Financial Report June 30, 2012
Contents Report Letter 1 Financial Statements Balance Sheet 2 Statement of Activities and Changes in Net Assets 3 Statement of Cash Flows 4 5-25
Independent Auditor's Report To the Board of Trustees Guest House, Inc. We have audited the accompanying balance sheet of Guest House, Inc. (the "Organization") as of and the related statements of activities and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Organization's management. 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. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Guest House, Inc. at and the changes in its net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. December 21, 2012 1
Balance Sheet Assets June 30, 2012 June 30, 2011 Current Assets Cash and cash equivalents $ 540,597 $ 527,837 Investments 23,074,147 23,891,033 Receivables: Patient - Net 690,602 522,759 Other 118,112 142,641 Prepaid postretirement benefit plan asset (Note 8) 1,594,383 - Prepaid expenses and other current assets 110,228 84,146 Total current assets 26,128,069 25,168,416 Land, Buildings, and Equipment - Net (Note 3) 5,300,712 5,394,694 Contributions Receivable - Net (Note 2) 127,810 201,952 Total assets $ 31,556,591 $ 30,765,062 Liabilities and Net Assets Current Liabilities Accounts payable $ 157,312 $ 260,526 Annuities payable 59,105 62,597 Loans payable (Note 4) 44,500 37,000 Deferred cost assurance program revenue - 44,011 Accrued compensation 245,955 246,843 Total current liabilities 506,872 650,977 Loans Payable - Net of current portion (Note 4) - 30,000 Other Long-term Liabilities Annuities payable - Net of current portion 231,087 258,470 Postretirement healthcare benefit obligation (Note 8) - 426,212 Accrued pension (Note 8) 4,320,099 798,166 Total liabilities 5,058,058 2,163,825 Net Assets Unrestricted 23,182,845 25,258,572 Temporarily restricted 903,506 1,018,664 Permanently restricted 2,412,182 2,324,001 Total net assets 26,498,533 28,601,237 Total liabilities and net assets $ 31,556,591 $ 30,765,062 See. 2
Statement of Activities and Changes in Net Assets Unrestricted Temporarily Restricted Year Ended June 30 2012 2011 Permanently Temporarily Restricted Total Unrestricted Restricted Permanently Restricted Total Revenue and Support Contributions $ 3,456,601 $ 534,095 $ 88,181 $ 4,078,877 $ 3,521,653 $ 73,782 $ 5,000 $ 3,600,435 Net patient service revenue (Note 6) 2,973,246 - - 2,973,246 3,247,136 - - 3,247,136 Cost assurance program 508,803 - - 508,803 516,381 - - 516,381 Interest and dividend income 560,487 89,675-650,162 505,228 74,597-579,825 Miscellaneous income 40,136 - - 40,136 91,209 - - 91,209 Total revenue and support 7,539,273 623,770 88,181 8,251,224 7,881,607 148,379 5,000 8,034,986 Net Assets Released from Restrictions 623,770 (623,770) - - 148,379 (148,379) - - Total revenue, support, and net assets released from restrictions 8,163,043-88,181 8,251,224 8,029,986-5,000 8,034,986 Expenses Therapy programs 3,777,346 - - 3,777,346 3,614,462 - - 3,614,462 Other programs 79,689 - - 79,689 394,411 - - 394,411 Facilities support 1,169,454 - - 1,169,454 1,179,018 - - 1,179,018 General and administrative 1,489,023 - - 1,489,023 1,814,032 - - 1,814,032 Development 913,387 - - 913,387 998,928 - - 998,928 Total expenses 7,428,899 - - 7,428,899 8,000,851 - - 8,000,851 Increase in Net Assets - Before other changes in net assets 734,144-88,181 822,325 29,135-5,000 34,135 Gain on Curtailment of Postretirement Benefit Plan (Note 8) 2,375,857 - - 2,375,857 - - - - Other Changes in Benefit Plan Assets and Obligations (Note 8) (4,448,553) - - (4,448,553) 649,097 - - 649,097 Realized and Unrealized (Losses) Gains on Investments (737,175) (115,158) - (852,333) 3,381,183 492,183-3,873,366 (Decrease) Increase in Net Assets (2,075,727) (115,158) 88,181 (2,102,704) 4,059,415 492,183 5,000 4,556,598 Net Assets - Beginning of year 25,258,572 1,018,664 2,324,001 28,601,237 21,199,157 526,481 2,319,001 24,044,639 Net Assets - End of year $ 23,182,845 $ 903,506 $ 2,412,182 $ 26,498,533 $ 25,258,572 $ 1,018,664 $ 2,324,001 $ 28,601,237 See. 3
