Facts & Figures /

Financial
Statements

Statements of Financial Position

December 31   2017   2016

Assets

        
Cash and cash equivalents $ 5,850,889 $ 9,967,248
Investments, net   557,446,512   516,405,211
Interest and dividends receivable, net of allowance   334,974   310,501
Federal excise tax   846,000   775,000
Other assets   230,323   239,474
Total assets $ 564,708,698 $ 527,697,434
 

Liabilities

        
Accounts payable and accrued expenses $ 839,858 $ 752,386
Grants payable   12,402,508   16,710,378
Deferred federal excise tax   6,663,000   5,638,498
Total liabilities   19,905,366   23,101,262

Net Assets

        
Unrestricted   544,803,332   504,596,172
Total liabilities and net assets $ 564,708,698 $ 527,697,434

The accompanying notes are an integral part of the financial statements.

Statements of Activities

For the years ended December 31   2017   2016

Revenues, Gains, and Losses

        
Net realized investment gains $ 21,477,890 $ 17,065,818
Net unrealized investment gains   42,147,035   22,147,945
Dividend income   4,824,519   4,987,264
Interest income   846,598   904,026
Other income   443,059   2,909
Net revenue, gains, and losses   69,739,101   45,107,962

Expenses

        
Grants expensed   22,380,348   22,549,178
Administrative expenses   5,829,906   5,764,152
Loss on sale of fixed asset   —   1,338
Total expenses   28,210,254   28,314,668
         
Increase in net assets before federal excise tax provision   41,528,847   16,793,294
Federal excise tax provision   1,321,687   1,197,926
Net increase in net assets   40,207,160   15,595,368
Net assets – beginning   504,596,172   489,000,804
Net assets – ending $ 544,803,332 $ 504,596,172

The accompanying notes are an integral part of the financial statements.

Statements of Cash Flows

For the years ended December 31   2017   2016

Cash Flows From Operating Activities

        
Increase in net assets $ 40,207,160 $ 15,595,368
Adjustments to reconcile increase in net assets to net cash used in operating activities:        
Depreciation and amortization   57,251   53,360
Net realized gains on investments   (21,477,890)   (17,065,818)
Net unrealized losses on investments   (42,147,035)   (22,147,945)
Loss on sale of fixed asset   —   1,338
Deferred federal excise tax   1,024,502   523,064
Provision for uncollectible program-related loans   —   15,825
Changes in assets and liabilities:        
Receivables   (95,473)   (476,642)
Other assets   (25,658)   6,514
Accounts payable and accrued expenses   87,472   16,015
Grants payable   (4,307,870)   (2,539,606)
Net cash used in operating activities   (26,677,541)   (26,018,527)

Cash Flows From Investing Activities

        
Proceeds from sale of investments   99,213,306   103,167,036
Purchase of investments   (76,629,682)   (71,830,665)
Purchase of equipment and improvements   (22,442)   (87,710)
Net cash provided by investing activities   22,561,182   31,248,661
Net (decrease) increase in cash and cash equivalents   (4,116,359)   5,230,134
Cash and cash equivalents – beginning   9,967,248   4,737,114
Cash and cash equivalents – ending $ 5,850,889 $ 9,967,248

Supplemental Disclosure of Cash Flow Information

        
Cash paid during the year:        
Income taxes, excise $ 368,000 $ 1,100,000
Interest $ — $ —

The accompanying notes are an integral part of the financial statements.

Notes to Financial Statements — December 31, 2017 and 2016

Note 1 Summary of Significant Accounting Policies

Nature of operations: The George Gund Foundation (the Foundation) is a private foundation located in Cleveland, Ohio which makes grants to educational, community service, and philanthropic organizations.

Basis of accounting: The Foundation’s financial statements are presented on the accrual basis of accounting. Accordingly, revenues are recorded when earned, and expenses are recognized when incurred. The Foundation has only unrestricted net assets.

Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents: Cash and cash equivalents consist of highly-liquid investments with maturity dates of three months or less, which are readily convertible into cash.

Investments: Marketable and U.S. Government securities are reported at their market values. Securities traded on a national securities exchange are valued at the last reported trading price on the last business day of the year. Realized gains or losses are determined by comparison of asset cost to net proceeds received. Unrealized gains or losses are determined by comparison of asset cost to market values at the end of the year.

