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Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Independent Auditor’s Report and Financial Statements

September 30, 2018 and 2017

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Years Ended September 30, 2018 and 2017

Contents

Independent Auditor’s Report ............................................................................................. 1

Management’s Discussion and Analysis ........................................................................... 3

Financial Statements

Statements of Net Position ............................................................................................................... 12

Statements of Revenues, Expenses and Changes in Net Position .................................................... 14

Statements of Cash Flows ................................................................................................................ 15

Retirement Income Plan – Statements of Fiduciary Net Position .................................................... 17

Retirement Income Plan – Statements of Changes in Fiduciary Net Position ................................. 18

Notes to Financial Statements .......................................................................................................... 19

Required Supplementary Information

Schedule of Changes in Net Pension Liability and Related Ratios .................................................. 49

Schedule of Employer Contributions ............................................................................................... 50

Independent Auditor’s Report

The Board of Managers Dallas County Hospital District d/b/a Parkland Health & Hospital System Dallas, Texas We have audited the accompanying financial statements of the business-type activities, the aggregate discretely presented component units and the aggregate remaining fiduciary fund information of Dallas County Hospital District d/b/a Parkland Health & Hospital System (District), collectively a component unit of Dallas County, Texas, as of and for the years ended September 30, 2018 and 2017, and the related notes to the financial statements, which collectively comprise the District’s basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audits. We did not audit the financial statements of Parkland Foundation (Foundation), a discretely presented component unit of the District. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Foundation, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 from material misstatement. The financial statements of Parkland Community Health Plan, Inc. (Health Plan), Parkland Center for Clinical Innovation (2017) and Foundation, discretely presented component units of the District, and Dallas County Hospital District Retirement Income Plan (Pension Plan), a fiduciary fund of the District, were not audited in accordance with Government Auditing Standards. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

The Board of Managers Dallas County Hospital District d/b/a Parkland Health & Hospital System Page 2

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities, the aggregate discretely presented component units and the aggregate remaining fiduciary fund information of the District as of September 30, 2018 and 2017, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and pension information listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We and the other auditors have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 20, 2018, on our consideration of the District’s internal control over financial reporting and 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 effectiveness of the District’s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District’s internal control over financial reporting and compliance.

Dallas, Texas December 20, 2018

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Management’s Discussion and Analysis

Years Ended September 30, 2018 and 2017 (In Thousands)

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Introduction Our discussion and analysis of Parkland Health & Hospital System’s (“Parkland”) financial performance (excluding affiliates) provides an overview of the financial activities for the fiscal years that ended on September 30, 2018 (“FY18”) and 2017 (“FY17”). Please use in conjunction with Parkland’s basic financial statements.

2018 Highlights

There were many significant accomplishments in 2018 that positively impacted patient care: Quality, Safety and Outcomes

 Parkland introduced the Patient Family Advisory Council (PFAC) as a Strategic Priority 5 project in 2018. Parkland is committed to partnering with patients and families to assist with creating a patient- centered approach to the care delivered every day. The PFAC offers a unique partnering opportunity which can positively impact care, enhance service delivery and quality improvement efforts and assist with creating a more patient-centered approach.

 Parkland, the Meadows Mental Health Policy Institute (MMHPI), Dallas Fire-Rescue Department (DFR) and the Dallas Police Department (DPD) announced the launch of the Rapid Integrated Group Healthcare Team (RIGHT Care) program. The program will provide a comprehensive emergency response to calls involving behavioral health emergencies. The first-of-its-kind program in Texas is an innovative partnership involving specially-trained and equipped paramedics, police officers and mental health professionals who will respond as a single coordinated team to safely and effectively manage patients experiencing behavioral emergencies. The first phase was launched in January 2018 thanks to a grant from the W.W. Caruth, Jr., Foundation at Communities Foundation of Texas (Caruth).

 An e-Consult program at Parkland reduced the wait list for gastroenterology (GI) patients. With more than 400 referrals a month, wait times have reached at least 6 months. Within six months of instituting the e-Consult program, 45 percent of GI consultations were taking place digitally.

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 Parkland’s nursing leaders have achieved the Pathway to Excellence designation from the American Nurses credentialing Center (ANCC). The Pathway to Excellence designation identifies the elements of professional work environments where nurses can flourish and feel empowered. The designation substantiates nursing job satisfaction at Parkland and identifies it as one of the best places to work. In addition, organizations that are Pathway designated ultimately achieve better patient, staff and organization outcomes according to the ANCC.

 Parkland has been re-verified as an adult and pediatric burn center by the American Burn Association and the Committee on Trauma of the American College of Surgeons. Parkland has been a verified burn center since 1996 and is the only verified burn center in North Texas. The surveyors commended the burn center for having a “burn team composed of tremendous leaders of national and international stature with an established history of providing excellent care to the North Texas community.” Surveyors also noted ample evidence of continued contributions to the field through excellent research and offering the most up-to-date treatments, including laser therapy.

 Healthcare Information and Management Systems Society (HIMSS) has recognized Parkland with

the HIMSS Enterprise Davies Award of Excellence. The award recognizes outstanding achievement of organizations that have utilized healthcare information and technology to substantially improve patient outcomes and value. Parkland’s Outpatient Parenteral Antibiotic Therapy (OPAT) program was selected for the recognition as an outstanding example of improving care delivery by implementing innovations through advanced technology and health information system. Parkland designed the program to allow patients access to antibiotic therapy and treatment in the comfort of their own homes, a new care delivery model that helps both patients and providers avoid the expense, potential complications and inconvenience of hospitalization. The OPAT program’s goal was to empower patients to actively participate in their own care and equip them with the knowledge and skills to do so in their homes.

Efficiencies

 Parkland’s new hospital received designation as one of the 60 Greenest Hospitals in America by Becker’s Hospital Review for the second year in a row. This is a distinct honor that recognizes a commitment to energy and water efficiency, pollution prevention practices, waste reduction, recycling initiatives and indoor air quality standards.

 Parkland can see more than 900 patients in a 24 hour period. Parkland believed that Toyota’s

production know-how would help improve patient care in its emergency department. Therefore, Toyota and Parkland teamed up to streamline emergency care. Toyota recommended focusing on the discharge process to save time. Based on the new process, time has been reduced by 9.2%, from 431 minutes to 391 minutes. Order-to-discharge time, which Toyota focused on, has been reduced from 52 minutes to 31 minutes. This has made a huge difference in providing emergency care services to new patients.

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 Parkland promotes a new test the hospital initiated that can diagnose heart attacks faster and with greater precision. It is among the first hospitals in the country and the first in Texas to debut the faster test. The Trop T-hs assay is a more sensitive version of the Trop T-hs blood test. This new test shows the ability to rule out heart attack within the first hour in about half the patients presenting with chest pain.

Financial Highlights

 Net position decreased $4.3 million between FY17 and FY18. Net position increased $11 million between FY16 and FY17.

 Total assets and deferred outflows of resources decreased $2.5 million (0.1%) between FY17 and FY18 due to reduced investment in capital assets in 2018. Total assets and deferred outflows increased $10 million (.4%) between FY16 and FY17 based on an increase in cash due to improved collections, improved volumes and a reduction in capital spending from prior year.

 During fiscal year 2017, Parkland made a significant investment in the completion of the Ron J.

Anderson, MD Clinic. The clinic is a five-story, 227,420 square foot state-of-the-art facility. The clinic is comprised of exam rooms, MRI’s, CT scanners, radiology and ultrasound rooms, multiple laboratories and a 24-hour pharmacy.

Financial Analysis The Statement of Net Position and the Statement of Revenues, Expenses, and Changes in Net Position: These statements report information about Parkland’s resources and its activities that describe the financial results of the fiscal years presented, and Parkland’s financial position at the end of each year.

Net position is the difference between assets, deferred inflows and outflows, and liabilities. Over time, increases or decreases in Parkland’s net position are one indicator of whether Parkland’s financial health is improving or deteriorating. Other non-financial factors, such as changes in Parkland’s patient base; measures of the quality of services provided; and local, state, and federal economic factors are also considered.

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Table 1: Summary Statement of Net Position

2018 2017 Dollar

Change Percentage

Change

As s e ts Current assets 540,050$ 545,112$ (5,062)$ -0.9% Capital assets, net 1,548,553 1,626,044 (77,491) -4.8% Noncurrent assets and deferred outflows of resources 199,199 119,186 80,013 67.1%

Total assets and deferred outflows of resources 2,287,802 2,290,342 (2,540) -0.1%

Liabilitie s

Long-term debt outstanding 688,717 704,937 (16,220) -2.3% Capital leases 13,175 13,572 (397) -2.9% Other liabilities and deferred inflows of resources 722,679 704,286 18,393 2.6%

Total liabilities and deferred inflows of resources 1,424,571 1,422,795 1,776 0.1% Ne t Pos ition Invested in capital assets, net of related debt 845,514 902,560 (57,046) -6.3%

Restricted - expendable 3,489 2,717 772 28.4% Unrestricted 14,228 (37,730) 51,958 -137.7%

Total net position 863,231 867,547 (4,316) -0.5% Total liabilities, deferred inflows of resources

and net position 2,287,802$ 2,290,342$ (2,540)$ -0.1%

2017 2016 Dollar

Change Percentage

Change

As se ts Current assets 545,112$ 451,819$ 93,293$ 20.6% Capital assets, net 1,626,044 1,697,535 (71,491) -4.2% Noncurrent assets and deferred outflows of resources 119,186 130,839 (11,653) -8.9%

Total assets and deferred outflows of resources 2,290,342 2,280,193 10,149 0.4%

Liabilitie s Long-term debt outstanding 704,937 719,866 (14,929) -2.1% Capital leases 13,572 13,969 (397) -2.8% Other liabilities and deferred inflows of resources 704,286 690,215 14,071 2.0%

Total liabilities and deferred inflows of resources 1,422,795 1,424,050 (1,255) -0.1%

Ne t Pos ition Invested in capital assets, net of related debt 902,560 942,575 (40,015) -4.2%

Restricted - expendable 2,717 2,196 521 23.7% Unrestricted (37,730) (88,628) 50,898 -57.4%

Total net position 867,547 856,143 11,404 1.3% Total liabilities, deferred inflows of resources

and net position 2,290,342$ 2,280,193$ 10,149$ 0.4%

Overall, total assets and deferred outflows of resources decreased 0.1% from 2017 to 2018 and increased less than 0.4% from 2016 to 2017.

 Current assets decreased 0.9% from 2017 to 2018 due to a decrease in amounts due from affiliates

associated with additional allowances on those balances recognized by Parkland and 20.6% from 2016 to 2017 due to an increase in cash on hand as capital outlays associated with the construction of the new hospital campus began to diminish in 2017 once the construction was substantially complete.

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 Capital assets, net, decreased 4.8% from 2017 to 2018 and 4.2% from 2016 to 2017 primarily due to depreciation of the new hospital.

 Noncurrent assets and deferred outflows of resources increased 67.1% from 2017 to 2018 due to an

increase in long term investments as the result of additional cash on hand that was not internally restricted. Noncurrent assets and deferred outflows of resources decreased 8.9% from 2016 to 2017 due to a change in the classification of certain assets limited to use from current to noncurrent.

