Palomar Health Consolidated Financial Statements as of and for the Years Ended June 30, 2015 and 2014, and Independent Auditors' Report PALOMAR HEALTH TABLE OF CONTENTS Page MANAGEMENT'S DISCUSSION AND ANALYSIS 1-10 INDEPENDENT AUDITORS' REPORT 11-12 CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 2015 AND 2014: Statements of Net Position Statements of Revenue, Expenses, and Changes in Net Position 13-14 15 Statements of Cash Flows 16-17 Notes to Consolidated Financial Statements 18-41 PALOMAR HEALTH MANAGEMENT'S DISCUSSION AND ANALYSIS Overview Palomar Health (PH) is a public health care district and is a political subdivision in the State of California (the \"State\") organized pursuant to Division 23 of the Health and Safety Code of the State. This section of PH's annual financial report presents management's discussion and analysis of the financial performance for the years ended June 30, 2015 and 2014. Although the 2013 condensed consolidated statement of net position, the condensed consolidated statement of revenue, expenses, and changes in net position, and the condensed consolidated statement of cash flows are presented in this section, they are not presented in the accompanying consolidated financial statements and notes to the consolidated financial statements. We encourage the reader to consider the information presented here in conjunction with the consolidated financial statements as a whole that follow this section. This annual financial report includes: Management's Discussion and Analysis Independent Auditors' Report Consolidated financial statements of PH, including notes that explain in more detail some of the information in the consolidated financial statements. The consolidated financial statements of PH include the financial statements of Arch Health Partners, Inc. (\"Arch\"). In accordance with Governmental Accounting Standards Board (GASB) Codification Section 2100, The Financial Reporting Entity, for financial reporting purposes, PH's reporting entity now includes Arch as a blended component unit as a result of the fiscal dependency of Arch on PH. Accordingly, the change in reporting entity has been applied retrospectively to include Arch as a blended component unit of PH for all years presented. Additionally, as discussed in Note 1 to the consolidated financial statements, the deferred rent liability was previously restated in the financial statements of Arch for the year ended June 30, 2013, resulting in an adjustment to reduce net position by $1,963 as of June 30, 2013. Required Financial Statements Consolidated Statements of Net Position The consolidated statements of net position include all of PH's assets and liabilities and provide information about the nature and amounts of investments in resources (assets) and obligations to PH's creditors (liabilities) and net position the difference between assets and liabilities of PH and the changes in them. The consolidated statements of net position also provide the basis for evaluating the capital structure of PH and assessing the liquidity and financial flexibility of PH. -1- CONDENSED CONSOLIDATED STATEMENTS OF NET POSITION AS OF JUNE 30, 2015, 2014, AND 2013 ($ in thousands) 2015 ASSETS 355,385 1,154,277 71,502 2014 (As Restated, See Note 1) 2013 (As Restated, See Note 1) $ $ Current assets Capital assetsnet Noncurrent assets $ 314,047 1,208,784 70,017 299,103 1,265,756 77,234 TOTAL $ 1,581,164 $ 1,592,848 $ 1,642,093 $ $ $ LIABILITIES AND NET POSITION Current liabilities Workers' compensationnet of current portion Fair value of interest rate swap Long-term debtnet of current portion Total liabilities 137,148 699 28,664 1,136,411 110,960 744 26,528 1,131,405 115,966 1,068 26,343 1,123,398 1,302,922 1,269,637 1,266,775 11,151 10,749 9,344 1,314,073 1,280,386 1,276,119 Invested in capital assetsnet of related debt 49,173 120,027 184,340 Restricted for repayment of debt 11,701 10,192 13,753 Restricted for capital acquisitions 10,363 11,485 13,167 345 1,844 329 195,509 168,914 154,385 267,091 312,462 365,974 $ 1,581,164 $ 1,592,848 $ 1,642,093 Deferred inflow of resourcesDeferred revenue and deferred rent liability Total liabilities and deferred inflow of resources Restricted for other purposes Unrestricted Total net position TOTAL -2- 2015: Analysis of the Consolidated Statements of Net Position Current assets increased by $41,338 or 13% in 2015, primarily due to increases in investments of $46,613 and net patient accounts receivable of $4,832. Investments increased by $46,613 because of $40,400 purchases of marketable securities and net patient accounts receivable increased by $4,832 mainly due to a shift in payor mix as a result of an increase in patients qualifying for governmental programs and a shift from traditional Medicare and Medi-Cal to managed care plans. These increases were offset by a decrease in estimated third-party settlements receivable for $6,482 due to settlement of prior year receivables. Capital assets - net decreased by $54,507 or 5% primarily due to depreciation and amortization expense of $52,537 and net disposals of $10,159, offset by purchases related to major building projects of $8,189. Net disposals included sale of the Innovation property and Black Mountain property, which had a combined net book value of $9,854. Noncurrent assets increased by $1,485 or 2% primarily due to an increase of $1,098 of a loan receivable from Palomar Health Foundation. Current liabilities increased by $26,188 or 24% primarily due to an increase in the current portion of long-term debt of $11,578, accrued compensation and related liabilities of $4,176, and other accrued liabilities of $9,716. Long-term liabilities increased by $7,097 or 1% primarily due to an increase in the negative fair value of the interest rate swap of $2,136 and an increase in long-term debt of $5,006. Net position decreased by $45,371 or 15% primarily due to loss from operations of $15,513 and interest expense of $63,994, offset by property tax revenue of $32,033. 2014: Analysis of the Consolidated Statements of Net Position Current assets increased by $14,944 or 5% in 2014, primarily due to increases in cash of $27,621 and the current portion of assets whose use is limited G.O. Bonds of $1,377. These were offset by decreases in investments of $5,728, estimated third-party settlements receivable of $2,243, and the current portion of assets whose use is limited of $3,388. Capital assets decreased by $56,972 or 5% primarily due to depreciation and amortization expense of $58,382 and net disposals of $9,949, offset by purchases related to major building projects of $11,359. Noncurrent assets decreased by $7,217 or 9% primarily due to a decrease in assets whose use is limited of $6,985. Current liabilities decreased by $5,006 or 4% primarily due to a decrease in the current portion of long-term debt of $7,465, offset by an increase in estimated third-party settlements liability of $2,046, other accrued liabilities of $902, the current portion of the G.O. Bonds of $574, and accrued compensation and related liabilities of $290. Long-term liabilities increased by $7,868 or 1% primarily as a result of the increase in G.O. Bonds of $15,452 and the fair value of the interest rate swap of $185, which were offset by decreases in the long-term debt of $7,445, and the long-term portion of workers' compensation of $324. -3- Net position decreased by $53,512 or 15% primarily due to loss