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ALBANY WATER BOARD AND ALBANY MUNICIPAL WATER FINANCE AUTHORITY (A Component Unit of the City of Albany, New York) Combined Financial Statements Together with Independent Auditor’s Report December 31, 2017 and 2016 ---PAGE BREAK--- ALBANY WATER BOARD AND ALBANY MUNICIPAL WATER FINANCE AUTHORITY (A COMPONENT UNIT OF THE CITY OF ALBANY, NEW YORK) Table of Contents December 31, 2017 and 2016 Page Independent Auditor’s Management’s Discussion and Analysis (Unaudited) 3-6 Basic Financial Statements Combined Statements of Net Position Combined Statements of Revenues, Expenses and Changes in Net Position Combined Statements of Cash Notes to Combined Financial Report Required Under Government Auditing Standards Independent Auditor’s Report On Internal Control Over Financial Reporting And On Compliance And Other Matters Based On An Audit Of Financial Statements Performed In Accordance With Government Auditing Standards ---PAGE BREAK--- 1 INDEPENDENT AUDITOR’S REPORT June 28, 2018 Members of the Boards Albany Water Board and Albany Municipal Water Finance Authority Report on the Combined Financial Statements We have audited the accompanying combined financial statements of the Albany Water Board and the Albany Municipal Water Finance Authority (the System), a component unit of the City of Albany, New York, as of and for the year ended December 31, 2017, and the related notes to the combined financial statements, which collectively comprise the System’s combined financial statements as listed in the table of contents. Management’s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 combined financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit 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 combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined 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 combined 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 combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. (Continued) 6 Wembley Court Albany, New York 12205 p (518) 464-4080 f (518) 464-4087 ALBANY • BATAVIA • BUFFALO • EAST AURORA • GENEVA • NYC • ROCHESTER • RUTLAND, VT • SYRACUSE • UTICA www.bonadio.com ---PAGE BREAK--- 2 INDEPENDENT AUDITOR’S REPORT (Continued) Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Albany Water Board and the Albany Municipal Water Finance Authority as of December 31, 2017, and the changes in its financial position and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Adjustments to Prior Period Combined Financial Statements The combined financial statements of the Albany Water Board and the Albany Municipal Water Finance Authority as of December 31, 2016, before they were restated for the matter discussed in Note 14 to the combined financial statements, were audited by other auditors whose report dated June 23, 2017, expressed an unmodified opinion on those statements. As part of our audit of the 2017 combined financial statements, we also audited the adjustments described in Note 14 that were applied to restate the 2016 combined financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2016 combined financial statements of the System other than with respect to the adjustments and, accordingly, we do not express an opinion or any form of assurance on the 2016 combined financial statements as a whole. Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 3 through 6 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 combined financial statements in an appropriate operational, economic, or historical context. We 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 June 28, 2018, on our consideration of the System’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely 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 System’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 System’s internal control over financial reporting and compliance. ---PAGE BREAK--- 3 ALBANY WATER BOARD AND ALBANY MUNICIPAL WATER FINANCE AUTHORITY (A COMPONENT UNIT OF THE CITY OF ALBANY, NEW YORK) Management’s Discussion and Analysis (Unaudited) December 31, 2017 and 2016 The following Management’s Discussion and Analysis (MD&A) of the Albany Water Board and the Albany Municipal Water Finance Authority (System), a component unit of the City of Albany (City) presents a brief narrative of the System’s financial performance for the years ended December 31, 2017 and 2016. Management has prepared the combined financial statements and related footnote disclosures, along with this MD&A. This information should be read in conjunction with the combined financial statements and accompanying notes. Two five-member Boards govern the Albany Water Board (AWB) and the Albany Municipal Water Finance Authority (AMWFA). The Boards have adopted several policies as required under the Public Authorities Act (“PAAA”) of 2005 and the Public Authorities Reform Act (“PARA”) of 2009, enhancing transparency and embracing best governance practices. The AWB Finance Committee meets on a quarterly basis to provide enhanced project and transactional analysis. On a basis, the AWB meets to discuss infrastructure needs, project activity and progress. The AWB meets and AMWFA meets quarterly to discuss the financial position. In addition, the AWB Audit Committee and the AMWFA, independently meet with the external auditors to discuss relevant issues and concerns. In summary, the years ended December 31, 2017 and 2016, reflected positive operational and financial results. The System, working together with the City, experienced weaker revenues than historically realized, generally controlled the growth of expenses, and recorded positive cash flow. Required Financial Statements: The combined financial statements of the System are prepared under accounting principles generally accepted in the United States of America (U.S. GAAP) and contain three statements that provide information on the System’s financial position and results of the operations as of and for the years ended December 31, 2017 and 2016. A description of these combined statements follows: The combined statements of net position include all assets, liabilities, and deferred inflows of resources and provide information about the nature and amounts of investments in resources (assets), the obligations to creditors (liabilities), and the sales of future revenues (deferred inflows of resources). The combined statements of net position present the financial position of the System at December 31, 2017 and 2016, at the end of its fiscal years. The combined statements of revenues, expenses, and changes in net position report all of the years’ revenues and expenses and results of operations. The combined statements of cash flows provide information about cash receipts and cash payments during the two reporting periods. The combined statements report cash receipts, cash payments, and net changes in cash and cash equivalents resulting from operating, capital financing, noncapital financing and investing activities. ---PAGE BREAK--- 4 Required Financial Statements: (Continued) The following comparative condensed combined financial statements and other selected information provide key financial data and indicators for management, monitoring, and planning. 