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Washington State Auditor’s Office Financial Statements and Federal Single Audit Report City of Kennewick Benton County Audit Period January 1, 2011 through December 31, 2011 Report No. 1008212 Issue Date September 4, 2012 ---PAGE BREAK--- September 4, 2012 Mayor and City Council City of Kennewick Kennewick, Washington Report on Financial Statements and Federal Single Audit Please find attached our report on the City of Kennewick’s financial statements and compliance with federal laws and regulations. We are issuing this report in order to provide information on the City’s financial condition. Sincerely, BRIAN SONNTAG, CGFM STATE AUDITOR Washington State Auditor Brian Sonntag Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 TDD Relay (800) 833-6388 FAX (360) 753-0646 http://www.sao.wa.gov ---PAGE BREAK--- Table of Contents City of Kennewick Benton County January 1, 2011 through December 31, 2011 Federal Summary 1 Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards 3 Independent Auditor’s Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 5 Independent Auditor’s Report on Financial Statements 7 Financial Section 9 ---PAGE BREAK--- Federal Summary City of Kennewick Benton County January 1, 2011 through December 31, 2011 The results of our audit of the City of Kennewick are summarized below in accordance with U.S. Office of Management and Budget Circular A-133. FINANCIAL STATEMENTS An unqualified opinion was issued on the financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund and the aggregate remaining fund information. Internal Control Over Financial Reporting: Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over financial reporting that we consider to be significant deficiencies. Material Weaknesses: We identified no deficiencies that we consider to be material weaknesses. We noted no instances of noncompliance that were material to the financial statements of the City. FEDERAL AWARDS Internal Control Over Major Programs: Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over major federal programs that we consider to be significant deficiencies. Material Weaknesses: We identified no deficiencies that we consider to be material weaknesses. We issued an unqualified opinion on the City’s compliance with requirements applicable to its major federal program. We reported no findings that are required to be disclosed under section 510(a) of OMB Circular A-133. Washington State Auditor's Office 1 ---PAGE BREAK--- Identification of Major Programs: The following was a major program during the period under audit: CFDA No. Program Title 14.218 Community Development Block Grant - Entitlement Grants The dollar threshold used to distinguish between Type A and Type B programs, as prescribed by OMB Circular A-133, was $300,000. The City qualified as a low-risk auditee under OMB Circular A-133. Washington State Auditor's Office 2 ---PAGE BREAK--- Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards City of Kennewick Benton County January 1, 2011 through December 31, 2011 Mayor and City Council City of Kennewick Kennewick, Washington We have audited the financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund and the aggregate remaining fund information of the City of Kennewick, Benton County, Washington, as of and for the year ended December 31, 2011, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 27, 2012. The prior year partial comparative information has been derived from the City’s 2010 financial statements that we issued our reports dated June 28, 2011. During the year ended December 31, 2011, the City implemented Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. 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. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit, we considered the City’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control over financial reporting. 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 City's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be deficiencies, significant deficiencies or material weaknesses. Washington State Auditor's Office 3 ---PAGE BREAK--- We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the City’s financial statements are free of material misstatement, we performed tests of the City’s 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. This report is intended for the information and use of management, the Mayor and City Council, federal awarding agencies and pass-through entities. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. BRIAN SONNTAG, CGFM STATE AUDITOR June 27, 2012 Washington State Auditor's Office 4 ---PAGE BREAK--- Independent Auditor’s Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 City of Kennewick Benton County January 1, 2011 through December 31, 2011 Mayor and City Council City of Kennewick Kennewick, Washington COMPLIANCE We have audited the compliance of the City of Kennewick, Benton County, Washington, with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on its major federal program for the year ended December 31, 2011. The City’s major federal program is identified in the Federal Summary. Compliance with the requirements of laws, regulations, contracts and grants applicable to its major federal program is the responsibility of the City’s management. Our responsibility is to express an opinion on the City’s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the City’s compliance with those requirements. In our opinion, the City complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended December 31, 2011. Washington State Auditor's Office 5 ---PAGE BREAK--- INTERNAL CONTROL OVER COMPLIANCE The management of the City is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the City’s internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. This report is intended for the information of management, the Mayor and City Council, federal awarding agencies and pass-through entities. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. BRIAN SONNTAG, CGFM STATE AUDITOR August 8, 2012 Washington State Auditor's Office 6 ---PAGE BREAK--- Independent Auditor’s Report on Financial Statements City of Kennewick Benton County January 1, 2011 through December 31, 2011 Mayor and City Council City of Kennewick Kennewick, Washington We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund and the aggregate remaining fund information of the City of Kennewick, Benton County, Washington, as of and for the year ended December 31, 2011, which collectively comprise the City’s basic financial statements as listed on page 9. These financial statements are the responsibility of the City’s management. Our responsibility is to express opinions on these financial statements based on our audit. The prior year comparative information has been derived from the City’s 2010 financial statements and, in our report dated June 28, 2011, we expressed unqualified opinions on the respective financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund and the aggregate remaining fund information. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund and the aggregate remaining fund information of the City of Kennewick, as of December 31, 2011, and the respective changes in financial position, and the respective budgetary comparison for the General Fund and Community Development funds, for the year then ended in conformity with accounting principles generally accepted in the United States of America. The financial statements include partial prior year comparative information. Such information does not include all of the information required for a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the City’s financial statements for the year ended December 31, 2010, from which such partial information was derived. Washington State Auditor's Office 7 ---PAGE BREAK--- As described in Note 1, during the year ended December 31, 2011, the City implemented Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. In accordance with Government Auditing Standards, we have also issued our report on our consideration of the City’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 10 through 28, pension fund on page 89 and information on other postemployment benefits on page 90 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 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 the 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. Our audit was performed for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. This schedule is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. BRIAN SONNTAG, CGFM STATE AUDITOR June 27, 2012 Washington