from operations of $27,450, and the interest expense of $64,870. The decrease is offset by property tax revenue of $29,868, investment income of $1,942 and other nonoperating-net of $7,183. Consolidated Statements of Revenue, Expenses, and Changes in Net Position All of PH's revenue, expenses, and changes in net position are included in the consolidated statements of revenue, expenses, and changes in net position. The consolidated financial statements measure the success of PH's operations during the years presented and are used to determine if PH has successfully recovered all of its costs through its fees and other sources of revenue. It also shows profitability and creditworthiness. Over time, increases or decreases in PH's net position are one indicator of PH's financial health. -4- CONDENSED CONSOLIDATED STATEMENTS OF REVENUE, EXPENSES, AND CHANGES IN NET POSITION FOR THE YEARS ENDED JUNE 30, 2015, 2014, AND 2013 ($ in thousands) 2015 OPERATING REVENUE: Net patient service revenue Net premium revenue Other revenue 2014 2013 (As Restated, (As Restated, See Note 1) See Note 1) $ 619,636 52,846 17,205 $ 583,616 55,113 13,962 $ 579,516 61,310 16,710 689,687 652,691 657,536 OPERATING EXPENSES 705,200 680,141 695,241 LOSS FROM OPERATIONS (15,513) (27,450) (37,705) NONOPERATING INCOME (EXPENSE): Investment income Unrealized (loss) gain on interest rate swap Interest expense Property tax revenueunrestricted Property tax revenueG.O. bonds Othernet 1,834 (2,136) (66,278) 14,303 17,730 4,689 1,942 (185) (64,870) 13,451 16,417 7,183 1,571 14,032 (56,036) 12,914 15,799 2,831 (29,858) (26,062) (8,889) (45,371) (53,512) (46,594) Total operating revenue Total nonoperating expensenet DEFICIENCY OF REVENUE OVER EXPENSES INTERFUND 695 DECREASE IN NET POSITION (45,371) (53,512) (45,899) NET POSITIONBeginning of year 312,462 365,974 411,873 $ 267,091 $ 312,462 $ 365,974 NET POSITIONEnd of year 2015: Analysis of the Consolidated Statement of Revenue, Expenses, and Changes in Net Position In accordance with accounting principles generally accepted in the United States of America (also known as GAAP or \"generally accepted accounting principles\") for governmental health care providers, PH's consolidated statements of revenue, expenses, and changes in net position reflect that nonoperating income (expenses) includes interest expense, which for nongovernmental hospitals is typically grouped as -5- an operating expense. While these Governmental Accounting Standards Board (GASB) requirements make district hospitals conform to other governmental entities, such as colleges and universities, they may be less comparable to nongovernment hospitals because the GASB requirements do not apply to them. This must be a consideration if trying to compare PH to nonprofit and for-profit hospitals. Interest expense was $66,278 in the year ended June 30, 2015, and $64,870 in the year ended June 30, 2014. Operating revenue is primarily generated through the treatment of patients (providing inpatient and outpatient, ancillary, and other patient care service) as well as other affiliated revenue. Operating revenue increased by $36,996 or 6% in the year ended June 30, 2015, primarily due to increases in net patient service revenue of $36,020, a decrease in net premium revenue of $2,267, and an increase in other revenue of $3,243. The increase in net patient service revenue is primarily due to revenue recognized from various supplemental funding sources, including the Intergovernmental Transfer Program (\"IGT\") and Outpatient Supplemental Program of $14,640 in the year ended June 30, 2015. Operating expenses are those expenses related to the treatment of patients, including overhead and administration expenses. Operating expenses increased by $25,059 or 4% in the year ended June 30, 2015, primarily due to increase in salaries, wages, and benefits of $20,437 as a result of increased levels of staffing, increase in purchased services of $5,598 as a result of an increase in information technology services to support the Meaningful Use program, and increase in supplies of $6,731 offset by a decrease in depreciation and amortization expense of $5,845. Nonoperating expense net increased by $3,796 or 15% in the year ended June 30, 2015, primarily due to an increase in the unrealized loss on interest rate swap of $1,951 and an increase in interest expense of $1,408. Nonoperating income includes PH's share of unrestricted property tax revenues of $14,303, collected by the County of San Diego, and restricted property tax revenue for repayment of G.O. Bonds of $17,730. As a result of the factors noted above, net position decreased by $45,371 for the year ended June 30, 2015. 2014: Analysis of the Consolidated Statement of Revenue, Expenses, and Changes in Net Position In accordance with accounting principles generally accepted in the United States of America (also known as GAAP or \"generally accepted accounting principles\") for governmental health care providers, PH's consolidated statements of revenue, expenses, and changes in net position reflect that nonoperating income (expenses) includes interest expense, which for nongovernmental hospitals is typically grouped as an operating expense. While these GASB requirements make district hospitals conform to other governmental entities, such as colleges and universities, they may be less comparable to nongovernment hospitals because the GASB requirements do not apply to them. This must be a consideration if trying to compare PH to nonprofit and for-profit hospitals. Interest expense was $64,870 in the year ended June 30, 2014, and $56,036 in the year ended June 30, 2013. Operating revenue is primarily generated through the treatment of patients (providing inpatient and outpatient, ancillary, and other patient care service) as well as other affiliated revenue. Operating revenue decreased by $4,845 or 1% in the year ended June 30, 2014, due to increases in net patient service revenue of $4,100, a decrease in net premium revenue of $6,197, and a decrease in other revenue of $2,748. Increases in inpatient and outpatient ancillary revenue and negotiated increases in contracted payer rates resulted in an increase in net charges during the year. The increase in net patient service revenue is primarily due to revenue recognized from various supplemental funding sources, including the IGT Program and Outpatient Supplemental Program totaling $9,303 in the year ended June 30, 2014. -6- Operating expenses are those expenses related to the treatment of patients, including overhead and administration expenses. Operating expenses decreased by $15,100 or 2% in the year ended June 30, 2014, primarily due to increases in supplies of $1,642, professional fees of $26,322 and depreciation and amortization of $2,497. This was offset by decreases in purchased services of $29,507 and salaries, wages, and benefits of $16,127 due to the closure of Palomar Continuing Care Center and the outsourcing of the information technology services. Nonoperating expense net increased by $17,173 or 193% in the year ended June 30, 2014, primarily due to an increase in the unrealized loss on interest rate swap of $14,217 and an increase in interest expense of $8,834. Nonoperating income includes PH's share of unrestricted property tax revenues of $13,451, collected by the County of San Diego, and restricted property tax revenue for repayment of G.O. Bonds of $16,417. As a result of the factors noted above, net position decreased by $53,512 for the year ended June 30, 2014. Consolidated Statements of Cash Flows The consolidated statements of cash flows report cash receipts, cash payments, and net changes in cash resulting from operating, investing, and financing activities, which provides answers to such questions as from where did cash come, for what was cash used, and what was the change in the cash balance during the reporting year. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2015, 2014, AND 2013 ($ in thousands) 2015 CASH FLOWS FROM: Operating activities Noncapital financing activities Capital and related financing activities Investing activities $ 54,046 16,649 (27,488) (44,893) 2014 2013 (As Restated, (As Restated, See Note 1) See Note 1) $ 40,086 15,763 (45,545) 17,317 $ 9,628 12,185 (96,391) 87,008 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,686) 27,621 12,430 CASH AND CASH EQUIVALENTS Beginning of year 46,969 19,348 6,918 CASH AND CASH EQUIVALENTS End of year $ 45,283 $ 46,969 $ 19,348 2015: Analysis of the Consolidated Statement of Cash Flows Operating activities cash inflow reflected an increase of $13,960 or 35% in the year ended June 30, 2015, over the year ended June 30, 2014. This increase is mostly attributable to increases in cash collections of -7- patient accounts of $44,599, and other sources of $1,577 offset by increases in payments to employees of $16,770 and increased payments to suppliers for $15,446. Net cash outflows from capital and related financing activities in 2015 were $27,488, primarily due to interest payments of $45,122, and the payment of long-term debt of $3,767 offset by the receipt of $17,730 of property taxes for debt service and $12,200 on proceeds from sale of fixed assets. Investing activities net cash outflows were $44,893 in 2015. This is primarily due to cash outflows from purchases of investments of $172,652, offset by cash inflow on proceeds from sale of investments of $126,016. The ending cash and cash equivalents of $45,283 reflect the checking account and overnight investment balances held by PH. In addition, there were current investments of $140,516 at June 30, 2015. 2014: Analysis of the Consolidated Statement of Cash Flows Operating activities cash inflow reflected an increase of $30,458 or 316% in the year ended June 30, 2014, over the year ended June 30, 2013. This increase is mostly attributable to increases in cash collections of patient accounts of $31,251 and decreases in payments to employees of $12,348 offset by increased payments to suppliers for $6,447. Net cash outflows from capital and related financing activities in 2014 were $45,545, primarily due to interest payments of $45,561, and the payment of long-term debt of $18,414 offset by the receipt of $16,417 of property taxes for debt service. Investing activities net cash inflows were $17,317 in 2014. This is primarily due to cash outflows from purchases of investments of $145,199, offset by cash inflow on proceeds from sale of investments of $162,358. The ending cash and cash equivalents of $46,969 reflect the checking account and overnight investment balances held by PH. In addition, there were current investments of $93,903 at June 30, 2014. 2015 and 2014: Capital Assets and Long-Term Debt The Board of Directors approved a facilities master plan (the \"Facilities Master Plan\") budgeted at $1,057,000. In November 2004, the residents of the district voted and approved to fund $496,000 of this expansion by the issuance of G.O. Bonds. Payment for these bonds is funded by an ad valorem property tax levied on the district residents. The approximate amount of the tax levy for each taxable property remained at $23.50 per $100 of assessed value in the years ended June 30, 2015 and 2014. The levy is established by the Board of Director's resolution each year in an amount sufficient to service the debt for the upcoming year along with a reserve amount. One of the major components of the Facilities Master Plan included the construction of the new Palomar Medical Center Campus named Palomar Medical Center in Escondido. On August 19, 2012, PH opened the 288-bed facility. It includes critical and general inpatient care, surgical and interventional services, and emergency and trauma services. Other building projects include the renovation of existing hospital facilities at Pomerado Hospital, renovation of Palomar Health Downtown Campus (PHDC), and construction of ambulatory and outpatient facilities at various locations in the District. -8- PH has three outstanding revenue bond issues that are classified as long-term debt. These are the 2006 Insured Certificates of Participation (COP), the 2009 COP, and the 2010 COP. There were no principal payments due on these issues, bringing the net long-term bond principal to $568,708 at June 30, 2015 and 2014. All debt payments have been made timely. During Fiscal Year 2014, the 1999 Insured Revenue Bonds were redeemed. More detailed information about PH's debt and bond redemption is presented in Note 8 to the consolidated financial statements. PH has an underlying Moody's Investor Service (\"Moody's) rating of Ba1 on its COP. In July 2005, PH issued its first series of G.O. Bonds authorized by voter approval in 2004 (measure BB) in the amount of $80,000 for use in funding the building expansion project. In December 2007, PH issued its second series of G.O. Bonds totaling $241,083. In March 2009, PH issued its third series of G.O. Bonds in the amount of $110,000. In November 2010, PH issued the final series of G.O. Bonds in the amount of $64,917. A principal payment of $3,383 and $2,808 reduced the G.O. Bonds' principal to $471,441 and $474,824 as of June 30, 2015 and 2014, respectively. PH continued to have an underlying Moody's rating of A2 on its G.O. Bonds. Liquidity and Capital Resources PH's unrestricted liquidity position as of June 30, 2015, was $185,799, including $45,283 in operating cash and $140,516 in unrestricted investments stated at fair value. PH's unrestricted liquidity position as of June 30, 2014, was $140,872, including $46,969 in operating cash and $93,903 in unrestricted investments stated at fair market value. The available liquidity of $185,799 at June 30, 2015, represents a $44,927 or 32% increase over the $140,872 in available liquidity as of June 30, 2014, and equals 33% of total outstanding debt exclusive of the G.O. Bonds, payments on which are funded separately from ad valorem taxes, as of June 30, 2015. Economic and Other Factors On June 24, 2015, PH's Board of Directors voted to transfer all services from the PHDC to other PH owned facilities and to close the seismically-challenged facility. This process is expected to take 8-12 months and result in significant overhead savings for the system. The next few years are anticipated to require additional capital outlay for the transition of services as well as Information System upgrades required to meet Meaningful Use requirements and ICD-10 coding requirements in addition to the replacement of outdated equipment and associated technology. The challenge of meeting these capital needs becomes more difficult as reimbursement for services continues to decline. On the federal level, the provisions of the Affordable Care Act continue to enforce the 2% sequestration for Medicare, Tricare, and Medicare HMOs, which were first experienced in fiscal year 2013. Other federal