2017 2016 As Restated Percent Change 2017-2016 2015 As Restated Percent Change 2016-2015 Net Operating Revenues 33,126,630 $ 36,097,860 $ 38,274,100 $ Operating Expenses: Operation and maintenance of water system 9,825,777 9,642,825 2% 9,654,070 0% Operation and maintenance of sewer system 9,844,899 9,028,170 9% 9,147,284 Depreciation 3,703,096 3,359,333 10% 3,141,019 7% Administration and general 4,098,311 4,150,837 3,702,611 12% Administrative fee, City of Albany 1,150,000 1,150,000 0% 750,000 53% Total operating expenses 28,622,083 27,331,165 5% 26,394,984 4% Operating income 4,504,547 8,766,695 -49% 11,879,116 -26% Non-operating items 956,120 (452,966) -311% (1,279,991) -65% Change in net position 5,460,667 8,313,729 -34% 10,599,125 -22% Net Position, beginning of year - as restated 44,632,351 36,318,622 23% 25,689,497 41% Net Position, end of year 50,093,018 $ 44,632,351 $ 12% 36,288,622 $ 23% Operating Revenues: Operating revenues for 2017 decreased by approximately $2,682,797 (or by due to a decrease in water usage. Operating revenues failed to meet the budget by approximately $6,200,000. In September 2012, the System rate structure was increased by approximately 4% for substantially all users. Operating Expenses: Operating expenses for 2017 increased by approximately $1,300,000 (or by reflecting increased costs in several areas of the System’s operations. On the water side, total costs approximated $9,826,000, an increase of approximately $183,000. On the sewer side, total costs approximated $9,845,000, approximately $817,000 in excess of similar costs in 2016. Costs associated with the County Sewer Contract, the System’s largest line item cost at approximately $6,182,000, decreased by approximately $32,000 (or about Other Revenue and Expense Items: Depreciation expense increased approximately $344,000 during 2017. The trend in the increase in depreciation is expected to increase in relation to replacing and maintaining aging infrastructure. Interest expense declined by approximately $198,000, as the Authority continues to amortize revenue bonds. Grant income has increased by approximately $723,000 due to increased progress in completing capital spending related to the Long-Term Control Plan. State and Federal agencies recognize the potential catastrophes linked to aging water and sewer infrastructure. In order to assist local municipalities complete necessary improvements, State and Federal agencies have made millions of dollars in grants and low (in some cases no) interest financing available. ---PAGE BREAK--- 5 Other Revenue and Expense Items: (Continued) 2017 2016 As Restated Percent Change 2017-2016 2015 As Restated Percent Change 2016-2015 Current assets 39,482,822 $ 41,010,765 $ 42,489,677 $ Restricted assets 15,092,420 5,715,193 164% 5,410,605 6% Capital assets, net 43,937,221 39,003,917 13% 32,791,141 19% Total assets 98,512,463 85,729,875 15% 80,691,423 6% Current liabilities 8,591,339 9,356,752 7,995,422 17% Noncurrent liabilities 39,574,077 31,556,388 25% 36,122,995 -13% Total liabilities 48,165,416 40,913,140 18% 44,118,417 Deferred inflows 254,029 184,384 38% 284,384 -35% Net position Net Investment in capital assets 15,748,733 5,476,374 188% (4,631,706) -218% Unrestricted 34,344,285 39,155,977 -12% 40,920,328 Total net position 50,093,018 $ 44,632,351 $ 12% 36,288,622 $ 23% Assets: Capital assets increased from December 31, 2017 to December 31, 2016 by approximately $4,930,000. Capital additions to the System approximated $8,336,000 million during 2017. Cash balances increased from 2016 to 2017 by approximately $9,681,000 million. Further, the increased balance includes approximately $9,162,000 in undisbursed EFC funds from 2017 Series Bonds and Notes. Receivables, net of allowances, decreased by approximately $4,081,000 as amounts transferred from the City were more than amounts actually expended by the City (on behalf of the System). Additionally, System receivables have declined in relation to the decline in revenue. Liabilities: During June 2011, the System took advantage of the low interest rate environment, and issued $52,120,000 of Revenue Bonds for the purpose of providing the Authority with the funds required to refund its then outstanding (higher interest rate) Revenue Bonds and to fund certain reserve accounts. As a result of payments during 2017, the System’s total bond debt declined by approximately $4,055,000. During 2017, the System entered into financing major planning and construction of projects associated with the Long-Term Control Plan. As a result, the System issued Series 2017 Bonds and Notes with the EFC totaling $11,774,086. Principal payments on the 2017 Series Bonds are to begin 2019. Debt Coverage Ratio: Under the Bond Resolution, the System is required to maintain rates such that, in each year, revenues (net of operating expenses) are at least 115% of total annual debt service. The System was in compliance with the required ratio during 2017 and 2016. Looking Ahead: The System is focused on managing a balanced budget for 2018, continuing to improve the water and sewer infrastructure, controlling operating expenses, and minimizing the impact of future system rate structure changes on City residents. In 2011, the System began allocating $2 million annually to fund a reserve for major unbudgeted capital projects - while still committing over $3 million annually to fund current capital projects. To this end, over the past 25 years, the System has expended over $75 million to fund capital projects. The System continues to seek potential water sales to other municipalities and new commercial customers. All of these actions, along with a commitment to maintain an adequate security environment, position the System to continue an increasing investment in needed infrastructure capital expenditures in future years. ---PAGE BREAK--- 6 Looking Ahead: (Continued) Working in concert with the City, the System remains committed to its primary mission: to ensure system users have access to a clean, safe, plentiful, and low cost water supply for many generations. The challenges for the future are many: budgetary pressures, an aging infrastructure, the requirement of funding over $50 million in the Hudson River Combined Sewer Overflow Project, and the County sewer contract, water conservation initiatives. Looking ahead, the System remains in a strong financial and operating position with the leadership team and financial resources to appropriately address these challenges in the years ahead. Questions about this report may be directed to the System at [PHONE REDACTED] or at 10 North Enterprise Drive, Albany, New York 12204. ---PAGE BREAK--- ALBANY WATER BOARD AND ALBANY MUNICIPAL WATER FINANCE AUTHORITY (A COMPONENT UNIT OF THE CITY OF ALBANY, NEW YORK) Combined Statements of Net Position December 31, 2017 and 2016 The accompanying notes are an integral part of this financial statement. 7 2016 2017 As Restated CURRENT ASSETS Cash and cash equivalents 5,330,278 $ 6,591,885 $ Investments 19,832,835 16,425,184 Receivables, net 8,626,779 9,908,049 Due from City, net 4,245,051 7,044,927 Grant receivable 377,649 - Prepaid expenses 1,070,230 1,040,720 Total current assets 39,482,822 41,010,765 NONCURRENT ASSETS Cash and cash equivalents, restricted 10,652,943 1,275,197 Investments, restricted 4,439,477 4,439,996 Capital assets, net 43,937,221 39,003,917 Total assets 98,512,463 85,729,875 LIABILITIES, DEFERRED INFLOWS, AND NET POSITION CURRENT LIABILITIES Accounts payable 3,093,751 3,166,049 Bonds and notes payable, current installments 3,305,000 4,025,000 Accrued expenses 2,192,588 2,165,703 Total current liabilities 8,591,339 9,356,752 LONG-TERM LIABILITIES Bonds and notes payable, less current installments 37,434,086 28,995,000 Premium on bonds, net 2,139,991 2,561,388 Total long-term liabilities 39,574,077 31,556,388 Total liabilities 48,165,416 40,913,140 DEFERRED INFLOWS OF RESOURCES Grant advances 169,645 - Sales of future revenues 84,384 184,384 Total deferred inflows of resources 254,029 184,384 COMMITMENTS AND CONTINGENCIES NET POSITION Net investment in capital assets 15,748,733 5,476,374 Unrestricted 34,344,285 39,155,977 Total net position 50,093,018 $ 44,632,351 $ December 31, ---PAGE BREAK--- ALBANY WATER BOARD AND ALBANY MUNICIPAL WATER FINANCE AUTHORITY (A COMPONENT UNIT OF THE CITY OF ALBANY, NEW YORK) Combined Statements of Revenues, Expenses and Changes in Net Position December 31, 2017 and 2016 The accompanying notes are an integral part of this financial statement. 