered by federal depository insurance as these funds are only a portion of the entire county deposits. Cash under control of the county treasurer totals $9,453,845 and $9,231,191 at September 30, 2016 and 2015, respectively. The County also controls a portion of the Facility's assets limited as to use. As of September 30, 2016 and 2015, assets limited as to use total $10,782,603 and $8,663,775, respectively. Cash - Bank The deposits reflected in the accounts of the bank (without recognition of checks written but not yet cleared, or deposits in transit) totaled $4,144 and $4,354 at September 30, 2016 and 2015, respectively, and are insured under the federal depository insurance coverage plan. Cash - Petty Cash The Facility has $750 of petty cash on hand at September 30, 2016 and Assets Limited as to Use This cash is limited as to use by the Houghton County Department of Human Services Board for future capital improvement and to pay future claims under the County of Houghton's self-insured workers' compensation plan, over which the board retains control and may, at its discretion, subsequently use for other purposes. As of September 30, 2016 and 2015, assets limited as to use for capital projects total $10,395,103 and $8,276,275, respectively. As of September 30, 2016 and 2015, assets limited as to use for workers' compensation claims totaled $387,500. Pension Trust Funds The Houghton County Medical Care Facility Retirement Plan is invested in a guaranteed insurance contract with MetLife Insurance Company. The funds are held in a trustee capacity and are used to pay retiree benefits accumulated during employment at the Facility. Michigan Compiled Laws Section (Public Act 20 of 1943, as amended) authorizes local governmental units to make deposits and invest in the accounts of federally insured banks, credit unions, and savings and loan associations that have offices in Michigan. The local unit is allowed to invest in bonds, securities, and other direct obligations of the United States or any agency or instrument of the United States; repurchase agreements; bankers' acceptances of United States banks; commercial paper rated within the two highest classifications, which matures not more than 270 days after the date of purchase; obligations of the State of Michigan or its political subdivisions, which are rated as investment grade; and mutual funds composed of investment vehicles that are legal for direct investment by local units of government in Michigan. The pension trust fund is authorized by Michigan Public Act 314 of 1965, as amended, to invest in certain reverse repurchase agreements, stocks, diversified investment companies, annuity investment contracts, real estate leased to public entities, mortgages, debt or equity of certain small businesses, certain state and local government obligations, and certain other specified investment vehicles. The Facility's deposits and investments are subject to several types of risks, including custodial credit risk of bank deposits and investments, interest rate risk, credit risk, and concentration of credit risk. It is impractical to determine the amount of risk associated with the Facility's funds as these funds are only a portion of the total county deposits. Note 4 - Resident Accounts Receivable The details of resident accounts receivable are set forth below: 14

17 Notes to Financial Statements Note 4 - Resident Accounts Receivable (Continued) September 30, 2016 and Accounts receivable residents $ 2,227,963 $ 1,835,591 Less allowance for uncollectible accounts (762,796) (275,946) Net resident accounts receivable $ 1,465,167 $ 1,559,645 The Facility provides services without collateral to its residents, most of whom are local residents and insured under third-party payor arrangements. The mix of receivables from residents and third-party payors is as follows: Medicare 10 % 9 % Medicaid Private pay Other payors Total 100 % 100 % Note 5 - Property and Equipment Cost of property and equipment and related depreciable lives for the years ended September 30, 2016 and 2015 are summarized below: 2015 Additions Retirements 2016 Depreciable Life - Years Land and land improvements $ 448,910 $ - $ - $ 448,910 N/A Buildings and improvements 13,071,459 73,898-13,145, Major moveable equipment 2,061, ,061, Fixed equipment 1,110,508 10,578 (4,908) 1,116, Construction in progress 147, , ,541 N/A Total 16,840, ,581 (4,908) 17,349,963 Less accumulated depreciation 11,496, ,409 (2,945) 12,116,318 Net carrying amount $ 5,343,436 $ (107,828) $ (1,963) $ 5,233, Additions Retirements 2015 Depreciable Life - Years Land and land improvements $ 448,910 $ - $ - $ 448,910 N/A Buildings and improvements 13,045,763 25,696-13,071, Major moveable equipment 2,045,432 16,545-2,061, Fixed equipment 1,021,515 88,993-1,110, Construction in progress - 147, ,436 N/A Total 16,561, ,670-16,840,290 Less accumulated depreciation 10,824, ,947-11,496,854 Net carrying amount $ 5,736,713 $ (393,277) $ - $ 5,343,436 Construction in progress as of September 30, 2016 and 2015 represents amounts paid in connection with the planning phase of the construction of major renovations of the Facility. The majority of renovations are scheduled to be made in the Facility's fiscal year end The Facility will plan on funding the project using current cash and cash obtained from operations. 15

