The Commonwealth Fund (the "Fund")
is a private foundation supporting independent research on health
and social issues.
a.
Investments—Investments in equity
securities with readily determinable fair values and all investments
in debt securities are carried at fair value, which approximates
market value. Assets with limited marketability, such as alternative
asset limited partnerships, are stated at the Fund’s equity
interest in the underlying net assets of the partnerships, which
are stated at fair value as reported by the partnerships. Realized
gains and losses on dispositions of investments are determined
on the following bases: FIFO for actively managed equity and
fixed income, average cost for commingled mutual funds, and
specific identification basis for alternative assets.
In accordance with Financial Accounting Standards Board Statement
No.133, Accounting for Derivative Instruments and Hedging Activities,
the Fund records derivative instruments in the statements of
financial position at their fair value, with changes in fair
value being recorded in the statement of activities. The Fund
does not hold or issue financial instruments, including derivatives,
for trading purposes. Both realized and unrealized gains and
losses are recognized in the statements of activities.
b.
Fixed Assets—Furniture, equipment, and building improvements are depreciated using the straight-line method over their estimated useful lives.
c.
Contributions, Promises to Give, and Net Assets Classifications —Contributions received and made, including unconditional promises to give, are recognized in the period incurred. The Fund reports contributions as restricted if received with a donor stipulation that limits the use of the donated assets. Unconditional promises to give for future periods are presented as program authorizations payable on the statement of financial position at fair values, which includes a discount for present value.
d.
Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires the Fund's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of additions to and deductions from the statement of activities. The calculation of the present value of program authorizations payable, present value of accumulated postretirement benefits, deferred Federal excise taxes, and the depreciable lives of fixed assets requires the significant use of estimates. Actual results could differ from those estimates.
2.
INVESTMENTS
Investments at June 30, 2004 and 2003 comprised the following:
2005
2004
Fair Value
Cost
Fair Value
Cost
U.S. Equities
$183,218,869
$157,581,858
$22,120,398
$199,573,796
Non-U.S. Equities
139,418,015
86,726,067
100,628,294
85,420,609
Fixed income
89,458,155
92,583,406
68,882,700
68,427,970
Short-term
16,769,839
16,769,839
24,156,609
24,156,609
Marketable alternative equity
72,222,771
42,111,141
65,567,269
42,140,486
Nonmarketable alternative equity
15,451,026
17,443,048
11,017,563
14,857,943
Inflation hedge
91,802,337
75,723,063
64,596,428
60,972,222
$608,341,012
$488,938,422
$572,128,427
$495,549,635
At June 30, 2005, the Fund had total unexpended commitments of approximately $54.4 million in various nonmarketable alternative equity investments.
The Fund's investment managers may use futures contracts to manage asset allocation and to adjust the duration of the fixed income portfolio. In addition, investment managers may use foreign exchange forward contracts to minimize the exposure of certain Fund investments to adverse fluctuations in the financial and currency markets. At June 30, 2005 and 2004, the Fund had no outstanding derivative positions.
3.
PROGRAM AUTHORIZATIONS PAYABLE
At June 30, 2005, program authorizations scheduled for payment at later dates were as follows:
July 1, 2005 through June 30, 2006
$13,96,966
July 1, 2006 through June 30, 2007
3,341,690
Thereafter
204,532
Gross program authorizations scheduled for payment at a later date
17,543,188
Less adjustment to present value
103,690
Program authorizations payable
$17,439,498
A discount rate of 2.83% was used to determine the present value of the program authorizations payable at June 30, 2005.
4.
UNFUNDED RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
The Fund has a noncontributory defined contribution retirement plan, covering all employees, under arrangements with Teachers Insurance and Annuity Association of America and College Retirement Equities Fund and Fidelity Investments. This plan provides for purchases of annuities and/or mutual funds for employees. The Fund's contributions approximated 19% of the participants' compensation for the years ended June 30, 2005 and 2004, respectively. Pension expense under this plan was approximately $925,000 and $878,000 for the years ended June 30, 2005 and 2004, respectively. In addition, the plan allows employees to make voluntary tax-deferred purchases of these same annuities and/or mutual funds within the legal limits provided for under Federal law.
The Fund also has a group of former employees who retired prior to the inauguration of the above plan and certain other former employees to whom pension benefits have been approved, on an individual case basis, by the Board of Directors. Benefits under this program are paid directly by the Fund to these retirees. These pension payments approximated $62,000 and $60,000 for the years ended June 30, 2005 and 2004, respectively. In addition, the Fund provides health and life insurance to certain former employees.
Effective July 1, 1998, the Fund entered into deferred compensation agreements with certain senior executives that provides for unfunded deferred compensation computed as a percentage of salary. There were no deferred compensation contributions for the year ended June 30, 2004.
Effective July 1, 2001, the Fund established a fully-funded Key Employee Stock Option Plan ("KEYSOP") for certain key executives which exchanges deferred compensation benefits for options to purchase mutual funds. In addition, the KEYSOP awarded options to purchase mutual funds to certain employees in exchange for certain pension benefits. The Fund no longer makes contributions to the KEYSOP.
