THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Basic Financial Statements and Other Financial Information December 31, 2016 and 2015 (With Independent Auditors’ Report Thereon) THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Table of Contents Page(s) Independent Auditors’ Report Management’s Discussion and Analysis – Unaudited 1–2 3–13 Basic Financial Statements as of and for the years ended December 31, 2016 and 2015: Balance Sheets 14 Statements of Revenues, Expenses and Changes in Net Position 15 Statements of Cash Flows 16 Notes to Basic Financial Statements 17–57 Required Supplementary Information Schedule of Changes in the Net Pension Liability and Related Ratios (unaudited) 58 Schedule of Pension Contributions (unaudited) 59 Other Financial Information as of and for the years ended December 31, 2016 and 2015 Combining Schedule of Assets, Deferred Outflows of Resources, Liabilities, Deferred Inflows of Resources and Net Position – Combined Group 60 Combining Schedule of Revenues, Expenses and Changes in Net Position – Combined Group 61 Combining Schedule of Cash Flows – Combined Group 62 KPMG LLP Duke Energy Center Suite 3200 550 South Tryon Street Charlotte, NC 28202-4214 Independent Auditors’ Report The Board of Commissioners The Charlotte-Mecklenburg Hospital Authority: Report on the Financial Statements We have audited the accompanying financial statements of The Charlotte-Mecklenburg Hospital Authority (d/b/a Carolinas HealthCare System) (the System) and its discretely presented component unit, as of and for the years ended December 31, 2016 and 2015, and the related notes to the financial statements, which collectively comprise the System’s basic financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express opinions 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 basic financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Charlotte-Mecklenburg Hospital Authority (d/b/a Carolinas HealthCare System) and its discretely presented component unit as of December 31, 2016 and 2015, and the respective changes in net position and cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. Other Matters Required Supplementary Information U.S. generally accepted accounting principles require that management’s discussion and analysis on pages 3 through 13, the schedule of changes in the net pension liability and related ratios on page 58 and the schedule of pension contributions on page 59 be presented to supplement the basic financial statements. Such information, although not part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the basic financial statements in an 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 financial statements, and other knowledge we obtained during our audit of the basic 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. Supplementary Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the System’s basic financial statements. The combining schedule of assets, deferred outflows of resources, liabilities, deferred inflows of resources and net position – combined group, the combining schedule of revenues, expenses and changes in net position – combined group and the combining schedule of cash flows – combined group, for the years ended December 31, 2016 and 2015 (collectively, the Combining Information) are the responsibility of management and were derived from and related directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the audited procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Combining Information is fairly stated in all material respects in relation to the basic financial statements as a whole. Charlotte, North Carolina April 25, 2017 2 THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Management’s Discussion and Analysis – Unaudited December 31, 2016 and 2015 (Dollars in thousands) This Management’s Discussion and Analysis report provides an overview of the financial position and results of activities of Carolinas HealthCare System (CHS or the System) for the years ended December 31, 2016, 2015, and 2014. It has been prepared by management and is required supplemental information to the basic financial statements and the notes that follow this section. Except as otherwise noted, the financial highlights in this analysis refer exclusively to the Primary Enterprise as described in note 1 of the notes to financial statements. Required Financial Statements The Governmental Accounting Standards Board (GASB) requires three financial statements: the statement of net position (balance sheet); the statement of revenues, expenses and changes in net position; and the statement of cash flows. The balance sheets include all of the System’s assets, deferred outflows of resources, liabilities and deferred inflows of resources and provide information about the nature and amounts of investments in resources (assets), future consumption of net position (deferred outflows of resources), the obligations to the System’s creditors (liabilities), and future acquisition of net position (deferred inflows of resources). The balance sheets, along with the related notes, also provide the basis for evaluating the capital structure of the System and assessing the liquidity and financial flexibility of the System. All of the System’s revenues and expenses are accounted for in the statements of revenues, expenses and changes in net position. This statement measures the financial performance of the System’s operations over the past years and can be used to determine whether the System has recovered its costs through its fees and other sources of revenue, as well as its creditworthiness. The statements of cash flows provide information on where cash came from, what it was used for, and what the change in the cash balance was by reporting cash receipts, cash payments and net changes in cash resulting from operations, investing, and financing activities. 3 (Continued) Balance Sheets Condensed balance sheets at December 31: 2016 Cash and short-term investments Other current assets Capital assets – net Investments designated for capital improvements and other long-term investments Other noncurrent assets $ Total assets 142,725 1,017,818 3,047,086 Long-term debt Other current and long-term liabilities $ 173,937 960,618 3,030,583 2014 $ 115,232 928,556 3,047,061 3,503,185 287,083 3,079,628 261,663 2,882,763 364,656 7,997,897 7,506,429 7,338,268 371,246 286,190 238,993 Deferred outflows of resources Total assets and deferred outflows of resources 2015 $ 8,369,143 $ 7,792,619 $ 7,577,261 $ 1,903,983 2,066,108 $ 1,916,225 1,941,415 $ 1,925,594 1,485,538 Total liabilities 3,970,091 3,857,640 3,411,132 Deferred inflows of resources 39,530 45,101 46,612 Net investment in capital assets Restricted – by donor Unrestricted 1,147,721 28,379 3,183,422 1,104,483 25,819 2,759,576 1,112,345 25,706 2,981,466 Total net position 4,359,522 3,889,878 4,119,517 Total liabilities, deferred inflows of resources and net position $ 8,369,143 $ 7,792,619 $ 7,577,261 The System’s cash position (cash, short-term investments, investments designated for capital improvements and other long-term investments) at December 31, 2016, 2015 and 2014 was $3,645,910, $3,253,565 and $2,997,995, respectively, while the System’s long-term debt at December 31, 2016, 2015 and 2014 was $1,903,983, $1,916,225 and $1,925,594, respectively. This debt currently carries long-term credit ratings of AA- with a stable outlook from S&P Global Ratings and Aa3 with a stable outlook from Moody’s Investors Service. Debt service (scheduled principal and interest payments, excluding refinancing activity) for 2016, 2015 and 2014 totaled $134,747, $125,121 and $126,580, respectively. The System’s long-term credit ratings, noted above, reflect an assessment of its future ability to meet its debt obligations and have a direct impact on its cost of borrowing. In addition to evaluating ongoing operating performance, rating agencies also measure balance sheet strength to assess how well an organization can withstand periods of financial stress. In doing so, they evaluate the amount of long-term debt as well as unrestricted cash and investments (cash, short-term investments, investments designated for capital improvements and other long-term 4 (Continued) investments) on the balance sheet. Sufficient levels of unrestricted cash and investments and related liquidity provide assurance that the System can not only pay its operating expenses and service its debt, but also continue to make necessary capital investments even in prolonged periods of operating volatility. Long-term credit ratings are based upon many broad factors, including the following key ratios for measuring liquidity and leverage: days cash on hand, the number of days the System could continue paying its operating expenses from current cash and investment balances; and cash-to-debt, which represents the percentage of the System’s existing debt that could be retired immediately. The System’s ratios are healthy for its rating compared with applicable rating agency medians and other similarly rated health systems. The ability to maintain these ratios and credit ratings at current levels enhances the ability of the System to borrow affordably when necessary and continue to provide high quality healthcare services to its communities even in difficult times. 2016 Days cash on hand Cash-to-debt 259 191.5% 2015 244 169.8% 2014 238 155.8% More detailed information about the System’s cash, investments and other financial instruments and debt is presented in notes 2, 3 and 5 of the notes to financial statements. The net position of the System at December 31, 2016 increased $469,644 from December 31, 2015. The increase in net position was due to positive results of operations of $215,520, investment and other nonoperating income of $248,055, and capital and other contributions of $6,069. The net position of the System at December 31, 2015 decreased $229,639 from December 31, 2014. The decrease in net position was due primarily to the impact of the cumulative effect of change in accounting principle as a result of the adoption of GASB Statement No. 68, Accounting and Financial Reporting for Pensions, of $460,905 and investment and other nonoperating loss of $90,494, offset by positive results of operations of $314,043 and capital and other contributions of $7,717. The net position of the System at December 31, 2014 increased $294,525 from December 31, 2013. The increase in net position was due to positive results of operations of $188,658, investment and other nonoperating income of $98,701, and capital and other contributions of $7,166. 5 (Continued) Statements of Revenues, Expenses, and Changes in Net Position Condensed statements of revenues, expenses and changes in net position for the years ended December 31: 2016 Operating revenues Operating expenses $ 5,657,401 5,441,881 Operating income $ 5,055,324 4,866,666 188,658 248,055 (90,494) 98,701 463,575 223,549 287,359 5,945 124 7,489 228 6,664 502 0 (460,905) 0 469,644 (229,639) 294,525 3,889,878 4,119,517 3,824,992 Capital contributions Other contributions Cumulative effect of change in accounting principle Increase (decrease) in net position $ 5,462,485 5,148,442 314,043 Revenue over expenses before contributions Ending net position $ 2014 215,520 Nonoperating income (loss) – net Beginning net position 2015 4,359,522 $ 3,889,878 $ 4,119,517 Operating revenues in 2016 increased 3.6% from the prior year, largely due to increases in hospital outpatient volumes as well as growth of the CHS Medical Group. The acute and tertiary care hospitals, comprising 71% (Figure 1) of the System’s net operating revenues, experienced a 2.1% increase in inpatient volumes and observation stays from the prior year. Other significant outpatient volume growth from the prior year included surgeries, emergency room visits, endoscopy, and cardiovascular invasive procedures. In addition, the CHS Medical Group Division operating revenues grew 4.6% due primarily to growth in the number of new physicians and advanced clinical practitioners (ACPs) joining CHS Medical Group Division and growth in visits. Operating revenues in 2015 increased 8.1% from the prior year, largely due to increases in hospital inpatient and outpatient volumes as well as growth of the CHS Medical Group Division. The acute and tertiary care hospitals, comprising 70% (Figure 1) of the System’s net operating revenues, experienced a 3.6% increase in inpatient volumes from the prior year. In addition, the CHS Medical Group Division operating revenues grew 2.6% due primarily to growth in the number of new physicians and ACPs joining CHS Medical Group Division and growth in visits. 6 (Continued) Figure 1 System Operating Revenues by Service Type 71% 70% $4,200,000 $3,600,000 $3,000,000 $2,400,000 $1,800,000 20% 21% $1,200,000 5% $600,000 5% 4% 4% $0 2016 2015 Tertiary & Acute Care Services Continuing Care and Specialty Services Physicians' Services Other Services Operating expenses in 2016 increased 5.7% from the prior year. Personnel costs, comprising 61% of the total System operating expenses in 2016 (Figure 2), increased 5.6% due to increase in hospital staffing to catch up to volume growth over the later part of 2015, increases in CHS Medical Group Division provider salary and benefits, growth in corporate support personnel, and annual market adjustments across the System. Other operating expenses, consisting primarily of pharmaceutical and supply costs, professional fees, rent and purchased services, increased 5.4%, primarily due to growth in patient volumes and inflationary cost increases, including the cost of new technologies. Operating expenses in 2015 increased 5.8% from the prior year. Personnel costs, comprising 61% of the total System operating expenses in 2015 (Figure 2), increased 4.4% due to CHS Medical Group Division growth, the effects of annual wage and market adjustments and increases in retirement plan expense associated with the adoption of GASB 68. Other operating expenses, consisting primarily of pharmaceutical and supply costs, professional fees, rent and purchased services, increased 8.8%, primarily due to growth in patient volumes and inflationary cost increases, including the cost of new technologies. 7 (Continued) Figure 2 System Operating Expenses 61% 61% $3,600,000 $3,000,000 $2,400,000 32% 32% $1,800,000 $1,200,000 7% 7% $600,000 $0 2016 Personnel Costs 2015 Medical Supplies and Other Depreciation, Amortization and Interest Nonoperating income, which consists primarily of realized and unrealized investment results, was impacted favorably in 2016 by market value appreciation of the System’s investments. As a governmental entity, the System is required to record all investment market value changes as a component of nonoperating income (loss). Total nonoperating income in 2016 included $229,839 of unrealized investment gains, whereas nonoperating loss in 2015 included $206,200 of unrealized investment losses. Statements of Cash Flows Condensed statements of cash flows for the years ended December 31: 2016 Net cash provided by operating activities Noncapital financing activities Net cash used in capital and related financing activities Net cash used in investing activities $ 569,050 3,723 (Decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ $ 648,768 21,960 2014 $ 621,724 (3,536) (437,864) (165,996) (365,703) (246,275) (477,190) (122,218) (31,087) 58,750 18,780 173,812 115,062 96,282 142,725 8 2015 $ 173,812 $ 115,062 (Continued) The System relies primarily on cash earned from operations to fund its capital needs and to pay principal and interest due on its long-term debt. Any excess cash is invested for future capital needs and new clinical programs. Maintaining clinical excellence and financial viability of the System is dependent upon capital investment in new technologies, programs, and additional facilities, as well as the routine replacement of existing property, plant and equipment. Capital additions, net of retirements, for 2016, 2015 and 2014 totaled $300,859, $249,790 and $358,978, respectively. During 2016, the System invested in new clinical programs, facilities and capital improvements needed to provide services that enhance the quality and increase the availability of treatments, such as expansion of Levine Cancer Institute, emergency departments and urgent care centers, medical office buildings and other hospital facilities, and state of the art enhancements at Carolinas HealthCare System NorthEast. More detailed information about the System’s capital assets is presented in note 4 of the notes to financial statements. Events and Factors Expected to Impact Future Periods Healthcare has historically been a capital-intensive industry that requires significant reinvestment to keep pace with care as it advances and technology as it evolves especially if operating in a market with a growing population. An entity’s ability to re-invest to meet its long-term capital and program needs hinges largely on its ability to perform well financially. We believe that the System, with its geographic dispersion, world-class providers and specialty service lines, extensive primary care network and focus on growth, value and affordability, is well positioned to meet the demands of the fast-changing, capital-intensive industry in which we operate. The past five years have seen growth in alternative payment models as the industry is moving from traditional fee for service to models that emphasize value and quality of services. This transition is not without financial risk to providers as these alternative payment models typically attribute a large percentage of rate increases to the achievement of value based targets. We believe the System is well poised to provide value to its payers and consumers by excelling at delivering high-value care in financially sustainable models. External pressures on revenue streams are not new to the industry as governmental payers have long tried to bend the growth curve in healthcare spending. Recently, North Carolina lawmakers approved a Medicaid reform plan in which provider-led entities and commercial insurers will co-exist in a fully capitated system expected to be operational in 2019. We believe healthcare providers, like the System, who are currently completing large scale data analytics, transforming care delivery and reducing total cost of care will be more apt to withstand the future revenue pressures in a fully capitated Medicaid environment. Employers are rapidly implementing high-deductible health plans and other plan design changes in an attempt to lower their health plan costs which, in turn, has led to greater consumerism. In a consumer-driven market, we believe that transparency, convenience and cost will ultimately drive consumers’ decisions in the future, which means that becoming more accessible and affordable is critical to financial viability. Truly integrated systems, like the System, are best positioned to deliver in a consumer-driven market. From a Federal perspective, there is heightened uncertainty on the future of Medicare and Medicaid policy as well as the future of the Affordable Care Act (ACA). At the state level in North Carolina, health policy discussions are ongoing related to critical issues such as Certificate of Need and Medicaid Expansion. For the time being, we believe that the industry will remain in a period of great legislative uncertainty at the state and federal level. CHS remains a financially viable entity with a strong governing board; an experienced management team; a broad and connected continuum of highly specialized world-class clinical services and a commitment to high levels of quality, safety, patient experience, cost efficiency and teammate engagement which we believe, along with other attributes, will enable us to respond to future challenges and be the first and best choice for care in the communities we serve. 