Community Hospitals of Central California and Affiliated ......Report of independent auditors on internal control over financial reporting and ... Auditor’s Responsibility ... 1,276,1311,245,976

Report of Independent Auditors

and Consolidated Financial Statements

Community Hospitals of Central California and Affiliated Corporations

dba Community Medical Centers

August 31, 2014 and 2013

CONTENTS

PAGEREPORTOFINDEPENDENTAUDITORS 1–2CONSOLIDATEDFINANCIALSTATEMENTS Consolidatedbalancesheets 4 Consolidatedstatementsofoperations 5 Consolidatedstatementsofchangesinnetassets 6 Consolidatedstatementsofcashflows 7 Notestoconsolidatedfinancialstatements 836SINGLEAUDIT Scheduleofexpendituresoffederalawards 38 Notestoscheduleofexpendituresoffederalawards 39 Reportofindependentauditorsoninternalcontroloverfinancialreportingand oncomplianceandothermattersbasedonanauditoffinancialstatements performedinaccordancewithGovernmentAuditingStandards 4041 Reportofindependentauditorsoncomplianceforeachmajorprogramandon internalcontrolovercomplianceinaccordancewithOMBCircularA‐133 4244 Scheduleoffindingsandquestionedcosts 45–47 Summaryscheduleofpriorauditfindings 48

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REPORTOFINDEPENDENTAUDITORSTheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersReportontheFinancialStatements

We have audited the accompanying consolidated financial statements of Community Hospitals of CentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCenters(CMC),whichcomprisetheconsolidatedbalancesheetsasofAugust31,2014and2013,andtherelatedconsolidatedstatementsofoperations,changesin net assets, and cash flows for the years then ended, and the related notes to the consolidated financialstatements.Management’sResponsibilityfortheConsolidatedFinancialStatements

Managementisresponsibleforthepreparationandfairpresentationoftheseconsolidatedfinancialstatementsinaccordancewithaccountingprinciplesgenerallyaccepted in theUnitedStatesofAmerica; this includesthedesign,implementation,andmaintenanceofinternalcontrolrelevanttothepreparationandfairpresentationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.Auditor’sResponsibility

Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.WeconductedourauditsinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmericaand the standards applicable to financial audits contained in Government Auditing Standards, issued by theComptrollerGeneraloftheUnitedStates.Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreefrommaterialmisstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in theconsolidated financial statements. The procedures selected depend on the auditor’s judgment, including theassessmentoftherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudor error. In making those risk assessments, the auditor considers internal control relevant to the entity’spreparationandfairpresentationoftheconsolidatedfinancialstatementsinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheentity’s internalcontrol.Accordingly,weexpressnosuchopinion.Anauditalso includesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofsignificantaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationoftheconsolidatedfinancialstatements.We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our auditopinion.

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Opinion

Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,theconsolidatedbalancesheetsofCMCasofAugust31,2014and2013,andthechangesintheirnetassetsandtheircashflowsfortheyearsthenendedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.OtherMatters

OtherInformation

Ourauditwasconducted for thepurposeof forminganopinionon theconsolidated financialstatementsasawhole.Theaccompanyingscheduleofexpendituresoffederalawards,asrequiredbyOfficeofManagementandBudgetCircularA‐133,AuditsofStates,LocalGovernments,andNon‐ProfitOrganizations,isnotarequiredpartofthe consolidated financial statements. Such information is the responsibilityofmanagementandwasderivedfrom and relates directly to the underlying accounting and other records used to prepare the consolidatedfinancialstatements.Theinformationhasbeensubjectedtotheauditingproceduresappliedintheauditoftheconsolidatedfinancialstatementsandcertainadditionalprocedures,includingcomparingandreconcilingsuchinformationdirectlytotheunderlyingaccountingandotherrecordsusedtopreparetheconsolidatedfinancialstatements or to the consolidated financial statements themselves, and other additional procedures inaccordance with auditing standards generally accepted in the United States of America. In our opinion, theinformationisfairlystatedinallmaterialrespectsinrelationtotheconsolidatedfinancialstatementsasawhole.OtherReportingRequiredbyGovernmentAuditingStandards

InaccordancewithGovernmentAuditingStandards,wehavealsoissuedareportdatedNovember24,2014,onourconsideration of CMC’s internal control over financial reporting and on our tests of its compliance with certainprovisionsoflaws,regulations,contracts,andgrantagreementsandothermatters.Thepurposeofthatreportistodescribethescopeofourtestingofinternalcontroloverfinancialreportingandcomplianceandtheresultsofthattesting,andnottoprovideanopiniononinternalcontroloverfinancialreportingoroncompliance.Thatreport is an integral part of an audit performed in accordance with Government Auditing Standards inconsideringCMC’sinternalcontroloverfinancialreportingandcompliance.Stockton,CaliforniaNovember24,2014

CONSOLIDATEDFINANCIALSTATEMENTS

COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDBALANCESHEETS(Inthousands)

4 Seeaccompanyingnotes

2014 2013

Currentassets:Cashandequivalents 64,134$ 37,984$Short‐terminvestments 3,168 12,056Patientaccountsreceivable(lessallowancefordoubtful

accountsof$83,205in2014and$125,307in2013) 179,114 166,016Estimatedthird‐partysettlements 8,837 ‐DuefromStateofCaliforniaforsupplementalfunding 14,700 18,953Otherreceivables 4,227 60,194Inventories 11,714 10,572Prepaidexpensesandother 25,644 15,606

311,538 321,381Assetslimitedastouse:

Board‐designatedassets 316,160 295,315Assetsheldbytrusteefor:

Debtservice 35,556 35,600Self‐insuranceincaptiveinsurancecompany 9,864 12,703Projectfunds ‐ ‐

Donor‐restrictedassets 18,137 17,694379,717 361,312

Property,plant,andequipment,net 795,796 732,033Constructioninprogress 45,308 77,420Otherassets 96,772 74,269

1,629,131$ 1,566,415$

Currentliabilities:Accountspayable 70,645$ 68,836$Accruedcompensationandemployeebenefits 68,028 61,749Estimatedthird‐partysettlements ‐ 8,287Otheraccruedliabilitiesanddeferredrevenue 34,096 33,659Currentmaturitiesoflong‐termdebt 8,301 10,695

181,070 183,226Long‐termdebt,lesscurrentmaturities 510,735 515,683Pensionbenefitobligation 23,203 33,957Otherlong‐termobligations 60,116 50,714

775,124 783,580Netassets:

Unrestricted 835,870 765,141Temporarilyandpermanentlyrestricted 18,137 17,694

854,007 782,8351,629,131$ 1,566,415$

AUGUST31,

ASSETS

LIABILITIESANDNETASSETS

COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONS

dbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFOPERATIONS(Inthousands)

Seeaccompanyingnotes 5

2014 2013

Unrestrictedrevenues,gains,andothersupport:Netpatientservicerevenues 1,303,294$ 1,401,939$Less:Provisionforbaddebts (129,577) (174,206)

1,173,717 1,227,733Premiumrevenue 1,286 1,342Investmentincome 22,237 10,169Otherrevenue 48,736 36,887

1,245,976 1,276,131

Expenses:Salaries,wages,andbenefits 620,342 565,721Supplies 200,693 198,573Outsideservices 204,475 186,546Insurance 6,334 3,731Depreciationandamortization 61,026 54,434Rentalandlease 10,422 11,057Interest 23,255 21,075Utilities 12,736 11,945Other 40,718 122,183

1,180,001 1,175,265

Excessofrevenues,gains,andothersupportoverexpenses 65,975 100,866

Netchangeinunrealizedgainsandlossesoninvestments (311) (571)

Netassetsreleasedfromrestrictionsforequipmentacquisition 2,009 1,426

Changeinunfundedaccumulatedpensionbenefitobligation 3,056 41,322

Other ‐ 66

Changeinunrestrictednetassets 70,729$ 143,109$

YEARSENDEDAUGUST31,

COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFCHANGESINNETASSETS(Inthousands)

6

Temporarilyand

permanentlyUnrestricted restricted Total

BalanceatAugust31,2012 622,032$ 13,110$ 635,142$Excessofrevenues,gains,andother

supportoverexpenses 100,866 ‐ 100,866Netchangeinunrealizedgainsand

lossesoninvestments (571) ‐ (571)Donor‐restrictedcontributions ‐ 7,276 7,276Netassetsreleasedfromrestrictionsand

usedforoperations ‐ (1,266) (1,266)Netassetsreleasedfromrestrictionsfor

equipmentacquisition 1,426 (1,426) ‐Changeinunfundedaccumulatedpension

benefitobligation 41,322 ‐ 41,322Other 66 ‐ 66

143,109 4,584 147,693BalanceatAugust31,2013 765,141 17,694 782,835

Excessofrevenues,gains,andothersupportoverexpenses 65,975 ‐ 65,975

Netchangeinunrealizedgainsandlossesoninvestments (311) ‐ (311)

Donor‐restrictedcontributions ‐ 3,596 3,596Netassetsreleasedfromrestrictionsand

usedforoperations ‐ (1,144) (1,144)Netassetsreleasedfromrestrictionsfor

equipmentacquisition 2,009 (2,009) ‐Changeinunfundedaccumulatedpension

benefitobligation 3,056 ‐ 3,056Other ‐ ‐ ‐

70,729 443 71,172BalanceatAugust31,2014 835,870$ 18,137$ 854,007$


dbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFCASHFLOWS(Inthousands)

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2014 2013

Cashflowsfromoperatingactivities:Changeinnetassets 71,172$ 147,693$Adjustmentstoreconcilechangeinnetassetstonetcash

providedbyoperatingactivities:Netunrealizedlossesandgainsoninvestments 311 571Donor‐restrictedcontributions (3,901) (4,249)Provisionforbaddebts 129,577 174,206Depreciationandamortization 61,026 54,434Amortizationofbonddiscount/premium (132) (178)Netchangesinoperatingassetsandliabilities:

Patientaccountsreceivableandotherreceivables (86,708) (170,637)DuefromStateofCaliforniaforsupplementalfunding 4,253 (5,231)Inventories,prepaidexpenses,andother (40,932) (14,222)Accountspayableandotheraccruedliabilities 5,202 (15,141)Accruedcompensationandemployeebenefits 6,279 (123)Pensionbenefitobligation (10,754) (44,304)Estimatedthird‐partysettlements (17,124) (7,718)

118,269 115,101

Cashflowsfrominvestingactivities:Purchasesofproperty,plant,andequipment,net (75,239) (109,867)Purchaseofinvestments (234,530) (230,969)Proceedsfromsalesofinvestments 210,193 208,205Cashandcashequivalentsmovementsinassetslimitedastouse 14,466 (8,077)Changeinassetsunderbondindentureagreements 43 (27)

