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FY2008 - Children s Hospital Boston

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					REPORT     ON   AUDIT    OFFEDERAL AWARDS IN
ACCORDANCE WITH           OMB CIRCULAR A-133

Children’s Hospital
Year Ended September 30, 2008
With Reports of Independent Auditors
                                                    Children’s Hospital

  Report on Audit of Federal Awards in Accordance with OMB Circular A-133

                                             Year Ended September 30, 2008




Section I – Financial Information

Report of Independent Auditors..............................................................................................1

Audited Financial Statements

Balance Sheets ........................................................................................................................3
Statements of Operations and Changes in Net Assets ............................................................4
Statements of Cash Flows.......................................................................................................6
Notes to Financial Statements.................................................................................................7

Section II – OMB Circular A-133 Audit of Federal Awards

Report on Internal Control Over Financial Reporting and on Compliance
 and Other Matters Based on an Audit of the Financial Statements Performed in
 Accordance with Government Auditing Standards............................................................31

Report on Compliance With Requirements Applicable to Each Major Program and
 on Internal Control Over Compliance in Accordance With OMB Circular A-133...........33

Schedule of Expenditures of Federal Awards.......................................................................35

Notes to Schedule of Expenditures of Federal Awards ........................................................44

Schedule of Findings and Questioned Costs.........................................................................47
Section I – Financial Information
                                                                       Ernst & Young LLP
                                                                       200 Clarendon Street
                                                                       Boston, Massachusetts 02116-5072
                                                                       Tel: 617 266 2000
                                                                       Fax: 617 266 5843
                                                                       www.ey.com




                              Report of Independent Auditors

The Board of Trustees
Children’s Hospital

We have audited the accompanying balance sheets of Children’s Hospital (the Hospital) as of
September 30, 2008 and 2007, and the related statements of operations and changes in net assets,
and cash flows, for the years then ended. These financial statements are the responsibility of the
Hospital’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United
States, and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an audit of the
Hospital’s internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Hospital’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of Children’s Hospital as of September 30, 2008 and 2007, and the results
of its operations, changes in its net assets, and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.

As discussed in Note 11 to the accompanying financial statements, in 2007, the Hospital changed
its method of accounting for its defined benefit plans.

In accordance with Government Auditing Standards, we have also issued our report, dated
December 12, 2008, on our consideration of the Hospital’s internal control over financial
reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts
and grant agreements, and other matters. The purpose of that report is to describe the scope of
our testing of internal control over financial reporting and compliance, and the results of that
testing, and not to provide an opinion on the internal control over financial reporting or on
compliance. That report is an integral part of an audit performed in accordance with Government
Auditing Standards, and should be considered in assessing the results of our audit.


                                                                                                                     1
                                                                           A member firm of Ernst & Young Global Limited
Our audit was performed for the purpose of forming an opinion on the basic financial statements
taken as a whole. The accompanying schedule of expenditures of federal awards is presented for
purposes of additional analysis as required by U.S. Office of Management and Budget Circular
A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required
part of the basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our opinion, is fairly
stated, in all material respects, in relation to the basic financial statements taken as a whole.




December 12, 2008




                                                                                                                  2
                                                                        A member firm of Ernst & Young Global Limited
                                                               Children’s Hospital

                                                                  Balance Sheets
                                                  September 30                                                          September 30
                                               2008           2007                                                   2008           2007
                                                  (In Thousands)                                                        (In Thousands)
Assets                                                                    Liabilities and net assets
Current:                                                                  Current:
Cash and cash equivalents                  $      514      $      912      Accounts payable and accrued expenses   $ 105,254    $    84,726
Patient accounts receivable, net of                                        Accrued salaries and wages                 84,153         70,688
 allowance for uncollectible accounts of                                   Current portion of estimated
 $21,404 in 2008 and $18,909 in 2007           113,430          93,511       third-party liabilities                  13,926         13,645
Other receivables                               40,059          44,394     Deferred revenue                           18,555         18,844
Due from parent                                977,742         810,140
Other current assets                             9,019           7,482
Current portion of assets whose use is
   limited                                        921              876
Total current assets                        1,141,685          957,315    Total current liabilities                  221,888        187,903

Assets whose use is limited:                                              Long-term liabilities:
 By Board designation                           63,612          75,771     Long-term debt                            539,325        539,325
 By donor-imposed restrictions                 415,365         398,907     Long-term portion of estimated
 By long-term debt agreements                        –           3,916       third-party liabilities                  32,833         38,153
 By externally administered trusts              42,769          50,468     Net pension liability                      45,989              –
 Net pension asset                                   –           1,446     Funds held for others                      34,592         26,539
 Other                                          11,979          12,779     Other liabilities                          76,992         50,723
                                               533,725         543,287    Total long-term liabilities                729,731        654,740

                                                                          Commitments and contingencies

Property, plant, and equipment, net            733,682         683,894    Net assets:
                                                                           Unrestricted                               951,528      857,633
Pledges receivable, net                         73,506          65,943     Temporarily restricted                     321,371      392,607
                                                                           Permanently restricted                     266,099      170,647
Other assets                                    8,019         13,091      Total net assets                          1,538,998    1,420,887
Total assets                               $2,490,617     $2,263,530      Total liabilities and net assets         $2,490,617   $2,263,530

See accompanying notes.


3
                                      Children’s Hospital

                  Statements of Operations and Changes in Net Assets

                                                                Year Ended September 30
                                                                 2008                2007
                                                                      (In Thousands)
 Revenue:
   Net patient services revenue                                 $ 926,339       $    801,145
   Research grants and contracts                                  118,399            112,526
   Recovery of indirect costs on grants and contracts              43,027             42,888
   Other operating revenue                                         38,644             31,957
   Unrestricted contributions, net of fundraising expenses of
     $6,251 for 2008 and $5,527 for 2007                             9,972             12,735
   Net assets released from restriction used for operations         34,670             29,463
 Total revenue                                                   1,171,051          1,030,714

 Expenses:
   Salaries and benefits                                           506,904           454,214
   Supplies and other expenses                                     357,616           294,431
   Direct research expenses of grants                              118,399           112,526
   Provision for uncollectible accounts                             24,025            23,177
   Uncompensated care pool assessment                               10,980             9,617
   Depreciation and amortization                                    83,058            80,003
   Interest                                                         25,858            22,440
 Total expenses                                                  1,126,840           996,408

 Gain from current operations                                      44,211             34,306
  Resolution of prior year allowances and third-party
     settlements                                                   14,154             13,039
 Gain from operations                                              58,365             47,345

 Non-operating gains (losses):
   Income from investments                                          5,781              6,029
   Support from Medical Center                                     38,020             44,152
   (Decrease) increase in value of alternative investments         (2,454)             4,496
   Net realized (loss) gain on investments                           (570)             7,899
   Recognition of other-than-temporary losses on
     investments                                                    (2,425)             (260)
   Loss on extinguishment of debt                                   (4,940)                –
   Adjustment of interest rate swaps to fair value                 (28,396)            2,883
 Total non-operating gains (losses)                                  5,016            65,199
 Excess of revenues over expenses                                   63,381           112,544

See accompanying notes.




                                                                                            4
                                     Children’s Hospital

          Statements of Operations and Changes in Net Assets (continued)

                                                                  Year Ended September 30
                                                                   2008                2007
                                                                        (In Thousands)

Changes in unrestricted net assets:
  Excess of revenues over expenses                            $    63,381         $ 112,544
  Net assets released from restrictions for capital asset
    acquisitions                                                    7,965              5,215
  Net transfers of funds from Medical Center                      105,173             33,913
  Net unrealized (loss) gain on investments                        (4,908)             3,667
  Net asset transfer related to donor-match program               (28,039)            (5,988)
  Other                                                            (3,189)            (2,445)
  Pension adjustment                                              (46,488)                 –
  Adjustment to apply SFAS No. 158                                      –             43,537
Increase in unrestricted net assets                                93,895            190,443

Changes in temporarily restricted net assets:
  Contributions                                                     42,541            51,322
  Income and net realized (loss) gain on investments                (2,861)           17,182
  Recognition of other-than-temporary losses on investments        (14,763)           (1,346)
  (Decrease) increase in value of alternative investments          (16,354)           20,406
  Net unrealized (loss) gain on investments                        (37,364)           38,817
  Net assets released from restrictions                            (42,635)          (34,678)
  Net assets transfer related to donor-match program                   200            (1,300)
(Decrease) increase in temporarily restricted net assets           (71,236)           90,403

Changes in permanently restricted net assets:
  Contributions                                                    67,613             14,996
  Net assets transfer related to donor-match program               27,839              7,288
Increase in permanently restricted net assets                      95,452             22,284

Increase in net assets                                           118,111             303,130
Net assets at beginning of year                                1,420,887           1,117,757
Net assets at end of year                                     $1,538,998          $1,420,887

See accompanying notes.




                                                                                          5
                                    Children’s Hospital

                                Statements of Cash Flows

                                                           Year Ended September 30
                                                            2008               2007
                                                                (In Thousands)
Operating activities
Change in net assets                                       $ 118,111        $ 303,130
Non-cash activities included in change in net assets:
   Depreciation and amortization                                 83,058        80,003
   Net transfers from Medical Center                           (163,452)      (78,065)
   Restricted contributions and investment income              (112,159)      (68,154)
   Net realized and unrealized loss (gain) on
      investments                                               83,704        (89,025)
   Loss from extinguishment of debt                              4,940              –
Changes in operating assets and liabilities:
   Patient accounts receivable                                 (19,919)       (11,013)
   Other accounts receivable                                     4,335            360
   Other current assets                                         (1,537)        (1,860)
   Accounts payable and accrued expenses                        33,993         (5,735)
   Estimated third-party liabilities                            (5,039)           961
   Other liabilities                                            80,022        (33,130)
Net cash provided by operating activities                      106,057         97,472

Financing activities
Issuance of bank term loan                                      200,000             –
Purchase of bonds                                              (200,000)            –
Payments of debt issuance costs                                    (375)            –
Net transfers from the Medical Center                           163,452        78,065
Increase in due from Medical Center                            (167,602)     (149,451)
Increase in pledges receivable                                   (7,563)      (17,994)
Restricted contributions and investment income                  112,159        68,154
Net cash provided by (used in) by financing activities          100,071       (21,226)

Investing activities
Additions to fixed assets, net of retirements                  (132,339)     (122,726)
(Increase) decrease in assets whose use is limited               (74,187)      44,632
Net cash used in investing activities                          (206,526)      (78,094)

Net decrease in cash and cash equivalents                          (398)       (1,848)
Cash and cash equivalents at beginning of year                      912         2,760
Cash and cash equivalents at end of year                   $        514      $    912

See accompanying notes.




                                                                                         6
                                       Children’s Hospital

                                Notes to Financial Statements

                                        September 30, 2008


1. Summary of Significant Accounting Policies

Organization

Children’s Hospital (the “Hospital”) is a voluntary, not-for-profit pediatric teaching hospital
located in Boston, Massachusetts, whose mission is pediatric patient care, research, training, and
community service (mission-related activities). Since January 1, 1983, the Hospital has operated
as a subsidiary of Children’s Medical Center (the “Medical Center”). The Medical Center is the
not-for-profit parent holding company which holds and manages investments, and conducts
fund-raising activities for the benefit of the Hospital. Waltham Medical Center LLC is a
subsidiary of Children’s Medical Center, which was transferred to Children’s Extended Care
Center Incorporated, a subsidiary of Children’s Medical Center, in February 2006. This property,
located in Waltham, on the site of the former Waltham Hospital, provides health care-related
services to the surrounding community. Approximately one-quarter of the facility is leased to
non-related organizations. The balance is leased to Children’s Hospital as part of the satellite
strategy.

The Hospital is affiliated with 16 tax-exempt physician controlled Foundations (the
“Foundations”). These independent, not-for-profit group practices perform their own billing for
professional services, and pay salaries and fringe benefits to their members.

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 amounts could differ from those estimates.

In 2008, changes to prior year estimates increased the gain from operations by approximately
$14 million as adjustments to prior year estimates for third-party settlements (Note 11). In 2007,
changes to prior year estimates increased the gain from operations by approximately $24 million,
of which approximately $13 million is separately identified in the statement of operations as
adjustments to prior year estimates for third-party settlements and uncollectible accounts
(Note 11).

Reclassification

Certain amounts for the year ended September 30, 2007 have been reclassified to be consistent
with the presentation of the amounts for the year ended September 30, 2008.


                                                                                                    7
                                      Children’s Hospital

                         Notes to Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

Cash equivalents include money market instruments with average maturities of less than 90 days,
excluding amounts included in investments and other assets whose use is limited.