State Auditor's Office 8 ---PAGE BREAK--- Financial Section City of Kennewick Benton County January 1, 2011 through December 31, 2011 REQUIRED SUPPLEMENTARY INFORMATION Management’s Discussion and Analysis – 2011 BASIC FINANCIAL STATEMENTS Balance Sheet – 2011 and 2010 Statement of Activities – 2011 and 2010 Balance Sheet – Governmental Funds – 2011 and 2010 Reconciliation of the Balance Sheet to the Government Wide Balance Sheet – Governmental Funds – 2011 Statement of Revenues, Expenditures and Changes in Fund Balances – Governmental Funds – 2011 and 2010 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities – 2011 Statement of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual-General Fund – 2011, 2010 and 2009 Statement of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual-Community Development Fund – 2011, 2010 and 2009 Balance Sheet – Proprietary Funds – 2011 and 2010 Reconciliation of the Balance Sheet – Proprietary Funds – To the Balance Sheet – Business-Type Activities – Proprietary Funds – 2011 Statement of Revenues, Expenses and Changes in Fund Net Assets – Proprietary Funds – 2011 and 2010 Reconciliation of the Statement of Revenues, Expenses, and Changes in Fund Net Assets of Proprietary Funds to the Statement of Activities – Business-Type Activities – 2011 Statement of Cash Flows – Proprietary Funds – 2011 and 2010 Statement of Fiduciary Net Assets – Fiduciary Funds – 2011 and 2010 Statement of Changes in Fiduciary Net Assets – Fiduciary Funds – 2011 and 2010 Notes to the Financial Statements – 2011 REQUIRED SUPPLEMENTAL INFORMATION Firemen’s Pension Fund – 2011 Other Postemployment Benefits (LEOFF I Retiree Medical) - 2011 SUPPLEMENTARY INFORMATION Expenditures of Federal Awards – 2011 Notes to the Financial Assistance Schedules – 2011 Washington State Auditor's Office 9 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Management’s Discussion and Analysis As management of the City of Kennewick, we offer readers of the City of Kennewick’s financial statements this narrative overview and analysis of the financial activities of the City of Kennewick for the year ended December 31, 2010. The information presented within this overview should be considered in conjunction with our letter of transmittal and the City’s financial statements immediately following this analysis. Financial Highlights The assets of the City of Kennewick exceeded its liabilities at December 31, 2011 by $316,812,159 (net assets). Of this amount, $27,171,070 (unrestricted net assets) may be used to meet the city’s ongoing obligations to citizens and creditors. However, although not formally restricted, a portion of unrestricted net assets as of December 31, 2011 have been identified by City Council for projects that were in progress or planned at the end of 2011, but will not be completed until 2012 or beyond. The city’s total net assets increased by $5,627,537 in 2011. A significant portion of this increase is attributable to capital grants and contributions received from developers in the form of donated infrastructure related to residential and commercial development and state and federal grants received for street reconstruction and improvement projects and water and sewer infrastructure improvements. Expenses were $36,592,279 greater than the program revenues generated for governmental activities. Program revenues exceeded expenses by $661,596 for business-type activities. As of December 31, 2011, the City of Kennewick’s governmental funds reported combined ending fund balances of $20,073,783, a decrease of $9,728,692 in comparison with the prior year. Approximately 15 percent of this total amount, $3,110,898, represents unassigned (undesignated) fund balance. A significant portion of unassigned fund balance (approximately 69 percent) is needed to meet a Council budget policy that requires a minimum fund balance (reserve) in the general fund. Additionally, a portion of unassigned fund balance as of December 31, 2011 has been identified by City Council for projects that were in progress or planned in 2011, but will not be completed until 2012 or beyond. As of December 31, 2011, unassigned fund balance for the general fund was $3,355,669, or 7.6 percent of total reported general fund expenditures and 6.9 percent of total operating fund expenditures (general and street fund), which exceeds the city’s budgetary policy of maintaining fund balance equal to 5 percent of annual operating expenditures for these funds. In addition, committed fund balance reported in the city’s general fund was $2,597,500 as of December 31, 2011. This fund balance is committed through council budget policy to respond to potential unforeseen adversities or major projects that were not anticipated when the city’s budget was prepared. Together these fund balances represent approximately 12.2 percent of 2011 operating funds expenditures. The City of Kennewick’s total capital assets increased by $7,219,173 during the year ended December 31, 2011. This increase reflects the investment made in the city’s infrastructure including parks, city streets and water and sewer infrastructure. These capital projects were funded utilizing a combination of private and public resources. The City of Kennewick’s total outstanding debt decreased by $5,609,478 during the year ended December 31, 2011. This net change reflects the city’s issuance of $5,330,000 in limited tax general Washington State Auditor's Office 10 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington obligation refunding bonds during 2011 to advance refund $5,210,000 in outstanding 2003 limited tax general obligation bonds. The remaining net change in the city’s outstanding debt is the result of scheduled principal payments on the city’s outstanding bonds and notes payable. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City of Kennewick’s basic financial statements and as a tool to assist users in their interpretation of them. The City of Kennewick’s basic financial statements are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. The government-wide financial statements are designed to provide readers with a broad overview of the City of Kennewick’s finances, in a manner similar to a private-sector business. The statement of net assets presents information on all of the City of Kennewick’s assets and liabilities, with the difference between the two reported as net assets. Analyzing net assets over a period of time may be a useful indicator of whether the financial position of the City of Kennewick is improving or deteriorating. The statement of activities presents information on how the government’s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods. Examples of these types of items include uncollected taxes and earned, but unused, vacation and sick leave. The fund financial statements present financial information about the City of Kennewick in a more traditional manner. The City of Kennewick, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the city can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on a near-term view of the city’s financial resources available for spending. The modified accrual basis of accounting is utilized in preparation of these statements, which may be useful in evaluating the city’s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with the information presented for governmental activities in the government-wide financial statements. This comparison provides readers with a better understanding of the long-term impacts of near-term financing decisions. Both the governmental balance sheet and governmental fund statement of revenues, expenditures and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City of Kennewick maintains thirteen individual governmental funds for financial reporting purposes. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balance for the general fund, community development fund and the capital improvement fund, all of which have been determined to be major funds. Data from the other governmental funds is combined into a single, aggregated presentation. However, individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements. Washington State Auditor's Office 11 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington The City of Kennewick adopts a biennial appropriated budget. A budgetary comparison for the general fund and major special revenue funds has been provided in this report to demonstrate compliance with their respective budgets. The City of Kennewick maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City of Kennewick uses six enterprise funds to account for its water and sewer utility, ambulance service, building inspection function, coliseum facility operations, stormwater utility and golf course operations. Internal service funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the city, or to other governmental units on a cost- reimbursement basis. The City of Kennewick uses three internal service funds to account for the management, maintenance, and repair of all city-owned equipment, the purchasing, warehousing, and disbursement of office and maintenance supplies for all departments within the city, and for self-insurance services to all city departments. Because all three of these services predominantly benefit governmental rather than business-type functions, they have been included within the governmental activities in the government-wide financial statements. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the water and sewer fund and coliseum fund, both of which are considered to be major funds. Data from the other enterprise funds is combined into a single, aggregated column. In addition, all three internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the nonmajor enterprise funds, as well as the individual internal service funds, is provided in the form of combining statements. Fiduciary funds are used to account for resources held for the benefit of parties outside of the government. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the City of Kennewick’s own programs. The method of accounting utilized for these funds is similar in nature to that of the proprietary funds. The notes to the financial statements provide additional information that is considered to be essential for a full understanding of the information provided in the government-wide and fund financial statements. In addition to the basic financial statements and accompanying notes, this report also contains certain required supplementary information concerning the City of Kennewick’s progress in funding its obligation to provide pension benefits to members of the city’s firemen’s pension fund and other post-employment benefits (OPEB) in the form of healthcare to its Fire Pension Act and Law Enforcement Officers and Firefighters (LEOFF) retirement plan 1 retirees. The combining statements referred to earlier in connection with nonmajor governmental and enterprise funds and individual internal service funds are presented immediately following the required supplementary information described in the preceding paragraph. Government-wide Financial Analysis As noted earlier, net assets may serve over time as a useful indicator of a government’s financial position. As of December 31, 2011, the City of Kennewick’s assets exceeded liabilities by $316,812,159. The following is a condensed version of the city’s statement of net assets for the years ended December 31, 2011 and 2010, respectively. Washington State Auditor's Office 12 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 2011 2010 2011 2010 2011 2010 Assets Current assets 33,148,566 $ 34,808,778 $ 194,609 $ 2,905,631 $ 33,343,175 $ 37,714,409 $ Capital assets 190,117,050 184,536,606 150,638,699 148,999,970 340,755,749 333,536,576 Other noncurrent assets 11,888,631 18,760,345 4,593,853 4,048,178 16,482,484 22,808,523 Total assets 235,154,247 $ 238,105,729 $ 155,427,161 $ 155,953,779 $ 390,581,408 $ 394,059,508 $ Liabilities Current liabilities 6,618,929 $ 10,058,224 $ 4,142,746 $ 4,695,545 $ 10,761,675 $ 14,753,769 $ Noncurrent liabilities 33,776,580 36,454,788 29,230,994 31,666,329 63,007,574 68,121,117 Total liabilities 40,395,509 46,513,012 33,373,740 36,361,874 73,769,249 82,874,886 Net Assets Invested in capital assets, net of related debt 161,606,903 159,856,733 121,159,008 116,639,866 282,765,911 276,496,599 Restricted 4,393,322 4,306,567 2,481,856 2,244,485 6,875,178 6,551,052 Unrestricted (deficit) 28,758,513 27,429,417 (1,587,443) 707,554 27,171,070 28,136,971 Total net assets 194,758,738 191,592,717 122,053,421 119,591,905 316,812,159 311,184,622 Total liabilities and net assets 235,154,247 $ 238,105,729 $ 155,427,161 $ 155,953,779 $ 390,581,408 $ 394,059,508 $ City of Kennewick Balance Sheets Governmental Activities Business-Type Activities Total The majority of the City of Kennewick’s net assets (89 percent) reflect its investment in capital assets, such as land, buildings, improvements, infrastructure and equipment, less any related debt used to acquire those assets that is still outstanding, net of any unspent debt proceeds, which is $57,989,838. These capital assets are used to provide services to citizens and therefore, it should be noted that these assets are not available for future spending. In addition, it should also be noted that although the City of Kennewick’s investment in its capital assets is reported net of related debt, other resources will be drawn upon to repay this debt, since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the City of Kennewick’s net assets (2 percent) is subject to external restrictions, including bond covenants and construction requirements, on how they must be used. The remaining balance of unrestricted net assets of $27,171,070 may be used to meet the government’s ongoing obligations to citizens and creditors. However, a portion of unrestricted net assets as of December 31, 2011 is earmarked by City Council for future projects and other needs of the city for the remainder of its 2011/2012 biennium. As of December 31, 2011, the City of Kennewick was able to report positive balances in all three categories of net assets. In addition, both governmental activities and business-type activities were also able to report positive balances in all categories, with the exception of unrestricted net assets for business-type activities. This deficit balance is attributable to a deficit in unrestricted net assets for the city’s coliseum business-type activity, which is the result of the fact that the city utilized an interfund loan to finance the acquisition of its coliseum facility, rather than external debt. The outstanding balance of this interfund loan, which is $4,061,723, is not considered capital related debt for purposes of calculating the net assets category of invested in capital assets, net of related debt, under generally accepted accounting principles. Instead, the interfund loan reduces unrestricted net assets, despite the fact that the purpose of the interfund loan was to acquire the facility. As mentioned in the financial highlights section of this analysis, the city’s net assets increased by $5,627,537 overall for the year ended December 31, 2011. A large portion of this increase is attributable to capital grants and contributions received from developers in the form of donated infrastructure related to residential and Washington State Auditor's Office 13 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington commercial development and state and federal grants received for street reconstruction and improvement projects and water and sewer infrastructure improvements. Governmental activities increased the City of Kennewick’s net assets by $3,166,021 during the year ended December 31, 2011, which equated to 56 percent of the overall increase of $5,627,537 for the government as a whole. Key elements of the current year’s increase in net assets and changes relative to the prior year follow. Program revenues decreased by approximately $1.8 million during 2011, despite an increase of over $2 million in developer contributions of right of way and other infrastructure in 2011 related to residential and commercial development activity. This increase was offset by a significant reduction in capital grants received during the year after a major project was completed in 2010 that was funded with state and federal grants. Additionally, the city’s Community Development Block Grant (CDBG) program experienced a decline in operating grant revenue in 2011 due to the completion of a one-time project in 2010 that was funded through the U.S. Department of Housing and Urban Development (HUD) Neighborhood Stabilization Program. On a full accrual basis, tax revenues increased by 4.7 percent in 2011 when compared to 2010, which equates to a total increase of approximately $1.8 million. The most significant components of this overall increase were a 4.7 percent increase in property tax revenues, a 9.6 percent increase in sales tax, and a 2 percent increase in utility tax revenues, which were partially offset by a 10.9 percent decrease in real estate excise tax. The increase in property tax revenue for 2011 was attributable to $100.3 million in new construction, state assessed value, and annexed