The Commonwealth Fund (the "Fund") is a private foundation supporting independent research on health and social issues.
a.
Investments — Investments in equity securities with readily determinable fair values and all investments in debt securities are carried at fair value, which approximates market value. Assets with limited marketability, such as alternative asset limited partnerships, are stated at the Fund's equity interest in the underlying net assets of the partnerships, which are stated at fair value as reported by the partnerships. Realized gains and losses on dispositions of investments are determined on the following bases: FIFO for actively managed equity and fixed income, average cost for commingled mutual funds, and specific identification basis for alternative assets.
In accordance with Financial Accounting Standards Board Statement No.133, Accounting for Derivative Instruments and Hedging Activities, the Fund records derivative instruments in the statements of financial position at their fair value, with changes in fair value being recorded in the statement of activities. The Fund does not hold or issue financial instruments, including derivatives, for trading purposes. Both realized and unrealized gains and losses are recognized in the statements of activities.
b.
Fixed Assets — Furniture, equipment, and building improvements are depreciated using the
straight-line method over their estimated useful lives.
c.
Contributions, Promises to Give, and Net Assets Classifications — Contributions received and made, including unconditional promises to give, are recognized in the period incurred. The Fund reports contributions as restricted if received with a donor stipulation that limits the use of the donated assets. Unconditional promises to give for future periods are presented as program authorizations payable on the statement of financial position at fair values, which includes a discount for present value.
d.
Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires the Fund's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of additions to and deductions from the statement of activities. The calculation of the present value of program authorizations payable, present value of accumulated postretirement benefits, deferred Federal excise taxes, and the depreciable lives of fixed assets requires the significant use of estimates. Actual results could differ from those estimates.
e.
Reclassifications — Certain prior year's amounts have been reclassified to conform to the current year's presentation.
2.
Investments
Investments at June 30, 2003 and 2002 comprised the following:
2003
2002
Fair Value
Cost
Fair Value
Cost
U.S. Equities
$204,406,869
$214,896,635
$203,489,962
$243,609,135
Non-U.S. Equities
100,628,294
92,578,688
54,623,652
51,635,737
Fixed income
79,075,285
77,792,969
157,230,687
152,801,073
Short-term
13,957,645
14,019,919
19,344,993
19,205,892
Marketable alternative equity
56,670,856
29,560,194
40,896,657
16,008,520
Nonmarketable alternative equity
10,200,114
18,172,907
11,744,061
18,771,284
Inflation hedge
30,209,893
27,351,262
19,549,200
18,577,565
$498,148,956
$474,372,574
$506,879,212
$520,609,206
At June 30, 2003, the Fund had total unexpended commitments of approximately $24.1 million in various limited partnership investments.
The Fund's investment managers may use futures contracts to manage asset allocation and to adjust the duration of the fixed income portfolio. In addition, investment managers may use foreign exchange forward contracts to minimize the exposure of certain Fund investments to adverse fluctuations in the financial and currency markets. The table below summarizes the Fund's outstanding positions in futures and forward contracts at June 30:
2003
2002
Contract type
Number of Long (Short) Contracts
Notional Amount
Number of Long (Short) Contracts
Notional Amount
30-year Treasury Bond futures
45
4,500,000
35
3,500,0005
10-year Treasury Note futures
74
7,400,000
1
100,000
5-year Treasury Note futures
(78)
7,800,000
1
100,000
2-year Treasury Note futures
(30)
6,000,000
—
—
Included in short-term investments at June 30, 2003 is a variation amount receivable of approximately $33,000, which represents funds due from brokers for excess amounts on deposit. At June 30, 2002, there was a variation amount payable of approximately $12,000, which represented funds due to brokers for additional amounts required on deposit. Also included in short term investments are unrealized losses and gains on open futures contracts of approximately $69,000 and $70,000 at June 30, 2003 and June 30, 2002, respectively.
3.
Program Authorizations Payable
At June 30, 2003, program authorizations scheduled for payment at later dates were as follows:
July 1, 2003 through June 30, 2004
$17,410,853
July 1, 2004 through June 30, 2005
1,311,929
July 1, 2005 through June 30, 2006
56,127
Gross program authorizations scheduled for payment at a later date
18,778,909
Less adjustment to present value
27,904
Program authorizations payable
$18,751,005
A discount rate of 1.2% was used to determine the present value of the program authorizations payable at June 30, 2003.
4.
Unfunded Retirement and Other Postretirement Benefits
The Fund has a noncontributory defined contribution retirement plan, covering all employees, under arrangements with Teachers Insurance and Annuity Association of America and College Retirement Equities Fund and Fidelity Investments. This plan provides for purchases of annuities and/or mutual funds for employees. The Fund's contributions approximated 20% and 19% of the participants' compensation for the years ended June 30, 2003 and 2002, respectively. Pension expense under this plan approximated $938,000 and $746,000 for the years ended June 30, 2003 and 2002, respectively. In addition, the plan allows employees to make voluntary tax-deferred purchases of these same annuities and/or mutual funds within the legal limits provided for under Federal law.
The Fund also has a group of former employees who retired prior to the inauguration of the above plan and certain other former employees to whom pension benefits have been approved, on an individual case basis, by the board of directors. Benefits under this program are paid directly by the Fund to these retirees. This pension expense is included in the Fund's unfunded retirement and other postretirement expense and approximated $93,000 and $107,000 for the years ended June 30, 2003 and 2002, respectively. In addition, the Fund provides health and life insurance to certain former employees.
