F INANCIAL S TATEMENTS Valley of the Sun United Way Fiscal Years Ended June 30, 2015 and 2014 With Report of Independent Auditors Ernst & Young LLP
Financial Statements Fiscal Years Ended June 30, 2015 and 2014 Contents Report of Independent Auditors...1 Financial Statements Statements of Financial Position...3 Statements of Activities...4 Statements of Functional Expenses...6 Statements of Cash Flows...8 Notes to Financial Statements...9 1510-1703302
Ernst & Young LLP Ernst & Young Tower One Renaissance Square Suite 2300 2 North Central Avenue Phoenix, AZ 85004 Tel: +1 602 322 3000 Fax: +1 602 322 3023 ey.com The Board of Directors Valley of the Sun United Way Report of Independent Auditors We have audited the accompanying financial statements of Valley of the Sun United Way, which comprise the statements of financial position as of June 30, 2015 and 2014, and the related statements of activities, functional expenses, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1510-1703302 1 A member firm of Ernst & Young Global Limited
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Valley of the Sun United Way at June 30, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. October 23, 2015 ey 1510-1703302 2 A member firm of Ernst & Young Global Limited
Statements of Financial Position Assets Current assets: Cash (including cash held for others of $1,069,000 and $942,000 in 2015 and 2014, respectively) 13,304,851 June 30 2015 2014 $ $ 11,274,486 Short-term investments 4,901,886 4,907,989 Contributions receivable, less allowance for uncollectible pledges of $2,198,000 and $2,318,000 in 2015 and 2014, respectively 15,033,673 15,683,281 Other receivables 1,548,332 3,214,002 Prepaids and other assets 256,413 1,113,247 Total current assets 35,045,155 36,193,005 Long-term investments 52,923,297 53,555,292 Contributions receivable, less current portion 116,693 88,066 Property and equipment, net 2,202,562 1,590,598 Other assets 444,239 413,100 Total assets $ 90,731,946 $ 91,840,061 Liabilities and net assets Current liabilities: Allocations payable, undesignated $ 5,309,061 $ 9,441,958 Allocations payable, donor-designated 8,211,158 8,066,043 Accounts payable and accrued liabilities 8,262,020 6,302,361 Refundable grant advances 3,282,807 5,104,724 Total current liabilities 25,065,046 28,915,086 Net assets: Unrestricted: Undesignated 18,298,340 16,491,786 Board-designated endowments 29,769,203 31,211,427 Total unrestricted 48,067,543 47,703,213 Temporarily restricted 2,432,012 1,105,429 Permanently restricted 15,167,345 14,116,333 Total net assets 65,666,900 62,924,975 Total liabilities and net assets $ 90,731,946 $ 91,840,061 See accompanying notes. 1510-1703302 3
Statement of Activities Fiscal Year Ended June 30, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Gross campaign results (2014/2015) $ 40,237,310 $ $ $ 40,237,310 Gross campaign results in prior year released from restriction 593,936 (593,936) Total campaign results (2014/2015) 40,831,246 (593,936) 40,237,310 Less donor designations (17,637,942) 106,462 (17,531,480) Campaign revenue 23,193,304 (487,474) 22,705,830 Less provision for uncollectible pledges (1,168,546) (1,168,546) Net campaign revenue (2014/2015) 22,024,758 (487,474) 21,537,284 Future gross campaign results 340,696 340,696 Less donor designations (72,630) (72,630) Future net campaign revenue 268,066 268,066 Investment loss (27,941) (27,941) Grants and contracts 69,980,266 1,545,991 71,526,257 Other contributions 1,174,780 1,051,012 2,225,792 Gifts-in-kind and contributed services 7,059,080 7,059,080 Designated from other United Ways 131,501 131,501 Administrative fees 643,110 643,110 Gain on sale of building 2,570,000 2,570,000 Miscellaneous income 217,001 217,001 81,747,797 1,545,991 1,051,012 84,344,800 Total revenue 103,772,555 1,326,583 1,051,012 106,150,150 Expenses: Program services: Gross funds awarded/distributed 105,057,813 105,057,813 Less donor designations (17,604,109) (17,604,109) Net funds awarded/distributed 87,453,704 87,453,704 Other program services 7,653,238 7,653,238 Total program services 95,106,942 95,106,942 Supporting services: Organizational administration 4,506,722 4,506,722 Fundraising 5,048,665 5,048,665 Total supporting services 9,555,387 9,555,387 Total expenses 104,662,329 104,662,329 Changes in net assets before effect of changes in unrecognized benefit plan costs (889,774) 1,326,583 1,051,012 1,487,821 Changes in unrecognized benefit plan costs 1,254,104 1,254,104 Changes in net assets 364,330 1,326,583 1,051,012 2,741,925 Net assets, beginning of year 47,703,213 1,105,429 14,116,333 62,924,975 Net assets, end of year $ 48,067,543 $ 2,432,012 $ 15,167,345 $ 65,666,900 See accompanying notes. 1510-1703302 4