Statement of Cash Flows Year Ended June 30, 2011 June 30, 2011 Cash Flows from Operating Activities (Decrease) increase in net assets $ (2,102,704) $ 4,556,598 Adjustments to reconcile (decrease) increase in net assets to net cash from operating activities: Depreciation 275,411 259,207 Loss (gain) on sale of property and equipment 18,432 (3,210) Realized and unrealized loss (gain) on investments 852,333 (3,873,366) Accrued pension 3,821,933 (307,723) Postretirement healthcare benefit obligation (1,890,595) (291,895) Bad debt expense 1,135 26,515 Change in present value discount - Contributions receivable (4,658) 5,818 Contributions restricted for long-term use (91,881) (78,782) Changes in operating assets and liabilities which (used) provided cash: Patient receivable (168,978) 171,056 Contributions receivable 82,500 150,312 Other receivable 24,529 (33,627) Prepaid expenses and other (26,082) (11,134) Accounts payable (103,214) 113,163 Annuities payable (30,875) (20,529) Deferred cost assurance program revenue (44,011) 44,011 Accrued compensation (888) 43,329 Pension and postretirement benefits (430,000) (1,440,000) Net cash provided by (used in) operating activities 182,387 (690,257) Cash Flows from Investing Activities Purchase of property and equipment (199,861) (438,357) Purchases of investments (1,441,673) (1,653,469) Proceeds from sales and maturities of investments 1,406,226 2,269,315 Proceeds from sale of property and equipment - 46,088 Net cash (used in) provided by investing activities (235,308) 223,577 Cash Flows from Financing Activities Payments on debt (22,500) (37,000) Proceeds from contributions restricted for investment in endowment 88,181 5,000 Net cash provided by (used in) financing activities 65,681 (32,000) Net Increase (Decrease) in Cash and Cash Equivalents 12,760 (498,680) Cash and Cash Equivalents - Beginning of year 527,837 1,026,517 Cash and Cash Equivalents - End of year $ 540,597 $ 527,837 Supplemental Disclosure of Cash Flow Information - Cash paid for interest $ 1,181 $ 2,643 See. 4
Note 1 - Nature of Activities and Significant Accounting Policies Guest House, Inc. (the "Organization"), located in Lake Orion, Michigan, is a nonstock, nonprofit corporation. The Organization operates two state-licensed residential treatment facilities (one in Lake Orion, Michigan and one in Rochester, Minnesota), treating clergy and male and female religious with alcohol and chemical dependency and other related disorders. The Organization also operates a short-term residential facility in Lake Orion. Significant accounting policies are as follows: Cash and Cash Equivalents - The Organization considers all highly liquid temporary investments purchased with an original maturity date of three months or less, including investments in money market funds, to be cash equivalents other than the cash and cash equivalents that are considered to be part of the investment portfolio. Concentration of Credit Risk Arising from Deposit Accounts - The Organization maintains cash balances at a bank whose accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Organization evaluates the financial institutions with which it deposits funds; however, it is not practical to insure all cash deposits. Accounts Receivable - Accounts receivable are stated at invoice amounts. An allowance for doubtful accounts is established based on a specific assessment of all invoices that remain unpaid following normal payment periods. In addition, a general valuation allowance is established based on historical loss experience. All amounts deemed uncollectible are charged against the allowance for doubtful accounts in the period that determination is made. The allowance for doubtful accounts was $39,101 and $47,904 at, respectively. Investments - Investments include money market funds, mutual funds, debt securities, common stock, and private equity securities totaling $22,697,412 and $23,605,219 as of, respectively, that are measured at fair market value as described in Note 11. In addition, investments include cash and certificates of deposit totaling $376,735 and $285,814 as of, respectively, that are managed as part of the investment portfolio. Land, Buildings, and Equipment - Land, buildings, and equipment are recorded at cost on the date of purchase or at fair market value at the date of donation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, ranging from 3 to 40 years. Additions and improvements in excess of $2,000 are capitalized. Costs of maintenance and repairs are charged to expense when incurred. 5