 Deferred outflows of resources decreased $29 million in 2018 and decreased $16 million in 2017 related to recognition of net pension liability in accordance with GASB 68.

 Liabilities and deferred inflows of resources increased 0.1% from 2017 to 2018. Liabilities and deferred inflows of resources decreased 0.1% from 2016 to 2017 primarily due to a decrease of long term debt as the result of payments of principal and amortization of premiums.

Table 2: Summary of Revenues, Expenses and Changes in Net Position

2018 2017 2016 Operating revenues :

Net patient s ervices 1,017,559$ 866,868$ 772,813$ Government programs 247,772 173,293 217,612 Other 150,045 138,879 130,344

Total operating revenues 1,415,376 1,179,040 1,120,769

Operating expenses : Salaries, wages , and benefits 1,109,700 1,038,970 1,016,704 Purchas ed medical services 241,532 110,131 107,452 Supplies and other 419,800 344,736 310,290 Pharmaceuticals 179,695 167,175 160,672 Depreciation and amortization 102,911 105,401 103,496

Total operating expenses 2,053,638 1,766,413 1,698,614 Operating los s (638,262) (587,373) (577,845)

Nonoperating revenues and expenses, net 630,799 581,878 533,584 Capital contributions 3,147 16,899 44,235

Change in net position (4,316) 11,404 (26) Net pos ition – beginning of year 867,547 856,143 856,169 Net pos ition – end of year 863,231$ 867,547$ 856,143$

Overall, operating revenues increased 20.0% from 2017 to 2018 and 5.2% from 2016 to 2017.

 Net patient services revenue increased 17.4% in 2018 and 12.2% in 2017, primarily due to the acquisition of seventeen nursing homes in April 2017 and rate increases associated with the Medicaid Uniform Hospital Rate Increase Program (UHRIP) effective March 1, 2018.

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 Other operating revenues increased 8.0% in 2018 over 2017 due to an increase in replacement drugs. Other operating revenues increased 6.5% in 2017 over 2016 due to an increase in replacement drugs and revenue from the tobacco settlement.

Operating expenses increased 16.3% from 2017 to 2018 and 4.0% from 2016 to 2017.

 Salaries, wages, and benefits increased by 6.8% from 2017 to 2018 primarily due to the annual employee merit salary increases and the first full year of operations for 17 of the 29 nursing homes. Salaries, wages, and benefits increased by 2.2% from 2016 to 2017 primarily due to the annual employee merit salary increases and the salaries from 29 nursing homes, 17 of which began operating under the District effective April 1, 2017.

 Other operating expenses increased 29.8% between 2017 and 2018 primarily due to an increase in expenses associated with the seventeen nursing homes purchased on April 1, 2017 operating for a full 12 months in 2018. In addition, in 2018, certain burden alleviation programs ended which resulted in Parkland onboarding significant purchased medical service contracts in 2018. Other operating expenses increased 6.7% between 2016 and 2017 primarily due to an increase in pharmaceutical costs and rent expense associated with the purchase of seventeen nursing homes on April 1, 2017.

Overall, Parkland’s operating loss increased 8.7% from 2017 to 2018 and 1.6% from 2016 to 2017 due to the items mentioned above. As the only public hospital in Dallas, Parkland receives ad valorem tax revenues to subsidize the cost of services provided to uninsured patients who qualify for tax-supported care. Although the expenses incurred to provide these services are recognized as operating expenses, accounting principles generally accepted in the United States of America (“GAAP”) require that ad valorem tax revenues be reported as nonoperating revenues.

Nonoperating revenues and expenses increased 8.4% from 2017 to 2018, primarily due to an increase in ad valorem tax revenues and grants. Parkland’s tax rate was 27.9 cents per $100 assessed valuation for 2018 and 2017. Taxes are levied by Parkland and collected on behalf of Parkland by Dallas County. Nonoperating revenues increased 9.1% from 2016 to 2017.

Patient Volumes Patient volumes at Parkland are measured on an inpatient and outpatient basis. Inpatient discharges decreased 4.3% in 2018 to 39,944 compared to 2017 discharges of 41,728. Inpatient discharges increased 2.7% in 2017 to 41,728 compared to 2016 discharges of 40,652. Emergency department visits decreased 0.6% to 242,640 in 2018 from 244,197 in 2017. Emergency department visits increased 3.9% to 244,197 in 2017 from 235,034 in 2016. Combined outpatient visits, including on-campus outpatient visits, Community Oriented Primary Care and Acute Response Clinic visits, decreased 0.9% to 1,037,320 in 2018 from 1,046,806 in 2017. The combined outpatient visits decreased 3.1% for 2017 over 2016 volume of 1,080,668.

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Table 3: Capital Assets

At the end of fiscal years 2018 and 2017, Parkland had $1.5 billion and $1.6 billion, respectively in capital assets, net of accumulated depreciation, as detailed in the notes to the financial statements. The components of Parkland’s capital assets are as follows:

Dollar Percentage 2018 2017 Change Change

Capital As sets Buildings 1,649,788$ 1,652,188$ (2,400)$ -0.1% Construction in progres s 21,609 20,573 1,036 5.0% Capital leas es 14,569 14,546 23 0.2% Land and improvements 144,625 144,493 132 0.1% Equipment (including IT projects in progress ) 763,710 743,633 20,077 2.7%

2,594,301 2,575,433 18,868 0.7% Accumulated depreciation and amortization (1,045,748) (949,389) (96,359) 10.1% Capital assets , net 1,548,553$ 1,626,044$ (77,491)$ -4.8%

Dollar Percentage 2017 2016 Change Change

Capital As sets Buildings 1,652,188$ 1,671,187$ (18,999)$ -1.1% Construction in progres s 20,573 12,843 7,730 60.2% Capital leas es 14,546 14,546 - 0.0% Land and improvements 144,493 144,306 187 0.1% Equipment (including IT projects in progress ) 743,633 698,661 44,972 6.4%

2,575,433 2,541,543 33,890 1.3% Accumulated depreciation and amortization (949,389) (844,008) (105,381) 12.5% Capital assets , net 1,626,044$ 1,697,535$ (71,491)$ -4.2%

Overall, capital assets, net, decreased 4.8% from 2017 to 2018. Capital assets, net, decreased 4.2% from 2016 to 2017.

Table 4: Debt Financing

Bond - financed debt decreased $16.2 million due to principal payments made in 2018 and the amortization of premium. No new debt was issued in 2018 or 2017.

2018 2017 2016

Taxable Series 2009B Bonds 222,490$ 222,490$ 222,490$ Taxable Series 2009C Bonds 427,925 443,030 457,740 Tax Exempt 2013 Bonds , including premium 38,302 39,417 39,636

688,717$ 704,937$ 719,866$

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Economic Factors

Parkland’s Board of Managers and management continue to monitor and consider many factors that have direct or indirect impact on future operations. These include:

 Dallas County’s population growth, including growth in the number of uninsured that fall under Parkland’s mission;

 Federal and state government funding programs, including the 1115 Transformation Waiver, Medicare, Medicaid, disproportionate share, and new programs, such as the Network Access Improvement Program (“NAIP”), Quality Incentive Payment Program (“QIPP”) and the Uniform Hospital Rate Increase Program (“UHRIP”); and

 Clinical workforce shortages, particularly in nursing. Significant Financial Practices

Parkland has adopted financial practices designed to maintain its creditworthiness and to position Parkland to carry out its constitutionally defined mission of providing health care to the residents of Dallas County, as well as its fiduciary responsibility to the taxpayers of Dallas County. Those practices are as follows:

 Assets Limited To Use

The Board of Managers sets aside funds for both long-term stability and capital improvements.

 Monthly Financial Reporting

The Board of Managers meets monthly and reviews the financial statements from the prior month. This information is presented to show actual monthly and year-to-date revenues and expenses compared to budget and the prior year. Management provides explanations for significant variances.

 Pay-As-You-Go Capital

Funding

Historically, Parkland has maintained the practice of funding capital items under a pay-as-you-go process. In November 2008, Dallas County voters approved the necessary tax increase to issue bonds to partially fund the new Parkland Hospital. In September 2009, Parkland issued $705 million in voter-approved bonds for use in the construction of a new Parkland Hospital. In December 2013, Parkland issued an additional $38.3 million in bonds for continued construction costs for the new Parkland Hospital. Except for the construction of the new hospital campus, Parkland has continued its practice of pay-as-you-go capital funding for routine capital expenditures.

 Budget Process

The operating and capital budgets are proposed by Parkland management and endorsed by the Board of Managers. Final approval is obtained from the Dallas County Commissioners Court. The budgets remain in effect for the entire fiscal year.

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Contacting Parkland’s Financial Management

This financial report is designed to provide our taxpayers, creditors, patients, and suppliers with a general overview of Parkland’s finances and to show Parkland’s accountability for the funds it receives. If you have questions about this report or need additional financial information, contact: By Mail: Parkland Health & Hospital System 5200 Harry Hines Dallas, Texas 75235 Attention: Richard Humphrey, Executive Vice President and Chief Financial Officer

By E-Mail: [email protected]

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Statements of Net Position

September 30, 2018 and 2017 (In Thousands)

See Notes to Financial Statements 12

Parkland Health & Hospital

System

Parkland Community

Health Plan, Inc. 12/31/2017

Parkland Center for Clinical Innovation

Parkland Foundation

Parkland Health & Hospital

System

Parkland Community

Health Plan, Inc. 12/31/2016

Parkland Center for Clinical Innovation

Parkland Foundation

Current Assets

Cash and cash equivalents 229,350$ 45,670$ -$ 15,586$ 271,935$ 33,967$ -$ 10,586$

Restricted cash 23,610 - - - - - - -

Short-term inves tments 529 - - 6,815 - 34,037 - 4,869

Ass ets limited to us e 55,071 - - - 38,348 - - -

Ad valorem taxes receivable, less allowance for

uncollectible taxes of $16,863 in 2018

and $15,389 in 2017 4,191 - - - 4,768 - - -

Patient accounts receivable, les s allowance for

uncollectible accounts $467,578 in 2018

and $497,710 in 2017 132,916 7,844 - - 120,389 6,687 - -

Due from affiliates 422 - - - 19,928 - - -

Government programs receivable 46,566 - 429 - 49,253 - 196 -

Other receivables 24,139 - 898 4,317 23,245 - 1,454 1,491

Inventories and other assets 23,256 - 57 - 17,246 188 35 18

Total current assets 540,050 53,514 1,384 26,718 545,112 74,879 1,685 16,964

Capital ass ets, net 1,548,553 - 14,069 - 1,626,044 - 14,140 -

Long-term inves tments 108,067 90,544 658 8,668 - 73,940 1,013 8,489

Ass ets limited to us e 60,236 - - - 59,222 - - -

Other noncurrent ass ets 277 - 420 16,497 219 - 368 6,660

Total Ass ets 2,257,183$ 144,058$ 16,531$ 51,883$ 2,230,597$ 148,819$ 17,206$ 32,113$

