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Operations Effectiveness. Does it appear that the Mayo Clinic management team is operating effectively as a nonprofit organization? Are they controlling operations? Why or why
- Operations Effectiveness. Does it appear that the Mayo Clinic management team is operating effectively as a nonprofit organization? Are they controlling operations? Why or why not? What evidence can you use to determine operational effectiveness?
- AccountingPerformance.DiscusstheperformanceoftheMayoClinicsrevenuecycle,accountsreceivables,cashflow,andinventory.YouranalysisshouldcomparetheMayoClinicsperformancebetween2010and2011tojustifyyourconclusions.
- incorporateatleastfourfinancialconcepts andmayincludeaspreadsheettodemonstrateyourcalculations.
Mayo Clinic Consolidated Financial Report December 31, 2011 Contents Independent Auditor's Report on the Financial Statements 1 Financial Statements Consolidated statements of financial position 2 Consolidated statements of activities 3 Consolidated statements of cash flows 4 Notes to consolidated financial statements Independent Auditor's Report on the Supplemental Information 5-40 41 Supplemental Information Mayo Clinic Florida: Statements of financial position Statements of activities 42 43 Independent Auditor's Report Board of Trustees Mayo Clinic We have audited the accompanying consolidated statements of financial position of Mayo Clinic (Clinic) as of December 31, 2011 and 2010, and the related consolidated statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the Clinic's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Clinic's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Clinic's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Clinic as of December 31, 2011 and 2010, and the consolidated changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Minneapolis, Minnesota February 16, 2012 1 Mayo Clinic Consolidated Statements of Financial Position December 31, 2011 and 2010 (In Millions) Assets Current Assets Cash and cash equivalents Accounts receivable for medical services, less allowances for uncollectible accounts of $340.8 in 2011 and $399.1 in 2010 Securities lending collateral (Note 4) Other receivables (Notes 9 and 14) Other current assets (Note 14) Total current assets $ Investments (Note 3) Investments Under Securities Lending Agreement (Note 4) Other Long-Term Assets (Notes 9 and 14) Property, Plant and Equipment, net (Note 5) Total assets 2010 2011 $ 141.3 $ 73.8 1,422.4 68.3 267.6 141.8 2,041.4 1,221.0 64.5 236.9 144.4 1,740.6 4,171.0 3,899.1 66.4 63.9 351.1 385.8 3,499.0 10,128.9 3,489.6 9,579.0 $ Liabilities and Net Assets Current Liabilities Accounts payable Accrued payroll Deferred revenue Long-term variable-rate debt (Note 7) Securities lending payable (Note 4) Other current liabilities (Notes 13 and 14) Total current liabilities $ 306.7 421.9 44.8 240.0 68.3 377.6 1,459.3 $ 265.5 389.0 36.9 330.0 64.5 549.9 1,635.8 Long-Term Debt (Note 7) 1,631.9 1,360.4 Accrued Pension and Postretirement Benefits, net of current (Note 12) 1,636.7 1,099.3 Other Long-Term Liabilities (Notes 8, 13 and 14) Total liabilities 671.6 5,399.5 669.7 4,765.2 3,074.8 863.9 790.7 4,729.4 10,128.9 3,225.8 850.8 737.2 4,813.8 9,579.0 Net Assets (Notes 9 and 10) Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ See Notes to Consolidated Financial Statements. 2 $ Mayo Clinic Consolidated Statements of Activities Years Ended December 31, 2011 and 2010 (In Millions) Unrestricted Revenue, gains and other support: Net medical service revenue $ Grants and contracts Investment return allocated to current activities (Note 3) Contributions available for current activities Premium revenue Other (Note 15) Net assets released from restrictions (Note 9) Total revenue, gains and other support 7,141.1 368.5 126.6 143.9 108.5 458.3 148.5 8,495.4 Expenses: Salaries and benefits Supplies and services Facilities Provision for uncollectible accounts Finance and investment Total expenses (Note 11) 5,141.3 1,897.5 614.6 159.8 52.3 7,865.5 Income (loss) from current activities Noncurrent and other items: Contributions not available for current activities, net Unallocated investment return, net (Note 3) Income tax expense (Note 6) Contribution received from affiliation (Note 17) Other Total noncurrent and other items Increase in net assets before other changes in net assets Pension and other postretirement benefit adjustments (Note 12) Increase (decrease) in net assets Net assets at beginning of year Net assets at end of year $ Temporarily Restricted $ 18.0 110.8 (148.5) (19.7) 2010 2011 Permanently Restricted $ - Total $ 7,141.1 368.5 144.6 254.7 108.5 458.3 8,475.7 Unrestricted $ 6,735.7 344.6 104.5 69.4 108.6 451.6 151.8 7,966.2 - - 5,141.3 1,897.5 614.6 159.8 52.3 7,865.5 4,911.8 1,725.0 590.7 160.1 39.1 7,426.7 629.9 (19.7) - 610.2 (11.2) (28.5) (22.9) 16.2 0.4 (46.0) 13.3 19.5 32.8 53.5 53.5 583.9 13.1 (734.9) (151.0) 13.1 3,225.8 3,074.8 $ 850.8 863.9 See Notes to Consolidated Financial Statements. 3 $ 18.3 109.3 (151.8) (24.2) Permanently Restricted $ - Total $ 6,735.7 344.6 122.8 178.7 108.6 451.6 7,942.0 - - 4,911.8 1,725.0 590.7 160.1 39.1 7,426.7 539.5 (24.2) - 515.3 55.6 (9.0) (22.9) 16.2 0.4 40.3 (14.1) 196.4 (22.3) 1.3 161.3 (6.5) 78.1 71.6 44.6 44.6 24.0 274.5 (22.3) 1.3 277.5 53.5 650.5 700.8 47.4 44.6 792.8 53.5 (734.9) (84.4) (250.0) 450.8 47.4 44.6 (250.0) 542.8 737.2 790.7 $ Temporarily Restricted $ 4,813.8 4,729.4 $ 2,775.0 3,225.8 $ 803.4 850.8 $ 692.6 737.2 $ 4,271.0 4,813.8 Mayo Clinic Consolidated Statements of Cash Flows Years Ended December 31, 2011 and 2010 (In Millions) 2010 2011 Cash Flows From Current Activities Increase (decrease) in net assets Adjustments to reconcile changes in net assets to net cash provided by current activities: Depreciation and amortization Provision for uncollectible accounts Net realized and unrealized gain on investments Restricted gifts, bequests and other Net change in accounts receivable and other current assets and liabilities, net of effects from affiliation Change in deferred tax asset Pension and other postretirement benefits adjustments Net change in other long-term assets and liabilities Net cash provided by current activities $ (84.4) $ 542.8 401.2 159.8 (48.1) (53.5) 395.4 160.1 (316.2) (44.6) (265.5) 4.6 296.6 45.4 456.1 (249.0) 27.3 (35.8) 95.1 575.1 Cash Flows From Investing Activities Purchase of property, plant and equipment Purchases of investments Sales and maturities of investments Proceeds from affiliation Net cash used in investing activities (410.6) (470.9) 244.6 1.1 (635.8) (373.1) (1,991.0) 1,773.0 (591.1) Cash Flows From Financing Activities Restricted gifts, bequests and other Borrowings on long-term debt Payment of long-term debt Net cash provided by financing activities 65.7 725.0 (543.5) 247.2 62.8 130.0 (144.0) 48.8 67.5 32.8 Net increase in cash and cash equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year $ See Notes to Consolidated Financial Statements. 