goldwater institute for public policy research
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012
CONTENTS
Page INDEPENDENT AUDITORS’ REPORT
1-2
CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position
3
Consolidated Statement of Activities and Changes in Net Assets
4
Consolidated Statement of Functional Expenses
5
Consolidated Statement of Cash Flows
6
Notes to Consolidated Financial Statements
7 - 17
INDEPENDENT AUDITORS' REPORT To the Board of Directors of BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY Report on the Consolidated Financial Statements We have audited the consolidated financial statements of Barry Goldwater Institute for Public Policy Research and Subsidiary, which comprise the consolidated statement of financial position as of December 31, 2012, and the related consolidated statements of activities and changes in net assets, functional expenses, and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility for the Consolidated Financial Statements Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION December 31, 2012 (with summarized comparative totals at December 31, 2011)
ASSETS 2012 CURRENT ASSETS Cash and cash equivalents Pledges receivable, net Investment in notes receivable Other receivables Prepaid expenses TOTAL CURRENT ASSETS
$
INVESTMENTS PROPERTY AND EQUIPMENT, net TOTAL ASSETS
$
722,832 33,323 1,950,000 4,747 57,130 2,768,032
2011 $
540,479 155,293 1,700,000 42,716 19,880 2,458,368
865,504
784,619
1,717,580
1,709,113
5,351,116
$
4,952,100
42,987 66,552 4,384 113,923
$
21,150 121,686 3,994 146,830
LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable Accrued liabilities Current portion of capital lease obligation TOTAL CURRENT LIABILITIES
$
CAPITAL LEASE OBLIGATION, less current portion TOTAL LIABILITIES NET ASSETS Unrestricted: Undesignated Board designated operating reserve Total unrestricted net assets Temporarily restricted Permanently restricted TOTAL NET ASSETS TOTAL LIABILITIES AND NET ASSETS
$
See Notes to Consolidated Financial Statements -3-
5,235
9,619
119,158
156,449
3,029,126 600,000 3,629,126 738,477 864,355 5,231,958
2,918,975 600,000 3,518,975 412,321 864,355 4,795,651
5,351,116
$
4,952,100
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
Unrestricted SUPPORT AND REVENUES Contributions Foundation contributions and grants Litigation cost reimbursement revenue Interest and dividends Realized and unrealized gains (losses) Other income Total support and revenues before special events and net assets released from restrictions
$
$
2,859,491
Special events: Special events revenues Less costs of direct donor benefits Gross profit on special events
3,589,577
EXPENSES AND LOSSES: Program services Fundraising Management and general Loss on uncollectible pledges TOTAL EXPENSES AND LOSSES CHANGE IN NET ASSETS NET ASSETS, BEGINNING OF YEAR $
$
-
2012 $
-
-
410,975
TOTAL SUPPORT AND REVENUES
420,115 287,005 10,890 19,121 -
Totals
Permanently Restricted
737,131
394,897 (75,786) 319,111
Net assets released from restrictions
NET ASSETS, END OF YEAR
1,935,269 805,495 59,635 50,878 8,214
Temporarily Restricted
2011
2,355,384 1,092,500 70,525 69,999 8,214
$
3,596,622
-
1,534,821 890,400 1,395,020 51,981 (5,032) 3,985
3,871,175
394,897 (75,786) 319,111
434,362 (111,554) 322,808
(410,975)
-
-
-
326,156
-
3,915,733
4,193,983
2,712,064 436,894 330,468 -
-
-
2,712,064 436,894 330,468 -
3,065,304 425,569 282,528 5,900
3,479,426
-
-
3,479,426
3,779,301
-
436,307
414,682
4,795,651
4,380,969
110,151
326,156
3,518,975
412,321
3,629,126
$
738,477
864,355 $
864,355
See Notes to Consolidated Financial Statements -4-
$
5,231,958
$
4,795,651
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
Totals Program Services Wages and salaries Direct mail and postage Employee benefits Payroll taxes Depreciation and amortization Building expense Litigation fees and attorney's fees Travel Printing and research publications Dues and subscriptions Advertising and public relations Gala fundraising event Technology Audit and financial services Telephone Insurance Event Bank and credit card fees Contract labor Supplies Book and marketing expense Business meals Licenses/fees Bad debt expense Equipment lease and repair Website development expense Seminars and meetings Media studio Payroll and plan maintenance fees Legal Interest expense List rentals Research materials TOTAL EXPENSES
Fundraising
Management and General
2012
2011
$
1,673,625 176,636 137,714 105,207 96,563 91,171 92,277 35,321 48,524 40,876 35,898 8,042 23,503 22,787 23,780 28,492 6,528 15,227 10,962 6,649 7,006 8,236 7,392 6,989 2,659 -
$
229,553 31,432 18,120 14,430 13,216 12,478 20,510 5,116 24,125 4,056 3,934 2,972 24,183 7,555 2,629 3,654 4,640 12,167 1,209 915 -
$
187,534 1,742 14,311 11,789 12,412 11,720 9,259 2,178 4,336 31,503 4,205 2,972 2,031 10,513 2,810 1,574 80 10,000 1,293 169 6,931 1,106 -
$
2,090,712 209,810 170,145 131,426 122,191 115,369 92,277 65,090 48,524 48,170 35,898 32,167 31,895 31,503 30,926 29,724 28,492 26,214 24,596 20,666 14,616 12,863 12,247 10,000 9,508 9,151 7,561 6,989 6,931 2,659 1,106 -
$
2,241,512 252,383 163,521 139,987 109,166 104,344 81,779 58,966 53,196 37,223 74,219 53,379 23,980 30,437 28,110 20,174 34,047 15,841 78,507 23,986 4,386 15,494 3,458 11,188 64,099 7,888 6,415 11,026 1,462 22,239 989
$
2,712,064
$
436,894
$
330,468
$
3,479,426
$
3,773,401
See Notes to Consolidated Financial Statements -5-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, 2012 (with summarized comparative totals at December 31, 2011) 2012 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Change in discount on long-term pledges Provision for bad debts Loss on uncollectible pledges Realized and unrealized (gains) losses on investments Changes in operating assets and liabilities: Decrease (increase) in: Pledges receivable Other receivables Prepaid expenses Increase (decrease) in: Accounts payable Accrued liabilities Net cash provided by operating activities
$
436,307
2011 $
414,682
122,191 (4,810) 10,000 (69,999)
109,166 (14,417) 5,900 5,032
126,780 27,969 (37,250)
142,045 5,733 (10,456)
21,837 (55,134) 577,891
(12,727) 58,360 703,318
CASH FLOWS FROM INVESTING ACTIVITIES Payments from notes receivable Proceeds from sale of investments Cash invested in notes receivable Purchases of investments Purchases of property and equipment Net cash used in investing activities
250,000 413,643 (500,000) (424,529) (130,658) (391,544)
250,000 535,035 (1,000,000) (545,111) (78,854) (838,930)
CASH FLOWS FROM FINANCING ACTIVITIES Payments on capital lease obligation Net cash used in financing activities
(3,994) (3,994)
(3,638) (3,638)
NET CHANGE IN CASH AND CASH EQUIVALENTS
182,353
(139,250)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
540,479
679,729
CASH AND CASH EQUIVALENTS, END OF YEAR
$
722,832
$
540,479
$
1,106
$
1,462
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid for interest
See Notes to Consolidated Financial Statements -6-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies Barry Goldwater Institute for Public Policy Research (“the Institute”) was established in 1988 as an independent, non-partisan research and educational organization dedicated to the study of public policy. Through research papers, workshops, commentaries and policy briefings, the Institute's mission is to advance the principles of limited government, economic freedom and individual responsibility - the principles championed by the late Senator Barry Goldwater during his years of public service. To promote these principles, change public opinion, and assist Arizona leaders in developing sound public policy, the Institute conducts research on timely issues. The Institute neither seeks nor accepts government funding and relies wholly on contributions from the private sector to fund its activities. In February 2001 the Institute’s Board of Directors formed Goldwater Institute Holding Company, LLC (“Holding Company”), with the Institute as the sole member. The Holding Company was formed to hold and manage the Institute's real property. The Institute transferred its real property to the Holding Company in 2002. The significant accounting policies followed by the Institute and its subsidiary, the Holding Company, collectively referred to in these consolidated financial statements as the “Institute,” are summarized below: Basis of presentation – The accompanying consolidated financial statements are presented in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 958205, Not-for-Profit Entities - Presentation of Financial Statements. Under FASB ASC 958-205, the Institute is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Prior year summarized information – The consolidated financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with U.S. generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Institute’s audited consolidated financial statements for the year ended December 31, 2011, from which the summarized information was derived. Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Institute and its wholly owned subsidiary Goldwater Institute Holding Company, LLC. All significant intercompany transactions and accounts have been eliminated in consolidation. Management’s use of estimates – The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition – The Institute recognizes amounts received from grants at the time the Institute receives notification of the award in situations where no further activities are required. Revenue from public policy and lecture events is recognized upon the occurrence of the event. Fees received prior to the occurrence of a scheduled event are deferred until the period in which the event occurs.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies (continued) Contributions – The Institute accounts for contributions in accordance with FASB ASC 958-605, Not-forProfit Entities - Revenue Recognition. Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. All donor-restricted support is reported as an increase in temporarily or permanently restricted net assets depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. Restricted support, where restrictions are met in the same period as the contribution is made, is shown as unrestricted support. In 2011, the Institute received a conditional promise to give of up to $200,000 in matching funds. For every dollar the Institute raised from other sources for a specific project between December 1, 2012 and November 30, 2013, the donor pledged to contribute two dollars, up to a maximum of $200,000. This pledge was also contingent on the donor’s review and approval of the Institute’s use of other contributed funds in fiscal year 2012. No amounts related to this conditional promise to give were recognized in the Institute’s fiscal year 2011 consolidated financial statements as the conditions of the promise to give were not substantially met as of December 31, 2011. During 2012, these conditions were met and the funds were received from the donor and recognized as temporarily restricted contributions. Special events revenue – The Institute conducts special events in which a portion of the gross proceeds paid by the participant represents payment for the direct cost of the benefits received by the participant at the event. Unless a verifiable, objective means exists to demonstrate otherwise, the fair value of meals and entertainment provided at special events is measured at the actual cost to the Institute. The direct costs of the special events which ultimately benefit the donor rather than the Institute are recorded as costs of direct donor benefits. All proceeds received in excess of the direct costs are recorded as gross profit on special events in the accompanying consolidated statement of activities and changes in net assets. Litigation cost reimbursement revenue – The Institute engages in litigation to champion causes related to its founding principles. The Institute may be awarded reimbursement of its legal costs incurred in litigating cases if the court finds in favor of the Institute. Litigation cost reimbursement revenue awarded as a result of litigation of cases is recognized when the ruling is made by the court. Donated materials and services – Donated materials are reflected as contributions in the consolidated statement of activities and changes in net assets at their estimated values at the date of receipt. Donated services are recognized as contributions in accordance with FASB ASC 958-605 if the services (a) create or enhance nonfinancial assets or (b) require specialized skills, are performed by people with those skills, and would otherwise be purchased. When these conditions are met, the fair value of the donated services is reflected as contributions in the consolidated statement of activities and changes in net assets. No amounts have been reflected in the accompanying consolidated financial statements for certain donated volunteer services because they did not qualify for recording under the guidelines of FASB ASC 958-605. The Institute received the following donated materials and services: Used for Programs Fundraising Programs Programs
Airline miles Beverages Expert witness services Miscellaneous goods
$
$ -8-
2012 4,411 4,411
2011 $
$
11,985 8,493 5,778 26,256
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies (continued) Cash – Cash consists of cash and, at times, cash equivalents consisting of highly liquid financial instruments purchased with original maturities of three months or less. Deposits at each financial institution are insured in limited amounts by the Federal Deposit Insurance Corporation (FDIC). Promises to give – Unconditional promises to give that are to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected in future years are initially recorded at the fair value of their estimated future cash flows as of the date of the promise to give through the use of a present value discount technique. In periods subsequent to initial recognition, unconditional promises to give are reported at the amount management expects to collect and are discounted over the collection period using the same discount rate as determined at the time of initial recognition. The discount rate determined at the initial recognition of the unconditional promise to give is based upon management’s assessment of many factors, including when the receivable is expected to be collected, the creditworthiness of the other parties, the Institute’s past collection experience and its policies concerning the enforcement of promises to give, expectations about possible variations in the amount or timing, or both, of the cash flows, and other factors concerning the receivable’s collectability. Amortization of the discounts is included in support from contributions. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Pledges receivable are stated at the amount management expects to collect. Management provides for uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to pledges receivable. At December 31, 2012 and 2011, pledges receivable are considered by management to be fully collectible, and, accordingly an allowance for uncollectible pledges is not considered necessary. Other receivables – Other receivables consists primarily of amounts due from attendees of the Institute’s special events. Notes receivable – Notes receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance for uncollectible notes receivable based on its assessment of the current status of individual balances. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for uncollectible notes receivable and a credit to notes receivable. At December 31, 2012 and 2011, notes receivable are considered by management to be fully collectible and, accordingly, an allowance for uncollectible notes receivable is not considered necessary. Interest on notes receivable is recognized over the term of the notes receivable and is calculated using the simple-interest method on principal amounts outstanding. Investments – The Institute accounts for its investments in accordance with FASB ASC 958-320, Not-forProfit Entities - Investments-Debt and Equity Securities. Under FASB ASC 958-320, the Institute reports investments in equity securities that have readily determinable fair values, and all investments in debt securities at fair value. The fair values of investments are based on quoted market prices. Investments 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 risks in the near term would materially affect account balances and the amounts reported in the accompanying consolidated financial statements.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies (continued) Property and equipment and related depreciation and amortization – Purchased property and equipment is valued at cost, and donated property and equipment is recorded at fair value at the date of gift to the Institute. Maintenance and repairs are charged to operations when incurred. Betterments and renewals in excess of $500 are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Depreciation and amortization of property and equipment is computed on a straightline basis over the following estimated useful lives: Buildings and improvements Furniture and equipment
