FINANCIAL STATEMENTS
Fiscal Year Ended September 27, 2015
To the Board of Trustees of
The RAND Corporation
Independent Auditor’s Report
We have audited the accompanying consolidated financial statements of The RAND Corporation (“the
Company”) and its subsidiaries, which comprise the consolidated statement of financial position as of
September 27, 2015, and the related consolidated statement of activities and changes in net assets and
consolidated statement of cash flows for the year then ended.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation and maintenance of internal control relevant to the preparation
and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s
preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of The RAND Corporation and its subsidiaries at September 27, 2015, and
the changes in its net assets and its cash flows for the year then ended in accordance with accounting
principles generally accepted in the United States of America.
Other Matters
We have previously audited The RAND Corporation’s 2014 financial statements, and we expressed an
unmodified audit opinion on those audited financial statements in our report dated February 3, 2015. In
our opinion, the summarized comparative information presented herein as of and for the year ended
September 28, 2014 is consistent, in all material respects, with the audited financial statements from
which it has been derived.
February 2, 2016
PricewaterhouseCoopers LLP, 601 South Figueroa Street, Los Angeles, CA 90017
T: (213) 356 6000, F: (813) 637 4444, www.pwc.com/us
i
The RAND Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
with summarized financial information as of September 28, 2014
(in thousands)
ASSETS
Current assets
Cash and cash equivalents
Short term investments
Receivables, net
Billed and unbilled costs
Other receivables
September 27, 2015
September 28, 2014
$
$
Prepaid expenses and other current assets
Property and equipment
Land
Buildings and improvements
Leasehold improvements
Equipment
Construction in progress
Less: Accumulated depreciation and amortization
Net property and equipment
Long-term investments
Other assets
Total assets
LIABILITIES AND NET ASSETS
Current liabilities
Accounts payable and other liabilities
Unexpended portion of grants and contracts received
Accrued compensation and vacation
Current portion of long-term debt
45,870
2,264
5,587
6,103
104,085
109,420
1,334
113,631
1,334
113,006
13,529
13,119
79,852
3,632
211,978
(100,929)
73,064
3,158
203,681
(91,752)
111,049
111,929
221,678
230,686
3,571
4,496
$
440,383
$
456,531
$
20,235
15,536
19,992
2,390
$
19,050
18,035
18,193
2,305
Total current liabilities
45,009
10,174
56,877
3,786
Total current assets
27,888
9,947
Deferred rent
Accrued postretirement benefit liability
Other long-term liabilities
Long-term debt, less current portion
58,153
57,583
8,182
13,106
20,787
111,760
5,881
9,242
17,673
114,150
Total liabilities
Net assets
Unrestricted
Operations
Board-designated
211,988
204,529
—
143,313
7,577
156,823
Total unrestricted
143,313
164,400
28,526
56,556
32,721
54,881
Temporarily restricted
Permanently restricted
Total net assets
228,395
Total liabilities and net assets
$
440,383
252,002
$
456,531
The accompanying notes are an integral part of these consolidated financial statements.
1
The RAND Corporation
CONSOLIDATED STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS
with summarized financial information for the year ended September 28, 2014
(in thousands)
For the Years Ended
September 28,
2014
September 27, 2015
BoardDesignated
Operations
Total
Unrestricted
Temporarily
Restricted
Permanently
Restricted
Total
Total
REVENUE, GAINS, AND OTHER SUPPORT
Contracts and grants
$
Investment income, net
—
308,765
$
—
3,685
$
308,765
3,685
$
—
1,904
$
—
—
308,765
$282,103
5,589
$
4,654
Net realized gains on investments
—
6,052
6,052
2,945
—
8,997
5,993
Net unrealized (losses) gains on investments
—
(15,833)
(15,833)
(7,511)
—
(23,344)
7,864
Contributions
3,549
—
3,549
4,732
1,675
9,956
12,556
2
Transfer of designated net assets
to operations
7,696
(7,696)
—
—
—
—
—
6,500
—
6,500
(6,500)
—
—
—
326,510
(13,792)
312,718
(4,430)
1,675
309,963
313,170
Net assets released from restrictions
Total revenues, gains, and other support
EXPENSES AND LOSSES
Research
247,999
—
247,999
—
—
247,999
227,272
77,606
—
77,606
—
—
77,606
69,789
Management and general
Total expenses
325,605
—
325,605
—
—
325,605
297,061
Change in net assets before other items
905
(13,792)
(12,887)
(4,430)
1,675
(15,642)
16,109
—
(3,068)
—
—
(3,068)
(1,969)
Other items:
Change in fair value of derivative instruments (Note 8)
(3,068)
Adjustment to accrued postretirement benefit liability (other than net periodic
postretirement benefit cost) (Note 7)
(4,277)
—
(4,277)
—
—
(4,277)
(858)
Foreign exchange loss on revaluation (Note 2)
—
(620)
—
—
(620)
—
Net asset transfers (Note 2)
Change in net assets
(620)
(517)
282
(235)
235
—
—
—
(7,577)
(13,510)
(21,087)
(4,195)
1,675
(23,607)
13,282
Net assets at beginning of year
7,577
156,823
164,400
32,721
54,881
252,002
238,720
Net assets at end of year
$
$
$
$
$
$
$252,002
—
143,313
143,313
28,526
56,556
The accompanying notes are an integral part of these consolidated financial statements.