Investments include program-related loans, net of allowance, which are due from various not-for-profit organizations, valued at $8,208,724 and $8,749,350 at December 31, 2017 and 2016, respectively. The notes receivable are due at various dates, from 2018 through 2032 and carry interest at rates between 1% and 2%; principal and interest payment arrangements vary by note. There were no unfunded note commitments as of December 31, 2017 and 2016. The Foundation has an additional mission-related loan due from a not-for-profit organization valued at $623,636 and $724,979 as of December 31, 2017 and 2016, respectively. This investment is secured by a deposit account.

The Foundation invests in certain alternative investments which include investments in limited partnerships. Market values represent the Foundation’s pro rata interest in the net assets of each limited partnership as of December 31, 2017 and 2016, as provided by the fund managers. Market values as of December 31, 2017 and 2016 are not based on audited financial information supplied by the general partner or manager of the funds. Audited information is only available annually based on the partnerships’ or funds’ year end. Management reviews monthly valuations provided by the general partner or manager of the funds and assesses the reasonableness of the fair values provided at the interim dates and included in the financial statements. As of December 31, 2017 and 2016, the Foundation had total unfunded capital commitments related to alternative investments of $1,037,500 and $1,598,806, respectively. There is a conditional unfunded capital commitment of $3,250,000 at December 31, 2017. Because of the inherent uncertainty of the valuation of alternative investments, the market values reflected in the accompanying financial statements may differ significantly from realizable values.

Allowance for uncollectible interest: Investments in program-related loans are stated at the present value of the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a provision for uncollectible accounts, and a credit to a valuation allowance, based on its assessment of the current status of individual accounts. At December 31, 2017 and 2016, an allowance for uncollectible accounts in the amount of $-0- and $583,000, respectively, is netted against investments in notes receivable.

Interest receivable is stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a provision for uncollectible interest, and a credit to a valuation allowance, based on its assessment of the current status of individual accounts. At December 31, 2017 and 2016, an allowance for uncollectible interest in the amount of $-0- and $268,886, respectively, is netted against interest receivable.

Furniture, equipment, and leasehold improvements Furniture, equipment, and leasehold improvements are stated at cost. Amortization and depreciation is recorded using both straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation and amortization expense amounted to $57,251 and $53,360 for the years ended December 31, 2017 and 2016, respectively.

Fair value measurement - definition and hierarchy: The Foundation follows FASB ASC 820-10, Fair Value Measurements. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

In determining fair value, the Foundation uses various valuation approaches, including market, income, and / or cost approaches. FASB ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs, and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Foundation. Unobservable inputs reflect the Foundation's assumptions used in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels, based on the reliability of inputs, as follows:

  • Level 1 – Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Foundation has the ability to access.
    • Assets and liabilities utilizing Level 1 inputs include: exchange-traded equity securities that are actively traded.
  • Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
    • Assets and liabilities utilizing Level 2 inputs include: government bonds, corporate bonds, foreign bonds, private equity investments, charitable reserve funds, and program related savings.
  • Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
    • Assets and liabilities utilizing Level 3 inputs include: equity securities that are not actively traded, private equity investments, and program related/other investments held in loans.

Recent accounting pronouncements In August 2016, the FASB issued ASU 2016-14 entitled, Presentation of Financial Statements of Not-for-Profit Entities. The update was issued to improve the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity's liquidity, financial performance, and cash flows. The effective date is for fiscal years beginning after December 15, 2017, and is to be applied retrospectively. Management has not yet determined whether the new standard will have a material effect on its financial statements.

In May 2015, the FASB issued ASU 2015-07 entitled, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for investments eligible to be measured at fair value using the net asset value per share practical expedient. The effective date is for fiscal years beginning after December 15, 2016, and is to be applied retrospectively. During 2017, the Foundation implemented this update retrospectively as it relates to the charitable reserve fund. Adoption of this accounting standards update did not have an impact on reported amounts in the financial statements, but rather changed the fair value disclosures.