Note 1 - Nature of Activities and Significant Accounting Policies (Continued) Charitable Gift Annuity - The Organization receives irrevocable charitable gift annuities for which the Organization serves as trustee. Assets held by the trusts are included in investments. Contribution revenues are recognized at the date the trusts are established after recording liabilities for the present value of the estimated future payments made to the beneficiaries. The liabilities are adjusted during the term of the trusts for advances in the actuarial value accretion of the discount and other changes affecting the estimates of future benefits. Any new annuity agreements are calculated using the 1988 Mortality Tables, using discount rates ranging from 4.8 to 8.3 percent. Revenue Recognition - The Organization uses the accrual basis of accounting in preparation of its financial statements and, accordingly, records patient service revenue at basic daily rates when services are performed. Net patient service revenue represents patient service revenue less underwritten accounts and subsidized free care. The Organization has a cost assurance program whereby dioceses/orders contractually commit to making monthly or annual payments to the Organization for a period of five years. The payments by the dioceses/orders are based on the number of persons in the dioceses/orders who are eligible to receive services from the Organization. In return, the Organization has committed to provide primary care services, at no incremental cost, to any eligible person from the diocese/order during the contractual period. Contributions and Pledges Receivable - Contributions received by the Organization are recognized as a contribution receivable and contribution revenue when the contribution commitment has been received and all significant conditions of the contribution have been met. Contribution revenue is classified as unrestricted, temporarily restricted, or permanently restricted based upon the existence of donorimposed restrictions. Contributions with donor-imposed time or purpose restrictions that are met in the same period as the gift are both reported as restricted support and as a release of restriction. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The unamortized discount represents the adjustment required to record pledges expected to be received in future years at their current value. Amortization of the discount is recorded as additional contribution revenue and is used in accordance with donor-imposed restrictions over the period of the pledge. The discounts on those amounts are computed using appropriate interest rates to the years in which the promises are received and the years in which the pledges are expected to be fulfilled. 6
Note 1 - Nature of Activities and Significant Accounting Policies (Continued) Classification of Net Assets - Net assets of the Organization are classified as permanently restricted, temporarily restricted, or unrestricted depending on the presence and characteristics of donor-imposed restrictions limiting the Organization's ability to use or dispose of contributed assets or the economic benefits embodied in those assets. Donor-imposed restrictions that expire with the passage of time or can be removed by meeting certain requirements result in temporarily restricted net assets. Permanently restricted net assets result from donor-imposed restrictions that limit the use of net assets in perpetuity. Earnings and gains on donor-restricted endowments are classified as temporarily restricted until they have been appropriated and spent by the Organization. Earnings, gains, and losses on all other restricted net assets are classified as unrestricted unless specifically restricted by the donor. Permanently restricted net assets as of consist of endowment contributions that are required to be held in perpetuity. Temporarily restricted net assets as of consist entirely of the accumulated earnings and gains on the endowment assets. Functional Allocation of Expenses - The costs of providing program and support services have been reported on a functional basis in the statement of activities and changes in net assets. Indirect costs have been allocated between program and support services based on estimates, as determined by management. Although the methods of allocation are considered reasonable, other methods could be used that would produce a different amount. Tax Status - The Organization is a 501(c)(3) corporation and therefore is not subject to federal income tax. Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Organization and recognize a tax liability if the Organization has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS or other applicable taxing authorities. Management has analyzed the tax positions taken by the Organization and has concluded that as of, there are no uncertain positions taken or expected to be taken that would require recognition of a liability or disclosure in the financial statements. The Organization is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Management believes it is no longer subject to income tax examinations for years prior to the year ended June 30, 2009. 7