4 73.8 141.3 $ 41.0 73.8 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 1. Organization and Summary of Significant Accounting Policies Organization: Mayo Clinic (Clinic) and its Arizona, Florida, Iowa, Minnesota and Wisconsin affiliates provide comprehensive medical care and education in clinical medicine and medical sciences and conduct extensive programs in medical research. The Clinic and its affiliates also provide hospital and outpatient services, and at each major location, the clinical practice is closely integrated with advanced education and research programs. The Clinic and most of its subsidiaries have been determined to qualify as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code (Code) and as a public charity under Section 509(a)(2) of the Code. Basis of presentation: Included in the Clinic's consolidated financial statements are all of its wholly owned or wholly controlled subsidiaries, which include both tax-exempt and taxable entities. All significant intercompany transactions have been eliminated in consolidation. In addition, these statements follow generally accepted accounting principles applicable to the not-for-profit industry as described in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 958. New accounting pronouncements: In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements, and clarifies the application of existing fair value measurement requirements. The update is effective during interim and annual periods beginning on or after January 1, 2012, for the Clinic. Adoption of this update will not have a material effect on the Clinic's consolidated financial statements. In July 2011, the FASB issued ASU No. 2011-06, Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers, which requires the liability for the fee be estimated and recorded once the entity provides qualifying health insurance with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation, unless another method is better. The update is effective January 1, 2014, for the Clinic, which is when the fee becomes initially effective. The Clinic is assessing the impact of the implementation of ASU 2011-06 on its consolidated financial statements. Also in July 2011, the FASB issued ASU No. 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities, which requires certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosures about their policies for recognizing and assessing bad debts, disclosures of patient service revenue, and qualitative and quantitative information about changes in the allowance for doubtful accounts. The update is effective for fiscal years and interim periods beginning on or after January 1, 2012, for the Clinic. The presentation of the provision for bad debts will be applied retrospectively to all prior periods presented, and the disclosure requirements will be provided for the period of adoption and subsequent reporting periods. Adoption of this update will not have a material effect on the Clinic's consolidated financial statements. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of 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 those estimates. 5 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 1. Organization and Summary of Significant Accounting Policies (Continued) Cash and cash equivalents: Cash and cash equivalents include currency on hand, demand deposits with banks or other financial institutions, and short-term investments with maturities of three months or less from the date of purchase, which are not managed by the Clinic's investment managers. Accounts receivable for medical services: Accounts receivable for medical services are stated at net realizable value. The Clinic estimates the allowances for uncollectible accounts based on historic writeoffs and the aging of the accounts. Accounts are written off when collection efforts have been exhausted. Inventories: Inventories, consisting primarily of medical supplies and pharmaceuticals, are stated at the lower of cost or market, determined using the first-in, first-out method. Investments: Investments in equity and debt securities, including alternative investments, are recorded at fair value (Note 3). Realized gains and losses are calculated based on the average cost method. Investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) are included in the consolidated statements of activities. The investments in alternative investments may individually expose the Clinic to securities lending, short sales, and trading in futures and forward contract options and other derivative products. The Clinic's risk is limited to the investment's carrying value. It is the Clinic's intent to maintain a long-term investment portfolio to support research, education and other activities. Accordingly, the total investment return is shown in the consolidated statements of activities in two segments. The investment return allocated to current activities is determined by a formula, which involves allocating 5 percent of a three-year moving average of investment returns related to endowments and additionally entails the matching of financing costs for the assets required for operations. Management believes this return is approximately equal to the real return that the Clinic expects to earn on its investments over the long term. The unallocated investment return, included in noncurrent and other items in the consolidated statements of activities, represents the difference between the total investment return and the amount allocated to current activities. Property, plant and equipment: Property, plant and equipment are carried at cost less accumulated depreciation. Plant and equipment are depreciated over estimated useful lives ranging from three to 50 years using the straight-line method. Depreciation expense is reflected in facilities expense and was $401.2 and $395.4 in 2011 and 2010, respectively, and includes amortization of assets recorded under capital leases. Costs associated with the development and installation of internal-use software are accounted for in accordance with the IntangiblesGoodwill and Other, Internal Use Software subtopic of the FASB ASC. Accordingly, internal-use software costs are expensed or capitalized according to the provisions of the accounting standard. Asset retirement obligations: The Clinic accounts for the estimated cost of legal obligations associated with long-lived asset retirements in accordance with the Asset Retirement and Environmental Obligations topic of the FASB ASC. The asset retirement liability, recorded in other long-term liabilities, is accreted to the present value of the estimated future costs of these obligations at the end of each period. 