9 (Continued) Community Benefit The mission of CHS is to improve Health, elevate Hope and advance Healing – for all. Our commitment to this mission requires both “investments in” and “partnerships with” the community spanning the entire geographic region within which the System operates. The System defines and measures Community Benefit consistent with the North Carolina Hospital Association (NCHA) guidelines and includes costs associated with: • patient care provided to underinsured and uninsured patients, • medical education provided to the next generation of healthcare professionals, • medical research to stay on the “cutting edge” for new treatments and cost effective care, volunteerism of System teammates and contributions to community groups and local nonprofit organizations, and • vital healthcare and community health improvement services as well as community building activities. The community’s uninsured and underinsured care constitutes both a challenge and an opportunity for the System. It is a challenge to ensure that the necessary clinical programs and facility infrastructures are in place to meet the demand for all patients. It is also an opportunity to provide access to needed healthcare services for the large uninsured and underinsured population. The cornerstone of the System’s overall Community Benefit is its commitment to provide hospital and other healthcare services to all patients regardless of their ability to pay. North and South Carolina’s Medicaid programs, while providing healthcare coverage for many of the poor, disabled, and elderly residents, do not cover all who are unable to pay for healthcare. Also, Medicaid, by design, reimburses healthcare providers at substantially less than actual cost and has not kept pace in recent years with the industry’s rapidly rising cost of technology and enrollment. Within Mecklenburg, Cabarrus, Cleveland, Union, Lincoln, Stanly, and Anson counties, the System provides approximately 85% of the hospital services to the Medicaid and uninsured patient populations. In many cases, the System provides the only access to certain outpatient and physician specialty care for those in the community in need of financial assistance, as well as serving uninsured patients who are not eligible for financial assistance discounts, Medicaid, or other governmental funding. More detailed information about the System’s net patient service revenue is presented in notes 1 and 6 of the notes to financial statements. The System supports and subsidizes medical education and research, which benefits not only the System and the patients it serves, but the entire healthcare provider community. Carolinas Medical Center (CMC) has in training 321 medical residents in 39 programs. In 2016, approximately 41% of the 104 residents that completed the program stayed in the Carolinas. The System continues to expand medical school access at the Charlotte campus of the University of North Carolina (UNC) School of Medicine by providing clinical education for medical students and growing the number of students that will be completing their third and fourth years of medical school. During the 2016-2017 academic year, the Charlotte campus of the UNC School of Medicine will have 26 full-time third year students, an estimated 100 fourth year students, and another 100 visiting students from other universities who will take advantage of CMC’s medical student rotation options. The Family Medicine Residency program, Union Track, trains physicians to provide full-scope primary care to the underserved in small towns or rural settings. The program, which currently trains six residents is embedded in a local physician practice, and is designed as an “apprenticeship model” in which the residents learn by practicing side-by-side with private practitioners. Carolinas HealthCare System NorthEast sponsors the Cabarrus Family Medicine Residency Program and a primary care sports medicine fellowship. These two programs, accredited by the Accreditation Council for Graduate Medical Education, train 24 family medicine residents, and one sports medicine fellow each year. Since its inception in 1996, the Cabarrus Family Medicine Residency Program has graduated 136 family medicine residents, with 71% staying in the Carolinas to practice. 10 (Continued) Through two of its hospitals, CHS owns, operates and subsidizes two colleges that offer nursing and allied health programs culminating in certificates, diplomas and degrees at the associate, baccalaureate and master’s degree levels, as well as noncredit continuing education programs and workshops. Carolinas College of Health Sciences, affiliated with Carolinas Medical Center, is located in Mecklenburg County, while Cabarrus College of Health Sciences, affiliated with Carolinas HealthCare System NorthEast, is located in Cabarrus County. In 2016, over 1,300 students were collectively enrolled in programs such as Nursing, Nurse Anesthetist, Surgical Technology, Pharmacy Technology, Medical Laboratory Science, Histotechnology, Health Studies, Medical Imaging, Radiation Therapy, Radiological Technology, Medical Assistant, and Occupational Therapy. An additional 776 students were enrolled in a continuing education program or workshops. With 396 graduates in 2016 alone, the System is one of the top producing nursing and allied health entities in North Carolina. Equally important, 94% of graduates accept positions in the Carolinas in their field of training providing a valuable workforce resource to alleviate projected clinical personnel shortages. In 2016, The Nursing Schools Almanac rated Carolinas College of Health Sciences the 9th best Nursing School among 1,900 two-year institutions throughout the U.S. Also in 2016, Zippia named Cabarrus College of Health Sciences the best small college in North Carolina. Additionally, Cabarrus College of Health Sciences was named to the President’s Higher Education Community Service Honor Roll for their 7,027 student community service hours. Additionally, the Charlotte Area Health Education Center, operated and subsidized by the System, is the only organization providing continuing education to all area healthcare professionals from all settings, including hospitals, post-acute care and physician practices. The ability to develop and advance medical discovery is a critical component to the System’s giving back to the community locally, nationally and globally. As scientific technologies and medical breakthroughs advance, more patients experience enriched, longer lasting quality of life standards. The Division of Therapeutic Research and Development cultivates patient-centered projects that are clinically relevant and fundamentally important to improving healthcare quality and effectiveness. Research programs throughout the System, encompassing more than 220 investigators and almost 900 active clinical studies, are focused on the development of new treatments, therapies, diagnostics, or devices as well as conducting population-based research, developing innovative care delivery models and analyzing healthcare economics. The System’s research programs and initiatives leverage the scope and scale of CHS to provide patients with leading-edge treatments and therapies as well as attract nationally respected physicians to the community. The System and its team members together are “improving Health, elevating Hope and advancing Healing – for all” by becoming actively involved with, or contributing to, various organizations that seek to improve the overall health and well-being of the community. In 2016, System teammates supported over 500 nonprofit organizations by volunteering nearly 40,000 work-hours in service projects including, but not limited to: distributing gifts across nine counties to more than 2,800 individuals and families as part of the Holiday Cheer project; providing 6,437 backpacks of nutritious food to low income children and families across the region; delivering hot, nutritious meals to low income elderly citizens, vulnerable populations and the Men’s Homeless Shelter; planting 350 trees in low income neighborhoods, operating 2 teaching gardens, engaging local schools, cleaning local greenways and working on the Carolina Thread Trail to help improve environmental sustainability; and contributing donations to Goodwill that equated to over $23 thousand of revenue for their work programs. Most of this volunteerism in 2016 was directed to organizations that support and promote community health priorities and other social determinants of health. In addition to teammate hours, the System also donated approximately $4.4 million in medical equipment, computer equipment and materials to international nonprofit organizations to help people in need as well as numerous other monetary and in-kind donations to local community partners such as The Spokes Group, Hands on Charlotte, Girls on the Run, Let Me Run and the Children’s Attention Home. 11 (Continued) To further improve the physical, mental, and spiritual health of our community in 2016, the System: • screened 2,183 athletes in Mecklenburg, Union and Lincoln counties in North Carolina and York County in South Carolina during the annual Heart of a Champion Day with 87 student-athletes referred for additional medical evaluation, • trained 3,960 community members and System teammates in the Mental Health First Aid program, a groundbreaking public education program that helps identify, understand, and respond to signs of mental illnesses and substance abuse disorders, • added 18 new Faith Communities for a total of 144 in 11 counties within the CHS Faith Community Health Ministry, a partnership program between the System and faith communities designed to promote better health through education, access to healthcare and encouragement toward wellness and wholeness, • through Physician Reach Out provided access to primary and specialty medical care to 5,783 eligible uninsured residents in partnership with Care Ring, • activated the Healthy Together campaign at 11 schools where 4,788 students joined the 5-2-1-0 League and committed to the Health Together program focused on childhood obesity. The System also leads the efforts of the Healthy Weight Healthy Child Community Coalition, which is focused on identifying and implementing healthy weight interventions across school, childcare, clinical, and community settings, and • initiated the One Charlotte partnership with Novant Health and improved the health of 2,000 people in Mecklenburg County’s most vulnerable populations. In addition to their time, System teammates continue to donate millions of their own dollars to charitable organizations and other community based entities. In the 2016 Community Giving Campaign, System teammates contributed over $3.7 million (not included in costs in note 1 of the notes to financial statements) to United Way, Arts Councils of Cabarrus, Anson, Cleveland, Gaston, Lincoln, Mecklenburg, Stanly, Union and York Counties and Children’s Miracle Network. The System operates, often at a deficit due to high levels of uninsured and underinsured patients, certain health services that are essential to the community. For example, the System provides community clinics that are patient centered medical homes. These community clinics are operated at CMC-Myers Park, CMC-North Park, and CMCBiddle Point. The System offers behavioral health services through multiple outlets including outreach and educational programs to the community, a call line available 24 hours a day at no charge to the client, and quality services to patients across its multiple healthcare treatment locations. Additionally, The Office of Healthy Environments, operated by the System, demonstrates committed resources to understanding and mitigating negative environmental impacts while seeking creative solutions for healthy patient centered operations. In 2016 their office launched Energy Connect, linking teammate actions to energy savings, natural resource conservation and patient experience, and designed and implemented a cans and bottles recycling framework at CHS Pineville. The System also operates the Carolinas Poison Center, one of 55 such centers in the United States certified by the American Association of Poison Control Centers, for the entire state of North Carolina. Its mission is to serve the people and healthcare professionals of North Carolina by providing information and assistance in the prevention, treatment and surveillance of poisonings and overdoses. 12 (Continued) Additional detail regarding the System’s financial commitment to the community (20.4% of the Primary Enterprise’s operating expenses) is presented in note 1 of the notes to financial statements. Finance Contact The System’s financial statements are designed to present users with a general overview of the System’s finances and to demonstrate the System’s accountability. If you have any questions about the report or need additional financial information, please contact the Senior Vice President of Finance, Carolinas HealthCare System, 1000 Blythe Boulevard, Charlotte, NC 28203. 13 THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Balance Sheets December 31, 2016 and 2015 (Dollars in thousands) 2016 Primary Enterprise Assets and Deferred Outflows of Resources Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable – net Other accounts receivable Assets limited as to use – investments Inventories Prepaid expenses $ Total current assets Capital assets Accumulated depreciation Total capital assets – net Other noncurrent assets: Assets limited as to use: Investments designated for capital improvements Other long-term investments Other assets limited as to use – investments Other assets 142,725 0 732,526 115,661 34,148 63,325 72,158 2015 Component Unit $ 4,686 6,765 0 8,563 0 0 320 Primary Enterprise $ 173,812 125 703,734 101,357 33,097 61,490 60,940 Component Unit $ 4,684 6,059 0 7,546 0 0 368 1,160,543 20,334 1,134,555 18,657 5,556,647 (2,509,561) 11,504 (5,811) 5,281,020 (2,250,437) 10,983 (5,267) 3,047,086 5,693 3,030,583 5,716 3,478,928 24,257 107,037 180,046 0 257,766 0 35,814 3,062,478 17,150 96,348 165,315 0 248,805 0 21,236 Total other noncurrent assets 3,790,268 293,580 3,341,291 270,041 Total assets 7,997,897 319,607 7,506,429 294,414 Deferred outflows of resources Total assets and deferred outflows of resources 371,246 0 286,190 0 $ 8,369,143 $ 319,607 $ 7,792,619 $ 294,414 $ 265,272 342,799 195,669 194,140 65,849 $ 307 0 1,983 0 0 $ 242,404 290,694 207,527 169,506 60,980 $ 308 0 2,196 0 0 Liabilities, Deferred Inflows of Resources and Net Position Current liabilities: Accounts payable Salaries and benefits payable Other liabilities and accruals Estimated third-party payer settlements Current portion of long-term debt Total current liabilities 1,063,729 2,290 971,111 2,504 Long-term debt – less current portion Interest rate swap liability Pension liability Other liabilities 1,838,134 224,535 516,725 326,968 0 0 0 2,942 1,855,245 261,736 430,289 339,259 0 0 0 1,295 3,970,091 5,232 3,857,640 3,799 39,530 0 45,101 0 1,147,721 28,379 3,183,422 5,693 278,303 30,379 1,104,483 25,819 2,759,576 5,716 253,272 31,627 4,359,522 314,375 3,889,878 290,615 Total liabilities Commitments and contingencies (notes 1, 2, 5 and 9) Deferred inflows of resources Net position: Net investment in capital assets Restricted – by donor Unrestricted Total net position Total liabilities, deferred inflows of resources and net position $ 8,369,143 See accompanying notes to financial statements. 14 $ 319,607 $ 7,792,619 $ 294,414 THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Statements of Revenues, Expenses and Changes in Net Position Years ended December 31, 2016 and 2015 (Dollars in thousands) 2016 Net patient service revenue Other revenue $ Total revenue 5,136,830 520,571 2015 Component Unit Primary Enterprise $ 0 18,772 Primary Enterprise $ 4,948,438 514,047 Component Unit $ 0 16,113 5,657,401 18,772 5,462,485 16,113 3,305,457 975,673 377,429 394,175 299,487 89,660 2,145 0 0 28,091 640 0 3,131,025 917,758 328,598 410,645 274,767 85,649 2,176 0 0 26,479 556 0 5,441,881 30,876 5,148,442 29,211 215,520 (12,104) 314,043 (13,098) 46,957 202,375 (1,277) 2,639 14,741 0 45,727 (134,101) (2,120) 2,495 (9,295) 0 Total nonoperating income (loss) – net 248,055 17,380 (90,494) (6,800) Revenue over (under) expenses before contributions 463,575 5,276 223,549 (19,898) 5,945 124 0 17,468 1,016 0 7,489 228 (460,905) (485) 2,089 0 469,644 23,760 (229,639) (18,294) Operating expenses: Personnel costs Supplies Purchased services Other expenses Depreciation and amortization Interest expense Total operating expenses Operating income (loss) Nonoperating income (loss): Interest and dividend income Net increase (decrease) in the fair value of investments Other – net Capital contributions Other contributions Cumulative effect of change in accounting principle Increase (decrease) in net position Net position: Beginning of year End of year 3,889,878 $ See accompanying notes to financial statements. 15 4,359,522 290,615 $ 314,375 4,119,517 $ 3,889,878 308,909 $ 290,615 THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Statements of Cash Flows Years ended December 31, 2016 and 2015 (Dollars in thousands) 2016 Primary Enterprise Cash flows from operating activities: Receipts from third-party payers and patients Payments to suppliers Payments to employees Other receipts – net $ Net cash provided by (used in) operating activities 5,133,755 (1,741,815) (3,293,868) 470,978 $ 569,050 Noncapital financing activities 2015 Component Unit 0 (12,983) 0 870 Primary Enterprise $ (12,113) 3,723 Cash flows from capital and related financing activities: Purchase of capital assets Donated funds designated for building and equipment purchases Acquisition of health related businesses Principal payments, refunding and retirements on short- and long-term debt Interest payments on short- and long-term debt Decrease in bond proceeds held by trustee Proceeds from issuance of long-term debt (Increase) decrease in other assets affecting capital and related financing activities Other contributions Net cash (used in) provided by capital and related financing activities Cash flows from investing activities: Withdrawal from investments designated for capital improvements Contribution to investments designated for capital improvements Investment earnings Decrease in other trusteed assets Purchase of investments Net cash (used in) provided by investing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents: Beginning of year Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) Interest expense considered capital financing activity Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization Increase in patient accounts receivable – net Increase in inventories and other current assets (Increase) decrease in other assets affecting operating activities Increase in accounts payable and other current liabilities (Decrease) increase in other liabilities affecting operating activities Increase (decrease) in estimated third-party payer settlements 16 648,768 (13,572) 21,960 0 (249,790) 7,489 0 (46,450) (94,701) 2,915 13,125 1,709 0 (882) (485) 0 0 0 0 0 (1,635) 2,089 (437,864) 2,704 (365,703) (913) 100,000 (276,000) 2,732 7,675 (403) 9,400 0 11 0 0 245,000 (514,000) 1,134 23,040 (1,449) 16,000 0 13 0 0 (165,996) 9,411 (246,275) 16,013 (31,087) 2 58,750 1,528 4,684 115,062 3,156 $ 142,725 $ 4,686 $ 173,812 $ 4,684 $ 215,520 89,660 $ (12,104) 0 $ 314,043 85,649 $ (13,098) 0 $ See accompanying notes to financial statements. 