18 Notes to Financial Statements Note 6 - Self Insurance September 30, 2016 and 2015 The Facility is partially self insured under a plan covering substantially all employees for health benefits. The Facility covers differences between historical and current co-pay expenses incurred by employees covered under the plan. The Facility participates in the Houghton County self-insured workers' compensation plan (the "Program"). The Program is self insured to a limit of $400,000 for each occurrence at September 30, 2016 and After the specific limit is reached, a statutory coverage is in place. The Facility has internally designated cash in the amount of $387,500 as of September 30, 2016 and 2015 for payment of future workers' compensation claims. The change in the estimated liability for self-insured medical benefit claims for the fiscal years ended September 30, 2016 and 2015 is as follows: Estimated medical benefits liability - Beginning of year $ 38,526 $ 43,269 Estimated claims incurred, including changes in estimates 225, ,120 Claim payments (245,407) (477,863) Note 7 - Tax Revenue Estimated medical benefits liability - End of year $ 18,957 $ 38,526 Taxes are levied on December 1 and payable by March 1 of the subsequent year. The Facility's tax revenue is collected by the various local tax collecting units (townships, cities, etc.) and is recognized when levied to the extent it results in current receivables within the year budgeted by the board to provide resources for financing budgeted expenditures. During the year ended September 30, 2010, the residents of Houghton County approved a $ mill levy for six years to support the operations of the Facility. During the year ended September 30, 2016, the residents of Houghton County approved a $ mill levy for six years to support the operations of the facility. The Facility has recognized income of $2,150,040 and $2,140,625 for the years ended September 30, 2016 and 2015, respectively, related to this tax levy. Note 8 - Defined Contribution Plan The Facility offers a defined contribution retirement plan under Sections 457 and 401(a) of the Internal Revenue Code to employees who wish to participate. The Section 457 defined contribution plan is funded by employee elective compensation deferrals, which totaled approximately $313,000 and $140,000 for the fiscal years ended September 30, 2016 and 2015, respectively. The Section 401(a) defined contribution plan became available to employees during the year ended September 30, The plan is funded by employee elective compensation deferrals. There was approximately $37,000 and $14,000 of employee elective deferrals for fiscal years ended September 30, 2016 and 2015, respectively. Note 9 - Other Postemployment Benefits During fiscal year 2014, the Facility began paying the health insurance premiums for its former administrator and the administrator's spouse. The Facility has estimated its liability based on the net present value of the future life insurance premiums based on the life expectancy of the administrator and the administrator's spouse. The Facility has not funded the liability for these other postemployment benefits (OPEB) and insurance premiums are paid monthly as they become due. 16

19 Notes to Financial Statements Note 9 - Other Postemployment Benefits (Continued) September 30, 2016 and 2015 Charges and payments for the estimated OPEB liability for fiscal years 2016 and 2015 are as follows: Estimated OPEB liability - Beginning of year $ 374,167 $ 324,814 Change in net present value of future payments 74,034 86,265 Amounts contributed - Payment of premiums (25,607) (11,089) Estimated OPEB liability - End of year 422, ,990 Amount due within one year (28,399) (25,823) Long-term portion of OPEB liability $ 394,195 $ 374,167 Note 10 - Agent Defined Benefit Pension Plan Description Plan Description The Houghton County Department of Human Services Board (the "Board") administers the Houghton County Medical Care Facility Pension Plan, a single-employer pension plan, with MetLife Insurance Company covering substantially all full-time employees hired before April 20, Benefit terms have been established by contractual agreements between the Facility and the various employee union representations; amendments are subject to the same process. The financial statements of the plan are included in these financial statements as a pension and other employee benefit trust fund (a fiduciary fund). Benefits Provided The pension plan provides retirement, disability, and death benefits. The pension plan provides retirement, disability, and death benefits. Retirement benefits for employees are calculated ranging from 1.5 to 1.6 percent of the member s final five-year average salary times the member s years of service. Plan members with 10 years of continuous service are eligible to retire at age 60 to 65, depending on retirement eligibility and age. Benefit terms do not provide for annual cost-of-living adjustments to each member s retirement allowance subsequent to the member s retirement date. Employees Covered by Benefit Terms At the December 31, 2015 and December 31, 2014 measurement dates, the following employees were covered by the benefit terms: Inactive plan members or beneficiaries currently receiving benefits Inactive plan members entitled to but not yet receiving benefits Active plan members Total employees covered by the plan