6 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 1. Organization and Summary of Significant Accounting Policies (Continued) Net assets: Resources are classified for reporting purposes into three net asset categories (unrestricted, temporarily restricted and permanently restricted) according to the absence or existence of donorimposed restrictions. Temporarily restricted net assets are those assets, including contributions and accumulated investment returns, whose use has been limited by donors to specific purposes or time periods. Permanently restricted net assets are those for which donors require the principal of the gifts to be maintained in perpetuity and provide a permanent source of income. Net medical service revenue: The Clinic has agreements with third-party payors that provide for payments to the Clinic at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem rates. Net medical service revenue is reported at the estimated net amounts due from patients and third-party payors for services rendered. Grants and contracts: Reciprocal grants and contracts revenue is recognized when the expenses have been incurred for the purpose specified by the grantor or in accordance with the terms of the agreement. Payments received in advance are reported as deferred revenue. Grant and contract amounts due to the Clinic are included in other receivables. Premium revenue: Premium revenue represents capitated health premiums received by a managedcare subsidiary from third-party payors and is recognized as revenue in the period in which enrollees are entitled to health care services. Charity and uncompensated care: The Clinic provides health care services to patients who meet certain criteria under its Charity Care Policy without charge or at amounts less than established rates. Since the Clinic does not pursue collection of these amounts, they are not reported as revenue. The estimated cost of providing these services was $61.9 and $64.4 in 2011 and 2010, respectively, calculated by multiplying the ratio of cost to gross charges for the Clinic by the gross uncompensated charges associated with providing care to charity patients. In addition to the charges related to the direct patient care provided under the Clinic's Charity Care Policy, the Clinic has programs offered to benefit the broader community and other governmental reimbursement programs. The Clinic also participates in various state Medicaid programs for indigent patients. The estimated cost of providing services related to Medicaid programs totaled $260.4 and $215.5 in 2011 and 2010, respectively. Contributions: The Clinic classifies unrestricted contributions and temporarily restricted contributions that are available for current activities as revenue, based on the lack of specific donor restriction or the presence of donor restrictions and the ability of the Clinic to meet those restrictions within the fiscal year. Permanently restricted contributions and temporarily restricted contributions that are not available for current activities are classified in noncurrent and other items in the consolidated statements of activities. Development expenses of $41.0 and $38.2 are allocated between current ($33.2 and $32.8) and noncurrent ($7.8 and $5.4) activities in 2011 and 2010, respectively. The current portion is recorded in expenses, and the noncurrent portion is netted against unrestricted contributions in the consolidated statements of activities. Unconditional promises to give are reported at fair value at the time of the pledge. An allowance for uncollectible pledges receivable is estimated based on a combination of historical experience and specific identification. Conditional promises to give are recognized at fair value when the conditions on which they depend are substantially met or the probability that the condition will not be met is remote. The Clinic does not imply a time restriction that expires over the useful life for gifts of long-lived assets. 7 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 1. Organization and Summary of Significant Accounting Policies (Continued) The Clinic periodically receives works of art from various benefactors. These items are unique in nature and are held on display for the benefit and enjoyment of the Clinic's patients. It is the Clinic's policy to neither capitalize contributed works of art nor record the related contribution revenue. Income from current activities: The Clinic's policy is to include in income from current activities all net medical service and other revenue, grants and contracts, investment return allocated to current activities, contributions available for current activities, premium revenue, net assets released from restrictions, and substantially all expenses. Contributions not available for current activities, unallocated investment return, and those items not expected to recur on a regular basis are included in noncurrent and other items in the consolidated statements of activities. Subsequent events: The Clinic evaluated events and transactions occurring subsequent to December 31, 2011, through February 16, 2012, the date of issuance of the consolidated financial statements. During this period, there were no subsequent events requiring recognition in the consolidated financial statements. Additionally, there were no nonrecognized subsequent events requiring disclosure, except for an affiliation detailed in Note 17. Note 2. Net Medical Service Revenue and Contractual Arrangements With Third-Party Vendors The Clinic provides care to patients under the Medicare program and contractual arrangements with other third-party payors. The Medicare program pays for inpatient and most outpatient services at predetermined rates. Certain hospital services are reimbursed based on allowable costs as reported in cost reports, which are subject to retroactive audit and adjustment. Future changes in the Medicare program and reduction of funding levels could have an adverse effect on the Clinic. Adjustments arising from reimbursement arrangements with third-party payors are accrued on an estimated basis in the period in which the services are rendered. Estimates for cost report settlements and contractual allowances can differ from actual reimbursement based on the results of subsequent reviews and cost report audits. The impact to net medical service revenue of such items was an increase of $2.1 and $2.4 in 2011 and 2010, respectively. Net medical service revenue under the Medicare program represented approximately 24 percent and 25 percent of total net medical service revenue for 2011 and 2010, respectively. At December 31, 2011 and 2010, approximately 16 percent and 15 percent, respectively, of accounts receivable for medical services was due from the Medicare program. 8 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 3. Fair Value Measurements, Investments and Other Financial Instruments The Clinic holds certain financial instruments that are required to be measured at fair value on a recurring basis. The valuation techniques used to measure fair value under the Fair Value Measurements and Disclosures topic of the FASB ASC are based upon observable and unobservable inputs. The standard establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the same term of the financial instrument. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 9 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 3. Fair Value Measurements, Investments and Other Financial Instruments (Continued) The following tables present the financial instruments carried at fair value as of December 31, 2011 and 2010, by caption on the consolidated statements of financial position by the valuation hierarchy defined above: December 31, 2011 Level 1 Assets: Securities lending collateral $ Investments: Cash and cash equivalents Fixed-income securities: U.S. government U.S. government agencies U.S. corporate Foreign Common and preferred stocks: U.S. Foreign Mutual funds: Fixed-income Equities Alternative investments: Absolute return and hedge funds Private equity, real estate and natural resources funds Other investments Less securities under lending agreement Total investments Liabilities: Securities lending collateral Total liabilities at fair value 68.3 $ 313.4 Total Fair Value Level 3 - $ - - 18.2 320.8 248.9 - - $ 68.3 - 313.4 4.8 18.2 320.8 248.9 4.8 310.9 209.4 - - 310.9 209.4 288.9 314.4 - - 288.9 314.4 - - 1,303.0 1,303.0 9.5 - 895.2 - 895.2 9.5 (66.4) 1,380.1 Investments under securities lending agreement Other long-term assets: Trust receivables Technology-based ventures Total other long-term assets Total assets at fair value Level 2 587.9 66.4 - $ 64.6 64.6 1,579.4 $ $ $ 68.3 68.3 $ $ 10 2,203.0 29.1 29.1 617.0 - (66.4) 4,171.0 - $ $ $ 59.9 4.8 64.7 2,267.7 - 66.4 $ 153.6 4.8 158.4 4,464.1 $ $ 68.3 68.3 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 3. Fair Value Measurements, Investments and Other Financial Instruments (Continued) December 31, 2010 Level 1 Assets: Securities lending collateral $ Investments: Cash and cash equivalents Fixed-income securities: U.S. government U.S. government agencies U.S. corporate Foreign Common and preferred stocks: U.S. Foreign Mutual funds: Fixed-income Equities Alternative investments: Absolute return and hedge funds Private equity, real estate and natural resources funds Other investments Less securities under lending agreement Total investments Liabilities: Securities lending collateral Total liabilities at fair value 64.5 $ 192.1 Total Fair Value Level 3 - $ - - 15.5 423.9 321.0 - - $ 64.5 - 192.1 1.5 15.5 423.9 321.0 1.5 262.2 232.4 - - 262.2 232.4 236.9 316.4 - - 236.9 316.4 - - 1,189.9 1,189.9 3.4 - 767.8 - 767.8 3.4 (63.9) 1,179.5 Investments under securities lending agreement Other long-term assets: Trust receivables Technology-based ventures Total other long-term assets Total assets at fair value Level 2 760.4 63.9 - $ 66.8 66.8 1,374.7 $ $ $ 64.5 64.5 $ $ 11 1,959.2 23.3 23.3 783.7 - (63.9) 3,899.1 - $ $ $ 58.0 6.5 64.5 2,023.7 - 63.9 $ 148.1 6.5 154.6 4,182.1 $ $ 64.5 64.5 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 3. Fair Value Measurements, Investments and Other Financial Instruments (Continued) Following is a description of the Clinic's valuation methodologies for assets and liabilities measured at fair value. Fair value for Level 1 is based upon quoted market prices. Fair value for Level 2 is 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. Inputs are obtained from various sources, including market participants, dealers and brokers. Level 3, which primarily consists of alternative investments (principally limited partnership interests in absolute return, hedge, private equity, real estate and natural resources funds), represents the Clinic's ownership interest in the net asset value (NAV) of the respective partnership obtained from fund manager statements and audited financial statements. Investments held by the partnerships consist of marketable securities as well as securities that do not have readily determinable fair values. The fair values of the securities held by limited partnerships that do not have readily determinable fair values are determined by the general partner and are based on historical cost, appraisals or other estimates that require varying degrees of judgment. If no public market exists for the investment securities, the fair value is determined by the general partner, taking into consideration, among other things, the cost of the securities, prices of recent significant placements of securities of the same issuer, and subsequent developments concerning the companies to which the securities relate. Alternative investments are redeemable with the investee fund at NAV under the original terms of the subscription agreement. Due to the nature of these investments, changes in market conditions and the overall economic environment may significantly impact the NAV of the funds and, therefore, the value of the Clinic's interest. It is therefore reasonably possible that, if the Clinic were to sell all or a portion of its alternative investments, the transaction value could be significantly different than the fair value reported as of December 31. The trusts are recorded at fair value based on the underlying value of the assets in the trust or discounted cash flow of the expected payment streams. The trusts reported as Level 3 are primarily perpetual trusts managed by third parties invested in stocks, mutual funds, and fixed-income securities that are traded in active markets with observable inputs, which would result in Level 1 and 2 hierarchal reporting. However, since the Clinic will never receive the trust assets, these perpetual trusts are reported as Level 3. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Clinic believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 12 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 3. Fair Value Measurements, Investments and Other Financial Instruments (Continued) The following tables are a rollforward of the consolidated statement of financial position amounts for financial instruments classified by the Clinic within Level 3 of the valuation hierarchy defined above: Fair value January 1, 2011 Realized and unrealized gains Purchases Issuances and settlements Fair value December 31, 2011 Absolute Return Investments Private Equity Investments $ $ $ Amount of unrealized gains (losses) related to financial instruments held at December 31, 2011, and included in statement of activities Fair value January 1, 2010 Realized and unrealized gains Purchases Issuances and settlements Fair value December 31, 2010 Amount of unrealized gains related to financial instruments held at December 31, 2010, and included in statement of activities 1,189.9 25.0 159.1 (71.0) 1,303.0 $ 2.8 Other $ $ 767.8 113.2 168.2 (154.0) 895.2 $ 96.8 Absolute Return Investments Private Equity Investments $ $ $ 918.4 143.2 201.5 (73.2) 1,189.9 $ 134.4 Total $ $ 66.0 3.5 69.5 $ (1.1) $ $ Other $ $ 604.7 90.7 116.1 (43.7) 767.8 $ 61.6 2,023.7 141.7 327.3 (225.0) 2,267.7 98.5 Total $ $ 65.3 0.7 66.0 $ 1,588.4 234.6 317.6 (116.9) 2,023.7 $ 0.1 $ 196.1 The following information pertains to those alternative investments recorded at net asset value in accordance with the Fair Value Measurements and Disclosures topic of the FASB ASC. At December 31, 2011, alternative investments recorded at net asset value consisted of the following: Absolute return/hedge funds (a) Private partnerships (b) $ $ Fair Value Unfunded Commitment 1,303.0 895.2 2,198.2 $ $ 13 546.5 546.5 Redemption Frequency (If Currently Eligible) Redemption Notice Period Monthly to annually 30-90 days Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 3. Fair Value Measurements, Investments and Other Financial Instruments (Continued) At December 31, 2010, alternative investments recorded at net asset value consisted of the following: Absolute return/hedge funds (a) Private partnerships (b) $ $ Fair Value Unfunded Commitment 1,189.9 767.8 1,957.7 $ $ 467.4 467.4 Redemption Frequency (If Currently Eligible) Redemption Notice Period Monthly to annually 30-90 days (a) This category includes investments in absolute return/hedge funds, which are actively managed, commingled investment vehicles that derive the majority of their returns from factors other than the directional flow of the markets in which they invest. Representative strategies include high-yield credit, distressed debt, merger arbitrage, relative value, and long-short equity strategies. The fair values of the investments