39 years 3 - 15 years
Impairment of long-lived assets – The Institute accounts for long-lived assets in accordance with the provisions of FASB ASC 360, Property, Plant, and Equipment. FASB ASC 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment charges were recorded for the years ended December 31, 2012 and 2011. Functional expenses – Expenses are charged to program services, management and general, and fundraising categories based on direct expenditures incurred. Any expenditures not directly chargeable are allocated based on personnel activity and other appropriate allocation methods. Advertising expense – Advertising costs are charged to operations when incurred. Advertising expense charged to operations was $35,898 for 2012 and $74,219 for 2011. Income tax status – The Institute qualifies as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code (IRC) and, accordingly, there is no provision for income taxes. Income determined to be unrelated business taxable income (UBTI) would be taxable. Goldwater Institute Holding Company, LLC is a disregarded entity for income tax purposes. The Institute evaluates its uncertain tax positions, if any, on a continual basis through review of its policies and procedures, review of its regular tax filings, and discussions with outside experts. At December 31, 2012 and 2011, management believes the Institute does not have any uncertain tax positions. The Institute’s federal Return of Organization Exempt from Income Tax (Form 990) for 2009, 2010 and 2011 are subject to examination by the IRS, generally for the three years after they were filed. The return for the year ended December 31, 2012 has not yet been filed as of the date of this report. Reclassifications – Certain amounts have been reclassified in the summarized comparative information for fiscal year 2011 to conform to the presentation of the 2012 financial statements. The reclassifications did not have an effect on the change in net assets. Certain expenses were reclassified to conform their classification within the different functional expense categories to the classification used in 2012. The effect of the reclassifications was to decrease printing and research publications expense by $140,795 and increase direct mail and postage expense by the same amount.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies (continued) Recent accounting pronouncement – In May 2011, the FASB issued Accounting Standard Update (“ASU”) No. 2011-04 (“ASU 2011-04”) “Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.” ASU 2011-04 provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 does not extend the use of fair value, but rather provides additional disclosure guidance about the application of fair value in those areas where fair value is already required or permitted, especially for Level 3 fair value measurements. ASU 2011-04 is effective for the first reporting period beginning after December 15, 2011. The Institute adopted ASU 2011-04 during 2012. There was no significant impact on the consolidated financial statements. In October 2012, the FASB issued ASU No. 2012-05 (“ASU 2012-05”) “Statement of Cash Flows (Topic 230) Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows.” ASU 2012-05 requires nonprofit organizations to classify cash receipts from the sale of donated financial assets consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that upon receipt were directed without any limitations imposed by the nonprofit organization for sale and were converted nearly immediately into cash. ASU 2012-05 is effective prospectively for fiscal years beginning after June 15, 2013 and early adoption is permitted. Retrospective application to all prior periods presented upon the date of adoption is permitted. The Institute adopted ASU 2012-05 during 2012. The adoption of this provision resulted in an increase in net cash flows from operating activities of $428,335 and $46,755 with corresponding reductions to net cash flows from investing activities for fiscal year 2012 and 2011, respectively, in the accompanying consolidated statement of cash flows. Subsequent events – The Institute has evaluated subsequent events through May 15, 2013, which is the date the consolidated financial statements were available to be issued.
(2)
Pledges receivable Pledges receivable consist of the following unconditional promises to give: 2012 Receivable in less than one year Receivable in one to five years Total gross pledges receivable Less discounts pledges Net pledges receivable Less current portion Noncurrent portion
$
$
33,375 33,375 (52) 33,323 (33,323) -
2011 $
$
160,155 160,155 (4,862) 155,293 (155,293) -
The estimated cash flows for pledges receivable are discounted over the collection period using a discount rate as determined by management of 5%. At December 31, 2012 and 2011, approximately 0% and 94%, respectively, of the gross pledges are due from board members. Contributions from board members represented approximately 16% and 17% of contributions for the years ended December 31, 2012 and 2011, respectively.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(3)
Investment in notes receivable The Institute has elected to invest its excess cash in two promissory notes with a privately held corporation controlled by a board member. These revolving notes provide the Institute with the ability to request payments of the principal balances at any time prior to their maturity dates. The Institute may reinvest funds into the notes up to the maximum amount provided in the note agreements. On January 1, 2002, the Institute obtained an unsecured revolving promissory note from a privately held corporation controlled by a board member for the sum of $200,000. The note bears interest at 10% per annum until paid. Terms of the note call for interest to be paid to the Institute monthly. During 2011, the maturity of the note was extended from December 31, 2011 to December 31, 2015. The balance of this note at December 31, 2012 and 2011 was $200,000. During the year ended December 31, 2005, the Institute obtained another unsecured revolving promissory note from the same corporation as above for the purpose of investing the Institute's excess cash with a maximum amount of $1,000,000. During 2011, the maximum amount was increased to $1,750,000 and the maturity date was extended from December 31, 2011 to December 31, 2015. The note bears interest at the rate charged by Farm Credit Services Southwest (2.25% at December 31, 2012). The terms of the note call for interest to be paid to the Institute monthly. The balance of this note at December 31, 2012 and 2011 was $1,750,000 and $1,500,000, respectively. For the years ended December 31, 2012 and 2011, interest earned on the notes receivable was $50,532 and $34,376, respectively. The unsecured investments in these revolving notes represent a concentration of credit risk due to the fact that approximately 36% and 34% of the Institute’s assets are invested with a single borrower as of December 31, 2012 and 2011, respectively. The fact that the notes are unsecured increases the overall level of risk associated with these investments.