(85,067) (140,735)

Cashflowsfromfinancingactivities:Repaymentsoflong‐termdebt (11,053) (11,843)Proceedsfromlong‐termdebt 100 912Proceedsfromrestrictedcontributions 3,901 4,249

(7,052) (6,682)

26,150 (32,316)Cashandequivalents,beginningofyear 37,984 70,300

Cashandequivalents,endofyear 64,134$ 37,984$

Supplementaldisclosureofcashflowinformation:Interestpaid 26,284$ 26,519$

YEARSENDEDAUGUST31,

COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS

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NOTE1–ORGANIZATIONCommunityHospitalsofCentralCaliforniaandAffiliatedCorporations,dbaCommunityMedicalCenters(CMC),isanot‐for‐profitmultifacilityintegratedhealthcareorganizationlocatedinFresno,California.CMChasestablishedanObligatedGrouptoaccesscapitalmarkets.ObligatedGroupmembersarejointlyandseverallyliableforthelong‐termdebtoutstandingundertheObligatedGroup’smastertrustindenture.TheObligatedGroupmembers are denotedwith an asterisk (*). CMC includes the following consolidatedentities:Acutecareservices–Acutecareservicesconsistofasinglecorporateentity,FresnoCommunityHospitalandMedicalCenter*,whichoperatesastwogeneralacutecarehospitalsthatprovideafullrangeofmedical,surgical,intensivecare,emergencyroom,burnandtrauma,andobstetricservices.Thesefacilitiesalsoofferhomehealth,psychiatric,rehabilitation,andavarietyofotherservices.Theacutecarehospitalsare:

CommunityRegionalMedicalCenter(CRMC) ClovisCommunityMedicalCenter(CCMC)

CaliforniaImagingInstituteLLC(CII),operatestwofreestandingoutpatientimagingcentersthatprovidecomprehensiveimagingservices.Itisownedinpartnershipwithaphysician‐ownedradiologymedicalgroup. Fresno CommunityHospital andMedical Center accounts for this investment using the equitymethod.Corporateactivities–Corporateactivitiesconsistofcentralizedsharedservices,realestateactivities,andretailpharmacyoperations.

CommunityHospitalsofCentralCalifornia*(CHCC) CommunityHealthEnterprises(CHE)

FresnoHeartandSurgicalHospital*–TheFresnoHeartandSurgicalHospitalprovidescardiac‐relatedservicesandbariatricandotherminimallyinvasivesurgeries.DeranKoligianAmbulatoryCareCenter–DeranKoligianAmbulatoryCareCenter,LLC(DKACC)isanot‐for‐profitsinglememberLLC,whosesolememberisFresnoCommunityHospitalandMedicalCenter.CommunityInsuranceServicesCompany–CommunityInsuranceServicesCompany(CISC),isawhollyownedcaptiveinsurancecompanythatmaintainsprofessionalandgeneralliabilitycoverageandhasnoincometaxobligation.CommunityCareHealthPlan–CommunityCareHealthPlan(CCHP), isawhollyownedKnox‐KeenelicensedHealthMaintenanceOrganizationthatprovideshealthinsurancecoveragetotheemployeesofCMCandentitiespartiallyownedbyCMC.


dbaCOMMUNITYMEDICALCENTERSNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS

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NOTE1–ORGANIZATION(CONTINUED)Physicianmanagementservices–PhysicianmanagementservicesconsistofSantéHealthSystem(Santé),which is amanagement service organization (MSO) providing independent physician association andphysicianpracticemanagementservices.CMCaccountsfortheinvestmentinSantéusingtheequitymethod.Developmentactivities–Developmentactivitiesconsistofasinglecorporateentity,CommunityHospitalsofCentralCaliforniaFoundation,whichconductsfundraisingactivitiesforthenot‐for‐profitorganizationswithinthehealthsystem.ObligatedGroupmembers–ObligatedGroupmembersaretheparentcorporationsofcertainconsolidatedentitiesthatarenotObligatedGroupmembers.AccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(U.S.GAAP)requireconsolidationofallcontrolledsubordinatecorporations.Accordingly,theconsolidatedfinancialstatementsofCMCarethesameastheObligatedGroupfinancialstatementsunderU.S.GAAP.NOTE2–AGREEMENTWITHTHECOUNTYOFFRESNOEffectiveOctober7, 1996,CMC, throughoneof its affiliates (FresnoCommunityHospital andMedicalCenter), entered into a series of agreements (theTransactionAgreements)with theCountyofFresno(theCounty).TheTransactionAgreementswereamendedin1998andagainin2003relatedtoaUniversityMedicalCenter(UMC)lease.TheprincipalongoingprovisionoftheTransactionAgreementsareasfollows:

CMCisrequiredtoprovidecomprehensivemedicalcaretocertainclassesofindigentpersonsand inmates within the County for a period of 30years in return for certain payments.Paymentsreceivedunderthisagreementtotaledapproximately$21,375,000and$21,065,000fortheyearsendedAugust31,2014and2013,respectively.CMCwasnotifiedinAugust,2014thattheCountywasterminatingthecontracteffectiveNovember30,2014.

AssecurityforCMC’sperformanceunderthetermsoftheTransactionAgreements,theCountywasgrantedafirst‐prioritylienonCCMCandanadjoiningmedicalofficebuilding.Inaddition,duringthe30‐yearperiodcommencingOctober7,1996,(a)theCountyisentitledtonominate27%ofthemembersofCMC’s(andcertainof itsaffiliates’)boardoftrusteesandrelatedsubcommitteesand(b)CMCanditsaffiliatesareprecluded,withcertainspecifiedexceptions,frommakinganynetassettransfersoutsideofCMC.


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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES Basisofconsolidation–TheconsolidatedfinancialstatementsincludetheaccountsofCMCandaffiliatesaslistedunderOrganization inNote1.All significant intercompanyaccountsandtransactionshavebeeneliminatedinconsolidation. Useofestimates–ThepreparationofconsolidatedfinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateoftheconsolidatedfinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.Cash and equivalents –Cash and equivalents include all highly liquid investmentswith an originalmaturityofthreemonthsorlesswhenpurchased.CashandequivalentspurchasedbyCMC’sinvestmentmanagersaspartoftheirinvestmentstrategiesareincludedinassetslimitedastouseandshort‐terminvestments.CMCregularlymaintainsbalancesindepositoryaccountsinexcessoftheFDICinsurancelimit.Accountsreceivable–CMC’sprimaryconcentrationofcreditriskispatientaccountsreceivableandSB855and SB1255 disproportionate share funds receivable, which consist of amounts owed by variousgovernmentagencies,insurancecompanies,andprivatepatients.CMCmanagesthereceivablesbyregularlyreviewingitsaccountsandcontractsandbyprovidingappropriateallowancesforuncollectibleamounts.CMCprovidesforestimatedlossesonpatientaccountsreceivablebasedonpriorbaddebtexperience.Uncollectiblereceivablesarecharged‐offwhendeemeduncollectible.Recoveriesfrompreviouslycharged‐offaccountsarerecordedwhenreceived.Themixofreceivablesfromthird‐partypayorsandpatientsatAugust31,2014and2013,isasfollows:

2014 2013

Medicare 15% 15%Medi‐CalandmanagedMedi‐Cal 24% 20%Contractedratepayors 52% 51%Commercialinsuranceandotherpayors 9% 14%

Total 100% 100%



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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIESAllowancefordoubtfulaccounts–Accountsreceivablearereducedbyanallowancefordoubtfulaccounts.Inevaluatingthecollectabilityofaccountsreceivable,CMCanalyzesitspasthistoryandidentifiestrendsforeachofitsmajorpayorsourcesofrevenuetoestimatetheappropriateallowancefordoubtfulaccountsandprovisionforbaddebts.Managementregularlyreviewsdataaboutthesemajorpayorsourcesofrevenueinevaluatingthesufficiencyoftheallowancefordoubtfulaccounts.Forreceivablesassociatedwithservicesprovidedtopatientswhohavethird‐partycoverage,CMCanalyzescontractuallydueamountsandprovidesanallowancefordoubtfulaccountsandaprovisionforbaddebts,ifnecessary(forexample,forexpecteduncollectibledeductiblesandcopaymentsonaccountsforwhichthethird‐partypayorhasnotyetpaid,orforpayorswhoareknowntobehaving financialdifficultiesthatmaketherealizationofamountsdueunlikely).Forreceivablesassociatedwithself‐paypatientsandnon‐contractedinsurance(whichincludesbothpatientswithoutinsuranceandpatientswithdeductibleandcopaymentbalancesdueforwhichthird‐partycoverageexistsforpartofthebill),CMCrecordsasignificantprovisionforbaddebtsintheperiodofserviceonthebasisofitspastexperience,whichindicatesthatmanypatientsareunableorunwillingtopaytheportionoftheirbillforwhichtheyarefinanciallyresponsible.Thedifferencebetweenthestandardrates(orthediscountedratesifnegotiated)andtheamountsactuallycollectedafterallreasonablecollectioneffortshavebeenexhaustedischargedoffagainsttheallowancefordoubtfulaccounts.CMC’s allowance for doubtful accounts for self‐pay patients decreased from 84.8 percent of self‐payaccountsreceivableatAugust31,2013,to76.1percentofself‐payaccountsreceivableatAugust31,2014.Inaddition,CMC’swrite‐offswereapproximately$129,577,000forfiscalyear2014and$174,206,000forfiscalyear2013.Decreasedwrite‐offsweretheresultofdecreasedself‐payrevenueof34.5percentinfiscalyear2014.ThedecreaseinselfpayrevenuewasprimarilytheresultofimplementationoftheMedicaidexpansiononinsurancemarketplacecomponentsoftheAffordableCareAct(seeNote4)in2014.CMCmaintainedallowancesfordoubtfulaccountsfromthird‐partypayorsof$7,745,000infiscalyear2014and$8,750,000infiscalyear2013.Inventories–Inventoriesarestatedatthelowerofcost,determinedbythefirst‐in,first‐outmethod,ormarket.Assetslimitedastouseandshort‐terminvestments–Assetslimitedastouseconsistprincipallyofcorporatedebtsecurities,equitysecurities,andU.S.governmentandagencysecurities,allofwhichareavailableforsaleandcarriedatfairmarketvalue.Thefairvaluesfortheseinvestmentsarebasedonquotedmarket prices. Investments also include repurchase agreements. Certain marketable securities aredesignatedasassetsheldintrust.Theseincludeassetsheldbytrusteesinaccordancewiththeindenturesrelatingtolong‐termdebt.Inaddition,certaininvestmentsaresetasidebytheboardoftrusteesforfuturecapitalimprovements.