Note 1 - Nature of Activities and Significant Accounting Policies (Continued) Risks and Uncertainties - The Organization invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term, and that such changes could materially affect the amounts reported in the balance sheet. The Organization also has a pension plan and a health and welfare plan which rely on assumptions related to the discount rate, expected long-term return on plan assets, and life expectancies to determine the costs and liabilities associated with the plans. Due to the level of risk associated with these assumptions, it is at least reasonably possible that changes in assumptions will occur in the near term, and that such changes could materially affect the amounts reported in the balance sheet. Subsequent Events - The financial statements and related disclosures include evaluation of events up through and including December 21, 2012, which is the date the financial statements were available to be issued. Note 2 - Contributions Receivable During 2004, Guest House, Inc. commenced a five-year capital campaign. In fiscal years 2012 and 2011, Guest House, Inc. recorded net capital campaign contributions of $80,867 and $73,782, respectively. Outstanding pledges at June 30 are comprised of the following: 2012 2011 Total pledges outstanding $ 135,000 $ 213,800 Less unamortized discount (1,890) (6,548) Less allowance for uncollectible amounts (5,300) (5,300) Net contributions receivable $ 127,810 $ 201,952 8
Note 3 - Land, Buildings, and Equipment The cost of land, buildings, and equipment consists of the following: 2012 2011 Land $ 204,400 $ 204,400 Buildings and equipment 10,337,206 10,160,880 Vehicles 264,513 320,662 Furniture and fixtures 403,928 398,823 Total cost 11,210,047 11,084,765 Less accumulated depreciation (5,909,335) (5,690,071) Net land, buildings, and equipment $ 5,300,712 $ 5,394,694 Depreciation expense for the years ended is $275,411 and $259,207, respectively. Note 4 - Loans Payable Loans payable consist of the following at June 30: 2012 2011 During 2005, the Organization entered into various uncollateralized financing agreements with Catholic institutions at preferred interest rates ranging from 1 to 3 percent $ 44,500 $ 67,000 Less current portion 44,500 37,000 Long-term portion $ - $ 30,000 During July 2012, the Organization paid off the entire balance of long-term debt. Interest expense associated with these obligations totaled $1,181 and $2,643 for the years ended, respectively. Note 5 - Operating Leases The Organization leases certain vehicles and equipment. The leases expire at various dates through 2016, and each lease requires a monthly payment ranging from $120 to $1,100. The total lease expense related to all of these leases for the years ended was $43,300 and $46,655, respectively. 9
Note 5 - Operating Leases (Continued) Future payments due under these operating leases are as follows: Years Ending June 30 Note 6 - Net Patient Service Revenue Amount 2013 $ 14,469 2014 12,669 2015 10,232 2016 4,731 Total $ 42,101 Net patient service revenue on the statement of activities and changes in net assets is comprised of basic daily rate and counseling and medical revenue less underwritten accounts and subsidized free care. The detail is as follows: 2012 2011 Patient service revenue: Basic daily rate $ 2,749,992 $ 3,228,008 Counseling and medical 1,376,676 1,639,198 Gross patient service revenue 4,126,668 4,867,206 Underwritten accounts (381,142) (239,973) Subsidized free care (772,280) (1,380,097) Net patient service revenue $ 2,973,246 $ 3,247,136 Note 7 - Underwritten Accounts and Subsidized Free Care Included in underwritten accounts in the accompanying notes to the financial statements are allowances and adjustments to patient service revenue account balances recognized during the year related to patient service accounts not eligible for defined subsidized free care programs. The underwritten accounts for the years ended June 30, 2012 and 2011 are $381,142 and $239,973, respectively. 10
Note 7 - Underwritten Accounts and Subsidized Free Care (Continued) Subsidized free care offsets the associated revenue recorded as part of the patient service revenue. For the years ended, subsidized free care is comprised of the following: 2012 2011 Evaluation program $ 25,809 $ 45,376 Alumni visitors program 44,000 79,300 Cost assurance program 702,471 1,255,421 Subsidized free care $ 772,280 $ 1,380,097 Note 8 - Pension and Other Postretirement Benefit Plans The Organization has provided pension benefits for all full-time employees under a noncontributory defined benefit pension plan. The plan provides defined benefits based on years of service and final average salary. Entry to this plan was frozen