(4)
Investments 2012
Investments consist of: U.S. equity mutual funds U.S. fixed income funds International equity mutual funds Global commodity equities International fixed income funds Cash and money market funds Alternative real estate equities International currency funds Total investments
$
$
296,957 231,982 163,946 93,640 50,136 28,843 865,504
2011 $
$
183,474 286,278 92,678 101,033 22,791 24,299 51,678 22,388 784,619
Expenses relating to investment revenues, including custodial fees and investment advisory fees of $9,103 for 2012 and $8,537 for 2011 were charged to operations.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(5)
Property and equipment Property and equipment consist of: 2012 Cost and donated value: Land Buildings and improvements Furniture and equipment Total cost and donated value Accumulated depreciation and amortization Property and equipment, net
$
$
358,480 1,768,348 824,339 2,951,167 (1,233,587) 1,717,580
2011 $
$
358,480 1,768,348 693,681 2,820,509 (1,111,396) 1,709,113
Depreciation and amortization expense charged to operations was $122,191 and $109,166, respectively, for the years ended December 31, 2012 and 2011. In January 2010, the Institute entered into a capital lease agreement for equipment. The cost of the asset held under capital lease agreement totaled $20,300 at December 31, 2012 and 2011. Accumulated amortization on the asset held under capital lease agreement included in accumulated depreciation and amortization above is $11,842 as of December 31, 2012 and $7,782 as of December 31, 2011. (6)
Capital lease obligation Capital lease obligation consists of a non-cancelable equipment lease agreement, payable in monthly installments totaling $675, maturing in January 2015. The obligation under the capital lease reflects the present value of future rental payments, discounted at the Institute’s incremental borrowing rate. The future minimum lease payments and capital lease obligation under this capital lease are as follows: Years Ending December 31, 2013 2014 2015 Total minimum lease payments Less executory costs Net minimum lease payments Less amount representing interest Present value of minimum lease payments Less current portion of capital lease obligation Capital lease obligation, long-term portion
(7)
$
$
8,100 8,100 675 16,875 (6,250) 10,625 (1,006) 9,619 (4,384) 5,235
Board designated operating reserve In September 2007, the board of directors approved a motion, subject to available funds, to establish an operating reserve of $600,000. The board of directors must approve the use of any funds held within the operating reserve.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(8)
Temporarily restricted net assets 2012
Temporarily restricted net assets consist of: Programs Education Litigation Investigative Reporting Pledges restricted by time only Reagan Fellows Constitutional Litigation Center pledges Healthcare Litigation Other Total temporarily restricted net assets
$
$
387,840 245,747 36,258 32,275 8,709 1,048 26,600 738,477
2011 $
$
222,500 4,867 97,238 70,968 16,748 412,321
Temporarily restricted net assets are included in cash and cash equivalents, pledges receivable and investments in the accompanying consolidated statement of financial position. (9)
Fair value measurements FASB ASC 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements. FASB ASC 820 also establishes a hierarchy for ranking the quality and reliability of the information used to determine fair values. FASB ASC 820 also requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1:
Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:
Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:
Unobservable inputs for the asset or liability.
The following table summarizes the valuation of the Institute’s assets and liabilities subject to fair value measurement other than at initial recognition by the above categories as of December 31, 2012:
Total U.S. equity mutual funds U.S. fixed income funds International equity mutual funds Global commodity equities International fixed income funds
$
-14-
296,957 231,982 163,946 93,640 50,136
Unadjusted Quoted Market Prices (Level 1) $
296,957 231,982 163,946 93,640 50,136
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(9)
Fair value measurements (continued) The following table summarizes the valuation of the Institute’s assets and liabilities subject to fair value measurement other than at initial recognition by the above categories as of December 31, 2011:
Total U.S. fixed income funds U.S. equity mutual funds Global commodity equities International equity mutual funds Alternative real estate equities International fixed income funds International currency funds
$
286,278 183,474 101,033 92,678 51,678 22,791 22,388
Unadjusted Quoted Market Prices (Level 1) $
286,278 183,474 101,033 92,678 51,678 22,791 22,388
The assets above were valued utilizing quoted market prices. The Institute currently has no other assets and liabilities subject to fair value measurement other than at initial recognition. (10) Endowments The Institute’s endowments consist of three individual funds established for a variety of purposes. The Institute’s endowments include only donor-restricted endowment funds. As required by GAAP, net assets associated with endowment funds, are classified and reported based on the existence or absence of donorimposed restrictions. In September 2008, the State of Arizona enacted ARS§10-11801 et seq Management of Charitable Funds Act (MCFA). The Board of Directors of the Institute has interpreted MCFA 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 Institute 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 those amounts are appropriated for expenditure by the Institute in a manner consistent with the standard of prudence prescribed by MCFA. In accordance with MCFA, the Institute considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) (2) (3) (4) (5) (6) (7)
The duration and preservation of the fund The purposes of the Institute and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the Institute The investment policies of the Institute
-15-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(10) Endowments (continued) Endowment net assets consist of the following permanently restricted endowment funds: Duncan Endowment McClelland Fellowship Norton Fellowship Total permanently restricted endowment funds
2012 $
$
2011
700,000 100,330 64,025 864,355
$
$
700,000 100,330 64,025 864,355
The changes in endowment net assets for the year ended December 31, 2012 are as follows: Temporarily Restricted
Unrestricted Endowment net assets, January 1, 2012 Contributions Investment Return: Interest and dividends Realized and unrealized gains Appropriation of endowment assets for expenditure Endowment net assets, December 31, 2012
$
$
(50,878) $ -
298 -
Permanently Restricted $
864,355 -
Total $
813,775 -
50,878
10,890 19,121
-
10,890 69,999
-
-
-
-
-
$
30,309
$
864,355
$
894,664
The changes in endowment net assets for the year ended December 31, 2011 are as follows:
Unrestricted Endowment net assets, January 1, 2011 $ Contributions Investment Return: Interest and dividends Realized and unrealized losses Appropriation of endowment assets for expenditure Endowment net assets, December 31, 2011 $
(54,629) $ 8,783 (5,032) (50,878) $
Temporarily Restricted -
Permanently Restricted $
863,355 1,000
Total $
808,726 1,000
298 -
-
9,081 (5,032)
-
-
-
298
$
864,355
$
813,775
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 MCFA requires the Institute to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $0 and $50,878 as of December 31, 2012 and 2011, respectively. These deficiencies resulted primarily from unfavorable market fluctuations. Included in endowments is cash and cash equivalents totaling $29,160 and $29,156 as of December 31, 2012 and 2011, respectively.
-16-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(10) Endowments (continued) The Institute has adopted investment and spending policies to support current operations through a total return investment strategy and a spending policy to maintain, and ideally increase, the purchasing power of the endowment, without putting the principal value of these funds at prudent risk. Endowment assets include those assets of donor-restricted funds that the Institute must hold in perpetuity. Under this policy, as approved by the board of directors, the endowment assets are invested in a manner that is intended to produce sufficient liquidity to meet distribution requirements, earn a total return of 3% in excess of inflation as measured by the Consumer Price Index over a five-year time horizon, earn competitive returns relative to capital market measures, including broad market indices, as well as funds with similar objectives. The Institute expects its endowment funds, over time, to provide an average rate of return of approximately 7% annually. Actual returns in any given year may vary from this amount. To satisfy its long-term rate-of-return objectives, the Institute 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 Institute 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. The endowments allow for annual distributions of five percent each of the endowment fund balance to be used to support program activities. (11) Retirement plan As of January 1, 2009, the Institute implemented a 403(b) matching plan. The plan is a non-safe harbor plan with the employer matching contributions subject to a 6 year graded vesting schedule. The amount of the Institute’s match is discretionary and will be determined by the Institute on an annual basis. Contributions totaling $13,127 and $12,694 for the years ended December 31, 2012 and 2011, respectively, were made by the Institute, in addition to the elective deferrals made by employees.