Note 2 Investments

Cost and market value of investments were as follows:

2017 2016
  Market Value Cost Market Value Cost
Fixed income securities $ 18,998,258 $ 19,153,224 $ 21,230,373 $ 21,539,738
Common stocks and alternative investments   538,448,254   204,839,531   495,174,838   212,654,360
Total $  557,446,512 $ 223,992,755 $  516,405,211 $  234,194,098

Market values of investments are based on December 31, 2017 and 2016 published quotations, except that estimates are used when quotations are not available. Fixed income securities consist of U.S. government securities, U.S. government guaranteed securities, corporate securities, and charitable reserve funds. Common stocks and alternative investments consist principally of U.S. and international equity securities, program and mission-related investments, and investments in limited partnerships.

Note 3 Fair Value Disclosure and Measurement

Published market quotations do not necessarily represent realizable values, particularly where sizable holdings of a company’s stock exist, as in the case of the Foundation’s holding of the Kellogg Company common stock

The Foundation’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC 820-10. See Note 1 for a discussion of the Foundation's policies regarding this hierarchy.

The following fair value hierarchy tables present information about the Foundation's assets and liabilities measured at fair value on a recurring basis:

Fair Value Measurements at Reporting Date Using
December 31, 2017 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Balance

Corporate Stock
Consumer goods $ 116,927,716 $ — $ — $ 116,927,716
Financial   18,318,758   —   —   18,318,758
Services   21,403,223   —   —   21,403,223
Industrial goods   5,617,190   —   —   5,617,190
Basic materials   13,928,403   —   —   13,928,403
Technology   18,952,187   —   —   18,952,187
Healthcare   10,365,062   —   —   10,365,062
Media   6,013,328   —   —   6,013,328
Mfg - Other   1,488,239   —   —   1,488,239
Closely-held   —   —   100   100

Preferred Stock
Preferred stock   —   124,100   —   124,100

Bonds
Corporate   —   4,880,438   —   4,880,438
United States Treasury and Agency   —   3,437,886   —   3,437,886
State and Municipal   —   905,754   —   905,754
Foreign   —   57,890   —   57,890

Limited Partnerships
Limited partnerships   —   228,371,042   88,081,198   316,452,240

Other Investments
Program-related savings   —   25,348   —   25,348
Program-related loans, net of allowance   —   —   8,208,724   8,208,724
Mission-related investment   —   —   623,636   623,636

Charitable Reserve Fund (a)
Charitable reserve fund (a)   —   —   —   9,716,290
 
Total Fair Value Assets $ 213,014,106 $ 237,802,458 $ 96,913,658 $ 557,446,512
Fair Value Measurements at Reporting Date Using
December 31, 2016 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Balance

Corporate Stock
Consumer goods $ 129,639,397 $ — $ — $ 129,639,397
Financial   16,312,343   —   —   16,312,343
Services   15,837,545   —   —   15,837,545
Industrial goods   1,858,780   —   —   1,858,780
Basic materials   12,609,508   —   —   12,609,508
Technology   16,017,639   —   —   16,017,639
Healthcare   7,769,469   —   —   7,769,469
Media   7,368,092   —   —   7,368,092
Retail   4,519,708   —   —   4,519,708
Mfg - Other   2,554,106   —   —   2,554,106
Closely-held   —   —   100   100

Bonds
Corporate   —   4,277,385   —   4,277,385
United States Treasury and Agency   —   4,544,946   —   4,544,946
State and Municipal   —   1,048,186   —   1,048,186
Foreign   —   174,293   —   174,293

Limited Partnerships
Limited partnerships   —   200,600,732   70,587,806   271,188,538

Other Investments
Program-related savings   —   25,284   —   25,284
Program-related loans, net of allowance   —   —   8,749,350   8,749,350
Mission-related investment   —   —   724,979   724,979

Charitable Reserve Fund (a)
Charitable reserve fund (a)   —   —   —   11,185,563
 
Total Fair Value Assets $ 214,486,587 $ 210,670,826 $ 80,062,235 $ 516,405,211

(a) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statements of financial position.