0 (14,474) 0 902 (617) 2,189 0 0 0 0 0 116 1,016 299,487 (28,792) (30,213) (9,534) 35,541 (27,253) 24,634 Net cash provided by (used in) operating activities $ (300,859) 4,756 (5,293) (761,723) (103,747) 0 730,723 (1,721) 0 173,812 End of year 4,919,035 (1,657,692) (3,139,482) 526,907 Component Unit 569,050 640 0 (675) 12 0 14 0 $ (12,113) 274,767 (34,415) (13,445) 7,435 34,422 (17,045) (2,643) $ 648,768 556 0 (1,175) 76 69 0 0 $ (13,572) THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Notes to Basic Financial Statements December 31, 2016 and 2015 (Dollars in thousands) (1) Significant Accounting Policies (a) Organization, Basis of Presentation, and Discretely Presented Component Unit Carolinas HealthCare System (CHS or the System) is the largest public, multi-hospital system in the Carolinas and one of the largest public, multi-hospital systems in the United States. The System’s diverse network of care locations includes academic medical centers, hospitals, freestanding emergency departments, physician practices, surgical and rehabilitation centers, home health agencies, long-term care facilities and behavioral health centers, as well as hospice and palliative care services. The System was organized in 1943 under the North Carolina Hospital Authorities Act. It is a public body and a body corporate and politic and, therefore, has been determined by the Internal Revenue Service to be exempt from federal and state income taxes. The System has its headquarters in Charlotte, North Carolina. For financial reporting purposes, the System is divided into the “Primary Enterprise” and “Component Unit.” The Primary Enterprise consists of The Charlotte-Mecklenburg Hospital Authority (d/b/a Carolinas HealthCare System) and all affiliates whose assets and income the System controls without limitation. The Carolinas HealthCare Foundation, Inc. (the Foundation), the System’s sole Component Unit, raises and holds economic resources for the direct benefit of the System. The Foundation operates to raise funds to enhance, promote and support medical services, scientific education and research. It solicits contributions for System entities and, in the absence of donor restrictions, its Board of Directors has discretionary control over the amounts to be distributed. The Foundation is reported on a basis consistent with the System’s calendar year and is discretely presented. Transactions between the System and the Foundation resulting in intercompany receivables, payables, revenues and expenses are not eliminated. Net capital and operating contributions to the System from the Foundation included in the statements of revenues, expenses and changes in net position were $24,809 and $25,561 for the years ended December 31, 2016 and 2015, respectively. Certain healthcare facilities in the Carolinas and Georgia (the Regional Enterprise Facilities) are managed by the System or its affiliates pursuant to management agreements; however, only the management and contracted services fees earned by the System, not the financial position or results of operation of those facilities, are reflected in the financial statements of the System. (b) The Combined Group The System’s Second Amended and Restated Bond Order authorizes the creation of a Combined Group, which consists of the Obligated Group and Designated Affiliates (there are no Designated Affiliates at this time). Only the Combined Group has a direct or indirect obligation to pay amounts due on the System’s bonds. As of December 31, 2016, the members of the Combined Group were substantially all of the members of the Primary Enterprise and the Foundation. There are some affiliates of the Primary Enterprise which are not part of the Combined Group. The affiliates that are part of the Primary Enterprise, but not part of the Combined Group, made up less than 1% of the total revenue and less than 1% of the total assets of the Primary Enterprise for each of the years ended December 31, 2016 and 2015. Supplemental financial information for the Combined Group as of and 17 (Continued) for the years ended December 31, 2016 and 2015 is presented as Other Financial Information following the notes to financial statements. (c) Governmental Accounting Standards In 2016, the System adopted GASB Statement No. 72, Fair Value Measurement and Application, which provides additional guidance to governments on the fair value measurement of specific assets and liabilities and requires enhancements to the related disclosures. See note 3 and 8 for enhanced disclosures, fair value measurement of certain assets and liabilities and additional information regarding the adoption of this Statement and its impact on the basic financial statements of the System. In 2016, the System adopted GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets that are not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, which extends the provisions of Statement 68 to defined benefit pension plans previously not included in the prior Statement’s scope. Additionally, this Statement provides further clarity to specific provisions of Statements 67 and 68. The adoption of this Statement had no material impact on the basic financial statements of the System. In 2016, the System adopted GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, which provides a hierarchy of authoritative generally accepted accounting principles. The adoption of this Statement had no material impact on the basic financial statements of the System. In 2016, the System adopted GASB Statement No. 77, Tax Abatement Disclosures, which establishes disclosure requirements for governments that offer or enter into tax abatement agreements. The adoption of this Statement had no material impact on the basic financial statements of the System. In 2016, the System adopted GASB Statement No. 78¸ Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans. This Statement expands the scope and applicability of Statement No. 68 to exclude specific pensions provided through certain cost-sharing multiple-employer defined benefit pension plans and establishes recognition and reporting requirements for those plans. The adoption of this Statement had no material impact on the basic financial statements of the System. In 2016, the System adopted GASB Statement No. 79, Certain External Investment Pools and Pool Participants, which establishes qualifying criteria for external investment pools to elect to measure all of its investments at amortized cost. Additionally, the Statement establishes additional financial statement disclosure requirements for qualifying external investment pools and for participating governments in those pools. The adoption of this Statement had no material impact on the basic financial statements of the System. (d) Basis of Accounting The basic financial statements have been prepared on the accrual basis of accounting using the economic resources measurement focus in accordance with Generally Accepted Accounting Principles (GAAP) as prescribed by the GASB. 18 (e) Cash Equivalents For purposes of the balance sheets and statements of cash flows, the System considers all investments purchased with a maturity of three months or less and which are not limited as to use to be cash equivalents. (f) Patient Accounts Receivable – Net Patient accounts receivable is recorded net of allowances for uncollectible accounts of $461,856 and $437,363 at December 31, 2016 and 2015, respectively. Net patient revenue is shown net of provision for uncollectible accounts of $580,924 and $600,654 for the years ended December 31, 2016 and 2015, respectively. (g) Other Accounts Receivable Other accounts receivable consists primarily of amounts due from regional enterprise facilities, other affiliates, federal and state governments and other non-patient receivables from external parties. (h) Capital Assets Property, plant and equipment are stated at cost. The System capitalizes expenditures for equipment when the unit of acquisition cost is five hundred dollars or greater and the estimated useful life is greater than three years. Expenditures that materially increase values, change capacities, or extend useful lives are capitalized. Routine maintenance, repairs and replacements are charged to expense when incurred. Depreciation is determined using the straight-line method over the estimated useful lives of the depreciable assets. Property classification Estimated lives (years) 8–15 5–40 3–15 Land improvements Buildings Equipment The System evaluates long-lived assets regularly for impairment. If circumstances suggest that assets may be impaired, an assessment of recoverability is performed prior to any write-down of assets. An impairment charge is recorded on those assets for which the estimated fair value is below its carrying amount. No material impairment charges to long-lived assets were recorded for the fiscal years ended December 31, 2016 and 2015. (i) Cost of Borrowing Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the costs of acquiring these assets. (j) Other Assets Limited as to Use - Investments Other assets limited as to use include investments held in a revocable trust for the payment of contingencies not covered by insurance, amounts the System holds as custodian and amounts intended for future expenditures of the System. 19 (k) Other Assets Other assets consist of goodwill (representing the cost in excess of the fair value of the net position acquired in periods prior to the adoption of GASB Statement No. 69, Government Combinations and Disposals of Government Operations), teammate benefit plan assets not subject to GASB Statement No. 68 and investments in certain healthcare-related businesses accounted for using the cost or equity method. (l) Deferred Outflows of Resources Deferred outflows of resources consist of the unamortized amounts related to long-term debt refunding transactions, the aggregate negative fair value of interest rate swaps that are effective hedges, benefit plan differences between expected and actual investment earnings, benefit plan differences between expected and actual experience related to demographic factors, benefit plan assumption changes and the excess cost of net position related to the acquisition of health-related businesses. The balance of the deferred outflows of resources at December 31, 2016 and 2015 is composed of the following: 2016 Refunding of debt Aggregate negative fair value of interest rate swaps Deferred outflows of resources related to CHS DB Plan (note 8) Deferred outflows of resources related to other plans (note 8) Excess cost of net position acquired (m) 2015 $ 190,013 34,438 126,018 14,931 5,846 $ 115,271 131,687 31,843 6,067 1,322 $ 371,246 $ 286,190 Other Liabilities and Accruals Other liabilities and accruals consists primarily of the current portion of benefit and incentive plan liabilities, current interest payable on long-term debt and other current accruals. (n) Other Liabilities (Long-term) Other liabilities consist primarily of the long-term portions of self-insurance and benefit plan and incentive plan liabilities, a long-term liability payable to Union County and unearned rent. The provision for self-insurance claims includes estimates of the ultimate costs for both reported claims and claims incurred, but not reported. (o) Deferred Inflows of Resources Deferred inflows of resources consist of the gain related to a 2008 sale-leaseback transaction, which is being amortized over the terms of the related leases, and benefit plan differences between expected and actual experience related to demographic factors and benefit plan assumption changes. 2016 Sale-leaseback gain Deferred inflows of resources related to CHS DB Plan (note 8) Deferred inflows of resources related to other plans (note 8) 20 2015 $ 34,388 3,016 2,126 $ 40,440 3,553 1,108 $ 39,530 $ 45,101 (p) Net Position The financial statements utilize a net position presentation. Net position is categorized as net investment in capital assets, restricted – by donor, and unrestricted. Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted net position consists of assets generated from revenues that have third-party limitations on their use. Unrestricted net position has no third-party restrictions on use. When both restricted and unrestricted resources are available for use, generally it is the System’s policy to use restricted resources first and then unrestricted resources when they are needed. (q) Operating Revenues and Expenses For purposes of financial reporting, transactions deemed by management to be ongoing, major, or central to the provision of healthcare services, including interest costs, are reported as operating revenues and expenses; otherwise, they are reported as nonoperating income and losses. (r) HITECH Incentive Funding for Meaningful Use of Electronic Health Records (EHR) The American Recovery and Reinvestment Act of 2009 (ARRA) established incentive payments under the Medicare and Medicaid programs for certain healthcare providers that use certified EHR technology. The program is commonly referred to as the Health Information Technology for Economic and Clinical Health (HITECH) Act. To qualify for incentives under the HITECH Act, healthcare providers must meet designated EHR meaningful use criteria as defined by the Centers for Medicare and Medicaid Services (CMS). Incentive payments are awarded to healthcare providers who have attested to CMS that applicable meaningful use criteria have been met. Compliance with meaningful use criteria is subject to audit by the federal government or its designee and incentive payments are subject to adjustment in a future period. The System recognizes revenue for EHR incentive payments in the period in which it has obtained reasonable assurance that it is in compliance with the applicable EHR meaningful use requirements. Accordingly, the System recognized other revenues for EHR incentives of approximately $6,600 and $18,611 for the years ended December 31, 2016 and 2015, respectively. (s) Financial Assistance and Community Benefit Costs The System, under its coverage and financial assistance programs, provides care without charge or at discounted rates to certain uninsured patients as well as any patient, regardless of their insurance coverage, who experiences financial hardship. Key elements used to determine eligibility for financial assistance include a patient’s demonstrated inability to pay based on family size and household income relative to federal income poverty guidelines. Patients potentially eligible for other governmental programs, such as Medicaid, must pursue those options by fully cooperating in the eligibility process before receiving financial assistance from the System. The System’s cost of care (estimated using applicable cost to charge ratios) extended to uninsured patients qualifying for financial assistance was $147,662 and $143,543 for the years ended December 31, 2016 and 2015, respectively. In addition to providing financial assistance to uninsured patients and in furtherance of its mission, the System provides a broad range of benefits and services, including medical education and research 21 opportunities, to the community spanning the geographic region within which the System operates. These community benefits can be measured and categorized as follows:  Cost of care extended to uninsured and underinsured patients who do not qualify for financial assistance, estimated using applicable cost to charge ratios.  Unpaid Cost of Medicare and Medicaid Services – Represents the net unreimbursed cost, estimated using the applicable cost to charge ratios, of services provided to patients who qualify for federal and/or state government healthcare benefits.  Community Benefit Programs – Includes the unreimbursed cost of various medical education programs, and costs of various research programs, nonbilled medical services, in-kind donations and other services that meet a community need, but do not pay for themselves and would not be provided if based solely on financial considerations alone. The total estimated cost of financial assistance and the aforementioned programs and services that benefit the community is as follows for the year ended December 31: 2016 Cost of financial assistance to uninsured patients Unpaid cost of Medicare and Medicaid services Community benefit programs $ Community benefit subtotal Cost of care extended to uninsured and underinsured patients who do not qualify for financial assistance Community benefit including cost of care for patients not qualifying for financial assistance Percentage of the Primary Enterprise's operating expenses (t) $ 147,662 637,443 93,176 2015 $ 143,543 526,085 97,214 878,281 766,842 231,442 213,514 1,109,723 20.4% $ 980,356 19.0% Capital Contributions and Grants Funds donated to acquire property, plant and equipment are considered donations of capital and are included as a component of capital assets and net position. (u) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to makes 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 and the reported amounts of revenue and expenses during the reporting period. The System considers critical accounting policies to be those that require more significant judgments and estimates in the preparation of its financial statements, including the following: recognition of net patient service revenues; valuation of accounts receivable, including contractual allowances and provisions for bad debts; reserves for losses and expenses related to teammate healthcare, professional liabilities, workers’ compensation and general liabilities; valuation of pension 22 and other retirement obligations; and estimated third-party payer settlements. Actual results could differ from those estimates. (v) Future Accounting and Reporting Requirements In 2015, the GASB concurrently issued GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. Statements 74 and 75 require measurement and reporting of other postemployment benefits in a manner similar to pensions and must be adopted no later than the years ending December 31, 2017 and 2018, respectively. The adoption of these Statements is not expected to have a material impact on the basic financial statements of the System. In 2016, the GASB issued Statement No. 81, Irrevocable Split-Interest Agreements, which requires a government to recognize assets, liabilities and deferred inflows of resources at the inception of an irrevocable split-interest agreement for resources received pursuant to the agreement. Assets representing the government’s beneficial interests in irrevocable split-interest agreements that are administered by a third party will be recognized under the Statement when control of present service capacity of the beneficial interests is maintained by the government. The requirements of this Statement are required to be adopted no later than the year ending December 31, 2017. The System has not yet determined the impact of this Statement on the basic financial statements. In 2016, the GASB issued Statement No. 82, Pension Issues – an amendment of GASB Statements No. 67, No. 68, and No. 73, which resolves issues related to payroll-related presentation matters, employer payment classification and selection of assumptions and treatment of deviations from the guidance. The requirements of Statement 82 are required to be adopted no later than the year ending December 31, 2017. The adoption of this Statement is not expected to have a material impact on the basic financial statements of the System. In 2016, the GASB issued Statement No. 83, Certain Asset Retirement Obligations, which establishes the definition of asset retirement obligations and guidelines for the recognition and disclosure of liabilities associated with the retirement of a tangible capital asset. The requirements of this Statement are required to be adopted no later than the year ending December 31, 2019. The adoption of this Statement is not expected to have a material impact on the basic financial statements of the System. In 2017, the GASB issued Statement No. 84, Fiduciary Activities, which establishes criteria for identifying fiduciary activities of governments and how those activities should be reported. The requirements of this Statement are required to be adopted no later than the year ending December 31, 2019. The System has not yet determined the impact of this Statement on the basic financial statements. In 2017, the GASB issued Statement No. 85, Omnibus 2017, which addresses a variety of practice issues that related to the application of certain GASB Statements. Those issues include blending component units, goodwill, fair value measurement and application, and postemployment benefits. The requirements of this Statement are required to be adopted no later than the year ended December 31, 2018. The System has not yet determined the impact of this Statement on the basic financial statements. 