value that was added to the city’s assessed valuation in 2010 for the 2011 tax levy. Sales tax revenue, which is the city’s largest source of tax revenue, increased by 9.6 percent when compared to 2010. This increase was partially attributable to continued economic development efforts that resulted in new businesses opening in the city during the year. Additionally, the impact of one-time federal stimulus funding received for clean-up work at the Hanford nuclear site on the local economy, and on employment in particular, was a significant factor in the increase in retail sales activity within the city during the year. Washington State Auditor's Office 14 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 2011 2010 2011 2010 2011 2010 Revenues Program revenues: Charges for services 5,916,190 $ 5,767,630 $ 23,503,479 $ 23,563,839 $ 29,419,669 $ 29,331,469 $ Operating grants and contributions 5,110,566 6,103,229 1,738 97,737 5,112,304 6,200,966 Capital grants and contributions 4,607,412 5,548,392 3,291,914 1,142,903 7,899,326 6,691,295 General revenues: Property taxes 10,759,727 10,279,405 - - 10,759,727 10,279,405 Sales taxes 15,567,650 14,205,554 - - 15,567,650 14,205,554 Utility taxes 10,933,041 10,723,581 - - 10,933,041 10,723,581 Real estate excise tax 1,252,925 1,406,052 - - 1,252,925 1,406,052 Gambling excise tax 947,459 749,091 - - 947,459 749,091 Lodging tax 1,217,838 1,137,879 - - 1,217,838 1,137,879 Other taxes 460,538 790,899 - - 460,538 790,899 Unrestricted investment earnings 298,070 396,668 120,972 134,579 419,042 531,247 Total revenues 57,071,416 57,108,380 26,918,103 24,939,058 83,989,519 82,047,438 Expenses: General government 4,745,936 9,225,038 - - 4,745,936 9,225,038 Public safety 26,119,643 22,433,245 - - 26,119,643 9,225,038 Transportation 10,990,550 7,687,655 - - 10,990,550 22,433,245 Physical environment 1,952,847 1,816,213 - - 1,952,847 7,687,655 Economic environment 1,282,400 2,462,264 - - 1,282,400 1,816,213 Culture and recreation 5,527,044 5,194,534 - - 5,527,044 2,462,264 Interest on long-term debt 1,608,027 1,602,003 - - 1,608,027 5,194,534 Water and Sewer - - 14,518,407 13,862,434 14,518,407 15,464,437 Medical Services - 4,482,199 3,960,511 4,482,199 3,960,511 Building Safety - - 1,148,047 1,020,997 1,148,047 1,020,997 Stormwater - - 1,251,620 1,064,695 1,251,620 1,064,695 Columbia Park Golf Course - - 271,019 - 271,019 - Coliseum - - 4,464,243 4,227,127 4,464,243 4,227,127 Total expenses 52,226,447 50,420,952 26,135,535 24,135,764 78,361,982 83,781,754 Increase in net assets before transfers 4,844,969 6,687,428 782,568 803,294 5,627,537 7,490,722 Transfers (1,678,948) (1,406,419) 1,678,948 1,406,419 - - Increase (decrease) in net assets 3,166,021 5,281,009 2,461,516 2,209,713 5,627,537 7,490,722 Net assets - beginning 191,592,717 186,311,708 119,591,905 117,382,192 311,184,622 303,693,900 Net assets - ending 194,758,738 $ 191,592,717 $ 122,053,421 $ 119,591,905 $ 316,812,159 $ 311,184,622 $ Governmental Activities Business-Type Activities Total City of Kennewick Changes in Net Assets Utility tax revenue increased by 2 percent overall in 2011. This overall increase was attributable to increases in utility tax revenue generated from sales of electricity, cable television, natural gas and garbage services, which were largely offset by a decrease in utility tax from telephone services. Each of the increases described above were the direct result of rate increases enacted by the respective utility service provider, with the most significant being an 8 percent increase enacted by the electric public utility district servicing Kennewick, which is the largest source of utility tax for the city. These increases were offset by a 7 percent reduction in telephone utility tax revenue, which was attributable to one of the city’s largest cellular telephone service providers discontinuing their past practice of remitting utility tax on gross revenue generated from the sale of data services based on their interpretation of the Internet Tax Freedom Act. Sales of residential and commercial properties declined in 2011, resulting in a 10.9 percent reduction in real estate excise tax during the year. This was attributable to the lingering impacts of the recent national recession on the credit market and the difficulty that developers and builders have experienced in obtaining capital for their projects. Unrestricted investment earnings decreased by 24.9 percent in 2011 when compared to 2010, or approximately $99,000. This decrease is directly tied to interest rates available for the city’s investment portfolio, which were significantly lower during 2011 than 2010. As an example, one of the city’s primary investment vehicles, the Washington State Local Government Investment Pool (LGIP), had an average earnings rate of .17 percent during 2011, compared to .26 percent for 2010. Additionally, the city’s yield on its investments in agency securities also declined considerably during the year, particularly Washington State Auditor's Office 15 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington as older investments matured or were called and had to be replaced with newer, lower yielding investments. On an accrual basis, expenses within governmental activities increased by approximately $1.8 million in 2011 relative to 2010, which equates to a 3.6 percent increase. This change was primarily attributable to an increase in personnel expenses for the city in 2011 within its governmental activities. Some of the major factors leading to this overall increase follow. Expenses for salaries and wages increased by 3 percent in 2011, or about $664,000. This change was attributable to negotiated pay increases for the city’s union personnel and pay for performance awards to its non-represented employees. Expenses for personnel benefits increased by 8.6 percent in 2011, or approximately $604,000. This overall increase was attributable to two main factors. First, the city’s medical insurance premiums increased by 11 percent in 2011, which was partially offset by an increase to the portion of insurance premiums paid by employees. Additionally, the city experienced a significant increase in its expenses for retirement contributions for the State of Washington’s Public Employee Retirement System (PERS) II and III retirement plans. In July of 2011, employer contribution rates were increased from 5.31 percent to 7.07 percent to address the unfunded liability of the state’s PERS I plan. Net transfers made from governmental activities to business-type activities increased by approximately $273,000 in 2011. This change was almost entirely attributable to a $292,000 increase in 2011 to the transfer required from governmental activities to the medical services business-type activity to offset the operating deficit for the activity. A larger operating contribution was required as a result of increases to personnel, medical supply and fuel expenses. Additionally, transfers from governmental activities to the building safety business-type activity decreased by $100,000 in 2011 as a result of better operating results for the activity stemming from increases in building permit revenue. This reduction was offset by a $75,000 increase in transfers to the golf course business-type activity for operational needs of the Columbia Park Golf Links golf course during the first year of operations under a new management company hired by the city. Prior to 2010, the course was leased to a third-party that operated the course independently The following chart illustrates the surplus or net subsidy required for different governmental programs. The illustration clearly shows that all governmental programs are reliant on tax revenues in 2011 to cover the shortfall of program revenues available to fund the costs of providing service to Kennewick’s citizens. . Washington State Auditor's Office 16 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington $0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 General government Public safety Transportation Physical environment Economic environment Culture and recreation Interest on long- term debt Expenses and Program Revenues - Governmental Activities Expenses Program revenues The following graph illustrates different components of the City of Kennewick's revenues from governmental activities. As the graph illustrates, taxes are the major revenue source, making up approximately 72 percent of the total revenues that support governmental activities. Program revenues, which include charges for services provided as well as operating and capital contributions from external parties, are also