The following table provides a reconciliation of changes in Level 3, assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2017:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
  Limited Partnerships Other Investments Common Stock Total
Beginning balance – January 1, 2017 $ 70,587,806 $ 9,474,329 $ 100 $ 80,062,235
Total gains or losses (realized/unrealized)
included in changes in net assets		   18,540,360   —   —   18,540,360
Purchases   411,307   362,500   —   773,807
Sales proceeds   (1,458,275)   (1,004,469)   —   (2,462,744)
Ending balance – December 31, 2017 $ 88,081,198 $ 8,832,360 $ 100 $ 96,913,658
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to assets still held at the reporting date $ 17,940,760 $ — $ — $ 17,940,760

The following table provides a reconciliation of changes in Level 3, assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2016:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
  Limited Partnerships Other Investments Common Stock Total
Beginning balance – January 1, 2016 $ 67,944,398 $ 9,253,373 $ 100 $ 77,197,871
Total gains or losses (realized/unrealized)
included in changes in net assets		   4,218,249   —   —   4,218,249
Purchases   160,000   1,176,800   —   1,336,800
Sales proceeds   (1,734,841)   (955,844)   —   (2,690,685)
Ending balance – December 31, 2016 $ 70,587,806 $ 9,474,329 $ 100 $ 80,062,235
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to assets still held at the reporting date $ 3,142,996 $ — $ — $ 3,142,996

The following table represents the Foundation’s level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, the significant unobservable inputs and the ranges of values for those inputs.

Instrument Fair Values Principal Valuation
Technique		 Unobservable
Inputs		 Range of
Significant
Input Values		 Weighted
Average
Closely held stock $ 100 Recent sales  Recent sales — —
Program-related loans $ 8,208,724 Discounted cash flows Applicable interest and term — —
Mision-related loan $ 623,636 Discounted cash flows Applicable interest and term — —

At December 31, 2017, the Foundation’s limited partnerships are subject to withdrawal restrictions as follows:

  Limited partnerships
Available for redemption:    
Monthly $ 309,266,293
Subject to distribution   7,185,947
Total $ 316,452,240

Investments that are available for redemption may be redeemed by the Foundation generally with 15- to 30-day advance notice on a monthly basis, subject to the terms of the investment agreement.

Investments subject to distribution cannot be redeemed by the Foundation, but rather will be distributed by the limited partnership upon the liquidation of the underlying assets of the partnership. Distributions are generally expected, but not guaranteed, over the next five to ten years.

The investment objective for limited partnerships is long-term capital appreciation in excess of what is available in the public markets. Private equity funds generally hold illiquid debt and equity securities of public and / or privately-held companies. This asset class includes venture capital, buyout, and distressed funds.

Gains and losses (realized and unrealized) from Level 3 investments included in changes in net assets include net realized investment gains of $599,600 and $1,075,253 for the periods ended December 31, 2017 and 2016, respectively, and net unrealized investment gains of $17,940,760 and $3,142,996 for the periods ended December 31, 2017 and 2016, respectively.

At December 31, 2017 and 2016, the Foundation’s charitable reserve fund was not subject to withdrawal restrictions. The fund holds mostly fixed income investments, and is measured at fair value using the net asset value per unit as a practical expedient. There are no unfunded commitments related to this fund.

Note 4 Credit Concentration

Aside from its holdings in the Kellogg Company, the Foundation’s portfolio of investments is highly diversified; however, at December 31, 2017 and 2016, 20% and 24% of the total market value of securities, and approximately 72%, respectively, of dividend income in each year are attributable to ownership of Kellogg Company stock.

Note 5 Grants

Grants are expensed upon approval by the Board of Trustees, payable upon the performance of specified conditions, and paid when the specified conditions are satisfied. Discretionary grants in amounts up to $10,000 and cumulative for the year up to $780,000 for the years ended December 31, 2017 and 2016, respectively, are recommended by the program officers and approved by the executive director, expensed upon approval, and ratified by the Board of Trustees at the following board meeting. Grants that are cancelled or in excess of needed amounts are included as a reduction of grant expense in the year they are cancelled or returned.

Note 6 Leases

The Foundation occupies office space in the Landmark Office Towers. The lease was renewed in March of 2018, and is effective January 1, 2019. This renewal extends the lease through December 31, 2023. There is a renewal option for an additional period. Rental expense for the years ended December 31, 2017 and 2016 amounted to $135,148 and $152,678, respectively.