Statement of Activities Fiscal Year Ended June 30, 2014 Temporarily Permanently Unrestricted Restricted Restricted Total Gross campaign results (2013/2014) $ 43,257,806 $ $ $ 43,257,806 Gross campaign results in prior year released from restriction 366,383 (366,383) Total campaign results (2013/2014) 43,624,189 (366,383) 43,257,806 Less donor designations (17,812,267) 117,344 (17,694,923) Campaign revenue 25,811,922 (249,039) 25,562,883 Less provision for uncollectible pledges (1,301,428) (1,301,428) Net campaign revenue (2013/2014) 24,510,494 (249,039) 24,261,455 Future gross campaign results 499,804 499,804 Less donor designations (106,462) (106,462) Future net campaign revenue 393,342 393,342 Investment gain 8,405,507 8,405,507 Grants and contracts 64,108,076 20,555 64,128,631 Other contributions 2,012,186 (3,091) 2,009,095 Gifts-in-kind and contributed services 4,801,701 4,801,701 Designated from other United Ways 94,823 94,823 Administrative fees 648,083 648,083 Miscellaneous income 198,864 198,864 80,269,240 20,555 (3,091) 80,286,704 Total revenue 104,779,734 164,858 (3,091) 104,941,501 Expenses: Program services: Gross funds awarded/distributed 95,927,473 95,927,473 Less donor designations (17,801,385) (17,801,385) Net funds awarded/distributed 78,126,088 78,126,088 Other program services 6,202,145 6,202,145 Total program services 84,328,233 84,328,233 Supporting services: Organizational administration 3,192,464 3,192,464 Fundraising 4,457,106 4,457,106 Total supporting services 7,649,570 7,649,570 Total expenses 91,977,803 91,977,803 Changes in net assets before effect of changes in unrecognized benefit plan costs 12,801,931 164,858 (3,091) 12,963,698 Changes in unrecognized benefit plan costs (872,549) (872,549) Changes in net assets 11,929,382 164,858 (3,091) 12,091,149 Net assets, beginning of year 35,773,831 940,571 14,119,424 50,833,826 Net assets, end of year $ 47,703,213 $ 1,105,429 $ 14,116,333 $ 62,924,975 See accompanying notes. 1510-1703302 5
Statement of Functional Expenses Fiscal Year Ended June 30, 2015 Supporting Services Program Organizational Services Administration Fundraising Total Salaries $ 3,645,510 $ 2,015,036 $ 2,438,284 $ 8,098,830 Employee benefits 1,109,925 671,092 811,088 2,592,105 Payroll taxes 264,722 143,529 174,995 583,246 5,020,157 2,829,657 3,424,367 11,274,181 Professional fees 193,994 260,377 72,868 527,239 Supplies 38,026 12,431 17,829 68,286 Telephone 157,699 70,584 104,490 332,773 Postage 6,771 5,589 9,546 21,906 Occupancy 501,725 216,875 329,489 1,048,089 Equipment rental and maintenance 40,333 18,088 27,519 85,940 Printing and publications 293,201 24,777 144,150 462,128 Local transportation 42,550 4,233 29,738 76,521 Travel and conferences 95,698 24,414 29,382 149,494 Local meetings 31,353 10,365 13,546 55,264 Other fees 86,450 124,543 59,764 270,757 Computer services 239,397 130,086 69,808 439,290 Advertising 262,333 218,980 161,835 643,148 Staff development 25,726 18,853 16,424 61,003 Special events 39,974 45,152 148,119 233,245 Miscellaneous 30,857 38,008 16,873 85,738 Contributed services 135,046 155,532 93,695 384,273 National dues 163,303 188,075 113,300 464,678 2,384,436 1,566,962 1,458,376 5,409,773 Depreciation 248,645 110,103 165,923 524,671 7,653,238 4,506,722 5,048,666 17,208,625 Net funds awarded/distributed 87,453,704 87,453,704 $ 95,106,942 $ 4,506,722 $ 5,048,666 $ 104,662,329 See accompanying notes. 1510-1703302 6
Statement of Functional Expenses Fiscal Year Ended June 30, 2014 Supporting Services Program Organizational Services Administration Fundraising Total Salaries $ 3,418,245 $ 1,645,566 $ 2,460,280 $ 7,524,091 Employee benefits 392,015 202,573 278,425 873,013 Payroll taxes 224,731 113,060 171,237 509,028 4,034,991 1,961,198 2,909,941 8,906,131 Professional fees 325,116 162,365 78,618 566,099 Supplies 33,352 11,757 20,519 65,628 Telephone 188,802 79,394 149,699 417,895 Postage 10,079 5,826 9,709 25,614 Occupancy 117,149 52,143 95,050 264,342 Equipment rental and maintenance 21,623 9,442 18,217 49,282 Printing and publications 235,196 15,319 214,004 464,518 Local transportation 34,445 3,178 28,749 66,372 Travel and conferences 123,136 46,785 48,680 218,602 Local meetings 53,639 10,429 14,240 78,308 Other fees 50,406 73,759 39,953 164,118 Computer services 283,836 127,442 88,367 499,645 Advertising 177,080 195,222 171,871 544,173 Staff development 53,055 44,653 50,296 148,004 Special events 3,753 4,138 146,268 154,159 Miscellaneous 18,658 31,547 12,721 62,925 Contributed services 95,666 105,468 79,954 281,088 National dues 159,337 175,662 133,167 468,166 1,984,328 1,154,529 1,400,082 4,538,939 Depreciation 182,826 76,737 147,082 406,645 6,202,145 3,192,464 4,457,106 13,851,715 Net funds awarded/distributed 78,126,088 78,126,088 $ 84,328,233 $ 3,192,464 $ 4,457,106 $ 91,977,803 See accompanying notes. 1510-1703302 7