23 (w) Business Combinations and Certain Other Affiliations The System accounts for the acquisition of healthcare-related businesses in accordance with GASB Statement No. 69. Any excess of purchase price over the net position acquired is recorded as a deferred outflow of resources and is attributed to future periods in a systematic manner based upon professional standards. Any purchase price in excess of net position acquired prior to January 1, 2013 is being amortized over periods that do not exceed 25 years. The results of operations of these acquired entities are included in the System’s results of operations from the dates of acquisition. (2) Cash, Investments and Other Financial Instruments (a) Cash and Cash Equivalents As of December 31, 2016 and 2015, the System had cash and cash equivalents of $142,725 and $173,812, respectively, of which a portion was invested with the North Carolina Capital Management Trust’s Cash Portfolio, which has a rating of AAAm from S&P Global Ratings. For cash and cash equivalents, the System follows North Carolina General Statute 159-30, whereby all deposits of the System are held in depositories that are either insured or covered under statewide single financial institution collateral pools (the Pooling Method). Collateral is maintained for all the depositories’ governmental units in the state. The North Carolina State Treasurer monitors the Pooling Method depositories for adequate collateralization. Under the Pooling Method, all uninsured deposits are collateralized with securities held by the State Treasurer’s agent in the name of the State Treasurer. The amount of the pledged collateral is based on an approved averaging method for noninterest-bearing deposits and the actual current balance for interest-bearing deposits. Depositories using the Pooling Method report to the State Treasurer the adequacy of their pooled collateral covering uninsured deposits. The State Treasurer does not confirm this information with the System. Because of the inability to measure the exact amount of collateral pledged for the System under the Pooling Method, the potential exists for under collateralization, and this risk may increase in periods of high cash flows. However, each Pooling Method Depository is subject to financial stability standards and oversight by the State Treasurer of North Carolina. (b) Investments Designated for Capital Improvements and Other Assets Limited as to Use The System may, for funds not required for immediate disbursement, make investments that are permissible for trustees, executors, and other fiduciaries under North Carolina law. Funds that are not needed for immediate operating needs and that have been designated by the Board of Commissioners for capital improvements, along with other trusteed assets, are invested in cash equivalents, fixed income securities, equity securities, equity securities held in common collective trust funds, a real asset mutual fund and limited partnerships. Investments included in the portfolio are reflected at fair value at the balance sheet date, as noted in the table below, with gains and losses reflected in nonoperating income (loss) in the accompanying statements of revenues, expenses and changes in net position. The System operates a regional integrated healthcare system, which has significant capital needs arising from both changes in medical technology and a growing demand for healthcare services. At December 31, 2016, the fair value of investments designated for capital improvements of $3,478,928 is substantially less than the historical cost of property, plant and equipment of $5,556,647. The System’s investments designated for capital improvements and other assets limited as to use (Bond proceeds held by trustee, Other long-term investments and current and noncurrent Assets limited as to 24 use), based on fair value as of December 31, 2016, and organized by investment type to provide an indication of the level of investment and deposit risks assumed, are as follows: Ratings by nationally recognized agency Effective duration in years Cash equivalents Fixed income: U.S. government treasuries and agencies Mortgage pass-throughs Collateralized mortgage obligations Corporate bonds Municipal bonds Asset-backed securities Fixed income – other Long/short fixed income Designated for capital improvements $ 160,475 $ Other assets limited as to use 19,583 AA A AAA AA A 10.55 6.71 3.49 4.28 0.33 86,550 1,043 33,581 49,988 2,938 6,037 246 2,665 3,006 117 AA BBB AAA AA A BBB 3.33 6.69 11.09 7.35 6.76 5.99 9,003 2,647 6,991 13,248 58,028 95,701 646 132 486 715 4,042 6,593 AAA AA A BBB AAA AA A BBB N/A N/A 5.72 7.92 7.39 2.01 1.45 4.57 4.46 5.89 3.96 N/A 7,917 13,517 127 1,442 42,192 18,953 9,939 386 287,754 171,750 365 882 113 60 3,265 987 580 81 3,055 6,339 5.34 913,695 40,412 985,047 503,861 508,595 177,948 36,675 18,452 15,142 11,626 2,175,451 81,895 85,839 43,754 68,918 30,796 2,965 4,443 2,673 13,471 3,478,928 $ 165,442 Total fixed income (weighted average duration) Equity: Domestic equities International equities Global equities Long/short equity Total equity Real assets Multi-strategy hedge funds Commodities Private equities Total reported value $ 25 The System’s investments designated for capital improvements and other assets limited as to use (Bond proceeds held by trustee, Other long-term investments and current and noncurrent Assets limited as to use), based on fair value as of December 31, 2015, and organized by investment type to provide an indication of the level of investment and deposit risks assumed, are as follows: Ratings by nationally recognized agency Effective duration in years Cash equivalents Fixed income: U.S. government treasuries and agencies Mortgage pass-throughs Collateralized mortgage obligations Corporate bonds Municipal bonds Asset-backed securities Fixed income – other Long/short fixed income Designated for capital improvements $ AA A BBB AAA AA A BBB AAA AA BBB AAA AA A BBB BB AAA AA A AAA AA A BBB N/A N/A Total fixed income (weighted average duration) 46,133 1,027 606 14,442 48,101 6,793 2,162 1,059 4,840 1,297 3,165 11,351 34,098 57,611 117 3,633 11,666 1,632 25,996 19,113 5,069 392 317,671 121,575 6,103 111 80 1,164 2,885 774 213 0 420 80 73 707 2,796 5,508 14 189 660 363 2,584 1,196 464 82 3,869 4,102 4.06 739,549 34,437 921,488 392,609 341,830 199,578 31,701 14,787 10,985 13,262 1,855,505 70,735 54,690 112,873 61,002 38,329 2,524 9,912 2,366 7,011 Total equity Real assets Multi-strategy hedge funds Commodities Private equities $ 26 19,610 8.83 7.35 14.46 3.62 3.87 1.13 0.90 1.63 4.80 7.13 13.32 6.89 6.75 6.91 11.91 4.69 8.63 3.35 1.81 4.29 4.45 6.21 2.44 N/A Equity: Domestic equities International equities Global equities Long/short equity Total reported value 200,530 $ Other assets limited as to use 3,062,478 $ 146,595 (c) Custodial Credit Risk Custodial credit risk is the risk that the System will not be able to recover the value of its bank deposits, which are exposed to custodial credit risk if they are uninsured and uncollateralized. As of December 31, 2016, all of the System’s bank deposits were either insured by federal depository insurance or collateralized by the Pooling Method. Fixed income investments and equity securities are exposed to custodial credit risk if the securities are uninsured, are not registered in the name of the System, and are held by either the counterparty or the counterparty’s trust department or agent, but not in the System’s name. As of December 31, 2016, all of the System’s fixed income investments and equity securities are held by the System’s custodial bank in the System’s name and are, therefore, not exposed to custodial credit risk. (d) Credit Risk With respect to fixed income investments, credit risk is the risk that an issuer or other counterparty to an investment will not fulfill their obligations as required by the fixed income security. The System’s investment policy requires that the overall average credit quality of the core fixed income portfolios must be maintained at AA or higher, and the overall average credit quality of the core plus fixed income portfolios must be maintained at A or higher. As of December 31, 2016, the System’s fixed income portfolio met these overall average requirements. The quality ratings of the System’s investments in fixed income securities (excluding long/short fixed income), as determined by nationally recognized statistical rating organizations, are disclosed in the preceding tables. (e) Concentration of Credit Risk Credit concentration risk results from not adequately diversifying investments. Per the System’s investment policy equity and fixed income restrictions, (1) no more than 7% of any investment manager’s equity portfolio may be invested in securities of any one issuing corporation, and (2) fixed income investments in any single issuer (excluding obligations of the U.S. government and its agencies) may not exceed 5% of any investment manager’s portfolio market value at the time of purchase. Although exceptions to these policy restrictions are at times granted to investment managers, at no time may an investment in any one corporation exceed 5% of that corporation’s outstanding shares while fixed income investments in any single issuer (excluding obligations of the U.S. government and its agencies) may not exceed 5% of the total issue at the time of purchase. At December 31, 2016, no investment in any one corporation or single issuer exceeded 5% of the outstanding shares or total issue at the time of purchase, respectively. (f) Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of a fixed income investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The System monitors the interest rate risk inherent in its fixed income portfolio by measuring the effective duration in years, which measures the expected change in value of a fixed income security or portfolio for a given change in interest rates. As a means of limiting interest rate risk, the System’s investment policy (excluding long/short fixed income) limits the effective duration in years of the core fixed income portfolio to a range of 75% to 125% of the duration of its benchmark (Barclay’s Capital Aggregate Bond Index) and limits the 27 effective duration in years of the core plus fixed income portfolio to a range of 0% to 150% of the duration of its benchmark (blend of Barclays Capital Government/Credit Bond Index and Citi World Government Bond Index (WGBI)) at all times. As noted in the December 31, 2016 table above, the effective duration in years of the System’s total core and core plus fixed income portfolios was 5.34 years while the Barclays Capital Aggregate Bond Index’s effective duration was 5.89 years and the blend of the Barclay’s Capital Government/Credit Bond Index and the Citi WGBI was 7.80 years. The System’s fixed income investments also include asset-backed securities that are sensitive to interest rate fluctuations due to embedded prepayment options. (g) Foreign Currency Risk Foreign currency risk is the chance that changes in exchange rates will adversely affect the fair value of investments and deposits. The System’s investment policy limits foreign currency investments to international and global managers who can utilize such investments for currency hedging purposes only. At December 31, 2016, the System had $130,897 of exposure to foreign currency risk in the form of cash and cash equivalents $447, mutual funds $70,261 (including approximately 99% in the British Pound and approximately 1% in the Canadian Dollar) and common stock in foreign currencies $60,189 (including approximately 22% in the British Pound, approximately 18% in the Euro, approximately 16% in the Japanese Yen and the remaining 44% spread over other common stock in foreign currencies, none of which exceed 10%). (3) Fair Value Measurements U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy that requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following describes the three levels of inputs used to measure fair value on a recurring basis: Level 1 – Level 1 inputs are unadjusted quoted market prices in active markets for identical assets or liabilities that are available as of the measurement date. Level 2 – Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. Level 3 – Level 3 inputs are unobservable inputs that reflect System management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Level 3 assets include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, or for which the determination of fair value requires significant management judgment or estimation. Investments that do not have a readily determinable market value are reported using net asset value (NAV) as a “practical expedient” as outlined in GASB 72. 28 Although System management believes the fair value accounting estimates reflected in the System’s financial statements are reasonable, there can be no assurances that the System could ultimately realize these values. The fair value hierarchy classification of the System’s assets measured at fair value as of December 31, 2016 is summarized in the table below: Designated for Capital Improvements Investments by fair value level Cash equivalents Fixed income: U.S. government treasuries and agencies Mortgage pass-throughs Collateralized mortgage obligations Corporate bonds Municipal bonds Asset-backed securities Fixed income - other Total fixed income $ Other Assets Limited as to Use 160,475 $ 19,583 $ 180,058 $ 87,593 86,507 11,650 173,968 23,003 71,470 287,754 741,945 6,283 5,788 778 11,836 1,420 4,913 3,055 34,073 0 0 0 0 0 0 290,809 290,809 Equity: Domestic equities International equities Global equities Total equity Real assets Total investments by fair value level 985,047 503,861 317,714 1,806,622 85,839 2,794,881 Investments measured at the NAV Global equities Long/short fixed income Long/short equity Multi-strategy hedge funds Commodities Private equities 190,881 171,750 177,948 43,754 68,918 30,796 5,235 6,339 11,626 4,443 2,673 13,471 Total investments measured at the NAV 684,047 43,787 3,478,928 $ 165,442 Total investments measured at fair value $ Fair value at reporting date using Quoted prices in active Significant markets for other Significant identical observable unobservable assets inputs inputs (Level 1) (Level 2) (Level 3) 36,675 18,452 9,907 65,034 2,965 121,655 $ 29 1,021,722 522,313 327,621 1,871,656 88,804 2,431,327 $ 0 $ 0 93,876 92,295 12,428 185,804 24,423 76,383 0 485,209 0 0 0 0 0 0 0 0 0 0 0 0 0 485,209 $ 0 0 0 0 0 0 (Continued) The fair value hierarchy classification of the System’s assets measured at fair value as to use as of December 31, 2015 is summarized in the table below: Designated for Capital Improvements Investments by fair value level Cash equivalents Fixed income: U.S. government treasuries and agencies Mortgage pass-throughs Collateralized mortgage obligations Corporate bonds Municipal bonds Asset-backed securities Fixed income - other Total fixed income Equity: Domestic equities International equities Global equities Total equity Real assets Total investments by fair value level Investments measured at the NAV Global equities Long/short fixed income Long/short equity Multi-strategy hedge funds Commodities Private equities Total investments measured at the NAV Total investments measured at fair value $ $ Other Assets Limited as to Use Fair value at reporting date using Quoted prices in active Significant markets for other Significant identical observable unobservable assets inputs inputs (Level 1) (Level 2) (Level 3) 200,530 $ 19,610 $ 220,140 $ 0$ 0 47,766 71,498 7,196 106,342 16,931 50,570 317,671 617,974 6,294 5,036 500 9,098 1,212 4,326 3,869 30,335 0 0 0 0 0 0 321,540 321,540 54,060 76,534 7,696 115,440 18,143 54,896 0 326,769 0 0 0 0 0 0 0 0 921,488 392,609 206,132 1,520,229 54,690 2,393,423 31,701 14,787 6,635 53,123 2,524 105,592 $ 953,189 407,396 212,767 1,573,352 57,214 2,172,246 $ 0 0 0 0 0 326,769 $ 0 0 0 0 0 0 135,698 121,575 199,578 112,873 61,002 38,329 669,055 3,062,478 $ 4,350 4,102 13,262 9,912 2,366 7,011 41,003 146,595 Fixed income and equity securities classified in Level 1 of the fair value hierarchy are valued using prices quoted in active markets for those securities. The System accounts for these investments through the use of quoted market prices for those investments with readily determinable market values. Fixed income and equity securities classified in Level 2 of the fair value hierarchy are valued using a matrix pricing technique provided by the external investment managers and the System’s investment custodian. Matrix pricing is used to value securities based on the securities’ relationship to benchmark quoted prices, benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others. System management reviews the valuations received from third parties. 30 (Continued) The table below discloses the unfunded commitments, redemption frequency and redemption notice period for investments measured at net asset value as of December 31, 2016 and 2015: Designated for Capital Improvements and Other Assets Limited as to Use Combined Unfunded 2016 Global equities Long/short fixed income limited partnerships $ 196,116 2015 $ 140,048 Redemption Commitments Redemption Notice as of 12-31-16 Frequency Period 0 Monthly 6 days $ 178,089 125,677 0 Quarterly/Biannually 45-90 days 189,574 212,840 0 Monthly/Quarterly 30-90 days M ulti-strategy hedge fund limited partnerships 48,197 122,785 0 Quarterly/Biannually/ Annually 45-90 days Commodities fund of funds limited partnerships 71,591 63,368 0 Monthly 35 days Private equity fund of funds limited partnerships 44,267 45,340 6,313 n/a n/a Long/short equity limited partnerships Total $ 727,834 $ 710,058 $ 6,313 Global equities are strategies that invest primarily in domestic and international public companies. Fund managers of each strategy have the ability to shift investments among geographies, sectors, and industries. The fair values of the investments in this type have been determined using the NAV per share of the investments. Long/short fixed income investments are hedge fund strategies that invest both long and short primarily in fixed income. Fund managers of each hedge fund strategy have the ability to shift investments among sectors, duration, yield, and from a net long position to a net short position. The fair values of the investments in this type have been determined using the NAV per share of the investments. Long/short equity investments are hedge fund strategies that invest both long and short primarily in equities. Fund managers of each hedge fund have the ability to shift investments among sectors, styles, market capitalization, and from a net long position to a net short position. The fair values of the investments in this type have been determined using the NAV per share of the investments. Multi-strategy hedge fund investments are hedge fund strategies that invest both long and short primarily in relative value opportunities and special situations across equity, fixed income, and real estate. The fair values of the investments in this type have been determined using the NAV per share of the investments. Commodities fund of funds are strategies that invest both long and short primarily in exchange traded commodities. Fund managers of each strategy have the ability to shift investments among commodities, sectors, timeframe, and from a net long position to a net neutral position. The fair values of the investments in this type have been determined using the NAV per share of the investments. 