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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Assetslimitedastouseandshort‐terminvestments(continued)–Investmentincomeisincludedintheexcessofrevenues,gains,andothersupportoverexpensesunlesstheincomeisrestrictedbydonororlaw.ForinvestmentspurchasedpriortoSeptember1,2008,unrealizedgainsandlossesoninvestmentsareexcludedfromtheexcessofrevenues,gains,andothersupportoverexpensesunlesstheinvestmentsaretradingsecurities,oranunrealizedlossisdeterminedtobeotherthantemporaryforanysecuritythatisavailableforsale.Managementroutinelyevaluatesitsinvestmentsinmarketablesecuritiesforotherthantemporaryimpairment.CMChaselectedtoreportinvestmentsindebtandequitysecuritiespurchasedonorafterSeptember1,2008underAccountingStandardsCodification(ASC)825,FinancialInstruments,suchthatunrealizedgainsandlossesonsuchsecuritiesareincludedintheexcessofrevenues,gains,andothersupportoverexpensesunlesstheincomeisrestrictedbydonororlaw.CMChasdiscretiontoestablishpoliciesregardingwhichportionofassetslimitedastouseisclassifiedasshort‐terminvestments.Theamountclassifiedasshort‐terminvestmentsconsistsofavailablecashheldininvestmentaccounts,moneymarketsbalances,andhighlyliquidinvestmentsecuritieswithanoriginalmaturityofthreemonthsorless.Property,plant,andequipment–Property,plant,andequipmentarestatedatcost,orinthecaseofdonateditems,atfairmarketvalueatthedateofdonation.Routinemaintenanceandrepairsarechargedtoexpense as incurred. Expenditures that increase values, change capacities, or extend useful lives arecapitalized,asisinterestforsignificantconstructionprojects.In2014and2013,$3,121,000and$5,380,000,respectively,ofnetinterestexpensewascapitalizedforconstructionprojects.Depreciationiscomputedbythestraight‐linemethodovertheestimatedusefullivesoftheassets,whichrangefrom10to25yearsforlandimprovements,5to40yearsforbuildingsandimprovements,andanaverageof8yearsforequipment.CMC’smanagementregularlyreviewslong‐livedassetsforindicationsofimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverable.Managementestimatesthefairvalueoflegalassetretirementobligationsthatareconditionalonafutureeventiftheamountcanbereasonablyestimated,inaccordancewithFinancialAccountingStandardsBoard(FASB).Estimatesaredevelopedthroughtheidentificationofapplicablelegalrequirements,identificationofspecificconditionsrequiringincrementalcostattimeofassetdisposal,estimationofcoststoremediateconditions,andestimationofremainingusefullivesordateofassetdisposal.



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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Self‐insuranceandotherbenefitplans–CMC is self‐insured forworkers compensation claimsandmaintainsaself‐insuredmedical,dental,andvisioncareplanasanoptionforitsemployees.Claimsareaccruedundertheseplansastheincidentsthatgiverisetothemoccur.Unpaidclaimaccrualsarebasedonthe actuarially estimated ultimate cost of settlement, including claim settlement expenses. CMC hasreinsurancearrangementswithinsurancecompaniestolimititslossesonclaimsformedicalandworkerscompensationexpenses.Theportionnotexpectedtobepaidwithinoneyearisincludedwithinotherlong‐termobligations.AsofAugust31,2014,CMChasaclaimsliabilityof$62,353,000andacorrespondinginsurancerecoveryreceivableof$2,640,000formedicalandworkerscompensationclaimsthatareinsuredbyathirdpartyexcesslosspolicy.AsofAugust31,2013,CMChasaclaimsliabilityof$54,299,000andacorrespondinginsurancerecoveryreceivableof$1,894,000formedicalandworkerscompensationclaimsthat are insured by a third party excess loss policy. The claims liability is classified in other accruedliabilitiesandlong‐termobligationsandtheinsurancerecoveryreceivableisclassifiedinprepaidsandotherassets,respectively,intheaccompanyingbalancesheet.Professionalliabilityinsurance–CommunityInsuranceServicesCompany(CISC),CMCwhollyownedcaptiveinsurancecompany,hasissuedclaims‐madepoliciestoinsurethemedicalandgeneralliabilityrisksofCMC’saffiliates.CISCretains$2,000,000perincidentand$15,000,000intheaggregateandisreinsuredupto$90,000,000perincidentandintheaggregatewiththird‐partyreinsurers.AsofAugust31,2013,CMChadrecordedestimatedliabilitiesforclaimsincurredandreportedof$6,115,000,andacorrespondinginsurance recovery receivable of $341,000. These amounts are included within the accompanyingconsolidatedbalance sheets.AsofAugust31,2014,CMChadrecordedestimated liabilities forclaimsincurredandreportedof$6,504,000,andacorrespondinginsurancerecoveryreceivableof$3,098,000.Theseamountsareincludedwithintheaccompanyingconsolidatedbalancesheets.Shouldthereinsurancepoliciesnotberenewedorreplacedwithequivalentinsurance,claimsrelatedtooccurrencesduringthetermoftheclaims‐madepolicybutreportedsubsequenttoitsterminationmaybeuninsured. Liabilities of $3,146,000 and $2,983,000 have been recorded for the actuarially estimatedincurredbutnotreportedliabilityatAugust31,2014and2013,respectively.Theseliabilitiesareincludedwithinotherlong‐termobligationsintheaccompanyingconsolidatedbalancesheets.Incometaxes–MostentitiesincludedinCMCareexemptfromtaxationunderSection501(c)(3)oftheInternalRevenueCodeandSection23701doftheCaliforniaRevenueandTaxationCodeandaregenerallynotsubjecttofederalorstateincometaxes.However,theexemptorganizationsaresubjecttoincometaxesonanynetincomethatisderivedfromatradeorbusiness,regularlycarriedon,andnotinfurtheranceofthepurposesforwhichitwasgrantedexemption.Noincometaxprovisionhasbeenrecordedasthenetincome,ifany,fromanyunrelatedtradeorbusiness,intheopinionofmanagement,isnotmaterialtothebasicfinancialstatementstakenasawhole.CMCincludesentitiesthataresubjecttoincometaxes;however,suchincometaxactivitiesarenotsignificanttotheconsolidatedfinancialstatements.


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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Donorgifts–UnconditionalpromisestogivecashandotherassetstoCMCarereportedatfairmarketvalueatthedatethepromiseisreceived.Conditionalpromisestogiveandindicationsofintentionstogivearereportedatfairmarketvalueatthedatethegiftisreceivedandanyconditionsaresubstantiallymet.Thegiftsarereportedaseithertemporarilyorpermanentlyrestrictedsupportiftheyarereceivedwithdonorstipulations that limit theuseof thedonatedassets.Whenadonorrestrictionexpires, that is,whenastipulatedtimerestrictionendsorpurposerestrictionisaccomplished,restrictednetassetsarereclassifiedasunrestrictednetassets.Fairvalueoffinancialinstruments–Unlessotherwiseindicated,thefairvalueofallreportedassetsandliabilities,whichrepresent financial instruments,approximatetheircarryingvalues.CMC’spolicy istorecognizetransfersinandtransfersoutofLevels1and2asoftheendofthereportingperiod.Excessofrevenues,gains,andothersupportoverexpenses–Excessofrevenues,gains,andothersupportoverexpensesreflectedintheaccompanyingconsolidatedstatementsofoperationsincludesallchangesinunrestrictednetassetsotherthanchangesinunrealizedgainsoncertainmarketablesecurities,netassetsreleasedfromrestrictionsforequipmentacquisition,andchangesinpensionbenefitobligation.Reclassifications–Certainamountsinthe2013financialstatementshavebeenreclassifiedtoconformtothe2014presentation.Subsequentevents–Subsequenteventsareeventsortransactionsthatoccurafterthebalancesheetdatebutbeforefinancialstatementsareissued.CMCrecognizesintheconsolidatedfinancialstatementstheeffectsofallsubsequenteventsthatprovideadditionalevidenceaboutconditionsthatexistedatthedateoftheconsolidatedbalancesheet,includingtheestimatesinherentintheprocessofpreparingtheconsolidatedfinancialstatements.CMC’sconsolidatedfinancialstatementsdonotrecognizesubsequenteventsthatprovideevidenceaboutconditionsthatdidnotexistatthedateoftheconsolidatedbalancesheetbutaroseafterthebalancesheetdateandbeforetheconsolidatedfinancialstatementsareissued.CMChasevaluatedsubsequenteventsthroughNovember24,2014,whichisthedatetheconsolidatedfinancialstatementsareissued.



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NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUESNetpatientservicerevenues–Netpatientservicerevenuesarereportedattheestimatednetrealizableamountsfrompatients,third‐partypayors,andothersforservicesrendered,includingestimatedretroactiveadjustmentsunderreimbursementagreementswiththird‐partypayors.Estimatedsettlementsunderthird‐partyreimbursementagreementsareaccruedintheperiodinwhichtherelatedservicesarerenderedandadjustedinfutureperiods,basedonupdatedinformationandasaresultoffinalsettlements.Grosspatientchargescompriseusualandcustomarychargesforservicesprovidedtoallpatients.ThecompositionofconsolidatednetpatientrevenuebymajorpayorgroupasoftheyearsendedAugust31,2014and2013,isasfollows:

2014 2013

Medicare 23% 21%Medi‐CalandmanagedMedi‐Cal 29% 32%Contractedratepayors 37% 33%Commercialinsuranceandotherpayors 10% 13%MedicallyIndigentServicesProgram(MISP) 1% 1%

Total 100% 100%

CMChasagreementswiththird‐partypayorsthatprovideforpaymentstoCMCatamountsdifferentfromitsestablishedrates.Asummaryofthepaymentarrangementswithmajorthird‐partypayorsisasfollows:CMC is evaluatingwhether it receivedoverpayments, andwhetherany suchoverpayments shouldbereportedtothepayerandrepaid,pertainingtocertainpatientservicesprovided.CMChasrecordedanestimatedliabilityof$14,549,000inits2014financialstatementsrelatedtothismatter.CMCwillcontinuetoevaluatethematterbutmanagementdoesnotbelievethattheultimateoutcomewillhaveamateriallyadverseimpactonthefinancialpositionoroperationsofCMC.Medicare– Inpatient acute care services, skillednursing services, rehabilitation services, and certainoutpatientservicesrenderedtoMedicareprogrambeneficiariesarepaidatprospectivelydeterminedratesper diagnosis. These rates vary according to a patient classification system that is based on clinical,diagnostic,andotherfactors.CertaininpatientnonacuteservicesandmedicaleducationcostsrelatedtoMedicarebeneficiariesarepaidbasedonacost‐basedreimbursementmethodology.Professionalservicesarereimbursedbasedonafeeschedule.