to new participants and benefits were frozen for current participants as of December 31, 2007. The Organization also has a postretirement healthcare plan and provides life insurance benefits covering substantially all full-time employees. The postretirement plan paid up to $245.25 per month per member towards a Medicare Supplemental Plan. Effective June 15, 2012, all future benefits under the postretirement healthcare plan were curtailed, or effectively eliminated. In addition, the plan was partially settled during the year ended June 30, 2012. The life insurance policies of inactive participants had their benefits settled when the Organization paid $239,382 to an insurance company for the coverage. In June 2012, 38 inactive participates received cash settlements totaling $76,000 in place of current health care coverage. As a result of the curtailment and partial settlement, a curtailment gain of $2,375,857 was recognized. Subsequent to year end, the remaining participants had their benefits settled for cash payments totaling $174,000. Obligations and Funded Status Pension Benefits Other Postretirement Benefits 2012 2011 2012 2011 Projected benefit obligation $ 17,994,493 $ 14,816,653 $ 488,780 $ 2,902,425 Fair value of plan assets 13,674,394 14,018,487 2,083,163 2,476,213 Funded status at end of year $ (4,320,099) $ (798,166) $ 1,594,383 $ (426,212) 11
Note 8 - Pension and Other Postretirement Benefit Plans (Continued) The accumulated benefit obligation for the defined benefit pension plan is the same as the projected benefit obligation as of since the plan was frozen as of December 31, 2007. Amounts recognized in the balance sheet consist of the following: Pension Benefits Other Postretirement Benefits 2012 2011 2012 2011 Noncurrent assets $ - $ - $ 1,594,383 $ - Noncurrent liabilities $ 4,320,099 $ 798,166 $ - $ 426,212 Amounts not yet recognized in net periodic benefit cost consist of the following: Pension Benefits Other Postretirement Benefits 2012 2011 2012 2011 Net loss $ 6,443,648 $ 2,817,940 $ - $ 1,194,037 Prior service credit - - - (2,531,024) Total not yet recognized in net periodic benefit cost $ 6,443,648 $ 2,817,940 $ - $ (1,336,987) The estimated net loss for the defined benefit pension plan that will be amortized into net periodic benefit cost over the next fiscal year is $477,021. Net Periodic Benefit Cost (Gain), Employer Contributions, and Benefits Paid Pension Benefits Other Postretirement Benefits 2012 2011 2012 2011 Net periodic benefit cost (gain) $ 196,225 $ 292,423 $ (337,583) $ (242,947) Employer contributions 300,000 1,300,000 130,000 140,000 Benefits paid 853,818 744,599 233,192 152,419 Settlements paid - - 315,382-12
Note 8 - Pension and Other Postretirement Benefit Plans (Continued) Other Changes in Plan Assets and Benefit Obligations Pension Benefits Other Postretirement Benefits 2012 2011 2012 2011 Net loss (gain) $ 3,797,062 $ (379,297) $ 454,052 $ (363,145) Amortization of prior service credit - - 463,699 463,699 Amortization of net loss (171,354) (220,852) (94,906) (149,502) Gain on curtailment and settlement - - (2,375,857) - Total recognized in nonoperating income $ 3,625,708 $ (600,149) $ (1,553,012) $ (48,948) Total recognized in net periodic benefit cost and nonoperating income $ 3,821,933 $ (307,726) $ (1,890,595) $ (291,895) Assumptions Weighted average assumptions used to determine benefit obligations at June 30: Pension Benefits Other Postretirement Benefits 2012 2011 2012 2011 Discount rate 4.25 % 5.75 % 4.25 % 5.75 % Weighted average assumptions used to determine net periodic benefit cost for years ended June 30: Pension Benefits Other Postretirement Benefits 2012 2011 2012 2011 Discount rate 5.75 % 5.50 % 5.75 % 5.50 % Expected long-term return on plan assets 6.00 6.00 6.00 7.00 13
Note 8 - Pension and Other Postretirement Benefit Plans (Continued) The overall expected rate of return on plan assets represents a weighted average composite rate based on the historical rates of returns of the respective asset classes adjusted for anticipated market movements. Assumed Healthcare Cost Trend Rates at June 30 2012 2011 Healthcare cost trend rate assumed for next year N/A 9 % Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) N/A 5 % Year that the rate reaches the ultimate trend rate N/A 2017 Pension Plan Assets The goals of the pension plan investment program are to fully fund the obligation to pay retirement benefits in accordance with the plan documents and to provide returns that, along with appropriate funding from the Organization, maintain an asset/liability ratio that is in compliance with all applicable laws and regulations and assures timely payment of retirement benefits. Investments are permitted in money market funds and mutual funds, including both equity and fixed-income funds. The target allocation of plan assets is 60 percent equity funds and 40 percent bond funds. The fair values of the Organization s pension plan assets at by major asset classes are as follows: Fair Value Measurements at June 30, 2012 Total at June 30, 2012 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market mutual funds $ 258,032 $ 258,032 $ - $ - Mutual fund - Fixed income (a) 4,666,889 4,666,889 - - Mutual funds - Equity (b) 8,749,473 8,749,473 - - Total $ 13,674,394 $ 13,674,394 $ - $ - 14