Deferred Outflows of Resources 30,619 - - - 59,745 - - -

Total Assets & Deferred Outflows of Resources 2,287,802$ 144,058$ 16,531$ 51,883$ 2,290,342$ 148,819$ 17,206$ 32,113$

2018 2017

Assets

Discretely Presented Component Units Discretely Presented Component Units

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Statements of Net Position (Continued)

September 30, 2018 and 2017 (In Thousands)

See Notes to Financial Statements 13

Parkland Health & Hospital

System

Parkland Community

Health Plan, Inc. 12/31/2017

Parkland Center for Clinical Innovation

Parkland Foundation

Parkland Health & Hospital

System

Parkland Community

Hea lth Plan, Inc. 12/31/2016

Parkland Center for Clinical Innovation

Parkland Foundation

Current Liabilities

Accounts payable and accrued expenses 204,092$ 44,712$ 1,779$ 557$ 182,579$ 48,255$ 910$ 133$

Due to affiliates 688 365 23,622 1,175 1,561 380 22,228 1,935

Due to third-party reimburs ement programs 9,839 - - - 9,455 - - -

Government programs liability 53,347 - - - 58,020 - - -

Intergovernmental transfer obligation 23,610 - - - - - - -

Current portion long term debt 16,485 - - - 15,995 - - -

Current portion capital lease payable 453 - - - 420 - - -

Interest payable 4,847 - - - 4,935 - - -

Other current liabilities 12,067 25 68 218 14,286 18,327 1,431 3,297

Total current liabilities 325,428 45,102 25,469 1,950 287,251 66,962 24,569 5,365

Net pens ion liability 368,133 - - - 423,189 - - -

Other noncurrent liabilities 13,617 - - - 9,837 - - -

Long term debt 672,232 - - - 688,942 - - -

Capital leas es 12,722 - - - 13,152 - - -

Total Liabilities 1,392,132$ 45,102$ 25,469$ 1,950$ 1,422,371$ 66,962$ 24,569$ 5,365$

Deferred Inflows of Resources 32,439 - - - 424 - - -

Total Liabilities & Deferred Inflows of Resources 1,424,571$ 45,102$ 25,469$ 1,950$ 1,422,795$ 66,962$ 24,569$ 5,365$

Net Pos ition

Inves ted in capital assets, net of related debt 845,514 - - - 902,560 - - -

Restricted 3,489 - - 48,240 2,717 - - 25,224

Unrestricted 14,228 98,956 (8,938) 1,693 (37,730) 81,857 (7,363) 1,524

Total Net Pos ition 863,231 98,956 (8,938) 49,933 867,547 81,857 (7,363) 26,748

Total Liabilities and Net Pos ition 2,287,802$ 144,058$ 16,531$ 51,883$ 2,290,342$ 148,819$ 17,206$ 32,113$

2018 2017

Discretely Presented Component Units Discretely Presented Component Units

Liabilities and Net Position

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Statements of Revenues, Expenses and Changes in Net Position

Years Ended September 30, 2018 and 2017 (In Thousands)

See Notes to Financial Statements 14

Parkland Health & Hospital

System

Parkland Community

Health Plan, Inc. 12/31/2017

Parkland Center for Clinical Innovation

Parkland Foundation

Parkland Health & Hospital

System

Parkland Community

Health Plan, Inc. 12/31/2016

Parkland Center for Clinical Innovation

Parkland Foundation

Ope rating Re ve nue s

Net patient services 1,017,559$ -$ -$ -$ 866,868$ -$ -$ -$

Government programs 247,772 - - - 173,293 - - -

Premiums - 555,270 - - - 533,323 - -

Other 150,045 - 1,760 39,399 138,879 - 1,146 20,781

Total operating revenues 1,415,376 555,270 1,760 39,399 1,179,040 533,323 1,146 20,781 Ope rating Expe nse s

Salaries, wages, and benefits 1,109,700 - 7,088 - 1,038,970 - 4,925 -

Purchased medical services 241,532 - - - 110,131 - - -

Supplies and other 419,800 59,218 1,938 16,627 344,736 59,519 1,743 28,912

Pharmaceuticals 179,695 - - - 167,175 - - -

Depreciation and amortization 102,911 - 2,483 - 105,401 - 1,671 -

Claims - 480,023 - - 492,055 - -

Total operating expenses 2,053,638 539,241 11,509 16,627 1,766,413 551,574 8,339 28,912

Ope rating income (los s) (638,262) 16,029 (9,749) 22,772 (587,373) (18,251) (7,193) (8,131)

Nonope rating Re ve nue s (Expe ns e s )

Ad valorem tax support 620,998 - - - 575,745 - - -

Gain on sale/transfer of asset 888 - - - 2,387 - - -

Grants and contributions 28,894 - 8,920 - 29,172 - 2,475 -

Build America Bonds Subsidy and

Investment income (loss) 20,145 1,070 (355) 413 15,436 1,524 - 644

Interest expense (40,126) - (391) - (40,862) - (371) -

Total nonoperating revenues and expenses 630,799 1,070 8,174 413 581,878 1,524 2,104 644

Ne t income (loss) be fore capital contributions (7,463) 17,099 (1,575) 23,185 (5,495) (16,727) (5,089) (7,487)

Capital contributions 3,147 - - - 16,899 - - - Change in ne t pos ition (4,316) 17,099 (1,575) 23,185 11,404 (16,727) (5,089) (7,487)

Net position – beginning of year 867,547 81,857 (7,363) 26,748 856,143 98,584 (2,274) 34,235

Net position – end of year 863,231$ 98,956$ (8,938)$ 49,933$ 867,547$ 81,857$ (7,363)$ 26,748$

2018 2017

Discretely Presented Component Units Discretely Presented Component Units

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Statements of Cash Flows

Years Ended September 30, 2018 and 2017 (In Thousands)

See Notes to Financial Statements 15

2018 2017

Operating Activities Receipts from third-party payors and patients 1,007,356$ 866,877$ Payments to suppliers (818,239) (622,614) Payments to employees (1,088,875) (1,009,403) Other receipts 148,009 136,147 Receipts from Local Provider Participation Fund, net 23,610 - Receipts from government programs 246,928 186,520

Net cash us ed in operating activities (481,211) (442,473)

Noncapital Financing Activities Ad valorem taxes 581,570 534,973 Grants and contributions 28,894 29,172

Net cash provided by noncapital financing activities 610,464 564,145

Capital and Related Financing Activities Receipt of property taxes for debt service 40,005 40,312 Capital contributions 3,147 16,899 Purchases of capital as sets (33,089) (44,852) Sales of capital as sets 4,728 2,387 Interest paid (40,439) (41,159) Payment of debt and capital lease principal (16,392) (14,710) Build America Bond subsidy 12,222 12,381

Net cash us ed in capital and related financing activities (29,818) (28,742)

Investing Activities Interest received 7,923 2,890 Investments : Purchas es (155,747) (56,217) Maturities 26,360 5,270 Change in designated as sets 1,163 564

Net cash us ed in inves ting activities (120,301) (47,493) Increase (Decreas e) in Cash and Cas h Equivalents (20,866) 45,437

Cash and Cash Equivalents , Beginning of Year 277,315 231,878

Cash and Cash Equivalents , End of Year 256,449$ 277,315$

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Statements of Cash Flows (Continued)

Years Ended September 30, 2018 and 2017 (In Thousands)

See Notes to Financial Statements 16

2018 2017

Reconciliation of Net Operating Revenues (Expenses) to Net Cash Used in Operating Activities

Operating los s (638,262)$ (587,373)$ Depreciation and amortization 102,911 105,401 Provision for amounts due from affiliate 21,042 310 Change in operating as sets and liabilities: Patient accounts receivable (12,527) 2,073 Other receivables, inventories and other ass ets (6,962) 637 Due from affiliates (2,409) (11,649) Accounts payable and accrued expenses 25,342 2,878 Third-party reimbursement and other government obligations 22,008 (2,531) Other current liabilities (2,219) 16,161 Deferred outflows 29,126 15,698 Net pens ion liability (55,056) 15,004 Deferred inflows 32,015 (849) Other long-term liabilities 3,780 1,767

Net cas h used in operating activities (481,211)$ (442,473)$

Supplemental Cash Flows Information Unpaid purchas es of capital ass ets in accounts payable and accrued expenses 1,147$ 4,976$

Reconciliation of Cas h and Cas h Equivalents to the Balance Sheets Cash and cash equivalents lis ted on the statements of net position 229,350$ 271,935$ Restricted cas h listed on the s tatements of net position 23,610 - Cash and cash equivalents included in ass ets limited as to us e 3,489 5,380

256,449$ 277,315$

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Dallas County Hospital District Retirement Income Plan

Statements of Fiduciary Net Position

Years Ended December 31, (In Thousands)

See Notes to Financial Statements 17

2017 2016 As sets

Investments: Cash and cas h equivalents 22,818$ 17,562$ Domes tic equities 312,304 265,483 Non-U.S. equities 199,274 167,364 Emerging market equities 43,633 32,444 Domes tic fixed income 219,421 188,053 Non-U.S. fixed income 45,631 34,925 Hedge funds 42,677 39,870 Real estate 89,169 81,505 Other inves tments 6,062 5,082

Total investments 980,989 832,288

Receivables : Participant contributions - 1,156 Employer contributions - - Accrued interes t and dividends 1,380 1,294 Investments s old but not s ettled 774 727 Other receivables 4,293 2,594

Total receivables 6,447 5,771

Total ass ets 987,436$ 838,059$

Liabilities

Accrued administrative expenses 323$ 415$ Investments purchas ed but not settled 10,917 6,554 Other liabilities 4,345 2,335

Total liabilities 15,585$ 9,304$

Net Position Restricted for Pensions 971,851$ 828,755$

Refer to the audited financial statements for the Dallas County Hospital Dis trict Retirement Income Plan as of and for the years ended December 31, 2017 and 2016 at www.parklandhospital.com

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Dallas County Hospital District Retirement Income Plan

Statements of Changes in Fiduciary Net Position

Years Ended December 31, (In Thousands)

See Notes to Financial Statements 18

2017 2016

Additions Contributions:

Employer contributions 27,915$ 28,083$ Employee contributions 37,530 30,270

Total contributions 65,445 58,353

Inves tment earnings (losses): Net appreciation (depreciation) in fair value of investments 118,382 44,688 Interest 6,245 6,230 Dividends 4,833 4,516 Other 624 367 Inves tment management expense (2,531) (1,726)

Net investment earnings 127,553 54,075

Total additions 192,998 112,428

Deductions

Benefit payments to participants 41,240 35,528 Refunds to former participants 8,404 8,784 Administrative expenses and other 258 260

Total deductions 49,902 44,572

Net Increase in Plan Net Position 143,096 67,856

Net Position Res tricted for Net Pensions:

Beginning of year 828,755 760,899 End of year 971,851$ 828,755$

Refer to the audited financial statements for the Dallas County Hospital District Retirement Income Plan for the years ended December 31, 2017 and 2016.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

19

Note 1: Organization and Significant Accounting Policies

Organization

The Dallas County Hospital District, dba Parkland Health & Hospital System (“Parkland”), is a political subdivision of the state of Texas (“State”), and is a discretely presented component unit of Dallas County, Texas. Components of the Dallas County Hospital District are Parkland Health & Hospital System (“Parkland”); the Parkland Community Health Plan, Inc. (“Health Plan”); the Parkland Foundation (“Foundation”); and Parkland Center for Clinical Innovation (“PCCI”). As an essential government function of Dallas County, Parkland is generally exempt from federal income taxes under Section 115 of the Internal Revenue Code. However, Parkland is subject to federal income tax on any unrelated business taxable income. Parkland also holds dual status as a 501(c)(3) organization. During 2018 and 2017, all income was related to essential government functions. Parkland, PCCI, and the Foundation have fiscal years ending September 30. The Health Plan’s fiscal year ends December 31.