16

NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUES(CONTINUED)Medi‐Cal–InpatientservicesrenderedtoMedi‐Calprogrambeneficiariesarereimbursedprimarilyatprospectivelydeterminedratesperdiagnosis.Additionally,CMCisallocatedcertainfundsavailablefromapool of State of California funds for disproportionate share hospital services under the SB855 andSB1255/PrivateHospitalFundprogramsbaseduponanannualdeterminationforeligibility.Revenuesunder the SB855 program and SB1255/Private Hospital Fund totaled $47,543,000 and $8,528,000,respectively,fortheyearendedAugust31,2014and$46,826,000and$8,250,000,respectively,fortheyearendedAugust31,2013.AsofAugust31,2014and2013,CMCrecordedreceivablesof$15,501,000and$18,953,000, respectively, for amountsdue from theStateofCalifornia forSB855,SB1255,andotherprograms(Note14).CostreportsfiledundertheMedicareandMedi‐Calprogramsforservicesbasedoncostreimbursementaresubjecttoaudit.Theestimatedamountsduetoorfromtheprogramsarereviewedandadjustedannuallybasedonthestatusofsuchauditsandanysubsequentappeals.Differencesbetweenfinalsettlementsandamountsaccruedinpreviousyearsarereportedasadjustmentstonetrevenueintheyearinwhichtheexaminationiscompleted.Netpatientservicerevenueincreased$677,000and$4,164,000in2014and2013,respectively,relatedtoupdatesofprioryears’costreportreservesandincreasedby$10,733,000and$8,832,000,respectively,relatedtosuccessfulappealsofprioryears’costreportsettlements.Other–CMChasenteredintopaymentagreementswithcertaincommercialinsurancecarriers,healthmaintenanceorganizations(HMOs),andpreferredproviderorganizations.ThebasisforpaymenttoCMCundertheseagreementsincludesprospectivelydeterminedratesperdiagnosis,discountsfromestablishedcharges,andprospectivelydetermineddailyrates.CMCalsoreceivesStateofCaliforniafundspursuanttoProposition99.Premiumrevenue–CMChasanagreementwithanindependentphysicianassociation(IPA)toprovidemedicalservicestocertainIPAmembers.Underthisagreement,CMCreceivesmonthlycapitationpaymentsandrecognizesasrevenueduringtheperiodregardlessofwhetherservicesactuallyperformedbyCMC.Charitycare–HealthcareservicesareprovidedtopatientswhomeetcertaincriteriaunderCMC’scharitycarepolicieswithoutchargeoratamounts less thanestablishedrates.Traditionalcharitycarecoversservicesprovidedtopersonswhomeetcertaincriteriaandcannotaffordtopay.Unpaidcostsofcharityaretheestimatedcostsofservicesprovidedtosuchpatients.Theestimatedcostofprovidingtheseserviceswas$6,242,000and$6,665,000for theyearsendedAugust31,2014and2013,respectively,calculatedbymultiplyingtheratioofcosttogrosschargesbythegrossuncompensatedchargesassociatedwithprovidingcharitycaretopatients.



17

NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUES(CONTINUED)Hospitalfeeprogram–InNovember2009,theCaliforniaHospitalFeeProgram(theProgram)wassignedintoCaliforniastate law.TheProgramprovidessupplementalMedi‐Calpayments tocertainCaliforniahospitals.TheProgramisfundedbyaqualityassurancefee(theFee)paidbyparticipatinghospitalsandbymatchingfederalfunds.HospitalsreceivesupplementalpaymentsfromeithertheCaliforniaDepartmentofHealthCareServices(DHCS),managedcareplansoracombinationofboth.California enacted a thirty‐month quality assurance fee program (30‐month Program) for the periodJuly1,2011 throughDecember31,2013.FinalapprovalbyCMS for the fee forserviceportionof thisprogramoccurredonJune22,2012.ForthefeeforserviceportionfortheyearendedAugust31,2014and2013,estimatedsupplementalpaymentsof$25,972,000and$77,915,000,respectively,areincludedinnetpatientservicerevenue.FortheyearsendedAugust31,2014and2013,estimatedfeesandpledgeexpenseof$15,031,000and$93,108,000,respectively,areincludedinotherexpenses.AtAugust31,2014,CMChasareceivableof$6,767,000andaliabilityof$2,047,000relatingtothe30‐monthProgram.AtAugust31,2013,CMChadareceivableof$52,317,000andaliabilityof$19,376,000relatingtothe30‐monthProgram.ThefinalsixmonthsofthemanagedcareportionofthisprogramhasnotyetreceivedfinalapprovalfromCMS.CMCdidnotrecordanyactivityrelatingtothemanagedcareportionintheyearendedAugust31,2014.FortheyearendedAugust31,2013,CMCrecognized$82,968,000innetpatientservicerevenuerelatedtotheapprovedportionofthemanagedcareportionofthisprogram.InMarch2010,PresidentObamasignedtheHealthCareReformlegislationintolaw.Thenewlawwillresultinsweepingchangesacrossthehealthcareindustry.TheprimarygoalofthiscomprehensivelegislationistoextendcoveragetoapproximatelyuninsuredlegalU.S.residentsthroughacombinationofpublicprogramexpansionandprivatesectorhealthinsurancereforms.Tofundtheexpansionofinsurancecoverage,thelegislationcontainsmeasuresdesignedtopromotequalityandcostefficiencyinhealthcaredeliveryandtogeneratebudgetarysavingsintheMedicareandMedicaidprograms.


18

NOTE5–ASSETSLIMITEDASTOUSEAssetslimitedastouseincludemarketablesecuritiesthatarecarriedatfairvalue,basedonquotedmarketprices.Pledgesreceivablearecarriedatnetrealizablevalue.ThecompositionofassetslimitedastouseatAugust31,2014and2013isasfollows(inthousands):

Fairvalue Fairvalueand and

carrying carryingCost value Cost value

Cashandequivalents 36,110$ 36,110$ 54,384$ 54,384$U.S.Treasurybillsandnotes 17,696 17,696 35,980 35,980U.S.governmentagencydebt 32,178 32,366 33,818 34,041Corporatedebtsecurities 168,756 168,759 142,048 142,056Equitysecurities 53,176 57,814 43,284 48,122Mutualfunds 42,091 42,091 30,737 30,737Repurchaseagreements 19,393 19,393 19,394 19,394

Totalcashandmarketablesecurities 369,400 374,229 359,645 364,714

Lessamountsclassifiedasshort‐terminvestments (3,168) (3,168) (12,056) (12,056)

Pledgesreceivable,net 8,656 8,656 8,654 8,654

5,488 5,488 (3,402) (3,402)

Totalassetslimitedastouse 374,888$ 379,717$ 356,243$ 361,312$

2014 2013



19

NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)CMC adopted ASC 820,FairValueMeasurementsandDisclosure, on September 1, 2008 for fair valuemeasurementsoffinancialassetsandliabilities.ASC820establishedafairvaluehierarchythatprioritizestheinputstovaluationtechniquesusedtomeasurefairvalue.Thehierarchygivesthehighestprioritytounadjustedquotedpricesinactivemarketsforidenticalassetsorliabilities(Level1measurements)andthelowestprioritytomeasurementsinvolvingsignificantunobservableinputs(Level3measurements).Thethreelevelsoffairvaluehierarchyareasfollows:

Level1inputsarequotedprices(unadjusted)inactivemarketsforidenticalassetsorliabilitiesthatCMChastheabilitytoaccessatthemeasurementdate.

Level2inputsareinputsotherthanquotedpricesincludedwithinLevel1thatareobservablefor

theassetorliability,eitherdirectlyorindirectly.

Level3inputsareinputsthatareunobservableinputsfortheassetorliability.Thelevelinthefairvaluehierarchywithinwhichafairvaluemeasuremententirelyfallsisbasedonthelowestlevelinputthatissignificanttothefairvaluemeasurementinitsentirety.


20

NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThefollowingtablepresentsfinancialassetsmeasuredatfairvalueasofAugust31,2014(inthousands):

Quotedprices Significantinactive other Significant

marketsfor observable unobservableidenticalassets inputs inputs Fairvalue

Investments Level1 Level2 Level3 total

Cashandequivalents 3,168$ ‐$ ‐$ 3,168$

U.S.TreasuryandU.S.agencyfixedincome:U.S.Treasurybillsandnotes 17,696 ‐ ‐ 17,696U.S.governmentagencydebt ‐ 26,744 ‐ 26,744

17,696 26,744 ‐ 44,440

Corporatedebtsecurities:Healthcare ‐ 16,002 ‐ 16,002Energy ‐ 10,368 ‐ 10,368

Financials ‐ 97,764 ‐ 97,764Industrials ‐ 6,800 ‐ 6,800Informationtechnology ‐ 5,398 ‐ 5,398Telecommunications ‐ 7,659 ‐ 7,659Consumerdiscretionary ‐ 10,763 ‐ 10,763Consumerstaples ‐ 9,243 ‐ 9,243Other ‐ 4,762 ‐ 4,762

‐ 168,759 ‐ 168,759

Equitysecurities:Healthcare 9,258 ‐ ‐ 9,258Financials 7,955 ‐ ‐ 7,955Consumerstaples 5,568 ‐ ‐ 5,568Consumerdiscretionary 6,538 ‐ ‐ 6,538Materials 2,206 ‐ ‐ 2,206Energy 5,204 ‐ ‐ 5,204Informationtechnology 12,156 ‐ ‐ 12,156Industrials 6,886 ‐ ‐ 6,886Telecommunications 747 ‐ ‐ 747Other 1,296 ‐ ‐ 1,296

57,814 ‐ ‐ 57,814

Mutualfunds:Midcapcore 7,560 ‐ ‐ 7,560Smallcapcore 8,554 ‐ ‐ 8,554Internationalcore 13,214 ‐ ‐ 13,214Emergingmarkets 2,950 ‐ ‐ 2,950Specialty‐realestate 1,923 ‐ ‐ 1,923Other 2,430 ‐ ‐ 2,430

36,631 ‐ ‐ 36,631115,309 195,503 ‐ 310,812

Fundsheldbytrustees

Repurchaseagreements ‐ 19,393 ‐ 19,393U.S.governmentagencydebt ‐ 5,622 ‐ 5,622Mutualfunds 5,460 ‐ ‐ 5,460Cashandequivalents 32,942 ‐ ‐ 32,942