20 Notes to Financial Statements September 30, 2016 and 2015 Note 10 - Agent Defined Benefit Pension Plan Description (Continued) Contributions Article 9, Section 24 of the State of Michigan Constitution requires that financial benefits arising on account of employee service rendered in each year be funded during that year. Accordingly, the Board retains an independent actuary to determine the annual contribution. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by plan members during the year with an additional amount to finance any unfunded accrued liability. Contribution requirements of plan members are established and may be amended by the board of trustees in accordance with the facility charter, union contracts, and plan provisions. For the years ended September 30, 2016 and 2015, the Facility s average contribution rate was approximately 25 and 22 percent of annual payroll, respectively. There were no active member contributions as of September 30, 2016 and Pension Plan Investments - Policy and Rate of Return Investment Policy The pension plan s policy in regard to the allocation of invested assets is established and may be amended by a majority vote of the Board's members. It is the policy of the Board to pursue an investment strategy which would stabilize investment returns and aims to refrain from dramatically shifting asset class allocations over short time spans. As of December 31, 2015 and 2014, the Board has allocated all assets to a fixed-income fund. Concentrations At December 31, 2015 and 2014, the Plan held approximately 100 percent of its investment portfolio in a fixed-income fund. Rate of Return For the years ended December 31, 2015 and 2014, the annual money-weighted rate of return on pension plan investments, net of pension plan investment expense, was 4.0 percent and 5.1 percent, respectively. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested. Net Pension Liability The components of the net pension liability of the Facility at December 31, 2015 and 2014 were as follows: Total pension liability $ 34,832,165 $ 33,490,509 Facility's net position 30,525,217 28,434,038 Facility's net pension liability $ 4,306,948 $ 5,056,471 Plan fiduciary net position as a percentage of the total pension liability The Facility has chosen to use December 31, 2015 and December 31, 2014 as its measurement dates for the net pension liability. The net pension liability reported at September 30, 2016 and September 30, 2015 was determined using a measure of the total pension liability and the pension net position as of December 31, 2015 and December 31, 2014, respectively. The December 31, 2015 and December 31, 2014 total pension liability was determined by an actuarial valuation performed as of those dates. 18

21 Notes to Financial Statements September 30, 2016 and 2015 Note 10 - Agent Defined Benefit Pension Plan Description (Continued) Changes in the net pension liability during the 2015 measurement year were as follows: Changes in Net Pension Liability Total Pension Liability Increase (Decrease) Plan Net Position Net Pension Liability Balance at January 1, 2015 $ 33,490,509 $ 28,434,038 $ 5,056,471 Service cost 771, ,810 Interest 1,725,237-1,725,237 Differences between expected and actual experience 53,199-53,199 Contributions - 2,216,672 (2,216,672) Net investment income - 1,152,160 (1,152,160) Benefit payments, including refunds (1,208,590) (1,208,590) - Administrative expenses - (69,063) 69,063 Net changes 1,341,656 2,091,179 (749,523) Balance at December 31, 2015 $ 34,832,165 $ 30,525,217 $ 4,306,948 Changes in the net pension liability during the 2014 measurement year were as follows: Changes in Net Pension Liability Total Pension Liability Increase (Decrease) Plan Net Position Net Pension Liability Balance at January 1, 2014 $ 32,451,375 $ 26,216,243 $ 6,235,132 Changes for the year: Service cost 812, ,130 Interest 1,686,594-1,686,594 Differences between expected and actual experience (303,978) - (303,978) Contributions - 2,086,090 (2,086,090) Net investment income - 1,355,182 (1,355,182) Benefit payments, including refunds (1,155,612) (1,155,612) - Administrative expenses - (67,865) 67,865 Net changes 1,039,134 2,217,795 (1,178,661) Balance at December 31, 2014 $ 33,490,509 $ 28,434,038 $ 5,056,471 19