In August 2015, Parkland opened the new Parkland Hospital. Parkland operates 774 inpatient beds, 96 neonatal beds, numerous outpatient clinics, and an emergency department. Parkland also operates the Community Oriented Primary Care clinics and Acute Response Clinics in the community. Additionally, Parkland serves as the major teaching hospital for the UT Southwestern Medical Center at Dallas (“UT Southwestern”) in accordance with an affiliation agreement effective September 1, 2006. Parkland also manages the Dallas County jail health system. The Dallas County jail is the seventh largest jail in the nation with approximately 5,500 adult and juvenile inmates.

Parkland acquired the licenses and operations of twelve nursing homes in February 2015 and an additional seventeen nursing homes in April 2017. The arrangement improves the continuity of care for Parkland’s patients by allowing Parkland to track their nursing home care. The arrangement also gives uninsured patients easier access to nursing home beds, rather than extended stays at Parkland. Each nursing home is eligible to receive supplemental Medicaid funding with Parkland holding the operating licenses. The Texas Legislature approved the collaboration between nursing homes and public hospitals in 2013 as the state shifted its Medicaid nursing home program into managed care.

The members of Parkland’s Board of Managers are appointed by the Dallas County Commissioners Court. Dallas County taxpayers provide ad valorem tax revenues to Parkland, but Dallas County does not hold title to any of Parkland’s assets and does not have any rights to Parkland’s surpluses. The Dallas County Commissioners Court approves Parkland’s tax rate and annual budget.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

20

The Foundation is a nonprofit corporation organized in Texas in 1985, to support and benefit Parkland exclusively. It is an organization as described in Section 501(c)(3) of the Code. The Foundation’s mission is to secure substantial financial resources that advance the clinical, educational, and research endeavors of Parkland. Because these resources can only be used by, or for the benefit of Parkland, the Foundation is considered a component unit of Parkland. In addition, because Parkland is entitled to these economic resources and they are significant to Parkland, the Foundation is discretely presented in Parkland’s financial statements. Financial statements for the Foundation can be obtained from the Parkland Foundation, 1341 W. Mockingbird, Suite 1100E, Dallas, Texas 75247, ATTN: President and Chief Executive Officer.

The Health Plan is a nonprofit corporation organized in Texas in 1995 and is reported as a component unit of Parkland because its Board of Directors is appointed by Parkland’s Board of Managers and Parkland can impose its will on the Health Plan. It is discretely presented because its board is not substantively the same as Parkland’s board, it does not provide services entirely, or almost entirely, for the benefit of Parkland, nor does it have any outstanding debt that is expected to be repaid by Parkland. It is an organization as described in Section 501(c)(4) of the Code. The Health Plan participates in the Texas Medicaid Managed Care Program and the Children’s Health Insurance Program. All income of the Health Plan was related business income. Financial statements for the Health Plan can be obtained from Parkland Community Health Plan, 1341 W. Mockingbird, Suite 1150E, Dallas, Texas 75247, ATTN: Executive Director.

PCCI is a nonprofit research and development corporation organized in Texas in 2012. It is an organization as described in Section 501(c)(3) of the Code. PCCI is included in Parkland’s financial statements because its Board of Directors is appointed by Parkland’s Board of Managers and Parkland can impose its will on PCCI. It does not provide services entirely, or almost entirely, for the benefit of Parkland, nor does it have any outstanding debt that is expected to be repaid by Parkland. Financial statements for PCCI can be obtained from Parkland Center for Clinical Innovation, 8435 N. Stemmons Freeway, Suite 1150, Dallas, Texas 75247, ATTN: Director of Finance.

Parkland maintains the Dallas County Hospital District Retirement Income Plan (the Plan) a single- employer defined benefit pension plan. The plan is administered by Parkland and is fiscally dependent on Parkland. The Plan is reported as a fiduciary fund in the statements. For purposes of measuring the net pension liability, deferred outflows of resources, deferred inflows of resources and pension expense, information about the fiduciary net position of the Plan and additions to/deductions from the Plan’s fiduciary net position have been determined on the same basis as they are reported by the Plan. For these purposes, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value or amortized cost. Separate financial statements of the Plan are available at www.ParklandHospital.com.

Principles of Reporting

The financial statements include the accounts of Parkland, the Health Plan, the Foundation and PCCI, as described above.

The following are transactions between Parkland and its component units:

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

21

Parkland provides certain administrative services to the Health Plan including employment of all individuals who perform the daily business functions of the Health Plan. The Health Plan pays Parkland a management fee, which is recorded as an expense for the Health Plan. The management fee revenue of $4.8 million and $4.5 million for 2018 and 2017, respectively, are based on Parkland’s fiscal year end.

Parkland supports the Foundation by employment of all individuals performing the daily business functions of the Foundation and payments for goods and services. These costs are recognized as in- kind contributions and expenses in the Foundation’s financial statements. In addition, in fiscal year 2018 and 2017, the Foundation made contributions to Parkland of $3 million and $17 million, respectively, in support of construction of the new health clinic adjacent to the new hospital in 2018 and 2017. These amounts were recorded in capital contributions in the statements of revenues, expenses and changes in net position.

Parkland supports PCCI by funding payments for operating expenses. In addition, in 2013, Parkland sold intellectual property associated with PCCI’s software system to PCCI for $4.5 million plus accrued interest. The amounts due to Parkland by PCCI for both the intellectual property and operations, net of allowance, was $0 million and $19.5 million as of September 30, 2018 and 2017, respectively. This is included in due from affiliates on Parkland’s statement of net position.

In accordance with GASB Statement No. 84, the assets and net position of the Plan are presented separately from those of Parkland. The Plan is used to account for assets held in trust for the benefit of the employees of the System for the defined benefit pension plan. The financial statements of the Plan are prepared using the accrual basis of accounting. Employer contributions to the Plan are recognized when due. Benefits are recognized when due and payable in accordance with the terms of the Plan.

Unless otherwise noted, the following footnotes do not include the Foundation, the Health Plan or PCCI.

Significant Accounting Policies

Net position is classified into three components: invested in capital assets, net of related debt; restricted; and unrestricted. These classifications are defined as follows:

Invested in Capital Assets, Net of Related Debt — This component of net position consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any bonds, mortgages, notes or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Unspent related debt proceeds are excluded from the calculation of invested in capital assets, net of related debt.

Restricted — This component of net position consists of those assets whose use is restricted through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, laws or regulations of other governments, or laws through constitutional provisions or enabling legislation.

Unrestricted — This component of net position consists of those assets that do not meet the definition of “restricted” or “invested in capital assets, net of related debt.”

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

22

Parkland uses the accrual method of accounting, whereby revenues are recognized in the accounting period when services are rendered and expenses are recognized when incurred.

Parkland is considered a governmental organization and is subject to the pronouncements of the Governmental Accounting Standards Board (“GASB”).

Statements of Revenues, Expenses and Changes in Net Position

For purposes of financial statement presentation, operating revenues include those generated from direct patient care and related support services. Nonoperating revenues consist of those revenues that are related to financing and investing types of activities and result from nonexchange transactions or investment income. When an expenditure is incurred for the purposes for which there are both restricted and unrestricted net position available, it is Parkland’s policy to apply those expenditures to restricted net position, to the extent that such are available, and then to unrestricted net position.

Use of Estimates

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

Parkland Foundation Net Assets

Upon receipt, contributions, grants, and other revenue restricted by donors for specific purposes are recorded to the appropriate restricted net asset class. Restricted net assets are generally recognized as additions to unrestricted net assets only to the extent that qualifying expenditures are incurred. Pledges received with substantial contingencies are not reflected in the statements of net position until the contingencies have been fulfilled.

Cash, Cash Equivalents and Investments

Parkland considers all highly liquid investments with original maturities of less than 90 days at date of purchase to be cash equivalents. Cash and cash equivalents include demand deposits and investments in the Texas Local Government Investment Pool (“TexPool”), which is a local government investment pool sponsored by the Texas Comptroller of Public Accounts and managed by Federated Investors. Additional cash and cash equivalents are kept in AAA-rated Securities and Exchange Commission- registered money market mutual funds. All Parkland demand deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) or collateralized with securities pledged to Parkland and held in safekeeping at a third-party bank on behalf of Parkland’s depository institution.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

23

Statutes give Parkland the authority to invest in obligations of the United States, as well as direct obligations of the State and other obligations guaranteed or insured by the State or the United States. The following investments are also acceptable: obligations of states, agencies, counties, or cities of any state that have been rated not less than “A” or its equivalent by a nationally recognized ratings firm, and certificates of deposit guaranteed, insured, or secured by approved investments. Other authorized investments include prime commercial paper; Securities and Exchange Commission-registered, no- load money market mutual funds whose assets consist exclusively of approved investments; and approved local government investment pools.

Investments (including those in assets limited to use) at September 30, 2018 and 2017 are reported at fair value based on quoted market prices with realized and unrealized gains and losses included in investment income in the statements of revenues, expenses, and changes in net position. TexPool investments are amortized using the cost method. Obligations of the United States government with maturity dates in excess of one year that are not expected to be traded within one year are reported as long-term investments in the accompanying statements of net position.

Receivables and Payables

The carrying amount of receivables and payables is reported in the statements of net position at approximate fair value due to the short maturity of these instruments.

Inventories

Inventories are stated at the lower of cost (determined on an average-cost basis) or market.

Capital Assets

Capital assets are recorded at cost or, if donated, acquisition value at the date of receipt. Costs of major renewals and betterments that extend useful lives are capitalized, while maintenance and repairs are charged to current operations. Assets with a purchase price of $5,000 or more are capitalized and assets with a purchase price of less than $5,000 are expensed. Disposals are removed at carrying cost, less accumulated depreciation, with any resulting gain or loss included in other nonoperating revenue or expense. Depreciation is recorded on the straight-line method over the estimated useful lives of the assets. Estimated useful lives for buildings are 10 to 40 years and for equipment 3 to 20 years.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

24

Parkland evaluates long-lived assets regularly for impairment under the provisions of GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. If circumstances suggest that assets may be impaired, an assessment of recoverability is performed prior to any write-down of assets. If an asset’s estimated fair value is below its carrying value an impairment is recorded. Parkland recorded no impairments in 2018 and 2017.

Assets Limited to Use

Resources are also set aside for board-designated purposes or self-insurance arrangements. It has been the general practice of Parkland, due to the timing of cash flows, to temporarily use board designated funds to fund operating activities.