228,395
The RAND Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
with summarized financial information for the year ended September 28, 2014
(in thousands)
For the Year Ended
September 27, 2015
For the Year Ended
September 28, 2014
$(23,607)
$13,282
Depreciation and amortization
10,048
9,614
Net realized/unrealized loss (gain)
14,347
(13,857)
Permanently restricted contribution revenue
(1,675)
(5,535)
Change in fair value of derivative instruments
3,068
1,969
Foreign exchange loss (gain)
68
(12)
Loss on disposition of property and equipment
95
4
(Increase) decrease in billed and unbilled costs
(11,007)
26,631
(Increase) decrease in other receivables
(2,665)
303
Decrease (increase) in prepaid and other current assets
562
(509)
Decrease in other long-term assets
885
1,432
Increase (decrease) in accounts payable and other liabilities
1,185
(1,029)
(Decrease) increase in unexpended portion of grants and
contracts received
(2,499)
1,066
Increase in accrued compensation and vacation
1,799
1,019
Increase in deferred rent
2,301
333
Increase in postretirement benefit liability
3,864
245
Net cash (used in) provided by operating activities
(3,231)
34,956
Purchases of investments
(76,671)
(97,200)
Sales of investments
71,558
87,221
Purchases of property and equipment
(9,221)
(7,449)
Net cash used in investing activities
(14,334)
(17,428)
Cash flows from financing activities:
Principal payments on long-term debt
(2,305)
(2,215)
Permanently restricted contributions received in cash
Net cash provided by financing activities
111
3,167
Effect of currency exchange rate changes on cash
333
(27)
Net (decrease) increase in cash and cash equivalents
(17,121)
20,668
Cash and cash equivalents at beginning of year
45,009
24,341
Cash and cash equivalents at end of year
$27,888
$45,009
Supplemental cash flow information:
Cash paid for interest
$3,721
$3,794
Cash flows from operating activities:
Change in net assets
Adjustments to reconcile change in net assets to net cash
provided by operating activities:
Changes in assets and liabilities:
Cash flows from investing activities:
2,416
The accompanying notes are an integral part of these consolidated financial statements.
3
5,382
The RAND Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANC IAL STATEMENTS
1. Corporate Organization:
The RAND Corporation (RAND) is a nonprofit, tax-exempt corporation performing research and analysis funded
primarily by contracts, grants, and contributions. In addition, the Pardee RAND Graduate School, which is part of the
RAND Corporation, confers PhD degrees in Policy Analysis.
The consolidated financial statements of RAND include the accounts of two foreign subsidiaries: RAND Europe, a
Community Interest Company domiciled in the United Kingdom and RAND Australia, a Proprietary Company Limited
by shares, based in Australia. All intercompany balances and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies:
Fiscal Year. RAND’s fiscal year contains 52 or 53 weeks, ending on the last Sunday in September. Fiscal years 2015 and
2014 contained 52 weeks.
Basis of Presentation. The accompanying financial statements have been prepared on the accrual basis of accounting
in accordance with accounting principles generally accepted in the United States of America (GAAP).
Net assets are classified into three categories according to donor-imposed restrictions, as follows:
Unrestricted—Net assets that are not subject to donor-imposed stipulations.
Temporarily restricted—Net assets whose use by RAND is subject to donor-imposed stipulations that either expire by
the passage of time or can be fulfilled and removed by actions of RAND.
Permanently restricted—Net assets subject to donor-imposed stipulations that neither expire by the passage of time
nor can be fulfilled or removed by actions of RAND.
The financial statements include certain prior year summarized comparative information in total but not by net asset
category. Such prior year information does not include sufficient detail to constitute a presentation in conformity
with GAAP. Accordingly, such information should be read in conjunction with RAND’s financial statements for the year
ended September 28, 2014, from which the summarized financial information was derived.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the balance sheet date. Estimates also affect the reported amount of revenues, expenses, or
other changes in net assets during the reporting period. Actual results could differ from these estimates.
Reclassifications. Certain reclassifications have been made to prior year amounts to conform to the current year
presentation. These reclassifications had no effect on net assets.
Revenue and Expense Recognition. Revenues from contracts and grants are recognized as the related services
are performed in accordance with the terms of the contract or grant. Such revenues are reported as increases to
unrestricted net assets from operations.
Contributions, including unconditional promises to give, are recognized as revenue in the period received and are
reported as increases in the appropriate category of net assets. Contributions that are received and spent within the
same fiscal year are reported as increases to unrestricted net assets from operations.
Board-approved transfers from the unrestricted portion of RAND’s Long-Term Investment Fund (the LTIF) to be used
for operations are reported as decreases to board-designated unrestricted net assets and increases to unrestricted net
assets from operations.
Board-approved transfers from the restricted portion of the LTIF to be used for operations plus contributions received
in prior years and spent in the current year (that are not invested in the LTIF) are reported as decreases to temporarily
restricted net assets and increases to unrestricted net assets from operations.
Expenses (research expenses as well as management and general expenses) are generally reported as decreases in
unrestricted net assets from operations.
Change in Net Assets from Operations (Before Other Items). Change in net assets from operations (before other items)
for fiscal year 2015 was $905,000. This represents revenue less expenses from operations (as described above) and
comprises the following: revenue from contracts and grants, plus contributions spent in the current fiscal year, plus all
board-approved transfers for operations, less all research and management and general expenses.
Concentrations of Risk. Cash and cash equivalents are maintained with several financial institutions. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed
upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal credit risk.
RAND derived 81 and 82 percent of its contracts and grants revenues in fiscal years 2015 and 2014, respectively, from
contracts and grants with agencies of the United States federal government.