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or market.

Assets Whose Use Is Limited or Restricted

Assets whose use is limited or restricted include amounts whose use has been designated by the
Board of Trustees (the “Board”), donor-restricted assets, and amounts set aside for debt service
and deferred compensation. Amounts invested in marketable securities are reported at fair
market value determined principally from quoted market prices. Unrestricted investment income
is reported as a non-operating gain. Restricted net income is reported as an addition to restricted
net assets. Realized gains (losses) are computed at an average-cost basis, and are reported as
non-operating gains (losses) or additions (subtractions) to restricted net assets in accordance with
the donor’s intent. Impairments in investment value that are determined to be other-than-
temporary are reported as non-operating gains (losses). Unrealized gains and losses on
investments are reported as a change in the appropriate net asset category; unrestricted amounts
are excluded from the excess of revenue over expenses.

Alternative investments, which consist primarily of interests in limited liability partnerships and
limited liability corporations, are reported using the equity method of accounting. Under the
equity method, the Hospital recognizes its share of the increase or decrease in the investments’
net asset value in non-operating gains (losses). Certain of the alternative investments may hold
some securities without readily determinable fair values and, consequently, the general partner or
investment manager may estimate fair value for such securities. These estimates, which could
materially affect the Hospital’s carrying value, may differ significantly from the values that
would have been used had a ready market existed, and may also differ significantly from the
values at which such investments may be sold, and the differences could be material.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Interest costs incurred during the construction
period of major projects are capitalized as a component of the cost of these assets, and are
depreciated over the estimated useful lives of the assets. The costs of repairs and maintenance are
charged to expense as incurred.




                                                                                                  8
                                      Children’s Hospital

                        Notes to Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

Depreciation and amortization is computed on the straight-line method based on the estimated
useful lives of the assets. The estimated useful lives conform to the guidelines established by the
American Hospital Association. The Hospital’s policy is to fund depreciation expense in
amounts not exceeding cumulative allowable depreciation expense.

Original Issue Discount and Debt Issuance Fees

Unamortized original issue discounts, and the costs associated with the issuance of debt, are
amortized using the interest method over the life of the bond issue.

Pledges

Pledges, less an allowance for uncollectible amounts, are recorded as receivable in the year made.
Pledges receivable over a period greater than one year are stated at net present value.

Net Assets

The accompanying balance sheets of the Hospital classify net assets into three categories:
unrestricted, temporarily restricted, and permanently restricted. Net assets which bear no external
restriction as to use or purpose are classified as unrestricted. Also included in unrestricted net
assets are assets whose use is limited under debt or trust agreements. In addition, unrestricted net
assets include Board-designated funds for plant replacement and expansion, and mission-related
activities.

Net assets which are restricted by donors or grantors as to use or purpose are classified as either
temporarily restricted or permanently restricted:

    Temporarily restricted net assets are restricted by the donor or grantor, principally for the
    support of research, patient care, departmental support, medical education, community
    health services, and the acquisition of property, plant, and equipment. When a restriction
    expires, that is, when a stipulated time restriction ends or the purpose of the restriction is
    accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and
    reported in the statements of operations and changes in net assets as net assets released from
    restrictions.

    Permanently restricted net assets represent contributions to the Hospital, the principal of
    which may not be expended. Income from permanently restricted net assets may be
    unrestricted or restricted in accordance with the donor’s request. In accordance with the
    laws of the Commonwealth of Massachusetts, gains on permanently restricted net assets are
    recorded as temporarily restricted net assets until appropriated for expenditure by the Board.



                                                                                                  9
                                      Children’s Hospital

                        Notes to Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

Net Patient Services Revenue

Net patient services revenue is reported at the estimated net realizable amounts from patients,
third-party payors, and others for services rendered, including estimated contractual adjustments
under reimbursement agreements with third-party payors. Contractual adjustments are accrued
on an estimated basis in the period in which the related services are rendered. If estimated
allowances are adjusted in future periods, the adjustments are recorded as resolution of prior year
third-party contractual arrangements.

Revenues from Medicare and Medicaid, including Medicaid Out-of-State programs, accounted
for approximately 1.2% and 10.0%, respectively, of the Hospital’s net patient service revenues
for the year ended September 30, 2008 (1.1% and 11.0%, respectively, for 2007). Laws and
regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation. As a result, there is at least a reasonable possibility that recorded estimates will
change by a material amount in the near term.

Research Grants and Contracts

The Hospital engages in research activities funded by grants and contracts with federal and state
governments, and various private sources. Revenues associated with grants and contracts are
recognized as the related costs are incurred. Research funds received in advance are reported as
deferred revenue and are recognized as earned revenue as the related research expenditures are
incurred. Recoveries of indirect costs relating to certain government grants and contracts are
reimbursed at predetermined rates negotiated with government agencies. Recoveries of indirect
costs relating to non-government grants are reimbursed at varying rates, depending upon sponsor
policies.

Contributions

Unrestricted gifts are recorded as operating income; restricted gifts are recorded as additions to
restricted net asset balances. Donated securities and property are recorded at fair market value as
of the date of donation.

Income Taxes

The Hospital is exempt from income taxes on related business income under Internal Revenue
Code Section 501(c)(3).




                                                                                                 10
                                     Children’s Hospital

                        Notes to Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

New Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Pension
and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and
132(R). The standard applies to all plan sponsors that offer defined benefit postretirement benefit
plans. SFAS No. 158 requires an entity to recognize in its statement of financial position an
asset, for a defined benefit postretirement plan’s overfunded status, or a liability, for a plan’s
underfunded status; measure a defined benefit postretirement plan’s assets and obligations that
determine funded status as of the end of the employer’s fiscal year; and recognize the periodic
change in the funded status of a defined benefit postretirement plan as a component of changes in
unrestricted net assets in the year in which the change occurs. The Hospital adopted the
provisions of SFAS No. 158 in 2007. See Note 12 for further discussion of the effect of adopting
SFAS No. 158 on the Hospital’s financial statements.

In June 2006, the FASB issued FASB Interpretation Number (“FIN”) 48, Accounting for
Uncertainty in Income Taxes, which is effective for financial statements for fiscal years
beginning after December 15, 2006. FIN 48 provides guidance to all enterprises, including pass-
through entities, for how uncertain tax provisions should be recognized, measured, presented,
and disclosed in the financial statements. The adoption of FIN 48 did not materially impact the
Hospital’s financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosure about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15,
2007. The Hospital is evaluating the effect that the adoption of SFAS No. 157 will have on its
financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain
financial instruments and other items at fair value that are not currently required to be measured
at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
Hospital is evaluating the effect that the adoption of SFAS No. 159 will have on its financial
statements.




                                                                                                11
                                    Children’s Hospital

                       Notes to Financial Statements (continued)


2. Investments and Other Assets Whose Use Is Limited or Restricted

Investments and other assets whose use is limited or restricted consist of the following at
September 30 at fair value (in thousands):

                                                             2008         2007
  Pooled investments:
   Investment pool by manager type:
     Equity securities                                      $313,106    $357,518
     Fixed income securities                                 149,900     113,141
     Other                                                    17,557       5,847
  Total pooled investments                                   480,563     476,506
  Non-pooled investments:
     Equity securities                                         1,112        1,617
     Fixed income securities                                  10,202       15,572
  Total non-pooled investments                                11,314       17,189
  Externally administered trusts (marketable equity and
     debt securities)                                         42,769      50,468
  Total investments and other assets whose use is limited   $534,646    $544,163

Included in the pooled investments above are alternative investments, which represent 39% of
the pooled investments.

These investments, and other assets whose use is limited or restricted, are presented in the
accompanying balance sheets at September 30 as follows (in thousands):

                                                              2008          2007

  Assets whose use is limited or restricted:
    By Board designation for mission-related activities     $ 63,612      $ 75,771
    By donor-imposed restriction                             415,365       398,907
    Under long-term debt agreements                              921         4,792
    By externally administered trusts                         42,769        50,468
    Net pension asset                                              –         1,446
    Other:
      As funds held for others                                 1,586         1,831
      Under deferred compensation agreements                   9,253         9,808
      Other                                                    1,140         1,140
                                                              11,979        12,779
  Total investments and other assets whose use is limited   $534,646      $544,163



                                                                                         12
                                      Children’s Hospital

                        Notes to Financial Statements (continued)


2. Investments and Other Assets Whose Use Is Limited or Restricted (continued)

The components of investment earnings include (in thousands):

                                                                Temporarily
  Year Ended September 30, 2008               Unrestricted       Restricted       Total

  Interest and dividend income:
    Other operating revenue                      $ 5,674        $          –     $ 5,674
    Non-operating revenue                          5,781                   –       5,781
    Increase in temporarily restricted net
      assets                                            –               2,005       2,005
  Decrease in value of alternative
    investments                                    (2,454)         (16,354)       (18,808)
  Realized losses                                    (570)          (4,866)        (5,436)
  Other-than-temporary losses                      (2,425)         (14,763)       (17,188)
  Net unrealized losses                            (4,908)         (37,364)       (42,272)
  Total return on investments                    $ 1,098         $ (71,342)     $ (70,244)


                                                                Temporarily
  Year Ended September 30, 2007               Unrestricted       Restricted       Total

  Interest and dividend income:
    Other operating revenue                      $ 6,000            $      –     $ 6,000
    Non-operating revenue                          6,029                   –       6,029
    Increase in temporarily restricted net
      assets                                            –               1,836       1,836
  Increase in value of alternative
    investments                                    4,496             20,406       24,902
  Realized gains                                   7,899             15,346       23,245
  Other-than-temporary losses                       (260)            (1,346)      (1,606)
  Net unrealized gains                             3,667             38,817       42,484
  Total return on investments                    $27,831            $75,059     $102,890

Management continually reviews its investment portfolio where the market value is below cost,
and in cases where the decline is considered to be other than temporary, an adjustment is
recorded to realize the loss. The Hospital recorded a realized loss for other-than-temporary
declines in the fair value of investments of approximately $17,188,000 and $1,606,000 for the
years ended September 30, 2008 and 2007, respectively, of which $2,425,000 and $260,000,
respectively, is included in unrestricted investment income, and $14,763,000 and $1,346,000,
respectively, is included in changes in temporarily restricted net assets.




                                                                                             13
                                     Children’s Hospital

                        Notes to Financial Statements (continued)


2. Investments and Other Assets Whose Use Is Limited or Restricted (continued)

Consistent with market value declines in the investment securities markets after September 30,
2008, the Hospital’s investments declined by approximately 13% between September 30, 2008
and November 30, 2008.

3. Related Party Transactions

During the years ended September 30, 2008 and 2007, the Hospital transferred amounts equal to
depreciation expense to the Medical Center to fund future capital expenditures of $82,534,000
and $79,496,000, respectively, and received funding for capital and other expenditures in the
amounts of $187,707,000 and $113,409,000, respectively.

During the years ended September 30, 2008 and 2007, the Hospital received support from the
Medical Center to fund patient care, teaching, and research activities in the amounts of
$58,279,000 and $50,152,000, respectively. Of the amount reported for the year ended
September 30, 2008 and 2007, $38,020,000 and $44,152,000, respectively, is reported as non-
operating income, and $5,674,000 and $6,000,000, respectively, is reported as other operating
revenue to support other mission-related activities. As a result of a policy change in 2008, the
Hospital reported $14,585,000 of fundraising expenses on restricted contributions for the year
ended September 30, 2008, while the Medical Center absorbed $12,896,000 of fundraising
expenses on restricted contributions for the year ended September 30, 2007. Amounts due from
the Medical Center, as of September 30, 2008 and 2007, were $977,742,000 and $810,140,000,
respectively. Amounts due from parent result primarily from net cash provided by the Hospital’s
operations and transferred to the Medical Center, the Hospital’s accrued and unpaid support from
the Medical Center and other intercompany transactions.

During the years ended September 30, 2008 and 2007, the Hospital made payments of
$6,977,000 and $6,788,000, respectively, to the Foundations for administrative, supervisory, and
training activities provided by their members to the Hospital. The Hospital also supported
through loans and restricted gifts the recruitment and retention of physicians in the Foundations
in the amount of $6,200,000 and $8,107,000 in 2008 and 2007, respectively. The Hospital bills
for professional services and a limited number of clinical services, and accordingly remunerates
the Foundations for physician fees associated with these services. These physician fees and other
administrative payments were $55,920,000 and $47,793,000 for the years ended September 30,
2008 and 2007, respectively.

The Hospital leases building space from Waltham Medical Center. During the year ended
September 30, 2008 and 2007, the Hospital incurred $6,173,000 and $5,222,000, respectively, in
rent expense related to this operating lease. The lease automatically renews each year.