22 Notes to Financial Statements September 30, 2016 and 2015 Note 10 - Agent Defined Benefit Pension Plan Description (Continued) Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions For the years ended September 30, 2016 and 2015, the Facility recognized pension expense of $1,140,416 and $1,186,226, respectively. At September 30, 2016 and 2015, the Facility reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Description Deferred Outflows of Resources Deferred Inflows of Resources Deferred Outflows of Resources Deferred Inflows of Resources Difference between expected and actual experience $ 44,333 $ 13,683 $ - $ 18,244 Net difference between projected and actual earnings on pension plan investments 234, , ,553 Employer contributions to the plan subsequent to the measurement date 1,377,872-1,372,764 - Total $ 1,656,619 $ 230,810 $ 1,372,764 $ 278,797 Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows. Years Ending September 30 Deferred Outflows of Resources Deferred Inflows of Resources 2017 $ 67,470 $ 47, ,470 47, ,470 47, ,470 43, ,867 43,426 Total $ 278,747 $ 230,810 Actuarial Assumptions The total pension liability in the December 31, 2015 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Salary increases Investment rate of return 4 percent average, including inflation 5 percent, net of pension plan investment expense, including inflation The total pension liability in the December 31, 2014 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Salary increases Investment rate of return 4 percent average, including inflation 5 percent, net of pension plan investment expense, including inflation In the December 31, 2015 actuary report, the mortality rates were based on the IRS 2016 Annuitant and Non-Annuitant Mortality Table (separate tables for males and females). In the December 31, 2014 actuary report, the mortality rates were based on the IRS 2015 Annuitant and Non-Annuitant Mortality Table (separate tables for males and females). 20

23 Notes to Financial Statements September 30, 2016 and 2015 Note 10 - Agent Defined Benefit Pension Plan Description (Continued) Discount Rate The discount rate used to measure the total pension liability was 5.0 percent for December 31, 2015 and The projection of cash flows used to determine the discount rate assumes that employee contributions will be made at the current contribution rate and that employer contributions will be made at rates equal to the difference between actuarially determined contribution rates and the employee rate. Projected Cash Flows Based on those assumptions, the pension plan's fiduciary net position was not projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. The long-term expected rate of return on pension plan investments was determined using a method which best estimates the expected future real rate of return. The best estimate for the rate of return as of December 31, 2015 and 2014 for the fixed income fund is 5 percent. Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the Facility at September 30, 2016, calculated using the discount rate of 5.0 percent, as well as what the Facility s net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (4.0 percent) or 1 percentage point higher (6.0 percent) than the current rate: 1 Percent Decrease (4.0%) Current Discount Rate (5.0%) 1 Percent Increase (6.0%) Net pension liability of the Facility $ 9,770,621 $ 4,306,948 $ (154,478) The following presents the net pension liability of the Facility at September 30, 2015, calculated using the discount rate of 5.0 percent, as well as what the Facility s net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (4.0 percent) or 1 percentage point higher (6.0 percent) than the current rate: 1 Percent Decrease (4.0%) Current Discount Rate (5.0%) 1 Percent Increase (6.0%) Net pension liability of the Facility $ 10,343,285 $ 5,056,471 $ 739,025 Note 11 - Change in Accounting Principle During 2016, the Facility elected to change its method of accounting for the estimated allowance for Medicaid accounts receivable expected to be collected through the Medicaid Interim Payment (MIP) settlement process. In prior years, the estimated allowance for uncollectible Medicaid accounts receivable was included within estimated third-party payor settlements and the Facility has now netted these allowance against the respective Medicaid receivables. The method of accounting was adopted because the Facility believes this presentation in the statement of net position more clearly represents future cash flow to the financial statement reader. Comparative financial statements of prior years have been adjusted to apply the new method retrospectively. 21