Statements of Cash Flows Fiscal Year Ended June 30 2015 2014 Operating activities Changes in net assets $ 2,741,925 $ 12,091,149 Adjustments to reconcile changes in net assets to net cash provided by (used in) operating activities: Depreciation 524,671 406,645 Provision for uncollectible pledges 1,168,546 1,301,428 Net unrealized loss (gain) on investments 3,041,697 (6,396,143) Gain on sale of building (2,570,000) Changes in unrecognized benefit plan costs (1,254,104) 872,549 Changes in operating assets and liabilities: Contributions receivable (519,893) (2,055,458) Other receivables 1,665,670 (2,184,916) Long-term contributions receivable (59,761) 57,223 Prepaids and other assets 2,110,938 (685,571) Allocations payable (3,987,780) (5,559,474) Accounts payable and accrued liabilities 137,742 (697,586) Other long-term liabilities (455,221) Net cash provided by (used in) operating activities 2,999,651 (3,305,375) Investing activities Purchases of investments (2,402,651) (974,654) Purchases of property and equipment (1,630,972) (353,131) Proceeds from disposal of property and equipment 3,064,337 Net cash used in investing activities (969,286) (1,327,785) Increase (decrease) in cash and cash equivalents 2,030,365 (4,633,160) Cash, beginning of year 11,274,486 15,907,646 Cash, end of year $ 13,304,851 $ 11,274,486 See accompanying notes. 1510-1703302 8
Notes to Financial Statements June 30, 2015 1. Description of Business Valley of the Sun United Way (the Organization) is an Arizona nonprofit organization whose mission is to improve lives by mobilizing the caring power of its community. The Organization was formed in 1925 and has addressed Maricopa County s most important human care needs for more than 80 years. Valley of the Sun United Way develops and supports hundreds of health and human services programs that address our community s most pressing needs. We will achieve our three key Community Objectives to 1) Ensure Children and Youth Succeed; 2) End Hunger and Homelessness; and, 3) Increase Financial Stability of Families and Individuals. United Way partners with Maricopa County leaders, business supporters, non-profit organizations, volunteers and donors to develop innovative solutions that address short-term individual needs and create long-term community solutions. By coming together around these common objectives, we create lasting, systemic change that transforms lives and builds a strong community for us all to live, work and raise our families. Vision To build a caring community where all children and youth succeed, families are self-sufficient and all people enjoy maximum health and independence. Valley of the Sun United Way Community Objectives Ensure Children and Youth Succeed Together with our partners, we develop partnerships and support programs that focus on key transitions which influence a child s success in school and life: ready for kindergarten, read at grade level by end of third grade, graduation from high school, and prepared for college or career. Increase Financial Stability We empower community members to break the cycle of poverty for themselves and their families. United Way and our partners focus on job training and workforce preparation, financial literacy education and connecting people to resources that will help them achieve financial independence. 1510-1703302 9
1. Description of Business (continued) End Hunger and Homelessness United Way works with partners to achieve systemic improvements that will end both chronic hunger and chronic homelessness in Maricopa County. The Organization receives funds that are allocated to programs serving identified community needs, similar to the Organization s unrestricted funds and Community Objectives. The primary source of grant funds is the State of Arizona through the First Things First (FTF) program. Grants received are managed by the Organization on behalf of the state and include financial support to parents to allow their children to attend high quality childcare centers. The Organization is the administrator of the Arizona State Employees Charitable Campaign, which is a campaign for the solicitation, receipt, and distribution of funds collected from pledges made by state employees. The Organization is also the administrator of the Maricopa County Combined Federal Campaign, which is a campaign for the solicitation, receipt, and distribution of funds collected from pledges made by federal employees in Maricopa County. The results of both campaigns are accounted for in the same manner as pledges made directly to the Organization and are included in total campaign results in the accompanying statements of activities. 2. Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Cash Cash held for others is restricted and consists of cash received from donors designated for specific nonprofit organizations. 1510-1703302 10