                                                                                              14
                                     Children’s Hospital

                        Notes to Financial Statements (continued)


4. Contributions

Contributions received and pledged to the Hospital were as follows for the years ended
September 30 (in thousands):

                                                                  2008                2007

  Gross contributions                                          $127,490             $88,863
  Provision for uncollectible pledges and discounts              (1,113)             (4,283)
  Net contributions                                            $126,377             $84,580

These contributions are reported in the accompanying financial statements in accordance with
donors’ restrictions as follows:

                                                                 Year Ended September 30
                                                                  2008            2007

  Unrestricted contributions                                   $ 16,223             $18,262
  Temporarily restricted                                         42,541              51,322
  Permanently restricted                                         67,613              14,996
  Net contributions                                            $126,377             $84,580

In addition to the $127,490,000 and $88,863,000 in gross contributions raised, the Hospital
raised $11,059,000 and $6,639,000 in non-governmental grant awards to bring the total funds
raised to $138,549,000 and $95,502,000 for the years ended September 30, 2008 and 2007,
respectively.

Contributions pledged to the Hospital are due as follows as of September 30 (in thousands):

                                                                  2008               2007

  Due in less than one year                                     $31,355            $25,560
  Due in one to five years                                       54,018             51,701
  Due in more than five years                                       548                526
                                                                 85,921             77,787
  Less discount to present value                                 (8,119)            (7,955)
  Less allowance for uncollectible pledges                       (4,296)            (3,889)
  Total pledges receivable, net                                 $73,506            $65,943




                                                                                               15
                                     Children’s Hospital

                        Notes to Financial Statements (continued)


5. Free Care, Uncompensated Care, and Community Services

The Hospital provides care to patients who meet certain criteria under its free care policy without
expectation of payment or at amounts less than its established rates. As the Hospital does not
pursue collection of amounts determined to qualify as free care, they are not reported as net
patient services revenue. The Hospital also supports the delivery of health care services to the
indigent through payments to the Health Safety Net Trust (“HST”) (formerly the
“Uncompensated Care Pool”), which is administered by the Commonwealth of Massachusetts.
The amounts of net receipts to HST, provision for uncollectible accounts, and free care were as
follows (in thousands):

                                                                 Year Ended September 30
                                                                   2008           2007

   Uncompensated care pool receipts                                $ (6,643)        $ (10,599)
   Uncompensated care pool tax                                      10,980              9,617
   Net disbursements to (receipt from) the uncompensated
    care pool                                                         4,337              (982)

   Provision for uncollectible accounts                              24,025            23,177
   Total uncompensated care expense                                  28,362            22,195

   Free care (deductions from revenue at standard charge)            6,749            11,622
   Total free care and uncompensated care                          $35,111          $ 33,817

The Hospital also provides resources to support numerous initiatives aimed at contributing to the
physical and psychological well-being of children, youth, and families living in the Hospital’s
community. The initiatives include programs at the Hospital, and in collaboration with
community-based organizations, to provide comprehensive services to adolescent mothers and
children, HIV outreach services, services to reduce infant mortality, assistance to the homeless,
and training and other related services to individuals with developmental disabilities. The
Hospital also provides medical services to the community through its emergency room, which
operates 24 hours a day, and is available to all regardless of ability to pay.




                                                                                                 16
                                     Children’s Hospital

                        Notes to Financial Statements (continued)


6. Property, Plant, and Equipment

Property, plant, and equipment consist of the following at September 30 (in thousands):

                                                                2008             2007

   Land and improvements                                    $     6,183      $     6,183
   Buildings and improvements                                 1,004,282          908,990
   Equipment                                                    424,274          366,500
   Construction-in-progress                                      47,477           69,279
                                                              1,482,216        1,350,952
   Less accumulated depreciation and amortization              (748,534)        (667,058)
                                                             $ 733,682        $ 683,894

At September 30, 2008, the Hospital had commitments of $56,808,000 to complete projects
relating to capital construction and software development.

7. Asset Retirement Obligation

Conditional asset retirement obligations recorded under the provisions of FIN 47, Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB SFAS 143, Accounting for
Asset Retirement Obligations, amounted to $16,605,000 and $18,775,000 as of September 30,
2008 and 2007, respectively. These obligations are recorded in other non-current liabilities in the
accompanying balance sheets. There are no assets that are legally restricted for purposes of
settling asset retirement obligations.

During 2008 and 2007, retirement obligations incurred and settled were $3,501,000 and
$1,709,000, respectively. Accretion expense of $1,332,000 and $1,250,000 was recorded during
the years ended September 30, 2008 and 2007, respectively.




                                                                                                17
                                    Children’s Hospital

                       Notes to Financial Statements (continued)


8. Leases

The Hospital leases buildings under operating leases which expire at various dates through 2028.
The Hospital’s obligations under non-cancelable leases as of September 30, 2008 are as follows
(in thousands):

  2009                                                      $ 14,835
  2010                                                         14,126
  2011                                                         12,525
  2012                                                         11,286
  2013                                                         10,976
  Thereafter                                                  123,504
  Total                                                     $ 187,252

Rent expense under non-related party operating leases was approximately $11,512,000 and
$7,759,000 for the years ended September 30, 2008 and 2007, respectively.

9. Long-Term Debt

Long-term debt at September 30 consists of the following (in thousands):

                                                              2008             2007

  Bank term loan                                            $200,000       $          –
  Massachusetts Health and Educational Facilities
   Authority issues:
     Series L-2                                                    –        120,000
     Series L-1                                                    –         80,000
     Series K                                                 30,800         30,800
     Series J                                                 74,200         74,200
     Series I                                                 49,075         49,075
     Series H                                                 80,000         80,000
     Series G                                                105,250        105,250
                                                            $539,325       $539,325

The estimated fair market value of the Hospital’s long-term debt as of September 30, 2008 and
2007 approximated its carrying value.




                                                                                                18
                                    Children’s Hospital

                       Notes to Financial Statements (continued)


9. Long-Term Debt (continued)

Summary information for each issue follows:

Bank Term Loan

On August 28, 2008, the Hospital entered into a term loan agreement with a bank in the amount
of $200,000,000. Proceeds from the loan were used to purchase the Children’s Hospital Series
L-1 and L-2 Massachusetts Health and Educational Facilities Authority (“MHEFA”) Revenue
Bonds from the bank. These bonds were previously purchased by the bank during 2008 under
the terms of the standby bond purchase agreement which was triggered when remarketing efforts
on these bonds began to fail. The Hospital recorded a related extinguishment loss during 2008 of
$4,940,000. The bank loan bears interest at a variable rate (3.3% at September 30, 2008) and
matures on October 15, 2009. Interest payments are due monthly. The bank loan is collateralized
by certain property financed by Series L-1 and L-2 Bonds.

Series L-2 Bonds

On May 9, 2006, the Hospital issued Series L-2 MHEFA Revenue Bonds in the aggregate
principal amount of $120,000,000. Proceeds from the bonds were used to reimburse and fund
certain capital additions, renovations, and equipment expenditures.

In connection with the issuance of these variable rate demand bonds, the Hospital entered into a
standby bond purchase agreement with a bank, whereby the bank agreed to purchase any
tendered bond which is not otherwise purchased. During 2008, the bank purchased $120,000,000
of the Series L-2 Revenue Bonds, which were subsequently sold back to the Hospital as
described under the bank term loan above.

Series L-1 Bonds

On May 5, 2004, the Hospital issued Series L-1 MHEFA Revenue Bonds in the aggregate
principal amount of $80,000,000. Proceeds from the bonds were used to reimburse and fund
certain capital additions, renovations, and equipment expenditures.

In connection with the issuance of these variable rate demand bonds, the Hospital entered into a
standby bond purchase agreement with a bank, whereby the bank agreed to purchase any
tendered bond which is not otherwise purchased. During 2008, the bank purchased $80,000,000
of the Series L-1 Revenue Bonds, which were subsequently sold back to the Hospital as
described under the bank term loan above.




                                                                                             19
                                    Children’s Hospital

                       Notes to Financial Statements (continued)


9. Long-Term Debt (continued)

Series J and K Bonds


On July 12, 2002, the Hospital issued Series J and K MHEFA Revenue Bonds in the aggregate
principal amount of $105,000,000. Proceeds from the bonds were used to reimburse and fund
certain capital additions, renovations, and equipment expenditures, and refund the Series E
Revenue Bonds. Interest on the bonds is variable based on 14-day (Series J) and weekly auctions
(Series K), and was 3.53% on both Series J and K at September 30, 2008. Interest payments are
due every 14 days on Series J and weekly for Series K. The first annual principal payment on
Series J and K is due in 2022. Final principal payments are due in 2025 for Series K and in 2036
for Series J. There is no put feature back to the Hospital by bondholders and, as such, no
commercial bank liquidity feature is required.

Series G, H, and I Bonds

On May 31, 2001, the Hospital issued Series G, H, and I MHEFA Revenue Bonds in the
aggregate principal amount of $234,325,000. Proceeds from the bonds were used to reimburse
and fund certain capital renovation and equipment expenditures, refund the Series F Revenue
Bonds, and fund the construction of a new 12-story research building and a 10-story clinical
expansion building. Interest on the bonds is variable based on daily (Series G) and weekly
auctions (Series H and I), and was 3.45%, 3.00%, and 3.00% on Series G, H, and I, respectively,
at September 30, 2008. Interest payments are due monthly on Series G and weekly for Series H
and I. The first annual principal payment on Series G is due in 2030, and on Series H and I in
2026. Final principal payments are due in 2035 for Series G and 2040 for Series H and I. There
is no put feature back to the Hospital by bondholders and, as such, no commercial bank liquidity
feature is required.

The MHEFA Revenue Bonds are collateralized by the Hospital’s gross cash receipts.




                                                                                             20
                                           Children’s Hospital

                            Notes to Financial Statements (continued)


9. Long-Term Debt (continued)

Interest Rate Swap Agreements

                                      Notional                Fixed
       Inception Date                 Amount              Interest Rate         Maturity Date

           December 2007              $120,000,000             3.42%               December 2041
               May 2006                119,875,000             3.57                    April 2040
             August 2004                70,000,000             4.00*                 October 2027
           November 2003                50,000,000             3.13                November 2040
           December 2001                35,000,000             4.72                December 2021
           December 2001                35,000,000             4.72                December 2026
               May 2001                105,250,000             4.58                December 2036

*Fixed at 4.0% through October 1, 2027, if the variable-rate tax-exempt index reaches 4.5%.

Management’s view of the risk of nonperformance by the counterparties to these interest rate
swap agreements is that it is minimal. The interest rate swap agreements meet the definition of
derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Consequently, the fair value of the swaps (a liability of $53,459,000 and $25,063,000
at September 30, 2008 and 2007, respectively) is reported in other liabilities in the accompanying
balance sheets, and the change in fair value during the year of $28,396,000 and $2,883,000 for
the years September 30, 2008 and 2007, respectively, is reported as a non-operating (loss) gain in
the statements of operations and changes in net assets. The swaps, while serving as an economic
hedge, do not qualify as an accounting hedge under SFAS No. 133.

Cash flows under the swaps netted to payments of approximately $7,287,000 and $1,934,000 in
2008 and 2007, respectively, and are included in interest expense.

Guaranteed Debt

As security to the Hospital’s bank term loan, Series G, H, I, J, K, L-1, and L-2 bondholders, the
Medical Center has executed unconditional and irrevocable guaranties of full and punctual
payment of all obligations of the Hospital under the terms of the related loan agreements.

The Hospital has also guaranteed $630,000 of the principal of $4,410,000 of revenue bonds
issued by MHEFA on behalf of the Community Health Center Capital Fund. As of
September 30, 2008, there have not been any requirements to honor calls under this guarantee.




                                                                                                    21
                                     Children’s Hospital

                        Notes to Financial Statements (continued)


9. Long-Term Debt (continued)

In accordance with the terms of the loan agreements for Series G, Series H, Series I, Series J, and
Series K, certain funds were established with independent trustees. The purpose of each fund and
its respective balance at September 30 are as follows (in thousands):

                                                                           2008          2007

 Bond funds – to receive debt service payments from the Hospital
  and to disburse such payments to the bondholders                        $ 921          $ 876
 Construction funds – to provide reimbursement to the Hospital of
  construction, renovation, and certain other capital expenditures             –          3,916
                                                                             921          4,792
  Current portion                                                           (921)          (876)
                                                                          $    –         $3,916

Interest paid was $28,184,000 and $20,464,000 for the years ended September 30, 2008 and
2007, respectively. In 2008, interest capitalized in connection with ongoing construction projects
approximated $1,658,000. In 2007, there was no interest capitalized.