Effective July 1, 1998, the Fund entered into deferred compensation agreements with certain senior executives that provides for unfunded deferred compensation computed as a percentage of salary. Such deferred compensation expense for the years ended June 30, 2003 and 2002 is recorded in the financial statements.
Effective July 1, 2001, the Fund established a fully-funded KEYSOP for certain key executives which exchanges deferred compensation benefits for options to purchase mutual funds. In addition, the KEYSOP awarded options to purchase mutual funds to certain employees in exchange for certain pension benefits. This expense and the related investments are recorded in the financial statements as of and for the years ended June 30, 2003 and 2002, respectively. The Fund no longer makes any contributions to this KEYSOP.
Effective July 9, 2002, the Fund established a Section 457 Plan for certain employees that provides for unfunded deferred compensation with employer contributions made within the legal limits provided for under Federal law.
The Fund provides postretirement medical insurance coverage for retirees who meet the eligibility criteria. The following data is for the Fund's postretirement medical plan for the years ended June 30, 2003 and 2002:
2003
2002
Benefit obligation at June 30
$1,492,410
$1,689,435
Fair value of plan assets at June 30
—
—
Funded status
$(1,492,410)
$(1,689,435)
Accrued benefit cost recognized
$1,765,517
$2,052,010
Net periodic (benefit) expense
$(197,025)
$568,923
Employer contribution
$89,468
$75,373
Significant assumptions related to postretirement benefits as of June 30 were as follows:
2003
2002
Discount rate
5.9%
7.0%
Health care cost trend rates — Initial
10.0%
9.5%
Health care cost trend rates — Ultimate
5.0%
5.5%
5.
Tax Status
The Fund is exempt from Federal income taxes under Section 501(c)(3) of the Internal Revenue Code, but is subject to a 2% or 1% Federal excise tax, if certain criteria are met, on net investment income. For the years ended June 30, 2003 and 2002, that excise tax rate was 1% and 2%, respectively. The Fund is also subject to Federal and state taxes on unrelated business income. In addition, The Fund records deferred Federal excise taxes, based upon expected excise tax rates, on the unrealized appreciation or depreciation of investments being reported for financial reporting purposes in different periods than for tax purposes.
The Fund is required to make certain minimum distributions in accordance with a formula specified by the Internal Revenue Service. For the year ended June 30, 2003, distributions approximating $27.9 million were made before the June 30, 2004 deadline to satisfy the minimum requirements of approximately $23.1 million for fiscal year 2003.
In the Statements of Financial Position, the deferred tax liability of $475,528 at June 30, 2003 resulted from Federal excise taxes on unrealized appreciation on investments. At June 30, 2002, the deferred tax asset of $285,942 represented a federal excise tax benefit on the unrealized depreciation on investments.
For the years ended June 30, 2003 and 2002, the tax provision (benefit) - net was as follows:
2003
2002
Excise taxes — current
$129,680
$123,838
Excise taxes — deferred
761,470
(605,276)
Unrelated business income taxes — current
44,561
2,135
Unrelated business income taxes — deferred
—
23,965
$935,711
$(455,338)
6.
Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Fund, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Fund could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
All Financial Instruments Other Than Investments — The carrying amounts of these items are a reasonable estimate of their fair value.
Investments — For marketable securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market price for similar securities. For alternative asset limited partnerships held as investments, fair value is estimated using private valuations of the securities or properties held in these partnerships. The carrying amount of these items is a reasonable estimate of their fair value. For futures and foreign exchange forward contracts, the fair value equals the quoted market price.
7.
Contributions Received
In fiscal years 1987 and 1988, the Fund received a total of $15,415,804 as a grant from the James Picker Foundation, with an agreement that a designated portion of the Fund's grants be identified as "Picker Program Grants by the Commonwealth Fund." The Fund fulfills this obligation by making Picker Program Grants devoted to specific themes approved by the Fund's board of directors. For the years ended June 30, 2003 and 2002, Picker Program Grants totaled $1,370,227 and $942,000, respectively.
In April 1996, the Fund received The Health Services Improvement Fund, Inc.'s ("HSIF") assets and liabilities, $1,721,016 and $57,198, respectively, resulting in a $1,663,818 increase in net assets. In accordance with the terms of an agreement with HSIF, this contribution enables the Fund to make Commonwealth Fund/HSIF grants to improve health care coverage, access, and quality in the New York City greater metropolitan region.
During the year ended June 30, 2002, the Fund received a bequest of $3,001,124 from the estate of Professor Frances Cooke Macgregor as a contribution to the general endowment, with the amount of annual grants generated by this addition to the endowment to be governed by the Fund's overall annual payout policies. This gift was made with the provisions that in at least the five-year period following its receipt, grants made possible by it will be used to address iatrogenic medicine issues, and that grants made possible by the gift be designated "Frances Cooke Macgregor" grants. In keeping with this bequest, an amount of $552,000 was recorded as a temporarily restricted net asset as of and for the year ended June 30, 2002.
During the year ended June 30, 2002, the Fund received a bequest of $3,001,124 from the estate of Professor Frances Cooke Macgregor as a contribution to the general endowment, with the amount of annual grants generated by this addition to the endowment to be governed by the Fund's overall annual payout policies. This gift was made with the provisions that in at least the five-year period following its receipt, grants made possible by it will be used to address iatrogenic medicine issues, and that grants made possible by the gift be designated "Frances Cooke Macgregor" grants. In keeping with this bequest, an amount of $552,000 was recorded as a temporarily restricted net asset as of and for the year ended June 30, 2002.
During the year ended June 30, 2003, net assets released from donor restrictions were $150,000.