Note 8 - Pension and Other Postretirement Benefit Plans (Continued) Fair Value Measurements at June 30, 2011 Total at June 30, 2011 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market mutual funds $ 4,435,043 $ 4,435,043 $ - $ - Mutual fund - Fixed income (a) 3,643,177 3,643,177 - - Mutual funds - Equity (b) 5,940,267 5,940,267 - - (a) (b) Total $ 14,018,487 $ 14,018,487 $ - $ - The pension plan's investment in a fixed-income mutual fund includes investment in a fund that focuses on investment-grade intermediate- and long-term debt securities. Eighty-one percent of the pension plan's equity mutual funds invest in common stock of medium-cap and large-cap U.S. companies. Fourteen percent of the pension plan's equity mutual funds invest primarily in international companies and 5 percent invest in small-cap U.S. companies. Other Postretirement Plan Assets The goals of the postretirement benefits plan investment program are to fully fund the obligation to pay benefits in accordance with the plan documents and to provide returns that, along with appropriate funding from the Organization, maintain an asset/liability ratio that is in compliance with all applicable laws and regulations and assures timely payment of benefits. Investments are permitted in money market funds and mutual funds, including both equity and fixed-income funds. The target allocation of plan assets is 60 percent equity funds and 40 percent bond funds. The fair values of the Organization's other postretirement benefit plan assets at June 30, 2012 and 2011 by asset class are as follows: Fair Value Measurements at June 30, 2012 Total at June 30, 2012 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market mutual funds $ 40,645 $ 40,645 $ - $ - Mutual funds - Fixed income (a) 671,448 671,448 - - Mutual funds - Equity (b) 1,371,070 1,371,070 - - Total $ 2,083,163 $ 2,083,163 $ - $ - 15
Note 8 - Pension and Other Postretirement Benefit Plans (Continued) Fair Value Measurements at June 30, 2011 Total at June 30, 2011 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market mutual funds $ 16,384 $ 16,384 $ - $ - Mutual funds - Fixed income (a) 937,505 937,505 - - Mutual funds - Equity (b) 1,522,324 1,522,324 - - (a) (b) Total $ 2,476,213 $ 2,476,213 $ - $ - The postretirement benefit plan's investment in a fixed-income mutual fund includes investment in a fund that focuses on investment-grade intermediate- and long-term debt securities. Eighty-two percent of the postretirement benefit plan's equity mutual funds invest in common stock of medium-cap and large-cap U.S. companies. Thirteen percent of the postretirement benefit plan's equity mutual funds invest primarily in international companies, and 5 percent invest in small-cap U.S. companies. The above tables present information about the pension and postretirement benefit plan assets measured at fair value at and the valuation techniques used by the Organization to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Organization has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Organization s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each plan asset. Contributions The Organization expects to contribute $300,000 to its pension plan in 2013. 16
Note 8 - Pension and Other Postretirement Benefit Plans (Continued) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Year Note 9 - Employees' Retirement Plan Pension Benefits Other Postretirement Benefits 2013 $ 939,896 $ 174,000 2014 964,072-2015 1,016,986-2016 1,047,534-2017 1,071,936-2018-2022 5,505,799 - Beginning on January 1, 2008, the Organization began offering its eligible employees the opportunity to participate in the 403(b) retirement plan. The Organization is required to contribute 3.67 percent of salary for full-time employees. In addition, the Organization makes discretionary contributions ranging from 0 to 7.33 percent of salary for full-time employees depending on length of service and age of the employee. The Organization's total contribution was approximately $106,540 and $256,500 for the years ended, respectively. 17