Uncompensated Care

Parkland provides services to uninsured patients who qualify for tax-supported care. The program is called Parkland Financial Assistance and is designed for Dallas County indigent patients with family incomes up to 250% of the federal poverty level and no third-party coverage, such as Medicaid, Medicare or commercial insurance. Parkland recognized ad valorem tax revenues of approximately $621.0 million and $575.7 million in 2018 and 2017, respectively, to fund services for qualified patients and debt service obligations.

Parkland also provides services to patients who are Dallas County residents and have incomes that exceed the limit for tax-supported health care or whose income cannot be determined. Although these patients are uninsured, they do not qualify for tax-supported health care and are classified as self-pay. Certain of these patients are medically indigent. Additionally, certain of these patients have limited financial resources and are unable to pay for the services received, while others may be able to pay for some or all services received, but are unwilling to do so.

Management estimates the cost of uncompensated health care by applying a ratio of overall costs to gross charges, applied to the gross uncompensated charges, which includes services provided to Medicaid beneficiaries, the uninsured and patients enrolled in other indigent programs. During the year ended September 30, 2018, the estimated cost of uncompensated care is approximately $1,021 million, of which approximately $392.3 million is charity care. For the year ended September 30, 2017, the estimated cost of uncompensated care is approximately $879.7 million, of which approximately $364.1 million was charity care.

Ad Valorem Taxes

Parkland received approximately 30% and 32% of its total revenues from ad valorem taxes in 2018 and 2017, respectively. Parkland’s ad valorem taxes receivable is net of an allowance for uncollectible taxes of $16.9 million and $15.4 million as of September 30, 2018 and 2017.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

25

Current taxes are collected beginning in October of each year and become delinquent after January 31. Ad valorem tax revenue is recognized in the year for which taxes are levied. A schedule of ad valorem taxes follows:

Fiscal Year Tax Base Tax (per $100)

Valuation Net Tax

Revenue (1)

Cost of Uncompensated

Care

Cost of Uncompensated Care Over Tax

2017 208,525,289$ 0.279 575,745$ 879,735$ 303,990$ 2018 224,543,899 0.279 620,998 1,020,698 399,700

(1) Net tax revenue includes adjustments for actual collection performance.

Disproportionate Share

The disproportionate share program is a supplemental reimbursement program for hospitals that provide a significant portion of Medicaid and indigent care services. Under program guidelines, Parkland may use the funds to benefit the indigent in either current or future periods. Parkland recognizes all funds received under the program as operating revenue in the applicable year, and any amounts relating to that year that are not yet received are included in other receivables in the accompanying statements of net position. There is no guarantee that this program will continue into future years. Total revenue recognized related to the disproportionate share program was $65.7 million and $65.0 million in 2018 and 2017, respectively.

1115 Transformation Waiver Funds

The 1115 Transformation Waiver began October 1, 2011. Under this waiver, the former Upper Payment Limit (“UPL”) programs were discontinued in favor of a reimbursement methodology that balances payment for uncompensated care costs (“UC”) with the need to improve quality of care for Texas recipients using Delivery System Reform Incentive Payments (“DSRIP”) funds. Over the five year waiver period, UC reimbursement generally moves downward while available DSRIP monies increase, so there is an even split between UC and DSRIP by the last year of the waiver. The program divides the state into 20 Regional Health Partnerships (“RHPs”), creating an environment where regional collaboration is essential to earn available monies. Parkland serves as an “anchor” hospital (administrative lead) for one of these regions. On December 21, 2017 the Texas Health and Human Services Commission (“HHSC”) received an approved extension from CMS for the period of January 1, 2018 through September 30, 2022. Among other changes, the approved plan requires a change in the methodology used to allocate UC funds and a phase out of the DSRIP program over the five year period. Revenue recognized related to the 1115 Waiver was $169.7 million and $102.7 million in 2018 and 2017, respectively. Parkland recognizes all funds received under the program as operating revenue in the statement of revenues, expenses and changes in net position, and any amounts relating to that year that are not yet received are included in other receivables, net of amounts to be distributed to other participating hospitals in the region, in the accompanying statements of net position. These amounts involve a considerable amount of judgment and are subject to audit and final reconciliation by the HHSC.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

26

Local Provider Participation Fund and Uniform Hospital Rate Increase Program

During 2017, Parkland began participation in a Local Provider Participation Fund (LPPF) in Dallas County. Parkland acts as the administrator of the LPPF by assessment and collection of mandatory payments from hospitals in Dallas County. These payments are to be used to fund intergovernmental transfers representing the state’s share of supplemental Medicaid funding programs. More specifically, the payments collected by Parkland will be used to fund the state’s share of the Uniform Hospital Rate Increase Program (UHRIP) and UC. Under UHRIP, HHSC directs managed care organizations in a service delivery area to provide a uniform percentage rate increase to all hospitals within a particular class of hospitals. The rate increases were effective March 1, 2018 and are adjusted every six months.

During 2018, Parkland collected $191.7 million from the LPPF in mandatory payments and made intergovernmental transfers of $169.0 million. At September 30, 2018, Parkland held $23.6 million in mandatory payments that will be transferred in 2019. The rate increase for Parkland associated with UHRIP for the period from March 1, 2018 through August 31, 2018 was 58%. The rate increase for Parkland for the period from September 1, 2018 through February 28, 2019 is 62%.

Net Patient Services Revenue

Parkland has agreements with third-party payors that provide for reimbursement to Parkland at amounts different from its established rates. Contractual adjustments under third-party reimbursement programs represent the difference between Parkland’s established rates for services and the amounts reimbursed by third-party payors. Parkland’s more significant third-party payors are the Medicare and Medicaid programs, which accounted for gross charges of approximately 16.5% and 29.9%, respectively, in 2018 and 16.0% and 29.6%, respectively, in 2017. Allowances for uncollectible amounts are estimated using historical experience, current trends and policy information, aged account balances, and a collectability analysis. Net patient services revenue in the accompanying statements of revenues, expenses and changes in net position is net of contractual adjustments and bad debt provisions totaling approximately $6.0 billion and $5.7 billion for the years ended September 30, 2018 and 2017, respectively.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

27

In accordance with provisions of the Medicare and Medicaid programs, inpatient services to Medicare and Medicaid beneficiaries are paid at prospectively determined rates per discharge based on a patient classification system utilizing clinical, diagnostic, and other factors. Medicare outpatient services are reimbursed on a prospective basis through ambulatory payment classifications, which are based on clinical resources used in performing the procedure. Medicaid outpatient services are paid based on the lower of reasonable costs or customary charges, a fee schedule, or blended rates. For certain costs, as defined by the Medicare program, including kidney acquisition and medical education, additional reimbursement is provided based on cost pass-through payments and the cost report.

Cost-reimbursable items are reimbursed to Parkland at a tentative rate, with final settlement determined after submission of annual cost reports by Parkland, which are subject to audit by the administrative contractors prior to final settlement. Any differences between final audited settlements and amounts accrued at the end of the prior reporting period are included currently in the statements of revenues, expenses, and changes in net position as an adjustment to the appropriate allowance account. Such adjustments increased net patient services revenue by $0.4 million and $7.8 million in 2018 and 2017, respectively. Parkland’s cost reports have generally been audited and settled by the administrative contractors through 2014 for both Medicare and Medicaid. Cost reports for both programs are subject to certain re-openings and appeals as per federal and state regulations.

Premium Revenues

The Health Plan’s premium revenues are recognized in the period in which the members of the Health Plan are entitled to receive health care services. Premiums collected in advance are deferred. Revenues for delivery supplemental payments received for Medicaid-eligible births under the Health Plan are recognized based on claims information from Texas hospitals and information from the State and include estimates for incurred, but unreported births at year-end.

Grant Revenue

Grant revenues are recognized in the period in which expenditures related to the grant are incurred or the period in which grant funds become available.

Build America Bond Interest Subsidy

Parkland issued taxable Build America Bonds (BAB) in 2009. Under the BAB program, the U.S. Treasury pays 35% of the interest payments as a subsidy to the issuer. Parkland records the interest subsidy received or receivable from the U.S. Treasury as nonoperating revenue when Parkland has met all of the eligibility criteria to receive the subsidy. Parkland recorded approximately $12.2 million of nonoperating revenue in 2018 and $12.4 million in 2017, for the BAB interest subsidy. The BAB subsidy was reduced by 6.6% and 6.9% in 2018 and 2017, respectively, as part of the federal sequestration spending reductions.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

28

Compensated Absences

Parkland accrues an estimated liability for compensated absences as they are earned by employees based on Parkland’s policy. Parkland’s liability related to compensated absences was $43.6 million for 2018 and $41.2 million 2017 and is recorded in the financial statements in accounts payable and accrued expenses.

Pharmaceutical Costs

Parkland participates in replacement pharmaceutical programs on behalf of patients who enroll and meet eligibility requirements of these programs.

Risk Management

Parkland is exposed to various risks of loss from torts; theft of, damage to and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters; medical malpractice; and employee health, dental and accident benefits. Commercial insurance coverage is purchased for claims arising from such matters other than medical malpractice, employee health claims and workers’ compensation. Settled claims have not exceeded this commercial coverage in any of the three preceding years.

Parkland is self-insured for a portion of its exposure to risk of loss from medical malpractice, workers compensation and employee health claims. Annual estimated provisions are accrued for the self- insured portion of medical malpractice, workers’ compensation and employee health claims and include an estimate of the ultimate costs for both reported claims and claims incurred but not yet reported.

Reclassifications

Certain reclassifications have been made to the 2017 financial statements to conform to the 2018 presentation. The reclassifications had no effect on the changes in financial position.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

29

Note 2: Deposits and Investments

As of September 30, 2018 and 2017, Parkland had deposits and investments as follows (in thousands):

Weighted- Weighted-

Fair Average Days Fair Average Days

Description Value to Maturity Value to Maturity

Bank deposits 2,720$ N/A 3,670$ N/A Texpool deposits 237,685 1 268,958 1 Money market 4,100 1 4,687 1 FNMA 83,375 767 38,425 714 FHLB 81,351 583 22,353 612 FHLMC 66,056 606 28,936 617 FFCB - - 896 349 US treasury 1,576 405 1,580 682

476,863$ 369,505$

2018 2017

Des cription on Statements of Net Position

2018 2017

Cash and cash equivalents 252,960$ 271,935$ Ass ets limited to use Current portion 55,071 38,348 Noncurrent portion 60,236 59,222 Inves tments Short-term 529 - Long-term 108,067 -

476,863$ 369,505$

Investment Maturities

2018 2017

One year or less 69,632$ 30,067$ After one through five years 162,354 61,124 After five through ten years - - After ten years 4,472 5,686

236,458$ 96,877$

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

30

Estimated fair values have been determined by Parkland using appropriate valuation methodologies by third parties, quoted market prices and information available to management as of September 30, 2018 and 2017. The investments are recorded at fair value with the exception of Texpool deposits which are recorded at amortized cost. Parkland adjusts the carrying value of financial instruments classified as assets to reflect their estimated fair value. Cash and cash equivalents included in assets limited to use were $3.5 million and $5.4 million as of September 30, 2018 and 2017.