in this category have been estimated using the net asset value per share of the investments. Investments in this category generally carry \"lock-up\" restrictions that do not allow investors to seek redemption in the first year after acquisition. Following the initial lock-up period, liquidity is generally available monthly, quarterly or annually following a redemption request. Over 90 percent of the investments in this category have at least annual liquidity. (b) This category includes limited partnership interests in closed-end funds that focus on venture capital, private equity, real estate and resource-related strategies. The fair values of the investments in this category have been estimated using the net asset value of the Clinic's ownership interest in partners' capital. Distributions from each fund will be received as the underlying investments of the funds are liquidated. It is estimated that the underlying assets of most funds will generally be liquidated over a seven- to 10-year period. From time to time, the Clinic invests directly in certain derivative contracts that do not qualify for hedge accounting and are recorded at fair value in investments. Changes in fair value are reported as a component of net unrealized gains in the investment return. These contracts are used in the Clinic's investment management program to minimize certain investment risks. At December 31, 2011, the Clinic held derivative contracts consisting of options, swaps and foreign exchange with a total fair value of $5.9. During the year ended December 31, 2011, realized and unrealized gains from derivative contracts totaled $23.3. At December 31, 2010, the Clinic did not hold any significant derivative contracts. The carrying values of cash, cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair values due to the short-term nature of these financial instruments. The estimated fair value of long-term debt (Note 7), based on quoted market prices for the same or similar issues, was approximately $0.1 more than its carrying value at December 31, 2011, and $2.2 less than its carrying value at December 31, 2010. The Clinic uses various external investment managers to diversify the investments in alternative assets. The largest allocation to any alternative investment strategy manager as of December 31, 2011 and 2010, is $210.8 (9.6 percent) and $192.6 (9.8 percent), respectively. 14 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 3. Fair Value Measurements, Investments and Other Financial Instruments (Continued) The Clinic is required to maintain funds held by trustees under bond indentures, offshore captive investment, and other arrangements. The trustee-held investments, which primarily consist of mutual funds, were $353.7 and $323.6, respectively, at December 31, 2011 and 2010, which includes segregated investments for deferred compensation plans of $231.5 and $225.1 at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, cash and mutual funds included segregated investments owned by Mayo Foundation for Medical Education and Research, a wholly owned subsidiary of Mayo Clinic, for gift annuity reserves of $83.8 and $90.6, respectively. The Clinic has designated investment balances of $919.4 and $871.5 at December 31, 2011 and 2010, respectively, for research, education, and capital replacement and expansion. Investment return (loss) consisted of the following for the years ended December 31: 2011 Dividends and interest Net realized gains Net change in unrealized gains and (losses) $ $ 87.5 86.5 (38.4) 135.6 2010 $ $ 81.1 55.0 261.2 397.3 Investment return (loss) (Note 1) is reported in the consolidated statements of activities as follows for the years ended December 31: 2011 Investment return allocated to current activities Unallocated investment return (losses), net $ $ Note 4. 144.6 (9.0) 135.6 2010 $ $ 122.8 274.5 397.3 Securities Lending The Clinic has an arrangement with its investment custodian to lend Clinic securities to approved brokers in exchange for a fee. Among other provisions that limit the Clinic's risk, the securities lending agreement specifies that the custodian is responsible for lending securities and obtaining adequate collateral from the borrower. Collateral is limited to cash, government securities, and irrevocable letters of credit. The collateral provided by brokers is maintained at levels approximating 102 percent of the market value of securities on loan (including accrued interest) for U.S. issuers and 105 percent for the non-U.S. issuers and is adjusted for daily market fluctuations. At December 31, 2011 and 2010, investment securities with an aggregate market value of $66.4 and $63.9, respectively, were loaned to various brokers and are returnable on demand. In exchange, the Clinic received cash collateral of $68.3 and $64.5, respectively. In accordance with the Transfers and Servicing, Secured Borrowing and Collateral subtopic of the FASB ASC, the cash collateral is shown as both an asset and a liability on the consolidated statements of financial position. 15 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 5. Property, Plant and Equipment, Net Property, plant and equipment, net at December 31 consisted of the following: 2011 Land Buildings and improvements Furniture and equipment $ Accumulated depreciation 200.5 4,213.9 2,631.3 7,045.7 2010 $ (3,660.0) 3,385.7 Construction in progress $ 113.3 3,499.0 194.4 4,092.4 2,487.9 6,774.7 (3,362.5) 3,412.2 $ 77.4 3,489.6 The above costs and accumulated depreciation include costs for capitalized software, including costs capitalized in accordance with the IntangiblesGoodwill and Other, Internal Use Software subtopic of the FASB ASC. The total cost for capitalized software was $481.7 and $419.9, and the total accumulated amortization was $317.0 and $270.1 at December 31, 2011 and 2010, respectively. Amortization expense for capitalized software was $51.9 and $47.3 for 2011 and 2010, respectively. Note 6. Income Taxes Most of the income received by the Clinic and its subsidiaries is exempt from taxation under Section 501(a) of the Internal Revenue Code. Some of its subsidiaries are taxable entities, and some of the income received by otherwise exempt entities is subject to taxation as unrelated business income (UBI). The Clinic or its subsidiaries file income tax returns in the U.S. federal, various state, and foreign jurisdictions. The statutes of limitations for tax years 2008 through 2010 remain open in the major U.S. taxing jurisdictions in which the Clinic and subsidiaries are subject to taxation. In addition, for all tax years prior to 2008 generating or utilizing a net operating loss (NOL), tax authorities can adjust the amount of NOL carryforward to subsequent years. The Internal Revenue Service (IRS) performed an examination of the tax and information returns of the Clinic and two subsidiaries for 2005 and 2006. As a result of the audit by the IRS, one remaining entity has extended the statutes of limitations for tax years 2005 through 2008 until December 31, 2012. As of December 31, 2011, one audit remains open, and the IRS has proposed one adjustment that management has taken into consideration during its determination of unrecognized tax benefits, since the proposed issue has not been settled. At December 31, 2011 and 2010, the reserve for unrecognized tax benefits was not significant. 