-17-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012
CONTENTS
Page INDEPENDENT AUDITORS’ REPORT
1-2
CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position
3
Consolidated Statement of Activities and Changes in Net Assets
4
Consolidated Statement of Functional Expenses
5
Consolidated Statement of Cash Flows
6
Notes to Consolidated Financial Statements
7 - 17
INDEPENDENT AUDITORS' REPORT To the Board of Directors of BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY Report on the Consolidated Financial Statements We have audited the consolidated financial statements of Barry Goldwater Institute for Public Policy Research and Subsidiary, which comprise the consolidated statement of financial position as of December 31, 2012, and the related consolidated statements of activities and changes in net assets, functional expenses, and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility for the Consolidated Financial Statements Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION December 31, 2012 (with summarized comparative totals at December 31, 2011)
ASSETS 2012 CURRENT ASSETS Cash and cash equivalents Pledges receivable, net Investment in notes receivable Other receivables Prepaid expenses TOTAL CURRENT ASSETS
$
INVESTMENTS PROPERTY AND EQUIPMENT, net TOTAL ASSETS
$
722,832 33,323 1,950,000 4,747 57,130 2,768,032
2011 $
540,479 155,293 1,700,000 42,716 19,880 2,458,368
865,504
784,619
1,717,580
1,709,113
5,351,116
$
4,952,100
42,987 66,552 4,384 113,923
$
21,150 121,686 3,994 146,830
LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable Accrued liabilities Current portion of capital lease obligation TOTAL CURRENT LIABILITIES
$
CAPITAL LEASE OBLIGATION, less current portion TOTAL LIABILITIES NET ASSETS Unrestricted: Undesignated Board designated operating reserve Total unrestricted net assets Temporarily restricted Permanently restricted TOTAL NET ASSETS TOTAL LIABILITIES AND NET ASSETS
$
See Notes to Consolidated Financial Statements -3-
5,235
9,619
119,158
156,449
3,029,126 600,000 3,629,126 738,477 864,355 5,231,958
2,918,975 600,000 3,518,975 412,321 864,355 4,795,651
5,351,116
$
4,952,100
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
Unrestricted SUPPORT AND REVENUES Contributions Foundation contributions and grants Litigation cost reimbursement revenue Interest and dividends Realized and unrealized gains (losses) Other income Total support and revenues before special events and net assets released from restrictions
$
$
2,859,491
Special events: Special events revenues Less costs of direct donor benefits Gross profit on special events
3,589,577
EXPENSES AND LOSSES: Program services Fundraising Management and general Loss on uncollectible pledges TOTAL EXPENSES AND LOSSES CHANGE IN NET ASSETS NET ASSETS, BEGINNING OF YEAR $
$
-
2012 $
-
-
410,975
TOTAL SUPPORT AND REVENUES
420,115 287,005 10,890 19,121 -
Totals
Permanently Restricted
737,131
394,897 (75,786) 319,111
Net assets released from restrictions
NET ASSETS, END OF YEAR
1,935,269 805,495 59,635 50,878 8,214
Temporarily Restricted
2011
2,355,384 1,092,500 70,525 69,999 8,214
$
3,596,622
-
1,534,821 890,400 1,395,020 51,981 (5,032) 3,985
3,871,175
394,897 (75,786) 319,111
434,362 (111,554) 322,808
(410,975)
-
-
-
326,156
-
3,915,733
4,193,983
2,712,064 436,894 330,468 -
-
-
2,712,064 436,894 330,468 -
3,065,304 425,569 282,528 5,900
3,479,426
-
-
3,479,426
3,779,301
-
436,307
414,682
4,795,651
4,380,969
110,151
326,156
3,518,975
412,321
3,629,126
$
738,477
864,355 $
864,355
See Notes to Consolidated Financial Statements -4-
$
5,231,958
$
4,795,651
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
Totals Program Services Wages and salaries Direct mail and postage Employee benefits Payroll taxes Depreciation and amortization Building expense Litigation fees and attorney's fees Travel Printing and research publications Dues and subscriptions Advertising and public relations Gala fundraising event Technology Audit and financial services Telephone Insurance Event Bank and credit card fees Contract labor Supplies Book and marketing expense Business meals Licenses/fees Bad debt expense Equipment lease and repair Website development expense Seminars and meetings Media studio Payroll and plan maintenance fees Legal Interest expense List rentals Research materials TOTAL EXPENSES
Fundraising
Management and General
2012
2011
$
1,673,625 176,636 137,714 105,207 96,563 91,171 92,277 35,321 48,524 40,876 35,898 8,042 23,503 22,787 23,780 28,492 6,528 15,227 10,962 6,649 7,006 8,236 7,392 6,989 2,659 -
$
229,553 31,432 18,120 14,430 13,216 12,478 20,510 5,116 24,125 4,056 3,934 2,972 24,183 7,555 2,629 3,654 4,640 12,167 1,209 915 -
$
187,534 1,742 14,311 11,789 12,412 11,720 9,259 2,178 4,336 31,503 4,205 2,972 2,031 10,513 2,810 1,574 80 10,000 1,293 169 6,931 1,106 -
$
2,090,712 209,810 170,145 131,426 122,191 115,369 92,277 65,090 48,524 48,170 35,898 32,167 31,895 31,503 30,926 29,724 28,492 26,214 24,596 20,666 14,616 12,863 12,247 10,000 9,508 9,151 7,561 6,989 6,931 2,659 1,106 -
$
2,241,512 252,383 163,521 139,987 109,166 104,344 81,779 58,966 53,196 37,223 74,219 53,379 23,980 30,437 28,110 20,174 34,047 15,841 78,507 23,986 4,386 15,494 3,458 11,188 64,099 7,888 6,415 11,026 1,462 22,239 989
$
2,712,064
$
436,894
$
330,468
$
3,479,426
$
3,773,401
See Notes to Consolidated Financial Statements -5-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, 2012 (with summarized comparative totals at December 31, 2011) 2012 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Change in discount on long-term pledges Provision for bad debts Loss on uncollectible pledges Realized and unrealized (gains) losses on investments Changes in operating assets and liabilities: Decrease (increase) in: Pledges receivable Other receivables Prepaid expenses Increase (decrease) in: Accounts payable Accrued liabilities Net cash provided by operating activities
$
436,307
2011 $
414,682
122,191 (4,810) 10,000 (69,999)
109,166 (14,417) 5,900 5,032
126,780 27,969 (37,250)
142,045 5,733 (10,456)
21,837 (55,134) 577,891
(12,727) 58,360 703,318
CASH FLOWS FROM INVESTING ACTIVITIES Payments from notes receivable Proceeds from sale of investments Cash invested in notes receivable Purchases of investments Purchases of property and equipment Net cash used in investing activities
250,000 413,643 (500,000) (424,529) (130,658) (391,544)
250,000 535,035 (1,000,000) (545,111) (78,854) (838,930)
CASH FLOWS FROM FINANCING ACTIVITIES Payments on capital lease obligation Net cash used in financing activities
(3,994) (3,994)
(3,638) (3,638)
NET CHANGE IN CASH AND CASH EQUIVALENTS
182,353
(139,250)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
540,479
679,729
CASH AND CASH EQUIVALENTS, END OF YEAR
$
722,832
$
540,479
$
1,106
$
1,462
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid for interest
See Notes to Consolidated Financial Statements -6-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies Barry Goldwater Institute for Public Policy Research (“the Institute”) was established in 1988 as an independent, non-partisan research and educational organization dedicated to the study of public policy. Through research papers, workshops, commentaries and policy briefings, the Institute's mission is to advance the principles of limited government, economic freedom and individual responsibility - the principles championed by the late Senator Barry Goldwater during his years of public service. To promote these principles, change public opinion, and assist Arizona leaders in developing sound public policy, the Institute conducts research on timely issues. The Institute neither seeks nor accepts government funding and relies wholly on contributions from the private sector to fund its activities. In February 2001 the Institute’s Board of Directors formed Goldwater Institute Holding Company, LLC (“Holding Company”), with the Institute as the sole member. The Holding Company was formed to hold and manage the Institute's real property. The Institute transferred its real property to the Holding Company in 2002. The significant accounting policies followed by the Institute and its subsidiary, the Holding Company, collectively referred to in these consolidated financial statements as the “Institute,” are summarized below: Basis of presentation – The accompanying consolidated financial statements are presented in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 958205, Not-for-Profit Entities - Presentation of Financial Statements. Under FASB ASC 958-205, the Institute is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Prior year summarized information – The consolidated financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with U.S. generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Institute’s audited consolidated financial statements for the year ended December 31, 2011, from which the summarized information was derived. Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Institute and its wholly owned subsidiary Goldwater Institute Holding Company, LLC. All significant intercompany transactions and accounts have been eliminated in consolidation. Management’s use of estimates – The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition – The Institute recognizes amounts received from grants at the time the Institute receives notification of the award in situations where no further activities are required. Revenue from public policy and lecture events is recognized upon the occurrence of the event. Fees received prior to the occurrence of a scheduled event are deferred until the period in which the event occurs.