31 (Continued) Private equity fund of funds are strategies that invest primarily in domestic and international public and private companies. Fund managers of each strategy have the ability to shift investments among geographies, sectors, industries, and the stage in the company’s life cycle. The fair values of the investments in this type have been determined using the NAV per share of the System’s ownership interest in partners’ capital. Investments of this type do not allow for redemptions. Instead, investments in the strategies are returned through partnership distributions that generally coincide with liquidations of the underlying assets of the funds. It is estimated that the current liquidation period for these investments was five to ten years at December 31, 2016. The fair values of the System’s interest rate swaps (see note 5) were estimated using the zero coupon method. This method calculates the future net settlement payments required by the swap, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero coupon bonds due on the date of each future net settlement on the swaps. The spot rates used for discounting are further adjusted for the credit (non-payment) risk associated with the party that is a net debtor as of the measurement date. The swap valuations are considered Level 2 liabilities and were valued at $224,535 and $261,736 at December 31, 2016 and 2015, respectively. 32 (Continued) The Carolinas HealthCare Foundation, Inc.’s Investments The Foundation’s investments at December 31, 2016 are as follows: Fair value at reporting date using Quoted prices in active Significant markets for other Significant identical observable unobservable assets inputs inputs (Level 1) (Level 2) (Level 3) 2016 Cash equivalents Fixed income Domestic equities International equities Global equities Real assets Total by fair value level $ Investments measured at the NAV Global equity Long/short fixed income Long/short equity Multi-strategy hedge funds Commodities Private equity Total assets measured at the NAV Total assets measured at fair value 17,850 34,284 72,919 37,359 12,681 6,468 181,561 $ $ 17,850 18,044 72,919 37,359 12,681 6,468 165,321 $ $ 0 16,240 0 0 0 0 16,240 $ $ 0 0 0 0 0 0 0 13,613 17,600 22,413 6,926 4,212 18,206 82,970 $ 264,531 33 (Continued) The Foundation’s investments at December 31, 2015 are as follows: Fair value at reporting date using Quoted prices in active Significant markets for other Significant identical observable unobservable assets inputs inputs (Level 1) (Level 2) (Level 3) 2015 Cash equivalents Fixed income Domestic equities International equities Global equities Real assets Total by fair value level $ Investments measured at the NAV Global equity Long/short fixed income Long/short equity Multi-strategy hedge funds Commodities Private equity Total assets measured at the NAV Total assets measured at fair value 8,846 29,291 64,535 37,025 18,013 5,048 162,758 $ $ 8,846 20,918 64,535 37,025 18,013 5,048 154,385 $ $ 0 8,373 0 0 0 0 8,373 $ $ 0 0 0 0 0 0 0 11,310 13,451 26,108 19,250 3,730 18,257 92,106 $ 254,864 34 (Continued) (4) Capital Assets Capital assets activity for the year ended December 31, 2016, was as follows: Beginning balance Depreciable capital assets: Land improvements Buildings Equipment $ Depreciable capital assets – gross Accumulated depreciation Depreciable capital assets – net Nondepreciable capital assets: Land Construction in progress Net capital assets $ Additions Transfers Retirements Ending balance 117,638 $ 3,031,139 1,763,016 0 $ 6,589 28,554 815 $ 74,279 158,464 (75) $ (4,199) (34,713) 118,378 3,107,808 1,915,321 4,911,793 35,143 233,558 (38,987) 5,141,507 (2,250,437) (297,892) 38,768 (2,509,561) 2,661,356 (262,749) 233,558 (219) 2,631,946 197,393 171,834 0 279,471 121 (233,679) 0 0 3,030,583 $ 16,722 $ 0 0 $ (219) $ 197,514 217,626 3,047,086 Capital assets activity for the year ended December 31, 2015, was as follows: Beginning balance Depreciable capital assets: Land improvements Buildings Equipment $ Depreciable capital assets – gross Accumulated depreciation Depreciable capital assets – net Nondepreciable capital assets: Land Construction in progress Net capital assets $ Additions Transfers Retirements Ending balance 115,346 $ 2,871,760 1,654,505 0 $ 8,993 23,605 2,773 $ 156,437 125,865 (481) $ (6,051) (40,959) 117,638 3,031,139 1,763,016 4,641,611 32,598 285,075 (47,491) 4,911,793 (2,023,573) (273,012) 0 46,148 (2,250,437) 2,618,038 (240,414) 285,075 (1,343) 2,661,356 195,993 233,030 0 225,341 1,462 (286,537) (62) 0 197,393 171,834 3,047,061 $ (15,073) $ 0 $ (1,405) $ 3,030,583 Net capitalized interest expense of $7,090 and $7,415 for the years ended December 31, 2016 and 2015, respectively, was included in the cost of projects. The cost of capital expenditures included in accounts payable was $25,945 and $20,576 as of December 31, 2016 and 2015, respectively. 35 (Continued) (5) Long-Term Debt Long-term debt, net of related issuance premiums and unamortized gains on debt-related derivative agreements, consists of the following as of December 31: 2015 2016 The System Series 2005 B, C, and D Variable Rate Refunding Revenue Bonds, maturing 2017 through 2026, bearing interest at variable rates which are adjusted weekly (weighted average rate for the year ended December 31, 2016 was 0.38%) The System Series 2007 A Revenue and Refunding Revenue Bonds, maturing 2017, bearing interest at 4.5% and 5.0% The System Series 2007 B Variable Rate Refunding Revenue Bonds, maturing 2017 through 2038, bearing interest at variable rates which are adjusted daily (weighted average rate for the year ended December 31, 2016 was 0.32%) The System Series 2007 C Variable Rate Refunding Revenue Bonds, maturing 2027 through 2037, bearing interest at variable rates which are adjusted weekly (weighted average rate for the year ended December 31, 2016 was 0.42%) The System Series 2007 D Variable Rate Revenue Bonds, maturing 2041 through 2043, bearing interest at variable rates which are adjusted weekly (weighted average rate for the year ended December 31, 2016 was 1.26%) The System Series 2007 E Variable Rate Revenue Bonds, maturing 2041 through 2044, bearing interest at variable rates which are adjusted weekly (weighted average rate for the year ended December 31, 2016 was 0.40%) The System Series 2007 F Variable Rate Revenue Bonds, maturing 2030 through 2042, bearing interest at variable rates which are adjusted weekly (weighted average rate for the year ended December 31, 2016 was 1.24%) The System Series 2007 G Variable Rate Revenue Bonds, maturing 2031 through 2041, bearing interest at variable rates which are adjusted weekly (weighted average rate for the year ended December 31, 2016 was 1.02%) The System Series 2007 H Variable Rate Revenue Bonds, maturing 2027 through 2045, bearing interest at variable rates which are adjusted weekly (weighted average rate for the year ended December 31, 2016 was 0.39%) The System Series 2008 A Refunding Revenue Bonds, maturing 2017 and 2018, bearing interest at 4.00% and 4.25% respectively 36 $ 61,545 $ 61,545 13,500 153,260 82,635 83,535 87,635 87,635 67,140 67,140 77,220 77,220 57,055 57,055 113,825 113,825 166,050 166,050 2,855 303,110 (Continued) 2016 The System Series 2009 A Refunding Revenue Bonds, maturing 2017 through 2039, bearing interest at 4.0% to 5.25% The System Series 2011 A Revenue Bonds, maturing 2017 through 2042 bearing interest at 3.0% to 5.25% The System Series 2012 A Revenue and Refunding Revenue Bonds maturing 2017 through 2043 bearing interest at 2.0% to 5.0% The System Series 2013 A Revenue and Refunding Revenue Bonds, maturing 2017 through 2039 bearing interest at 3.0% to 5.0% The System Series 2015 A Taxable Refunding Revenue Bonds, maturing 2017 through 2024 bearing interest at 2.64% The System Series 2015 B Taxable Commercial Paper Revenue Bonds (weighted average interest rate for the year ended December 31, 2016 was 0.47%) The System Series 2016 A Refunding Revenue Bonds, maturing 2018 through 2047 bearing interest at 3.0% to 5.0% Other long-term debt $ 188,975 Commercial paper and current portion Net unamortized premiums Unamortized gains on debt-related derivative agreements $ 2015 $ 191,245 136,145 139,400 151,345 152,755 121,950 124,140 11,815 13,125 30,000 25,000 390,560 70,678 0 74,452 1,830,928 1,890,492 (65,849) (60,980) 1,765,079 1,829,512 69,532 3,523 21,818 3,915 1,838,134 $ 1,855,245 A summary of changes in long-term debt during 2016 is as follows: Beginning balance Fixed rate revenue bonds Variable rate revenue bonds Commercial paper revenue bonds Other long-term debt Additions Retirements Ending balance $ 1,077,035 714,005 25,000 74,452 $ 390,560 294,735 150,000 0 $ (450,450) $ (295,635) (145,000) (3,774) 1,017,145 713,105 30,000 70,678 $ 1,890,492 $ 835,295 $ (894,859) $ 1,830,928 37 (Continued) A summary of changes in long-term debt during 2015 is as follows: Beginning balance Fixed rate revenue bonds Variable rate revenue bonds Commercial paper revenue bonds Other long-term debt Additions Retirements Ending balance $ 1,103,245 $ 717,780 0 77,531 13,125 $ 0 25,000 0 (39,335) $ (3,775) 0 (3,079) 1,077,035 714,005 25,000 74,452 $ 1,898,556 $ 38,125 $ (46,189) $ 1,890,492 As of December 31, 2016 and 2015, all of the System’s variable rate revenue bonds were hedged. Debt service requirements for long-term debt in future years, excluding commercial paper but including the impact of other long-term debt (a note payable to a financial services company and a note payable to Cleveland County) and interest rate swap transactions discussed later in this note, are shown in the table below. Net swap payments, as reflected in the table below, are projected using the December 31, 2016 relationship between the Securities Information and Financial Markets Association (SIFMA) Municipal Swap Index and the one-month London InterBank Offered Rate (LIBOR) of approximately 93%, which is higher than interest projected using the 70% average relationship between SIFMA and LIBOR over the past 10 years. Principal 2017 2018 2019 2020 2021 2022–2026 2027–2031 2032–2036 2037–2041 2042–2046 2047 Interest Total $ 33,531 34,604 36,006 37,611 39,275 226,653 279,457 360,646 423,570 327,435 2,140 $ 74,709 79,273 77,727 76,121 74,455 342,745 281,917 207,752 114,159 22,296 37 $ 108,240 113,877 113,733 113,732 113,730 569,398 561,374 568,398 537,729 349,731 2,177 $ 1,800,928 $ 1,351,191 $ 3,152,119 The System’s Revenue Bonds (other than the Series 2015 A and Series 2015 B Revenue Bonds which are taxable) are tax-exempt and are secured by and payable from the System’s revenues, the money and securities held in certain funds and accounts created by the applicable bond agreements and held by the bond trustee, and in the case of the Combined Group, amounts payable by the other members of the Combined Group under their respective Member Guaranty Agreement or Member Security Agreement. The tax-exempt fixed rate revenue bonds are redeemable at the option of the System at par value upon the expiration of the 10-year no call period subsequent to their respective issuance date. In December 2005, the System issued Series 2005 B, C and D Variable Rate Refunding Revenue Bonds which, together with $2,855 of System funds, currently refunded $96,760 of Series 1996 A Revenue Bonds. Interest on the Series 2005 B, C and D Variable Rate Refunding Revenue Bonds is payable monthly in arrears and principal is payable on January 15 of each year. In February 2011, the System utilized a mandatory tender process to substitute new direct pay letters of credit on these bonds. As a result of this 38 (Continued) mandatory tender process, these bonds were deemed extinguished and the remarketed bonds were treated as a new issuance. In December 2016, the System utilized a mandatory tender process to convert Series 2005 B, C and D to direct purchase bonds. As a result of this mandatory tender process, these bonds were deemed extinguished and the remarketed bonds were treated as a new issuance In August 2007, the System issued Series 2007 A Revenue and Refunding Revenue Bonds, which currently refunded $114,030 of the outstanding Series 1997 A Revenue Bonds and advance refunded $26,445 of the outstanding Series 2001 A Revenue Bonds. Interest on the Series 2007 A Revenue Bonds is payable semiannually on January 15 and July 15 of each year and principal is payable on January 15 of each year. Also in August 2007, the System issued Series 2007 B and C Variable Rate Refunding Revenue Bonds, which advance refunded all $71,015 of the outstanding Series 2003 A Revenue Bonds and all $100,000 of the outstanding Series 2005 A Revenue Bonds. Interest on the Series 2007 B and C Variable Rate Refunding Revenue Bonds is payable monthly in arrears and principal is payable on January 15 of each year. In September 2007, the System issued Series 2007 D, E and F Variable Rate Revenue Bonds insured by Financial Security Assurance, Inc., now known as Assured Guaranty Municipal Corp. (AGMC). Interest on the Series 2007 D, E and F Variable Rate Revenue Bonds is payable monthly in arrears and principal is payable on January 15 of each year. In May 2013, the System utilized a mandatory tender process to convert Series 2007 D and F to direct purchase bonds and to substitute a new direct pay letter of credit on Series 2007 E. As a result of this mandatory tender process, these bonds were deemed extinguished and the remarketed bonds were treated as a new issuance. In November 2016, the System utilized a mandatory tender process to change the holder of the Series 2007 D direct purchase bonds. As a result of this mandatory tender process, these bonds were deemed extinguished and the remarketed bonds were treated as a new issuance. Also in September 2007, the System issued Series 2007 G Variable Rate Revenue Bonds insured by AGMC and Series 2007 H Variable Rate Revenue Bonds. The proceeds of the Series 2007 H Variable Rate Revenue Bonds were used to repay $159,930 of outstanding revenue bonds issued by the North Carolina Medical Care Commission (NCMCC) for the benefit of Carolinas HealthCare System NorthEast. Interest on the Series 2007 G Variable Rate Revenue Bonds and the Series 2007 H Variable Rate Revenue Bonds is payable monthly in arrears. Principal is payable on January 15 of each year. In May 2013, the System utilized a mandatory tender process to convert Series 2007 G to direct purchase bonds. As a result of this mandatory tender process, these bonds were deemed extinguished and the remarketed bonds were treated as a new issuance. In November 2016, the System utilized a mandatory tender process to convert Series 2007 H to direct purchase bonds. As a result of this mandatory tender process, these bonds were deemed extinguished and the remarketed bonds were treated as a new issuance. In June 2008, the System issued Series 2008 A Refunding Revenue Bonds which currently refunded all $70,020 of the outstanding Series 1996 B, C and D Variable Rate Revenue Bonds, all $66,175 of the outstanding Series 2003 B Variable Rate Revenue Bonds, all $100,000 of the outstanding Series 2005 E Variable Rate Revenue Bonds and all $71,200 of the outstanding Series 2007 I Variable Rate Revenue Bonds. Interest on the Series 2008 A Revenue Bonds is payable semiannually on January 15 and July 15 of each year and principal is payable on January 15 of each year. In August 2009, the System issued Series 2009 A Refunding Revenue Bonds which currently refunded all $7,810 of the outstanding Series 1997 A Revenue Bonds, all $76,075 of the outstanding Series 2007 J Variable Rate Revenue Bonds, all $78,225 of the outstanding Series 2007 K Variable Rate Revenue Bonds and all $50,365 of the outstanding Series 2007 L Variable Rate Revenue Bonds. Interest on the Series 2009 A Revenue Bonds is payable semiannually on January 15 and July 15 of each year and principal is payable on January 15 of each year. 39 (Continued) In May 2011, the System issued Series 2011 A Revenue Bonds. Interest on the Series 2011 A Revenue Bonds is payable semiannually on January 15 and July 15 of each year and principal is payable on January 15 of each year. In May 2012, the System issued Series 2012 A Revenue and Refunding Revenue Bonds which currently refunded all $88,535 of the outstanding Series 2001 A Revenue Bonds and $32,185 of outstanding revenue bonds issued by the NCMCC for the benefit of Carolinas HealthCare System Union. The Series 2012 A Revenue and Refunding Revenue Bonds also included $50,000 to finance a small portion of the System’s capital plan. Interest on the Series 2012 A Revenue Bonds is payable semiannually on January 15 and July 15 of each year and principal is payable on January 15 of each year. In May 2013, the System issued Series 2013 A Revenue and Refunding Revenue Bonds which advance refunded $4,815 of the outstanding Series 2009 A Refunding Revenue Bonds and all $73,250 of outstanding revenue bonds issued by the NCMCC for the benefit of Carolinas HealthCare System Cleveland (CHS Cleveland). The Series 2013 A Revenue and Refunding Revenue Bonds also included $50,000 to finance a small portion of the System’s capital plan. Interest on the Series 2013 A Revenue Bonds is payable semiannually on January 15 and July 15 of each year and principal is payable on January 15 of each year. In January 2015, the System issued Series 2015 A Taxable Refunding Revenue Bonds which, together with funds held by Carolinas HealthCare System Stanly (CHS Stanly) in Debt Service Reserve Funds, currently refunded all $16,030 of outstanding Series 1996 and Series 1999 Revenue Bonds issued by the NCMCC for the benefit of CHS Stanly. The Series 2015 A Revenue Bonds were purchased by a financial institution and will be held through their maturity on January 15, 2024 but the System may prepay the bonds at any time without penalty or premium except for any cost of prepayment (based upon U.S. Treasury obligations) that applies. Interest on the Series 2015 A Revenue Bonds is payable semiannually on January 15 and July 15 of each year and principal is payable on January 15 of each year. In October 2015, the System established a taxable commercial paper program providing for the issuance of up to $200,000 in aggregate taxable commercial paper revenue bonds. The bonds issued under the commercial paper program currently carry short-term credit ratings of A-1+ from S&P Global Ratings and P-1 from Moody’s Investors Service. Proceeds from the sale of commercial paper will be used to pay for additional healthcare