Cash and Cash Equivalents. RAND considers all highly liquid financial instruments purchased with an original maturity
of three months or less, and whose purpose is not restricted, to be cash equivalents.
4
Short-term Investments. Investments with an original maturity of one year or less, whose purpose is not restricted,
and which are not managed as part of the LTIF portfolio, are classified as short-term investments. RAND held shortterm investments with readily determinable fair values of $9,947,000 and $10,174,000 and an amortized cost basis of
$9,963,000 and $10,196,000 as of the end of fiscal years 2015 and 2014, respectively.
Property and Equipment. Property and equipment is stated at cost. Depreciation is computed by the straight-line
method over the estimated useful lives of the assets ranging from 3 to 40 years. Leasehold improvements are amortized
by the straight-line method over the shorter of the estimated useful lives of the assets or the remaining term of the
lease. Construction in progress will be amortized over the estimated useful lives of the respective assets when they are
ready for their intended use and placed in service. Certain computer systems and software are internally developed.
Costs associated with the application development stage are capitalized and depreciated over the useful life of the
system or software. All other costs are expensed as incurred.
Investments. All investments related to permanently restricted net assets, board-designated unrestricted net assets,
and certain temporarily restricted net assets are pooled in the LTIF. Income on the LTIF is allocated to individual funds
based on the average balance for each fund.
The percentage of board-designated funds distributed for unrestricted use was approximately 5.0 percent in fiscal
years 2015 and 2014 based on the average of the trailing 12-quarter market values of the funds. The total net
distribution was $7,696,000 and $7,417,000 for fiscal years 2015 and 2014, respectively.
Gains and losses on investments and investment income are reported as increases or decreases in unrestricted net assets
and temporarily restricted net assets, unless otherwise stipulated by the donor.
Income Tax Status. RAND is exempt from income tax under Section 501(c)(3) of the U.S. Internal Revenue Code and
corresponding California provisions and has qualified for the 50 percent charitable contributions limitation. RAND has
been classified as an organization that is not a private foundation under Section 509(a)(1) and has been designated a
“publicly supported” organization under Section 170(b)(1)(A)(vi) of the U.S. Internal Revenue Code.
Foreign Currency Translation. RAND’s foreign subsidiaries primarily transact in the local currencies. RAND translates
the foreign assets and liabilities at exchange rates in effect at the balance sheet dates and translates the revenues and
expenses using average rates during the year. Gains and losses resulting from exchange-rate changes on transactions
denominated in a currency other than the local currency are included in Change in net assets before other items on
the Consolidated Statements of Activities and Changes in Net Assets (Statement of Activities).
Within Other items on the Statement of Activities, RAND has recorded a foreign exchange loss on the revaluation
of a long term intercompany loan. RAND does not anticipate settling the long term intercompany loan with RAND
Europe in the foreseeable future, so consistent with ASC 830 Foreign Currency Matters, RAND has recognized foreign
exchange losses of $620,000 as of September 27, 2015.
New Accounting Pronouncements. In May 2015, the Financial Accounting Standards Board (FASB) issued ASC 820,
Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share
(or Its Equivalent), with the guidance becoming effective for fiscal years beginning after December 15, 2016, and
early adoption is permitted. Under the new guidance, investments measured at net asset value (NAV), as a practical
expedient for fair value, are excluded from the current fair value hierarchy and may therefore reduce the associated
disclosures. RAND adopted the guidance effective in fiscal year 2015. See Notes 6 and 7.
Net Asset Transfers. In November 2014, the Board of Trustees authorized up to $7,000,000 to be transferred from
operations to the long-term investment fund. As such, a net asset transfer of $7,000,000 from unrestricted net assets
from operations to board designated unrestricted net assets was made in fiscal year 2015.
Also, a net asset transfer of $235,000 from board designated unrestricted net assets to temporarily restricted net assets
was necessary to cover market value declines for certain endowments. These net asset transfers are reversed as the
market value of the investments recover. There were no such losses in fiscal year 2014.
At the end of fiscal year 2015, unrestricted net assets from operations was not sufficient to absorb the decline in fair
value of derivatives, the increase to accrued postretirement benefit liability and a foreign exchange loss on revaluation.
As such, a noncash net asset transfer of $6,483,000 from board designated unrestricted net assets to unrestricted net
assets from operations was made as unrestricted net assets from operations cannot be less than zero for financial
statement presentation purposes. This noncash transfer is reversed as unrestricted net assets from operations become
available.
The net asset transfers line of ($517,000) from operations, $282,000 to board designated and $235,000 to temporarily
restricted on the Statement of Activities reflects the three noncash transfers described above summed by restriction
category.
Subsequent Events. Subsequent events have been evaluated through February 2, 2016, the date the financial statements were available to be issued.
5
3. Billed and Unbilled Costs:
The following table summarizes the components of billed and unbilled contract and grant costs (in thousands):
U.S. government agencies
Billed
Unbilled
September 27, 2015
September 28, 2014
$
22,455
20,679
$13,698
20,438
43,134
34,136
State, local, and private sponsors
Billed
Unbilled
6,847
7,148
5,271
7,305
Allowance for bad debt
13,995
(252)
12,576
(842)
$
$45,870
56,877
Unbilled amounts principally represent recoverable costs billed in the first quarter of fiscal year 2016 and fiscal year
2015, respectively.
No significant contract terminations are anticipated, and past contract terminations have not resulted in significant
unreimbursed costs.