-7-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies (continued) Contributions – The Institute accounts for contributions in accordance with FASB ASC 958-605, Not-forProfit Entities - Revenue Recognition. Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. All donor-restricted support is reported as an increase in temporarily or permanently restricted net assets depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. Restricted support, where restrictions are met in the same period as the contribution is made, is shown as unrestricted support. In 2011, the Institute received a conditional promise to give of up to $200,000 in matching funds. For every dollar the Institute raised from other sources for a specific project between December 1, 2012 and November 30, 2013, the donor pledged to contribute two dollars, up to a maximum of $200,000. This pledge was also contingent on the donor’s review and approval of the Institute’s use of other contributed funds in fiscal year 2012. No amounts related to this conditional promise to give were recognized in the Institute’s fiscal year 2011 consolidated financial statements as the conditions of the promise to give were not substantially met as of December 31, 2011. During 2012, these conditions were met and the funds were received from the donor and recognized as temporarily restricted contributions. Special events revenue – The Institute conducts special events in which a portion of the gross proceeds paid by the participant represents payment for the direct cost of the benefits received by the participant at the event. Unless a verifiable, objective means exists to demonstrate otherwise, the fair value of meals and entertainment provided at special events is measured at the actual cost to the Institute. The direct costs of the special events which ultimately benefit the donor rather than the Institute are recorded as costs of direct donor benefits. All proceeds received in excess of the direct costs are recorded as gross profit on special events in the accompanying consolidated statement of activities and changes in net assets. Litigation cost reimbursement revenue – The Institute engages in litigation to champion causes related to its founding principles. The Institute may be awarded reimbursement of its legal costs incurred in litigating cases if the court finds in favor of the Institute. Litigation cost reimbursement revenue awarded as a result of litigation of cases is recognized when the ruling is made by the court. Donated materials and services – Donated materials are reflected as contributions in the consolidated statement of activities and changes in net assets at their estimated values at the date of receipt. Donated services are recognized as contributions in accordance with FASB ASC 958-605 if the services (a) create or enhance nonfinancial assets or (b) require specialized skills, are performed by people with those skills, and would otherwise be purchased. When these conditions are met, the fair value of the donated services is reflected as contributions in the consolidated statement of activities and changes in net assets. No amounts have been reflected in the accompanying consolidated financial statements for certain donated volunteer services because they did not qualify for recording under the guidelines of FASB ASC 958-605. The Institute received the following donated materials and services: Used for Programs Fundraising Programs Programs
Airline miles Beverages Expert witness services Miscellaneous goods
$
$ -8-
2012 4,411 4,411
2011 $
$
11,985 8,493 5,778 26,256
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies (continued) Cash – Cash consists of cash and, at times, cash equivalents consisting of highly liquid financial instruments purchased with original maturities of three months or less. Deposits at each financial institution are insured in limited amounts by the Federal Deposit Insurance Corporation (FDIC). Promises to give – Unconditional promises to give that are to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected in future years are initially recorded at the fair value of their estimated future cash flows as of the date of the promise to give through the use of a present value discount technique. In periods subsequent to initial recognition, unconditional promises to give are reported at the amount management expects to collect and are discounted over the collection period using the same discount rate as determined at the time of initial recognition. The discount rate determined at the initial recognition of the unconditional promise to give is based upon management’s assessment of many factors, including when the receivable is expected to be collected, the creditworthiness of the other parties, the Institute’s past collection experience and its policies concerning the enforcement of promises to give, expectations about possible variations in the amount or timing, or both, of the cash flows, and other factors concerning the receivable’s collectability. Amortization of the discounts is included in support from contributions. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Pledges receivable are stated at the amount management expects to collect. Management provides for uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to pledges receivable. At December 31, 2012 and 2011, pledges receivable are considered by management to be fully collectible, and, accordingly an allowance for uncollectible pledges is not considered necessary. Other receivables – Other receivables consists primarily of amounts due from attendees of the Institute’s special events. Notes receivable – Notes receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance for uncollectible notes receivable based on its assessment of the current status of individual balances. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for uncollectible notes receivable and a credit to notes receivable. At December 31, 2012 and 2011, notes receivable are considered by management to be fully collectible and, accordingly, an allowance for uncollectible notes receivable is not considered necessary. Interest on notes receivable is recognized over the term of the notes receivable and is calculated using the simple-interest method on principal amounts outstanding. Investments – The Institute accounts for its investments in accordance with FASB ASC 958-320, Not-forProfit Entities - Investments-Debt and Equity Securities. Under FASB ASC 958-320, the Institute reports investments in equity securities that have readily determinable fair values, and all investments in debt securities at fair value. The fair values of investments are based on quoted market prices. Investments 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 risks in the near term would materially affect account balances and the amounts reported in the accompanying consolidated financial statements.