facilities or the costs of operating healthcare facilities, including general operating costs, routine capital expenditures and the acquisition and installation of healthcare equipment. The System has established a self-liquidity program that will be used to repurchase any commercial paper that is not remarketed. Commercial paper may be issued with maturity dates from one to 270 days from the date of issuance. While management may elect to continuously roll over all or portions of the commercial paper, the principal amount of all commercial paper must be repaid by October 2055. At December 31, 2016, commercial paper totaling $30,000, with a weighted average maturity and interest rate of 35 days and 0.60%, respectively, was outstanding and included within current portion of debt. In addition, in early 2017, the System sold $135,000 of new commercial paper under the program with various maturities through May 2017. In November 2016, the System issued Series 2016 A Refunding Revenue Bonds which currently refunded $121,240 of the outstanding Series 2007 A Revenue and Refunding Revenue Bonds and advance refunded $300,255 of the outstanding Series 2008 A Refunding Revenue Bonds. Interest on the Series 2016 A Refunding Revenue Bonds is payable semiannually on January 15 and July 15 of each year and principal is payable on January 15 of each year. 40 (Continued) In the event bondholders elect to tender any or all of the Series 2007 B, C, and E Revenue Bonds for purchase and the bonds cannot be remarketed, liquidity facilities and a direct pay letter of credit provided by two financial institutions are utilized to purchase the unremarketed bonds. Bonds held by the liquidity facility and letter of credit providers generally require payment of a higher rate of interest. The terms of these liquidity facilities and direct pay letter of credit are described in the table below. Series 2007 B 2007 C 2007 E Facility type Liquidity facility Liquidity facility Direct pay letter of credit Expiration year Repayment period 2021 2021 2020 7 year 7 year 5 year The System’s Series 2005 B, C and D Variable Rate Refunding Revenue Bonds and Series 2007 D, F, G and H Revenue Bonds have been purchased by three financial institutions with holding periods noted in the table below that expire prior to the maturity of the respective bonds. Series 2005 BCD 2007 D 2007 F 2007 G 2007 H Facility type Direct purchase bonds Direct purchase bonds Direct purchase bonds Direct purchase bonds Direct purchase bonds Expiration year 2026 2023 2023 2026 2022 Interest expense, exclusive of amounts capitalized, was $89,660 and $85,649 for the years ended December 31, 2016 and 2015, respectively. Interest paid to bond holders and other lenders totaled $103,747 and $94,701 for the years ended December 31, 2016 and 2015, respectively. There are various financial covenants and restrictions contained in the System’s Bond Order, liquidity facilities, direct pay letter of credit and continuing covenant agreements for direct purchase bonds, including maintenance of a defined minimum level of annual long-term debt service coverage. As of December 31, 2016, the System was in compliance with these financial covenants. In October 2014, the System became the sole member of Pineville LTACH/Rehab Hospital, LLC (the LLC), which owns and leases a facility to the System. Previously, the LLC was a joint venture between the System and an unaffiliated entity. The facility was constructed with the proceeds from a $30,101 loan to the LLC from a financial services company that is payable beginning September 2013 through August 2038 at an interest rate of 3.84%. The loan, which was not issued under the System’s Bond Order, is secured by a leasehold deed of trust and assignment of facility leases and rents. The balance of $27,547 at December 31, 2016 is included in other long-term debt. In March 2013, the System entered into an Amended and Restated Interlocal Agreement with Cleveland County, North Carolina for the purpose of more fully integrating CHS Cleveland with the System and enhancing the System’s ability to provide services to the residents of Cleveland County. The System’s payment to Cleveland County included an unsecured, noninterest bearing note in the original amount of $77,000 payable through 2038 which is recorded as long-term debt at its net present value. Interest Rate Swaps The System has adopted an Interest Rate Exchange Agreement Policy (the Policy) that governs its use of derivative agreements and restricts the use of such agreements to achieving desired interest cost savings, 41 (Continued) hedging interest rate risk in financing transactions, adjusting the mix of variable and fixed rate debt exposure to appropriate levels, providing flexibility to meet financial objectives not available under then-existing market conditions and improving cash flows. The Policy does not allow the System to speculate using derivative agreements. On January 15, 2006, the System entered into an uninsured floating-to-fixed interest rate swap agreement on its Series 2005 B, C and D Variable Rate Refunding Revenue Bonds. In August 2007, the System entered into four floating-to-fixed interest rate swaps under separate agreements insured by Ambac Assurance Corporation (Ambac) with two counterparties, in connection with its Series 2007 B and C Variable Rate Refunding Revenue Bonds, with an aggregate initial notional amount of $177,835. These swaps were entered into in conjunction with the refunding of the Series 2003 A and 2005 A Revenue Bonds. In September 2007, the System entered into five AGMC-insured floating-to-fixed interest rate swaps under separate agreements with three counterparties, in connection with its Series 2007 D, E and F Variable Rate Revenue Bonds, with an aggregate initial notional amount of $201,415. Also in September 2007, the System entered into two Ambac and two AGMC-insured floating-to-fixed interest rate swaps under separate agreements with two counterparties, in connection with its Series 2007 G and H Variable Rate Revenue Bonds, with an aggregate initial notional amount of $279,875. The significant terms and features of the above transactions as of and for the years ended December 31, 2016 and 2015, are summarized in the below table. The notional amounts of the swaps effectively match the principal amounts of the associated debt. The swaps contain scheduled reductions to outstanding notional amounts that are expected to follow scheduled or anticipated reductions in the associated bonds. Associated bonds Notional amount Swap type Origination date Final bond maturity The System pays The System receives Fair value at December 31, 2016 Change in fair value during the year Fair value at December 31, 2015 Change in fair value during the year 2005 BCD 2007 B 2007 C 2007 D $ 61,545 $ Floating-to-fixed January 15, 2006 January 15, 2026 5.52% 75% of LIBOR 82,635 $ Floating-to-fixed August 28, 2007 January 15, 2038 4.36% SIFMA $ (11,652) $ (24,034) $ (25,825) $ 3,052 4,212 4,529 3,931 (14,704) (28,246) (30,354) (28,372) 1,758 (1,870) (2,121) (1,330) 42 87,635 $ 67,140 Floating-to-fixed Floating-to-fixed August 28, 2007 September 19, 2007 January 15, 2037 January 15, 2043 4.38% 3.88% SIFMA 62.97% of LIBOR plus 0.29% (24,441) (Continued) Associated bonds Notional amount Swap type Origination date Final bond maturity The System pays The System receives Fair value at December 31, 2016 Change in fair value during the year Fair value at December 31, 2015 Change in fair value during the year 2007 E $ $ 2007 F 2007 G 2007 H 77,220 $ 57,055 $ 113,825 $ 166,050 Floating-to-fixed Floating-to-fixed Floating-to-fixed Floating-to-fixed September 19, 2007 September 19, 2007 September 19, 2007 September 19, 2007 January 15, 2044 January 15, 2042 January 15, 2041 January 15, 2045 3.89% 3.90% 3.90% 3.88% 62.97% of LIBOR 62.97% of LIBOR 62.97% of LIBOR 62.97% of LIBOR plus 0.29% plus 0.29% plus 0.29% if LIBOR is equal to or greater than 3.5%; 77.5% of LIBOR if LIBOR is less than 3.5% (28,596) $ (20,312) $ (38,061) $ (51,614) 4,151 2,960 5,583 8,783 (32,747) (23,272) (43,644) (60,397) (1,483) (978) (1,623) (1,933) The swaps’ aggregate negative fair value of $224,535 and $261,736, as of December 31, 2016 and 2015, respectively, is reported as a long-term liability on the balance sheet. The System has determined that its 14 interest rate swaps are effective hedging derivatives. Because the swaps are effective hedges, aggregate changes in their fair value, including $37,201 and $(9,580) for the years ended December 31, 2016 and 2015, respectively, are deferred and are reported on the balance sheet as a deferred outflow of resources. See note 3 for further discussion of the measurement techniques and inputs utilized in the measurement of the swaps’ fair value. In April 2013, the System reduced its counterparty risk by novating four of its swaps with an aggregate notional value of $207,075 from one of its existing counterparties to another existing counterparty with a higher rating. This transaction was treated as a termination of the original swaps and the execution of new swaps with identical terms. As a result of the termination of the swaps and the related hedging relationships, the aggregate change in fair value of the swaps of $76,495, which had been deferred on the balance sheet, was recognized as a nonoperating investment loss on the statement of revenues, expenses and changes in net position as of the transaction date. The System determined that the new swaps were effective hedging instruments. The novation and certain mandatory tender processes discussed above resulted in the termination of the related hedging relationships. Although hedging relationships have been subsequently re-established, the swaps are considered off-market swaps because the fixed rates of the swaps differed from the market rates for similar swaps at the time the hedging relationship was re-established. The negative fair value of the off-market swaps are being amortized using straight-line amortization. As of December 31, 2016, all of the System’s swaps were effective hedges. In May 2014, the System terminated the Ambac insurance on a swap agreement associated with Series 2007 B, C and H bonds that had an aggregate notional value of $168,973. Other than the termination of the insurance, the terms of the swap agreement remained unchanged. As of December 31, 2016 and 2015, all swaps had a negative fair value. The negative fair value may be countered by a reduction in total interest payments required under the System’s associated variable rate revenue bonds, creating a lower synthetic interest rate. Because the coupons on the variable rate revenue bonds adjust to changing interest rates, the bonds do not have corresponding fair value increases. 43 (Continued) As of December 31, 2016 and 2015, the System was not exposed to credit risk because the swaps had negative fair values. However, should interest rates change and the fair values of the swaps become positive, the System would be exposed to credit risk in the amount of the swaps’ fair value. The System’s 14 interest rate swaps are executed under six swap agreements with various counterparties. Seven swaps, approximating 50% of the notional amount of swaps outstanding, are provided by one counterparty that was rated A+ and A1 by S&P Global Ratings and Moody’s Investors Service, respectively, as of December 31, 2016. Five additional swaps, approximating 39% of the outstanding notional value, are provided by another counterparty rated AA– and Aa1. The remaining two swaps are provided by a third counterparty rated A+ and A1 as of December 31, 2016. In the event the System’s credit ratings, as determined by S&P Global Ratings and Moody’s Investors Service, fall below a level of A+ or A1, respectively, and the three uninsured swap agreements associated with Series 2005 B, C and D bonds and Series 2007 B, C and H bonds (with one counterparty) and with Series 2007 B and C bonds (with a different counterparty) each has a negative fair value of $25,000 or more, then the System must post collateral on these swap agreements equal to the amount of fair value in excess of $25,000. As of December 31, 2016, the fair values of these swap agreements were $(11,652), $(50,737) and $(24,929), respectively. No collateral was required to be posted by the System for these swap agreements. In the event the System’s credit ratings, as determined by S&P Global Ratings and Moody’s Investors Service, fall below a level of A+ or A1, respectively, and the uninsured swap agreement associated with Series 2007 H bonds has a negative fair value of $50,000 or more, then the System must post collateral on this swap agreement equal to the amount of fair value in excess of $50,000. As of December 31, 2016, the fair value of this swap agreement was $(25,807). No collateral was required to be posted by the System for this swap agreement. With respect to the AGMC-insured swap agreement associated with Series 2007 E, F and G bonds, should the financial strength ratings of AGMC, as determined by S&P Global Ratings and Moody’s Investors Service, fall below A– or A3, respectively, upon the request of the counterparty, the System, at its option, must either procure replacement swap insurance policies from counterparties rated at least AAA by S&P Global Ratings and Aaa by Moody’s Investors Service, respectively, or agree to post collateral on those swap agreements equal to the amount of negative fair value in excess of $25,000 if the System’s credit ratings, as determined by S&P Global Ratings and Moody’s Investors Services, fall below a level of A+ or A1, respectively. As of December 31, 2016, the fair value of this swap agreement was $(43,482). No collateral was required to be posted by the System for this swap agreement given AGMC’s ratings of AA and A2. With respect to the AGMC-insured swap agreement associated with Series 2007 D, E, F and G bonds, should the financial strength ratings of AGMC, as determined by S&P Global Ratings and Moody’s Investors Service, fall below A– or A3, respectively, upon the request of the counterparty the System, at its option, must either procure replacement swap insurance policies from counterparties rated at least AAA by S&P Global Ratings and Aaa by Moody’s Investors Service, respectively, or agree to post collateral on this swap agreement equal to the amount of negative fair value in excess of $50,000 if the System’s credit ratings, as determined by S&P Global Ratings and Moody’s Investors Service, fall below a level of A+ or A1, respectively. As of December 31, 2016, the fair value of this insured swap agreement was $(67,928). No collateral was required to be posted by the System for this swap agreement given AGMC’s ratings of AA and A2. The System’s Series 2007 B, C and E bonds bear interest at a rate that is equivalent to the SIFMA rate while the Series 2005 B, C and D bonds and Series 2007 D, F, G and H bonds bear interest at LIBOR plus a spread. For those swaps on the SIFMA-based variable rate revenue bonds for which it receives a variable rate based on LIBOR, the System is exposed to basis risk depending upon the relationship between SIFMA and LIBOR. 44 (Continued) If that relationship changes, the effective synthetic rate on the SIFMA-based variable rate revenue bonds may be higher than the intended synthetic rate. As of December 31, 2016, the SIFMA rate was 0.72% and LIBOR was 0.77%, resulting in a SIFMA to LIBOR relationship of approximately 93%. The System or the counterparty may terminate any of the swaps if either party fails to perform under the terms of the agreement. If any of the swaps are terminated, the associated variable rate revenue bonds would no longer carry synthetic interest rates. Also, if the swap has a negative fair value at the time of termination, the System would be liable to the counterparty for a payment equal to the swap’s fair value. Likewise, if the swap has a positive fair value at the time of termination, the System would be entitled to a payment equal to the swap’s fair value from the counterparty terminating the swap. Debt service requirements of the System’s outstanding variable rate revenue bonds and net swap payments, assuming current interest rates and the SIFMA to LIBOR relationship remain the same, as of December 31, 2016, were as follows: Variable rate bonds Principal Interest 2017 2018 2019 2020 2021 2022–2026 2027–2031 2032–2036 2037–2041 2042–2046 (6) Interest rate swap – net Total $ 6,120 6,400 6,820 7,255 10,710 34,540 60,565 139,035 232,930 208,730 $ 7,051 6,979 6,902 6,821 6,714 32,559 29,910 25,553 17,041 2,166 $ 23,887 23,617 23,329 23,024 22,595 109,198 99,193 81,149 49,435 7,325 $ 37,058 36,996 37,051 37,100 40,019 176,297 189,668 245,737 299,406 218,221 $ 713,105 $ 141,696 $ 462,752 $ 1,317,553 Net Patient Service Revenue Net patient service revenue is recorded when patient services are performed at the estimated net realizable amounts from patients, third-party payers and others for services rendered. The use of estimates is very common for health systems, since, with increasing frequency, even noncost-based governmental programs have become subject to retrospective adjustments. Often such adjustments are not known for a considerable period of time after the related services are rendered. The lengthy period of time between rendering services and reaching final settlement, compounded further by the complexities and ambiguities of governmental reimbursement regulations and the frequency of changes in payer guidelines, makes it difficult to estimate the net patient service revenue associated with these programs. 