10. Restricted Net Assets

Temporarily restricted net assets at September 30 are comprised of the following (in thousands):

                                                                      2008            2007

  Mission-related activities                                       $142,199         $135,471
  Accumulated gains on permanently restricted net assets            179,172          257,136
                                                                   $321,371         $392,607

Permanently restricted net assets at September 30 are restricted as follows (in thousands):

                                                                      2008            2007
  Investments to be held in perpetuity, the income from
    which is:
     Unrestricted as to use                                        $ 25,402         $ 22,332
     Restricted for patient care-related activities                 117,601          101,695
     Restricted for research                                        109,255           39,259
     Restricted for medical education                                13,841            7,361
                                                                   $266,099         $170,647




                                                                                                 22
                                    Children’s Hospital

                       Notes to Financial Statements (continued)


10. Restricted Net Assets (continued)

The Hospital's faculty match program is a donor match program where the Hospital matches
certain permanently restricted gifts from donors under a pre-defined ratio. This program has
resulted in several major gifts to the Hospital in support of certain strategic purposes.

Net assets were released from donor or grantor restrictions during the year ended September 30
by incurring expenses satisfying the following restricted purposes (in thousands):

                                                                    2008           2007

  Mission-related activities                                       $34,670        $29,463
  Property, plant, and equipment                                     7,965          5,215
                                                                   $42,635        $34,678

11. Net Patient Services Revenue

The Hospital has agreements with numerous third-party payors that provide for payments at
amounts different from its established charges. Medicaid payments are based on a contract with the
Massachusetts Executive Office of Health and Human Services, and reimburse for services on a
standardized payment per-encounter basis for outpatients and a standardized case mix adjusted
discharge basis for inpatients. The current year payments are reflective of current year rate
inflation adjusted for prior year diagnoses, procedures, and case mix.

Contracts with managed care providers provide for payments based on a variety of methodologies,
including discounted charges, per-case, and per-diem arrangements for inpatients, and discounted
charges and fee schedule arrangements for outpatients. Commercial insurers reimburse the
Hospital for services on the basis of established charges. Since the Hospital is a pediatric
institution, it is exempt from the Federal Prospective Payment System, which governs Medicare
reimbursement; therefore, the Hospital’s Medicare reimbursement is based upon Medicare’s
proportionate share of reasonable costs.

During 2008 and 2007, in connection with special legislative appropriations, the Hospital received
$21,697,000 and $20,273,000, respectively, from the Federal Children’s Hospital’s GME program
for reimbursement of graduate medical education expense, and $7,141,000 and $8,681,000 from
the State Medicaid program in connection with the disproportionate share program. In 2008, the
Hospital also recognized $6,645,000 from Massachusetts Medicaid for pediatric cases with a case
mix index greater than five. There is no guarantee that similar appropriations will occur in the
future, or at what level.




                                                                                             23
                                     Children’s Hospital

                        Notes to Financial Statements (continued)


11. Net Patient Services Revenue (continued)

Differences between estimated and final settlements are recorded as contractual adjustments in
the year determined. The Hospital recorded favorable adjustments of approximately $14,154,000
and $13,039,000 during 2008 and 2007, respectively, as a result of final settlements and other
adjustments to prior year estimates.

The Hospital grants credit without collateral to its patients. The concentration of credit risk by
payor as measured by patient accounts receivables, net of contractual adjustments, was as
follows:

                                                             Year Ended September 30
                                                                 2008         2007

   Other managed care                                             36%              40%
   Blue Cross                                                     23               21
   Medicaid                                                       15               12
   Commercial                                                     10               10
   Self-pay                                                        9                9
   Neighborhood Health Plan                                        5                5
   Other governmental                                              2                3
   Total                                                         100%             100%

12. Employees’ Retirement Plans

The Hospital sponsors two non-contributory, defined benefit retirement plans (the Regular
Employees’ Pension Plan and the Maintenance Employees’ Pension Plan), which cover
substantially all employees of the Hospital. The Hospital does not provide postretirement
benefits other than pension to its retirees.

The Regular Employees’ Pension Plan and Maintenance Employees’ Pension Plan are cash
balance plans under which benefits are based on the annuitized value of a participant’s account,
which consists of basic credits (determined on age, years of vesting service, and compensation),
plus interest credits thereon. The measurement date of these plans is September 30.




                                                                                               24
                                      Children’s Hospital

                         Notes to Financial Statements (continued)


12. Employees’ Retirement Plans (continued)

Adoption of SFAS No. 158

In 2007, the Hospital adopted the provisions of SFAS No. 158. SFAS No. 158 required the
Hospital to recognize the funded status (i.e., the difference between the fair value of plan assets
and the projected benefit obligations) of its pension plan in the September 30, 2007 balance
sheet, with a corresponding adjustment to unrestricted net assets. The adjustment to unrestricted
net assets at adoption represents the net unrecognized actuarial losses and the unrecognized prior
service costs remaining from the initial adoption of SFAS No. 87, Employees’ Accounting For
Pensions, both of which were previously netted against the Plan’s funded status in the Hospital’s
balance sheet pursuant to the provisions of SFAS No. 87. These amounts will be subsequently
recognized as net periodic pension cost pursuant to the Hospital’s historical accounting policy
for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods
and are not recognized as net periodic pension cost in the same periods are recognized as other
changes in unrestricted net assets. Those amounts will be subsequently recognized as a
component of net periodic pension cost on the same basis as the amounts recognized in
unrestricted net assets at the adoption of SFAS No. 158.

The incremental effects of adopting the provisions of SFAS No. 158 on the Hospital’s balance
sheet at September 30, 2008 are presented in the following table. The adoption of SFAS No. 158
had no effect on the Hospital’s statement of operations for the years ended September 30, 2008
or 2007, or for any prior period presented, and it will not affect the Hospital’s operating results in
future periods.

                                                          At September 30, 2007
                                                  Prior to      Effect of
                                                 Application    Adopting As Reported at
                                                  of SFAS         SFAS      September 30
                                                  No. 158        No. 158        2007

    Net pension asset                              $       –        $ 1,446          $ 1,446
    Accrued pension liability                       (42,091)         42,091                –
    Other changes in unrestricted net assets              –          43,537           43,537

Included in other changes in unrestricted net assets for years ended September 30, 2008 and
2007, respectively, are the following amounts that had not yet been recognized in net periodic
pension cost: unrecognized prior service costs of $686,000 and $804,000, and unrecognized
actuarial loss of $2,265,000 and gain of $44,341,000, respectively. The prior service cost and
actuarial gain included as other changes in unrestricted net assets, and expected to be recognized
in net periodic pension cost during the fiscal year ended September 30, 2009, are $118,000 and
$8, respectively.



                                                                                                   25
                                      Children’s Hospital

                        Notes to Financial Statements (continued)


12. Employees’ Retirement Plans (continued)

Reconciliation of Funded Status and Accumulated Benefit Obligation

A reconciliation of the changes in the Hospital’s pension plans’ projected benefit obligation and
the fair value of assets, and the accumulated benefit obligation of the plans as of both periods,
follows (in thousands):

                                                                  September 30
                                                                2008        2007
   Change in benefit obligation

   Benefit obligation at beginning of year                   $ 303,516      $ 270,946
   Service cost                                                 23,402         19,805
   Interest cost                                                18,374         16,187
   Actuarial (gain) loss                                       (27,532)         5,472
   Benefits paid                                                (9,457)        (8,894)
   Benefit obligations at end of year                          308,303        303,516

   Change in plan assets

   Fair value of plan assets at beginning of year             $304,962       $242,582
   Actual return on plan assets                                (51,777)        54,183
   Employer contribution                                        18,586         17,091
   Benefits paid                                                (9,457)        (8,894)
   Fair value of plan assets at end of year                    262,314        304,962

   Funded status                                              $ (45,989)     $   1,446

   Accumulated benefit obligation                             $242,792       $233,868

The funded status of the plans of $(45,989,000) and $1,446,000, at September 30, 2008 and
2007, is reported in the accompanying balance sheet under long-term liabilities or long-term
assets, respectively.




                                                                                              26
                                       Children’s Hospital

                         Notes to Financial Statements (continued)


12. Employees’ Retirement Plans (continued)

Net periodic pension cost includes the following components (in thousands):

                                                                      September 30
                                                                   2008         2007
  Components of net periodic benefit cost

  Service cost                                                    $ 23,402       $ 19,805
  Interest cost                                                     18,374         16,187
  Expected return on plan assets                                   (22,144)       (17,268)
  Amortization of prior service cost                                   118            118
  Recognized net actuarial gain                                       (217)           (45)
  Net periodic pension cost                                       $ 19,533       $ 18,797

The weighted-average assumptions used to develop pension expense as of September 30, 2008 and
2007 are as follows:

  Weighted-average assumptions for pension cost                    2008            2007

  Discount rate                                                    6.00%            6.00%
  Expected return on plan assets                                   7.00             7.00
  Rate of compensation increase                                    5.00             5.00

To develop the expected long-term rate of return on plan assets assumption, the Hospital
considered the historical return and the future expectations for returns for each asset class, as well
as the target asset allocation of the pension portfolio.

The weighted-average assumptions used to develop the projected benefit obligation as of
September 30 are as follows:

                                                                   2008            2007
  Weighted-average assumptions for benefit obligation

  Discount rate                                                    6.50%          6.00%
  Rate of compensation increase                                    5.00           5.00




                                                                                                   27
                                     Children’s Hospital

                        Notes to Financial Statements (continued)


12. Employees’ Retirement Plans (continued)

Plan Assets

The Plans’ investment objectives are to achieve long-term growth in excess of long-term
inflation, and to provide a rate of return that meets or exceeds the actuarial expected long-term
rate of return on plan assets over a long-term time horizon. In order to minimize risk, the plans
intend to minimize the variability in yearly returns. The plans also intend to diversify their
holdings among asset classes, investment managers, sectors, industries, and companies. The asset
policy guidelines include total equities between 50% and 75%, total fixed income between 10%
and 40%, and other strategies between 5% and 25%.

The Hospital’s pension plans weighted-average asset allocations at September 30, by asset
category, are as follows:

                                                2008              2007

     Domestic equities                          46%                46%
     International equities                     19                 27
     Fixed income                                9                 10
     Other                                      26                 17
     Total                                     100%               100%

Contributions

The Hospital expects to contribute approximately $19,341,000 to its pension plans in 2009.

Estimated Future Benefit Payments

Benefit payments, which reflect expected future service, are expected to be paid as follows (in
thousands):

                                                       Pension
     Fiscal Year                                       Benefits

     2009                                           $ 14,642
     2010                                             10,231
     2011                                             10,768
     2012                                             12,230
     2013                                             11,949
     Years 2014 – 2018                               102,536



                                                                                              28
                                      Children’s Hospital

                         Notes to Financial Statements (continued)


12. Employees’ Retirement Plans (continued)

Certain physicians, by virtue of their joint appointments at the Hospital and Harvard University,
are eligible for participation in the Harvard Retirement Plan for Teaching Faculty (the “Harvard
Plan”), a defined contribution plan, and do not participate in the Hospital’s plans. The Hospital’s
pension expense related to the Harvard Plan was approximately $3,074,000 and $2,863,000 for
the years ended September 30, 2008 and 2007, respectively.

13. Professional Liability

The Hospital’s primary professional and general liability insurance coverage is provided by
Controlled Risk Insurance Company, Ltd. (“CRICO”), a corporation formed and wholly owned
by the Harvard-affiliated medical institutions. The Hospital owns approximately 10% of
CRICO’s stock. The premiums that the Hospital pays to CRICO are actuarially determined based
on asserted claims, and reported but unasserted claims, and have been discounted at a rate of
5.5%. CRICO obtains excess coverage from other insurers.

The Hospital’s professional liability insurance policy is on a claims-made basis. The Hospital
accrues a liability for claims incurred but not reported. At September 30, 2008 and 2007, the
liability was $3,044,000 and $2,438,000 for the years ended September 30, 2008 and 2007,
respectively.

