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HomeMy WebLinkAboutCFCLT Financial Audit June 2023 Cape Fear Community Land Trust, Inc. Financial Statements For the Year Ended June 30, 2023 Earney & Company, L.L.P., 710 Military Cutoff Road, Suite 250 Wilmington, NC 28405 T: (910) 256 9995, F: (910) 256 2829, www.earneynet.com INDEPENDENT AUDITOR’S REPORT To the Board of Directors of Cape Fear Community Land Trust, Inc. Opinion We have audited the accompanying financial statements of Cape Fear Community Land Trust, Inc. (a nonprofit organization), which comprise the statement of financial position as of June 30, 2023, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cape Fear Community Land Trust, Inc. as of June 30, 2023, 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. Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Cape Fear Community Land Trust, Inc. and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for 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. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Cape Fear Community Land Trust, Inc.’s ability to continue as a going concern within one year after the date the financial statements are available to be issued. - 2 - Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with generally accepted auditing standards, we:  Exercise professional judgment and maintain professional skepticism throughout the audit.  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Obtain an understanding of internal control relevant to the audit 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 Cape Fear Community Land Trust, Inc.’s internal control. Accordingly, no such opinion is expressed.  Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.  Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Cape Fear Community Land Trust, Inc.’s ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit. Wilmington, North Carolina January 10, 2024 Cape Fear Community Land Trust, Inc. Statement of Financial Position As of June 30, 2023 The Accompanying Notes are an Integral Part of these Financial Statements - 3 - Without Donor With Donor Restrictions Restrictions Total ASSETS Current Assets Cash & cash equivalents 78,934$ -$ 78,934$ Total Current Assets 78,934 - 78,934 Non-Current Assets Program rental property, net (Note 5) 72,409 74,000 146,409 Property held for future use (Note 6) 61,994 122,050 184,044 Total Non-Current Assets 134,403 196,050 330,453 Right-of-use asset (Note 10) 2,961 - 2,961 Total Assets 216,298$ 196,050$ 412,348$ LIABILITIES & NET ASSETS Current Liabilities Accounts payable & accrued liabilities 1,868$ -$ 1,868$ Other current liabilities 1,416 - 1,416 Short-term operating lease liability (Note 10) 2,961 - 2,961 Current portion of notes payable (Note 7) 101,420 - 101,420 Total Current Liabilities 107,665 - 107,665 Long-Term Liabilities Notes payable, net of current maturities (Note 7) 37,312 - 37,312 Total Long-Term Liabilities 37,312 - 37,312 Total Liabilities 144,977 - 144,977 Net Assets Without donor restrictions 71,321 - 71,321 With donor restrictions - 196,050 196,050 Total Net Assets 71,321 196,050 267,371 Total Liabilities & Net Assets 216,298$ 196,050$ 412,348$ 2023 Cape Fear Community Land Trust, Inc. Statement of Activities For the Year Ended June 30, 2023 The Accompanying Notes are an Integral Part of these Financial Statements - 4 - Without Donor With Donor Restrictions Restrictions Total REVENUE Grants & contributions 122$ 24,000$ 24,122$ Contributions of nonfinancial assets 55,200 - 55,200 In-kind professional services 18,000 - 18,000 Program rental property 19,263 - 19,263 Ground leases 5,850 - 5,850 Tax refund 566 - 566 Investment income 761 - 761 Net assets released from restriction 24,000 (24,000) - Total Revenue 123,762 - 123,762 EXPENSES Program 83,468 - 83,468 General & administrative 19,104 - 19,104 Fundraising 2,774 - 2,774 Total Expenses 105,346 - 105,346 Change in Net Assets 18,416 - 18,416 Net Assets, Beginning 151,455 97,500 248,955 Transfer (98,550) 98,550 - Net Assets, Ending 71,321$ 196,050$ 267,371$ 2023 Cape Fear Community Land Trust, Inc. Statement of Functional Expenses For the Year Ended June 30, 2023 The Accompanying Notes are an Integral Part of these Financial Statements - 5 - General & Program Administrative Fundraising Total Operating Expenses Salaries 37,685$ 7,066$ 2,355$ 47,106$ Payroll taxes & fees 1,770 332 110 2,212 Total Salaries & Related Expenses 39,455 7,398 2,465 49,318 Contracted services 645 1,706 - 2,351 Rental properties 2,744 - - 2,744 Interest & fees 2,144 - - 2,144 General operations 4,446 463 155 5,064 Bad debt - 9,075 - 9,075 Insurance 3,582 - - 3,582 Occupancy 2,462 462 154 3,078 Acquisition & project costs 5,078 - - 5,078 In-kind professional services 18,000 - - 18,000 Depreciation 4,912 - - 4,912 Total Functional Expenses 83,468$ 19,104$ 2,774$ 105,346$ 2023 Cape Fear Community Land Trust, Inc. Statement of Cash Flows For the Year Ended June 30, 2023 The Accompanying Notes are an Integral Part of these Financial Statements - 6 - Without Donor With Donor Restrictions Restrictions Total Cash Flows From Operating Activities Cash Collections for: Grants & contributions 122$ 24,000$ 24,122$ Program rental property 20,313 - 20,313 Ground leases 5,850 - 5,850 Miscellaneous income 1,327 - 1,327 Less: Cash Payments for: Salaries & related expenses (49,318) - (49,318) Other operating expenses (39,419) - (39,419) Net assets released from restriction 