a large source of revenue used to support governmental activities, making up approximately 27 percent of total revenues. Charges for services 10% Operating grants and contributions 9% Capital grants and contributions 8% Sales taxes 27% Gambling taxes 2% Unrestricted investment earnings 1% Utility taxes 19% Other taxes 1% Property taxes 19% Real estate excise taxes 2% Lodging taxes 2% Revenue by Source -Governmental Activities Washington State Auditor's Office 17 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Business-type activities contributed to the City of Kennewick’s net assets by $2,461,516 for the period ended December 31, 2011, which equated to 44 percent of the overall increase of $5,627,537 for the government as a whole. The graph presented on the following page illustrates the excess of program revenues over expenses or expenses in excess of program revenues for each of the city’s business-type activities. Key elements of the current year increase in net assets and changes relative to the prior year follow. $0 $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 $16,000,000 $18,000,000 $20,000,000 Water and Sewer Medical Services Building Safety Stormwater Golf Course Coliseum Expenses and Program Revenues - Business-type Activities Expenses Program revenues The largest component of revenues for business-type activities, charges for services, experienced a decline of less than 1 percent in 2011. The water and sewer business-type activity, which contributes most significantly to this revenue category when looking at business-type activities as a whole, experienced an overall increase of approximately 1.0 percent in 2011, which was attributable to a rate increase of 1.5 percent enacted for the year. Within the medical services business-type activity, charges for services decreased by 1.6 percent overall during 2011. Although the activity’s billable ambulance transports increased by just over 1 percent in 2011, over 65 percent of these transports were for patients covered under Medicare or Medicaid. The amount the city was allowed to collect under these programs declined in 2011 on average, which resulted in lower net revenue for the city’s billable ambulance transports. Charges for services in the building safety business-type activity increased by 22 percent in 2011 as a result of building permit activity during the year. The number of building permits issued in 2011 actually declined by approximately 2 percent, however the valuation of those permits increased by nearly 15 percent. Charges for services in the city’s stormwater business-type activity increased by 3.4 percent in 2011. This change was the result of a 1.5 percent rate increase to the city’s stormwater utility charge, Washington State Auditor's Office 18 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington coupled with moderate growth in the utility’s customer base. As mentioned previously in this report, the city formed its golf course business-type activity in January of 2011 to account for the operations of the city’s Columbia Park Golf Links golf course. For 2011, the course generated approximately $189,000 in revenue from charges for services. Finally, revenues generated from charges for services decreased by 14.8 percent within the coliseum business-type activity in 2011, which was attributable to the loss of events and lagging ticket sales at the facility in the late summer and early fall of 2011. Additionally, charges for services revenue in 2010 included a one-time management fee paid to the facility related to a partnership with Pacific Northwest National Laboratories (PNNL) for security improvements at the facility. Capital grants and contributions for business-type activities increased by approximately $2.1 million in 2011. The water and sewer and stormwater business-type activities account for the majority of capital grants and contributions revenue within the city’s business-type activities as a result of developer contributions in the form of water and sewer and stormwater infrastructure, which increased by $1.2 million in 2011. Additionally, the current year’s increase in this category was attributable to a capital grant received from the Washington State Department of Ecology within the water and sewer business- type activity. Business-type expenses increased by approximately $2 million overall in 2011 when compared to 2010, which equates to an increase of 8.3 percent. Expenses for the city’s water and sewer business-type activity increased by approximately $656,000 in 2011, which equated to an increase of 4.7 percent. This change was primarily attributable to increases in maintenance and operating costs of the activity including personnel and electricity expenses. Additionally, depreciation expense for the activity increased by approximately $227,000 in 2011 as a result of the significant water and sewer system infrastructure placed in service in the past few years. Expenses for the medical services business-type activity increased during 2011 by approximately $522,000 or 13.2 percent. This change was attributable to increases in salary and benefit costs for firefighter personnel as well as increases in other operating costs of the utility, including significant inflationary increases in the cost of fuel and medical supplies. Expenses for the building safety business-type activity increased by approximately $127,000, or 12.4 percent, in 2011. This change was attributable to an increase in operating costs for the activity, which was the result of increases in salary and benefit costs, including medical insurance and employer retirement contributions. Expenses of the stormwater business-type activity increased by approximately $187,000, or 17.6 percent, in 2011. This change was primarily attributable to increases in maintenance and operating costs of the activity including personnel expenses. The increase in personnel expenses experienced in 2011 was partially the result of a position vacancy within the activity in 2010. As mentioned earlier in this report, the city formed its golf course business-type activity in January of 2011 to account for the operations of the city’s Columbia Park Golf Links golf course. For 2011, the course’s expenses were approximately $271,000. Lastly, expenses for the coliseum business-type activity increased by approximately $237,000, or 5.6 percent, during 2011. This overall increase was primarily the result of inflationary increases to the activity’s operating costs including personnel and utility costs. Washington State Auditor's Office 19 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington The following graph provides an illustration of the different components of the City of Kennewick’s revenues generated from business-type activities. Charges for services, which include items such as charges for water and sewer services and ambulance services provided, are by far the largest source of revenues for business- type activities, making up 87.3 percent of total revenues. Charges for services $23,503,479 87.31% Grants and contributions $3,293,652 12.24% Unrestricted investment earnings $120,972 0.45% Revenue by Source - Business-type Activities Financial Analysis of the Government’s Funds As noted earlier, the City of Kennewick uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds focus on providing information on the City of Kennewick’s near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the city’s financing requirements. In particular, unreserved fund balance may serve as a useful measure of the city’s net resources available for spending. As of December 31, 2011, the City of Kennewick’s governmental funds reported combined ending fund balances of $20,073,783, a decrease of $9,728,692 in comparison with the prior year. Approximately 15 percent of this total amount, $3,110,898, represents unassigned fund balance. A significant portion of unassigned fund balance (approximately 72 percent) is needed to meet a council budget policy that requires a minimum unassigned fund balance (reserve) in the general fund. The remainder of fund balance is 1) restricted to reflect externally imposed constraints placed on the use of resources by creditors, grantors or contributors ($6,228,997), 2) committed to reflect amounts that can only be spent for specific purposes stipulated by law, external providers, or through enabling legislation ($6,113,113), or 3) assigned to reflect amounts that can only be used for a specific purpose determined by a formal action of the city’s highest level of decision making authority ($4,620,775). Washington State Auditor's Office 20 