programs now allow Medicare to penalize hospitals. While minimal in 2015, potential penalties and loss of Medicare reimbursement for re-admissions, RAC takebacks, the two midnight rule, and value based purchasing may increase each year. Other penalties and loss of reimbursement for quality measures and patient experience will impact PH within the next fiscal year. Additional federal cuts are slated to go into effect in fiscal year 2017 that will reduce the amount of Medicaid Disproportionate Share (DSH) allotments to the states, which will translate into less funding for uncompensated care. On a State level, the California legislature continues to change reimbursement laws and regulations to create continued uncertainty over future healthcare reimbursement. Medi-Cal reimbursement has been reduced significantly with across-the-board rate cuts and the State moved to several new methods of reimbursement in 2014, which reduced reimbursement on a go-forward basis. The effects of these reductions are considered particularly troublesome with the Medi-Cal expansion from the introduction of the State exchanges. In -9- addition, there is still uncertainty of select NDPH-IGT, Hospital Fee, and other funding programs as the Centers for Medicare and Medicaid Services continue to delay approval of legislatively created programs. The 2015-16 state budget eliminates the partial restoration of the Medi-Cal reimbursement cuts to distinct-part nursing facilities. A long-standing challenge for PH is a weak local economy and a challenging payor mix. Legislation mandated by the state of California relative to staffing ratios, and improved clinical quality and safety standards that are tied to government reimbursement contributes to higher staffing costs, increased uncompensated care expense but lowered reimbursement. Finance Contact PH's consolidated financial statements are designed to present users with a general overview of PH's finances and to demonstrate PH's accountability. If you have any questions about the report or need additional financial information, please contact the Executive Vice-President Finance, Palomar Health, 456 E. Grand Avenue, Escondido, California 92025. - 10 - INDEPENDENT AUDITORS' REPORT To the Board of Directors of Palomar Health: We have audited the accompanying consolidated financial statements of Palomar Health (PH), which comprise the consolidated statements of net position as of June 30, 2015 and 2014, and the related consolidated statements of revenue, expenses, and changes in net position and of cash flows for the years 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 Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of Arch Health Partners, Inc. (\"Arch\"), a blended component unit, which statements reflect total assets constituting 1% of consolidated total assets as of June 30, 2015 and 2014, and total revenues constituting 5% and 6%, respectively, of consolidated total revenues for the periods then ended. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Arch, is based solely on the report of the other auditors. 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 consolidated financial statements are free from 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 auditor's 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 PH'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 PH'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. - 11 - Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PH as of June 30, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1 to the consolidated financial statements, the accompanying 2014 consolidated financial statements have been restated as a result of a change in reporting entity. Our opinion is not modified with respect to this matter. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 1 through 10 be presented to supplement the basic consolidated financial statements. Such information, although not a part of the basic consolidated financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic consolidated financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic consolidated financial statements, and other knowledge we obtained during our audit of the basic consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. November 25, 2015 - 12 - PALOMAR HEALTH CONSOLIDATED STATEMENTS OF NET POSITION AS OF JUNE 30, 2015 AND 2014 (Dollars in thousands) 2015 2014 (As Restated, See Note 1) ASSETS CURRENT ASSETS: Cash and cash equivalents Investments Patient accounts receivablenet of allowances for uncollectible accounts of $34,581 in 2015 and $48,328 in 2014 Other receivables Supplies/inventories Prepaid expenses and other Estimated third-party payor settlements receivable Assets whose use is limitedcurrent portion Assets whose use is limitedgeneral obligation bondscurrent portion Total current assets ASSETS WHOSE USE IS LIMITED: Held by trustee under indenture agreements Held by trustee under general obligation bonds indenture Held in escrow for street improvements Restricted by donor and other Total assets whose use is limited Less current portion Total assets whose use is limitedlong-term portion CAPITAL ASSETSNet OTHER ASSETS: Prepaid debt insurance costs Investment in and amounts due from affiliated entities Other Total other assets TOTAL $ 45,283 140,516 $ 46,969 93,903 126,618 6,260 9,862 3,594 1,688 132 121,786 7,957 9,215 4,708 8,170 1,857 21,432 19,482 355,385 314,047 44,362 21,432 10,363 345 44,598 19,482 11,485 1,843 76,502 77,408 21,564 21,339 54,938 56,069 1,154,277 1,208,784 8,176 3,884 4,504 8,759 3,787 1,402 16,564 13,948 $ 1,581,164 $ 1,592,848 (Continued) - 13 - PALOMAR HEALTH CONSOLIDATED STATEMENTS OF NET POSITION AS OF JUNE 30, 2015 AND 2014 (Dollars in thousands) 2015 2014 (As Restated, See Note 1) LIABILITIES AND NET POSITION CURRENT LIABILITIES: Accounts payable Accrued compensation and related liabilities Current portion of general obligation bonds Current portion of long-term debt Estimated third-party payor settlements liability Other accrued liabilities Accrued interest payable $ 28,426 41,824 3,941 11,383 11,574 30,139 9,861 $ 28,761 37,648 3,382 364 10,740 20,423 9,642 137,148 110,960 699 744 LONG-TERM DEBTGeneral obligation bondsnet of current portion 586,134 570,217 LONG-TERM DEBTNet of current portion 550,277 561,188 FAIR VALUE OF INTEREST RATE SWAP 28,664 26,528 1,302,922 1,269,637 11,151 10,749 1,314,073 1,280,386 49,173 11,701 10,363 345 195,509 120,027 10,192 11,485 1,844 168,914 267,091 312,462 $ 1,581,164 $ 1,592,848 Total current liabilities WORKERS' COMPENSATIONNet of current portion Total liabilities DEFERRED INFLOW OF RESOURCESDeferred revenue and deferred rent liabilities Total liabilities and deferred inflow of resources COMMITMENTS AND CONTINGENCIES (Note 14) NET POSITION: Net investment in capital assets Restricted for repayment of debt Restricted for capital acquisitions Restricted for other purposes Unrestricted Total net position TOTAL See notes to consolidated financial statements. (Concluded) - 14 - PALOMAR HEALTH CONSOLIDATED STATEMENTS OF REVENUE, EXPENSES, AND CHANGES IN NET POSITION FOR THE YEARS ENDED JUNE 30, 2015 AND 2014 (Dollars in thousands) 2015 OPERATING REVENUE: Net patient service revenue Net premium revenue Other revenue 2014 (As Restated, See Note 1) $ 619,636 52,846 17,205 $ 583,616 55,113 13,962 689,687 652,691 OPERATING EXPENSES: Salaries, wages, and benefits Professional fees Supplies Purchased