8 2016 2017 As Restated NET OPERATING REVENUES 33,126,630 $ 36,097,860 $ OPERATING EXPENSES Operation and maintenance of water system Water supply, power and pumping 931,178 977,887 Water purification 2,409,338 2,094,386 Water transmission and distribution 4,506,580 4,625,522 Taxes paid to municipalities 1,978,681 1,945,030 Operation and maintenance of sewer system Sewer services 3,135,621 2,377,595 Albany County sewer contract 6,181,905 6,214,036 Sewer pumping stations 527,373 436,539 Depreciation 3,703,096 3,359,333 Administration and general 4,098,311 4,150,837 Administrative fee, City of Albany 1,150,000 1,150,000 Total operating expenses 28,622,083 27,331,165 Operating income 4,504,547 8,766,695 NON-OPERATING INCOME (EXPENSE) Interest expense (1,142,576) (1,340,749) Gain on sale of assets 17,540 16,300 Grants 19,302 30,520 Interest income 479,179 495,529 Realized gain on sale of investments 10,622 10,179 Unrealized loss on investments (127,052) (2,659) Total non-operating income (expense) (742,985) (790,880) OTHER ADDITIONS Capital Grants 1,699,105 337,914 CHANGE IN NET POSITION 5,460,667 8,313,729 NET POSITION, beginning of year, as originally stated 44,632,351 36,622,102 Prior period adjustment (Note 14) - (303,480) NET POSITION, beginning of year, restated 44,632,351 36,318,622 NET POSITION, end of year 50,093,018 $ 44,632,351 $ Years Ended December 31, ---PAGE BREAK--- ALBANY WATER BOARD AND ALBANY MUNICIPAL WATER FINANCE AUTHORITY (A COMPONENT UNIT OF THE CITY OF ALBANY, NEW YORK) Combined Statements of Cash Flows December 31, 2017 and 2016 The accompanying notes are an integral part of this financial statement. 9 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers 34,911,632 $ 36,580,368 $ Cash payments to City for payroll, benefits, and administrative costs (8,953,145) (7,969,871) Cash payments to suppliers for goods and services (13,831,337) (11,489,502) Net cash provided by operating activities 12,127,150 17,120,995 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITES Acquisition and construction of capital assets (8,636,401) (9,572,109) Proceeds from sales of capital assets 17,540 16,300 Proceeds from the issuance of debt 11,774,086 - Principal payments on bonds and notes (4,055,000) (4,535,000) Interest paid (1,577,256) (2,066,542) Receipt of capital grant funds 1,491,101 337,914 Net cash used in capital and related financing activities (985,930) (15,819,437) CASH FLOWS FROM NONCAPITAL AND RELATED FINANCING ACTIVITIES Receipt of grant funds 19,302 30,520 Net cash provided by noncapital and related financing activities 19,302 30,520 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (25,967,562) (2,679,230) Proceeds from sales and maturities of investments 22,444,000 784,186 Interest earned on investments 479,179 495,529 Net cash used by investing activities (3,044,383) (1,399,515) Net increase (decrease) in cash and cash equivalents 8,116,139 (67,437) CASH AND CASH EQUIVALENTS, beginning of year 7,867,082 7,934,519 CASH AND CASH EQUIVALENTS, end of year 15,983,221 $ 7,867,082 $ RECONCILIATION OF OPERATING INCOME TO NET CASH AND CASH EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES Operating income 4,504,547 $ 8,766,695 $ Adjustments to reconcile operating income to net cash and cash equivalents provided by operating activities Depreciation 3,703,096 3,359,333 Amortization - - Changes in: Receivables, net 1,281,270 465,102 Prepaid expenses (29,510) (46,957) Due from city, net 2,799,876 2,591,306 Accounts payable and accrued expenses (32,129) 2,085,516 Deferred inflows - sales of future revenues (100,000) (100,000) Total adjustments 7,622,603 8,354,300 12,127,150 $ 17,120,995 $ Years Ended December 31, ---PAGE BREAK--- 10 ALBANY WATER BOARD AND ALBANY MUNICIPAL WATER FINANCE AUTHORITY (A COMPONENT UNIT OF THE CITY OF ALBANY, NEW YORK) Notes to Combined Financial Statements December 31, 2017 and 2016 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Financial Reporting Entity The City of Albany Water and Sewer System (System) provides water supply and distribution, and the collection and disposal of sewage, principally for the City of Albany (City). The System, as presented in the accompanying combined financial statements, began operations in 1988, and consists of two legally separate, but interdependent, entities: Albany Water Board (Board) and Albany Municipal Water Finance Authority (Authority). The System is a component unit of the City and, as such, is included in the City’s financial statements. The Board, a corporate municipal instrumentality, was established in 1986 with the power to set and collect water and sewer fees in amounts sufficient to pay the debt service on the bonds of the Authority, as well as to provide for the costs of the operation and maintenance of the System. The primary responsibility of the Board is to charge, collect, and enforce rates and other charges for the System. The Board consists of five members who are appointed by the Mayor of the City. The Authority, a public benefit corporation, was established in 1986 for the purpose of issuing revenue bonds to pay for the purchase, future improvement, and construction of the System. Among its powers, the Authority may borrow money, issue debt, and require that the Board charge and collect sufficient rates to pay the costs of operating and financing the System. The Authority consists of seven members, two members of whom are appointed by the Governor of New York State and five members of whom are appointed by the Mayor of the City. The Board is a party to an Operating Agreement with the City whereby the City provides the Board with management, operational, and administrative personnel, and certain services, supplies, and equipment for the operation and maintenance of the System. Direct costs under this agreement, including substantially all operation, maintenance, payroll, and payroll related costs, are charged to the Board (by the City) as incurred. Indirect costs have been assumed by the City in lieu of the City paying water and sewer charges. Revenues and expenses relating to the City’s use of the System, which have not been quantified and recorded in the combined financial statements, are not believed to be significant relative to the total operations of the System. The City, Board, and Authority are parties to a financing agreement which authorized the issuance of bonds by the Authority to finance the purchase of the System (from the City). The financing agreement requires the Board to maintain a rate structure which adequately funds debt service (Note 11), requires the Board to provide for the transfer of revenues to the Authority for debt service payments, and stipulates other administrative requirements for the Board, Authority, and City. The financing agreement also requires the Board to prepare an annual budget for the funding of debt service costs of the Authority and the operation and maintenance costs of the System. b. Basis of Accounting and Presentation of Combined Financial Statements The accompanying combined financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) as applied to governmental units. The Government Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. ---PAGE BREAK--- 11 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) b. Basis of Accounting and Presentation of Combined