4. Contributions Receivable:
Unconditional promises to give were $4,065,000 and $2,672,000 as of September 27, 2015 and September 28, 2014,
respectively. The receivables are recorded net of the discount for future cash flows and allowance for bad debt using
the credit-adjusted rate of return appropriate for the expected term of the promise to give determined at the time
the unconditional promise to give is initially recognized. Receivables expected in one year or less are included in Other
receivables and receivables expected after one year are included in Other assets on the Consolidated Statements of
Financial Position. The carrying amount of the receivables is deemed a reasonable estimate of their fair value.
Realization of the pledges is expected in the following periods (in thousands):
September 27, 2015
September 28, 2014
In one year or less
Between one year and five years
$
3,691
589
4,280
$
1,851
1,081
2,932
Less discount
Allowance for bad debt
(40)
(175)
$
$
4,065
(85)
(175)
2,672
Contributions receivable in the following net asset categories are primarily intended to be used for the purposes more
fully described in Note 11 (in thousands):
September 27, 2015
September 28, 2014
Board designated
$
$125
Temporarily restricted
Permanently restricted
1,832
1,1,574
$4,065
$
—
3,233
973
4,2,672
During the fiscal year ended September 27, 2015, RAND received payments on prior year pledges in the amount of
$1,535,000.
Donors have made conditional promises to give $3,050,000 as of September 27, 2015 and September 28, 2014. In
conformity with GAAP, these conditional pledges are not recorded in these consolidated financial statements.
5. Long-Term Investments:
Long-term investments are presented at fair value and all related transactions are recorded on the trade date. The
investments consist of cash and money market funds, equity funds, fixed income funds, blended funds, and alternative
investments. Approximately 42% of long-term investments consist of foreign investment holdings.
As of September 27, 2015, RAND had commitments outstanding to purchase private equity and real estate funds of
$22,629,000; $7,971,000 of these commitments are estimated to be due within one year.
On the Statement of Activities, investment income is shown net of related expenses of $425,000 and $406,000, for the
fiscal years ended September 27, 2015 and September 28, 2014, respectively.
6
Long-term investments consist of the following (in thousands):
September 27, 2015
Cash and Money Market Funds
$
Equity Funds, at fair value
(cost, 2015—$124,208; cost, 2014—$112,249)
Fixed Income Funds, at fair value
(cost, 2015—$45,125; cost, 2014—$45,412)
Alternative Investments
(cost, 2015—$30,678; cost, 2014—$27,799)
$
September 28, 2014
4327
$847
144,517
153,920
45,724
48,062
31,005
27,857
221,678
$230,686
6. Fair Value Measurements:
The authoritative accounting guidance for fair value measurement provides the definition of fair value, establishes a
fair value hierarchy based on the inputs used to measure fair value, and details the required disclosures about the use
of fair value measurements.
Under the guidance, fair value is defined as the price that would be received to sell an asset (or paid to transfer a
liability), or the “exit price.” The fair value hierarchy prioritizes the inputs to valuation techniques used to measure
fair value into levels:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments
in markets that are not active, or other inputs that are observable or whose significant value drivers are observable.
Level 3 – Significant inputs are supported by little or no market activity and are thus unobservable.
Investments for which fair value is measured using the NAV per share (or its equivalent) as a practical expedient shall
not be categorized using the aforementioned levels. These investments will be classified in a separate NAV category.
As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level
of input that is significant to the fair value or NAV measurement. RAND’s assessment of the significance of particular
inputs to the fair value measurement requires judgment and may affect the selection of the hierarchy level and the
valuation itself. RAND’s own creditworthiness has been considered in the fair value measurements contained herein.
Long-Term Investments – Quoted market prices are used to determine fair value for fixed income funds and equity
funds when available. All such investments are considered Level 1. Certain equity funds are not actively traded but the
underlying investments have observable inputs valued at NAV. Consistent with ASC 820, Fair Value Measurement, such
funds are considered NAV. Alternative investments include RAND’s share of private equity funds, real estate funds, and
hedge funds which are not actively traded. Fair value measurement for alternative investments considers all available
information for each investment fund, including annual audited financial statements, known activity subsequent
to the fund’s audited financial statement date, and valuation information from the fund manager. Alternative
investments are to be included in the NAV category if the underlying values are based on NAV equivalents, such as
ending capital balance amounts.
Derivative Financial Instruments – RAND uses two interest rate swaps to fix the interest rate on its 2008A and 2008B
variable rate bonds. Dealer quotes, based on cash flow models discounted at relevant market interest rates, are used
to determine the fair value of the swaps, both of which are considered Level 2.
RAND’s assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of
September 27, 2015 were as follows (in thousands):
Level 1
Level 2
Balance as of
September 27, 2015
NAV
Assets
Investments
Cash/Money Market Funds
Equity Funds
Fixed Income Funds
Alternative Investments
Private Equity and Real Estate Funds
Multi-Strategy & Long/Short Hedge Funds
$
432
92,384
45,724
$
—
—
—
—
—
$
—
—
—
52,133
—
$
27,895
3,110
432
144,517
45,724
27,895
3,110
Total Assets
$
138,540
$
—
$
83,138
$
221,678
Liabilities
Derivatives
$
—
$
20,787
$
—
$
20,787
7
RAND’s assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of
September 28, 2014 were as follows (in thousands):
Level 1
Level 2
NAV
Balance as of
September 28, 2014
$847
83,260
48,062
$—
—
—
$—
70,660
—
$847
153,920
48,062
—
—
23,720
23,720
—
—
4,137
4,137
Total Assets
$132,169
$—
$98,517
$230,686
Liabilities
Derivatives
$—
$17,673
$—
$17,673
Assets
Investments
Cash/Money Market Funds
Equity Funds
Fixed Income Funds
Alternative Investments
Private Equity and Real Estate Funds
Multi-Strategy & Long/Short Hedge Funds
RAND uses the NAV or its equivalent to determine the fair value of all the underlying investments that (i) do not have
a readily determinable fair value and (ii) either have the attributes of an investment company or prepare their financial statements consistent with the measurement principles of an investment company. The following table lists these
investments by major category as of September 27, 2015 (in thousands):
Category
Strategy
NAV
$
Value-oriented;
growth-oriented
Private
Equity
Venture capital,
buyouts, special
situations
14,681
13,626
Investment timeframes are 1–10 years; time to
draw down commitments is 2–8 years; interest in
the funds can be sold only with the consent of
the fund managers.