24,000 (24,000) - Net Cash Provided (Used) By Operating Activities (37,125) - (37,125) Cash Flows From Investing Activities Purchases & improvements to property held for future use (104,094) - (104,094) Net Cash Provided (Used) By Investing Activities (104,094) - (104,094) Cash Flows From Financing Activities Proceeds from note payable 98,550 - 98,550 Payment of note payable (48,634) - (48,634) Net Cash Provided (Used) By Financing Activities 49,916 - 49,916 Net Increase (Decrease) in Cash (91,303) - (91,303) Cash & Cash Equivalents, Beginning 170,237 - 170,237 Cash & Cash Equivalents, Ending 78,934$ -$ 78,934$ Reconciliation of Change in Net Assets to Cash Provided (Used) By Operating Activities: Change in net assets 18,416$ -$ 18,416$ Depreciation 4,912 - 4,912 Contributions of nonfinancial assets (55,200) - (55,200) Adjustments to Reconcile to Net Cash Provided (Used) By Operating Activities: Change in Current Assets & Liabilities (Use) Source: (Increase) decrease in grants & accounts receivable 1,050 - 1,050 Increase (decrease) in accounts payable, accrued expenses & other current liabilities (6,303) - (6,303) Net Cash Provided (Used) By Operating Activities (37,125)$ -$ (37,125)$ Supplemental Disclosure Interest paid -$ Income taxes paid 5,636$ 2023 Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 7 - 1. ORGANIZATION Cape Fear Community Land Trust, Inc. (the “Organization”) is a North Carolina non-profit corporation organized in February 2009 with operations in Wilmington, North Carolina. The Organization is exempt from income taxes under the Internal Revenue Service Code Section 501(c)(3). As such, contributions to the Organization are generally tax deductible. The Organization exists to sustain vibrant and economically diverse communities in the Cape Fear region through land stewardship and seeks to provide permanently affordable housing, business opportunities, and community amenities. It aims to impact affordability on a permanent basis by building and renovating homes and businesses in the Community Land Trust (CLT) model – where ownership, or tenancy, is conveyed to qualifying individuals or businesses using a 99-year, renewable, inheritable ground lease which intentionally limits appreciation. By offering homes or businesses to qualified low- and moderate-income families – yet retaining ownership of the land under these individual properties – the Organization removes the land cost component from the sales price equation. By holding the land “in trust”, the Organization aims to lock in affordability for future generations. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Organization prepares its financial statements in accordance with generally accepted accounting principles promulgated in the United States of America (U.S. GAAP) for not-for- profit organizations using the accrual basis of accounting. Accordingly, revenue is recognized when earned and expenses are recorded when incurred. The significant accounting policies followed are described below to enhance the usefulness of the financial statements to the reader. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. On an ongoing basis, the Organization’s management evaluates the estimates and assumptions based upon historical experience and various other factors and circumstances. The Organization’s management believes that the estimates and assumptions are reasonable in the circumstances; however, the actual results could differ from those estimates. Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 8 - Net Assets The financial statements report net assets and changes in net assets in two classes that are based upon the existence or absence of restrictions on use that are placed by its donors as follows: Net Assets Without Donor Restrictions – Net assets available for use in general operations and not subject to donor- (or certain grantor-) imposed restrictions. Net Assets With Donor Restrictions – Net assets subject to donor- (or certain grantor-) imposed restrictions. Some donor-imposed restrictions are temporary in nature, such as those that will be met by the passage of time or other events specified by the donor. Other donor-imposed restrictions are perpetual in nature, where the donor stipulates that resources be maintained in perpetuity. Donor-imposed restrictions are released when a restriction expires, which is when the stipulated time has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both. As of June 30, 2023, net assets with donor restrictions of $196,050 were temporary and relate to the 808 North 6th Street and 920 Meares Street properties described in Notes 5 and 6. The properties are to be used for affordable housing. If the Organization sells the properties to qualifying homeowners, it will have fulfilled its obligations to the City and the amount will be released from restriction. Cash and Cash Equivalents Cash and cash equivalents consist of cash held in checking, savings, and money market accounts and certificates of deposit with maturities of less than three months. From time to time during the period presented, the Organization has had cash balances in financial institutions that have exceeded federal depository insurance limits. The Organization deposits its cash with high quality institutions, and management believes the Organization is not exposed to significant credit risk on those amounts. Cash and cash equivalents are as follows as of June 30: 2023 Bank