Financial Statements - Continued Activities of both the Board and the Authority are accounted for similar to those often found in the private sector using the flow of economic resources measurement focus and the accrual basis of accounting. All assets, liabilities, deferred outflows of resources, deferred inflows of resources, net position, revenues, and expenses are accounted for through a single enterprise fund with revenue recorded when earned and expenses recorded at the time liabilities are incurred. For purposes of display, transactions deemed by management to be ongoing, major, or central to the provision of providing water and sewer services are reported as operating revenues and operating expenses. All other activities are reported as nonoperating activities. The Board and Authority, as fiscally interdependent entities, are combined for financial reporting purposes. Additionally, both the Board and the Authority are included in the City’s financial statements as a discretely presented component unit of the City. c. Bond Resolutions The System has entered into four Water and Sewer System General Revenue Bond Resolutions: the 1988 General Revenue Bond Resolution, the 2003 Second General Revenue Bond Resolution, the 2011 Third General Revenue Bond Resolution, and in 2012, the Fourth General Revenue Bond Resolution. These resolutions provide that the System pledge, for the payment of the bonds, all System revenues, the proceeds from the sale of bonds, and all monies and securities in any funds and accounts. Additionally, the Bond Resolutions provide for the assignment and transfer of all of the System’s rights and interests relative to the collection of revenues and the payment of debt service to an authorized trustee. Certain restricted funds and accounts (Note 6) have been established with the trustee to assure the System’s compliance with the Bond Resolutions. d. Net Position Net position is classified as follows: Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the net outstanding debt balances. Restricted net position has externally placed constraints on use. The System does not have any restricted net position as restricted assets are offset by related liabilities. Unrestricted net position consists of assets, deferred inflows and liabilities that do not meet the definition of “restricted net position” or “net investment in capital assets.” The System’s policy is to first utilize available restricted, and then unrestricted, resources when an expense is incurred for which both restricted and unrestricted net position are available e. Cash, Cash Equivalents, and Investments Cash equivalents include all highly liquid investments with original maturities of three months or less when purchased. Investments are carried at fair value, which is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. ---PAGE BREAK--- 12 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued) f. Revenues and Receivables Net receivables include all unpaid customer bills for System related services and also include estimated amounts earned for unbilled usage which relate to billing cycles which end subsequent to December 31 of each year. The Board records estimated unbilled revenue based on historic billing trends and, when applicable, considers the effect of rate structure changes which may have been implemented during the year. In November of each year, substantially all metered delinquent accounts are transferred to the City and placed on the City’s general property tax rolls. These accounts are subject to the City’s collection procedures (which subsequently provide for full collection by the County of Albany). The Board maintains an allowance for doubtful accounts to reflect potentially uncollectible receivables that may not be subject to the City’s or County’s collection procedures. The allowance for doubtful accounts, which is reflected as a contra-receivable for financial reporting purposes, approximated $56,000 at both December 31, 2017 and 2016. The principal revenues of the Board and Authority include all water and sewer user charges billed to customers, including penalties relating to late payments, service income, and connection and repair charges. The System had approximately 28,000 water and sewer customer accounts at December 31, 2017. Over 90% of the customer base is comprised of residential customers, substantially all of which are within the City of Albany. Water services are billed based on meter readings or at flat rate charges; sewer charges are generally billed at 100% of water charges. Revenues are based on billing rates imposed by the Board, which were last increased in September 2012. Approximately 59% of operating revenues is derived from the System’s 50 largest customers, which also include certain inter-municipality agreements. From time to time, the System receives grants from the state and federal government. Revenues from grants (including capital grants) are recognized when all eligibility requirements, including time requirements, are met. Grants may be restricted for either specific operating purposes or for capital purposes. Amounts that are unrestricted or that are restricted to a specific operating purpose are reported as nonoperating revenue. g. Capital Assets Capital assets, acquired through either purchase or construction, are recorded at cost. Depreciation is computed using the straight-line method based upon estimated useful lives as follows: Buildings 20-40 Years Water supply and waste water treatment systems 5-50 Years Water distribution and sewage collection systems 5-50 Years Equipment, furniture, fixtures and vehicles 3-10 Years Maintenance and repairs are charged to current operations. Major replacements and improvements, including all costs associated with the Board/Authority capital plan, are capitalized as capital assets. ---PAGE BREAK--- 13 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued) h. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment if circumstances suggest that there is a significant, unexpected decline in the service utility of a long-lived asset. The service utility of a long-lived asset is the usable capacity that at acquisition was expected to be used to provide service. An assessment of recoverability is performed prior to any write-down of assets and an impairment charge is recorded on those assets for which the estimated fair value is below its carrying amount. No impairment charges to long-lived assets were recorded for the years ended December 31, 2017 and 2016. i. Deferred Inflows of Resources In addition to liabilities, the combined statements of net position will sometimes report a separate section for deferred inflows of resources. Deferred inflows of resources represent unearned revenues that do not meet both the measurable and available criteria for recognition in the current year. The Board has two items that qualify for reporting in this category. The System has deferred sales of future revenues reported in the combined statements of net position. The deferred sales of future revenues result from an inter-municipality agreement with the Town of Guilderland which provides for a commitment to sell water to the Town (Note 10). The System has also received grant funds in advance of expenditure of allowable costs under the grant agreement, these amounts are recognized as deferred inflows of resources until such time as allowable costs are incurred. j. Employee Benefit Plans Certain employee benefit plans are provided by the City for System employees and reimbursed (by the Board) under the operation agreement. In this regard, employees earn vacation time credits as they provide service. Pursuant to collective bargaining