Real Estate
Real estate and
natural resources
13,214
9,003
Investment timeframes are 8–9 years; time to
draw down commitments is 2–4 years; interest in
the funds can be sold only with the consent of
the fund managers/general partners.
MultiStrategy
Various (fixed
income arbitrage,
structured credit,
event-driven)
1,593
—
Redemptions dependent upon realization of
side-pocket or other underlying investment sale.
Long/Short
Equity
Total
Long/short hedge
funds
1,517
—
Next scheduled for redemption in January 2016
at the end of a rolling 5-year lock-up period.
83,138
$
—
Nature and Risks of the Investment
Equity
Funds
$
52,133
Unfunded
Commitments
$
90%* daily redemptions permitted, 10%*
monthly redemptions permitted.
22,629
*Reflects fair value of investments based on NAV.
7. Postretirement Benefits Other Than Pensions:
The RAND Retiree Group Medical Benefits Plan (the Plan) provides health care benefits to certain employees who retire
having met the required age and years of service with RAND. This coverage also applies to their dependents. Retirees
may elect coverage under the Preferred Provider Organization, various HMOs, or reimbursement of individually
purchased Medigap policies. Medicare becomes the primary coverage for retirees when they reach age 65. Retirees
and dependents share substantially in the cost of coverage. RAND retains the right, subject to existing agreements, to
change or eliminate these benefits.
The Plan includes prescription drug coverage for retirees over age 65 that equals or exceeds the benefit provided by
Medicare. As long as the retirees remain in the Plan rather than enrolling in Medicare’s prescription drug coverage,
Medicare will share the cost of the Plan with RAND and the retiree. RAND’s share of the obligations for future retiree
medical benefits is reduced due to this subsidy from Medicare.
8
The following table sets forth the Plan’s funded status as shown in the Consolidated Statements of Financial Position
(in thousands):
September 27, 2015
September 28, 2014
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Increase due to passage of time
Plan participants’ contributions
Actuarial loss
Benefits paid
$26,290
971
1,138
571
1,829
(1,235)
$24,235
808
1,189
618
606
(1,166)
Benefit obligation at end of year
29,564
26,290
Change in plan assets
Fair value of the Plan’s total assets at beginning
of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
17,048
(884)
958
571
(1,235)
15,238
1,320
1,038
618
(1,166)
Fair value of the Plan’s total assets at end of year
16,458
17,048
Unfunded obligation
$
$9,242
13,106
The unfunded obligation is shown on the Statement of Financial Position as the Accrued postretirement benefit liability.
As shown in the table above, this net benefit obligation is offset by the change in plan assets during the year. Here,
plan assets represent the fair value of investments stemming from contributions less any benefits paid to participants.
The contributions received for the fiscal year ended September 27, 2015 were $1,529,000; the contributions expected
to be received during the fiscal year ended September 30, 2016 are $1,823,000.
The following table provides the relevant weighted-average assumptions used:
September 27, 2015
September 28, 2014
Discount rate used to determine benefit obligation
4.50%
4.40%
Discount rate used to determine net periodic postretirement benefit cost
4.40%
5.00%
Long-term rate of return on the Plan’s investment
assets
7.00%
7.00%
September 27, 2015
September 28, 2014
Health care cost trend rate assumed for next year
7.50%
7.00%
Rate to which the cost trend rate is assumed
to decline
5.00%
5.00%
2020
2018
Assumed health care cost trend rates are as follows:
Year that the rate reaches the ultimate trend rate
The net periodic postretirement benefit cost for fiscal years ended September 27, 2015 and September 28, 2014,
included the following components (in thousands):
2015
Service cost-benefits attributed to service during
the period
$
Increase in the accumulated postretirement
benefit obligation due to the passage of time
Expected return on the Plan’s investment assets
2014
971
$808
1,138
1,189
(1,191)
Gain amortization
(372)
Net periodic postretirement benefit cost
$546
(1,064)
(508)
$425
As shown in the table above, the amortization of $372,000 net gain was recognized for fiscal year 2015. No
amortization of a net gain or loss is expected for fiscal year 2016.
9
The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed
health care cost trend rate by one percentage point would increase the service cost and passage-of-time components
by $436,000 for the fiscal year 2015 expense and increase the accumulated postretirement benefit obligation by
$5,048,000 as of September 27, 2015. Decreasing the assumed health care cost trend rate by one percentage point
would decrease the service cost and passage-of-time components by $345,000 for the fiscal year 2015 expense and
decrease the accumulated postretirement benefit obligation by $4,086,000 as of September 27, 2015.