Parkland categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure fair value of the assets. Level 1 are quoted prices in an active market for identical assets; Level 2 are significant other observable inputs; and Level 3 are significant unobservable inputs (Parkland does not value any of its investments using Level 3 inputs).

The following is a summary of the hierarchy of the fair value of investments of Parkland as of September 30, 2018 and September 30, 2017:

Quoted Prices in Active

Markets for Identical Assets

Significant Other

Observable Inputs

(Level 1) (Level 2) Total

U.S. Government s ecurities 1,576$ -$ 1,576$ U. S. Government agency obligations 209,483 21,299 230,782 Money market funds - 4,100 4,100$

Total investments and cash equivalents by fair value level 211,059$ 25,399$ 236,458$

2018 Fair Value Measurements Using

Quoted Prices in Active

Markets for Identical Assets

Significant Other

Observable Inputs

(Level 1) (Level 2) Total

U.S. Government s ecurities 1,580$ -$ 1,580$ U. S. Government agency obligations 90,610 - 90,610 Money market funds - 4,687 4,687$

Total investments and cash equivalents by fair value level 92,190$ 4,687$ 96,877$

2017 Fair Value Measurements Using

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

31

These amounts exclude investments in local government investment pools which are recorded at amortized cost. These investments total $237.7 million and $269.0 million as of September 30, 2018 and 2017, respectively.

Interest Rate Risk — Parkland invests in fixed-rate debt securities that primarily have average maturities of approximately one to six years. Interest rate risk is limited by the short-term nature of these investments.

Credit Risk — Parkland has a comprehensive investment policy that is designed to comply with State law and the Texas Public Funds Investment Act. The debt securities issued by Federal National Mortgage Association (“FNMA”), the Federal Home Loan Bank (“FHLB”), the Federal Home Loan Mortgage Corporation (“FHLMC”), and the Federal Farm Credit Bureau (“FFCB”) are rated AA+ by Standard & Poor’s rating agency. TexPool’s portfolio consists exclusively of U.S. government securities; repurchase agreements collateralized by U.S. government securities; and AAA-rated, no-load money market mutual funds. All bank deposits are collateralized by FDIC insurance and with securities pledged to Parkland held in safekeeping at a third-party bank on behalf of Parkland’s depository institutions with the exception of $191 thousand of cash held at the individual nursing homes.

Concentration of Credit Risk — Per Parkland’s investment policy, no more than 40% of the investment portfolio can be invested in any one issuer of U.S. government agencies and government- sponsored enterprises, including, but not limited to, the FNMA, the FHLB, the FFCB and the FHLMC. The largest percentage in any one issuer is invested with FNMA at 17.5% as of September 30, 2018, and the FNMA at 11% as of September 30, 2017.

Custodial Credit Risk — Per Parkland’s investment policy, all investments are held in Parkland’s name in safekeeping at Parkland’s trust or custodial institutions.

Investment Income

Investment income for the years ended September 30, 2018 and 2017, consisted of the following (in thousands):

2018 2017

Interest income, including Realized gains /los ses 21,727$ 15,961$ Unrealized loss on inves tments (1,582) (525)

Total investment income 20,145$ 15,436$

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

32

Note 3: Assets Limited to Use

Assets limited to use at September 30, 2018 and 2017, consist of the following funds which are all investments in TexPool and U.S. government-sponsored enterprises:

2018 2017

Debt s ervice 3,489$ 2,717$ Designated for capital uses 103,561 87,611 Other designated 8,257 7,242 Total 115,307 97,570 Less current (55,071) (38,348)

Noncurrent 60,236$ 59,222$

Debt service — Assets limited to use for debt service represent those assets related to the bond issues whose use is legally restricted.

Designated for capital acquisitions — Assets limited to use designated for capital acquisitions represent funds designated at the discretion of the Board of Managers for annual capital additions, as well as funding for a combination of renovations and new facilities.

Other designated — Other assets limited to use includes funds designated by the Board of Managers to fund Parkland’s hospital professional liability program.

Note 4: Capital Assets

Capital assets at September 30, 2018, are summarized as follows: Beginning Additions / Retirements/ Ending

Balance Transfers In Transfers Out Balance

Capital Assets Land and improvements 144,493$ 726$ (594)$ 144,625$ Buildings 1,652,188 6,441 (8,841) 1,649,788 Capital leases 14,546 23 - 14,569 Equipment 743,633 21,033 (956) 763,710 Total capital assets 2,554,860 28,223 (10,391) 2,572,692

Les s Accumulated Depreciation Land and improvements (6,998) (1,106) - (8,104) Buildings (417,571) (38,654) 6,552 (449,673) Capital leases (1,897) (765) - (2,662) Equipment (522,923) (62,386) - (585,309) Total accumulated depreciation (949,389) (102,911) 6,552 (1,045,748)

Net 1,605,471 (74,688) (3,839) 1,526,944 Construction in progress 20,573 29,259 (28,223) 21,609 Capital Assets, Net 1,626,044$ (45,429)$ (32,062)$ 1,548,553$

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

33

Capital assets at September 30, 2017, are summarized as follows:

Beginning Additions / Retirements/ Ending

Balance Transfers In Transfers Out Balance

Capital Assets Land and improvements 144,306$ 333$ (146)$ 144,493$ Buildings 1,671,187 (18,999) - 1,652,188 Capital leases 14,546 - - 14,546 Equipment 698,661 44,992 (20) 743,633 Total capital assets 2,528,700 26,326 (166) 2,554,860

Less Accumulated Depreciation Land and improvements (5,887) (1,111) - (6,998) Buildings (379,642) (37,929) - (417,571) Capital leases (1,133) (764) - (1,897) Equipment (457,346) (65,597) 20 (522,923) Total accumulated depreciation (844,008) (105,401) 20 (949,389)

Net 1,684,692 (79,075) (146) 1,605,471 Cons truction in progress 12,843 44,297 (36,567) 20,573 Capital Ass ets, Net 1,697,535$ (34,778)$ (36,713)$ 1,626,044$

Note 5: Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at September 30, 2018 and 2017, consist of the following:

2018 2017

Accounts payable 24,720$ 22,535$ Accrued expens es 64,021 59,433 Accrued payroll 97,331 82,484 Employee health care benefit liability 13,653 13,645 Other employee benefits 4,367 4,482

Total accounts payable and accrued expenses 204,092$ 182,579$

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

34

The liabilities, described in the table below as of September 30, 2018 and 2017, are based on requirements that a liability for claims be reported if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These liabilities include estimates for both reported claims and incurred, but not reported claims. As a result of settled claims, the frequency of new claims, and other economic and social factors, claims liabilities are reevaluated periodically.

Balance at Beginning of

Year

Current-Year Claims &

Changes in Estimates

Claim Payments

Balance at End of Year

Hospital professional and general liability: 2017 7,102$ 3,339 (1,642) 8,799$ 2018 8,799$ 4,493 (2,732) 10,560$

Employee health care benefit liability: 2017 14,765$ 117,964 (119,084) 13,645$ 2018 13,645$ 133,335 (133,327) 13,653$

Workers’ compensation liability: 2017 4,506$ 864 (1,469) 3,901$ 2018 3,901$ 134 (859) 3,176$

Hospital Professional and General Liability — Parkland is involved in certain legal actions and claims arising in the ordinary course of operations. Parkland records estimated self-insurance costs for medical malpractice and general liabilities as other current and other long-term liabilities. The amounts provided for funding and the estimated liabilities are based on settlement of claims limited to $100,000 per claim and $300,000 per occurrence in accordance with the limited liability provisions of the Texas Tort Claim Act. The estimated liability is reported in other long term liabilities in the statements of net position.

Employee Health Care Benefit Liability — Parkland manages a self-insurance plan that provides for the payment of employee health claims. Parkland records estimated self-insurance costs for health claims as current liabilities. The amount of the estimated liability is derived from a claims modeling system. To obtain coverage, employees authorize payroll withholdings to pay the employee portion of contributions for individual and dependent coverage. Claims are paid by a third-party administrator acting on behalf of Parkland. The administrative contract between Parkland and the third-party administrator is renewable annually, and administrative fees are included in the contractual provisions. The employee health care benefit liability is reported in accounts payable and accrued expenses in the statements of net position.

Workers’ Compensation Liability — Parkland maintains a self-insurance program for workers’ compensation benefits, managed by a third-party administrator. Parkland records estimated self- insurance costs for workers’ compensation as current liabilities. The amount provided for the estimated liability is based on settlement of claims. The estimated liability is reported in accounts payable and accrued expenses in the statements of net position.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

35

Note 6: Operating Leases

Parkland leases facilities under operating leases that expire over periods of up to ten years. Renewal and purchase options are available on certain of these leases. At September 30, 2018, future minimum rental payments for operating leases, including escalations, were as follows:

Years Ending Amount

2019 33,612$ 2020 32,079 2021 5,592 2022 5,168 2023 4,832 2024-2028 5,853

Total 87,136$

Rental expense for all operating leases is included in supplies and other expenses on the statements of revenues, expenses, and changes in net position. Rental expense was approximately $34.8 million in 2018 and $25.0 million in 2017, respectively.

Parkland is also a lessor of land, office space and parking space under operating leases. Renewal options are available on certain of these leases. Rentals received under these arrangements are recorded in other operating revenue, net in the accompanying statements of revenues, expenses, and changes in net position.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

36

Minimum future rentals to be received under operating leases at September 30, 2018, are as follows:

Years Ending Amount

2019 826$ 2020 566 2021 530 2022 315 2023 150 2024-2028 768 2029-2033 799 2034-2038 832 2039-2043 555 2044-2048 499 2049-2053 542 2054-2058 586 2059-2063 507 2064-2068 549 2069-2073 594 2074-2078 643 2079-2083 696 2084-2088 673

Total 10,630$

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

37

Note 7: Capital Leases

Parkland is also a lessee of real estate and equipment under capital leases. At September 30, 2018, future minimum rental payments applicable to the capital leases were as follows:

Years Ending Amount

2019 1,680$ 2020 1,463 2021 1,314 2022 1,309 2023 1,309 2024-2040 25,166

Total minimum future leas e payments 32,241 Les s: Amount repres enting interest (19,066) Present value of net minimum lease payments 13,175$

The capital leases have a current liability of $453 thousand and long term liability of $12.7 million as of September 30, 2018. In 2017 the capital lease current liability was $420 thousand, and the long term liability was $13.2 million.

Class of Property 2018 2017

Real estate 11,686$ 12,203$ Equipment 985 1,210

12,671 13,413

Less: accumulated depreciation (766) (764)

Net capital as sets 11,905$ 12,649$

Asset Balance at September 30,

Amortization of assets held under capital leases is included as a component of depreciation expense.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

38

Note 8: Retirement Plans

Defined Benefit Plan — Parkland maintains the Dallas County Hospital District Retirement Income Plan, a single-employer, defined benefit pension plan (“Plan”). The Plan participation as of January 1, 2018 includes 10,974 active participants, 3,810 inactive employees entitled to but not yet receiving benefits, and 2,634 retirees and beneficiaries. The Plan is administered by the Board of Managers of Parkland (“Board”). The annual payroll for employees covered by the Plan for the years ended December 31, 2017 and 2016, which is included in the actuarial valuation as of January 1, 2018 and 2017, respectively, was approximately $632.7 million and $613.4 million.