-9-
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies (continued) Property and equipment and related depreciation and amortization – Purchased property and equipment is valued at cost, and donated property and equipment is recorded at fair value at the date of gift to the Institute. Maintenance and repairs are charged to operations when incurred. Betterments and renewals in excess of $500 are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Depreciation and amortization of property and equipment is computed on a straightline basis over the following estimated useful lives: Buildings and improvements Furniture and equipment
39 years 3 - 15 years
Impairment of long-lived assets – The Institute accounts for long-lived assets in accordance with the provisions of FASB ASC 360, Property, Plant, and Equipment. FASB ASC 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment charges were recorded for the years ended December 31, 2012 and 2011. Functional expenses – Expenses are charged to program services, management and general, and fundraising categories based on direct expenditures incurred. Any expenditures not directly chargeable are allocated based on personnel activity and other appropriate allocation methods. Advertising expense – Advertising costs are charged to operations when incurred. Advertising expense charged to operations was $35,898 for 2012 and $74,219 for 2011. Income tax status – The Institute qualifies as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code (IRC) and, accordingly, there is no provision for income taxes. Income determined to be unrelated business taxable income (UBTI) would be taxable. Goldwater Institute Holding Company, LLC is a disregarded entity for income tax purposes. The Institute evaluates its uncertain tax positions, if any, on a continual basis through review of its policies and procedures, review of its regular tax filings, and discussions with outside experts. At December 31, 2012 and 2011, management believes the Institute does not have any uncertain tax positions. The Institute’s federal Return of Organization Exempt from Income Tax (Form 990) for 2009, 2010 and 2011 are subject to examination by the IRS, generally for the three years after they were filed. The return for the year ended December 31, 2012 has not yet been filed as of the date of this report. Reclassifications – Certain amounts have been reclassified in the summarized comparative information for fiscal year 2011 to conform to the presentation of the 2012 financial statements. The reclassifications did not have an effect on the change in net assets. Certain expenses were reclassified to conform their classification within the different functional expense categories to the classification used in 2012. The effect of the reclassifications was to decrease printing and research publications expense by $140,795 and increase direct mail and postage expense by the same amount.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(1)
Company operations and summary of significant accounting policies (continued) Recent accounting pronouncement – In May 2011, the FASB issued Accounting Standard Update (“ASU”) No. 2011-04 (“ASU 2011-04”) “Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.” ASU 2011-04 provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 does not extend the use of fair value, but rather provides additional disclosure guidance about the application of fair value in those areas where fair value is already required or permitted, especially for Level 3 fair value measurements. ASU 2011-04 is effective for the first reporting period beginning after December 15, 2011. The Institute adopted ASU 2011-04 during 2012. There was no significant impact on the consolidated financial statements. In October 2012, the FASB issued ASU No. 2012-05 (“ASU 2012-05”) “Statement of Cash Flows (Topic 230) Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows.” ASU 2012-05 requires nonprofit organizations to classify cash receipts from the sale of donated financial assets consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that upon receipt were directed without any limitations imposed by the nonprofit organization for sale and were converted nearly immediately into cash. ASU 2012-05 is effective prospectively for fiscal years beginning after June 15, 2013 and early adoption is permitted. Retrospective application to all prior periods presented upon the date of adoption is permitted. The Institute adopted ASU 2012-05 during 2012. The adoption of this provision resulted in an increase in net cash flows from operating activities of $428,335 and $46,755 with corresponding reductions to net cash flows from investing activities for fiscal year 2012 and 2011, respectively, in the accompanying consolidated statement of cash flows. Subsequent events – The Institute has evaluated subsequent events through May 15, 2013, which is the date the consolidated financial statements were available to be issued.
(2)
Pledges receivable Pledges receivable consist of the following unconditional promises to give: 2012 Receivable in less than one year Receivable in one to five years Total gross pledges receivable Less discounts pledges Net pledges receivable Less current portion Noncurrent portion
$
$
33,375 33,375 (52) 33,323 (33,323) -
2011 $
$
160,155 160,155 (4,862) 155,293 (155,293) -
The estimated cash flows for pledges receivable are discounted over the collection period using a discount rate as determined by management of 5%. At December 31, 2012 and 2011, approximately 0% and 94%, respectively, of the gross pledges are due from board members. Contributions from board members represented approximately 16% and 17% of contributions for the years ended December 31, 2012 and 2011, respectively.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(3)
Investment in notes receivable The Institute has elected to invest its excess cash in two promissory notes with a privately held corporation controlled by a board member. These revolving notes provide the Institute with the ability to request payments of the principal balances at any time prior to their maturity dates. The Institute may reinvest funds into the notes up to the maximum amount provided in the note agreements. On January 1, 2002, the Institute obtained an unsecured revolving promissory note from a privately held corporation controlled by a board member for the sum of $200,000. The note bears interest at 10% per annum until paid. Terms of the note call for interest to be paid to the Institute monthly. During 2011, the maturity of the note was extended from December 31, 2011 to December 31, 2015. The balance of this note at December 31, 2012 and 2011 was $200,000. During the year ended December 31, 2005, the Institute obtained another unsecured revolving promissory note from the same corporation as above for the purpose of investing the Institute's excess cash with a maximum amount of $1,000,000. During 2011, the maximum amount was increased to $1,750,000 and the maturity date was extended from December 31, 2011 to December 31, 2015. The note bears interest at the rate charged by Farm Credit Services Southwest (2.25% at December 31, 2012). The terms of the note call for interest to be paid to the Institute monthly. The balance of this note at December 31, 2012 and 2011 was $1,750,000 and $1,500,000, respectively. For the years ended December 31, 2012 and 2011, interest earned on the notes receivable was $50,532 and $34,376, respectively. The unsecured investments in these revolving notes represent a concentration of credit risk due to the fact that approximately 36% and 34% of the Institute’s assets are invested with a single borrower as of December 31, 2012 and 2011, respectively. The fact that the notes are unsecured increases the overall level of risk associated with these investments.