38,402 25,015 ‐ 63,417Total 153,711$ 220,518$ ‐$ 374,229$

2014



21

NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThefollowingtablepresentsfinancialassetsmeasuredatfairvalueasofAugust31,2013(inthousands):






35,980 24,600 ‐ 60,580

Corporatedebtsecurities:Healthcare ‐ 11,963 ‐ 11,963Energy ‐ 12,188 ‐ 12,188Financials ‐ 73,879 ‐ 73,879Industrials ‐ 7,725 ‐ 7,725Informationtechnology ‐ 9,064 ‐ 9,064Telecommunications ‐ 6,589 ‐ 6,589Consumerdiscretionary ‐ 5,832 ‐ 5,832Consumerstaples ‐ 5,113 ‐ 5,113Other ‐ 9,703 ‐ 9,703

‐ 142,056 ‐ 142,056

Equitysecurities:Healthcare 6,643 ‐ ‐ 6,643Financials 6,063 ‐ ‐ 6,063Consumerstaples 6,261 ‐ ‐ 6,261Consumerdiscretionary 3,440 ‐ ‐ 3,440Materials 2,654 ‐ ‐ 2,654Energy 4,673 ‐ ‐ 4,673Informationtechnology 9,814 ‐ ‐ 9,814Industrials 6,286 ‐ ‐ 6,286Telecommunications 1,455 ‐ ‐ 1,455Other 833 ‐ ‐ 833

48,122 ‐ ‐ 48,122

Mutualfunds:Midcapcore 7,789 ‐ ‐ 7,789Smallcapcore 8,098 ‐ ‐ 8,098Internationalcore 7,627 ‐ ‐ 7,627Emergingmarkets 1,405 ‐ ‐ 1,405Specialty‐realestate 2,053 ‐ ‐ 2,053Other 2,134 ‐ ‐ 2,134

29,106 ‐ ‐ 29,106122,264 166,656 ‐ 288,920

Fundsheldbytrustees

Repurchaseagreements ‐ 19,394 ‐ 19,394U.S.governmentagencydebt ‐ 9,441 ‐ 9,441Mutualfunds 1,631 ‐ ‐ 1,631Cashandequivalents 45,328 ‐ ‐ 45,328

46,959 28,835 ‐ 75,794Total 169,223$ 195,491$ ‐$ 364,714$

2013


22

NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThescheduledmaturitiesofthedebtsecuritiesasofAugust31,2014areasfollows:

Amortized Estimatedcostbasis fairvalue

Duewithin1yearorless 15,570$ 15,098$Dueafter1yearthrough5years 152,689 153,376Dueafter5years 17,213 17,147

185,472 185,621

Mortgage‐backedsecurities,accruedinterest,andother 27,163 27,578

212,635$ 213,199$

ThescheduledmaturitiesofthedebtsecuritiesasofAugust31,2013areasfollows:

Amortized Estimatedcostbasis fairvalue

Duewithin1yearorless 14,588$ 14,588$Dueafter1yearthrough5years 95,092 95,092Dueafter5years 67,058 67,106

176,738 176,786

Mortgage‐backedsecurities,accruedinterest,andother 25,643 25,852

202,381$ 202,638$

Investment income is composed of the following for the years ended August 31, 2014 and 2013 (inthousands):

2014 2013

Interestincome 4,705$ 4,088$Netrealizedgains/lossesonsalesofsecuritiesand

other‐than‐temporaryimpairment 16,155 4,650Dividends 1,377 1,431

22,237$ 10,169$



23

NOTE6–PROPERTY,PLANT,ANDEQUIPMENTProperty,plant,andequipmentconsistofthefollowingasofAugust31,2014and2013(inthousands):

2014 2013

Landandlandimprovements 32,703$ 32,405$Buildingsandimprovements 764,455 690,274Equipment 542,541 503,566

1,339,699 1,226,245Accumulateddepreciation (543,903) (494,212)

795,796$ 732,033$

NOTE7–OTHERASSETSOtherassetsconsistofthefollowingasofAugust31,2014and2013(inthousands):

2014 2013

LoanreceivablefromDKACCLenders(Note8) 18,844$ 18,844$Investmentinrentalproperties 32,713 11,911Realestateheldfordevelopment 14,559 10,307Intangibleassets,net 3,968 3,543Unamortizedfinancingcosts,net 7,383 7,694Investmentinjointventures 10,842 11,456Loanreceivable(Note10) 4,872 4,539Equipmentheldforsale ‐ 3,500Other 3,591 2,475

96,772$ 74,269$


24

NOTE7–OTHERASSETS(CONTINUED)CMCowns rental properties, recordedat cost, net of accumulateddepreciation. Investments in rentalpropertiesconsistofthefollowingasofAugust31,2014and2013andareincludedinotherassetsintheaccompanyingconsolidatedbalancesheets(inthousands):

2014 2013

Land 7,353$ 4,085$Buildingsandlandimprovements 43,969 24,998Equipment 3,220 2,957

54,542 32,040Accumulateddepreciation (21,829) (20,129)

32,713$ 11,911$



25

NOTE8–LONG‐TERMDEBTLong‐termdebtconsistsofthefollowingasofAugust31,2014and2013(inthousands):

2014 2013

CaliforniaMunicipalFinanceAuthority

186,600$ 190,290$Unamortizedbonddiscount (2,798) (2,986)

Totalcertificatesofparticipation 183,802 187,304


296,480 300,055Unamortizedbondpremium 7,395 7,758

Totalcertificatesofparticipation 303,875 307,813


‐ 2,992

25,589 25,589

Otherlong‐termdebt 5,770 2,680

519,036 526,378

Currentmaturities (8,301) (10,695)

510,735$ 515,683$

Building Loan Agreement (DKACC), interest at 0.90% to 1.97%payable quarterly, principal due December 2038, collateralized by aguaranteebytheCMCObligatedGroup.

Certificates of Participation (Community Hospitals of CentralCalifornia Project) Series 2009, interest ranging from 3% to5.5% payable semi‐annually; principal payable in installmentsranging from $3,880,000 in 2015 to $13,850,000 in 2039,collateralizedbygrossrevenues.

Certificates of Participation (Community Hospitals of CentralCalifornia Project) Series 2007, interest ranging from 5% to5.25% payable semi‐annually; principal payable in installmentsranging from $3,755,000 in 2015 to $18,775,000 in 2046,collateralizedbygrossrevenues.

Certificates of Participation (Community Hospitals of CentralCaliforniaProject)Series2009,interestat5.19%.


26

NOTE8–LONG‐TERMDEBT(CONTINUED)Underthetermsof themaster trust indentureassociatedwiththecertificatesofparticipation,certainmembers of CMCaredesignated asmembers of theObligatedGroup. There are restrictive covenantsrequiringcompliancebytheObligatedGroup.Theseinclude,amongotherthings,limitationsontheissuanceofadditionaldebtandthemaintenanceofcertainfinancialratios.In2009,DKACCborrowed$25,589,000tofinancetheacquisitionandconstructionofcertainfacilitiesandequipmentunderafinancingstructuredtoqualifyforNewMarketsTaxCredits.TheNewMarketsTaxCreditsprogramisadministeredbytheFederalgovernmentandprovidestaxincentivesforthebenefitoflow‐incomecommunities.Inordertocomplywiththisprogram,affiliatesofCMC’sunderwriterformedagroupofentities(theLenders),whichwerecapitalizedby$7,500,000fromanaffiliateoftheunderwriterand by an $18,844,000 loan from CMC. This resulted in the Lenders accumulating funds totaling$25,589,000,whichwerethenloanedtoDKACC.TheObligatedGrouphasguaranteedDKACC’srepaymentobligationsunderthisborrowing,whichhasafinalmaturityofJanuary20,2038,butsuchguarantyisnotsecuredbyanObligationissuedundertheMasterIndenture.Additionally,theObligatedGrouphasalimitedguaranty,upto$10,000,000over7years,relatedtotheLenders’realizationoftaxcreditsavailableundertheNewMarketsTaxCreditprogram.TheObligatedGroupdoesnotcurrentlyexpecttomakeanypaymentsundertheseguarantees.Scheduledprincipalrepaymentsonlong‐termdebtandpaymentsoncapitalleaseobligationsbyfiscalyearareasfollows(inthousands):

Long‐termdebt

2015 8,437$2016 8,7932017 9,1182018 9,5802019 9,997Thereafter 468,514

514,439Addnetunamortizedbondpremium 4,597

519,036$

The aggregate estimated fair value of CMC’s long‐term obligations at August 31, 2014 and 2013 of$541,165,000and$495,523,000,respectively,wereestimatedusingdiscountedcashflowanalysesbasedonCMC’scurrentincrementalborrowingratesforsimilardebtinstruments.CMC’slong‐termobligationsareclassifiedasLevel2.



27

NOTE9–LINEOFCREDITCMC has a credit agreement with a bank that allows CMC to borrow up to $40,000,000. Under thisagreement,creditcardborrowingsareinterest‐freeandduemonthly.Allotherborrowingsbearinterestona LIBORbase.Amounts applied for letter of credit agreements totaled$2,707,000and$2,857,000onAugust31,2014and2013,respectively.TheletterofcreditagreementsareeffectivethroughSeptember2014.Outstandingcreditcardborrowingswere$200,000and$714,000onAugust31,2014and2013,respectively.TherewerenoLIBOR‐basedborrowingsasofthesedates.Anotesecuringthelineofcredithasbeenissuedunderthemastertrustindenture.TheagreementexpiresonJune27,2015.NOTE10–PENSIONPLANCMCmaintains a contributory defined benefit cash balance pension plan that covers substantially allemployees upon their retirement. Benefit payments for participants in the plan are determined byapplication of a benefit formula to the average base earnings of participants. In addition to normalretirementbenefits,undercertaincircumstances,theplanalsoprovidesearlyretirement,disability,death,andspousalbenefits.EmployeesofCMCbecomeeligibletoparticipateintheplanonJanuary1orJuly1followingthecompletionof1,000hoursandoneyearofservice.Thevestingperiodisthreeyears.Mandatorycontributionsaremadetotheplanbytheemployeesasspecifiedintheplandocuments.TotalemployeecontributionstotheplanfortheyearsendingAugust31,2014and2013were$5,094,000and$4,875,000,respectively.TotalemployercontributionstotheplanfortheyearsendingAugust31,2014and2013were$16,000,000and$16,000,000,respectively.TotalbenefitspaidfortheyearsendingAugust31,2014and2013were$13,085,000and$11,678,000,respectively.Theunfundedstatusispresentedasanoncurrentliabilityintheaccompanyingconsolidatedbalancesheets.