Details to compute the adjustment of $4,277,000 for the accrued postretirement benefit liability (other than net
periodic retirement benefit costs) In Other items on the Statement of Activities for year ended September 27, 2015
included the following components (in thousands):
Cumulative amounts recognized in unrestricted net assets
at prior fiscal year end
September 27, 2015
September 28, 2014
$
$(5,624)
( 4,766)
Net amortization during the year
Net loss that occurred during the year
Cumulative amounts recognized in unrestricted net assets
at current fiscal year end
372
508
3,905
350
$(489)
$(4,766)
As shown above, this adjustment of $4,277,000 was primarily due to changes in mortality assumptions and reduced
investment returns. The corresponding adjustment for the period ended September 28, 2014 was a net loss of
$858,000 due to prior year gain amortization and a decrease to the discount rate.
The following estimated benefit payments, which reflect expected future service and Medicare Part D subsidies, as
appropriate, are expected to be paid (in thousands):
Gross Benefit
Payments
Medicare Part
D Subsidies
Net Benefit
Payments
2016
$894
$73
$821
2017
1,015
86
929
2018
1,124
99
1,025
2019
1,229
115
1,114
2020
1,323
132
1,191
Next five years
7,968
924
7,044
RAND contributes to the RAND Retiree Medical Benefit Trust (the Trust). The Trust was established to hold the
investment assets of the Plan. The Plan and the Trust together are intended to constitute a Voluntary Employee Benefit
Association (VEBA).
The Plan’s long term investments consist of cash and money market funds, equity funds, fixed income funds, and
alternative investments. Approximately 43% of the Plan’s long term investments consist of foreign holdings and
$271,000 of commitments are due within one year.
Fair value measurement is required for the investment assets of the Plan. Note all identification, evaluation and
disclosures required for RAND’s long term investments shown in footnote 6 also apply to the Plan’s investment assets.
The Plan’s investment assets measured and reported at fair value on a recurring basis as of September 27, 2015 were
as follows (in thousands):
Level 1
Balance as of
September 27, 2015
NAV
Assets
Investments
Money Market Funds
Equity Funds
Fixed Income Funds
Alternative Investments
Private Equity and Real Estate Funds
Total Assets
$
5
$
11,531
2,820
14,356
10
$
348
—
—
$
—
11,879
2,820
1,662
$
2,010
5
1,662
$
16,366
The Plan’s investment assets measured and reported at fair value on a recurring basis as of September 28, 2014 were
as follows (in thousands):
Level 1
NAV
Balance as of
September 28, 2014
$6
$—
$6
11,191
3,351
516
—
11,707
3,351
Assets
Investments
Money Market Funds
Equity Funds
Fixed Income Funds
Alternative Investments
Private Equity and Real Estate Funds
Total Assets
—
1,418
1,418
$14,548
$1,934
$16,482
Certain investment assets of the Plan use the NAV or its equivalent for the fair value of all the underlying investments
because they (i) do not have a readily determinable fair value and (ii) either have the attributes of an investment
company or prepare their financial statements consistent with the measurement principles of an investment company.
The following table lists these investments by major category as of September 27, 2015 (in thousands):
Category
Strategy
NAV
Valueoriented;
growthoriented
Private Equity
Venture
capital,
buyouts
916
851
Investment timeframes are 4–12 years; time to draw
down commitments is 3–9 years; interest in the funds
can be sold only with the consent of the fund managers.
Real Estate
Real estate
and natural
resources
746
223
Investment timeframes are 8–9 years; time to draw down
commitments is 2–3 years with only 95% expected to be
called; interest in the funds can be sold only with the
consent of the fund managers.
$
348
2,010
$
$
—
Nature and Risks of the Investment
Equity funds
Total
$
Unfunded
Commitments
Monthly redemption permitted.
1,074
8. Borrowing Arrangements:
The following table sets forth the long-term debt as shown in the Consolidated Statements of Financial Position (in
thousands):
September 27,
September 28,
20152014
California Infrastructure and Economic Development Bank Variable Rate
Revenue Bonds, Series 2008A, issued in the original principal amount of
$34,575,000, in connection with the refunding of the Series 2007 bonds,
in May 2008; average interest rates of 0.96% and 0.95% for the fiscal
years ending September 27, 2015 and September 28, 2014, respectively
$
California Infrastructure and Economic Development Bank Variable Rate
Revenue Bonds, Series 2008B, issued in the original principal amount of
$93,565,000, in connection with the refunding of the Series 2002B bonds,
in June 2008; average interest rate of 0.96% and 0.95% for the fiscal
years ending September 27, 2015 and September 28, 2014, respectively Less current portion $
30,825
$
31,450
83,325 85,005
114,150 116,455
(2,390) (2,305)
111,760
$
114,150
In 2002, RAND issued $130,000,000 of tax-exempt revenue bonds to finance the construction of its Santa Monica
headquarters facility ($32,500,000 Series 2002A fixed rate and $97,500,000 Series 2002B variable rate). During fiscal
year 2007, RAND refinanced its 2002A fixed rate bonds resulting in the issuance of the $34,975,000 of variable rate
tax-exempt revenue bonds (Series 2007) and the defeasance of the original Series 2002A bonds
In 2008, RAND issued $34,575,000 of tax-exempt variable rate revenue bonds (Series 2008A) to refinance the Series
2007 tax-exempt variable rate revenue bonds. Costs incurred in connection with the issuance of the Series 2008A bonds
11
of approximately $379,000 were paid by RAND. The initial rate of interest was 1.65% and annual principal payments
ranging from $450,000 to $1,825,000 are due from April 1, 2009 to April 1, 2042.