(4)
Investments 2012
Investments consist of: U.S. equity mutual funds U.S. fixed income funds International equity mutual funds Global commodity equities International fixed income funds Cash and money market funds Alternative real estate equities International currency funds Total investments
$
$
296,957 231,982 163,946 93,640 50,136 28,843 865,504
2011 $
$
183,474 286,278 92,678 101,033 22,791 24,299 51,678 22,388 784,619
Expenses relating to investment revenues, including custodial fees and investment advisory fees of $9,103 for 2012 and $8,537 for 2011 were charged to operations.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(5)
Property and equipment Property and equipment consist of: 2012 Cost and donated value: Land Buildings and improvements Furniture and equipment Total cost and donated value Accumulated depreciation and amortization Property and equipment, net
$
$
358,480 1,768,348 824,339 2,951,167 (1,233,587) 1,717,580
2011 $
$
358,480 1,768,348 693,681 2,820,509 (1,111,396) 1,709,113
Depreciation and amortization expense charged to operations was $122,191 and $109,166, respectively, for the years ended December 31, 2012 and 2011. In January 2010, the Institute entered into a capital lease agreement for equipment. The cost of the asset held under capital lease agreement totaled $20,300 at December 31, 2012 and 2011. Accumulated amortization on the asset held under capital lease agreement included in accumulated depreciation and amortization above is $11,842 as of December 31, 2012 and $7,782 as of December 31, 2011. (6)
Capital lease obligation Capital lease obligation consists of a non-cancelable equipment lease agreement, payable in monthly installments totaling $675, maturing in January 2015. The obligation under the capital lease reflects the present value of future rental payments, discounted at the Institute’s incremental borrowing rate. The future minimum lease payments and capital lease obligation under this capital lease are as follows: Years Ending December 31, 2013 2014 2015 Total minimum lease payments Less executory costs Net minimum lease payments Less amount representing interest Present value of minimum lease payments Less current portion of capital lease obligation Capital lease obligation, long-term portion
(7)
$
$
8,100 8,100 675 16,875 (6,250) 10,625 (1,006) 9,619 (4,384) 5,235
Board designated operating reserve In September 2007, the board of directors approved a motion, subject to available funds, to establish an operating reserve of $600,000. The board of directors must approve the use of any funds held within the operating reserve.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(8)
Temporarily restricted net assets 2012
Temporarily restricted net assets consist of: Programs Education Litigation Investigative Reporting Pledges restricted by time only Reagan Fellows Constitutional Litigation Center pledges Healthcare Litigation Other Total temporarily restricted net assets
$
$
387,840 245,747 36,258 32,275 8,709 1,048 26,600 738,477
2011 $
$
222,500 4,867 97,238 70,968 16,748 412,321
Temporarily restricted net assets are included in cash and cash equivalents, pledges receivable and investments in the accompanying consolidated statement of financial position. (9)
Fair value measurements FASB ASC 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements. FASB ASC 820 also establishes a hierarchy for ranking the quality and reliability of the information used to determine fair values. FASB ASC 820 also requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1:
Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:
Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:
Unobservable inputs for the asset or liability.
The following table summarizes the valuation of the Institute’s assets and liabilities subject to fair value measurement other than at initial recognition by the above categories as of December 31, 2012:
Total U.S. equity mutual funds U.S. fixed income funds International equity mutual funds Global commodity equities International fixed income funds
$
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296,957 231,982 163,946 93,640 50,136
Unadjusted Quoted Market Prices (Level 1) $
296,957 231,982 163,946 93,640 50,136
BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(9)
Fair value measurements (continued) The following table summarizes the valuation of the Institute’s assets and liabilities subject to fair value measurement other than at initial recognition by the above categories as of December 31, 2011:
Total U.S. fixed income funds U.S. equity mutual funds Global commodity equities International equity mutual funds Alternative real estate equities International fixed income funds International currency funds
$
286,278 183,474 101,033 92,678 51,678 22,791 22,388
Unadjusted Quoted Market Prices (Level 1) $
286,278 183,474 101,033 92,678 51,678 22,791 22,388
The assets above were valued utilizing quoted market prices. The Institute currently has no other assets and liabilities subject to fair value measurement other than at initial recognition. (10) Endowments The Institute’s endowments consist of three individual funds established for a variety of purposes. The Institute’s endowments include only donor-restricted endowment funds. As required by GAAP, net assets associated with endowment funds, are classified and reported based on the existence or absence of donorimposed restrictions. In September 2008, the State of Arizona enacted ARS§10-11801 et seq Management of Charitable Funds Act (MCFA). The Board of Directors of the Institute has interpreted MCFA 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 Institute 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 those amounts are appropriated for expenditure by the Institute in a manner consistent with the standard of prudence prescribed by MCFA. In accordance with MCFA, the Institute considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) (2) (3) (4) (5) (6) (7)
The duration and preservation of the fund The purposes of the Institute and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the Institute The investment policies of the Institute
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(10) Endowments (continued) Endowment net assets consist of the following permanently restricted endowment funds: Duncan Endowment McClelland Fellowship Norton Fellowship Total permanently restricted endowment funds
2012 $
$
2011
700,000 100,330 64,025 864,355
$
$
700,000 100,330 64,025 864,355
The changes in endowment net assets for the year ended December 31, 2012 are as follows: Temporarily Restricted
Unrestricted Endowment net assets, January 1, 2012 Contributions Investment Return: Interest and dividends Realized and unrealized gains Appropriation of endowment assets for expenditure Endowment net assets, December 31, 2012
$
$
(50,878) $ -
298 -
Permanently Restricted $
864,355 -
Total $
813,775 -
50,878
10,890 19,121
-
10,890 69,999
-
-
-
-
-
$
30,309
$
864,355
$
894,664
The changes in endowment net assets for the year ended December 31, 2011 are as follows:
Unrestricted Endowment net assets, January 1, 2011 $ Contributions Investment Return: Interest and dividends Realized and unrealized losses Appropriation of endowment assets for expenditure Endowment net assets, December 31, 2011 $
(54,629) $ 8,783 (5,032) (50,878) $
Temporarily Restricted -
Permanently Restricted $
863,355 1,000
Total $
808,726 1,000
298 -
-
9,081 (5,032)
-
-
-
298
$
864,355
$
813,775
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 MCFA requires the Institute to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $0 and $50,878 as of December 31, 2012 and 2011, respectively. These deficiencies resulted primarily from unfavorable market fluctuations. Included in endowments is cash and cash equivalents totaling $29,160 and $29,156 as of December 31, 2012 and 2011, respectively.
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BARRY GOLDWATER INSTITUTE FOR PUBLIC POLICY RESEARCH AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2012 (with summarized comparative totals for the year ended December 31, 2011)
(10) Endowments (continued) The Institute has adopted investment and spending policies to support current operations through a total return investment strategy and a spending policy to maintain, and ideally increase, the purchasing power of the endowment, without putting the principal value of these funds at prudent risk. Endowment assets include those assets of donor-restricted funds that the Institute must hold in perpetuity. Under this policy, as approved by the board of directors, the endowment assets are invested in a manner that is intended to produce sufficient liquidity to meet distribution requirements, earn a total return of 3% in excess of inflation as measured by the Consumer Price Index over a five-year time horizon, earn competitive returns relative to capital market measures, including broad market indices, as well as funds with similar objectives. The Institute expects its endowment funds, over time, to provide an average rate of return of approximately 7% annually. Actual returns in any given year may vary from this amount. To satisfy its long-term rate-of-return objectives, the Institute 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 Institute 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. The endowments allow for annual distributions of five percent each of the endowment fund balance to be used to support program activities. (11) Retirement plan As of January 1, 2009, the Institute implemented a 403(b) matching plan. The plan is a non-safe harbor plan with the employer matching contributions subject to a 6 year graded vesting schedule. The amount of the Institute’s match is discretionary and will be determined by the Institute on an annual basis. Contributions totaling $13,127 and $12,694 for the years ended December 31, 2012 and 2011, respectively, were made by the Institute, in addition to the elective deferrals made by employees.
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