28

NOTE10–PENSIONPLAN(CONTINUED)Thefollowingtablessetforththeplan’sbenefitobligation,fairvalueofplanassets,andfundedstatusasofAugust31,2014and2013(inthousands):

2014 2013Changeinprojectedbenefitobligation(PBO):

PBOatbeginningofyear 203,975$ 231,208$Employerservicecost 11,219 14,979Interestcost 9,718 8,827Actuarial(gain)loss 5,832 (44,164)Planparticipants’contributions 5,094 4,875Benefitspaidfromplanassets (13,085) (11,678)Administrativeexpensespaid (65) (72)

PBOatendofyear 222,688$ 203,975$

2014 2013Changeinplanassets:

Fairvalueofassetsatbeginningofyear 170,017$ 152,946$Actualreturnonassets 21,524 7,946Employercontributions 16,000 16,000Planparticipants’contributions 5,094 4,875Benefitspaid (13,085) (11,678)Administrativeexpensespaid (65) (72)

Fairvalueofassetsatendofyear 199,485$ 170,017$



29

NOTE10–PENSIONPLAN(CONTINUED)

2014 2013

Fundedstatusatendofyear (23,203)$ (33,957)$Unrecognizedactuarialloss 25,927 28,928Unrecognizedpriorservicecost 240 295Unfundedaccumulatedpensionbenefitobligation (26,167) (29,223)

Pensionbenefitobligationrecognizedinconsolidatedbalancesheets (23,203)$ (33,957)$

Accumulatedbenefitobligationatendofyear 198,236$ 180,971$

WeightedaverageassumptionsasofAugust31areasfollows:

2014 2013

Discountrate 4.00% 4.90%Expectedlong‐termrateofreturnonassets 7.50% 7.50%Rateofcompensationincrease 4.00% 4.00% Netperiodicpensioncostfortheplanfor2014and2013isincludedinsalaries,wages,andbenefitsintheaccompanyingconsolidatedstatementsofoperations.Componentsofnetperiodicpensioncostincludethefollowing(inthousands):

2014 2013

Servicecost 11,219$ 14,979$Interestcost 9,718 8,827Expectedreturnonplanassets (13,266) (14,017)Amortizationofpriorservicecost 55 55Recognizednetactuariallosses 576 3,175

Netperiodicpensioncost 8,302$ 13,019$

2014 2013

Amountsrecognizedinnetassets:Netactuarialloss 25,927$ 28,928$Netpriorservicecost 240 295

26,167$ 29,223$


30

NOTE10–PENSIONPLAN(CONTINUED)

2014 2013Amountsrecognizedaschangesinnetassets:

Netgain (2,425)$ (38,092)$Amortizationofpriorservicecost (55) (55)Amortizationofnetloss (576) (3,175)

(3,056)$ (41,322)$

Theestimatednetlossandpriorservicecostthatwillbeamortizedintonetperiodpensioncostduringthe2015fiscalyearare$325,000and$55,000,respectively.CMC’spensionplanassetallocationsatAugust31,2014and2013byassetcategoryareasfollows:

2014 2013

Cashandequivalents 4% 6%Debtsecurities 43% 41%Equitysecurities 53% 53%

100% 100%

Theassetallocationpolicyforthepensionplanisasfollows:fixedincomesecurities30%to60%(whichmayincludeU.S.governmentsecuritiesandU.S.governmentagencybonds,corporatenotesandbonds,mortgage‐backed bonds, preferred stock, and the fixed income securities of foreign governments andcorporations);equitysecurities30%to60%(whichmayincludedomesticcommonstock,convertiblenotesandbonds,convertiblepreferredstocks,foreignequitysecurities);andmutualfundsandlimitedliabilitycompaniesorpartnershipsthatinvestinallowedsecuritiesasdefinedabove.CMC’sinvestmentstrategyforpensionplanassetsisdesignedtoemphasizelong‐termgrowthofprincipalwhileavoidingexcessiverisk.Theinvestmentperformanceofthetotalportfolio,aswellasassetclasscomponents,ismeasuredagainstcommonlyacceptedperformancebenchmarks.Theexpectedlong‐termrateofreturnonplanassetsistheexpectedaveragerateofreturnonthefundsinvestedcurrentlyandonfundstobeinvestedinthefutureinordertoprovideforthebenefitsincludedintheprojectedbenefitobligation.TheCMCpensionplanused7.5%incalculatingthe2014and2013expenseamounts.Thisassumptionisbasedoncapitalmarketassumptionsandtheplan’stargetassetallocation.CMCcontinuestomonitortheexpectedlong‐termrateofreturnifchangesinthoseparameterscause7.5%tobeoutsideofareasonablerangeofexpectedreturns,orifactualplanreturnsoveranextendedperiodoftimesuggestgeneralmarketassumptionsarenotrepresentativeofexpectedplanresults.



31

NOTE10–PENSIONPLAN(CONTINUED)ThefollowingtablepresentstheplanassetsmeasuredatfairvalueatAugust31,2014(inthousands):






18,013 12,367 ‐ 30,380

Corporatefixedincome:Asset‐backedsecurities ‐ 7,173 ‐ 7,173Financials ‐ 17,554 ‐ 17,554Othercorporatebonds ‐ 30,290 ‐ 30,290

‐ 55,017 ‐ 55,017

Commonstocks:Healthcare 9,372 ‐ ‐ 9,372Utilities 840 ‐ ‐ 840Financials 8,157 ‐ ‐ 8,157Consumerstaples 3,180 ‐ ‐ 3,180Consumerdiscretionary 6,075 ‐ ‐ 6,075Materials 3,228 ‐ ‐ 3,228Energy 5,363 ‐ ‐ 5,363Informationtechnology 11,509 ‐ ‐ 11,509Industrials 6,794 ‐ ‐ 6,794Americandepositoryreceipts 7,750 ‐ ‐ 7,750Other 436 ‐ ‐ 436

62,704 ‐ ‐ 62,704

Mutualfunds:Midcap 6,231 ‐ ‐ 6,231Smallcap 9,252 ‐ ‐ 9,252Internationalcore 18,149 ‐ ‐ 18,149Emergingmarkets 4,455 ‐ ‐ 4,455Specialty‐realestate 1,803 ‐ ‐ 1,803Other 3,008 ‐ ‐ 3,008

42,898 ‐ ‐ 42,898132,101$ 67,384$ ‐$ 199,485$


32

NOTE10–PENSIONPLAN(CONTINUED)ThefollowingtablepresentstheplanassetsmeasuredatfairvalueatAugust31,2013(inthousands):






16,641 9,579 ‐ 26,220

Corporatefixedincome:Asset‐backedsecurities ‐ 7,251 ‐ 7,251Financials ‐ 10,994 ‐ 10,994Industrials ‐ 20,945 ‐ 20,945Otherglobalcorporatebonds ‐ 5,041 ‐ 5,041

‐ 44,231 ‐ 44,231

Commonstocks:Healthcare 6,107 ‐ ‐ 6,107Utilities 564 ‐ ‐ 564Financials 5,851 ‐ ‐ 5,851Consumerstaples 3,982 ‐ ‐ 3,982Consumerdiscretionary 6,133 ‐ ‐ 6,133Materials 3,854 ‐ ‐ 3,854Energy 3,813 ‐ ‐ 3,813Informationtechnology 10,448 ‐ ‐ 10,448Industrials 8,614 ‐ ‐ 8,614Americandepositoryreceipts 4,872 ‐ ‐ 4,872

54,238 ‐ ‐ 54,238

Mutualfunds:Midcapcore 7,215 ‐ ‐ 7,215Smallcapcore 10,268 ‐ ‐ 10,268Internationalcore 6,976 ‐ ‐ 6,976Emergingmarkets 4,553 ‐ ‐ 4,553Specialty‐realestate 5,899 ‐ ‐ 5,899

34,911 ‐ ‐ 34,911116,207$ 53,810$ ‐$ 170,017$



33

NOTE10–PENSIONPLAN(CONTINUED)Forinformationaboutthevaluationtechniquesandinputstomeasurefairvalueoftheplanassets,seediscussionincludedinthefairvaluemeasurementdiscussionatNote5.Thefollowingpensionbenefitpaymentsreflectexpectedfutureservice.Paymentsexpectedtobepaidoverthenexttenyearsareasfollows(inthousands):

2015 13,227$2016 10,5052017 14,0712018 15,9022019 16,9772020‐2024 129,915

CMCexpectstocontributeapproximately$16,000,000tothepensionplanduringthe2015fiscalyear.CMCprovidesvarioussupplementalexecutiveretirementplans(SERPs).During2013,itenteredintoacollateralassignmentsplitdollaragreementwithanexecutive.CMChasinvested$4,739,000intothisplanandisentitledtoreceiveareturnofthesefunds,plusinterestatarateof2.55%,uponthedeathoftheexecutive.Other SERPs adoptedduring2013weredesigned to provide25% to47%ofbase salaries,dependingontheparticipant,uponretirementatage65.CMCcontributedapproximately$388,000tothisplanduringfiscalyear2014.CMCprovidesbenefitstocertainexecutivesthatarespecificallylinkedtoitslonger‐termretentiongoalsfortheseemployees.The termsvarybyparticipant.During fiscal years2014and2013,CMCcontributedapproximately$419,000and$419,000,respectively,totheseplans.AtAugust31,2014,theaggregateSERPsliabilityof$5,240,000wasrecordedforallplansinotherlong‐termliabilities.