Also in 2008, RAND issued $93,565,000 of tax-exempt variable rate revenue bonds (Series 2008B) to refinance the
Series 2002B tax-exempt variable rate revenue bonds. Included in the par amount of the Series 2008B bonds was
approximately $1,035,000 of costs incurred in connection with issuance. The initial rate of interest was 1.15% and
annual principal payments ranging from $1,110,000 to $4,935,000 are due from April 1, 2009 to April 1, 2042.
The Series 2008A and Series 2008B bonds contain various covenants including compliance with the following financial
measures: maximum debt-to-capitalization ratio, and either a minimum debt service coverage ratio or a minimum
liquidity level. RAND is in compliance with all covenants as of September 27, 2015.
Through August 2012, the payment of principal and interest on both the Series 2008A and 2008B bonds was
collateralized by direct-pay letters of credit. In August 2012, RAND entered into two Continuing Covenant Agreements
with a lender whereby the lender purchased the entire Series 2008A and entire Series 2008B bonds from the existing
bondholders and RAND in turn agreed to make bond principal and interest payments to the new lender. The interest
rate on the bonds is reset monthly based on 67% of one-month LIBOR plus a fixed spread and the initial term of the
agreements is 7 years.
Interest Rate Swaps. Concurrent with the issuance of the Series 2007 variable rate bonds, RAND entered into an
interest rate swap agreement with a counterparty whereby RAND agreed to pay the counterparty a fixed rate of
interest of 3.955% and the counterparty agreed to pay RAND the Series 2007 variable rate until April 1, 2012, and
67% of one-month LIBOR thereafter. Simultaneously, RAND entered into an additional interest rate swap agreement
with another counterparty for $42,350,000 of its Series 2002B variable rate bonds whereby RAND agreed to pay
the counterparty a fixed rate of interest of 3.955% and the counterparty agreed to pay RAND 67% of one-month
LIBOR. Both swaps remain in effect with the Series 2008A and Series 2008B bonds, with the same terms (except the
first counterparty agreed to pay RAND the Series 2008A variable rate in place of the Series 2007 variable rate) and
terminate on April 1, 2042, the maturity date of the Series 2008A and Series 2008B bonds. Related primarily to these
interest rate swaps, within the Change in fair value of derivative instruments on the Other items on the Statement of
Activities, is a loss of $3,068,000 and $1,969,000 for fiscal years 2015 and 2014, respectively.
Annual bond principal payments are required in the following fiscal years (in thousands):
2016
$2,390
20172,500
20182,595
20192,700
20202,795
Thereafter101,170
$
114,150
Accrued interest payable relating to the bonds was $307,000 and $302,000 as of September 27, 2015 and September
28, 2014, respectively. RAND’s total interest expense was $3,726,000 and $3,798,000 for the fiscal years ended
September 27, 2015 and September 28, 2014, respectively. The fair value of RAND’s revenue bonds approximates par
value as all of RAND’s revenue bonds are variable rate bonds.
Line of Credit. RAND has an uncollateralized line of credit in the principal amount of $25,000,000 which expires in
October 2016. The line of credit contains covenants that require RAND to achieve the same financial measures as the
Series 2008A and 2008B revenue bonds. Under the terms of the credit agreement, interest is payable monthly at (i)
the prime rate less 0.85% or (ii) the LIBOR rate plus 1.4% as selected by RAND. No amounts were drawn on the line of
credit during fiscal years 2015 or 2014.
9. Commitments and Contingencies:
Lease Commitments. Operating lease commitments, are as follows (in thousands):
2016
$5,978
20177,668
20187,673
20197,682
20207,794
Thereafter42,841
$
79,636
Future minimum rentals are comprised of office leases. Certain of RAND’s office leases contain rent escalation clauses
and fair-market renewal options. Property leases generally require RAND to pay for utilities, insurance, taxes, and
maintenance. RAND’s net rental expense was $7,449,000 and $7,791,000 for the fiscal years ended September 27, 2015
and September 28, 2014, respectively.
Other Commitments. Contract costs billed prior to September 25, 2009 have been audited and accepted. Contract
costs billed for the fiscal year ended September 26, 2010 have been audited, but have not yet been accepted by
12
the Administrative Contracting Officer. To date, there have been no significant cost disallowances. In the opinion
of management, contract costs billed subsequent to September 26, 2010 are allowable, and any potential cost
disallowance would not materially affect RAND’s consolidated financial position, changes in net assets, or cash flows.
RAND has certain contingent liabilities with respect to claims arising from the ordinary course of business. In the
opinion of management, such contingent liabilities will not result in any loss that would materially affect RAND’s
financial position, changes in net assets, or cash flows.
Environmental Remediation. Under the terms of an agreement with the City of Santa Monica (the “City”) for the sale
of land owned by RAND, RAND was responsible for the demolition of existing buildings on the site and environmental
remediation with respect to the underlying land. Under the terms of the agreement with the City, RAND must
indemnify the City for claims related to the presence of hazardous materials at the site for a period until ten years after
the demolition of the old buildings and completion of soil and groundwater remediation, which was acknowledged by
the City in December 2006. There can be no assurance that future claims for indemnity will not have a material adverse
effect on RAND’s Statement of Activities or Statement of Cash Flows.
10.Endowment:
RAND’s endowment consists of approximately 32 individual investment funds established for a variety of purposes. It
has both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowment
funds. As required by GAAP, net assets associated with endowment funds are classified and reported based on the
existence or absence of donor-imposed restrictions.
Absent explicit donor stipulations to the contrary, RAND classifies as permanently restricted net assets the original
value of gifts donated to the permanent endowment. The remaining portion of the donor-restricted endowment fund
that is not classified as permanently restricted—all investment earnings and temporarily restricted gifts—is classified as
temporarily restricted until those amounts are appropriated for expenditure by RAND in a manner consistent with the
standard of prudence prescribed by the Uniform Prudent Management of Institutional Funds Act (UPMIFA).