OZK - Checking 7,705$ Truist - Operating 4,483 Truist - Projects 12 Truist - Reserves 66,159 Truist - Security Deposit 575 Total Cash & Cash Equivalents 78,934$ Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 9 - Accounts Receivable Accounts receivable are shown at their net realizable value. Management uses their experience to analyze balances and then applies an appropriate estimate for uncollectible accounts. Property and Equipment Land, buildings, equipment, and rental properties are reported in the statement of financial position at cost if purchased and at fair value at the date of donation if donated. All land, buildings, and rental properties are capitalized. Equipment is capitalized if it has a cost of $1,000 or more and a useful life when acquired of more than one year. Repairs and maintenance that do not significantly increase the useful life of the asset are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with buildings and improvements being depreciated over 40 years, rental properties being depreciated over 27.5 years, and furniture and fixtures being depreciated over 5-15 years. Leases The Organization determines if an arrangement is a lease at inception. Operating leases are included in right-of-use (ROU) asset and short-term operating lease liability on the Organization’s statement of financial position. Operating lease ROU asset and operating lease liability are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The rate implicit within the Organization's lease is generally not determinable; therefore, the Organization uses judgment to determine the incremental borrowing rate used to calculate the present value of lease payments. The incremental borrowing rate is determined using information available related to similar terms and payments as of the commencement date. The ROU asset is assessed for impairment in accordance with the Organization’s accounting policy for long-lived assets. The Organization’s lease terms include options to extend or terminate. The period which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. The period which is subject to an option to terminate the lease is included in the lease term if it is reasonably certain that the option will not be exercised. Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For all material classes of leased assets, the Organization does not separate lease components from non-lease components, and account for both components as a single lease component. Revenue Recognition Revenue is recognized when earned. Program service fees received in advance are deferred to the applicable period in which the related services are performed or expenditures are incurred. Unrestricted contributions are recognized when cash, securities, or other assets; an unconditional promise to give; or a notification of a beneficial interest is received. Conditional promises to give are not recognized until the conditions on which they depend have been substantially met. Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 10 - Contributions In-Kind When contributed in-kind materials, property, and services meet the criteria for recognition, they are recorded as in-kind contribution revenues and charged to the appropriate expense or asset category. The Organization benefits from personal services provided by a substantial number of volunteers. Those volunteers have donated significant amounts of time and services in the Organization’s program operations. However, such contributed services do not meet the criteria for recognition in financial statements. GAAP allows recognition of contributed services only if (a) the services create or enhance nonfinancial assets or (b) the services would have been purchased if not provided by contributions, require specialized skills, and are provided by individuals possessing those skills. Expense Recognition and Allocation The cost of providing the Organization’s programs and other activities is summarized on a functional basis in the statement of activities and statement of functional expenses. Expenses that can be identified with a specific program or support service are charged directly to that program or support service. Costs common to multiple functions have been allocated among the various functions benefited using objective bases, such as time spent, salaries, square feet, and other bases. General and administrative expenses include those costs that are not directly identifiable with any specific program, but which provide for the overall support and direction of the Organization. General and administrative activities include those that provide governance (Board of Directors), oversight, business management, financial recordkeeping, budgeting, legal services, human resource management, and similar activities that ensure an adequate working environment and an equitable employment program. Fundraising activities include publicizing and conducting fundraising campaigns; maintaining donor lists; conducting special fundraising events; and other activities involved with soliciting contributions from corporations, foundations, individuals, and others. Fundraising costs, including advertising, are expensed as incurred even though they may result in contributions received in future years. Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 11 - Income Taxes The Organization is exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code. The Organization does generate rental income derived from debt- financed property. However, management has determined based on its understanding of Internal Revenue Code Section 514(b)(1)(A) that the income should not be treated as unrelated business income subject to taxation. The debt-financed properties are used specifically to further the Organization’s exempt purpose of providing affordable housing opportunities and therefore the related rental income is excluded from taxation. Accounting principles generally accepted in the United States of America require the Organization’s management to evaluate tax positions taken and recognize a tax liability (or asset) if the Organization has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Organization has analyzed the tax positions taken and has concluded that as of June 30, 2023, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Organization is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Organization believes it is no longer subject to income tax examinations for years prior to 2020. Subsequent Events Subsequent events have been evaluated through January 10, 2024, which is the date the financial statements were available to be issued. Events occurring after that date have not been evaluated to determine whether a change in the financial statements would be required. The Organization is frequently purchasing and selling property to further its exempt purpose of providing affordable housing opportunities. As such, the Organization entered into numerous agreements to purchase and/or sell property subsequent to year end. Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 12 - 3. LIQUIDITY AND AVAILABILITY OF RESOURCES Financial assets available to meet general expenditures over the next 12 months are as follows as of June 30: 2023 Operating Assets at Year End: Cash & cash equivalents 78,934$ Total Operating Assets at Year End 78,934 Plus: Net assets with purpose or time restrictions to be met in less than a year - Financial Assets Available to Meet General Expenditures Over the Next 12 Months 78,934$ The Organization operates with a balanced budget and anticipates collecting sufficient revenue to cover general expenditures not covered by donor-restricted resources. The Organization regularly monitors liquidity required to meet its operating needs and other contractual commitments. In fiscal year 2023, the Organization’s daily expenses averaged $212, excluding construction project expenses and depreciation. Therefore, the $78,934 of available financial assets could theoretically fund operations for 372 days at fiscal year 2023 expenditure levels. As part of the Organization’s liquidity management plan, cash in excess of daily requirements may be invested in short-term investments and money market funds. 4. GRANTS AND CONTRACTS During fiscal year 2023, the Organization’s principal supporter was New Hanover County. Funding from this entity of $24,000 comprised 47% of the Organization’s total revenue. If there were ever to be a significant reduction in funding from this entity, it could have an adverse impact on the Organization’s programs and activities. Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 13 - 5. PROGRAM RENTAL PROPERTY The Organization owns two residential rental properties at 808 North 6th Street and 1209 South 8th Street in Wilmington, North Carolina. Deed restrictions require the 808 North 6th Street property to be used in such a way as to ensure its continued affordability to households making 80% or less of the median income for the Wilmington area. In fiscal year 2023, the Organization rented the homes to qualified program participants. The Organization follows FASB ASC 842-30 (Lessor Accounting) which classifies the Organization’s lease agreements as operating leases. As such, the associated rental income appears on the statement of activities as the line item “program rental property.” The properties are being depreciated on a straight-line basis over 27.5 years and depreciation expense of $4,912 appears on the statement of functional expenses. 6. PROPERTY HELD FOR FUTURE USE The Organization received a parcel of land from the City of Wilmington, North Carolina, at 920 Meares Street in 2017 and has recorded the asset at the tax-assessed value of $24,750. In fiscal year 2023, the Organization started construction on 920 Meares Street. As of June 30, 2023, the 920 Meares Street property totaled $128,844 on the Organization’s statement of financial position. The Organization received a parcel of land from Cape Fear Habitat for Humanity, Inc., at 3620 Johnson Street in 2023 and has recorded the asset at the tax-assessed value of $55,200. Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 14 - 7. NOTES PAYABLE The Organization had the following debt obligations as of June 30, 2023: City of Wilmington The Organization owed the City of Wilmington $138,732 as of June 30, 2023, in the form of an interest-free loan received in 2011 to make improvements to the 808 North 6th Street property described in Note 5. The loan is to be repaid over a 20-year period with fixed monthly principal payments of $239. In fiscal year 2023, the Organization entered into an agreement with the City of Wilmington to receive Home Investment Partnership Program (HOME) funds in the amount of $289,328 for the construction on the affordable housing project at 920 Meares Street. The funds are being received from the City of Wilmington as costs are incurred on the project. The term of the loan is the earlier of the date the balance due is paid in full or deemed paid in full or beginning at completion of the project, as evidenced by the date of the certificate of occupancy and ending nine months from the date of the certificate of occupancy. As of June 30, 2023, the amount owed to the City of Wilmington was $98,550. Bank OZK During fiscal year 2023, the Organization paid off the fixed rate loan at Bank OZK that was secured by the 1209 South 8th Street property as described in Note 5. During fiscal year 2023, the Organization incurred total combined interest and fees on all the notes payable of $2,144 and this amount appears as a line item on the statement of functional expenses. Future scheduled principal payments shown on a combined basis for all loans are as follows as of June 30: 2024 101,420$ 2025 2,870 2026 2,870 2027 2,870 2028 2,870 Thereafter 25,832 Total 138,732$ Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 15 - 8. GROUND LEASES The Organization owns land at “Gideon Pointe,” a subdivision located in Wilmington, North Carolina. The improvements located on the property are not owned by the Organization. The subdivision exists as a community land trust and consists of an eight-home development. The Organization holds 99-year ground lease agreements with eight homeowners. The ground leases are renewable at the option of the homeowner for an additional 99 years. Each homeowner pays a land rent of $25 per month to the Organization. The minimum ground lease payments for the next five years for the eight lots total $2,400 per year. The rents may be increased by up to 10% every third year. The ground lease rental income appears on the statement of activities as the line item “ground leases.” No estimate of the fair value of the land has been recorded in the Organization’s financial statements because the land has no economic value due to the perpetual restrictions on its use. 9. COMMITMENTS As described in Notes 5, 6, and 8, the Organization is the owner of the land at the Gideon Pointe subdivision, house and land at 808 North 6th Street, and house and land at 920 Meares Street in Wilmington, North Carolina. These properties were all originally purchased or improved using federal Community Development Block Grant (CDBG) funds or Home Investment Partnership Program (HOME) funds. As a condition of receiving these properties, the Organization is responsible for enforcing affordability requirements on them. Although the Organization could conceivably have a future commitment to repay some portion of the original federal funds if affordability guidelines are not maintained, no liability is recorded on its financial statements. Affordability liens are placed on all properties and therefore the Organization does not anticipate being unable to enforce the affordability guidelines. Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 16 - 10. LEASES The Organization leases office space in Wilmington, North Carolina from a local landlord and is renewed on an annual basis. The depreciable lives of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise. As of June 30, 2023, the statement of financial position includes $2,961 of right-of-use asset and $2,961 of short-term operating lease liability. The components of the lease expense are as follows for the year ended June 30: 2023 Operating lease expense 3,000$ Total 3,000$ Supplemental information related to the lease is as follows: Cash paid for amounts included in the measurement of lease liability: Operating cash flows from operating lease 3,000$ ROU asset obtained in exchange for new operating lease liability 5,840$ Weighted-average remaining lease term in years for operating lease 1.00 Weighted-average discount rate for operating lease 2.84% Future minimum lease payments under the non-cancellable lease are as follows: For the Years Ending June 30 Operating 2024 3,000$ 2025 - 2026 - 2027 - 2028 - Thereafter - Total Undiscounted Cash Flows 3,000 Less: Present value discount (39) Total Lease Liability 2,961$ Cape Fear Community Land Trust, Inc. Notes to Financial Statements June 30, 2023 - 17 - 11. RISK MANAGEMENT From time to time, the Organization may be aware of various asserted and unasserted claims. Management feels that these claims can be successfully defended and intends to resist the allegations of these matters in every way and does not plan to seek out-of-court settlements. In the event that judgments adverse to their interest were to be rendered, management feels any liability will be fully covered by existing insurance or not be material to the financial statements. The Organization is exposed to various risks of loss in the ordinary course of business as a result of torts, theft of, damage to, or destruction of assets, business interruption, allegations of liability, natural disasters, employee and officer errors and omissions, and employee workers’ compensation and medical claims. The Organization purchases commercial insurance coverage against risk of loss due to errors and omissions, property damage and theft, and various other insurable risks. The Organization carries a commercial package policy with a $2,000,000 aggregate. The Organization carries a workers’ compensation insurance policy of $1,000,000. No claim payment has exceeded insurance coverage in the past three fiscal years where insurance coverage applies, subject to the deductibles and retentions noted above.