agreements, they may accumulate (subject to certain limitations) unused time earned and, upon retirement, termination, or death, may be compensated for such accumulated time. In addition, substantially all full-time employees of the City are members of the New York State and Local Employees’ Retirement System, a multi-employer defined benefit pension plan. Under the operation agreement, all employee benefits are recorded in the combined financial statements at the time they are incurred. The City recognizes in its financial statements the long-term liabilities of such employee benefits. k. Estimates and Assumptions The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The application of these accounting principles involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The System periodically evaluate estimates and assumptions used in the preparation of the combined financial statements and make changes on a prospective basis when adjustments are necessary. Significant estimates made by the System in the accompanying combined financial statements include certain estimates and assumptions related to the allowance for doubtful accounts and the calculation of the unbilled accounts receivable and the estimated useful lives of its depreciable capital assets. l. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. These reclassifications had no effect on changes in net position or operating income. ---PAGE BREAK--- 14 NOTE 2 - RECEIVABLES, NET Receivables, net consist of the following: December 31, 2016 2017 As Restated Billed 3,469,672 4,449,408 Unbilled 5,213,178 5,514,800 8,682,850 9,964,208 Allowance for doubtful accounts (56,071) (56,159) Receivables, net 8,626,779 $ 9,908,049 $ NOTE 3 - CASH, CASH EQUIVALENTS, AND INVESTMENTS Guidelines issued by the New York State Office of the State Comptroller (OSC) establish the criteria for permissible investments by the Board and Authority. Additionally, the Board and Authority have combined investment policies which incorporate provisions of the Bond Resolutions and the OSC’s guidelines. Under these policies, the Board and Authority may invest in obligations of the U.S. Government and its agencies, obligations of the State of New York, certificates of deposit (issued by a New York State commercial bank), and repurchase agreements (which are collateralized by obligations of the federal government). Generally, it is the Board’s and Authority’s policy to purchase U.S. Government agency obligations with the intent of holding them until they mature. All such obligations are registered and held by the Board’s or Authority’s custodian in the Board’s or Authority’s name. The cash, cash equivalents, and investments (at fair value) comprise the following: December 31, 2017 2016 Non-interest bearing accounts: Cash accounts 14,492,123 $ 6,591,885 $ Interest bearing and money market accounts: U.S. Treasury Fund money market 1,491,097 1,275,197 15,983,220 7,867,082 Investments: U.S. Treasury Notes and Securities 15,950,567 9,577,387 U.S. Government Agencies Notes 5,550,333 4,749,095 Certificates of Deposit 2,771,413 6,538,698 24,272,313 20,865,180 Total 40,255,533 $ 28,732,262 $ ---PAGE BREAK--- 15 NOTE 3 - CASH, CASH EQUIVALENTS, AND INVESTMENTS – (Continued) a. Credit Risk The System’s investment policy limits investments to time deposit accounts, certificates of deposit, obligations of the United States of America, obligations guaranteed by the United States of America, obligations of the State of New York, obligations of certain municipalities, schools districts, or other district corporations, obligations of public authorities, public housing authorities, urban renewal agencies and industrial development agencies that are authorized by State statutes, certifications of participation, and investments with agencies of the Federal government. All of the System’s fixed income investments had a credit rating of AA or higher by major rating agencies. b. Custodial Credit Risk All of the System’s deposits with financial institutions were either insured by the Federal Deposit Insurance Corporation (FDIC) or fully collateralized by authorized investments of the pledging financial institution at December 31, 2017 and 2016. Investments are exposed to custodial credit risk if the securities are uninsured, are not registered in the name of the government, and are held either by the counterparty or the counterparty’s trust department or agent but not in the government’s name. All of the System’s investments are held under its name with the custodian. c. Interest Rate Risk The fair value of the System’s fixed maturity investments fluctuates in response to changes in market interest rates. Fair values of interest rate-sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument, and other general market conditions. The System plans to hold its restricted investments to maturity, which minimizes the occurrence of loss on investments. d. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the System’s investment in single issues. As of December 31, 2017 and 2016, the System had approximately 66% and 46% of its investment portfolio in U.S. Treasury Obligations, and 13% and 20% in Federal Home Loan Agency Securities, respectively. No other issuer makes up more than 5% of the System’s restricted investment portfolio. The System holds certificates of deposit with several institutions, all of which are fully collateralized. Management of the System monitors the credit ratings associated with its underlying investments. e. Fair Value Hierarchy The System categorizes its fair value measurements into the fair value hierarchy established by GASB Statement No. 72. The three levels of inputs used to measure fair value are as follows: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets in active markets that the System has the ability to access. ---PAGE BREAK--- 16 NOTE 3 - CASH, CASH EQUIVALENTS, AND INVESTMENTS – Continued e. Fair Value Hierarchy (Continued) Level 2 Inputs to the valuation methodology include: Quoted prices for similar assets in active markets; Quoted prices for identical or similar assets in inactive markets; Inputs other than quoted prices that are observable for the asset; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset. Level 3 Inputs to the valuation methodology are unobservable inputs and significant to the fair value measurement. The fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. All of the investments held by the System at December 31, 2017 and 2016, are considered to be Level 1 and are based on quoted prices for identical assets in an active market. NOTE 4 - CAPITAL ASSETS Capital assets, including additions, deletions, and related transfers comprise the following: January 1, 2017 Additions Deletions December 31, 2017 Capital assets not being depreciated Land 19,680 $ - $ - $ 19,680 $ Construction in progress 4,294,908 4,604,888 (4,294,908) 4,604,888 Total Capital assets, not being depreciated 4,314,588 4,604,888 (4,294,908) 4,624,568 Capital assets being depreciated Water supply, distribution, and collection systems 25,726,845 - - 25,726,845 Water and sewer system, capital improvements equipment, furniture and fixtures, and vehicles 78,895,349 8,326,420 (46,790) 87,174,979 Six Mile waterworks ground lease 7,210,000 - - 7,210,000 Total capital assets, being depreciated 111,832,194 8,326,420 (46,790) 120,111,824 Less accumulated depreciation for: Water supply, distribution, and 24,595,652 211,273 - 24,806,925 collection systems Water and sewer systems, capital improvements, 51,046,851 3,325,116 (46,790) 54,325,177 equipment, furniture and fixtures, and vehicles Six Mile waterworks ground lease 1,500,362 166,707 - 1,667,069 Total accumulated depreciation 