2. Significant Accounting Policies (continued) Investments The Organization invests excess cash in investment-grade marketable securities. Such investments are governed by a comprehensive investment policy that details guidelines concerning investment types, concentrations, and maturities. Investments in equity securities with readily determinable fair values and investments in debt securities are measured at fair value (based on quoted market prices). Investment income is presented net of related expenses. Investment-related expenses totaled approximately $44,000 and $37,000 in 2015 and 2014, respectively. Investment securities are exposed to various risks, such as interest rate, market, and credit. 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 statements of financial position. Concentrations of Credit Risk Financial instruments that potentially subject the Organization to concentrations of credit risk consist principally of cash and contributions receivable. The Organization places its cash with federally insured institutions. Concentrations of credit risk with respect to contributions receivable are generally limited due to the large number of contributors comprising the Organization s contributor base. As a result, the Organization does not consider itself to have significant concentrations of credit risk with respect to contributions receivable. Substantially all of the Organization s contributions receivable are due from companies and individuals located within Maricopa County. At June 30, 2015 and 2014, $267,344 and $241,332, respectively, of total contributions receivable were due from nine individual donors and families for the endowment campaign described in Note 3. 1510-1703302 11
2. Significant Accounting Policies (continued) Grant Revenue Grants received from FTF totaled approximately $68,567,000 and $62,774,000 in 2015 and 2014, respectively. The Organization receives FTF grants on a prepayment basis, and funds received which are not spent during the grant period are required to be reimbursed to FTF. The refund payable is recorded in refundable grant advances. Grant revenue also includes grants from various other agencies which are received on a cost-reimbursement basis. Funds disbursed pursuant to these grants prior to reimbursement by the granting agency are recognized in other receivables. Contributions Receivable Unconditional promises to give are recorded at fair value upon receipt of a written commitment from the donor. Multiyear pledges are recognized at their net present value using yields on U.S. Treasury obligations of equivalent maturity dates at the time the pledge is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the conditions are met. Property and Equipment Building, equipment, and software are stated at cost. Depreciation is provided on a straight-line basis over the following estimated useful lives: Building and Improvements Furniture, fixtures, and equipment Software 5 20 years 3 15 years 3 5 years Routine maintenance and repairs are charged to expense as incurred. Net Assets Contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Donor-specific contributions whose restrictions are met within the same year as received are reported as unrestricted campaign revenue in the accompanying financial statements. 1510-1703302 12
2. Significant Accounting Policies (continued) The Organization s unrestricted net assets are reported in the following categories: Undesignated represents amounts available to fund future operating expenses, including allocations payable to health and human service agencies. Board-designated endowments represents amounts designated by the Board of Directors for long-term investment purposes. The related principal amounts are not intended for current use. Contributions that are restricted by the donor for a specific purpose or time period are reported as temporarily restricted when the restriction is not met within the year of receipt and the ultimate purpose of the proceeds is not permanently restricted. When a donor restriction expires, that is, when a stipulated time restriction ends or a purpose restriction is satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and are reported in the statements of activities as net assets released from restriction. Contributions