services Depreciation and amortization Rent expense Utilities Other 387,671 49,467 97,414 70,025 52,537 19,072 9,350 19,664 367,234 55,956 90,683 64,427 58,382 18,029 8,672 16,758 Total operating expenses 705,200 680,141 LOSS FROM OPERATIONS (15,513) (27,450) NONOPERATING INCOME (EXPENSES): Investment income Unrealized loss on interest rate swap Interest expense Property tax revenue Property tax revenuegeneral obligation bonds Othernet 1,834 (2,136) (66,278) 14,303 17,730 4,689 1,942 (185) (64,870) 13,451 16,417 7,183 Total nonoperating expensesnet (29,858) (26,062) DEFICIENCY OF REVENUE OVER EXPENSES (45,371) (53,512) NET POSITIONBeginning of year 312,462 365,974 $ 267,091 $ 312,462 Total operating revenue NET POSITIONEnd of year See notes to consolidated financial statements. - 15 - PALOMAR HEALTH CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2015 AND 2014 (Dollars in thousands) 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from: Patients, insurers, and other third-party payors Other sources Payments to: Employees Suppliers $ 731,824 18,801 Net cash provided by operating activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Receipt of district taxes Other Net cash provided by noncapital financing activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisition of capital assets Interest paid Repayment of long-term debt Proceeds from note payable Recovery of owner controlled insurance program (OCIP) premiums Proceeds on sale of fixed assets Receipt of property taxes restricted for debt service on general obligation bonds Other 2014 (As Restated, See Note 1) $ 687,225 17,224 (383,540) (313,039) (366,770) (297,593) 54,046 40,086 14,303 2,346 13,451 2,312 16,649 15,763 (8,189) (45,122) (3,767) (10,930) (45,561) (18,414) 122 6,000 6,821 12,200 17,730 (340) 16,417 (27,488) (45,545) (172,562) 126,016 1,249 414 (1,512) 1,502 (145,199) 162,358 1,659 (44,893) 17,317 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,686) 27,621 CASH AND CASH EQUIVALENTSBeginning of year 46,969 19,348 Net cash used in capital and related financing activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments Sale of investments Interest received on investments and notes receivable Receipt of payments on loans receivable Increase in loans receivable Other Net cash (used in) provided by investing activities CASH AND CASH EQUIVALENTSEnd of year $ 45,283 (1,501) $ 46,969 (Continued) - 16 - PALOMAR HEALTH CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2015 AND 2014 (Dollars in thousands) RECONCILIATION OF OPERATING LOSS TO NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Loss from operations Adjustments to reconcile income from operations to net cash provided by operating activities: Depreciation and amortization Provision for bad debts Equity in earnings of affiliates Changes in assets and liabilities: Patient accounts receivable Other receivables Supplies/inventories Prepaid expenses and other Estimated third-party payor settlements Othernet Accounts payable Accrued compensation and related liabilities Other accrued liabilities Deferred revenue and deferred rent liability 2015 2014 (As Restated, See Note 1) $ (15,513) $ (27,450) 52,537 60,347 (97) 58,382 76,198 (628) (65,179) 2,578 (647) (886) 7,316 (885) 226 4,131 9,716 402 (75,836) 3,650 560 (51) 4,289 240 (503) 464 (634) 1,405 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 54,046 $ 40,086 NONCASH INVESTING AND CAPITAL AND FINANCING ACTIVITIESCapital expenditures included in accounts payable $ 900 $ 1,461 See notes to consolidated financial statements. (Concluded) - 17 - PALOMAR HEALTH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 2015 AND 2014 (In thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OrganizationPalomar Health (PH), a public health care district, is organized under the provisions of the Health and Safety Code of the State of California to provide and operate health care facilities. The accompanying consolidated financial statements include the accounts of the following commonly controlled divisions and related entities of PH: Palomar Medical Center (PMC), located in west Escondido, California, includes a 288-bed general acute care hospital, including tertiary services, trauma services, and cardiovascular surgery Pomerado Hospital, located in Poway, California, includes a 107-bed general acute care hospital, and Villa Pomerado, a distinct part skilled nursing facility and sub-acute facility Palomar Health Downtown Campus (PHDC), formerly known as Palomar Medical Center (PMC), located in east Escondido, California, includes women's services, Center for Behavioral Health, and Rehabilitation Institute Home Health, located in Escondido, California San Marcos Ambulatory Care Center, located in San Marcos, California San Marcos Behavioral Medicine Center, located in San Marcos, California Central Office, providing management, financial, data processing, materials management, and public affairs services to the other divisions Palomar Health Development, a charitable nonprofit organization created to provide assistance and support for PH by obtaining grant funding from federal, state, local, and private sources Palomar Health expressCare clinics, located in select grocery stores in Escondido, Rancho Penasquitos, Temecula, and San Elijo Hills, California Arch Health Partners, Inc. (\"Arch\"), a non-profit medical foundation established under section 1206(l) of the California Health and Safety Code, with fifteen clinics located in Poway, Escondido, Ramona and San Marcos, California that provide primary and specialty care medical services and add another component in effective health care delivery to residents within PH's community. Change in Reporting EntityPH has provided a line of credit to Arch that bears interest at LIBOR plus 2% and is partly secured by certain assets of Arch including amounts on deposit in business bank accounts, furniture, fixtures and equipment, and accounts receivable. The outstanding principal and related accrued interest on the line of credit were $49,000 and $2,187, respectively, at June 30, 2015, and $32,600 and $743, respectively, at June 30, 2014. Under the credit agreement, repayment of the line of credit and accrued interest was scheduled to begin on July 1, 2015, in 60 equal monthly installments. - 18 - On July 1, 2015, the line of credit agreement was amended to increase the maximum advances available to Arch to $63,900 through June 30, 2016, and $76,900 through June 30, 2017, and to change the repayment terms to 120 equal monthly installments beginning on July 1, 2017. The line of credit agreement may be terminated without cause upon 90 days' written notice by either PH or Arch, except PH must provide one year's notice if termination of the agreement is due to determination by PH's Board of Directors that Arch's performance does not meet the standards previously agreed upon by PH and Arch. Subsequent to June 30, 2015, Arch has drawn an additional $5,700 on the line of credit. Management of PH believes that amounts due from Arch will be repaid to PH in accordance with the terms of the credit agreement. However, if Arch is unable to begin repaying the line of credit beginning on July 1, 2017, PH may find it necessary to modify the credit agreement to extend the due date of payments, reduce repayments of principal and interest, and agree to other modifications of the terms to attempt to recover amounts owed by Arch. In accordance with Governmental Accounting Standards Board (GASB) Codification Section 2100, The Financial Reporting Entity, for financial reporting purposes, PH's reporting entity now includes Arch as a blended component unit as a result of the fiscal dependency of Arch on PH. Accordingly, the change in reporting entity has been applied retrospectively in the accompanying consolidated financial statements to include Arch as a blended component unit of PH as of and for the years ended June 30, 2015 and 2014. The effect of the change as of July 1, 2013, was to decrease PH's consolidated net position by $11,986. PH uses proprietary (enterprise) fund accounting. Revenues and expenses are recognized on the accrual basis using the economic resources measurement focus. Eliminations of internal activity have been made in the consolidated financial statements. Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Accounting StandardsPursuant to GASB Codification Section P80, Proprietary Fund Accounting and Financial Reporting, PH follows applicable pronouncements of the GASB. PH also applies the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB), Accounting Principles Board, and the AICPA Committee on Accounting Procedure issued on or before November 30, 1989, that have been incorporated into GASB's authoritative literature. Cash and Cash EquivalentsCash and cash equivalents include highly liquid debt instruments with original maturities of three months or less and are intended for use in daily operations. InvestmentsInvestments in debt securities are carried at fair value, as determined by quoted market prices, in the consolidated statements of net position. Investment income or loss is included in nonoperating income, unless the income or loss is restricted by donor or law. Supplies/InventoriesSupplies/Inventories are stated at the lower of cost (first-in, first-out) or market value. Assets Whose Use is LimitedAssets whose use is limited primarily include assets held by trustees under indenture agreements and designated assets set aside by the Board of Directors for future capital improvements over which the Board of Directors retains control and may, at its discretion, subsequently use for other purposes. Amounts required to meet current liabilities of PH have been classified as current assets in the accompanying consolidated statements of net position. - 19 - PH has entered into an agreement with the City of Escondido (the \"City\") to financially participate in street improvements near the site of PMC. Under the agreement, PH was required to deposit $13,000 into an account jointly managed by PH and the City. PH's financial obligation is limited to the deposited amount plus any earned interest on the deposited funds. The balance of $10,363 and $11,485 as of June 30, 2015 and 2014, respectively, is included in assets whose use is limited in the accompanying consolidated statements of net position. Capital AssetsProperty, plant, and equipment acquisitions are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful life of each class of depreciable asset (the shorter of the estimated useful life or the lease term for leasehold improvements) as follows: Years Land improvements Buildings and building improvements Leasehold improvements Equipment 15 10-40 3-15 1-12 Interest cost incurred on borrowed funds during the period of construction of capital assets, net of interest earned, of $0 and $117 for the years ended June 30, 2015 and 2014, respectively, is capitalized as a component of the cost of acquiring those assets. Net interest cost capitalized was $0 and $117 for the years ended June 30, 2015 and 2014, respectively. Gifts of long-lived assets, such as land, buildings, or equipment, are reported as unrestricted support in other changes in net position and are excluded from the excess of revenue over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support in other changes in net position. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Capital assets are reviewed for impairment when events or changes in circumstances suggest that the service utility of the capital asset may have significantly and unexpectedly declined. Capital assets are considered impaired if both the decline in service utility of the capital asset is large in magnitude and the event or change in circumstance is outside the normal life cycle of the capital asset. Such events or changes in circumstances that may be indicative of impairment include evidence of physical damage, enactment, or approval of laws or regulations or other changes in environmental factors; technological changes or evidence of obsolescence; changes in the manner or duration of use of a capital asset; and construction stoppage. The determination of the impairment loss is dependent upon the event or circumstance in which the impairment occurred. Impairment losses are recorded in the consolidated statements of revenue, expenses, and changes in net position. In the years ended June 30, 2015 and 2014, no impairment charges were recorded. On June 24, 2015, PH's Board of Directors voted to close PHDC and transfer all services to other PH facilities. The closure of PHDC is expected to be completed near the end of fiscal year 2016. Management of PH estimates that the market value of the PHDC facility exceeds its carrying value in the consolidated financial statements. Debt Discounts, Debt Premiums, and Debt Issuance CostsDebt discounts and debt premiums are amortized by the bonds outstanding method over the life of the related bonds. Debt issuance costs, except prepaid insurance costs, are expensed as incurred. Prepaid insurance costs are reported as an asset and recognized as an expense over the duration of the related debt. - 20 - Interest Rate SwapsPH has entered into variable-to-fixed interest rate swaps, which are reflected at fair value in the consolidated statements of net position. The fair value of the interest rate swaps will fluctuate based generally on changes in market rates of interest. Any unrealized gains or losses resulting from changes in fair value are reported as nonoperating income (expenses) in the consolidated statements of revenue, expenses, and changes in net position. Interest cost on variable interest rate debt is reported based on the fixed interest rate paid by PH under the interest rate swaps. As of June 30, 2015 and 2014, the interest rate swaps are recorded as a liability of $28,664 and $26,528, respectively. Deferred Rent LiabilityRental expenses for operating leases are recorded on a straight-line basis. Arch has several real estate lease agreements that include rent holidays in addition to annual rental increases of 3%. The difference between straight-line rental expense and cash payments through June 30, 2015 and 2014 resulted in a deferred rent liability of $2,874 and $2,360, respectively. The deferred rent liability was previously restated in the financial statements of Arch for the year ended June 30, 2013, resulting in an adjustment to reduce net position of Arch by $1,963 as of June 30, 2013. Net PositionNet position of PH is classified in three broad components: net investment in capital assets, restricted (distinguishing between major categories of restrictions) and unrestricted. Net investment in capital assets consists of capital assets, net of accumulated depreciation and reduced by the outstanding balances of borrowings used to finance the purchase