77,142,865 3,703,096 (46,790) 80,799,171 Total capital assets being depreciated, net 34,689,329 4,623,324 - 39,312,653 Capital assets, net 39,003,917 $ 9,228,212 $ (4,294,908) $ 43,937,221 $ ---PAGE BREAK--- 17 NOTE 4 - CAPITAL ASSETS – (Continued) January 1, 2016 Additions Deletions December 31, 2016 Capital assets not being depreciated: Land 19,680 $ - $ - $ 19,680 $ Construction in progress 1,551,808 8,499,758 (5,756,658) 4,294,908 Total Capital Assets, not being depreciated 1,571,488 8,499,758 (5,756,658) 4,314,588 Capital assets being depreciated Water supply, distribution, and 25,726,845 - - 25,726,845 collection systems Water and sewer system, capital improvements 72,234,640 6,829,009 (168,300) 78,895,349 equipment, furniture and fixtures, and vehicles Six Mile Waterworks ground lease 7,210,000 - - 7,210,000 Total Capital Assets, being depreciated 105,171,485 6,829,009 (168,300) 111,832,194 Less Accumulated Depreciation for Water supply, distribution, and 24,384,379 211,273 - 24,595,652 collection systems Water and sewer system, capital improvements, 48,233,798 2,981,353 (168,300) 51,046,851 equipment, furniture and fixture, and vehicles Six Mile Waterworks ground lease 1,333,655 166,707 - 1,500,362 Total Accumulated Depreciation 73,951,832 3,359,333 (168,300) 77,142,865 Total Capital Assets being depreciated, net 31,219,653 3,469,676 - 34,689,329 Capital Assets, net 32,791,141 $ 11,969,434 $ (5,756,658) $ 39,003,917 $ Costs incurred through December 31, 2017 and 2016 related to the Long-Term Control Plan (Note 12), including costs incurred on behalf of other communities who are party to the Plan, have been classified within construction in process until the associated projects are complete. In December 2002, the Board and the City entered into a fifty-year ground lease under which the City conveyed to the Board a leasehold interest in certain real property, including Six Mile Waterworks (Rensselaer Lake), an emergency facility. The total cost of this lease, including certain related financing costs, was recorded as a capital asset. ---PAGE BREAK--- 18 NOTE 5 - BONDS AND NOTES PAYABLE Bonds and notes payable balances and activity for the years ended December 31, 2017 and 2016 are summarized below: January 1, 2017 Additions Deletions December 31, 2017 Due within One Year General revenue bonds Series 2011A 31,515,000 $ - $ 3,940,000 $ 27,575,000 $ 3,220,000 $ EFC revenue bonds Series 2010-C 55,000 - 15,000 40,000 15,000 Series 2012-B 1,450,000 - 100,000 1,350,000 70,000 EFC notes Series 2017-A - 5,083,286 - 5,083,286 - Series 2017-B - 3,962,500 - 3,962,500 - Series 2017-C - 874,140 - 874,140 - Series 2017-D - 1,854,160 - 1,854,160 - Bonds and notes payable 33,050,000 11,774,086 4,055,000 40,739,086 3,305,000 $ Unamortized bond premium 2,561,388 - 421,397 2,139,991 Bonds and notes payable, net 35,611,388 $ 11,774,086 $ 4,476,397 $ 42,879,077 $ January 1, 2016 Additions Deletions December 31, 2016 Due Within One Year General revenue bonds Series 2011A 35,935,000 $ - $ 4,420,000 $ 31,515,000 $ 3,940,000 $ EFC revenue bonds Series 2010-C 70,000 - 15,000 55,000 15,000 Series 2012-B 1,550,000 - 100,000 1,450,000 70,000 Bonds payable 37,585,000 - 4,535,000 33,020,000 4,025,000 $ Unamortized bond premium 3,042,995 - 481,607 2,561,388 Bonds payable, net 40,627,995 $ - $ 5,016,607 $ 35,581,388 $ ---PAGE BREAK--- 19 NOTE 5 - BONDS AND NOTES PAYABLE – (Continued) a. Revenue Bonds During June 2011, the Authority issued $52,120,000 of Series 2011 A Water and Sewer System Revenue Bonds for the purpose of providing the Authority with the funds required to refund (higher interest rate) all of the previously outstanding 2003 A and Series 2003 B Revenue Bonds. The Series 2011 A Revenue Bonds comprise both Serial and Term Bonds, with varying rates and maturities, as follows: Type Rate Maturity Serial Bonds/Series A 2.00% to 5.00% 2012 to 2022 42,440,000 $ Term Bonds/Series A 5.00% 2023 to 2033 9,680,000 52,120,000 $ Total Issued Interest on both the Serial and Term Bonds is payable semi-annually. The Series A Term Bonds require sinking fund installments, beginning in the year 2023, through the year 2033, of amounts ranging from $665,000 to $1,135,000, annually. The Term Bonds are callable at the option of the Authority, in whole or in part, beginning December 2023, at a redemption price of par, plus accrued interest. Under the financing agreement, the Board granted a security interest and mortgage in the System to the Authority. The Revenue Bonds are direct obligations of the Authority, secured by a pledge of revenues and funds established under the Bond Resolutions. b. Environmental Facilities Corporation (EFC) Revenue Bonds During 2012, certain previously outstanding pooled borrowing notes were refunded and reissued, resulting in one new EFC pooled borrowing note: The 2012 B EFC note requires serial installments, with an interest rate of approximately Final maturity dates extend through 2028. Interest is payable semi-annually. The 2010 C EFC note requires serial installments, with interest rates ranging from .87% to 3.38%. Final maturity dates extend through 2019. Interest is payable semi-annually. The Authority receives a subsidy credit toward its annual debt service cost from, and is charged an annual administrative fee by, the New York State Environmental Facilities Corporation. c. Environmental Facilities Corporation (EFC) Notes The Authority issued four Second Resolution Series 2017 Notes (2017 Notes) for the purpose of providing interim funding for the System’s share of capital costs, net of related grant and other funding for the Albany Pool - Long-Term Control Plan (LTCP) (2017-A) and other Board capital projects (2017-B, C, and The 2017 Notes were purchased by New York State Environmental Facilities Corporation (EFC), pursuant to project finance agreements with the Authority. The 2017 Notes provide for a zero rate of interest, but require annual principal reduction payments beginning in 2019. The Notes are expected to be converted to long-term bonds at the time of maturity. The 2017 Notes are payable from and secured by a pledge of the System’s revenues on parity with all other Authority bonds. ---PAGE BREAK--- 20 NOTE 5 - BONDS AND NOTES PAYABLE – (Continued) A summary of the terms of the zero interest Series 2017 EFC Notes are as follows: Type Maturity Total Issued Estimated First Principal Payment Amount Estimated First Principal Payment Date Series 2017-A March 16, 2022 5,083,286 $ 135,572 $ March 16, 2019 Series 2017-B April 6, 2020 3,962,500 $ 105,680 $ April 6, 2019 Series 2017-C December 14, 2022 874,140 $ 23,314 $ December 14, 2019 Series 2017-D December 14, 2022 1,854,160 $ 49,451 $ December 14, 2019 Future principal payments required on all outstanding revenue bonds (excluding Series 2017 EFC Notes) are as follows: Year Ending Series December 31 2011A 2010-C 2012-B Total 2018 3,220,000 15,000 70,000 3,305,000 2019 3,350,000 25,000 100,000 3,475,000 2020 3,515,000 - 110,000 3,625,000 2021 3,665,000 - 120,000 3,785,000 2022 4,145,000 - 120,000 4,265,000 2023-2027 2,875,000 - 670,000 3,545,000 2028-2032 2,565,000 - 160,000 2,725,000 2033 4,240,000 - - 4,240,000 27,575,000 $ 40,000 $ 1,350,000 $ 28,965,000 $ EFC Revenue Bonds Future interest payments required on all outstanding revenue bonds are as follows: Year Ending Series December 31 2011A 2010-C 2012-B Total 2018 1,378,750 $ 1,322 $ 82,897 $ 1,462,969 $ 2019 1,217,750 846 77,234 1,295,830 2020 1,050,250 - 71,331 1,121,581 2021 874,500 - 64,859 939,359 2022 691,250 - 57,651 748,901 2023-2027 2,139,250 - 165,115 2,304,365 2028-2032 1,316,500 - 5,045 1,321,545 2033 212,000 - - 212,000 8,880,250 $ 2,168 $ 524,132 $ 9,406,550 $ EFC Revenue