16 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 6. Income Taxes (Continued) The Clinic's practice is to recognize interest and penalties related to income tax matters in income tax expense. The components of tax expense are as follows for the years ended December 31: 2011 Currentfederal Currentstate $ 7.0 5.1 12.1 Deferredfederal Deferredstate Change in valuation allowance Total 2010 12.4 0.7 (2.3) 10.8 22.9 $ $ (11.2) 6.1 (5.1) 24.7 0.4 2.3 27.4 22.3 $ The Clinic records deferred income taxes due to temporary differences between financial reporting and tax reporting for certain assets and liabilities of its taxable activities. Following is a summary of the components of deferred taxes as of December 31: 2011 Bad-debt reserve Postretirement benefits Deferred compensation Net operating loss carryforwards Alternative minimum tax credit Pension Paid time off Other Total deferred tax asset $ Valuation allowance Net deferred tax asset $ Current Noncurrent $ $ 17 2010 0.3 7.3 16.5 0.4 4.6 12.4 1.3 3.1 45.9 45.9 2.7 43.2 45.9 $ $ $ $ 1.7 6.1 17.0 12.8 3.9 7.5 1.3 2.5 52.8 (2.3) 50.5 13.2 37.3 50.5 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 7. Financing Long-term debt at December 31 consisted of the following: 2011 City of Rochester, Minnesota Revenue Bonds issued in various series, subject to variable interest rates to a maximum rate of 15.00% (the average rate was 0.17% in 2011 and 0.29% in 2010), principal due in varying amounts from 2019 through 2038 $ City of Rochester, Minnesota Revenue Bonds issued in various series with fixed rates of interest ranging from 4.00% to 5.00%, principal due in varying amounts from 2028 through 2038 Industrial Development Authority of the County of Maricopa Hospital Revenue Bonds issued in various series, interest rate at 5.00%, principal due in varying amounts from 2031 through 2036 Jacksonville Economic Development Commission Health Care Facilities Revenue Bonds issued in various series, interest rate at 5.00%, principal due in varying amounts from 2031 to 2036 Wisconsin Health and Educational Facilities Authority Revenue Bonds, Series 2008, issued in various series, with fixed interest rates ranging from 4.00% to 5.50%, principal due in varying amounts through 2030 Fixed-rate notes, payable to banks, interest rate at 2.01%, principal due in varying amounts through 2016 Fixed-rate notes, payable to an insurance company, interest rate at 4.71%, principal due in equal amounts from 2042 through 2046 Other notes payable Unamortized discounts and premiums, net Long-term variable-rate debt classified as current Current maturities included in other current liabilities $ 2010 690.0 $ 980.0 490.0 205.0 50.0 165.0 125.0 225.0 87.1 90.0 225.0 - 215.0 - 26.7 13.4 1,922.2 25.8 4.6 1,695.4 (240.0) (50.3) 1,631.9 (330.0) (5.0) 1,360.4 $ The Clinic's outstanding revenue bond issues are limited obligations of various issuing authorities payable solely by the Clinic pursuant to loan agreements between the borrowing entities and the issuing authorities. Under various financing agreements, the Clinic must meet certain operating and financial performance covenants. 18 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 7. Financing (Continued) At December 31, 2011, the $690.0 of City of Rochester, Minnesota, variable-rate bonds consist of variable-rate demand revenue bonds. In conjunction with the issuance of the variable-rate demand revenue bonds, the Clinic has entered into various bank standby purchase and credit agreements in the amount of $450.0 that expire at various dates commencing January 2013. Under the terms of these agreements, the bank will make liquidity loans to the Clinic in the amount necessary to purchase a portion of the variable-rate demand revenue bonds if not remarketed. The liquidity loans would be payable over a three- to five-year period, with the first payment due after December 31, 2012. The Clinic has provided self-liquidity for the remaining $240.0 variable-rate demand revenue bonds, which have been classified as current in the accompanying consolidated statements of financial position. In May 2011, the City of Rochester, Minnesota, on behalf of the Clinic, issued fixed-rate bonds in the aggregate principal amount of $285.0. These bonds were issued to extinguish the variable-rate City of Rochester, Minnesota Bonds, Series 1992 and Series 2001. The loss on extinguishment of the bonds was not significant. In November 2011, the Clinic obtained $225.0 in various bank financing for general corporate purposes. In December 2011, the Clinic obtained $215.0 in fixed-rate notes from an insurance company. The proceeds from these notes were used to extinguish the 1998 Industrial Development Authority of the County of Maricopa Hospital Revenue Bonds and the 2001 Jacksonville Economic Development Commission Health Care Facilities Revenue Bonds. The loss on extinguishment of the bonds was not significant. All fixed-rate interest revenue bonds are callable from 2012 to 2020 at the option of the Clinic, at redemption prices ranging from 100 percent to 101 percent of the principal amount. The following are scheduled maturities of long-term debt for each of the next five years, assuming the variable-rate demand revenue bonds are remarketed, and the standby purchase agreements are renewed. As described above, if such bonds are not remarketed, $240.0 may be due in 2012 and $450.0 may be due in years from 2013 to 2016. Years Ending December 31, 2012 2013 2014 2015 2016 $ 50.3 50.8 50.4 49.3 49.5 Interest payments on long-term debt, net of amounts capitalized for 2011 and 2010, totaled $43.8 and $35.3, respectively. The amount of interest capitalized, net of related interest income, was $1.3 and $2.1 during 2011 and 2010, respectively. Interest expense totaled $43.8 and $36.0 for 2011 and 2010, respectively. At December 31, 2011 and 2010, the Clinic had unsecured lines of credit available with banks totaling $325.0, with varying renewal terms and interest up to 0.25 percent over various published rates. There were no amounts drawn at December 31, 2011 and 2010. 19 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 8. Lease Commitments Certain leases are classified as capital leases. The leased assets are included as part of property, plant and equipment (Note 5), and the capital lease obligations of $31.1 and $28.6 as of December 31, 2011 and 2010, respectively, are recorded in other current and long-term liabilities. Other leases are classified as operating and are not capitalized. The payments on such leases are recorded as expense. Details of the capitalized lease assets are as follows at December 31: 2011 Buildings and equipment Furniture and equipment $ Accumulated amortization $ 2010 33.3 3.6 36.9 (7.2) 29.7 $ $ 33.1 5.2 38.3 (7.9) 30.4 Rental expense incurred for operating leases was $33.1 and $26.2 for the years ended December 31, 2011 and 2010, respectively. At December 31, 2011, the estimated future minimum lease payments under noncancellable operating leases and capital leases were as follows: Years Ending December 31, Operating 2012 2013 2014 2015 2016 Thereafter Minimum lease payments $ $ Less amount representing interest Net minimum lease payments under capital leases 29.9 21.6 14.6 12.6 9.3 40.7 