Effective January 1, 2018, employees are required to contribute 6.2% of their salaries to the Plan. Effective January 1, 2017, employees were required to contribute 5.5% of their annual salaries to the Plan. Prior to this date, employees were required to contribute 4.5% of their annual salaries to the Plan. Parkland is required by the Plan to contribute the remaining amounts necessary to fund the Plan using actuarial methods.

Parkland’s funding policy is to make periodic actuarially determined employer contributions in amounts designed to accumulate sufficient assets to pay benefits when due. The projected entry age normal method is used to determine both the funding and the pension benefit obligation.

The Plan’s assets include investments reported at fair value. Investments in mutual funds, corporate equities, and fixed income securities are reported at fair value based on published market prices. Short- term money market funds are reported at cost, which approximates fair value. Investments in common collective trusts and hedge funds are reported at net asset value as a practical expedient for fair value.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

39

Calculation of Money Weighted Rate of Return — The money-weighted rate of return considers the changing amounts actually invested during a period and weights the amount of pension plan investments by the proportion of time they are available to earn a return during that period. External cash flows are determined on a monthly basis and are assumed to occur at the beginning of each month. External cash inflows are netted with external cash outflows, resulting in a net external cash flow in each month. The money-weighted rate of return is calculated net of investment expenses.

The Plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the discount rate for calculating the total pension liability is equal to the long term expected rate of return.

Actuarial Methods and Assumptions 2018 2017

Valuation date January 1, 2018 January 1, 2017 Measurement date December 31, 2017 December 31, 2016 Investment rate of return 7.00% 7.00% Inflation 2.50% 2.50% Actuarial cos t method Entry age normal Entry age normal Amortization method 30 year, closed 30 year, closed Amortization growth rate 4.00% 4.00%

Salary increases including inflation Graded table Graded table Mortality Non-annuitants : RP-2000

"Employees" table projected to 2033 us ing s cale AA;

Non-annuitants : RP-2000 "Employees" table projected to 2032 us ing s cale AA;

Annuitant: RP-2000: "Healthy Annuitants" table projected to 2025 us ing s cale AA

Annuitant: RP-2000: "Healthy Annuitants " table projected to 2024 us ing s cale AA

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

40

The long-term expected rate of return on pension plan investments was determined using a building- block method in which best-estimate range of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of real rates of return for each major asset class are summarized in the following table:

Long-Term

Expected

Geometric

Current Real Rate

Asset Class Index Allocation of Return

Cash Citigroup 90-Day T-Bills 1.51% -0.08% Core Fixed Income Barclays Aggregate 21.14% 1.67% Mortgages Barclays Mortgage 4.63% 2.77% Non-US Fixed Income JPM GBI Global ex-US 3.68% -0.15% Large Cap US Equities S&P 500 24.51% 2.86% Small Cap US Equities Rus sell 2000 8.40% 2.68% Developed Foreign Equities MSCI EAFE 16.24% 3.50% Emerging Market Equities MSCI Emerging Markets 7.97% 3.94% Private Equity Cambridge Ass ociates 4.54% 4.68% Hedge Funds / Abs olute Return HFRI Fund of Funds 4.38% 2.93%

Ass umed Inflation - Mean 2.30%

Portfolio Nominal Mean Return 5.47%

Portfolio Standard Deviation 10.69%

Long-Term Expected Rate of Return 7.00%

GASB 68 requires a blended discount rate be used to measure the total pension liability (the actuarial accrued liability calculated using the individual entry age normal cost method). The long-term expected return on Plan investments may be used to discount liabilities to the extent that the Plan’s fiduciary net position (fair market value of assets) is projected to cover benefit payments and administrative expenses. A 20 year high quality (AA/Aa or higher) municipal bond rate must be used for periods where the fiduciary net position is not projected to cover benefit payments and administrative expenses. GASB 68 does allow for alternative evaluations of projected solvency.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

41

The following circumstances justify an alternative evaluation of sufficiency for the Plan:

 Parkland has at least a five year history of paying at least 100% of the actuarially determined contribution (previously termed the annual required contribution).

 The actuarially determined contribution is based on a closed amortization period, which means that payment of the actuarially determined contribution each year will bring the Plan to a 100% funded position by the end of the amortization period.

 The projections regarding future solvency assume that Plan assets earn the assumed rate of return and there are no future changes in the Plan provisions or actuarial methods and assumptions. Therefore, the projections will not reflect any adverse future experience which might impact the Plan’s funded position.

Based on these circumstances, the detailed depletion date projections will show that the fiduciary net position is projected to be sufficient to cover benefit payments and administrative expenses.

Changes in the total pension liability, plan fiduciary net position and the net pension liability are:

(in thousands)

Total Pension Liability

(a)

Plan Fiduciary Net Position

(b)

Net Pension Liability (As set)

(a) - (b)

Balances at December 31, 2016 1,251,943$ 828,754$ 423,189$

Changes for the year Service cos t 44,516 - 44,516 Interest on total pension liability 89,044 - 89,044 Effect of plan changes (4,577) - (4,577) Effect of economic/demographic gains or loss es 8,896 - 8,896 Effect of ass umptions changes or inputs - - - Contributions - employee - 38,686 (38,686) Contributions - employer - 27,915 (27,915) Net inves tment income - 130,137 (130,137) Benefit payments , including refunds

of employee contributions (49,645) (49,645) - Administrative expenses - (3,803) 3,803

Net changes 88,234 143,290 (55,056)

Balances at December 31, 2017 1,340,177$ 972,044$ 368,133$

2017

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

42

(in thous ands)

Total Pension Liability

(a)

Plan Fiduciary Net Pos ition

(b)

Net Pens ion Liability (Asset)

(a) - (b)

Balances at December 31, 2015 1,169,576$ 761,391$ 408,185$

Changes for the year Service cost 41,024 - 41,024 Interest on total pension liability 83,216 - 83,216 Differences between expected and actual experience 2,439 - 2,439 Contributions - employee - 30,270 (30,270) Contributions - employer - 28,083 (28,083) Net investment income - 55,203 (55,203) Benefit payments, including refunds

of employee contributions (44,312) (44,312) - Adminis trative expenses - (1,881) 1,881

Net changes 82,367 67,363 15,004

Balances at December 31, 2016 1,251,943$ 828,754$ 423,189$

2016

Sensitivity Analysis — The following presents the net pension liability of Parkland, using the discount rate of 7.0%, as well as a calculation of the net pension liability if it were calculated using a discount rate that is one percentage point lower (6.0%) or one percentage point higher (8.0%) than the current rate.

September 30, 2018 Decreas e to 6.0%

Current Rate 7.0%

Increase to 8.0%

Total pens ion liability 1,514,129$ 1,340,177$ 1,196,227$ Fiduciary net position 972,043 972,044 972,043 Net pension liability 542,086 368,133 224,184

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

43

During the years ended December 31, 2017 and 2016, $38.7 million and $30.3 million, respectively, of employee contributions were made in accordance with the contribution requirements described above. During the fiscal years ended September 30, 2018 and 2017, $42.4 million and $35.5 million, respectively, of employee contributions were made in accordance with the contribution requirements described above. Parkland contributed approximately $27.9 million to the Plan during the year ended December 31, 2017, in accordance with contribution requirements determined by the January 1, 2017 actuarial valuation. Parkland contributed approximately $28.1 million to the Plan during the year ended December 31, 2016, in accordance with contribution requirements determined by the January 1, 2016 actuarial valuation. An additional $24.4 million was contributed between January 1, 2018 and September 30, 2018 and $20.0 million between January 1, 2017 and September 30, 2017. These amounts were recorded as a deferred outflow of resources at September 30, 2018 and 2017, respectively.

For the years ended September 30, 2018 and 2017, Parkland recognized pension expense of $37.5 million and $58.1 million, respectively. As of September 30, 2018 and 2017, the deferred inflows and outflows of resources are as follows:

Deferred Deferred Outflows of Inflows of Resources Resources

Differences between expected and actual experience 6,174$ -$

Employer contributions s ubsequent to the

measurement date 24,445 -

Net difference between projected and actual earnings on plan investments - 32,439

30,619$ 32,439$

2018

Deferred Deferred Outflows of Inflows of Resources Resources

Differences between expected and actual experience 1,509$ 424$ Employer contributions s ubsequent to the

measurement date 20,042 - Net difference between projected and actual earnings

on plan investments 38,194 - 59,745$ 424$

2017

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

44

At September 30, 2018 and 2017, Parkland reported approximately $24.4 million and $20.0 million, respectively, as deferred outflows of resources related to pensions resulting from Parkland contributions subsequent to the measurement date that will be recognized as a reduction of the net pension liability at September 30, 2019 and 2018, respectively. Other amounts reported as deferred outflows of resources and deferred inflows of resources at September 30, 2018, related to pensions will be recognized in pension expense as follows:

Years Ending September 30,

2018 2,810$ 2019 (49) 2020 (14,685) 2021 (14,341)

(26,265)$

The Plan issues a publicly available financial report that includes financial statements and required supplementary information for the Plan. The report is available on the Parkland website at ParklandHospital.com.

Defined Contribution Plan — Parkland also maintains a voluntary defined contribution plan covering all employees with at least one year of service. The defined contribution plan is administered by the Parkland Board of Managers (“Board”). The defined contribution plan provisions and contribution requirements are established and may be amended by the Board. Eligible employees can choose to contribute from 2% to 20% of their base salaries. Parkland will match employees’ contributions 100%, up to 6% of their base salaries. Employees are fully vested at all times in their voluntary contributions, plus earnings thereon. Vesting in Parkland’s matching contributions is based on years of service. After one year of service, employees vest at the rate of 20% per year for five years. Should an employee terminate prior to vesting completely in Parkland’s contributions, the unvested portion can be used to reduce Parkland’s matching contributions in the aggregate.

Contributions for the year ended September 30, 2018, were approximately $25.2 million from Parkland and $51.3 million from employees. Contributions for the year ended September 30, 2017, were approximately $22.9 million from Parkland and $49.5 million from employees.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

45

Note 9: Concentrations of Patient Accounts Receivable Credit Risk

Parkland grants credit without collateral to its patients, most of whom are Dallas County residents. The mix of receivables from patients and third-party payors, net of allowances for contractual adjustments and bad debts, as of September 30, 2018 and 2017, is as follows:

Commercial ins urance 53,166$ 40% 37,321$ 31% Medicaid 46,521 35% 46,952 39% Medicare 31,900 24% 30,097 25% Patients 1,329 1% 6,019 5%

Total 132,916$ 100% 120,389$ 100%

2018 2017

Note 10: Commitments and Contingencies

As a local governmental unit, Parkland is subject to the provisions of the Texas statute known as the Texas Tort Claims Act. Currently, Parkland’s liability is limited under the Act to monetary damages in a maximum amount of $100,000 for each person, $300,000 for each single occurrence for bodily injury or death, and $100,000 for each single occurrence for injury to or destruction of property. These liability limitations apply to claims and lawsuits covered by the Texas Tort Claims Act and do not apply to other types of claims and lawsuits, including, among others, civil rights and employment related litigation.