Note 10 - Donor-restricted Endowments The Organization s endowment consists of donor-restricted endowment funds. Net assets associated with endowment funds are classified based on those donor-imposed restrictions. Interpretation of Relevant Law The board of trustees of the Organization has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Organization classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until they have been appropriated for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by UPMIFA. The Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the Organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Organization (7) The investment policies of the Organization Endowment Net Asset Composition by Type of Fund as of June 30, 2012 Unrestricted Temporarily Restricted Permanently Restricted Donor-restricted endowment funds $ (12,877) $ 903,506 $ 2,412,182 $ 3,302,811 Total 18
Note 10 - Donor-restricted Endowments (Continued) Changes in Endowment Net Assets for the Fiscal Year Ended June 30, 2012 Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets - Beginning of year $ (4,964) $ 1,018,664 $ 2,324,001 $ 3,337,701 Investment return: Investment income - 89,675-89,675 Net depreciation (realized and unrealized) (7,913) (115,158) - (123,071) Total investment return (7,913) (25,483) - (33,396) Contributions - - 88,181 88,181 Appropriation of endowment assets for expenditure - (89,675) - (89,675) Endowment net assets - End of year $ (12,877) $ 903,506 $ 2,412,182 $ 3,302,811 Endowment Net Asset Composition by Type of Fund as of June 30, 2011 Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted endowment funds $ (4,964) $ 1,018,664 $ 2,324,001 $ 3,337,701 Changes in Endowment Net Assets for the Fiscal Year Ended June 30, 2011 Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets - Beginning of year $ (27,375) $ 526,481 $ 2,319,001 $ 2,818,107 Investment return: Investment income - 74,597-74,597 Net appreciation (realized and unrealized) 22,411 492,183-514,594 Total investment return 22,411 566,780-589,191 Contributions - - 5,000 5,000 Appropriation of endowment assets for expenditure - (74,597) - (74,597) Endowment net assets - End of year $ (4,964) $ 1,018,664 $ 2,324,001 $ 3,337,701 19
Note 10 - Donor-restricted Endowments (Continued) Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Organization to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $12,877 and $4,964 as of, respectively. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by the board of trustees. Return Objectives and Risk Parameters The Organization has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Organization must hold in perpetuity. Under this policy, as approved by the board of trustees, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of the Russell 3000 Index and other prominent indices, while assuming a moderate level of investment risk. The Organization expects its endowment funds, over time, to provide an average rate of return, over five-year rolling periods, of approximately 8.50 percent annually. Actual returns in any given year may vary from this amount. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the Organization relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Organization targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Relate to Spending Policy The Organization has a policy of appropriating for distribution each year the interest and dividend income earned during the year. In establishing this policy, the Organization considered the long-term expected return on its endowment. Accordingly, over the long term, the Organization expects the current spending policy to allow its endowment to grow at an average of 8.50 percent annually. This is consistent with the Organization s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term, as well as to provide additional real growth through new gifts and investment return. 20
Note 11 - Fair Value Measurements Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value. The following tables present information about the Organization s assets and liabilities measured at fair value on a recurring basis at and the valuation techniques used by the Organization to determine those fair values. In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets and liabilities that the Organization has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Organization s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. The Organization's policy is to recognize transfers between levels of the fair value hierarchy as of the actual date of the event of change in circumstances that caused the transfer. There were no significant transfers between levels of the fair value hierarchy during 2012 and 2011. 21