Professional liability insurance expense, net of recoveries, is as follows (in thousands):

                                                             Year Ended September 30
                                                                2008         2007

   Professional liability insurance premiums, net
     of recoveries                                              $3,778            $3,248
   Increase in reserve for incurred but not
     reported professional liability claims                        606               211
   Total                                                        $4,384            $3,459




                                                                                                29
                                      Children’s Hospital

                         Notes to Financial Statements (continued)


14. Functional Expenses

The Hospital is a multifaceted pediatric patient care provider dedicated to the improvement of
the quality of life for children and their families. In its leadership role in pediatric medicine, the
Hospital focuses its efforts in three major areas: patient care, research, and medical education.
Expenses related to providing these services are estimated as follows (in thousands):

                                                              Year Ended September 30
                                                                2008          2007

   Patient care                                              $ 853,189          $741,766
   Research                                                     228,207          212,254
   Medical education                                             45,444           42,388
   Total expenses                                            $1,126,840         $996,408




                                                                                                   30
Section II – OMB Circular A-133
    Audit of Federal Awards
                                                                        Ernst & Young LLP
                                                                        200 Clarendon Street
                                                                        Boston, Massachusetts 02116-5072
                                                                        Tel: 617 266 2000
                                                                        Fax: 617 266 5843
                                                                        www.ey.com




Report on Internal Control Over Financial Reporting and on Compliance and Other
                    Matters Based on an Audit of the Financial
   Statements Performed in Accordance with Government Auditing Standards


The Board of Trustees
Children’s Hospital

We have audited the financial statements of Children’s Hospital (the Hospital) as of and for the
year ended September 30, 2008, and have issued our report thereon dated December 12, 2008.
We conducted our audit in accordance with auditing standards generally accepted in the United
States, and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered the Hospital’s internal control over
financial reporting as a basis for designing our auditing procedures for the purpose of expressing
our opinion on the financial statements, but not for the purpose of expressing an opinion on the
effectiveness of the Hospital’s internal control over financial reporting. Accordingly, we do not
express an opinion on the effectiveness of the Hospital’s internal control over financial reporting.

A control deficiency exists when the design or operation of a control does not allow management
or employees, in the normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A significant deficiency is a control deficiency, or combination
of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record,
process, or report financial data reliably in accordance with generally accepted accounting
principles such that there is more than a remote likelihood that a misstatement of the entity’s
financial statements that is more than inconsequential will not be prevented or detected by the
entity’s internal control.

A material weakness is a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the financial statements
will not be prevented or detected by the entity’s internal control.

Our consideration of internal control over financial reporting was for the limited purpose
described in the first paragraph of this section, and would not necessarily identify all deficiencies
in internal control that might be significant deficiencies or material weaknesses. We did not
identify any deficiencies in internal control over financial reporting that we consider to be
material weaknesses, as defined above.



                                                                                                                    31
                                                                            A member firm of Ernst & Young Global Limited
Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Hospital’s financial statements are
free of material misstatement, we performed tests of its compliance with certain provisions of
laws, regulations, contracts, and grant agreements, non-compliance with which could have a
direct and material effect on the determination of financial statement amounts. However,
providing an opinion on compliance with those provisions was not an objective of our audit and,
accordingly, we do not express such an opinion. The results of our tests disclosed no instances of
non-compliance or other matters that are required to be reported under Government Auditing
Standards.

This report is intended solely for the information and use of the Board of Trustees, Audit
Committee, management, federal awarding agencies, and pass-through entities, and is not
intended to be, and should not be, used by anyone other than these specified parties.




December 12, 2008




                                                                                                                 32
                                                                         A member firm of Ernst & Young Global Limited
                                                                      Ernst & Young LLP
                                                                      200 Clarendon Street
                                                                      Boston, Massachusetts 02116-5072
                                                                      Tel: 617 266 2000
                                                                      Fax: 617 266 5843
                                                                      www.ey.com




Report on Compliance With Requirements Applicable to Each Major Program and
 on Internal Control Over Compliance in Accordance With OMB Circular A-133

The Board of Trustees
Children’s Hospital

Compliance
We have audited the compliance of Children’s Hospital (the Hospital) with the types of
compliance requirements described in the U.S. Office of Management and Budget (OMB)
Circular A-133, Compliance Supplement, that are applicable to each of its major federal
programs for the year ended September 30, 2008. The Hospital’s major federal programs are
identified in the summary of auditor’s results section of the accompanying schedule of findings
and questioned costs. Compliance with the requirements of laws, regulations, contracts, and
grants applicable to each of its major federal programs is the responsibility of the Hospital’s
management. Our responsibility is to express an opinion on the Hospital’s compliance based on
our audit.
We conducted our audit of compliance in accordance with auditing standards generally accepted
in the United States; the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular
A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and
OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance
about whether non-compliance with the types of compliance requirements referred to above that
could have a direct and material effect on a major federal program occurred. An audit includes
examining, on a test basis, evidence about the Hospital’s compliance with those requirements,
and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a
legal determination of the Hospital’s compliance with those requirements.
In our opinion, the Hospital complied, in all material respects, with the requirements referred to
above that are applicable to each of its major federal programs for the year ended September 30,
2008. However, the results of our auditing procedures disclosed instances of non-compliance
with those requirements, which are required to be reported in accordance with OMB Circular A-
133, and which are described in the accompanying schedule of findings and questioned costs as
items 2008-1 and 2008-2.
Internal Control Over Compliance
The management of the Hospital is responsible for establishing and maintaining effective
internal control over compliance with requirements of laws, regulations, contracts, and grants
applicable to federal programs. In planning and performing our audit, we considered the
Hospital’s internal control over compliance with requirements that could have a direct and


                                                                                                                  33
                                                                          A member firm of Ernst & Young Global Limited
material effect on a major federal program in order to determine our auditing procedures for the
purpose of expressing our opinion on compliance, but not for the purpose of expressing an
opinion on the effectiveness of internal control over compliance. Accordingly, we do not express
an opinion on the effectiveness of the Hospital’s internal control over compliance.

A control deficiency in an entity’s internal control over compliance exists when the design or
operation of a control does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect non-compliance with a type of
compliance requirement of a federal program on a timely basis. A significant deficiency is a
control deficiency, or combination of control deficiencies, that adversely affects the entity’s
ability to administer a federal program such that there is more than a remote likelihood that non-
compliance with a type of compliance requirement of a federal program that is more than
inconsequential will not be prevented or detected by the entity’s internal control.

A material weakness is a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that material non-compliance with a type of compliance
requirement of a federal program will not be prevented or detected by the entity’s internal
control.

Our consideration of internal control over compliance was for the limited purpose described in
the first paragraph of this section, and would not necessarily identify all deficiencies in internal
control that might be significant deficiencies or material weaknesses. We did not identify any
deficiencies in internal control over compliance that we consider to be material weaknesses, as
defined above.

The Hospital’s responses to the findings identified in our audit are described in the
accompanying schedule of findings and questioned costs. We did not audit the Hospital’s
responses and, accordingly, we express no opinion on them.

This report is intended solely for the information and the use of the Board of Trustees, Audit
Committee, management, federal awarding agencies, and pass-through entities, and is not
intended to be, and should not be, used by anyone other than those specified parties.




December 12, 2008




                                                                                                                   34
                                                                           A member firm of Ernst & Young Global Limited
                                                                       Children's Hospital

                                                      Schedule of Expenditures of Federal Awards

                                                         For the Year Ended September 30, 2008

     Federal Grantor/Pass-through                                                                      Federal CFDA     Federal
     Grantor/Program Title                                                                                Number      Expenditures

MAJOR PROGRAM:

RESEARCH AND DEVELOPMENT

Direct Programs:
Department of Health and Human Services/Public Health Service:
    Innovations in Applied Public Health Research                                                         93.061          $ 681,824
    Centers for Genomics and Public Health                                                                93.063             218,188
    Food and Drug Administration Research                                                                 93.103             385,810
    Maternal and Child Health Fed'l Consolidated Programs                                                 93.110           1,046,924
    Environmental Health                                                                                  93.113              49,639
    Oral Diseases and Disorders Research                                                                  93.121             706,856
    Human Genome Research                                                                                 93.172             699,810
    Research Related to Deafness and Communication Disorders                                              93.173             521,901
    National Research Service Award In Primary Care Medicine                                              93.186             465,240
    Research and Training in Complementary and Alternative Medicine                                       93.213                (284)
    National Research Service Awards Health Services Research Training                                    93.225             425,324
    Research on Healthcare Costs, Quality and Outcomes                                                    93.226              (8,613)
    National Center on Sleep Disorders Research                                                           93.233              95,552
    Mental Health Research Grants                                                                         93.242           2,049,982
    Substance Abuse and Mental Health Services-Projects of Regional and National Significance             93.243             569,347
     Poison Control Stabilization and Enhancement Grants                                                  93.253             403,147
    Alcohol Research Career Development Awards for Scientists and Clinicians                              93.271             127,713
    Alcohol Research Programs                                                                             93.273             327,655
    Drug Abuse and Addiction Research Programs                                                            93.279           1,847,051
    Mental Health Research Career/Scientist Dev. Awards                                                   93.281              97,048
    Centers for Disease Control and Prevention Investigations
      and Technical Assistance                                                                            93.283             563,143
    Discovery and Applied Research for Technological Innovations to Improve Human Health                  93.286             543,442
    Minority Health and Health Disparities Research                                                       93.307              34,594
    Trans-NIH Research Support                                                                            93.310           1,478,178
    General Clinical Research Centers                                                                     93.333              (2,657)
    National Center for Research Resources                                                                93.389           1,828,558
    Academic Research Enhancement Award                                                                   93.390             564,147
    Cancer Cause and Prevention Research                                                                  93.393             489,684
    Cancer Detection and Diagnosis Research                                                               93.394             394,151
    Cancer Treatment Research                                                                             93.395           1,482,601
    Cancer Biology Research                                                                               93.396           4,781,940
    Cancer Research Manpower                                                                              93.398             449,219
    Head Start                                                                                            93.600             889,677
    University Centers for Excellence in Developmental Disabilities Education, Research, and Service      93.632             465,389
    Cell Biology and Biophysics Research                                                                  93.821              27,318
    Heart and Vascular Diseases Research                                                                  93.837           9,143,389
    Lung Diseases Research                                                                                93.838           3,031,077
    Blood Diseases and Resources Research                                                                 93.839           7,912,891
    Arthritis, Musculoskeletal and Skin Diseases Research                                                 93.846           1,635,166
    Diabetes, Digestive, and Kidney Diseases Extramural Research                                          93.847           2,373,496
    Digestive Diseases and Nutrition Research                                                             93.848           5,132,132
    Kidney Diseases, Urology and Hematology Research                                                      93.849           6,314,630
    Extramural Research Programs in the Neurosciences and Neurological Disorders                          93.853          10,982,716
    Biological Basis Research in the Neurosciences                                                        93.854              46,082
    Allergy, Immunology and Transplantation Research                                                      93.855          10,418,787
    Microbiology and Infectious Diseases Research                                                         93.856           1,223,119
    Biomedical Research and Research Training                                                             93.859           1,718,222
    Population Research                                                                                   93.864             248,068
    Research for Mothers and Children                                                                     93.865           8,045,020
    Aging Research                                                                                        93.866             (60,900)
    Vision Research                                                                                       93.867           4,555,089
    Medical Library Assistance                                                                            93.879           1,271,298
    Grants for Training in Primary Care Medicine and Dentistry                                            93.884             191,831
    International Research and Research Training                                                          93.989             116,412




                                                                                                                                        35
                                                                     Children's Hospital

                                              Schedule of Expenditures of Federal Awards (continued)


     Federal Grantor/Pass-through                                                           Federal CFDA     Federal
     Grantor/Program Title                                                                     Number      Expenditures

Direct Programs (continued):

     Adolescent Family Life - Demonstration Projects                                           93.995          $ 412,844
     DHHS/NIH Contracts                                                                         N/A             1,969,986
       Total Department of Health and Human Services                                                                         $101,380,853

Department of the Army:
    Military Medical Research and Development                                                  12.420           2,846,834
    Basic Scientific Research                                                                  12.431                  58
    Department of the Army                                                                    Contracts           204,613
      Total Department of the Army                                                                                              3,051,505

Department of Education:
    National Institute on Disability & Rehabilitation Research                                 84.133           1,168,287
    Research in Special Education                                                              84.324              52,469
       Total Department of Education                                                                                            1,220,756

National Aeronautics and Space Administration                                                 Contracts                            12,663

Office of Naval Research:
     Basic and Applied Scientific Research                                                     12.300                             (15,386)

U.S. Air Force:
     Air Force Defense Research Sciences Program                                               12.800                             171,409

                                             Total Direct Programs                                                            105,821,800

Pass-through Programs (by Prime Recipient):

Baylor College of Medicine:
    Research Infrastructure                                                                    93.389                              79,057