designated by the donor for a specific unrelated organization are recognized by Valley of the Sun United Way as reductions of contributions revenue and gross funds awarded/designated. Permanently restricted net assets include contributions that require by donor restriction that the corpus be invested in perpetuity. Gifts-in-Kind and Contributed Services Donated assets and services are reflected as contributions in the accompanying statements of activities at their estimated fair values at the date of receipt. Gifts-in-kind received includes food, clothing and household goods, office furniture, supplies and tickets. Contributions of services are recognized if the services received create or enhance a non-financial asset or the services require specialized skills that are provided by individuals possessing those skills and include television, radio, print and outdoor advertising. Such contributions are measured at the fair value of the services received. Contributed services are reflected as unrestricted revenue and an equal amount is recorded in unrestricted organizational administration expenses in the statement of activities, resulting in no net impact on the changes in net assets during the year. 1510-1703302 13
2. Significant Accounting Policies (continued) Many individuals volunteer their time and perform a variety of tasks that assist the Organization in specific assistance programs, campaign solicitations, and various committee assignments. Since the services provided in these instances do not require specialized skills, they have not been valued or reflected in the accompanying statements of activities. Fundraising Costs All salary, overhead, and miscellaneous costs attributable to fundraising efforts are recorded as operating expenses in the period incurred. Advertising Advertising costs are expensed as incurred. Advertising expense for the years ended June 30, 2015 and 2014, was approximately $643,000 and $544,000, respectively. Administrative Fees Fees deducted from donor-designated contributions to cover administrative costs are recorded as administrative fees. Allowance for Uncollectible Pledges The allowance for uncollectible pledges is computed based upon a four-year historical average of collection experience by contribution type, adjusted for management s estimate of current economic factors and using the specific identification method. The Organization recorded a change in estimate of approximately $120,000 in 2015 to decrease the allowance for uncollectible pledges related to contributions receivable as of June 30, 2014. The Organization recorded a change in estimate of approximately $100,000 in 2014 to increase the allowance for uncollectible pledges related to contributions receivable as of June 30, 2013. Functional Allocation of Expenses Expenses are classified on a functional basis in the accompanying statements of activities. Program services are those related to community investment and community initiative activities and include the cost of certain community programs and the expenses associated with the administration and management of these activities. Supporting services are those expenses associated with fundraising and organizational administration. 1510-1703302 14
2. Significant Accounting Policies (continued) Net funds awarded/distributed consist of grant funds (mainly from FTF) as well as funds distributed to health and human service organizations that have programs which are in line with our Community Objectives. For purposes of the statements of functional expenses, a portion of organizational administration expenses is allocated to all program and supporting services on the basis of full-time employee equivalents. Tax Status The Organization is a nonprofit corporation and is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. Accordingly, a provision for income taxes has not been included in the accompanying statements of activities. Management is of the opinion that substantially all of the Organization s activities are related to its tax-exempt purpose, and no material uncertain tax positions have been identified or recorded in the financial statements at June 30, 2015 or 2014. Pension Benefits The Organization terminated its defined benefit pension plan in September 2014. See additional details in Note 8. 3. Endowment Campaign In late fiscal 2007, the Organization commenced an endowment campaign whereby funds raised are invested and the related investment income used to underwrite the Organization s organizational administration and fundraising costs. Through June 30, 2015, the endowment has cumulatively received unconditional pledges, net of pledges deemed to be uncollectible, to the endowment campaign that require multiyear payments totaling $15,175,000. Through June 30, 2015, the Organization has received approximately $14,900,000, and the payments remaining on these pledges are expected to be received as follows: $135,000 in 2016, $65,000 in 2017, $61,250 in 2018, and $13,750 in 2019. The Organization recorded $1,050,000 at June 30, 2015, for these endowment campaign contributions in contributions receivable, based on the net present value and using a discount rate of 1.60% to 3.49%. These receivables are included in permanently restricted net assets at June 30, 2015. 1510-1703302 15