or construction of those assets. Net position restricted for repayment of debt includes amounts deposited with trustees as required by bond indentures, as described in Note 8. Net position restricted for capital acquisitions relates to amounts restricted to acquire capital assets. Net position restricted for other purposes relates to noncapital net position that must be used for a particular purpose, as specified by contributors or others external to PH. Unrestricted net position represents the remaining net position that does not meet the definition of net investment in capital assets or restricted. Consolidated Statements of Revenue, Expenses, and Changes in Net PositionAll revenues and expenses directly related to the delivery of health care services are included in operating revenue and expenses in the consolidated statements of revenue, expenses, and changes in net position. Nonoperating income (expenses) consist of those revenues and expenses that result from nonexchange transactions, financing (interest expense and changes in the fair value of interest rate swaps), and investment income. Net Patient Service RevenuePH has agreements with third-party payors that provide for payments to PH at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and daily rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including a provision for bad debts and estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the year the related services are rendered and adjusted in future years, as final settlements are determined. Net Premium RevenuePH has agreements with various third-party payors to provide medical services to subscribing participants. Under some of these agreements, PH receives monthly capitation payments based on the number of each payor's participants, regardless of services actually performed by PH. Under these agreements, PH also participates in shared risk pools with medical groups, through which it could receive additional reimbursement or pay additional amounts to the medical groups. In conjunction with the shared risk pools, PH estimates incurred but not reported (IBNR) claims for medical services provided to patients. IBNR of $10,129 and $8,052 are included in other accrued liabilities in the accompanying consolidated statements of net position as of June 30, 2015 and 2014, respectively. - 21 - Charity CarePH provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Amounts determined to qualify as charity care are not reported as revenue in the accompanying consolidated financial statements. Charity care charges forgone, at established rates, for the years ended June 30, 2015 and 2014, were $12,670 and $11,291, respectively. PH's cost of providing charity care for years ended June 30, 2015 and 2014, were $2,899 and $2,852, respectively. The cost of providing charity care is calculated using the cost-to-charge ratio. Property TaxesPH receives financial support from property taxes. Property taxes are levied by the County of San Diego on behalf of PH to finance PH's activities. Amounts levied for General Obligation Bonds (\"G.O. Bonds\") are based on assessed property values and are set annually by the Board of Directors. Property tax revenue for the years ended June 30, 2015 and 2014, consists of the following: 2015 2014 To support operationsunrestricted use For debt service on general obligation bondsrestricted use $ 14,303 17,730 $ 13,451 16,417 Total $ 32,033 $ 29,868 Income TaxesPH is a governmental subdivision of the State of California and is exempt from federal income and state franchise taxes. Arch is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code (IRC) and Section 23701(d) of the California Revenue and Taxation Code. Accordingly, no provision for income taxes has been included in the accompanying consolidated financial statements. Recent Accounting Pronouncements In February 2015, the GASB issued GASB Statement No. 72, Fair Value Measurement and Application. This statement addresses accounting and financial reporting issues related to fair value measurements. The definition of fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This statement provides guidance for determining a fair value measurement for financial reporting purposes. This statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2015. Management has not determined the effect of GASB Statement No. 72 on the financial statements. In June 2015, the GASB issued GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPEB). The Statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expense/expenditures. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2017. Earlier application is permitted. Management has not determined the effect of GASB Statement No. 75 on the financial statements. In June 2015, the GASB issued GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The objective of this statement is to identify in the context of the current governmental financial reporting environmentthe hierarchy of generally - 22 - accepted accounting principles (GAAP). The \"GAAP hierarchy\" consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. This statement reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and nonauthoritative literature in the event that the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2015, and should be applied retroactively. Earlier application is permitted. Management has not determined the effect of GASB Statement No. 76 on the financial statements. 2. NET PATIENT SERVICE REVENUE PH renders services to certain patients under contractual arrangements with the Medicare and Medi-Cal programs and various health maintenance and preferred provider organizations. The Medicare program generally pays a prospectively determined fee for services rendered to Medicare patients. Additionally, Medicare reimburses PH for certain inpatient services (primarily mental health unit services) on the basis of costs incurred. The Medi-Cal program provides for payment on a prospectively negotiated contractual rate per day, percentage of charges for services rendered, or capitated payment arrangement. Revenue from the Medicare and Medi-Cal programs, inclusive of risk (capitated) and non-risk managed care programs, accounted for approximately 63% and 54% of PH's net patient service revenue for the years ended June 30, 2015 and 2014, respectively. Third-party settlements are recorded when received, which includes tentative settlements and lump-sum adjustments and final settlements for current and prior cost reporting years. The cost reports for the Medicare program have been settled through the year ended June 30, 2010, and the cost reports for Medi-Cal programs have been settled through the year ended June 30, 2012. Results of cost report settlements, as well as estimates for settlements of all years through 2015, have been reflected in the accompanying consolidated financial statements. As of June 30, 2015 and 2014, estimated third-party settlements resulted in a receivable of $1,688 and $8,170, respectively, and a liability of $11,574 and $10,740, respectively. During the years ended June 30, 2015 and 2014, PH settled various prior-year cost reports and appeal issues. These settlements resulted in approximately $13,580 and $22,344 of additional revenues for the years ended June 30, 2015 and 2014, respectively, which are included in net patient service revenue in the accompanying consolidated statements of revenue, expenses, and changes in net position. PH also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to PH under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. Beginning October 1, 2013, PH implemented a policy to provide a 40% discount on all charges billed to self-pay patients. The discount is recorded as an adjustment to gross patient service revenues to arrive at net patient service revenues prior to the provision for bad debts. 