Bonds ---PAGE BREAK--- 21 NOTE 6 - RESTRICTIONS ON CASH, CASH EQUIVALENTS AND INVESTMENTS Substantially all the cash, cash equivalents, and investments of the Authority are held by a Trustee in accordance with the provisions of the Bond Resolutions and/or the Financing Agreements. A schedule by fund and account follows: December 31, Cash and Cash 2016 Equivalents Investments Total Total Authority Funds 1999 Debt Service Reserve Fund 26,376 $ 10,982 $ 37,358 $ 36,955 $ 2003 C and 2012-B EFC Debt Service Reserve Fund 116,028 246,145 362,173 357,400 2011 A Debt Service Reserve Fund 1,315,921 4,182,350 5,498,271 5,305,249 2011 A Debt Service Fund 30,474 - 30,474 13,289 Other Funds 2,300 - 2,300 2,300 Note proceeds held by EFC 9,161,844 - 9,161,844 - Total Authority Funds 10,652,943 4,439,477 15,092,420 5,715,193 Board Funds Ongoing Projects Account 18,198 19,832,835 19,851,033 16,714,427 Lockbox and Other Accounts 5,311,981 - 5,311,981 6,302,642 Total Board Funds 5,330,179 19,832,835 25,163,014 23,017,069 Total 15,983,122 $ 24,272,312 $ 40,255,434 $ 28,732,262 $ December 31, 2017 Debt Service Funds: These accounts, which are held by a Trustee, provide for the funding of semi-annual debt service payments. The revenues from the Board are utilized to fund these accounts on a priority basis. Debt Service Reserve Funds: These accounts, which are held by a Trustee, were originally funded with deposits from the proceeds of various bond issues in amounts approximating the maximum annual debt service payments. In accordance with the Bond Resolution (or, as applicable, the SRF note agreements), these funds may only be applied to debt service payments to the extent other funds are not available. Ongoing Projects Account: This account provides for the funding of special, non-recurring capital projects as approved by the Board. The account is currently funded on an annual basis, pursuant to the Board’s budget, in the amount of $2,000,000. NOTE 7 - ACCRUED EXPENSES Accrued expenses comprise the following: 2017 2016 Albany County Sewer Contract obligation (Note 10) 2,076,404 2,036,236 $ Accrued interest 116,184 129,467 Total 2,192,588 $ 2,165,703 $ Years Ended December 31, ---PAGE BREAK--- 22 NOTE 8 - TRANSACTIONS WITH THE CITY OF ALBANY Amounts due from/to the City of Albany are as follows: 2017 2016 Due from the City of Albany 15,742,665 16,346,397 Due to the City of Albany (11,497,614) (9,301,470) Due from the City of Albany, net 4,245,051 $ 7,044,927 $ Years Ended December 31, Pursuant to the Operating Agreement, the City is entitled to water and sewer services without charge in exchange for providing the Board with services described in the agreement. Certain indirect costs, including certain legal services and accounting and engineering support incurred by the City, are charged to the Board on an annual basis. Indirect costs charged to the Board were $1,150,000 for both the years ended December 31, 2017 and 2016, and have been classified as “Administrative fee, City of Albany,” in the accompanying combined statements of revenues, expenses, and changes in net position. NOTE 9 - RETIREMENT PLAN As noted in Note 1a, the System reimburses the City for all personnel costs, including the costs associated with the retirement system. All personnel who perform work for the System are employees of the City. Furthermore, the System does not make a direct contribution to the New York State and Local Employees’ Retirement System (ERS) but rather reimburses the City for a portion of their ERS costs as stipulated in the operation agreement. As the System is considered a non-employer and does not make direct contributions to the ERS, the System is not required to report a net pension liability or asset, or any related deferred inflows of resources or deferred outflows of resources. The System is a member of the ERS and makes contributions on behalf of two AMWFA Board members who are eligible for compensation under New York State regulations. These contributions, and any resulting net pension liability, are immaterial to these combined financial statements. NOTE 10 – CAPITAL GRANTS During 2017, the System was recipient of capital grant funding totaling approximately $1.7 million; which relates to funding the improvement of water infrastructure, unrelated to the Long- Term Control Plan (Note 12). Capital grant revenue recognized for the year ended December 31, 2017 was as follows: Grantor Grant Name Project Amount Department of Environmental Conservation Water Quality Improvement Project Beaver Creek 750,000 $ Department of Environmental Conservation Water Quality Improvement Project Tivoli Day Lighting 80,355 Environmental Facilities Corporation Green Innovation Grant Program Hansen & CSO Abatement 450,000 Environmental Facilities Corporation Clean Water Improvement Act Hansen & CSO Abatement 418,750 1,699,105 $ ---PAGE BREAK--- 23 NOTE 11 - COMMITMENTS AND CONTINGENCIES a. Litigation The System is a party to various legal actions normally associated with water and sewer utility operations, the aggregate effect of which is not expected to be material to the future financial condition of the System. b. Sales of Future Revenue During 1998, the Board entered into an inter-municipality agreement with the Town of Guilderland which provides for a commitment to sell water to the Town through the year 2018. Under the agreement, the Town advanced the Board $2.3 million, of which $2.0 million was provided to induce the Board to enter into the agreement providing for the sale of water at below market rates over a 20-year period. The Board has recorded these funds as deferred inflows of resources, which are being amortized into revenue on the straight-line basis over the 20-year term of the agreement. c. Rebate on Interest Earnings In accordance with the Tax Reform Act of 1986, the Board and Authority are required to rebate to the Federal government the net interest earned on certain restricted funds under the bond issues, in excess of the interest expense on the bonds. During 2016, the Authority made the required 90% payment of the arbitrage liability which amounted to $260,486. As a result, there was no outstanding arbitrage rebate at December 31, 2017 and 2016. Any future amounts to be rebated are not expected to be material in relation to the System’s investment income. d. Albany County Sewer Contract The City, along with certain other municipalities, entered into an agreement with the Albany County Sewer District (the District) which was subsequently assumed by the Board. The District maintains and operates the County sewer system and waste treatment plants. Under the agreement, the District bills the Board its share of the debt service on County sewer obligations and related operating expenses. The Board is liable for its allocable share of debt service whether or not the City’s sewer system remains connected to the County system. e. Rate Covenants Under the Bond Resolution (Note the Board has agreed to establish rates sufficient in each year so that budgeted revenues are at least equal to 115% of the sum of budgeted annual aggregate debt service. The Board has also agreed that operating revenues collected for each fiscal year be at least equal to 100% of operating and Authority expenses and 100% of the amount necessary to pay the required deposits for debt service reserve and other funds from revenue sources. For fiscal year 2017 and 2016, the minimum debt coverage ratio was reached. For fiscal year 2017 and 2016, operating revenues collected were at least 100% of operating and authority expenses. For fiscal year 2017 and 2016, operating revenues collected were at least 100% of required deposits made to the Debt Service Reserve