45 (Continued) Under the Medicare and Medicaid programs, the System is entitled to reimbursements for certain patient charges at rates determined by federal and state governments. Differences between established billing rates and reimbursements from these programs are recorded as contractual adjustments to arrive at net patient service revenue. Final determination of amounts due from Medicare and Medicaid programs is subject to review by these programs. Changes resulting from final determination are reflected as changes in estimates, generally in the year of determination. In the opinion of management, adequate provision has been made for adjustments, if any, that may result from such reviews. Net patient service revenue increased approximately $44,000 and $5,000 for the years ended December 31, 2016 and 2015, respectively, due to removal of allowances previously estimated that are no longer necessary as a result of final settlements and years that are no longer subject to audits and reviews. Net patient service revenue consisted of the following for the years ended December 31: 2016 Gross patient charges at established rates, net of contractual adjustments - including charges forgone for patients qualifying for financial assistance Adjustments for uninsured and underinsured patients both qualifying and not qualifying for financial assistance Net patient service revenue $ 6,578,423 2015 $ (1,441,593) $ 5,136,830 6,369,541 (1,421,103) $ 4,948,438 The sources of the System’s gross patient revenue by type of payer, expressed as a percentage of total gross patient revenue, consisted of the following for the years ended December 31: 2016 Medicare Commercial Medicaid Direct from patient/other 2015 38.1% 35.7 16.9 9.3 38.0% 35.5 16.8 9.7 100.0% 100.0% The System has, since 1996, participated in the North Carolina Medicaid Reimbursement Initiative (the MRI Plan). In April 2012, CMS approved a North Carolina Medicaid assessment plan to reduce the gap between Medicaid and uninsured costs and payments (the GAP Plan). Under the GAP Plan, providers periodically pay an assessment to the State and periodically receive Medicaid payments from the State. The System reports assessments and receipts within other expenses and net patient service revenue, respectively, in the accompanying statements of revenues, expenses, and changes in net position. The following is a summary of the funds received and assessments paid under these programs for the years ended December 31 2016 MRI, net funds received GAP Plan funds received Less assessments paid Net amounts recognized 46 2015 $ 165,168 40,968 (31,807) $ 161,086 65,053 (47,984) $ 174,329 $ 178,155 (Continued) (7) Other Revenue Other revenue is composed of the following amounts for the years ended December 31: 2016 Medical education and research grants and contracts Reimbursed services provided to affiliates Pharmacy sales Rental and other revenue (8) 2015 $ 65,474 117,952 146,419 190,726 $ 69,964 114,152 138,918 191,013 $ 520,571 $ 514,047 Benefit Plans Retirement benefits are provided to teammates using both defined contribution plans and defined benefit plans. The System offers several defined contribution plans with the largest plan being a Section 401(K) defined contribution plan (the DC Plan) which covers all full-time teammates of the System and is funded by voluntary teammate contributions and certain matching contributions by the System. Defined contribution plan assets are not recorded in the System’s balance sheet but are held in participant-directed individual accounts and were $2,298,342 and $2,027,712 at December 31, 2016 and 2015, respectively. Total matching contribution expense for the DC Plan was $84,050 and $69,467 for the years ended December 31, 2016 and 2015, respectively. In connection with changes to the System’s defined benefit plans as described below, the DC Plan has been enhanced for teammates hired after January 1, 2014 and will be further enhanced for all effective January 1, 2018 with an increase in the System’s matching contribution. The System also maintains three single employer defined benefit plans (the CHS DB Plan, which is the largest plan, the CHS Cleveland DB Plan and the CHS Stanly DB Plan). Late in 2013, CHS undertook certain steps to modernize its retirement benefits by closing the CHS DB Plan to teammates hired after January 1, 2014. The CHS DB Plan will be frozen for all teammates effective January 1, 2018, after which no additional benefits will accrue under the CHS DB Plan. Similarly, the CHS Cleveland DB Plan and the CHS Stanly DB Plan have also been closed to teammates hired after January 1, 2015 and January 1, 2016, respectively, and will be frozen for all teammates effective January 1, 2018, after which no additional benefits will accrue under either Plan. The following information pertains to the CHS DB Plan. Separate financial statements for the CHS DB Plan are not required to be issued. CHS DB Plan Description and Benefits Provided – The CHS DB Plan provides pension benefits to all System teammates hired before January 1, 2014 and who have attained five or more years of service. These benefits are based on years of service and the teammates’ compensation. Effective January 1, 2009, the CHS DB Plan became a cash balance plan and a small group of teammates meeting specified employment, age, and service criteria are grandfathered and accrue benefits under the CHS pre-cash balance formula. The Board of Commissioners of the System (the Board) or an authorized committee of the Board has the authority to amend benefit provisions. The actuarial valuation establishing the net pension liability for the purposes of GASB Statement No. 68, Accounting and Financial Reporting for Pensions, was based on the CHS DB Plan membership data as of 47 (Continued) January 1, 2016 and 2015, respectively, and rolled forward to the measurement date of July 1, 2016 and 2015, respectively. The CHS DB Plan participant data as of July 1, 2016 and 2015, respectively is as follows: Retirees and beneficiaries receiving benefits Previously employed plan members entitled to but not yet receiving benefits Employed plan members Total 2016 1,541 5,419 2015 1,508 4,909 23,887 27,191 30,847 33,608 Contributions to the CHS DB Plan – Annual contributions to the CHS DB Plan are based upon actuarial calculations. Beginning in 2015, the CHS DB Plan utilizes the entry age normal method to determine annual contributions. There are no teammate contributions to the CHS DB Plan. The System’s funding policy is to contribute such actuarially determined amounts as are necessary to provide assets sufficient to meet the benefits to be paid to CHS DB Plan participants. In addition, with the freezing of the CHS DB Plan, the System plans to make contributions to the CHS DB Plan in addition to the annual actuarially determined amounts in an effort to reduce the unfunded actuarially accrued liability in a systematic manner. During 2016, the System elected to contribute an additional $42,200 above the actuarially determined contribution. The System’s contribution rates for the years ended December 31, 2016 and December 31, 2015 equaled 6.78% and 4.60% of covered payroll, respectively. These contribution rates are determined based on a measurement date of January 1, 2016 and 2015, respectively. CHS DB Plan Actuarial Assumptions – The total CHS DB Plan pension liability on the July 1, 2016 and 2015 respectively, measurement date was determined using the following actuarial assumptions: 2016 Inflation rate Investment rate of return (net of investment expenses, including inflation) Lump sum interest rate Projected salary increases 2.1% 7.5 5.0 3.0 2015 2.3% 7.5 5.0 4.0 Actuarial assumptions used in the July 1, 2016 valuation were based on the results of an actuarial experience study that is conducted every four years, most recently in 2016. Mortality rates were based on the RP-2014 table with MP-2015 Generational Projections. The long-term investment rate of return on pension assets was determined using a combination of benchmark return information and a building-block method in which best-estimated expected real rates of return are developed for each major asset class. These expected real rates of return are weighted by the target asset allocation percentage to produce an overall expected real rate of return which is then increased by expected inflation to produce a long-term investment rate of return on pension assets of 7.5%. 48 (Continued) The target allocation, expected nominal return (which includes inflation) and the best estimates of geometric or compounded real rates of return (which are net of inflation) for each major asset class were established as of July 1, 2015, the beginning of the measurement period, and are summarized in the following table: Target allocation Asset class Fixed income Long/short fixed income Multi-strategy hedge funds Domestic equities International equities Global equities Long/short equity Commodities Private equity Real assets 10.0% 7.5 7.5 22.5 15.0 15.0 10.0 2.5 7.5 2.5 100.0% Total target allocation Expected nominal return Expected real rate of return 2.5%-3.5% 6.6 6.6 6.5-7.0 6.8 6.9 6.6 4.5 8.7 7.3 0.4% - 1.4% 4.4 4.4 4.3–4.8 4.6 4.7 4.4 2.4 6.5 5.1 The target allocation, expected nominal return (which includes inflation) and the best estimates of geometric or compounded real rates of return (which are net of inflation) for each major asset class as of July 1, 2014, the beginning of the measurement period, and are summarized in the following table: Asset class Target allocation Fixed income Long/short fixed income Multi-strategy hedge funds Domestic equities International equities Global equities Long/short equity Commodities Private equity Real assets 10.0% 7.5 7.5 17.5 12.5 15.0 15.0 2.5 10.0 2.5 Expected nominal return Expected real rate of return 3.9% - 4.3% 5.2 7.4 6.9-7.0 7.4 7.4 6.9 6.0 9.1 7.8 1.6% - 2.0% 2.9 5.1 4.6-5.0 5.1 5.1 4.6 3.7 6.8 5.5 100.0% Total target allocation CHS DB Plan Discount rate – The discount rate used to measure the total CHS DB Plan pension liability as of July 1, 2016 and 2015 was 7.5%. The projection of cash flows used to determine the discount rate assumed that employer contributions will be made in amounts equal to the actuarially determined contributions. Based on those assumptions, the CHS DB Plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive teammates. Therefore, the long-term expected rate of return on pension assets of 7.5% was applied to all periods of projected benefit payments to determine the total pension liability. 49 (Continued) Changes in the CHS DB Plan Net Pension Liability Changes in the CHS DB Plan net pension liability for the year ended December 31, 2016, are as follows: Total pension liability (a) Balances at December 31, 2015 (based on July 1, 2015 measurement date) Changes for the fiscal year: Service cost Interest cost Differences between expected and actual experience Changes of assumptions Contributions - employer Investment gains and other, net Benefit payments Administrative expense Net changes $ 1,279,041 Increase (decrease) Plan fiduciary Net pension net position liability (b) (a) – (b) $ 53,214 95,929 $ Balances at December 31, 2016 (based on July 1, 2016 measurement date) CHS Cleveland DB Plan and CHS Stanly DB Plan combined Combined balances at December 31, 2016 (based on July 1, 2016 measurement date) 50 859,518 $ 0 0 7,092 20,252 0 0 (106,420) 0 70,067 $ 419,523 53,214 95,929 0 0 132,884 (36,909) (106,420) (364) (10,809) $ 7,092 20,252 (132,884) 36,909 0 364 80,876 $ 1,349,108 127,015 $ 848,709 110,689 $ 500,399 16,326 $ 1,476,123 $ 959,398 $ 516,725 (Continued) Changes in the CHS DB Plan net pension liability for the year ended December 31, 2015, are as follows: Total pension liability (a) Balances at December 31, 2014 (based on July 1, 2014 measurement date) Changes for the fiscal year: Service cost Interest cost Differences between expected and actual experience Contributions - employer Investment gains and other, net Benefit payments Administrative expense Net changes $ Balances at December 31, 2015 (based on July 1, 2015 measurement date) CHS Cleveland DB Plan and CHS Stanly DB Plan combined Combined balances at December 31, 2015 (based on July 1, 2015 measurement date) 1,246,910 Increase (decrease) Plan fiduciary Net pension net position liability (b) (a) – (b) $ 859,745 387,165 55,197 93,442 0 0 55,197 93,442 (4,091) 0 0 (112,417) $ (4,091) (92,405) (20,481) 0 696 32,358 $ 419,523 $ 32,131 $ 0 92,405 20,481 (112,417) (696) (227) $ 1,279,041 $ 859,518 126,772 $ $ 1,405,813 116,006 $ 975,524 10,766 $ 430,289 Sensitivity of the CHS DB Plan net pension liability to changes in the discount rate – The following table presents the net CHS DB Plan pension liability as of July 1, 2016 and 2015, respectively, calculated using the discount rate of 7.5% and alternatively, as required by GASB 68, what the net pension liability would be under different scenarios assuming it were calculated using a discount rate that is 1% lower (6.5%) or 1% higher (8.5%): 6.50% Net pension liability at July 1, 2016 Net pension liability at July 1, 2015 $ 604,112 525,691 7.50% $ 500,399 419,523 8.50% $ 410,989 328,324 CHS DB Plan Investments – Policies pertaining to the allocation of investments within the CHS DB Plan are established and may be amended by the Investment Oversight Committee (IOC) of the System’s Board. It is the policy of the IOC to invest pension assets in a wide range of permitted securities that maintain a balance between current income needs and the growth of principal for the future. The System, as plan sponsor, has fiduciary responsibility for the CHS DB Plan assets on behalf of the plan participants and beneficiaries. The Plan categorizes its fair value measurements within the fair value hierarchy established by GAAP. The methods for determining fair value are consistent with the System’s valuation techniques and presentation as detailed in note 3 above. 51 (Continued) CHS DB Plan assets were invested as follows as of July 1, 2016: Defined Benefit Plan Assets Cash and cash equivalents $ Fair value at reporting date using Quoted prices in active Significant markets for other Significant identical observable unobservable assets inputs inputs (Level 1) (Level 2) (Level 3) 95,582 $ 95,582 $ 13,343 22,629 2,354 17,766 53,302 0 0 0 0 53,302 Total fixed income 109,394 Equity: Domestic equities International equities Global equities Fixed income: U.S. government treasuries and agencies Corporate bonds Municipal bonds Asset-backed securities Fixed income - other 0 $ 13,343 22,629 2,354 17,766 0 0 0 0 0 0 53,302 56,092 0 204,402 114,381 56,059 204,402 114,381 56,059 0 0 0 0 0 0 Total equity 374,842 374,842 0 0 Real Assets 17,740 17,740 0 0 597,558 $ 541,466 $ Total investments by fair value level Investments measured at the NAV Global equities Long/short fixed income Long/short equity Multi-strategy hedge funds Commodities Private equities 56,092 $ 0 35,216 46,421 78,498 33,970 13,459 43,587 Total investments measured at the NAV Total investments measured at fair value $ 0 251,151 $ 848,709 52 (Continued) CHS DB Plan assets were invested as follows as of July 1, 2015: Defined Benefit Plan Assets Fair value at reporting date using Quoted prices in active Significant markets for other Significant identical observable unobservable assets inputs inputs (Level 1) (Level 2) (Level 3) 74,316 $ 74,316 $ 5,892 13,193 1,209 13,570 59,921 0 0 0 0 59,921 Total fixed income 93,785 Equity: Domestic equities International equities Global equities Total equity Cash and cash equivalents $ Fixed income: U.S. government treasuries and agencies Corporate bonds Municipal bonds Asset-backed securities Fixed income - other 0$ 5,892 13,193 1,209 13,570 0 0 0 0 0 0 59,921 33,864 0 197,383 102,739 56,877 197,383 102,739 56,877 0 0 0 0 0 0 356,999 356,999 0 0 17,576 17,576 0 0 Total investments by fair value level 542,676 $ 508,812 $ Investments measured at the NAV Global equities Long/short fixed income Long/short equity Multi-strategy hedge funds Commodities Private equities 38,053 66,246 105,870 51,655 15,938 39,080 Total investments measured at the NAV 316,842 Real Assets Total investments measured at fair value $ $ 0 33,864 $ 0 859,518 53 (Continued) The table below discloses the unfunded commitments, redemption frequency and redemption notice period for investments measured at net asset value as July 1, 2016 and 2015: Defined Benefit Plan Assets Unfunded 2016 Global equities Long/short fixed income limited partnerships $ 35,216 2015 $ 38,053 Redemption Commitments Redemption Notice as of 7-1-16 Frequency Period 0 Monthly 6 days $ 46,421 66,246 0 Quarterly 45-90 days Long/short equity limited partnerships 78,498 105,870 0 Monthly/Quarterly 30-90 days Multi-strategy hedge fund limited partnerships 33,970 51,655 0 Quarterly/Biannually/ Annually 45-90 days Commodities fund of funds limited partnerships 13,459 15,938 0 Monthly 35 days Private equity fund of funds limited partnerships 43,587 39,080 25,846 n/a n/a $ 251,151 $ 316,842 Total $ 25,846 The Plan’s presentation of asset segments is consistent with the System’s presentation as detailed in note 3. Pension expense and deferred outflows of resources and deferred inflows of resources related to the CHS DB Plan – For the year ended December 31, 2016, the System recognized pension expense of $119,047 for the CHS DB Plan. At December 31, 2016, the System reported net deferred outflows of resources as follows based on July 1, 2016 measurement date: Deferred outflows of resources Difference between expected and actual experience related to demographic factors Assumption changes Difference between expected and actual investment earnings Total $ 6,156 17,580 Deferred inflows of resources $ 102,282 $ 54 126,018 (3,016) 0 Net deferred outflows (inflows) $ 0 $ (3,016) 3,140 17,580 102,282 $ 123,002 (Continued) At December 31, 2015, the System recognized pension expense of $96,473 for the CHS DB Plan and reported net deferred outflows of resources as follows based on July 1, 2015 measurement date: Deferred outflows of resources Difference between expected and actual experience related to demographic factors Difference between expected and actual investment earnings Total $ 0 Deferred inflows of resources $ (3,553) $ 31,843 $ 31,843 Net deferred outflows (inflows) 0 $ (3,553) $ (3,553) 31,843 28,290 Amounts reported above as deferred outflows of resources and deferred inflows of resources related to the CHS DB Plan will be recognized in pension expense for the years ended December 31, as follows: Amount 2017 2018 2019 2020 2021 Thereafter $ 30,630 30,630 30,630 22,670 3,070 5,372 $ 123,002 CHS Cleveland DB Plan and CHS Stanly DB Plan Actuarial Assumptions and Reporting - The actuarial assumptions used for the CHS Cleveland DB Plan and the CHS Stanly DB Plan are similar to assumptions used for the CHS DB Plan described above. The CHS Cleveland DB Plan had a net pension liability of $17,709 and $10,765 and reported net deferred outflows of $8,578 and $4,044 at December 31, 2016 and 2015, respectively. The CHS Cleveland DB Plan had actuarially valued assets of $66,374 and $70,901 at December 31, 2016 and 2015, respectively. The CHS Stanly DB Plan had a net pension (asset) liability of $(1,383) and $1 and reported net deferred outflows of $4,227 and $915 at December 31, 2016 and 2015, respectively. The CHS Stanly DB Plan had actuarially valued assets of $44,315 and $45,105 at December 31, 2016 and 2015, respectively. (9) Commitments and Contingencies The System is subject to legal proceedings and claims that arise in the course of providing healthcare services. The System has instituted a limited self insurance program for professional liability and general liability claims. Self-insurance is limited to $5 million per occurrence, with no aggregate limit. General liability and professional liability are also covered by umbrella liability insurance policies. In management’s opinion, adequate provision has been made for amounts expected to be paid under the policy’s deductible limits for asserted and unasserted claims not covered by the policy and any other uninsured liability. The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to 55 (Continued) investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. In June 2016, the federal government and the State of North Carolina filed a civil antitrust lawsuit against the System alleging that the System violated Section 1 of the Sherman Act by imposing steering restrictions in negotiated agreements with four insurance companies in the Charlotte, North Carolina area. In August 2016, the System answered the complaint and moved that it be dismissed as a matter of law. In March 2017, a federal district court denied the Motion for Judgment on the Pleadings filed by the System. This civil antitrust lawsuit seeks injunctive relief only and no monetary damages are sought. In September 2016, an individual filed a proposed class action lawsuit making similar allegations against the System. This lawsuit seeks treble damages for an unspecified amount but no class has been certified. The System intends to vigorously defend these lawsuits; however, the System cannot guarantee the outcome of the lawsuits. The ultimate resolution of these lawsuits could have a material adverse effect on the System’s condition (financial or otherwise) or operations. Given the very early stages of these cases, it is impossible to estimate the likelihood of an unfavorable outcome or the risk of exposure facing the System. Obligations under noncancelable operating leases, principally real estate leases for medical office space, as of December 31, 2016, were as follows: 2017 2018 2019 