3. CASH AND CASH EQUIVALENTS AND INVESTMENTS The State of California Government Code (the \"Government Code\") authorizes PH to invest unrestricted and board-designated assets in obligations of the U.S. Treasury and certain U.S. government agencies, obligations of the State of California and local government entities, bankers' acceptances, commercial - 23 - paper, certificates of deposit, repurchase agreements, and mortgage securities. Certain of these investments may be purchased only in limited amounts and limited maturity dates, as defined in the Government Code. PH's bond indenture agreements authorize trustee-held assets to be invested in obligations of the U.S. Treasury and certain U.S. government agencies, repurchase agreements, and obligations of financial institutions meeting certain criteria defined in the indentures. The California State Treasury makes available the Local Agency Investment Fund (LAIF) through which local governments may pool investments. Each governmental entity may invest up to $50,000 of unrestricted monies in the fund and an unlimited amount of qualified bond proceeds. PH had invested $49,061 and $42,932 of unrestricted funds in this fund as of June 30, 2015 and 2014, respectively. PH had invested $10,171 and $10,147 in jointly managed funds under an escrow agreement with the City of Escondido as of June 30, 2015 and 2014, respectively. Investments in the LAIF are highly liquid, as deposits can be converted to cash within 24 hours without loss of interest. PH is a voluntary participant in the LAIF. The fair value of PH's investments in the LAIF is reported in the accompanying consolidated statements of net position based on PH's pro rata share of the fair value provided by LAIF for the entire LAIF portfolio. As of June 30, 2015 and 2014, PH had the following investments: 2015 2014 Investmentscurrent Assets whose use is limitedcurrent Assets whose use is limitedlong-term $ 140,516 21,564 54,938 $ 93,903 21,339 56,069 Total $ 217,018 $ 171,311 - 24 - As of June 30, 2015 and 2014, PH had investments by type and maturity as follows: 2015 Investment Maturities (in Years) Less Than 1 1-5 Investment Type Fair Value LAIF U.S. government bonds U.S. Treasury bills Corporate bonds Money market mutual funds $ 59,232 39,635 23,601 25,388 69,162 $ 59,232 Total $ 217,018 $ 131,919 $ 2,268 1,257 69,162 39,635 21,333 24,131 $ 85,099 2014 Investment Maturities (in Years) Less Than 1 1-5 Investment Type Fair Value LAIF U.S. government bonds U.S. Treasury bills Corporate bonds Money market mutual funds Other $ 53,079 22,009 13,242 14,642 66,838 1,501 $ 53,079 Total $ 171,311 $ 123,895 2,477 $ 22,009 10,765 14,642 66,838 1,501 $ 47,416 There are many factors affecting the value of investments. Some, such as interest rate risk, credit risk, concentration of credit risk, and custodial credit risk, may affect both equity and fixed income securities. Equity and debt securities respond to such factors as economic conditions, individual company earnings performance, and market liquidity, while fixed income securities are particularly sensitive to credit risks and changes in interest rates. Interest Rate RiskInterest rate risk is the risk that the value of fixed income securities will decline due to increasing interest rates. The terms of a debt investment may cause its fair value to be highly sensitive to interest rate changes. As a means of limiting exposure to fair value losses arising from increasing interest rates, PH's investment policy, as per statutory requirements, limits the term of any investment to a maturity not exceeding five years. Credit RiskFixed income securities are subject to credit risk, which is the chance that an issuer will fail to pay interest or principal in a timely manner or that negative perceptions of the issuer's ability to make these payments will cause security prices to decline. Certain fixed income securities, including obligations of the U.S. government or those explicitly guaranteed by the U.S. government, are not considered to have credit risk. State law limits PH's investment in commercial paper, corporate bonds, and bond mutual funds with an \"A\" rating issued by nationally recognized statistical rating organizations. PH has no investment policy that would further limit investment choices. As of June 30, 2015 and 2014, PH's investments, excluding U.S. government obligations, consisted of the following: corporate bond investments rated \"A\" or better by Standard & Poor's (S&P) and Moody's Investors - 25 - Service (Moody's), U.S. Government Agency investments rated \"AA+\" by S&P and \"AAA\" by Moody's, and PH's investments in the LAIF, which were not rated. Concentration of Credit RiskConcentration of credit risk is the risk associated with a lack of diversification, such as having substantial investments in a few individual issuers, thereby exposing PH to greater risks resulting from adverse economic, political, regulatory, geographic, or credit developments. Investments issued or guaranteed by the U.S. government and investments in external investment pools, such as the LAIF, are not considered subject to concentration of credit risk. In accordance with state law, no more than 5% of total investments may be invested in the securities of any one issuer, except obligations of the U.S. government, no more than 10% may be invested in any one mutual fund, and no more than 30% may be invested in bankers' acceptances of any one commercial bank. Investments in any one issuer (other than U.S. Treasury securities and external investment pools) that represent 5% or more of the total investments as of June 30, 2015 and 2014, are as follows: Investment Type Federal National Mortgage Association Federal Home Loan Mortgage Corp. U.S. Bank, Trustee Wells Fargo Advantage Government Money Market Federal Agency Securities Federal Agency Securities U.S. Bank Money Market U.S. Government Money Market Funds Total 2015 $ 2014 28,519 11,116 44,362 $ 12,255 9,753 44,598 21,624 20,727 $ 105,621 $ 87,333 Custodial Credit RiskInvestmentsAll of PH's investments are insured or registered or held by PH's agent in the agent's nominee name, with subsidiary records listing PH as the legal owner. For these reasons, PH is not exposed to custodial credit risk for its investments. Custodial Credit RiskDepositsCustodial credit risk is the risk that in the event of a bank failure, PH's deposits may not be returned to it. PH does not have a policy for custodial credit risk. As of June 30, 2015 and 2014, PH's bank balances totaled $50,159 and $48,707, respectively, and were not exposed to custodial credit risk, as the uninsured deposits are with financial institutions that are individually required by state law to have government deposits collateralized at a rate of 110% of the deposits. Such collateral is considered to be held in PH's name. Arch maintains bank deposit accounts that are insured by the Federal Deposit Insurance Corporation (FDIC) up to a limit of $250,000 per depositor. Arch had a cash balance of $1