128.7 Capital $ $ 20 2.9 2.3 2.3 2.2 1.6 26.8 38.1 (7.0) 31.1 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 9. Contributions and Restricted Expenditures The Clinic receives unrestricted, temporarily restricted, and permanently restricted contributions in support of research, education and clinical activities. Temporarily restricted net assets were available for the following purposes or periods at December 31: 2011 Research Education Buildings and equipment Charity care Clinical Other Pledges and trusts $ $ 326.0 191.1 24.4 32.6 60.8 26.4 202.6 863.9 2010 $ $ 298.9 194.9 29.5 33.2 53.6 33.0 207.7 850.8 Permanently restricted net assets at December 31 are summarized below, the income from which is expendable to support the following purposes: 2011 Research Education Charity care Clinical Other Pledges and trusts $ $ 445.6 131.6 8.7 41.0 31.8 132.0 790.7 2010 $ $ 400.1 121.9 8.9 35.1 27.0 144.2 737.2 Net assets were released from donor restrictions as expenditures were made, net of transfer from unrestricted net assets for deficiencies in donor-restricted endowment funds (Note 10), which satisfied the following restricted purposes for the years ended December 31: 2011 Research Education Buildings and equipment Other $ $ 21 81.3 22.7 13.5 31.0 148.5 2010 $ $ 80.9 25.9 9.1 35.9 151.8 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 9. Contributions and Restricted Expenditures (Continued) At December 31, outstanding pledges from various corporations, foundations and individuals, included in other receivables and other long-term assets, were as follows: 2011 Pledges due: In less than one year In one to five years In more than five years $ Allowance for uncollectible pledges and discounts $ 126.9 115.6 7.6 250.1 (47.4) 202.7 2010 $ $ 113.2 126.3 31.4 270.9 (52.0) 218.9 Estimated cash flows from pledge receivables due after one year are discounted using a risk-adjusted rate, ranging from 1.48 percent to 5.11 percent, that is commensurate with the pledges' due dates. The Clinic has received interests in various split-interest, perpetual, and charitable remainder trusts from donors, which are included in other long-term assets. The trusts, which are recorded at fair value based on the underlying value of the assets in the trust or discounted cash flow of the expected payment streams, were $153.6 and $148.1 at December 31, 2011 and 2010, respectively. Note 10. Endowment The Clinic's endowment consists of approximately 1,000 individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments (board-designated funds). Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The Board of Trustees retains the right to re-designate board-designated funds. The Board of Trustees of the Clinic has interpreted the Minnesota 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 Clinic 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 organization in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the Clinic considers the following factors in making a determination to appropriate or accumulate donor-restricted funds: 1. 2. 3. 4. The duration and preservation of the fund The purposes of the Clinic and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation 22 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 10. Endowment (Continued) 5. The expected total return from income and the appreciation of investments 6. Other resources of the Clinic 7. The investment policies of the Clinic The Clinic has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Clinic must hold in perpetuity or for a donor-specified period(s) as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce a real return, net of inflation and investment management costs, of at least 5 percent over the long term. Actual returns in any given year may vary from this amount. To satisfy its long-term rate-of-return objectives, the Clinic 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 Clinic targets a diversified asset allocation that places a greater emphasis on equity-based and alternative investments to achieve its long-term objective within prudent risk constraints. The Clinic has a policy of appropriating for distribution each year 5 percent of its endowment fund's moving average fair value over the prior 36 months as of September 30 of the preceding fiscal year in which the distribution is planned. In establishing this policy, the Clinic considered the long-term expected return on its endowment. Accordingly, over the long term, the Clinic expects the current spending policy to allow its endowment to grow at an average of the long-term rate of inflation. This is consistent with the Clinic's objective 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 December 31, 2011, the endowment net asset composition by type of fund consisted of the following: Temporarily Restricted Unrestricted Donor-restricted funds Board-designated funds Total funds $ $ (0.4) 833.1 832.7 23 $ $ 392.8 392.8 Permanently Restricted $ $ 790.7 790.7 Total $ $ 1,183.1 833.1 2,016.2 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 10. Endowment (Continued) Changes in endowment net assets for the fiscal year ended December 31, 2011, consisted of the following: Temporarily Restricted Unrestricted Endowment net assets, beginning of year $ Investment return: Investment income Net appreciation (realized and unrealized) Total investment return Contributions Appropriation of endowment assets for expenditure Other changes: Transfers to create board-designated endowment funds Endowment net assets, end of year $ 823.3 $ 400.6 Permanently Restricted $ 737.2 Total $ 1,961.1 15.5 19.0 - 34.5 10.6 26.1 13.1 32.1 - 23.7 58.2 - - 53.5 53.5 (41.9) (39.9) - (81.8) 25.2 832.7 $ 392.8 $ 790.7 $ 25.2 2,016.2 At December 31, 2010, the endowment net asset composition by type of fund consisted of the following: Temporarily Restricted Unrestricted Donor-restricted funds Board-designated funds Total funds $ $ (1.1) 824.4 823.3 24 $ $ 400.6 400.6 Permanently Restricted $ $ 737.2 737.2 Total $ $ 1,136.7 824.4 1,961.1 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 10. Endowment (Continued) Changes in endowment net assets for the fiscal year ended December 31, 2010, consisted of the following: Temporarily Restricted Unrestricted Endowment net assets, beginning of year $ Investment return: Investment income Net appreciation (realized and unrealized) Total investment return Contributions Appropriation of endowment assets for expenditure Other changes: Transfers to create board-designated endowment funds Endowment net assets, end of year $ 713.2 $ 349.7 Permanently Restricted $ Total 692.6 $ 1,755.5 15.7 17.3 - 33.0 70.0 85.7 67.8 85.1 - 137.8 170.8 - - 44.6 44.6 (32.5) (34.2) - (66.7) 56.9 823.3 $ 400.6 $ 737.2 $ 56.9 1,961.1 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 SPMIFA requires the Clinic to retain as a fund of perpetual duration. Deficiencies of this nature, which are reported in unrestricted net assets, were $0.4 and $1.1 as of December 31, 2011 and 2010, respectively. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by the Board of Trustees. Note 11. Functional Expenses The expenses reported in the consolidated statements of activities were incurred for the following for the years ended December 31: 2011 Patient care Lab and technology ventures Research Graduate and other education General and administrative Development expenses Other activities $ $ 25 6,178.0 619.9 595.6 242.9 88.9 33.2 107.0 7,865.5 2010 $ $ 5,811.2 605.3 554.6 235.5 77.2 32.8 110.1 7,426.7 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 12. Employee Benefit Programs The Clinic serves as plan sponsor for several defined benefit pension funds and other postretirement benefits. Included in other changes in unrestricted net assets at December 31, 2011 and 2010, are the following amounts, respectively, that have not yet been recognized in net periodic cost: unrecognized actuarial losses of $2,227.1 and $1,572.1 and unrecognized prior service benefit of $747.6 and $833.4. Actuarial losses are amortized as a component of net periodic pension cost, only if the losses exceed 10 percent of the greater of the projected benefit obligation or the fair value of plan assets. Unrecognized prior service benefits are amortized on a straight-line basis over the estimated life of plan participants. The unrecognized actuarial losses and prior service benefit included in net assets are expected to be recognized in net periodic pension cost during the year ending December 31, 2012, in the amount of $100.6 and $82.8, respectively. Changes in plan assets and benefit obligations recognized in unrestricted net assets during 2011 and 2010 included the following: 2011 Current-year actuarial gain (loss) Amortization of actuarial loss (gain) Current-year prior service cost Amortization of prior service cost (credit) Pension and other postretirement benefit adjustments $ $ (754.5) 105.3 (85.7) (734.9) 2010 $ $ 118.4 (58.0) (413.1) 102.7 (250.0) Change in plan assumptions: At December 31, 2010, the Clinic switched from using the Citigroup Above Median Pension Discount Curve to using a discount rate modeling process, which involves selecting a portfolio of bonds that could settle the benefit obligation of the pension and other postretirement benefit plans. The change in estimating the discount rate provides a better method of matching bonds to the anticipated cash flows needed to settle a plan's estimated future benefit payments. The change resulted in a decrease of the pension benefit obligation by approximately $130.0 and the other postretirement benefit obligation by approximately $30.0 at December 31, 2010. Net assets increased by an equal amount, and there was no impact to the income from current activities. Pension plans: Settlement: During the quarter ended September 30, 2010, the Clinic's lump-sum benefit payments to participants of the Supplemental Retirement Plan, a nonqualified plan, exceeded the sum of the service and interest costs, which resulted in the recognition of a $6.5 loss accounted for in accordance with the CompensationRetirement Benefits topic of FASB ASC. In addition, this was a significant event that required a remeasurement of the benefit obligation as of September 30, 2010, in accordance with the CompensationRetirement Benefits topic of FASB ASC. This resulted in a $33.2 increase in the benefit obligation reflected as a component of the pension and other postretirement benefit adjustments in the consolidated statements of activities. 26 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 12. Employee Benefit Programs (Continued) Plan terminations: The Clinic announced in November 2010 its intent to terminate its nonqualified pension plans and distribute the plans' assets. Since the termination triggered a constructive receipt for tax purposes to the participants, the Clinic paid the income tax due on future asset distribution of $190.3 directly to the IRS in November 2010 and added the total distribution to participants' 2010 W-2. The balance, net of taxes, was paid to participants in November 2011, in compliance with IRC 409A. As a result of the termination, the Clinic recognized a $16.2 curtailment loss in 2010, in accordance with the CompensationRetirement Benefits topic of FASB ASC, due to the acceleration of payments, elimination of the substantial risk of forfeiture, and the liberalization of the early retirement definition resulting in a plan amendment. In addition, the Clinic recognized a $50.0 settlement loss in 2010, from lump sums paid in the fourth quarter and the tax portion of the liquidation payment. Obligations and funded status: Following is a summary of the changes in the benefit obligation and plan assets, the resulting funded status of the qualified and nonqualified pension plans, and accumulated benefit obligation as of and for the years ended December 31: 2011 Qualified Change in projected benefit obligation: Benefit obligation, beginning of year Service cost Interest cost Actuarial loss (gain) Plan change Benefits paid Estimated benefit obligation at end of year Change in plan assets: Fair value of plan assets, beginning of year Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets at end of year $ $ $ $ 2010 Nonqualified 4,575.9 185.8 262.0 485.5 0.1 (219.8) 5,289.5 4,363.0 125.6 384.0 (219.8) 4,652.8 $ $ $ $ 243.1 0.6 (1.2) (239.9) 2.6 239.9 (239.9) - Qualified $ $ $ $ Nonqualified 4,068.4 171.0 240.9 266.2 (170.6) 4,575.9 3,794.6 516.3 222.7 (170.6) 4,363.0 $ $ $ $ 393.8 (3.0) 22.0 45.0 25.2 (239.9) 243.1 239.9 (239.9) - Pension Benefits 2011 Qualified Funded status of the plan Net amount recognized $ $ Accumulated benefit obligation $ (636.7) (636.7) 4,941.1 27 2010 Nonqualified Qualified $ $ (2.6) (2.6) $ $ $ 2.6 $ (212.9) (212.9) 4,181.3 Nonqualified $ $ (243.1) (243.1) $ 243.1 Mayo Clinic Notes to Consolidated Financial Statements (In Millions) Note 12. Employee Benefit Programs (Continued) Amounts recognized in the consolidated statements of financial position consist of the following at December 31: 2011 Qualified Current liabilities Noncurrent liabilities Net amount recognized $ $ 2010 Nonqualified (636.7) (636.7) $ $ (0.2) (2.4) (2.6) Qualified $ $ Nonqualified (212.9) (212.9) $ $ (240.9) (2.2) (243.1) Components of net periodic benefit cost are as follows for the years ended December 31: 2010 2011 Qualified Service cost Interest cost Expected return on plan assets Amortization of unrecognized: Prior service benefit Net actuarial loss Curtailment Settlement Net periodic benefit cost $ $ 185.8 262.0 (356.3) (60.2) 64.5 95.8 Nonqualified $ $ 0.6 38.6 22.9 62.1 Qualified $ $ 171.0 240.9 (328.1) (60.2) 48.6 72.2 Nonqualified $ $ (3.0) 22.0 (1.3) 4.0 16.2 56.5 94.4 Plan assets: The largest of the pension funds is the Mayo Clinic Master Retirement Trust Plan, which holds $4,573.9 of the $4,652.8 in combined plan assets at December 31, 2011. The investment policies described below apply to the Mayo Clinic Master Retirement Trust Plan (the Plan). The Plan employs a global, multi-asset approach in managing its retirement plan assets. This approach is designed to maximize risk-adjusted returns over a long-term investment horizon, consistent with the nature of the pension liabilities being funded. The plan asset portfolio's target allocation for total return investment strategies, which include public equities, private equities, absolute return, and real assets, is 77.5 percent. The portfolio's target fixed-income exposure is 22.5 percent. The fixed-income exposure may include the use of long-term interest rate swap contra
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