Note 11 - Fair Value Measurements (Continued) Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2012 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance at June 30, 2012 Assets - Investments: Money market mutual funds $ 405,798 $ - $ - $ 405,798 Mutual funds - U.S. fixedincome securities 6,346,698 - - 6,346,698 Mutual funds - International fixed-income securities 630,311 - - 630,311 Mutual funds - U.S. equity securities 8,226,547 - - 8,226,547 Mutual funds - International equity securities 5,814,425 - - 5,814,425 Mutual funds - Real estate equity securities 218,063 - - 218,063 Commodity index fund 195,677 - - 195,677 Debt securities - U.S. government - 10,448-10,448 Debt securities - U.S. corporate - 58,181-58,181 Common stock - U.S. 396,426 - - 396,426 Private equity - - 394,838 394,838 Total assets $ 22,233,945 $ 68,629 $ 394,838 $ 22,697,412 Liabilities - Annuities payable $ - $ 290,192 $ - $ 290,192 22
Note 11 - Fair Value Measurements (Continued) Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2011 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance at June 30, 2011 Assets - Investments: Money market mutual funds $ 655,364 $ - $ - $ 655,364 Mutual funds - U.S. fixedincome securities 6,093,274 - - 6,093,274 Mutual funds - International fixed-income securities 661,949 - - 661,949 Mutual funds - U.S. equity securities 8,267,647 - - 8,267,647 Mutual funds - International equity securities 6,438,615 - - 6,438,615 Mutual funds - Real estate equity securities 271,483 - - 271,483 Commodity index fund 187,503 - - 187,503 Debt securities - U.S. government - 10,352-10,352 Debt securities - U.S. corporate - 101,438-101,438 Common stock - U.S. 464,364 - - 464,364 Private equity - - 453,230 453,230 Total assets $ 23,040,199 $ 111,790 $ 453,230 $ 23,605,219 Liabilities - Annuities payable $ - $ 321,067 $ - $ 321,067 The fair value of the U.S. government debt securities and U.S. corporate debt securities at was determined primarily based on Level 2 inputs. The Organization estimates the fair value of these investments based on quoted market prices and other market data for the same or comparable instruments and transactions in establishing the prices, discounted cash flow models, and other pricing models. These models are primarily industry-standard models that consider various assumptions, including time value and yield curve as well as other relevant economic measures. The fair value of the annuities payable was determined primarily based on Level 2 inputs. The Organization estimates the fair value of these liabilities based on market interest rates, discounted cash flow models, and estimated life expectancies for beneficiaries. 23
Note 11 - Fair Value Measurements (Continued) Changes in Level 3 assets measured at fair value on a recurring basis for the years ended are as follows: Investment - Private Equity Balance - June 30, 2011 $ 453,230 Total unrealized losses (59,151) Net purchases, sales, calls, and maturities 759 Balance - June 30, 2012 $ 394,838 Investment - Private Equity Balance - June 30, 2010 $ 396,851 Total unrealized gains 39,955 Net purchases, sales, calls, and maturities 16,424 Balance - June 30, 2011 $ 453,230 Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets. As a result, the unrealized gains and losses for these assets presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs. Investments in Entities that Calculate Net Asset Value per Share The Organization holds shares or interests in investment companies at year end whereby the fair value of the investment held is estimated based on the net asset value per share (or its equivalent) of the investment company. At year end, the fair value, unfunded commitments, and redemption rules of those investments is as follows: Investments Held at June 30, 2012 Fair Value Unfunded Commitments Redemption Frequency, if Eligible Redemption Notice Period Private equity $ 394,838 $ 21,168 N/A N/A 24
Note 11 - Fair Value Measurements (Continued) Investments Held at June 30, 2011 Fair Value Unfunded Commitments Redemption Frequency, if Eligible Redemption Notice Period Private equity $ 453,230 $ 39,938 N/A N/A The private equity funds class includes investment in a limited partnership that invests in a series of multi-manager private capital funds of diversified multi-asset investments. The Organization's interest in the limited partnership cannot be redeemed prior to termination of the partnership. 25