Fund. ---PAGE BREAK--- 24 NOTE 12 – ALBANY POOL – LONG-TERM CONTROL PLAN The Board, on behalf of the City of Albany, along with six other Capital Region communities, is a party to an agreement known as the Albany Pool - Long-Term Control Plan (LTCP). The LTCP project, which was developed under a consent order with the New York State Department of Environmental Conservation, is intended to address the combined sewer overflow discharges into the Hudson River and improve overall water quality. Construction projects associated with the LTCP began in 2015 and are expected to be completed by 2027. The total cost of the project is expected to exceed $100 million, approximately 59% of which will be the funding responsibility of the System. The total allocation by participating community is as follows: Community Allocation % Albany 58.68% Troy 34.76% Cohoes 2.74% Rennselaer 2.13% Watervliet 1.16% Green Island 0.53% Although the System contributes 58.68% of project costs to the other communities’ projects, the System only capitalizes project costs that reside within the System’s jurisdiction. Contributions from the other Communities for the remaining 41.32% of LTCP project costs that reside within the System’s jurisdiction will be recognized as capital contributions (revenues) from the other Communities. Likewise, capital contributions to other communities for LTCP projects outside the jurisdiction of the System will be recognized as capital contributions (expenses) to the other Communities. NOTE 13 – RELEVANT PENDING ACCOUNTING PRONOUNCEMENTS In November 2016, GASB issued Statement No. 83, Certain Asset Retirement Obligations (GASB 83). GASB 83 addresses accounting and financial reporting for certain asset retirement obligations (AROs). An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability based on the guidance in this Statement. The System is required to adopt the provisions of this Statement for the year ending December 31, 2019. In June 2017, GASB issued Statement No. 87, Leases (GASB 87). GASB 87 establishes accounting and financial reporting for leases by governments. GASB 87 increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right-to-use an underlying asset. Under GASB 87, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities. The System is required to adopt the provisions of GASB 87 for the year ending December 31, 2020, but early implementation is encouraged. ---PAGE BREAK--- 25 NOTE 13 – RELEVANT PENDING ACCOUNTING PRONOUNCEMENTS – (Continued) In April 2018, GASB issued Statement No. 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements (GASB 88). GASB 88 defines debt for purposes of disclosure in notes to financial statements as a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. GASB 88 also requires that additional essential information related to debt be disclosed in notes to financial statements, including unused lines of credit; assets pledged as collateral for the debt; and terms specified in debt agreements related to significant events of default with finance-related consequences, significant termination events with finance-related consequences, and significant subjective acceleration clauses. For notes to financial statements related to debt, GASB 88 also requires that existing and additional information be provided for direct borrowings and direct placements of debt separately from other debt. The System is required to adopt the provisions of GASB 88 for the year ending December 31, 2019, but early implementation is encouraged. The System has not evaluated the effect of these statements on its combined financial statements. NOTE 14 – RESTATEMENT OF NET POSITION The System determined that the data used to calculate the 2015 and 2016 unbilled accounts receivable amount was not complete and accurate. The System recalculated the unbilled accounts receivable amounts for 2015 and 2016 and determined the misstatement to be significant. As a result of these misstatements, the System restated opening net position as of January 1, 2016 as well as other account balances at December 31, 2016 as follows: As Previously Reported Adjustment As Restated Receivables, net at December 31, 2016 11,520,578 (1,612,529) 9,908,049 Net operating revenues for the year ended December 31, 2016 37,406,909 (1,309,049) 36,097,860 Change in net position for the year ended December 31, 2016 9,622,778 (1,309,049) 8,313,729 Beginning net position, January 1, 2016 36,622,102 (303,480) 36,318,622 Ending net position, December 31, 2016 46,244,880 (1,612,529) 44,632,351 ---PAGE BREAK--- REPORT REQUIRED UNDER GOVERNMENT AUDITING STANDARDS ---PAGE BREAK--- 26 INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS June 28, 2018 Members of the Boards Albany Water Board and Albany Municipal Water Finance Authority We have audited, in accordance with the 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, the combined financial statements of the Albany Water Board and the Albany Municipal Water Finance Authority (the System), as of and for the year ended December 31, 2017, and the related notes to the combined financial statements, which collectively comprise the System's combined financial statements, and have issued our report thereon dated June 28, 2018. Our report includes a prior period financial statement paragraph related to the restatement of beginning of the year net position. Our opinion was not modified with respect to the restatement. Internal Control Over Financial Reporting In planning and performing our audit of the combined financial statements, we considered the System’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the combined financial statements, but not for the purpose of expressing an opinion on the effectiveness of the System’s internal control. Accordingly, we do not express an opinion on the effectiveness of the System’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did identify a deficiency in internal control, described in the following paragraph as finding 2017-001 that we consider to be a material weakness. (Continued) 6 Wembley Court Albany, New York 12205 p (518) 464-4080 f (518) 464-4087 ALBANY • BATAVIA • BUFFALO • EAST AURORA • GENEVA • NYC • ROCHESTER • RUTLAND, VT • SYRACUSE • UTICA www.bonadio.com ---PAGE BREAK--- 27 INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS (Continued) Finding 2017-001 The System issues combined financial statements prepared in accordance with generally accepted accounting principles and the fair presentation is the responsibility of the System’s management. In the process of closing the general ledger and preparing the combined financial statements, management of the System noted that the data used to calculate the 2015 and 2016 unbilled accounts receivable amount was not complete and accurate. The System recalculated the unbilled accounts receivable amounts for 2015 and 2016 and determined the misstatement to be significant. These prior year misstatements resulted in beginning net position at January 1, 2016 to be restated by $303,480 and net position at December 31, 2016 to be restated by $1,612,529. We recommend that the System continue to follow its implemented corrective action plan. The System agrees with the finding and the recommended procedures have been implemented. Compliance and Other Matters As part of obtaining reasonable assurance about whether the System’s combined financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. System’s Response to Finding The System’s repose to the finding identified in our audit is described in finding 2017-001. The System’s response was not subjected to the auditing procedures applied in the audit of the combined financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.