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington The general fund is the chief operating fund of the City of Kennewick. As of December 31, 2011, unassigned fund balance in the general fund was $3,355,669. A common measure of the general fund’s liquidity is to compare unassigned fund balance to total fund expenditures. Unassigned fund balance represents 7.6 percent of total general fund expenditures for the year ended December 31, 2011, as compared to 8.6 percent for the year ended December 31, 2010. It should be noted that the city also maintains a $2.6 million cash reserve for unanticipated changes in revenues and expenditures. The fund balance of the City of Kennewick’s general fund increased by $37,574 during 2011. Key factors in the change are as follows: Tax revenues are by far the largest funding source for the City of Kennewick’s general fund, making up approximately 73 percent of the fund’s total sources of revenue. In 2011, tax revenues receipted into the general fund grew by approximately 11.3 percent overall due to increases in revenue from property sales, utility, and gambling taxes. Property taxes allocated to the general fund increased by roughly 3.6 percent, which was primarily attributable to growth that occurred in the city during 2010 and increased the tax rolls for 2011. As explained in greater detail earlier in this report within the discussion of the statement of activities for governmental activities, the city added approximately $100.4 million to its assessed value for the 2011 levy from new construction and annexation. Sales and use tax revenues reported in the general fund increased by 25.3 percent in 2011 overall. The city’s general fund receives all of the regular and criminal justice sales and use tax received by the city, as well as a portion of the city’s optional sales and use tax. Citywide, regular and optional sales and use tax revenue increased by 7.5 percent in 2011. This increase reflects the relative strength of the local economy during the year and the related growth in the city’s base sales and use tax. Eight of the city’s top ten taxpayers experienced growth in their taxable sales activity for the year. Additionally, most local auto dealers experienced significant growth in 2011 after experiencing a relatively slow year in 2010 following the 2009 federal “cash for clunkers” program. Another significant factor in the increase experienced in 2011 was the State of Washington’s amnesty program, which allowed businesses to remit previously unpaid or unreported taxes owed without penalty or interest from February through April. The ongoing impacts of the amnesty program are limited; and therefore the proceeds received in 2011 were largely a one-time event. The city estimates that it received approximately $205,000 as a result of this program, which represents approximately 1.6 percent of the overall growth in regular and optional sales and use tax revenue for 2011. As mentioned previously, all of the city’s regular sales tax (first half cent) is receipted into the general fund. In accordance with a City Council budget policy, a portion of the proceeds from the city’s optional sales tax (second half cent) is also receipted into the general fund. The amount of optional sales tax allocated to the general fund is a combination of the revenue lost when motor vehicle excise tax was eliminated in conjunction with the city’s implementation of its optional sales tax, replacement of lost federal revenue sharing, and an allocation of $500,000 annually to support economic development efforts. In 2011, this formula resulted in a 5.9 percent increase to the amount of optional sales tax allocated to the general fund. Lastly, criminal justice sales tax, which is a 1/10 percent sales tax in Benton County that is distributed based on population rather than the point of sale, increased by 17.0 percent for the year. Utility tax revenues increased by 2 percent overall in 2011. As explained in greater detail earlier in this report within the discussion of the statement of activities for governmental activities, this overall change was the result of increases in utility tax revenue generated from sales of electricity, cable television services, natural gas and garbage services, which were largely offset by a decrease in utility tax from telephone services. Washington State Auditor's Office 21 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Finally, gambling tax revenues increased by 26.5 percent during 2011, primarily as a result of a change in the timing of tax collections from card rooms during the year. In early April, the city modified its municipal code to require card rooms to remit their tax obligations rather than quarterly. As a result, the city received gambling tax payments from card rooms for the months of October and November during 2011, while in previous years gambling tax payments for these months would have been received in January of the following year. Transfers to the general fund decreased by 15.3 percent, or approximately $491,000, in 2011. This revenue category consists primarily of ongoing transfers from the public safety fund of revenues collected from a voted 2.5 percent utility tax on sales of natural gas, telephone and electricity, which are utilized to partially fund 32 police and fire positions that were added when the tax was enacted. Overall, utility tax transferred into the general fund increased by 1.8 percent in 2011 based on the increases to electric and natural gas utility tax outlined earlier in this report. The primary factor for the overall decrease in transfers to the general fund in 2011 was the loss of a one-time transfer from the city’s equipment rental fund that occurred in 2010 related to the decision not to replace 2 fire vehicles whose potential replacement had been funded in past years by the general fund. Expenditures reported in the general fund increased by 12 percent in 2011. Major factors for this increase follow. First, as explained in more detail earlier in this report within the analysis of the statement of activities for governmental activities, expenditures for salaries and wages increased as a result of negotiated pay increases for the city’s union personnel and pay for performance awards to its non-represented employees. In 2011, the general fund experienced an increase of 2.3 percent in this expenditure category, or approximately $467,000. As also outlined earlier in this report, expenditures for personnel benefits increased during 2011 as a result of an increase to the city’s expenditures for medical insurance premiums and employer paid retirement contributions. Within the general fund, expenditures for benefits increased by 8.6 percent in 2011, or approximately $586,000. Transfers out, which is another major expenditure of the general fund, increased by 61.7 percent, or approximately $1.5 million in 2011, as a result of several factors. In May of 2011, the city entered into a settlement agreement that required the use of $650,000 in unassigned fund balance from the general fund. As a result, this amount was transferred to the city’s risk management fund when the settlement was paid. Additionally, the general fund transferred approximately $300,000 more than what was transferred to the risk management fund in 2010 to replenish the fund’s reserves. City Council’s budget policies state that each year the City Council shall evaluate making a $1 million transfer from the general fund to the capital improvement fund in order to implement council’s priority programs. In 2011, city staff recommended, and City Council approved, transferring $1.5 million, or an additional $500,000, from the general fund to the capital improvement fund to ensure adequate funding would be available for council’s priority capital projects in 2012. The funding for this additional transfer was unassigned fund balance available in the general fund that was available due to one-time expenditure savings. Transfers to the medical services business-type activity (fund) increased by $292,000 in 2011. The additional operating contribution was required to address an operating deficit resulting from increased operating expenditures for the city’s ambulance utility for the year, including increases to salary and benefit, medical supply and fuel expenditures. Washington State Auditor's Office 22 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington A transfer of $75,000 from the general fund to the golf course business-type activity (columbia park golf course fund) was required in 2011 to address start-up costs and an operating deficit for the city’s Columbia Park