Effective July 9, 2002, the Fund established a Section 457 Plan for certain employees that provides for unfunded benefits with employer contributions made within the legal limits provided for under Federal law.
The Fund provides postretirement medical insurance coverage for retirees who meet the eligibility criteria. The postretirement medical plan, which is measured as of the end of each fiscal year, is an unfunded plan, with 100% of the benefits paid by the Fund on a pay-as-you-go basis. Such payments approximated $110,000 and $103,000 for the years ended June 30, 2005 and 2004, respectively.
Expected contributions under the postretirement medical plan for the fiscal year ended June 30, 2006 are expected to be approximately $125,000. Additional required disclosure on the Fund's postretirement medical plan for the years ended June 30, 2005 and 2004 is as follows:
2005
2004
Benefit obligation at June 30
$2,133,837
$1,754,507
Fair value of plan assets at June 30
—
—
Status —
unfunded
$2,133,837
$1,75,507
Actuarial loss
$60,345
$170,495
Accrued benefit cost recognized
$2,194,182
$1,25,002
Net periodic
expense
$379,331
$262,097
Employer contribution
$110,151
$102,612
Significant assumptions related to postretirement benefits as of June 30 were as follows:
2005
2004
Discount rate
4.28%
5.33%
Health care cost trend rates—Initial
7.30%
7.10%
Health care cost trend rates—Ultimate
7.10%
7.20%
At June 30, 2005, benefits expected to be paid in future years are approximately as follows:
Year ended June 30, 2006
$125,000
Health care cost trend rates—Initial
7.30%
Health care cost trend rates—Ultimate
7.20%
5.
TAX STATUS
The Fund is exempt from Federal income taxes under Section 501(c)(3) of the Internal Revenue Code, but is subject to a 1% or 2% Federal excise tax, if certain criteria are met, on net investment income. For the years ended June 30, 2005 and 2004, that excise tax rate was 2%. The Fund is also subject to Federal and state taxes on unrelated business income. In addition, The Fund records deferred Federal excise taxes, based upon expected excise tax rates, on the unrealized appreciation or depreciation of investments being reported for financial reporting purposes in different periods than for tax purposes.
The Fund is required to make certain minimum distributions in accordance with a formula specified by the Internal Revenue Service. For the year ended June 30, 2005, distributions approximating $4.7 million are required to be made by June 30, 2006 to satisfy the minimum requirements of approximately $29.2 million for the year ended June 30, 2005.
In the Statements of Financial Position, the deferred tax liability of $2,338,052 and $1,531,576 at June 30, 2005 and 2004, respectively, resulted from expected Federal excise taxes on unrealized appreciation of investments.
For the years ended June 30, 2005 and 2004, the tax provision was as follows:
For the years ended
June 30, 2005 and 2004, the tax provision was as follows:
2005
2004
Excise taxes—current
$124,812
$1,023,977
Excise taxes—deferred
856,476
1,056,048
Unrelated business income taxes—current
73,511
88,380
$1,054,799
$2,168,405
6.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Fund, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Fund could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
All Financial
Instruments Other Than Investments—The carrying
amounts of these items are a reasonable estimate of their fair
value.
Investments—For
marketable securities held as investments, fair value equals
quoted market price, if available. If a quoted market price
is not available, fair value is estimated using quoted market
price for similar securities. For alternative asset limited
partnerships held as investments, fair value is estimated using
private valuations of the securities or properties held in these
partnerships. The carrying amount of these items is a reasonable
estimate of their fair value. For futures and foreign exchange
forward contracts, the fair value equals the quoted market price.
7.
CONTRIBUTIONS
RECEIVED
In fiscal years 1987 and 1988, the Fund received a total of $15,415,804 as a grant from the James Picker Foundation, with an agreement that a designated portion of the Fund's grants be identified as "Picker Program Grants by the Commonwealth Fund." The Fund fulfills this obligation by making Picker Program Grants devoted to specific themes approved by the Fund's Board of Directors. For the years ended June 30, 2004 and 2003, Picker program grants totaled approximately $1,350,000 and $1,370,000, respectively.
In April 1996, the Fund received The Health Services Improvement Fund, Inc.'s ("HSIF") assets and liabilities, $1,721,016 and $57,198, respectively, resulting in a $1,663,818 increase in net assets. In accordance with the terms of an agreement with HSIF, this contribution enables the Fund to make Commonwealth Fund/HSIF grants to improve health care coverage, access, and quality in the New York City greater metropolitan region.
During the year ended June 30, 2002, the Fund received a bequest of $3,001,124 from the estate of Professor Frances Cooke Macgregor as a contribution to the general endowment, with the amount of annual grants generated by this addition to the endowment to be governed by the Fund's overall annual payout policies. An additional amount of $100,000 was received during the year ended June 30, 2004. This gift was made with the provisions that in at least the five-year period following its receipt, grants made possible by it will be used to address iatrogenic medicine issues, and that grants made possible by the gift be designated "Frances Cooke Macgregor" grants. In keeping with this bequest, an initial amount of $552,000 was recorded as a temporarily restricted net asset as of and for the year ended June 30, 2002.
During the years ended June 30, 2005 and 2004, net assets released from donor restrictions were
$172,196 and $285,211, respectively.