Beth Israel Deaconess Medical Center Inc.:
     National Center on Sleep Disorders Research                                               93.233             160,912
     Discovery and Applied Research for Technological Innovations to Improve Human Health      93.286             271,461
     Blood Diseases and Resources Research                                                     93.839              84,351
     Diabetes, Digestive, and Kidney Diseases Extramural Research                              93.847             149,362
     Digestive Diseases and Nutrition Research                                                 93.848              (7,402)
     Extramural Research Programs in the Neurosciences and Neurological Disorders              93.853             (14,250)
     Microbiology and Infectious Diseases Research                                             93.856             171,791
        Total Beth Israel Deaconess Medical Center Inc.                                                                          816,225

Boston Medical Center/BCH Healthy Start Initiative:
     Drug Abuse and Addiction Research Programs                                                93.279              (7,859)
     Blood Diseases and Resources Research                                                     93.839             251,070
     Healthy Start Initiative                                                                  93.926             107,343
        Total Boston Medical Center/BCH Healthy Start Initiative                                                                 350,554

Boston University/BU Medical:
     Oral Diseases and Disorders Research                                                      93.121              40,343
     Human Genome Research                                                                     93.172              44,396
     Mental Health Research Grants                                                             93.242              28,966
     Heart and Vascular Diseases Research                                                      93.837              92,519
                                                                                              Contracts            90,486
        Total Boston University/BU Medical Center                                                                                296,710




                                                                                                                                             36
                                                                       Children's Hospital

                                              Schedule of Expenditures of Federal Awards (continued)


     Federal Grantor/Pass-through                                                            Federal CFDA     Federal
     Grantor/Program Title                                                                      Number      Expenditures

Pass-through Programs (by Prime Recipient) (continued):

Brigham & Women's Hospital:
     Environmental Health                                                                       93.113           $ 75,376
     Biometry and Risk Estimation-Health Risks from Environmental Exposures                     93.115            136,422
     Oral Diseases and Disorders Research                                                       93.121             20,223
     Human Genome Research                                                                      93.172             12,111
     Drug Abuse and Addiction Research Programs                                                 93.279             80,223
     Cancer Treatment Research                                                                  93.395            (23,375)
     Cancer Centers Support                                                                     93.397             (1,529)
     Heart and Vascular Diseases Research                                                       93.837              5,063
     Lung Diseases Research                                                                     93.838            190,661
     Blood Disease and Resources Research                                                       93.839             78,162
     Arthritis, Musculoskeletal and Skin Diseases Research                                      93.846              1,805
     Digestive Diseases and Nutrition Research                                                  93.848             73,986
     Kidney Diseases, Urology and Hematology Research                                           93.849            248,514
     Allergy, Immunology and Transplantation Research                                           93.855            204,866
     Child Health and Human Development Extramural Research                                     93.865            166,271
     Medical Library Assistance                                                                 93.879            126,257
        Total Brigham & Women's Hospital                                                                                      $1,395,036

CAS Medical Systems, Inc.:
    Extramural Research Programs in the Neurosciences and Neurological Disorders                93.853                           27,422

Case Western Reserve University:
     Heart and Vascular Diseases Research                                                       93.837                           (12,480)

Center for Integration of Medicine and Innovative Technology:
    Military Medical Research and Development                                                   12.420             214,473
                                                                                               Contracts           516,664
        Total Center for Integration of Medicine and Innovative Technology                                                      731,137

Children's Hospital - Philadelphia:
     Centers for Disease Control and Prevention Investigations
      and Technical Assistance                                                                  93.283              (3,399)
     Lung Diseases Research                                                                     93.838                 782
     Arthritis, Musculoskeletal and Skin Diseases Research                                      93.846                (783)
        Total Children's Hospital - Philadelphia                                                                                  (3,400)

Children's Hospital - Pittsburgh:
     Digestive Diseases and Nutrition Research                                                  93.848                 466
     Allergy, Immunology and Transplantation Research                                           93.855              17,402
        Total Children's Hospital - Pittsburgh                                                                                   17,868

Children's Hospital & Reg. Medical Center - Seattle:
     Arthritis, Musculoskeletal and Skin Diseases Research                                      93.846                             5,490

Children's Memorial Hospital:
     Child Health and Human Development Extramural Research                                     93.865                             4,589

Children's Mercy Hospital:
     Kidney Diseases, Urology and Hematology Research                                           93.849                           70,083

Children's Research Institute:
     Emergency Medical Services for Children                                                    93.127              61,210
     Heart and Vascular Diseases Research                                                       93.837              56,354
     Child Health and Human Development Extramural Research                                     93.865             128,306
        Total Children's Research Institute                                                                                     245,870

Clemson University:
    Extramural Research Programs in the Neurosciences and Neurological Disorders                93.853                               (41)

Coda, Inc.
                                                                                               Contracts                          (5,103)




                                                                                                                                            37
                                                                     Children's Hospital

                                             Schedule of Expenditures of Federal Awards (continued)


    Federal Grantor/Pass-through                                                           Federal CFDA     Federal
    Grantor/Program Title                                                                     Number      Expenditures

Pass-through Programs (by Prime Recipient) (continued):

Dana-Farber Cancer Institute:
    Cancer Treatment Research                                                                 93.395           $506,001
    Cancer Biology Research                                                                   93.396             (6,691)
    Cancer Centers Support Grants                                                             93.397            249,279
    Cancer Research Manpower                                                                  93.398             11,262
    Heart and Vascular Diseases Research                                                      93.837             80,900
    Extramural Research Programs in the Neurosciences and Neurological Disorders              93.853             72,716
    Allergy, Immunology and Transplantation Research                                          93.855             52,587
    Microbiology and Infectious Diseases Research                                             93.856             (1,195)
    Child Health and Human Development Extramural Research                                    93.865            543,554
                                                                                             Contracts          281,267
       Total Dana-Farber Cancer Institute                                                                                   $1,789,680

Dimock Community Health Center:
    Coordinated Services and Access to Research for Women, Infants, Children, and Youth       93.153                           87,552

Duke University:
    Allergy, Immunology and Transplantation Research                                          93.855             493,834
    Microbiology and Infectious Diseases Research                                             93.856             (10,595)
       Total Duke University                                                                                                  483,239

Educational Development Center, Inc:
    Nursing Research                                                                          93.361                 (39)
    Lung Diseases Research                                                                    93.838               8,918
        Total Educational Development Center, Inc                                                                                8,879

Emory University:
    Military Medical Research and Development                                                 12.420              (3,004)
    Vision Research                                                                           93.867              35,351
       Total Emory University                                                                                                  32,347

Ension, Inc.:
     Heart and Vascular Diseases Research                                                     93.837                           30,310

Harvard Medical School:
    National Center for Research Resources                                                    93.389             607,692
    Cancer Detection and Diagnosis Research                                                   93.394                 579
    Heart and Vascular Diseases Research                                                      93.837              11,408
    Blood Diseases and Resources Research                                                     93.839               3,248
    Extramural Research Programs in the Neurosciences and Neurological Disorders              93.853              19,117
    Allergy, Immunology and Transplantation Research                                          93.855             219,664
    Aging Research                                                                            93.866              23,725
       Total Harvard Medical School                                                                                           885,433

Harvard Pilgrim Health Care:
    Innovations in Applied Public Health Research                                             93.061             733,713
    Environmental Health                                                                      93.113              23,938
    Allergy, Immunology and Transplantation Research                                          93.855              14,868
       Total Harvard Pilgrim Health Care                                                                                      772,519

Harvard School of Dental Medicine:
    Arthritis, Musculoskeletal & Skin Diseases Research                                       93.846                          166,191

Harvard School of Public Health:
    Environmental Health                                                                      93.113             107,238
    Mental Health National Research Service Awards for Research Training                      93.282              22,539
    Cancer Biology Research                                                                   93.396              84,463
    Lung Diseases Research                                                                    93.838              82,506
    Arthritis, Musculoskeletal & Skin Diseases Research                                       93.846                  59
    Child Health and Human Development Extramural Research                                    93.865             718,480
       Total Harvard School of Public Health                                                                                 1,015,285




                                                                                                                                         38
                                                                     Children's Hospital

                                              Schedule of Expenditures of Federal Awards (continued)

     Federal Grantor/Pass-through                                                          Federal CFDA     Federal
     Grantor/Program Title                                                                    Number      Expenditures

Pass-through Programs (by Prime Recipient) (continued):

Harvard University:
    Mathematical and Physical Sciences                                                        47.049           $ (16,454)
    Computer and Information Science and Engineering                                          47.070              55,416
    Environmental Health                                                                      93.113            277,526
                                                                                             Contracts          134,182
        Total Harvard University                                                                                            $450,670

Hospital for Sick Children:
    Child Health and Human Development Extramural Research                                    93.865                          48,259

Immune Disease Institute:
   Blood Diseases and Resources Research                                                      93.839                         503,993

Immunodeficiency Research Consortium Inc.                                                    Contracts                        (3,435)

Indiana University:
     Extramural Research Programs in the Neurosciences and Neurological Disorders             93.853              57,595
     Medical Library Assistance                                                               93.879               2,100
                                                                                             Contracts           256,665
        Total Indiana University                                                                                             316,360

Infoscitex:
     Military Medical Research and Development                                                12.420              39,375
     National Center for Research Resources                                                   93.389             (32,999)
     Child Health and Human Development Extramural Research                                   93.865             127,246
         Total Infoscitex                                                                                                    133,622

Jaeb Center for Health Research:
     Vision Research                                                                          93.867                               5

Jcraig Venter Institute                                                                      Contracts                         1,966

Johns Hopkins University/School of Medicine:
     Mental Health Research Grants                                                            93.242               6,591
     Digestive Diseases and Nutrition Research                                                93.848              26,666
     Kidney Diseases, Urology and Hematology Research                                         93.849               6,426
     Allergy, Immunology and Transplantation Research                                         93.855              21,809
        Total Johns Hopkins University/School of Medicine                                                                     61,492

Joslin Diabetes Center:
      Diabetes, Digestive, and Kidney Diseases Extramural Research                            93.847                          33,599

Judge Baker Children's Center:
    Mental Health Research Grants                                                             93.242                             42

Louisiana State University/Health Sciences Center:
     Research on Healthcare Costs, Quality and Outcomes                                       93.226                         (25,274)

Magnascensors, Inc.:
    Allergy, Immunology and Transplantation Research                                          93.855                         126,472

Massachusetts General Hospital:
    Food and Drug Administration Research                                                     93.103               3,000
    Heart and Vascular Diseases Research                                                      93.837              22,263
    Digestive Diseases and Nutrition Research                                                 93.848              (8,947)
    Extramural Research Programs in the Neurosciences and Neurological Disorders              93.853              63,905
    Allergy, Immunology and Transplantation Research                                          93.855              69,201
    Child Health and Human Development Extramural Research                                    93.865             269,639
                                                                                             Contracts           (10,763)
       Total Massachusetts General Hospital                                                                                  408,298




                                                                                                                                        39
                                                                   Children's Hospital

                                              Schedule of Expenditures of Federal Awards (continued)


     Federal Grantor/Pass-through                                                         Federal CFDA     Federal
     Grantor/Program Title                                                                   Number      Expenditures

Pass-through Programs (by Prime Recipient) (continued):

Massachusetts Institute of Technology:
    Engineering Grants                                                                       47.041           $ (1,978)
    Cancer Control                                                                           93.399            144,553
      Total Massachusetts Institute of Technology                                                                          $142,575

Michigan State University:
    Microbiology and Infectious Diseases Research                                            93.856                          69,389

Mt. Sinai School of Medicine:
     Allergy, Immunology and Transplantation Research                                        93.855                          40,394

National Childhood Cancer Foundation:
     Cancer Treatment Research                                                               93.395                          66,750

National Jewish Medical and Research Center                                                 Contracts                       227,735

New England Genetics and Newborn Screening:
    Maternal and Child Health Fed'l Consolidated Programs                                    93.110                         (20,102)

New England Research Institutes, Inc.:
    Oral Disease and Disorders Research                                                      93.121              (2,487)
    Heart and Vascular Diseases Research                                                     93.837             745,547
    Blood Diseases and Resources Research                                                    93.839             131,925
      Total New England Research Institutes, Inc.                                                                           874,985

PPD Development, LP                                                                         Contracts                        12,779

Rand Corporation:
    Minority Health and Health Disparities Research                                          93.307                         135,478

Research Foundation of State University of New York:
    Kidney Diseases, Urology and Hematology Research                                         93.849              42,979
                                                                                            Contracts               162
       Total Research Foundation of State University of New York                                                             43,141

Rho Federal Systems Division, Inc.:
    Blood Diseases and Resources Research                                                    93.839                         112,470

Social Scientific Systems, Inc.:
     Mental Health Research Grants                                                           93.242                          18,848