Golf Links golf course in its first year of operations under new management. As a result of the course being closed until early March and unseasonably cool temperatures in the spring and early summer, the course experienced a larger operating deficit than anticipated for the year. Transfers to the capital improvement fund for capital improvements to city facilities decreased by $162,000 in 2011 as a result of a change to a City Council budget policy that reallocated the annual funding for these improvements from the general fund to the capital improvement fund in an effort to better align the city’s capital funding sources with capital expenditures. Lastly, operating transfers to the building safety business-type activity (fund) decreased by $100,000 in 2011. Historically, the city’s general fund has not provided an operating subsidy to this activity. However, building permit revenue, which is the primary revenue source for this fund, declined significantly in both 2008 and 2009, which resulted in the use of the activity’s existing reserves to meet operating costs. As a result, a transfer from the general fund was required in 2010 to replenish reserves and provide working capital for the activity. In 2011, building permit revenue increased by approximately 22 percent and a transfer from the general fund was not required. The community development fund has a total fund balance of $128,857, of which $85,506 is restricted for grant related projects, with the remaining balance representing assigned fund balance. Total fund balance increased by $6,187 for the year ended December 31, 2011 in the fund. Although the purpose of the community development fund does not necessarily dictate that the fund should accumulate a larger fund balance, this increase does signify a moderate improvement to the fund’s financial condition. The capital improvement fund has a total fund balance of $13,222,038, of which a significant is restricted for specific capital projects as spelled out in loan agreements ($5,414,728) or committed for advances to other funds or park improvements ($3,508,166). Overall fund balance decreased by $9,013,149 in 2011, primarily due to the city expending approximately $6.7 million of the proceeds of its $13,665,000 limited tax general obligation bonds issued during 2010 for projects in its Southridge Local Revitalization Area (LRA). Additionally, the In May of 2011, the city entered into a settlement agreement that required the use of approximately $1.5 million in available fund balance from the capital improvement fund. Assigned fund balance in the capital improvement fund, which represents fund balance available for the purpose of the fund, increased by $1,768,140 during 2011, which indicates that the fund’s financial condition improved during the year. However, there are several high priority capital projects scheduled for 2012 that will draw down the both the capital improvement fund’s restricted and assigned fund balance considerably. The proprietary funds of the City of Kennewick are utilized to account for operations of the city that are commercial in nature and are accounted for in a manner more similar to private enterprise. The statements for proprietary funds contain very similar information to the business-type activities found in the government-wide statements, but in more detail. Total net assets of the city’s proprietary (business-type) funds were $127,774,271 as of December 31, 2011, which was an increase of $4,220,105 for the year. Of the total net assets for proprietary funds, $121,159,008 represented investment in capital, net of related debt and $2,481,856 was restricted for capital projects and debt service, leaving unrestricted net assets of $4,133,407. The unrestricted net assets for proprietary (business-type) funds as a whole are significantly reduced by a deficit in the unrestricted net assets of the coliseum fund. This deficit is the result of a decision by the city to utilize an interfund loan to acquire its coliseum facility, which results in the interfund debt being included in the calculation of unrestricted net assets, as opposed to being included in the calculation of the net asset category of invested in capital assets, net of related debt. Washington State Auditor's Office 23 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington The city’s water and sewer and coliseum funds, which are its major enterprise funds, had total net assets of $111,107,046 and $5,238,091, respectively, as of December 31, 2011. The water and sewer fund’s net assets consist of $100,447,038 in invested in capital assets, net of related debt, $2,481,856 in restricted net assets for capital projects and debt service, and $8,178,152 in unrestricted net assets. The coliseum fund’s net assets consist of $9,432,668 in invested in capital assets, net of related debt and a deficit of $4,194,577 in unrestricted net assets. As mentioned above, this deficit is the result of the city utilizing an interfund loan to purchase the facility, as opposed to external debt. For both of these major enterprise funds, there were no significant restrictions or other commitments that will impact the availability of fund resources for future use. Please refer to the discussion on business-type activities found earlier in this report for further details concerning the finances of business-type funds. General Fund Budgetary Highlights As mentioned previously, the City of Kennewick adopts a biennial budget. The year ended December 31, 2011, marks the completion of the first year of the city’s 2011/2012 biennial budget cycle. Three budget adjustments were made to the city’s budget during 2011. The budgetary comparison statements for the general fund provide more detail on these adjustments. The following are some of the major adjustments to the general fund budget during 2011: An increase of approximately $1,316,000 in the beginning fund balance for the city’s general fund. This adjustment was necessary to adjust the city’s budgeted beginning fund balance from what was included in the city’s adopted budget for the 2011/2012 biennium to the actual amount at the start of the biennium. The addition of a $650,000 transfer to the city’s risk management fund from unassigned fund balance in the general fund to provide a portion of the funding required for a settlement payment related to a lawsuit involving a breach of contract claim against the city. The remaining funding sources for the claim were undesignated fund balance available in the city’s solid waste and capital improvement funds. An increase of approximately $78,900 for revenue received from state and federal agencies as a reimbursement for overtime expenditures incurred for fire personnel responding to regional wild fires. This increase in revenue was accompanied by a corresponding increase in budgeted overtime and travel expenditures within the Fire Department. An increase of approximately $174,000 for grant revenue awarded to the city’s police department through various state and federal grant programs. In addition to providing funding for overtime and other personnel costs of the city’s police department, approximately $73,000 of this grant funding was also passed through to sub-recipients of the city. At the close of 2011, general fund revenues were 51.6 percent of the amounts budgeted for the 2011/2012 biennium. Actual expenditures in the general fund for the year were 51.3 percent of the adjusted biennial budget. The city’s general fund had an unassigned fund balance of $3,355,669 as of December 31, 2011, which was higher than the budgeted ending fund balance for the 2011/2012 biennium and exceeded the city’s budgetary policy to maintain an ending fund balance of at least 5 percent of annual operating expenditures. Additionally, the city also continues to maintain a cash reserve fund for revenue stabilization and contingencies with a balance of approximately $2.6 million. Together these fund balances represented 12.2 percent of annual operating expenditures. Washington State Auditor's Office 24 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Capital Assets and Debt Administration Capital Assets: The City of Kennewick’s investment in capital assets for its governmental and business-type activities as of December 31, 2011, amounts to approximately $340,756,000 (net of accumulated depreciation). This investment includes land, buildings, improvements, infrastructure such as roads and bridges, equipment, and construction in progress. As the following table illustrates, the City of Kennewick’s net capital assets increased by 2.2 percent for the year (a 3.0 percent increase in governmental activities and a 1.1 percent increase in business-type activities). 