3. Endowment Campaign (continued) The Board of Directors has interpreted the Arizona State Prudent Management of Institutional Funds Act (SPMIFA) 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, including interest and dividends earned, that is not classified in permanently restricted net assets is classified as unrestricted net assets as those amounts are appropriated for expenditure by the Organization in the same fiscal period in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted 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 The Organization has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding 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 or that the Board of Directors has designated as endowment assets. Under this policy, as approved by the Board of Directors, the endowment assets are invested in a manner that is intended to produce a target annual rate of return greater than the Consumer Price Index plus 5%, over a full market cycle (defined over a five-year moving period) without exceeding a standard deviation of 1.2 times a weighted benchmark index. The benchmark index comprises each asset class index weighted by its target allocation. Actual returns in any given year may vary from this amount. 1510-1703302 16
3. Endowment Campaign (continued) 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 and fixed-income investments to achieve its long-term objective within prudent risk constraints. Over the long term, the Organization expects its endowment to grow at an average of the long-term rate of inflation. The Organization s objective is to maintain the purchasing power of the endowment assets held in perpetuity or for a specific term, as well as to provide additional real growth through new gifts and investment return. At June 30, 2015, the endowment net asset composition by type of fund consisted of the following: Unrestricted Permanently Restricted Total Donor-advised funds $ 36,353 $ $ 36,353 Board-designated quasi-endowment 22,590,698 22,590,698 Board-designated endowment 7,142,152 15,167,345 22,309,497 Total funds $ 29,769,203 $ 15,167,345 $ 44,936,548 Changes in endowment net assets for the year ended June 30, 2015, consisted of the following: Unrestricted Permanently Restricted Total Endowment net assets, beginning of year $ 31,211,427 $ 14,116,333 $ 45,327,760 Investment return: Investment income 1,701,127 1,701,127 Net realized and unrealized losses (1,757,796) (1,757,796) Total investment losses (56,669) (56,669) Transfers and contributions 128,634 1,050,000 1,178,634 Present value discount (1.60% 3.49%) 1,012 1,012 Appropriation of endowment assets for expenditure (1,514,189) (1,514,189) Endowment net assets, end of year $ 29,769,203 $ 15,167,345 $ 44,936,548 1510-1703302 17
3. Endowment Campaign (continued) At June 30, 2014, the endowment net asset composition by type of fund consisted of the following: Unrestricted Permanently Restricted Total Donor-advised funds $ 37,442 $ $ 37,442 Board-designated quasi-endowment 23,212,410 23,212,410 Board-designated endowment 7,961,575 14,116,333 22,077,908 Total funds $ 31,211,427 $ 14,116,333 $ 45,327,760 Changes in endowment net assets for the year ended June 30, 2014, consisted of the following: Unrestricted Permanently Restricted Total Endowment net assets, beginning of year $ 25,292,428 $ 14,119,424 $ 39,411,852 Investment return: Investment income 1,235,390 1,235,390 Net realized and unrealized gains 5,798,335 5,798,335 Total investment gains 7,033,725 7,033,725 Transfers and contributions 303,716 (10,000) 293,716 Present value discount (1.60% 3.49%) 6,909 6,909 Appropriation of endowment assets for expenditure (1,418,442) (1,418,442) Endowment net assets, end of year $ 31,211,427 $ 14,116,333 $ 45,327,760 1510-1703302 18