St. Elizabeth's Hospital                                                                    Contracts                        20,329

St. Judes Children's Research Hospital:
      Cancer Treatment Research                                                              93.395             243,726
      Blood Diseases and Resources Research                                                  93.839             (30,100)
                                                                                                                            213,626
The Regents of the Univ. of California:
    Injury Prevention and Control Research and State and Community Based Programs            93.136                           1,019

The Schepens Eye Research Institute:
     National Center for Research Resources                                                  93.389                          32,943

TKC Integration Services                                                                    Contracts                         5,121

Tufts University:
     Oral Diseases and Disorders Research                                                    93.121                          72,276

University of Alabama:
    Military Medical Research and Development                                                12.420                         116,784

University of California:
    Oral Diseases and Disorders Research                                                     93.121                          24,349




                                                                                                                                       40
                                                                    Children's Hospital

                                              Schedule of Expenditures of Federal Awards (continued)


     Federal Grantor/Pass-through                                                         Federal CFDA     Federal
     Grantor/Program Title                                                                   Number      Expenditures

Pass-through Programs (by Prime Recipient) (continued):

University of California, San Diego:
    Heart and Vascular Diseases Research                                                     93.837                        $       99

University of California, San Francisco:
    Extramural Research Programs in the Neurosciences and Neurological Disorders             93.853                             16,081

University of California, Los Angeles:
    Centers for Disease Control and Prevention Investigations
     and Technical Assistance                                                                93.283             $ 1,333
    Allergy, Immunology and Transplantation Research                                         93.855             154,090
       Total Univ. of California, Los Angeles                                                                                  155,423

University of Iowa:
    Arthritis, Musculoskeletal and Skin Diseases Research                                    93.846               7,852
                                                                                            Contracts           430,674
       Total University of Iowa                                                                                                438,526

University of Illinois at Chicago:
    Maternal and Child Health Fed'l Consolidated Programs                                    93.110                               110

University of Kentucky Research Foundation
    Allergy, Immunology and Transplantation Research                                         93.855                            197,289

University of Massachusetts Medical Center:
    AIDS Activity                                                                            93.118                             (7,783)

University of Massachusetts Worcester/Amherst/Boston:
    Minority Health and Health Disparities Research                                          93.307              15,027
    Centers for Disease Control and Prevention Investigations
     and Technical Assistance                                                                93.283                (761)
    AIDS Education and Training Centers                                                      93.145              22,309
    Cancer Biology Research                                                                  93.396              53,523
    Allergy, Immunology and Transplantation Research                                         93.855              22,831
    Microbiology and Infectious Diseases Research                                            93.856              73,374
    Child Health and Human Development Extramural Research                                   93.865               9,830
       Total University of Massachusetts Worcester/Amherst/Boston                                                              196,133

University of Miami:
    Heart and Vascular Diseases Research                                                     93.837                            165,652

University of Michigan:
    Environmental Health                                                                     93.113                            153,891

University of Minnesota:
    Human Genome Research                                                                    93.172                (433)
    Allergy, Immunology and Transplantation Research                                         93.855              67,980
    Child Health and Human Development Extramural Research                                   93.865              13,419
        Total University of Minnesota                                                                                           80,966

University of New Hampshire:
    Maternal and Child Health Fed'l Consolidated Programs                                    93.110                             65,510

University of Pennsylvania:
    Allergy, Immunology and Transplantation Research                                         93.855                             96,927

University of Pittsburgh:
    Mental Health Research Grants                                                            93.242             103,385
    Cancer Biology Research                                                                  93.396              15,416
    Heart and Vascular Diseases Research                                                     93.837             608,014
                                                                                            Contracts            28,352
       Total University of Pittsburgh                                                                                          755,167

University of Texas Health Science Center:
    Vision Research                                                                          93.867                             26,759




                                                                                                                                          41
                                                                          Children's Hospital

                                               Schedule of Expenditures of Federal Awards (continued)


     Federal Grantor/Pass-through                                                                         Federal CFDA     Federal
     Grantor/Program Title                                                                                   Number      Expenditures

Pass-through Programs (by Prime Recipient) (continued):

University of Texas Southwestern Medical Center:
    Emergency Medical Services for Children                                                                  93.127                        $       4,734

University of Wisconsin, Madison:
    Kidney Diseases, Urology and Hematology Research                                                         93.849                               24,003

US Immunodeficiency Network                                                                                 Contracts                             91,287

Vanderbilt University:
    Arthritis, Musculoskeletal and Skin Diseases Research                                                    93.846                                 2,163

Washington University:
    Lung Diseases Research                                                                                   93.838                               26,392

Wayne State University:
   Biometry and Risk Estimation-Health Risks from Environmental Exposures                                    93.115             $17,147
   Kidney Diseases, Urology and Hematology Research                                                          93.849              51,915
      Total Wayne State University                                                                                                                69,062

Westat, Inc:
                                                                                                            Contracts                            312,133

Wildlife Conservation Society:
                                                                                                            Contracts                               7,691
Yale University:
     Child Health and Human Development Extramural Research                                                  93.865                              159,298

                                                                           Total Pass Through Programs:                                        16,594,923

     Total Federal Research and Development
       Expenditures                                                                                                                        122,416,723

OTHER PROGRAMS:
Pass-through Programs (by Prime Recipient):

Action for Boston Community Development:
     Family Planning Services                                                                                93.217              43,235
     Head Start                                                                                              93.600              64,084
       Total Action for Boston Community Development                                                                                             107,319

Boston Public Health Commission:
     Rehabilitation Services/Vocational Rehabilitation Grants to States                                      84.126              23,059
     HIV Emergency Relief Formula Grants                                                                     93.915             134,302
       Total Boston Public Health Commission:                                                                                                    157,361

Commonwealth of Massachusetts, Dept. of Public Health:
   Acquired Immunodeficiency Syndrome (AIDS) Activity                                                        93.118             146,581
   Coordinated Services and Access to Research for Women, Infants, Children, and Youth                       93.153              26,293
   National Bioterrorism Hospital Preparedness Program                                                       93.889              91,232
   Maternal and Child Health Services Block Grant to States                                                  93.994             117,086
     Total Commonwealth of Massachusetts Dept. of Public Health                                                                                  381,192

Commonwealth of Massachusetts, Dept. of Social Services:
   Children's Justice Grants to States                                                                       93.643              39,888
   Child Abuse and Neglect State Grants                                                                      93.669             (10,547)
     Total Commonwealth of Massachusetts Dept. of Social Services                                                                                 29,341

Commonwealth of Massachusetts, Developmental Disability Council:
   Developmental Disabilities Basic Support and Advocacy Grants                                              93.630                                   (28)

Commonwealth of Massachusetts, Poison Control:
   Maternal and Child Health Services Block Grant to States                                                  93.994                             1,096,921

Commonwealth of Massachusetts, Office for Victim Assistance:
   Crime Victim Assistance                                                                                   16.575                              167,126




                                                                                                                                                             42
                                                                        Children's Hospital

                                              Schedule of Expenditures of Federal Awards (continued)


     Federal Grantor/Pass-through                                                             Federal CFDA     Federal
     Grantor/Program Title                                                                       Number      Expenditures

Other Programs (continued):

Commonwealth of Massachusetts, Rehabilitation Commission:
   Rehabilitation Services/Vocational Rehabilitation Grants to States                            84.126                     $     71,954

Rhode Island Department of Health:
    Medical Assistance Program                                                                   93.778                          224,562

     Total Other Program Expenditures                                                                                           2,235,748

TOTAL FEDERAL EXPENDITURES                                                                                                  $124,652,471




                                                                                                                                            43
                                   Children’s Hospital

               Notes to Schedule of Expenditures of Federal Awards

                              Year Ended September 30, 2008


1. Basis of Accounting

The schedule of expenditures of federal awards for the year ended September 30, 2008 is
prepared on the accrual basis of accounting. Consequently, expenditures are recognized
when the obligation is incurred.

2. Categorization of Expenditures

The categorization of expenditures by program included in the schedule of expenditures of
federal awards is based upon the grant documents. Changes in the categorization of
expenditures occur based upon revisions to the Catalog of Federal Domestic Assistance
(CFDA), which are issued in June and December of each year. The schedule of expenditures
of federal awards for the year ended September 30, 2008 reflects CFDA changes issued
through December 2008.

3. Subrecipients

Certain funds are passed through to subgrantee organizations by the Hospital. Of the federal
expenditures presented in the schedule, the Hospital provided $14,360,904 of federal awards
to subrecipients in the Research and Development Program as follows:

Baylor College of Medicine                                                $     167,396
Benaroya Research Institute at Virginia Mason                                     4,421
Beth Israel Deaconess Medical Center                                            779,719
Boston Medical Center                                                           351,677
Boston Public Health Commission                                                  13,116
Boston University                                                               493,817
Brigham & Women’s Hospital                                                    2,121,717
Cambridge Health Alliance                                                        45,851
Capital Region Family Health Center                                              47,080
CBR Institute for Biomedical Research/Immune Disease                            299,275
Cepros, O.P.S.                                                                  188,064
Children’s Healthcare of Atlanta                                                 18,421
Children’s Hospital of Philadelphia                                              96,677
Children’s Hospital and Regional Medical Center                                  30,302
Cincinnati Children’s Hospital Medical Center                                   120,176
Clemson University                                                               80,079
Creighton University                                                             54,871
Dana-Farber Cancer Institute                                                  1,065,621




                                                                                          44
                                     Children’s Hospital

        Notes to Schedule of Expenditures of Federal Awards (continued)


3. Subrecipients (continued)

Dartmouth College                                              $   960,230
East Carolina University                                               922
Emory University                                                     4,450
Fallon Clinic Inc.                                                  57,237
Families First Parenting Program                                    15,000
Harvard Medical School                                             795,873
Harvard School of Public Health                                    257,317
Harvard University                                                 759,788
Institute for Genomic Research                                      10,589
Joslin Diabetes Center                                              46,571
LaJolla Institute for Allergy & Immunology                           4,108
Loyola University of Chicago                                        49,296
Massachusetts General Hospital                                      81,271
Massachusetts Institute of Technology                              784,847
Mayo Clinic                                                         65,895
Michigan State University                                            5,015
National Jewish Medical and Research Center                        265,377
New York University                                                 12,515
Newton Wellesley Hospital                                            3,575
Pacer Center                                                        22,623
Philips Medical Systems                                            103,004
Rand Corporation                                                    62,103
Regents of University of California                                 50,162
Research Foundation                                                 27,073
Royal Victorian Eye and Ear Hospital                                 5,000
Southwest Foundation for Biomedical Research                         5,695
State University of New York                                        28,569
SUNY Upstate Medical University                                     14,405
The Charles Stark Draper Lab                                       141,187
The Jackson Laboratory                                             404,925
The Regents of the University of Minnesota                         392,127
Third Sector New England                                            60,447
Tufts New England Medical Center                                    21,211
Tufts University                                                    29,617
University Health Network                                           81,000
University of California                                            19,434
University of California Los Angeles                                 9,165
University of California Regents – San Francisco                   142,944
University of Chicago                                               83,402
University of Florida                                               11,627




                                                                             45
                                    Children’s Hospital

        Notes to Schedule of Expenditures of Federal Awards (continued)


3. Subrecipients (continued)


University of Iowa                                             $     6,989
University of Maryland                                               2,992
University of Massachusetts                                        858,008
University of Massachusetts Medical School                           2,248
University of Michigan                                               1,466
University of North Carolina Chapel Hill                             5,490
University of Southern California                                    5,089
University of Vermont                                              104,634
University of Washington                                           485,747
University of Western Australia                                     25,963
University of Wisconsin                                             18,224
Wake Forest University                                             125,731
Whitehead Institute                                                538,194
William Beaumont Hospital                                            6,823
Yale University                                                    299,430
Grand Total                                                    $14,360,904




                                                                             46
                                    Children’s Hospital

                      Schedule of Findings and Questioned Costs

                               Year Ended September 30, 2008



Part I – Summary of Auditors’ Results


Financial Statement Section

Type of auditor’s report issued:                                     Unqualified

Internal control over financial reporting:

     Material weakness(es) identified?                         Yes      X     No

     Significant deficiency(ies) identified that are
     not considered to be material weaknesses?                 Yes      X     None Reported

Non-compliance material to financial statements
noted?                                                         Yes      X     No


Federal Awards Section

Internal control over major programs:

     Material weakness(es) identified?                         Yes      X     No

     Significant deficiency(ies) identified that are
     not considered to be material weakness(es)?               Yes      X     None Reported

Type of auditor’s report issued on compliance for
major programs:                                                      Unqualified

Any audit findings disclosed that are required
to be reported in accordance with Section .510(a)
of OMB Circular A-133?                                    X     Yes           No




                                                                                         47
                                    Children’s Hospital

              Schedule of Findings and Questioned Costs (continued)


Part I – Summary of Auditors’ Results (continued)

Federal Awards Section (continued)


Identification of major programs:

           CFDA Number(s)                 Name of Federal Program or Cluster

           Various                        Research and Development


Dollar threshold used to distinguish between
Type A and Type B programs:                                        $3,000,000


Auditee qualified as low-risk auditee?                      X     Yes           No




Part II – Schedule of Financial Statement Findings

There were no significant deficiencies, material weaknesses, or instances of non-compliance
related to the financial statements.