As to litigation or other proceedings pending, or to its knowledge, threatened in any court, agency or other administrative body (either state or federal) that are not specifically disclosed in these footnotes, Parkland intends to vigorously defend these matters and pursue its counterclaims, if any. Furthermore, as to such matters Parkland is either currently unable to estimate the ultimate aggregate amount of monetary gain, loss or financial impact of these matters, or does not currently believe these proceedings will have a material adverse impact; provided, however, adverse resolution of these actions and counterclaims could have a material adverse effect on our business, financial condition or results of operations.

In response to a qui tam lawsuit filed in March 2010 alleging that Parkland had submitted certain claims for payment relating to the provision of physical medicine and rehabilitation services that were impermissible under then applicable Medicare and Medicaid program billing regulations, Parkland entered into a settlement agreement in May 2013 with the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General (“OIG-HHS”) of the United States Department of Health and Human Services, and the State of Texas. The settlement agreement was entered into with no admission of liability by Parkland and in final settlement and release of the alleged claims. Under the settlement agreement, Parkland paid $1.4 million to settle the allegations and entered into a five-year Corporate Integrity Agreement (“CIA”) with the OIG-HHS. Under the CIA, among other things Parkland agreed to: (1) implement corrective action to improve

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

46

systemic performance in compliance, ethics, clinical quality and patient safety; (2) measure, analyze, and track quality indicators, including adverse patient events, and implement written policies and procedures designed to ensure Parkland’s compliance with the federal healthcare program requirements on billing and reimbursement; (3) engage an outside monitoring organization to review Parkland’s submission of claims for reimbursement from federal healthcare programs; and (4) engage an outside monitoring organization to review Parkland’s clinical quality systems. Under the CIA, if Parkland fails to comply with its provisions, Parkland is entitled to notice of such non-compliance from the OIG-HHS and an opportunity to cure any alleged non-compliance. The CIA also contains provisions for imposition of monetary penalties for any non-compliance that is not timely cured by Parkland. Further, for any material breaches of the CIA that are not cured by Parkland, the CIA provides that Parkland could be excluded from participation in the Medicare and Medicaid programs, but the CIA also contains dispute resolution provisions for any proceeding seeking to exclude Parkland from participation in the Medicare and Medicaid programs for non-compliance.

Effective May 29, 2018, Parkland concluded the fifth and final Reporting Period of the CIA and timely submitted its fifth Annual Report to the OIG-HHS on September 27, 2018. As of September 30, 2018, no monetary penalties had been imposed by the OIG-HHS upon Parkland for non-compliance with the provisions of the CIA nor had Parkland received any indication from the OIG-HHS regarding non- compliance with the provisions of the CIA.

Note 11: Long-term Debt

Limited Tax Bonds — In 2009, Parkland issued three series of Dallas County Hospital District Limited Tax Bonds (“Bonds”), with a total principal amount of $705.0 million. Payment of principal and interest on the Bonds is supported by ad valorem tax revenue and federal subsidies under the Build America Bond program. In 2013, Parkland issued $38.3 million of Limited Tax and Revenue Bonds. The Bonds are rated “AA-” by Standard & Poor’s and “A+” by Fitch.

Tax-Exempt Series 2009A Bonds were issued with stated fixed interest rates ranging from 3.0% to 5.0%. These bonds matured from August 15, 2014 to August 15, 2016.

Taxable Series 2009B Bonds were issued with a total principal amount of $222.5 million, in accordance with provisions of the Build America Bond program. These bonds bear interest at fixed interest rates ranging from 4.9% to 6.2% and mature from August 15, 2020 through August 15, 2034. The Taxable Series 2009B Bonds are subject to redemption prior to maturity on August 15, 2019 or on any date thereafter, in whole or in part, at the option of Parkland, at the par amount plus any accrued interest.

Taxable Series 2009C Bonds were issued with a total principal amount of $457.7 million, in accordance with provisions of the Build America Bond program and bear interest at fixed interest rates ranging from 4.1% to 5.6%. These bonds mature from August 15, 2017 through August 15, 2044. The Taxable Series 2009C Bonds are subject to make-whole redemption prior to maturity at any time, in whole or in part, at the option of Parkland, at the greater of (i) the issue price of the principal amount redeemed, or (ii) the sum of the present value of the remaining scheduled payments of principal and interest at the Treasury Rate plus 25 basis points plus accrued interest.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

47

The Tax-Exempt Series 2013 Bonds bear interest at stated fixed interest rates between 4.0% and 5.0%, and mature from August 15, 2018 to 2038. The Series 2013 Bonds, with stated maturities on and after August 15, 2024, are subject to redemption prior to maturity on August 15, 2023 or on any date thereafter, in whole or in part, at the option of Parkland at the par amount plus any accrued interest. Payment of principal and interest on the Series 2013 Bonds is supported by parking revenues up to $3.0 million annually and by a tax levy for required debt service payments above $3.0 million.

The following is a summary of long-term debt for the years ended September 30, 2018 and 2017:

2018 2018

Beginning Ending

Balance Additions Amortization Reductions Balance

Taxable Series 2009B Bonds 222,490$ -$ -$ -$ 222,490$ Taxable Series 2009C Bonds 443,030 - - (15,105) 427,925 Tax-exempt 2013 Bonds 38,250 - - (890) 37,360 Tax-exempt 2013 Bonds premium 1,167 - (225) - 942 Total debt 704,937$ -$ (225)$ (15,995)$ 688,717$

Short-term debt 16,485 Long-term debt 672,232 Total debt 688,717$

2017 2017

Beginning Ending

Balance Additions Amortization Reductions Balance

Taxable Series 2009B Bonds 222,490$ -$ -$ -$ 222,490$ Taxable Series 2009C Bonds 457,740 - - (14,710) 443,030 Tax-exempt 2013 Bonds 38,250 - - - 38,250 Tax-exempt 2013 Bonds premium 1,386 - (219) - 1,167 Total debt 719,866$ -$ (219)$ (14,710)$ 704,937$

Short-term debt 15,995$ Long-term debt 688,942 Total debt 704,937$

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Notes to Financial Statements

September 30, 2018 and 2017 (In Thousands)

48

Long-term debt maturities (including mandatory redemptions), interest payments, net of estimated subsidy, and total debt service at September 30, 2018 are as follows:

Principal

Payments and BAB

Years Ending Mandatory Interest Interest Total Debt

September 30, Redemptions Payments Subsidy Service

2019 16,485$ 38,486$ (12,058)$ 42,913$ 2020 17,000 37,747 (11,832) 42,915 2021 17,585 36,905 (11,575) 42,915 2022 18,200 36,024 (11,303) 42,921 2023 18,875 35,056 (11,007) 42,924 2024-2028 105,450 159,364 (50,148) 214,666 2029-2033 128,385 126,299 (39,910) 214,774 2034-2038 156,760 85,567 (27,424) 214,903 2039-2043 170,995 40,217 (13,203) 198,009 2044 38,040 2,138 (702) 39,476

Subtotal 687,775 597,803 (189,162) 1,096,416

Bond premium 4,489 - - 4,489 Accumulated amortization (3,547) - - (3,547)

Total 688,717$ 597,803$ (189,162)$ 1,097,358$

Total interest costs were $40.1 million for fiscal year 2018 and $40.9 million for fiscal year 2017.

Required Supplementary Information

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Schedule of Changes in Net Pension Liability and Related Ratios

Year Ending December 31, (In Thousands)

49

2017 2016 2015 2014 Total pens ion liability Service cost 44,516$ 41,024$ 39,886$ 37,881$ Interest on total pens ion liability 89,044 83,216 78,296 72,677 Effect of plan changes (4,577) - - - Effect of economic/demographic gains or (losses ) 8,896 2,439 (2,122) 8,589 Benefit payments (49,645) (44,312) (49,392) (32,637) Net change in total pension liability 88,234$ 82,367$ 66,668$ 86,510$

Total pension liability, beginning 1,251,943 1,169,576 1,102,908 1,016,398 Total pension liability, ending (a) 1,340,177$ 1,251,943$ 1,169,576$ 1,102,908$

Fiduciary net pos ition Employer contributions 27,915$ 28,083$ 24,500$ 22,812$ Member contributions 38,686 30,270 29,471 27,378 Investment income net of investment expenses 130,137 55,203 (7,945) 43,705 Benefit payments (49,645) (44,312) (49,392) (32,637) Adminis trative expens es (3,803) (1,881) (2,047) (2,020) Net change in plan fiduciary net position 143,290$ 67,363$ (5,413)$ 59,238$

Fiduciary net pos ition, beginning 828,754 761,391 766,804 707,566 Fiduciary net pos ition, ending (b) 972,044$ 828,754$ 761,391$ 766,804$

Net pension liability = (a) - (b) 368,133$ 423,189$ 408,185$ 336,104$

Fiduciary net pos ition as of % of total pens ion liability 72.53% 66.20% 65.10% 69.53%

Covered employee payroll 632,669$ 613,367$ 574,215$ 554,120$

Net position liability as a % of covered payroll 58.19% 68.99% 71.09% 60.66%

This schedule is pres ented to illus trate the requirement to show information for 10 years. However, until a full 10-year trend is compiled, Parkland will pres ent information for thos e years for which information is available.

Dallas County Hospital District d/b/a Parkland Health & Hospital System

A Component Unit of Dallas County, Texas Schedule of Employer Contributions

Year Ending December 31, (In Thousands)

50

2017 2016 2015 2014 Contributions in relation to the actuarially determined contributions 27,915$ 28,123$ 24,500$ 22,812$

Actuarially determined contributions 27,915 28,083 24,540 22,812

Contribution surplus/deficit -$ 40$ (40)$ -$

Covered-employee payroll 632,669$ 613,367$ 574,215$ 554,120$

Contributions as a percentage of covered-employee payroll 4.4% 4.6% 4.3% 4.1%

Notes to Schedule:

Valuation date:

Methods and assumptions used to determine contributions rates:

2017 2016 2015 2014 Actuarial cost method Entry age normal cos t Entry age normal cost Entry age normal cost Entry age normal cost

Amortization method 30 year, closed 30 year, closed 30 year, closed 30 year, closed

Asset valuation method 5-year rolling phase-in 5-year rolling phase-in 5-year rolling phase-in 5-year rolling phase-in

Inflation 2.5% 2.5% 2.5% 3.0%

Inves tment rate of return 8%, net of pension plan investment expens e, including inflation

Retirement age 65 65 65 65

Mortality RP-2000, projected RP-2000, projected RP-2000, projected RP-2000, projected

This schedule is presented to illustrate the requirement to show information for 10 years. However, until a full 10-year trend is compiled, Parkland will present information for those years for which information is available.

7.75%, net of pension plan investment expens e, including inflation

Actuarially determined contribution rates are calculated as of January 1st one year prior to the end of the fiscal year in which contributions are reported.

7.50%, net of pension plan investment expens e, including inflation

7.25%, net of pension plan investment expens e, including inflation