The following table summarizes this long term investment fund by net asset class as of September 27, 2015 (in
thousands):
Unrestricted
Donor-restricted funds
$
Board-designated funds
End of year
$
—
Temporarily
Restricted
Permanently
Restricted
$
$
16,111
55,604
149,963
—
—
149,963
$
$
16,111
55,604
Total
$
71,715
149,963
$
221,678
The following table summarizes the activity in the endowment during fiscal year 2015 (in thousands):
Unrestricted
Beginning of year
$
Investment return
(5,631)
Contributions
125
Appropriations
Other changes–excess cash transfer
End of year
156,165
$
Temporarily
Restricted
Permanently
Restricted
$
$
21,333
53,188
(2,662)
—
Total
$
230,686
(8,293)
—
2,416
2,541
(7,696)
(2,560)
—
(10,256)
7,000
—
—
7,000
$
$
149,963
16,111
55,604
$
221,678
Investment and Spending Policies. RAND’s investment and spending policies are in compliance with UPMIFA. In
accordance with UPMIFA, RAND considers the following factors in making a determination to appropriate or
accumulate donor-restricted endowment funds: the duration and preservation of the fund, the mission of RAND,
general economic conditions, the possible effect of inflation and deflation, the expected total return from income and
the appreciation of investments, the investment policies of the organization, and RAND’s other resources.
Per RAND’s investment policy, endowment assets are invested in a manner that is intended to increase the purchasing
power on a long-term basis after inflation and payment for RAND operations. RAND relies on a total return strategy
in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield
(interest and dividends). RAND targets a diversified asset allocation to achieve its long-term return objectives within
prudent risk constraints.
Per RAND’s spending policy, a percentage of its endowment fund’s average fair value over the prior 12 quarters
through June 30 is appropriated for distribution each year. In establishing this policy, RAND considered the long-term
expected return on its endowment. Accordingly, over the long term, RAND expects the current spending policy to allow
its endowment to grow at a rate equal to or in excess of inflation.
13
11. Net Assets:
Board-Designated Net Assets. Board-designated net assets (net of cumulative net asset transfers) are available for the
following purposes (in thousands):
September 27, 2015
Designated for investment
$
138,157
September 28, 2014
$
150,988
Designated for special use:
RAND Education
3,232
3,737
Pardee RAND Graduate School
Bing Center for Health Economics
1,819
105
1,954
144
5,156
5,835
$143,313
$156,823
Temporarily Restricted Net Assets. Temporarily restricted net assets (both within and outside of the endowment and
including net asset transfers and pledges) are available for the following purposes (in thousands):
September 27, 2015
Pardee RAND Graduate School
$
September 28, 2014
National Security Research and Training
6,777
4,388
RAND Institute for Civil Justice
3,515
4,442
RAND General
2,861
3,064
RAND Health
2,531
2,727
President’s Fund
1,471
1,444
Paul O’Neill Alcoa Professorship in Policy Analysis
1,274
1,489
Pardee Center for Longer Range Global Policy
944
1,338
RAND Justice, Infrastructure, and Environment
801
288
635
3,329
657
4,247
RAND Headquarters
Other
$
28,526
$
7,872
5,153
$
32,721
Permanently Restricted Net Assets. Permanently restricted assets (including pledges) are shown below by the purpose
designated by the donor. The assets are invested in perpetuity and the income is available to support the restricted
activities (in thousands):
September 27, 2015
September 28, 2014
Pardee RAND Graduate School
General Support
Awards and Scholarships
$
16,972
$
16,768
12,618
11,149
National Security Research and Training
4,500
4,500
RAND Institute for Civil Justice
4,134
4,134
RAND—General Support
3,786
3,784
RAND Pardee Center for Longer Range Global Policy
3,670
3,670
Tang Institute for U.S.–China Relations
3,000
3,000
Samueli Institute Fund for Policy Studies in Integrative Medicine at RAND
3,000
3,000
Paul O’Neill Alcoa Professorship in Policy Analysis
2,500
2,500
Research Position Endowment
1,500
876
1,500
876
Other
$
56,556
$
54,881
12. Employee Retirement Plans:
RAND has four defined contribution employee plans: a Qualified Retirement Plan (“QRP”), a Supplemental Retirement
Annuity Plan (“SRAP”), a Nonqualified Deferred Compensation Plan (“NDCP”), and a Nonqualified Supplementary
Plan (“NSP”). Most full-time, regular employees are eligible to participate in the QRP and SRAP. Certain employees are
eligible to participate in the NSP and NDCP. RAND has reserved the right to terminate the plans at any time, but in
such an event, the benefits already purchased by the participant and contributions already made by RAND would not
be affected. The QRP and the NSP are entirely RAND-financed. RAND’s contributions to the Plans for eligible employees
range from 5 percent to 14 percent of salaries, depending on the level of wages and age of the participating employee.
RAND’s contributions to the QRP vest at the earlier of retirement or four years of service. Vesting begins after two years
of service and increases weekly to 100 percent at the end of four years of service. The NSP and NDCP vest under various
conditions specified in the plan. All contributions made by RAND are charged to operations. RAND’s contributions were
$13,554,000 and $11,991,000 for the fiscal years ended September 27, 2015 and September 28, 2014, respectively. The
SRAP and NDCP only require employee contributions and RAND does not contribute to these plans.
14
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