34

NOTE11–RESTRICTEDNETASSETSTemporarilyandpermanentlyrestrictednetassetsareavailableforthefollowingpurposesasofAugust31,2014and2013(inthousands):

2014 2013

Temporarilyrestrictednetassets:Patientcare 4,014$ 5,090$Purchaseofequipment 1,614 610Scholarshipsandothereducation 5,235 5,492Other 6,890 6,118

17,753 17,310Permanentlyrestrictednetassets 384 384

Totaltemporaryandpermanentlyrestrictednetassets 18,137$ 17,694$

NOTE12–FUNCTIONALCLASSIFICATIONOFOPERATINGEXPENSESThefollowingisasummaryofmanagement’sestimatedfunctionalclassificationofoperatingexpensesasofAugust31,2014and2013(inthousands):

2014 2013

Programservices 1,061,731$ 1,078,211$Managementandgeneral 126,494 95,285Fundraising 2,017 1,769

1,190,242$ 1,175,265$



35

NOTE13–OPERATINGLEASESCMCleasescertainpropertyandequipmentundernoncancelableoperatingleasesthatexpireinvariousyearsthrough2017.FutureminimumpaymentsatAugust31,2014byfiscalyearandintheaggregate,undernoncancelableoperatingleaseswithinitialtermsofoneyearormoreconsistofthefollowing(inthousands):

Fiscalyear2015 4,310$2016 2,0052017 1,4802018 1,3422019 1,342Thereafter 6,820

17,299$

Totaloperatingleaseexpensein2014and2013was$10,508,000and$11,057,000,respectively.NOTE14–COMMITMENTSANDCONTINGENCIESClaimsandregulatoryenvironment–CMCisinvolvedinvariousclaimsandlitigation,asbothplaintiffanddefendant,arisingintheordinarycourseofbusiness.Thehealthcareindustryissubjectedtonumerouslawsandregulationsoffederal,state,andlocalgovernments.Theselawsandregulationsinclude,butarenotnecessarily limited to, matters such as licensure, accreditation, government healthcare programparticipationrequirements,reimbursementforpatientservices,andMedicarefraudandabuse.Governmentactivityremainsatahighlevelwithrespecttoinvestigationsandallegationsacrossthenationconcerningpossibleviolationsoffraudandabusestatutesandregulationsbyhealthcareproviders.Violationsoftheselaws and regulations could result in expulsion from government healthcare programs together withimpositionofsignificantfinesandpenalties,aswellassignificantrepaymentsforpatientservicespreviouslybilled.


36

NOTE14–COMMITMENTSANDCONTINGENCIES(CONTINUED)Claimsandregulatoryenvironment(continued)–AsdisclosedinNotes2and4,theCounty,Medicare,andMedi‐CalgovernmentreimbursementprogramsaccountforasubstantialamountofCMC’snetpatientservicerevenue.ExpenditurereductioneffortsandbudgetconcernswithintheUnitedStatesandCalifornialegislature continue to create uncertainty over the volumeof futurehealth care funding. It is at leastreasonably possible that future reimbursements for patient services under these programs could benegativelyimpacted.In2010,SenateBill853wasenactedintolaw,directingtheDepartmentofHealthCareServices(DHCS)todevelopanewmethodofpayingforhospitalinpatientservicesinthefee‐for‐serviceMedi‐Calprogramutilizingadiagnosisrelatedgroup(DRG)methodology.TheDRGratepaymentmethodologyforinpatientservicesbeganonJuly1,2013.Theultimateimpactofthemethodologyisnotyetknown;however,anyratereductionsasaresultofthemethodologychangewillbephasedinoverfouryears:thefirstyearimpactwillbe2.5percentfor2013‐14;7.5percentin2014‐15;and15percentin2015‐16.Infiscalyear2016‐17,theDRGbasepricewillbefullyimplemented.CaliforniaAssemblyBill97(AB97)–AB97requiresDHCStoimplementpaymentreductionsof10%tomostcategoriesofservicesinMedi‐Calfeeforservice.ReductionsareeffectiveforservicesprovidedonorafterJune1,2011.CMChasaccruedapproximately$9,850,000atAugust31,2014asaresultofAB97.DHCSisexpectedtobeginretrospectiveratecutsinthefourthquarterof2014andthefirstquarterof2015.PledgestoMedicalFoundation–CMChasmadesignificantpledgestotheSantéMedicalFoundation(theMedicalFoundation)tosupportitseffortstorecruitneededspecialistsandprimarycarephysicianstotheFresnoareaaswellasitseffortstoinstallelectronichealthrecordsystemsinlocalphysicianoffices.Pledgesof$14,077,000and$13,050,000andpledgepaymentsof$9,131,000and$12,472,000weremadein2014and2013,respectively.TwooftheboardmembersoftheMedicalFoundationarealsomembersoftheboardofCMCorexecutivemanagementofCMC.

SINGLEAUDIT


dbaCOMMUNITYMEDICALCENTERSSCHEDULEOFEXPENDITURESOFFEDERALAWARDS

YEARENDEDAUGUST31,2014

Seeaccompanyingnotes 38

FederalCFDA/ContractNumber

Pass‐ThroughEntity

IdentifyingNumber

FederalExpenditures

U.S.DepartmentofHealthandHumanServices

GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children,andYouth(RyanWhiteProgramPartD) 93.153 397,496$

HIVCareFormulaGrants 93.917 528,211

GrantstoProvideOutpatientEarlyInterventionServiceswithRespecttoHIVDisease(RyanWhiteHIV/AIDSProgramPartC) 93.918 481,697

TotalExpenditureofFederalAwards 1,407,404$

FederalGrantorProgramTitle


dbaCOMMUNITYMEDICALCENTERSNOTESTOSCHEDULEOFEXPENDITURESOFFEDERALAWARDS


39

1. GENERAL The accompanying schedule of expenditures of federal awards (the Schedule) includes the

federalgrantactivityofCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCenters(CMC)underprogramsofthefederalgovernmentfortheyearendedAugust31,2014.The information in this schedule ispresented inaccordancewith therequirementsof theOfficeofManagementandBudget (OMB)CircularA‐133,AuditsofStates,LocalGovernments,andNon‐ProfitOrganizations.BecausetheSchedulepresentsonlyaselectedportion of the operations of CMC, it is not intended to and does not present the financialposition,changesinnetassets,orcashflowsofCMC.

2. BASISOFACCOUNTING Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such

expendituresarerecognizedfollowingthecostprinciplescontainedinOMBCircularA‐122,CostPrinciplesforNon‐profitOrganizations,whereincertaintypesofexpendituresarenotallowableor are limited as to reimbursement. Negative amounts shown on the Schedule representadjustments or credits made in the normal course of business to amounts reported asexpendituresinprioryears.

3. RELATIONSHIPTOFINANCIALSTATEMENTS FederalawardsarereportedasotherrevenueinCMC’sconsolidatedstatementsofoperations

whenqualifyingexpensesareincurredforthestatedpurposeofthegrants.4. SUBRECIPIENTS CMCdidnotprovidefederalawardstosubrecipientsduringtheyearendedAugust31,2014.

40

REPORTOFINDEPENDENTAUDITORSONINTERNALCONTROLOVERFINANCIALREPORTINGANDONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDITOFFINANCIALSTATEMENTS

PERFORMEDINACCORDANCEWITHGOVERNMENTAUDITINGSTANDARDSTotheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersWe have audited, in accordance with auditing standards generally accepted in the United States ofAmerica and the standards applicable to financial audits contained inGovernmentAuditingStandardsissued by the Comptroller General of the United States, the consolidated financial statements ofCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCenters(CMC), which comprise the consolidated balance sheet as of August31, 2014, and the relatedconsolidatedstatementsofoperations,changesinnetassets,andcashflowsfortheyearthenended,andthe related notes to the consolidated financial statements, and have issued our report thereon datedNovember24,2014.InternalControlOverFinancialReportingIn planning and performing our audit of the consolidated financial statements, we considered CMC’sinternalcontroloverfinancialreporting,(internalcontrol)todeterminetheauditproceduresthatareappropriateinthecircumstancesforthepurposeofexpressingouropinionontheconsolidatedfinancialstatements, but not for the purpose of expressing an opinion on the effectiveness of CMC’s internalcontrol.Accordingly,wedonotexpressanopinionontheeffectivenessofCMC’sinternalcontrol.A deficiency in internal control exists when the design or operation of a control does not allowmanagementoremployees,inthenormalcourseofperformingtheirassignedfunctions,toprevent,ordetect and correct, misstatements on a timely basis. A material weakness is a deficiency, or acombinationofdeficiencies,ininternalcontrol,suchthatthereisareasonablepossibilitythatamaterialmisstatementoftheentity’sfinancialstatementswillnotbeprevented,ordetectedandcorrectedonatimelybasis.Asignificantdeficiency isadeficiency,oracombinationofdeficiencies,ininternalcontrolthatislessseverethanamaterialweakness,yetimportantenoughtomeritattentionbythosechargedwithgovernance.Ourconsiderationoftheinternalcontrolwasforthelimitedpurposedescribedinthefirstparagraphofthissectionandwasnotdesignedtoidentifyalldeficienciesininternalcontrolthatmightbematerialweaknessesorsignificantdeficiencies.Giventheselimitations,duringourauditwedidnotidentifyanydeficiencies in internal control that we consider to be material weaknesses. However, materialweaknessesmayexistthathavenotbeenidentified.

41

ComplianceandOtherMattersAspartofobtainingreasonableassuranceaboutwhetherCMC’sconsolidated financialstatementsarefreefrommaterialmisstatement,weperformedtestsofitscompliancewithcertainprovisionsoflaws,regulations, contracts, and grant agreements, noncompliance with which could have a direct andmaterialeffecton thedeterminationofconsolidated financialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofourauditand,accordingly,wedo not express such an opinion. The results of our tests disclosed no instances of noncompliance orothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards.PurposeofthisReportThe purpose of this report is solely to describe the scope of our testing of internal control andcompliance and the results of that testing, and not to provide an opinion on the effectiveness of theentity’s internal control or on compliance. This report is an integral part of the audit performed inaccordance with Government Auditing Standards in considering the entity’s internal control andcompliance.Accordingly,thiscommunicationisnotsuitableforanyotherpurpose.Stockton,CaliforniaNovember24,2014

42

REPORTOFINDEPENDENTAUDITORSONCOMPLIANCEFOREACHMAJORPROGRAMANDONINTERNALCONTROLOVERCOMPLIANCEINACCORDANCEWITHOMBCIRCULARA‐133

TheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersReportonComplianceforEachMajorFederalProgramWehaveauditedCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedical Centers’ (CMC) compliancewith the types of compliance requirementsdescribed in theOMBCircularA‐133 Compliance Supplement that could have a direct andmaterial effect on each of CMC’smajor federal programs for the year ended August 31, 2014. CMC’s major federal programs areidentified in the summary of auditor’s results section of the accompanying schedule of findings andquestionedcosts.Management’sResponsibility

Management is responsible for compliancewith the requirements of laws, regulations, contracts, andgrantsapplicabletoitsfederalprograms.Auditor’sResponsibility

Our responsibility is to express an opinion on compliance for each of CMC'smajor federal programsbasedonourauditofthetypesofcompliancerequirementsreferredtoabove.WeconductedourauditofcomplianceinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica;thestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandards, issuedbytheComptrollerGeneraloftheUnitedStates;andOMBCircularA‐133,AuditsofStates,LocalGovernments,and Non‐Profit Organizations. Those standards and OMB Circular A‐133 require that we plan andperform the audit to obtain reasonable assurance about whether noncompliance with the types ofcompliance requirements referred to above that could have a direct and material effect on a majorfederal program occurred. An audit includes examining, on a test basis, evidence about CMC'scompliancewiththoserequirementsandperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.We believe that our audit provides a reasonable basis for our opinion on compliance for eachmajorfederalprogram.However,ourauditdoesnotprovidealegaldeterminationofCMC'scompliance.OpinionontheMajorFederalProgram

In our opinion, CMC complied, in all material respects, with the types of compliance requirementsreferredtoabovethatcouldhaveadirectandmaterialeffectoneachofitsmajorfederalprogramsfortheyearendedAugust31,2014.