4. Contributions Receivable Contributions receivable as of June 30 are as follows: 2015 2014 Less than one year $ 17,216,673 $ 17,890,924 More than one year 140,000 210,000 17,356,673 18,100,924 Allowance for uncollectible pledges (2,198,000) (2,317,643) Discount (1.60% to 3.49%) (8,307) (11,934) 15,150,366 15,771,347 Less current portion (15,033,673) (15,683,281) $ 116,693 $ 88,066 5. Fair Value Measurements The Organization uses a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows: Level 1: Pricing is based on observable inputs for identical instruments, such as quoted prices in active markets. Level 2: Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Level 3: Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management s judgment or estimates, based on assumptions, that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including, but not limited to, private and public comparables, third-party appraisals, discounted cash flow models, and fund manager estimates. 1510-1703302 19
5. Fair Value Measurements (continued) Assets measured at fair value are based on one or more of three valuation techniques described below. (a) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. (b) Cost approach. Amount that would be required to replace the service capacity of an asset (replacement cost). (c) Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option pricing, and excess earnings models). All of the Organization s investments as of and for the years ended June 30, 2015 and 2014, are considered Level 1 and were valued using the market approach. 6. Investments Investments, measured at fair value, consist of the following as of June 30: 2015 2014 Mutual funds: Short duration bond funds $ 4,901,886 $ 4,907,989 Bond funds 9,627,123 9,675,774 Equity funds 42,298,074 42,405,657 Exchange traded funds 998,100 1,473,861 57,825,183 58,463,281 Short-term investments (4,901,886) (4,907,989) Long-term investments $ 52,923,297 $ 53,555,292 1510-1703302 20
6. Investments (continued) Investment (loss) income consists of the following for the years ended June 30: 2015 2014 Interest and dividends $ 2,011,213 $ 1,510,440 Realized gains 1,002,543 498,924 Unrealized (losses) gains (3,041,697) 6,396,143 $ (27,941) $ 8,405,507 7. Property and Equipment Building and equipment consisted of the following as of June 30: 2015 2014 Building $ $ 1,575,716 Building improvements 273,721 743,816 Furniture, fixtures, and equipment 1,916,707 2,187,801 Software 882,364 1,409,974 3,072,792 5,917,307 Less accumulated depreciation (870,230) (4,326,709) $ 2,202,562 $ 1,590,598 In June 2015, the Organization sold land and buildings comprising its headquarters in Phoenix, Arizona for approximately $3,064,000. The property had a carrying value of $490,000 resulting in a gain on sale of $2,570,000. 1510-1703302 21
8. Retirement Plans Pension Plan Through September 2014 the Organization had a defined benefit pension plan (the Plan) for its employees. Employees who had reached the age of 21 and had been employed a minimum of one year were eligible under the Plan with full vesting after five years of participation. As of June 30, 2014, the accumulated benefit plan obligation was $5,541,370 and the fair value of plan assets, all Level I within the fair value hierarchy, was $6,361,548. The Organization recognized the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its defined benefit pension plan in the statement of financial position as prepaid and other assets, which at June 30, 2014, was $820,177. Effective July 1, 2013, the plan was curtailed and new employees were not eligible to participate in the Plan. In September 2014, the Organization final settled the Plan, disbursing approximately $4,644,000 to Plan participants and purchasing annuity contracts of $346,000 to settle all obligations with respect to the Plan. In fiscal year 2015, the Organization recognized a benefit of approximately $548,131 in the statement of changes in net assets related to the final settlement. Pension cost and the funded status of the Plan, as determined by the Plan s actuary as of and for the year ended June 30, 2014, is as follows: 2014 Benefit obligation $ (5,541,370) Fair value of plan assets 6,361,548 Funded status of the plan recognized in statements of financial position $ 820,177 Accumulated benefit obligation at end of year $ 5,541,370 Components of net periodic benefit cost: Service cost $ 321,528 Interest cost 372,339 Expected return on net assets (643,381) Amortization of unrecognized prior service cost (4,522) Amortization of loss 26,668 Total net periodic pension cost $ (1,030,954) Employer contributions $ 220,500 Benefits paid (3,766) 1510-1703302 22