2020 2021 2022–2026 2027–2031 $ 71,887 71,395 57,092 48,015 34,516 73,229 2,772 $ 358,906 The System has entered into contracts for various construction and capital projects, for which remaining commitments totaled approximately $159,368 at December 31, 2016. In connection with the merger with Cabarrus Memorial Hospital d/b/a NorthEast Medical Center in 2007, the System has committed to invest $600,000 in healthcare facilities and services in Cabarrus County, North Carolina. As of December 31, 2016, the System has spent $483,000 and approved an additional $177,000 which is well in excess of the $117,000 needed to fulfill this commitment. Of the $117,000 in approved expenditures, over $81,000 is included in the $159,368 of construction and capital commitments noted above. Effective January 1, 2012, under the terms of a Lease Agreement between the System and Union County, the System leases hospital real estate from, and makes annual lease payments to, Union County. The initial term of the Lease Agreement remains in effect until December 31, 2061, unless earlier terminated, extended or renewed in accordance with the provisions of the Lease Agreement. Upon the expiration of the initial term, unless certain events of default exist, the System has the option to extend and renew the Lease Agreement for an initial renewal term of 25 years. During the term of the Lease Agreement, Union County has the right to require the System to purchase the hospital real estate at a stated price determined in accordance with the Lease Agreement. If Union County elects to require the System to purchase the hospital real estate, the System will have no further obligations under the Lease Agreement. As of December 31, 2016, the purchase price as stated in the Lease Agreement was $128,463. The present value of the System’s 56 (Continued) obligation for the annual lease payments, discounted using an effective interest rate of 4.34%, was $124,347 as of December 31, 2016, and is recorded on the balance sheet as a long-term liability. The liability and related interest are payable in annual installments of approximately $6,000 per year through 2061. Additionally, as part of the Lease Agreement between the System and Union County, the System has committed to reinvest in healthcare related facilities and operations in Union County. As measured in 15-year increments commencing January 1, 2012, the System has committed to spending in Union County no less than 75% of the capital spending ratio of the System as a whole (defined as capital investments divided by net operating revenues), but limited to 75% of the operating income of the Union Healthcare Enterprise as defined in the Lease Agreement. The System has reinvested in excess of the commitment levels for the first four years of the 15-year period. The System committed to invest $70,000 in CHS Stanly and its subsidiaries over a period of 12 years, which includes a five-year commitment of $48,830 before the end of 2018. Of those totals, the System has committed to $22,600 of specifically identified projects by the end of 2016, which has been met. As of December 31, 2016, the System has spent and/or approved $40,247 towards the full $70,000 commitment. 57 REQUIRED SUPPLEMENTARY INFORMATION THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios (Unaudited) December 31, 2016 and 2015 (In thousands) 2016 Total pension liability: Service cost Interest cost Changes of benefit terms Differences between expected and actual experiences Changes of assumptions Benefit payments $ Net change in total pension liability 53,214 95,928 0 7,092 20,252 (106,420) 2015 $ 70,066 55,197 93,442 0 (4,091) 0 (112,417) 2014 $ 32,131 NA NA NA NA NA NA NA Total pension liability – beginning 1,279,041 1,246,910 Total pension liability – ending (a) 1,349,107 1,279,041 Plan fiduciary net position: Contributions – employer Investment gains and other, net Benefit payments Administrative expense 132,884 (36,909) (106,420) (365) 92,405 20,481 (112,417) (696) NA NA NA NA (10,810) (227) NA 859,518 859,745 NA Net change in plan fiduciary net position Plan fiduciary net position – beginning Plan fiduciary net position – ending (b) 848,708 Net pension liability – ending (a) – (b) $ Plan fiduciary net position as a percentage of the total pension liability Covered-employee payroll 1,959,073 25.5% Note to schedule: Measurement date is July 1 of prior fiscal year See accompanying independent auditors’ report. 58 859,518 $ 62.9% $ Net pension liability as a percentage of covered-employee payroll 500,399 NA 1,246,910 419,523 859,745 $ 67.2% $ 1,995,117 21.0% 387,165 69.0% $ 1,909,014 20.3% THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Required Supplementary Information Schedule of Pension Contributions (Unaudited) December 31, 2016 , 2015 and 2014 (In thousands) 2016 Actuarially determined contribution Contributions in relation to the actuarially determined contribution $ Contribution deficiency (excess) Covered-employee payroll Contributions as a percentage of covered-employee payroll 90,684 132,884 2015 $ 79,015 79,015 $ (42,200) $ 0 $ 0 1,959,073 $ 1,995,117 $ 1,909,014 6.8% 4.6% Methods and assumptions used to determine contribution rate for 2016: Actuarial Cost Method: Entry Age Normal with 20-year closed amortization period for initial unfunded and subsequent actuarial gains/losses. Asset Valuation Method: 5-year smoothing Cash Balance Interest Credits: 5.00% Salary Increases: 3.00% Investment Rate of Return: 7.50%, net of pension plan investment expense, including inflation Retirement Age: Varies by age, same as for GASB 68 Mortality: RP-2014 with generational projection using scale MP-2015 59 $ $ Notes to Schedule: Valuation Date: Actuarially determined contribution rates are calculated as of January 1, one year prior to the end of the fiscal year in which contributions are reported. See accompanying independent auditors’ report. 2014 92,405 92,405 4.1% OTHER FINANCIAL INFORMATION THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Combining Schedule of Assets, Deferred Outflows of Resources, Liabilities, Deferred Inflows of Resources and Net Position – Combined Group December 31, 2016 and 2015 (Dollars in thousands) 2016 Primary Enterprise Assets and Deferred Outflows of Resources Current assets: Cash and cash equivalents Short-term investments Patient accounts receivable – net Other accounts receivable Assets limited as to use – investments Inventories Prepaid expenses The Carolinas HealthCare Foundation, Inc. $ Total current assets 142,725 0 732,526 115,661 34,148 63,325 72,158 $ 4,686 6,765 0 8,563 0 0 320 2015 Subtotal $ 147,411 6,765 732,526 124,224 34,148 63,325 72,478 Eliminations $ 0 0 0 (1,977) 0 0 0 Primary Enterprise Total $ 147,411 6,765 732,526 122,247 34,148 63,325 72,478 The Carolinas HealthCare Foundation, Inc. $ 173,812 125 703,734 101,357 33,097 61,490 60,940 $ 4,684 6,059 0 7,546 0 0 368 Subtotal $ 178,496 6,184 703,734 108,903 33,097 61,490 61,308 Eliminations $ 0 0 0 (2,168) 0 0 0 Total $ 178,496 6,184 703,734 106,735 33,097 61,490 61,308 1,160,543 20,334 1,180,877 (1,977) 1,178,900 1,134,555 18,657 1,153,212 (2,168) 1,151,044 5,556,647 (2,509,561) 11,504 (5,811) 5,568,151 (2,515,372) 0 0 5,568,151 (2,515,372) 5,281,020 (2,250,437) 10,983 (5,267) 5,292,003 (2,255,704) 0 0 5,292,003 (2,255,704) Total capital assets – net 3,047,086 5,693 3,052,779 0 3,052,779 3,030,583 5,716 3,036,299 0 3,036,299 Other noncurrent assets: Assets limited as to use: Investments designated for capital improvement Other long-term investments Other assets limited as to use – investments Other assets 3,478,928 24,257 107,037 180,046 0 257,766 0 35,814 3,478,928 282,023 107,037 215,860 0 0 0 (1,698) 3,478,928 282,023 107,037 214,162 3,062,478 17,150 96,348 165,315 0 248,805 0 21,236 3,062,478 265,955 96,348 186,551 0 0 0 (22) 3,062,478 265,955 96,348 186,529 Capital assets Accumulated depreciation Total other noncurrent assets 3,790,268 293,580 4,083,848 (1,698) 4,082,150 3,341,291 270,041 3,611,332 (22) 3,611,310 Total assets 7,997,897 319,607 8,317,504 (3,675) 8,313,829 7,506,429 294,414 7,800,843 (2,190) 7,798,653 Deferred outflows of resources Total assets and deferred outflows of resources 371,246 0 371,246 0 371,246 286,190 0 286,190 0 286,190 $ 8,369,143 $ 319,607 $ 8,688,750 $ (3,675) $ 8,685,075 $ 7,792,619 $ 294,414 $ 8,087,033 $ (2,190) $ 8,084,843 $ 265,272 342,799 195,669 194,140 65,849 $ 307 0 1,983 0 0 $ 265,579 342,799 197,652 194,140 65,849 $ 0 0 (1,977) 0 0 $ 265,579 342,799 195,675 194,140 65,849 $ 242,404 290,694 207,527 169,506 60,980 $ 308 0 2,196 0 0 $ 242,712 290,694 209,723 169,506 60,980 $ 0 0 (2,190) 0 0 $ 242,712 290,694 207,533 169,506 60,980 Liabilities, Deferred Inflows of Resources and Net Position Current liabilities: Accounts payable Salaries and benefits payable Other liabilities and accruals Estimated third-party payer settlements Current portion of long-term debt Total current liabilities 1,063,729 2,290 1,066,019 (1,977) 1,064,042 971,111 2,504 973,615 (2,190) 971,425 Long-term debt – less current portion Interest rate swap liability Pension liability Other liabilities 1,838,134 224,535 516,725 326,968 0 0 0 2,942 1,838,134 224,535 516,725 329,910 0 0 0 (1,698) 1,838,134 224,535 516,725 328,212 1,855,245 261,736 430,289 339,259 0 0 0 1,295 1,855,245 261,736 430,289 340,554 0 0 0 0 1,855,245 261,736 430,289 340,554 3,970,091 5,232 3,975,323 (3,675) 3,971,648 3,857,640 3,799 3,861,439 (2,190) 3,859,249 39,530 0 39,530 0 39,530 45,101 0 45,101 0 45,101 1,147,721 28,379 3,183,422 5,693 278,303 30,379 1,153,414 306,682 3,213,801 0 0 0 1,153,414 306,682 3,213,801 1,104,483 25,819 2,759,576 5,716 253,272 31,627 1,110,199 279,091 2,791,203 0 0 0 1,110,199 279,091 2,791,203 Total liabilities Commitments and contingencies Deferred inflows of resources Net position: Net investment in capital assets Restricted – by donor Unrestricted Total net position Total liabilities, deferred inflows of resources and net position 4,359,522 $ 8,369,143 314,375 $ 319,607 4,673,897 $ 8,688,750 0 $ (3,675) 4,673,897 $ 8,685,075 3,889,878 $ 7,792,619 290,615 $ 294,414 4,180,493 $ 8,087,033 0 $ (2,190) 4,180,493 $ 8,084,843 The Total column presented above represents the Combined Group, which consists of the Obligated Group and its Designated Affiliates (including non-Obligated Group affiliates that at December 31, 2016 represent less than 1% of the total revenue and less than 1% of the total assets of the Combined Group; these same non-Obligated Group affiliates represent less than 1% of the total revenue and less than 1% of the total assets of the Primary Enterprise column), as such terms are defined in Section 101 of the Charlotte-Mecklenburg Hospital Authority’s Second Amended and Restated Bond Order adopted as of September 9, 1997, as amended. Because none of the members of the Obligated Group have Designated Affiliates at this time, the only members of the Combined Group are the members of the Obligated Group. See accompanying independent auditors’ report. 60 THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Combining Schedule of Revenues, Expenses and Changes in Net Position – Combined Group Years ended December 31, 2016 and 2015 (Dollars in thousands) 2016 The Carolinas HealthCare Foundation, Inc. Primary Enterprise Net patient service revenue Other revenue $ Total revenue 5,136,830 520,571 $ 0 18,772 2015 Subtotal $ 5,136,830 539,343 Eliminations $ 0 (26,723) Primary Enterprise Total $ 5,136,830 512,620 The Carolinas HealthCare Foundation, Inc. $ 4,948,438 514,047 $ 0 16,113 Subtotal $ 4,948,438 530,160 Eliminations $ 0 (24,979) Total $ 4,948,438 505,181 5,657,401 18,772 5,676,173 (26,723) 5,649,450 5,462,485 16,113 5,478,598 (24,979) 5,453,619 3,305,457 975,673 377,429 394,175 299,487 89,660 2,145 0 0 28,091 640 0 3,307,602 975,673 377,429 422,266 300,127 89,660 0 0 0 (25,673) 0 0 3,307,602 975,673 377,429 396,593 300,127 89,660 3,131,025 917,758 328,598 410,645 274,767 85,649 2,176 0 0 26,479 556 0 3,133,201 917,758 328,598 437,124 275,323 85,649 0 0 0 (23,629) 0 0 3,133,201 917,758 328,598 413,495 275,323 85,649 5,441,881 30,876 5,472,757 (25,673) 5,447,084 5,148,442 29,211 5,177,653 (23,629) 5,154,024 215,520 (12,104) 203,416 (1,050) 202,366 314,043 (13,098) 300,945 (1,350) 299,595 46,957 202,375 (1,277) 2,639 14,741 0 49,596 217,116 (1,277) 0 0 1,050 49,596 217,116 (227) 45,727 (134,101) (2,120) 2,495 (9,295) 0 48,222 (143,396) (2,120) 0 0 1,350 48,222 (143,396) (770) Total nonoperating income (loss) – net 248,055 17,380 265,435 1,050 266,485 (90,494) (6,800) (97,294) 1,350 (95,944) Revenue over (under) expenses before contributions 463,575 5,276 468,851 0 468,851 223,549 (19,898) 203,651 0 203,651 5,945 124 0 17,468 1,016 0 23,413 1,140 0 0 0 0 23,413 1,140 0 7,489 228 (460,905) (485) 2,089 0 7,004 2,317 (460,905) 0 0 0 7,004 2,317 (460,905) 469,644 23,760 493,404 0 493,404 (229,639) (18,294) (247,933) 0 (247,933) Operating expenses: Personnel costs Supplies Purchased services Other expenses Depreciation and amortization Interest expense Total operating expenses Operating income (loss) Nonoperating income Interest and dividend income Net increase (decrease) in the fair value of investment Other – net Capital contributions Other contributions Cumulative effect of change in accounting principl Increase (decrease) in net position Net position: Beginning of year End of year 3,889,878 $ 4,359,522 290,615 $ 314,375 4,180,493 $ 4,673,897 0 $ 0 4,180,493 $ 4,673,897 4,119,517 $ 3,889,878 308,909 $ 290,615 4,428,426 $ 4,180,493 0 $ 0 4,428,426 $ 4,180,493 The Total column presented above represents the Combined Group, which consists of the Obligated Group and its Designated Affiliates (including non-Obligated Group affiliates that at December 31, 2016 represent less than 1% of the total revenue and less than 1% of the total assets of the Combined Group; these same non-Obligated Group affiliates represent less than 1% of the total revenue and less than 1% of the total assets of the Primary Enterprise column), as such terms are defined in Section 101 of the Charlotte-Mecklenburg Hospital Authority’s Second Amended and Restated Bond Order adopted as of September 9, 1997, as amended. Because none of the members of the Obligated Group have Designated Affiliates at this time, the only members of the Combined Group are the members of the Obligated Group. See accompanying independent auditors’ report. 61 THE CHARLOTTE-MECKLENBURG HOSPITAL AUTHORITY (d/b/a Carolinas HealthCare System) Combining Statements of Cash Flows – Combined Group Years ended December 31, 2016 and 2015 (Dollars in thousands) 2016 The Carolinas HealthCare Foundation, Inc. Primary Enterprise Cash flows from operating activities: Receipts from third-party payers and patient Payments to suppliers Payments to employees Other receipts– net $ Net cash provided by (used in) operating activities 5,133,755 (1,741,815) (3,293,868) 470,978 $ 0 (12,983) 0 870 2015 Subtotal $ 5,133,755 (1,754,798) (3,293,868) 471,848 Eliminations $ 0 (1,050) 0 0 Primary Enterprise Total $ 5,133,755 (1,755,848) (3,293,868) 471,848 The Carolinas HealthCare Foundation, Inc. $ 4,919,035 (1,657,692) (3,139,482) 526,907 $ 0 (14,474) 0 902 Subtotal $ 4,919,035 (1,672,166) (3,139,482) 527,809 Eliminations $ 0 (1,350) 0 0 Total $ 4,919,035 (1,673,516) (3,139,482) 527,809 569,050 (12,113) 556,937 (1,050) 555,887 648,768 (13,572) 635,196 (1,350) 633,846 3,723 0 3,723 1,050 4,773 21,960 0 21,960 1,350 23,310 Cash flows from capital and related financing activities: Purchase of capital assets Donated funds designated for building and equipment purchase Acquisition of health related businesse Principal payments, refunding and retirements on short- and long-term deb Interest payments on short- and long-term deb Decrease in bond proceeds held by trustee Proceeds from issuance of long-term deb (Increase) decrease in other assets affecting capital and related financing activitie Other contributions (300,859) 4,756 (5,293) (761,723) (103,747) 0 730,723 (1,721) 0 (617) 2,189 0 0 0 0 0 116 1,016 (301,476) 6,945 (5,293) (761,723) (103,747) 0 730,723 (1,605) 1,016 0 0 0 0 0 0 0 0 0 (301,476) 6,945 (5,293) (761,723) (103,747) 0 730,723 (1,605) 1,016 (249,790) 7,489 0 (46,450) (94,701) 2,915 13,125 1,709 0 (882) (485) 0 0 0 0 0 (1,635) 2,089 (250,672) 7,004 0 (46,450) (94,701) 2,915 13,125 74 2,089 0 0 0 0 0 0 0 0 0 (250,672) 7,004 0 (46,450) (94,701) 2,915 13,125 74 2,089 Net cash (used in) provided by capital and related financing activities (437,864) 2,704 (435,160) 0 (435,160) (365,703) (913) (366,616) 0 (366,616) 100,000 (276,000) 2,732 7,675 (403) 9,400 0 11 0 0 109,400 (276,000) 2,743 7,675 (403) 0 0 0 0 0 109,400 (276,000) 2,743 7,675 (403) 245,000 (514,000) 1,134 23,040 (1,449) 16,000 0 13 0 0 261,000 (514,000) 1,147 23,040 (1,449) 0 0 0 0 0 261,000 (514,000) 1,147 23,040 (1,449) (165,996) 9,411 (156,585) 0 (156,585) (246,275) 16,013 (230,262) 0 (230,262) (31,087) 2 (31,085) 0 (31,085) 58,750 1,528 60,278 0 60,278 Noncapital financing activities Cash flows from investing activities: Withdrawal from investments designated for capital improvement Contribution to investments designated for capital improvement Investment earnings Decrease in other trusteed assets Purchase of investments Net cash (used in) provided by investing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents: Beginning of year End of year Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) Interest expense considered capital financing activit Adjustments to reconcile operating income (loss) to net cash provided b (used in) operating activities Depreciation and amortization Increase in patient accounts receivable – ne Increase in inventories and other current asset (Increase) decrease in other assets affecting operating activitie Increase in accounts payable and other current liabilitie (Decrease) increase in other liabilities affecting operating activitie Increase (decrease) in estimated third-party payer settlement Net cash provided by (used in) operating activities 173,812 4,684 178,496 0 178,496 115,062 3,156 118,218 0 118,218 $ 142,725 $ 4,686 $ 147,411 $ 0 $ 147,411 $ 173,812 $ 4,684 $ 178,496 $ 0 $ 178,496 $ 215,520 89,660 $ (12,104) 0 $ 203,416 89,660 $ (1,050) 0 $ 202,366 89,660 $ 314,043 85,649 $ (13,098) 0 $ 300,945 85,649 $ (1,350) 0 $ 299,595 85,649 299,487 (28,792) (30,213) (9,534) 35,541 (27,253) 24,634 $ 569,050 640 0 (675) 12 0 14 0 $ (12,113) 300,127 (28,792) (30,888) (9,522) 35,541 (27,239) 24,634 $ 556,937 0 0 (22) (191) 213 0 0 $ (1,050) 300,127 (28,792) (30,910) (9,713) 35,754 (27,239) 24,634 $ 555,887 274,767 (34,415) (13,445) 7,435 34,422 (17,045) (2,643) $ 648,768 556 0 (1,175) 76 69 0 0 $ (13,572) 275,323 (34,415) (14,620) 7,511 34,491 (17,045) (2,643) $ 635,196 0 0 0 0 0 0 0 $ (1,350) 275,323 (34,415) (14,620) 7,511 34,491 (17,045) (2,643) $ 633,846 The Total column presented above represents the Combined Group, which consists of the Obligated Group and its Designated Affiliates (including non-Obligated Group affiliates that at December 31, 2016 represent less than 1% of the total revenue and less than 1% of the total assets of the Combined Group; these same non-Obligated Group affiliates represent less than 1% of the total revenue and less than 1% of the total assets of the Primary Enterprise column), as such terms are defined in Section 101 of the Charlotte-Mecklenburg Hospital Authority’s Second Amended and Restated Bond Order adopted as of September 9, 1997, as amended. Because none of the members of the Obligated Group have Designated Affiliates at this time, the only members of the Combined Group are the members of the Obligated Group. See accompanying independent auditors’ report. 62