                                                                                         48
                                   Children’s Hospital

               Schedule of Findings and Questioned Costs (continued)


Part III – Schedule of Federal Award Findings and Questioned Costs

            Finding 2008-01                                 Allowable Costs

CFDA No. 93.225                        National Research Service Awards – Health Services
                                          Research Training
CFDA No. 93.283                        Center for Disease Control and Prevention Investigations
                                         and Technical Assistance
CFDA No. 93.839                        Blood Diseases and Resources Research
CFDA No. 93.847                        Diabetes, Digestive, and Kidney Diseases Extramural
                                          Research
CFDA No. 93.849                        Kidney Diseases, Urology, and Hematology Research
CFDA No. 93.855                        Allergy, Immunology, and Transplantation Research
CFDA No. 93.865                        Child Health and Human Development Extramural
                                         Research

Criteria or Specific Requirement        Department of Health and Human Services Appendix E
                                        of Title 45 Code of Federal Regulations, Part 74 Section
                                        IX A Paragraph 7c states, “Charges for salaries and
                                        wages of individuals other than members of the
                                        professional staff will be supported by daily time and
                                        attendance and payroll distribution records. For
                                        members of the professional staff, current and
                                        reasonable estimates of the percentage distribution of
                                        their total effort may be used as support in the absence
                                        of actual time records. In order to qualify as current and
                                        reasonable, estimates must be made no later than one
                                        month after the month in which the services were
                                        performed.”

Condition                               Of 77 effort reports tested, 6 were not signed and dated
                                        within one month of the actual activity. However, all
                                        effort reports selected for testing were ultimately
                                        signed.

Questioned Costs                        None. All the time and effort reports were ultimately
                                        signed.




                                                                                               49
                                     Children’s Hospital

              Schedule of Findings and Questioned Costs (continued)


Part III – Schedule of Federal Award Findings and Questioned Costs (continued)


            Finding 2008-01                                   Allowable Costs


Cause                                     During the period under audit, internal monitoring of
                                          the timeliness and completion of effort reporting
                                          improved significantly from the prior year. However,
                                          there remains an opportunity to further improve
                                          compliance.

Effect                                    Untimely effort reporting increases the likelihood of
                                          inaccuracies in reporting actual effort.

Recommendation                           We recommend the Hospital continue to focus on
                                         monitoring of effort reporting compliance and reinforce
                                         the need to submit all required time and effort reports
                                         timely.

Views of Responsible Officials and       During 2008, the significant drop in untimely submission
Planned Corrective Actions               of effort certifications forms is a direct result of the new
                                         compliance coordinator’s efforts to train department staff
                                         and continually monitor the process. We will continue
                                         to focus on this area, and are in the process of
                                         developing additional training for PIs and administrators
                                         on the principles of effort reporting.




                                                                                                  50
                                   Children’s Hospital

               Schedule of Findings and Questioned Costs (continued)


Part III – Schedule of Federal Award Findings and Questioned Costs

             Finding 2008-02                                  Allowable Costs

CFDA No. 93.853                          Extramural Research Programs in the Neurosciences and
                                         Neurological Disorders

Criteria or Specific Requirement         Department of Health and Human Services Appendix E of
                                         Title 45 Code of Federal Regulations, Part 74 Section IX
                                         A Paragraph 7d states, “estimates of effort spent by a
                                         member of the professional staff on each research
                                         agreement should be prepared by the individual who
                                         performed the services or by a responsible individual such
                                         as a department head or supervisor having first-hand
                                         knowledge of the services performed on each research
                                         agreement.”

Condition                                Of 77 effort reports tested, 1 was not signed by either the
                                         individual who performed the services, or by someone
                                         with first-hand knowledge of the actual effort spent on the
                                         grant.

Questioned Costs                         None. The individual who performed the services
                                         eventually signed the time and effort report after
                                         notification of non-compliance. In addition, we verified
                                         that the costs related to the time and effort report were
                                         appropriately allocated to the grant.

Cause                                    Management should reinforce the need for individuals
                                         with first-hand knowledge to sign effort reports.

Effect                                   Signing of time and effort reports by personnel who do not
                                         have first-hand knowledge of the effort performed
                                         increases the likelihood of inaccuracies in reporting actual
                                         effort.




                                                                                              51
                                    Children’s Hospital

              Schedule of Findings and Questioned Costs (continued)



Part III – Schedule of Federal Award Findings and Questioned Costs (continued)


            Finding 2008-02                                   Allowable Costs

Recommendation                               We recommend the Hospital continue to improve its
                                             monitoring of effort reporting to ensure that only those
                                             personnel with first-hand knowledge of the researcher’s
                                             effort are signing effort reports.

Views of Responsible Officials and Planned   We will continue to monitor for errors such as this one,
Corrective Actions                           and will strive to increase compliance from 99% to 100%.




                                                                                              52
                                Children’s Hospital

             Schedule of Findings and Questioned Costs (continued)


Part IV – Schedule of Prior Audit Findings


           Finding 2007-01                               Allowable Costs

CFDA No. 12.420                      Military Medical Research and Development
CFDA No. 47.070                      Computer and Information Science and Engineering
CFDA No. 93.103                      Food and Drug Administration Research
CFDA No. 93.115                      Biometry and Risk Estimation – Health Risks from
                                       Environmental Exposures
CFDA No. 93.226                      Research on Healthcare Costs, Quality, and Outcomes
CFDA No. 93.253                      Poison Control Stabilization and Enhancement Grants
CFDA No. 93.271                      Alcohol Research Career Development Awards for
                                       Scientists and Clinicians
CFDA No. 93.283                      Center for Disease Control and Prevention Investigations
                                       and Technical Assistance
CFDA No. 93.333                      General Clinical Research Centers
CFDA No. 93.395                      Cancer Treatment Research
CFDA No. 93.396                      Cancer Biology Research
CFDA No. 93.630                      Developmental Disabilities Basic Support and Advocacy
                                       Grants
CFDA No. 93.669                      Child Abuse and Neglect State Grants
CFDA No. 93.837                      Heart and Vascular Diseases Research
CFDA No. 93.838                      Lung Diseases Research
CFDA No. 93.839                      Blood Diseases and Resources Research
CFDA No. 93.848                      Digestive Diseases and Nutrition Research
CFDA No. 93.849                      Kidney Diseases, Urology, and Hematology Research
CFDA No. 93.853                      Extramural Research Programs in the Neurosciences and
                                       Neurological Disorders
CFDA No. 93.855                      Allergy, Immunology, and Transplantation Research
CFDA No. 93.856                      Microbiology and Infectious Diseases Research
CFDA No. 93.865                      Child Health and Human Development Extramural
                                       Research
CFDA No. 93.879                      Medical Library Assistance
Contract N01-AI-40029                National Jewish Medical and Research Center




                                                                                          53
                                   Children’s Hospital

               Schedule of Findings and Questioned Costs (continued)


Part IV – Schedule of Prior Audit Findings (continued)


            Finding 2007-01                                 Allowable Costs

Criteria or Specific Requirement        Department of Health and Human Services Appendix E
                                        of Title 45 Code of Federal Regulations, Part 74 Section
                                        IX A Paragraph 7c states, “Charges for salaries and
                                        wages of individuals other than members of the
                                        professional staff will be supported by daily time and
                                        attendance and payroll distribution records. For
                                        members of the professional staff, current and
                                        reasonable estimates of the percentage distribution of
                                        their total effort may be used as support in the absence
                                        of actual time records. In order to qualify as current and
                                        reasonable, estimates must be made no later than one
                                        month after the month in which the services were
                                        performed.”

Condition                               Of 72 effort reports tested, 43 were not signed and dated
                                        within one month of the actual activity. However, all
                                        effort reports selected for testing were ultimately
                                        signed. Additionally, 10 effort reports were signed, but
                                        were not dated.

Questioned Costs                        None. All the time and effort reports were ultimately
                                        signed.

Cause                                   During the period under audit, internal monitoring of
                                        the timeliness and completion of effort reporting was
                                        inadequate.

Effect                                  Untimely effort reporting increases the likelihood of
                                        inaccuracies in reporting actual effort.

Recommendation                         We recommend the Hospital improve its monitoring of
                                       effort reporting compliance and reinforce the need to
                                       submit all required time and effort reports timely.




                                                                                               54
                                     Children’s Hospital

              Schedule of Findings and Questioned Costs (continued)


Part IV – Schedule of Prior Audit Findings (continued)


            Finding 2007-01                                Allowable Costs

Views of Responsible Officials and       During 2007, a new effort reporting system was
Planned Corrective Actions               implemented at the Hospital. The system was rolled
                                         out in three phases (Phase I included CHB
                                         employees who are not key personnel on federal
                                         grants; Phase II included key personnel who are
                                         CHB employees; and Phase III was individuals
                                         employed by our Physician Foundations). The new
                                         system     provides     users  with    information
                                         documenting their committed effort on grants and
                                         effort allocated to teaching, patient care, and
                                         administration, if applicable.

                                         There is an administrative review process imbedded
                                         in the system that allows departmental grant
                                         administrators to verify the information received,
                                         and make corrections when appropriate. A date line
                                         has been added next to the signature, and the new
                                         policy includes restrictions on who is eligible to
                                         sign the certifications.

                                         The database that houses the system has built in
                                         reports to track metrics that enable the compliance
                                         team to assess compliance for return rate and
                                         timeliness of returns. Reports are generated monthly
                                         to determine if there are any outstanding effort
                                         certifications, and to determine patterns of late
                                         submissions. Lists of late or outstanding reports for
                                         Phase I and Phase II employees are sent to the
                                         department administrator. Lists of late or
                                         outstanding reports for Phase III employees are sent
                                         to the department administrator and the Dept/Div
                                         Chief.




                                                                                           55
                                   Children’s Hospital

               Schedule of Findings and Questioned Costs (continued)


Part IV – Schedule of Prior Audit Findings (continued)

             Finding 2007-02                                  Allowable Costs

CFDA No. 12.420                          Military Medical Research and Development
CFDA No. 93.839                          Blood Diseases and Resources Research
CFDA No. 93.856                          Microbiology and Infectious Diseases Research

Criteria or Specific Requirement         Department of Health and Human Services Appendix E of
                                         Title 45 Code of Federal Regulations, Part 74 Section IX
                                         A Paragraph 7d states, “estimates of effort spent by a
                                         member of the professional staff on each research
                                         agreement should be prepared by the individual who
                                         performed the services or by a responsible individual such
                                         as a department head or supervisor having first-hand
                                         knowledge of the services performed on each research
                                         agreement.”

Condition                                Of 72 effort reports tested, 3 were not signed by either the
                                         individual who performed the services, or by someone
                                         with first-hand knowledge of the actual effort spent on the
                                         grant.

Questioned Costs                         None. We verified that the costs related to the time and
                                         effort reports were appropriately allocated to the grants.

Cause                                    Management should reinforce the need for individuals
                                         with first-hand knowledge to sign effort reports.

Effect                                   Signing of time and effort reports by personnel who do not
                                         have first-hand knowledge of the effort performed
                                         increases the likelihood of inaccuracies in reporting actual
                                         effort.

Recommendation                           We recommend the Hospital improve its monitoring of
                                         effort reporting to ensure that only those personnel with
                                         first-hand knowledge of researcher’s effort are signing
                                         effort reports.




                                                                                              56
                                     Children’s Hospital

              Schedule of Findings and Questioned Costs (continued)


Part IV – Schedule of Prior Audit Findings (continued)


            Finding 2007-02                                 Allowable Costs

Views of Responsible Officials and       Further training on effort reporting occurring in Q1
Planned Corrective Actions               FY2008 emphasized the requirement of effort reports to
                                         be signed only by the employee or someone with first-
                                         hand knowledge (direct supervisor). Samples of reports
                                         are selected each month by the compliance team for
                                         review of appropriate signatures.




                                                                                            57

				
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