8. Retirement Plans (continued) Assumptions 2014 Weighted-average assumptions used to determine benefit obligation: Measurement date June 30 Discount rate 4.0% Rate of compensation increase 3.0% Weighted-average assumptions used to determine net periodic benefit cost: Measurement date June 30 Discount rate 4.5% Expected return on plan assets 8.0% Rate of compensation increase 4.0% The expected long-term rate of return on plan assets assumption of 8.0% was selected using the building block approach described by the Actuarial Standards Board in Actuarial Standards of Practice No. 27, Selection of Economic Assumptions for Measuring Pension Obligations. Based on the Organization s investment allocation for the pension plan in effect as of the beginning of the fiscal year, a best estimate range was determined for both the real rate of return (net of inflation) and for inflation based on historical 30-year-period rolling averages. An average inflation rate within the range equal to 3.0% was selected and added to the real rate of return range to arrive at a best estimate range of 7.25% 9.25%. A rate of 8.0% near the midpoint of the best estimate range was selected. Pension plan investment securities are exposed to various risks, such as interest rate, market, and credit. 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 value of plan assets. The financial statements reflect a correction of the prior year s presentation of the changes in unrecognized benefit plan costs within the statement of cash flows. The presentation of the 2014 statement of cash flows was revised to reflect an $872,549 adjustment to reconcile changes in net assets provided by (used in) operating activities, with a corresponding adjustment to the fluctuation in prepaids and other assets. There was no impact on net cash used in operating activities. 1510-1703302 23
8. Retirement Plans (continued) Plan Assets The following represents plan assets at June 30: Total 2014 Percentage Money market funds $ 6,361,548 100% $ 6,361,548 100% All of the Plan s assets were classified as Level 1 at June 30, 2014, and were valued using the market approach. The investment objective for plan assets is to minimize risk and preserve principal. As of June 30, 2014, all pension assets are held in money market funds Thrift Plan The Organization has a defined contribution 401(k) Thrift Plan for its employees (the Thrift Plan). Employees are eligible to participate in the Thrift Plan after they have completed one year of service and have attained the age of 21. Participants can elect to contribute up to 100% of their pretax annual compensation, as defined by the Thrift Plan, and are subject to the annual limits of the Internal Revenue Code. The Thrift Plan also allows for employer-matching contributions equal to 75% of the first 6% of the salary reduction amount contributed by the employee, which vests 25% each year for four years. For the years ended June 30, 2015 and 2014, the Organization s contributions totaled approximately $366,000 and $214,000, respectively. 9. Related-Party Transactions Volunteers from the local business community are relied upon to serve on the Board of Directors, on committees, and in other key positions within the Organization. Many of the volunteers make significant contributions through their involvement and assistance with fundraising campaigns on behalf of the Organization. Pledges from Board of Directors members totaled approximately $400,000 and $381,000 in 2015 and 2014, respectively. 1510-1703302 24
10. Commitments and Contingencies Operating Leases In July 2014, the Organization entered into an eleven-year noncancelable operating lease agreement for corporate offices in Phoenix, Arizona. The lease is subject to rent holidays and rent increases and the Organization recognizes rent expense on a straight-line basis over the lease period. In addition, incentives were granted, including discounted rental payments. As such, these allowances have been recorded as deferred rent and these items are being recognized as adjustments to rental expense on a straight-line basis over the term of the lease. Lease expense for the fiscal years ended June 30 was $793,455 and $0 in 2015 and 2014, respectively. Minimum lease commitments at June 30, 2015, are as follows (in thousands): Year: 2016 $ 330,125 2017 677,455 2018 854,323 2019 870,726 2020 887,129 Thereafter 5,082,412 $ 8,702,170 11. Subsequent Events The Organization has evaluated events subsequent to June 30, 2015, to assess the need for potential recognition or disclosures in the financial statements. Such events were evaluated through October 23, 2015, the date these financial statements were available to be issued. Based upon this evaluation, it was determined that no other subsequent events occurred that require recognition or additional disclosure in the financial statements. 1510-1703302 25
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2015 Ernst & Young LLP. All Rights Reserved. ey.com