43

OtherMatters

Theresultsofourauditingproceduresdisclosedinstancesofnoncompliance,whicharerequiredtobereportedinaccordancewithOMBCircularA‐133andwhicharedescribedintheaccompanyingscheduleof findingsandquestionedcostsas items2014‐001and2014‐002.Ouropiniononeachmajorfederalprogramisnotmodifiedwithrespecttothismatter.CMC’sresponsetothenoncompliancefindingsidentifiedinourauditisdescribedintheaccompanyingscheduleoffindingsandquestionedcosts.CMC’sresponsewasnotsubjectedtotheauditingproceduresappliedintheauditofcomplianceand,accordingly,weexpressnoopinionontheresponse.ReportonInternalControlOverCompliance

Management of CMC is responsible for establishing and maintaining effective internal control overcompliancewith the typesofcompliancerequirementsreferred toabove. Inplanningandperformingour audit of compliance, we considered CMC's internal control over compliance with the types ofrequirementsthatcouldhaveadirectandmaterialeffectonthemajorfederalprogramtodeterminetheauditingproceduresthatareappropriateinthecircumstancesforthepurposeofexpressinganopinionon compliance for each major federal program and to test and report on internal control overcomplianceinaccordancewithOMBCircularA‐133,butnotforthepurposeofexpressinganopinionontheeffectivenessofinternalcontrolovercompliance.Accordingly,wedonotexpressanopinionontheeffectivenessofCMC'sinternalcontrolovercompliance.Adeficiency in internalcontrolovercompliance existswhen thedesignor operationof a control overcompliance does not allow management or employees, in the normal course of performing theirassigned functions, to prevent, or detect and correct, noncompliance with a type of compliancerequirement of a federal program on a timely basis. A material weakness in internal control overcomplianceisadeficiency,orcombinationofdeficiencies,ininternalcontrolovercompliance,suchthatthereisareasonablepossibilitythatmaterialnoncompliancewithatypeofcompliancerequirementofafederal program will not be prevented, or detected and corrected, on a timely basis. A significantdeficiencyininternalcontrolovercomplianceisadeficiency,oracombinationofdeficiencies,ininternalcontrolovercompliancewithatypeofcompliancerequirementofafederalprogramthatislessseverethanamaterialweaknessininternalcontrolovercompliance,yetimportantenoughtomeritattentionbythosechargedwithgovernance.Ourconsiderationofinternalcontrolovercompliancewasforthelimitedpurposedescribedinthefirstparagraph of this section and was not designed to identify all deficiencies in internal control overcompliance that might be material weaknesses or significant deficiencies and therefore, materialweaknesses or significant deficiencies may exist that were not identified. We did not identify anydeficienciesininternalcontrolovercompliancethatweconsidertobematerialweaknesses.However,weidentifiedcertaindeficienciesininternalcontrolovercompliance,asdescribedintheaccompanyingschedule of findings and questions costs as items 2014‐001 and 2014‐002 that we consider to besignificantdeficiencies.

44

CMC’sresponsetothe internalcontrolovercompliancefindings identified inouraudit isdescribedinthe accompanying schedule of findings and question costs. CMC’s responsewas not subjected to theauditingproceduresappliedintheauditofcomplianceand,accordingly,weexpressnoopinionontheresponse.Thepurpose of this report on internal control over compliance is solely todescribe the scope of ourtestingofinternalcontrolovercomplianceandtheresultsofthattestingbasedontherequirementsofOMBCircularA‐133.Accordingly,thisreportisnotsuitableforanyotherpurpose.

Stockton,CaliforniaNovember24,2014

COMMUNITYMEDICALCENTERSSCHEDULEOFFINDINGSANDQUESTIONEDCOSTS

YEARENDEDAUGUST31,2014(CONTINUED)

45

SECTIONI–SUMMARYOFAUDITOR’SRESULTSFinancialStatementsTypeofauditor’sreportissued: UnmodifiedInternalcontroloverfinancialreporting:

Materialweakness(es)identified? Yes No Significantdeficiency(ies)identified? Yes Nonereported

Non‐compliancematerialtofinancial

statementsnoted? Yes NoFederalAwardsInternalcontrolovermajorfederalprograms:

Materialweakness(es)identified? Yes No Significantdeficiency(ies)identified? Yes Nonereported

Anyauditfindingsdisclosedthatare

requiredtobereportedinaccordancewithsection510(a)ofOMBCircularA‐133? Yes No

IdentificationofMajorFederalPrograms

CFDANumbers NameofFederalProgramorClusterTypeofAuditor’sReportIssued

93.153

93.918

U.S.DepartmentofHealthandHumanServices–GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children,andYouth(RyanWhiteProgram)

U.S.DepartmentofHealthandHumanServices–GrantstoProvideOutpatientEarlyInterventionServiceswithRespecttoHIVDisease(RyanWhiteHIV/AIDSProgramPartC)

Unmodified

Unmodified

Dollarthresholdusedtodistinguish

betweenTypeAandTypeBprograms $300,000Auditeequalifiedaslow‐riskauditee? yes noSECTIONII–FINANCIALSTATEMENTFINDINGSNonenoted



46

SECTIONIII–FEDERALAWARDFINDINGSANDQUESTIONEDCOSTSFINDING2014‐001–LevelofEffort(Instanceofnoncomplianceandsignificantdeficiency)

CFDANumber

FederalAgency/Pass‐throughEntity–ProgramName AwardNumber

Awardyear

QuestionedCosts

93.918 U.S.DepartmentofHealthandHumanServices–GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children,andYouth(RyanWhiteHIV/AIDSProgramPartD)

H76HA00765‐12‐01

8/31/14 None

Criteria:42U.S.Code§300ff–64 andthegrantagreementstatethatthegranteemustmaintainitsexpendituresforearlyinterventionservicesatalevelnotlessthanthelevelofexpendituresforsuchservicesforthefiscalyearprecedingthefiscalyearforwhichtheapplicantisapplyingtoreceivethegrant.Condition:CMC did not maintain non‐Federal funding for early intervention services for the period endingAugust31,2014atalevelgreaterthantheamountexpendedforsuchservicesforthepriorfiscalyear.Context:The finding applies to Finance Department oversight and controls with respect to maintaining andtracking expenditures to ensure the expenditures for early intervention services in the current fiscalyearexceedtheexpendituresforthepriorfiscalyear.Effect:Noncompliancewithgrantlevelofeffortrequirements.Cause:Thenon‐Federal funding forHIVearly interventionservices inthecurrentyearwerebelowbudgetedamountsduetovacantstaffpositionsand;therefore,CMCdidnotmaintainnon‐FederalfundingforHIVearlyinterventionservicesata levelthatwasnot lessthantheexpendituresforsuchactivitiesduringthepriorfiscalyear.Recommendation:Werecommendthatmanagementdeveloppolicies/procedurestomonitornon‐FederalfundingforHIVearly intervention services throughout the year to ensure that they exceed the previous yearexpendituresforsuchactivities.Viewsofresponsibleofficialsandplannedcorrectiveactions:Duringthe2013‐2014fiscalyearCommunitySpecialServices(CSS)hadseveralvacantstaffpositions.CSSwasunabletohirereplacements for thesepositions ina timelymanner.CSShavesincehiredperdiemsocialworkersandhavetrainedthesocialworkerstoalsocoverCSS.



47

FINDING2014‐002–Reporting(Instanceofnoncomplianceandsignificantdeficiency)

CFDANumber

FederalAgency/Pass‐throughEntity–ProgramName AwardNumber

Awardyear

QuestionedCosts

93.153

93.918

U.S.DepartmentofHealthandHumanServices–GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children,andYouth(RyanWhiteProgram)U.S.DepartmentofHealthandHumanServices–GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children,andYouth(RyanWhiteHIV/AIDSProgramPartD)

H12HA24778‐02‐01

H76HA00765‐12‐01

8/31/14

8/31/14

None

None

Criteria:OMBCircularA‐133,ComplianceSupplementPart3‐LrequiresrecipientstoreportexpendituresunderFederalawards.Condition:As the organization is a recipient of federal funds from the U.S Department of Health and HumanServices, OMB Circular A‐133 Compliance Supplement Part 3‐L is relevant; and therefore, quarterlyFederal Financial Reports are required to be submitted within 30 days of the end of each calendarquarter.Context:The finding applies to Finance Department oversight and controls with respect to maintaining andtracking expenditures to ensure the expenditures for early intervention services in the current fiscalyearexceedtheexpendituresforthepriorfiscalyear.Effect:Noncompliancewithgrantfinancialreportingrequirements.Cause:The quarterly federal funding report due April 30, 2014 was submitted May 1, 2014 due to a staffmembernotbeingabletocompilealltheinformationnecessaryforthereportuntilthedayaftertheduedateand;therefore,CMCdidnotsubmitthereportwithinthegivendeadline.Recommendation:Werecommendthatmanagementdeveloppolicies/procedurestomonitorcompletionandsubmissionofQuarterlyReportsforbothRyanWhiteProgramswithinthegivendeadlines.Viewsofresponsibleofficialsandplannedcorrectiveactions:CMChasput inplace calendarduedate reminders for the staff accountant in chargeof the grants toensurereportingdeadlinesaremet.

COMMUNITYMEDICALCENTERSSUMMARYSCHEDULEOFPRIORAUDITFINDINGS


48

SECTIONIV–SUMMARYOFPRIORAUDITFINDINGSFINDING2013‐001–LevelofEffort(Instanceofnoncomplianceandsignificantdeficiency)Condition:CMC did not maintain non‐Federal funding for early intervention services for the period endingAugust31,2013atalevelgreaterthantheamountexpendedforsuchservicesforthepriorfiscalyear.Recommendation:Werecommendthatmanagementdeveloppolicies/procedurestomonitornon‐FederalfundingforHIVearly intervention services throughout the year to ensure that they exceed the previous yearexpendituresforsuchactivities.Currentstatus:Notimplemented.Seecurrentyearfinding2014‐001.

Documents

Community Hospitals of Central California and Affiliated ......Report of independent auditors on internal control over financial reporting and ... Auditor’s Responsibility ... 1,276,1311,245,976