The future minimum lease commitments under leases with terms in excess of one year are as follows:

2018 $ 131,337
2019   135,315
2020   139,368
2021   143,496
2022   147,849
  $ 697,365

Note 7 Net Assets

Net assets include two board-designated funds (principal and income), both of which consist entirely of unrestricted net assets. The principal fund consists of investments in securities and receives the realized and unrealized gains or losses on those assets. The income fund receives interest and dividends on the principal fund investments, which are used for grants and administrative expenses. The statements of financial position included the following income fund accounts:

    2017   2016
Cash $ 964,629 $ 5,930,611
Receivables   1,180,974   1,085,501
Other assets   66,234   65,337
Due to principal fund   (3,680,785)   (2,522,322)
Accounts payable   (839,858)   (752,386)
Grants payable   (12,402,508)   (16,710,378)
Deferred federal excise tax   7,000   6,554
  $ (14,704,314) $ (12,897,083)

The following is a summary of the changes in total net assets:

    2017   2016
Income fund $ (1,807,231) $ 7,743,811
Principal fund   42,014,391   7,851,557
Increase in net assets   40,207,160   15,595,368
Net assets – beginning   504,596,172   489,000,804
Net assets – ending $ 544,803,332 $ 504,596,172

The change in individual funds includes transfers by the Foundation of $24,721,262 and $27,015,383 in 2017 and 2016, respectively, from the principal fund to the income fund.

Note 8 Employee Benefit Plan

The Foundation has an employee’s tax-sheltered annuity plan for all eligible employees. Such a plan is intended to comply with the requirements of Section 403(b) of the Internal Revenue Code (IRC). Employer contributions are required at 9% of the participants’ compensation up to the social security wage base for the year, and 14.7% of the participant’s compensation in excess of this wage base, with a limit of $275,000 and $270,000 of compensation for the years ended December 31, 2017 and 2016, respectively. Employer contributions to the plan for the years ended December 31, 2017 and 2016 amounted to $132,462 and $123,659, respectively. Participants are also permitted to make salary reduction contributions to the plan.

Note 9 Excise Taxes

The Foundation is exempt from federal income taxes under Section 501(c)(3) of the IRC, but is subject to a 2% (1% if certain criteria are met) federal excise tax on net investment income, including net realized gains, as defined by the IRC.

Deferred federal excise taxes are provided on the unrealized appreciation or depreciation of investments and interest, and dividend income and certain expenses being reported for financial statement purposes in different periods than for tax purposes.

Current excise taxes were provided at 1% (qualified for reduced excise tax rate) for 2017 and 2016, and deferred excise taxes were provided at 2% for both 2017 and 2016. The current and deferred portions of the excise tax provisions were $296,739 and $1,024,948 respectively, for a total expense of $1,321,687 in 2017. The current and deferred portions of the excise tax provisions were $674,847 and $523,079 respectively, for a total expense of $1,197,926 in 2016.

The Organization follows the provisions of FASB ASC 740-10, Income Taxes, which provides guidance on the recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition issues. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the accompanying financial statements.

Accrued interest relating to uncertain tax positions would be recorded as a component of interest expense, and penalties relating to uncertain tax positions would be recorded as a component of general and administrative expenses.

The federal tax returns of the Organization for 2015, 2016, and 2017 are subject to examination by the IRS, generally for three years after they were filed.

Note 10 Subsequent Events

The Organization has evaluated subsequent events from the statement of financial position date through June 4, 2018.

Independent Auditors’ Report

To the Board of Trustees, The George Gund Foundation

We have audited the accompanying financial statements of The George Gund Foundation (an Ohio private foundation), which comprise the statement of financial position as of December 31, 2017, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with 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 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 these 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The George Gund Foundation as of December 31, 2017, 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 Matter

The financial statements of The George Gund Foundation for the year ended December 31, 2016, were audited by Walthall, LLP, who merged with Rea & Associates, Inc. on November 1, 2017. Their report expressed an unmodified opinion on those statements on May 22, 2017.

Walthall, Drake & Wallace LLP

Certified Public Accountants
Cleveland, Ohio
June 4, 2018

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