2011 2010 2011 2010 2011 2010 Land 75,845 $ 73,385 $ 2,988 $ 2,988 $ 78,833 $ 76,373 $ Buildings 27,317 27,761 142,880 141,294 170,197 169,055 Improvements other than buildings 11,406 11,868 - - 11,406 11,868 Infrastructure 55,755 52,741 - - 55,755 52,741 Equipment 6,452 6,526 3,611 3,955 10,063 10,481 Construction in progress 13,342 12,256 1,131 734 14,473 12,990 Intangibles - - 29 29 29 29 Total capital assets 190,117 $ 184,537 $ 150,639 $ 149,000 $ 340,756 $ 333,537 $ (In thousands) Activities Activities Government City of Kennewick Capital Assets, net of depreciation Total Governmental Business-type Washington State Auditor's Office 25 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Major capital asset events during the current fiscal year included the following: A variety of major street construction projects across the city were completed or were in progress at the close of the year, including a $5.6 million project to construct Steptoe Street from Gage to Center Parkway, which is the first phase of a project that will link the city’s retail district to the southern growth area of the city. Construction in progress for these projects and various other street projects was approximately $7.4 million as of December 31, 2010. Several projects were completed or underway at the close of 2011 in the city’s Southridge Local Revitalization Area (LRA), which were funded with bonds issued by the city in 2010 under the state’s Local Revitalization Financing (LRF) program. In 2011, over $1.3 million was spent on street projects in the LRA. Additionally, approximately $5.4 million was spent on the city’s Southridge Sports and Events Complex, which will open in the spring of 2012. Construction was nearly completed on the water and sewer business-type activity’s $2.6 million Zone 5 reservoir and $1.1 million Zone 5 water main, which will serve the southern section of the city. Additional information about the city’s capital assets can be found in note 6. Long-term debt: 2011 2010 2011 2010 2011 2010 General obligation bonds 29,545,000 $ 31,385,000 $ - $ - $ 29,545,000 $ 31,385,000 $ Notes and loans 4,263,843 5,168,437 29,452,121 32,279,090 33,715,964 37,447,527 Capital leases - - 43,095 81,010 43,095 81,010 33,808,843 $ 36,553,437 $ 29,495,216 $ 32,360,100 $ 63,304,059 $ 68,913,537 $ City of Kennewick Outstanding Debt As of December 31, Activities Activities Totals Governmental Business-type As of The City of Kennewick’s total debt decreased by $5,609,478 (8.1 percent) during the year ended December 31, 2011. Activity within governmental activities during 2011 included the issuance of $5,330,000 of limited tax general obligation refunding bonds to refinance $5,210,000 of limited tax general obligation bonds issued in 2003 in order to take advantage of lower interest rates and reduce the city’s annual debt service on the bonds. The remaining activity for 2011 consisted of scheduled payments on the city’s existing debt obligations. During the process of issuing its 2011 limited tax general obligation refunding bonds, the city received an A+ rating for the bonds from Standard & Poor’s. At that time, Standard & Poor’s also affirmed the city’s A+ rating on its other outstanding limited tax general obligation debt. State statutes limit the amount of general obligation debt the city can issue to a percentage of the total assessed value of the taxable property of the city. The city is allowed to issue up to 1.5 percent of total assessed value for non-voted debt and 2.5 percent for voted debt. In addition, the city may issue up to 7.5 percent of assessed value for voted debt in excess of the 2.5 percent limit if it is for utilities, parks or open space purposes. As of December 31, 2011, the city had $45.4 million in non-voted capacity and $96 million in voted capacity. Additional information on the City of Kennewick’s long-term debt can be found in note 9. Washington State Auditor's Office 26 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Economic Factors and Next Year’s Budgets and Rates As mentioned previously, the City of Kennewick adopts a biennial budget. The close of the year ended December 31, 2011 marks the mid-point of the city’s 2011/2012 budget cycle. The local economy for the City of Kennewick has outperformed most other areas across the nation over the last few years and has been relatively insulated from the economic difficulties experienced throughout the country. This has been directly attributable to consistent ongoing federal funding for the Hanford area clean-up and $2 billion in one- time federal stimulus funding designated for the same purpose. At the conclusion of 2011, the city’s economic trends continue to be relatively positive overall and demonstrate continued growth. However, with federal stimulus projects now completed and overall employment at Hanford declining as a result, the potential for a financial downturn in the region now exists, which would only serve to exacerbate the city’s other budget vulnerabilities. The following are a few of the key factors that may impact the city’s governmental activities in 2012 and beyond: As outlined above, the City of Kennewick and the Tri-Cities as a whole was not as severely impacted by the recent national recession as other areas across the nation and State of Washington as a result of federal funding for the Hanford area clean-up. However, since its peak in October of 2011, non-farm industry employment has declined by approximately 4,300 jobs, primarily as a result of the completion of projects funded with one-time federal stimulus funding. It will be imperative for the city to closely monitor its economic trends in anticipation of a potential downturn in the local economy. In particular, trends in sales, utility and property tax receipts will be critical to monitor due to the city’s dependence on these revenue sources, all of which are directly tied to the overall growth in our community. Like many states across the nation, the State of Washington has faced severe budget deficits over the past 4-5 years. Most recently, the state projected a $2 billion deficit for the remainder of its 2011-2013 biennium, after addressing a $5.1 billion deficit when adopting the budget less than a year ago. In order to address these budgetary shortfalls, the state has made severe programmatic cuts, which have impacted the citizens of Kennewick, as well as the city itself. The state has increased user fees for state services and permits, and enacted unfunded mandates that shift responsibility for providing certain services to local governments without providing a corresponding funding source. Additionally, as part of its strategy to address its most recent deficit, the state enacted both temporary and permanent reductions to state shared revenues, including liquor excise taxes and profits. The city remains vulnerable to further state program cuts, fee increases, unfunded mandates and reductions in revenue sharing as the state begins planning for its 2013-2015 biennial budget. In the fall of 2009, the city received notification that it had been awarded $500,000 per year for up to 25 years under the State of Washington’s Local Revitalization Financing (LRF) program for its Southridge revitalization area. The LRF program is funded through a sales tax credit by the state, which results in no increase to the existing sales tax rate paid by consumers. In 2011, the city qualified for the award by demonstrating that the state had received an increase in sales and property tax receipts from within the LRA in the prior calendar year greater than the award amount. The city was also required to issue bonds to pay for projects in the revitalization area, which it did in 2010, and apply the state’s award toward the debt service on those bonds. As mentioned earlier in this report, several key projects in the revitalization area began or were completed during 2011. Additionally, prior to the release of this report, Kennewick General Hospital (KGH) announced that a new hospital facility will be built in the Southridge revitalization area within the next 18 months, which will further spur growth in the area. The success of the LRF program is critical to the future development of the Southridge area and overall economic growth of Kennewick. The following are some factors that may impact the city’s business-type activities in 2012 and for the remainder of the 2011/2012 biennium: Washington State Auditor's Office 27 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington A recent cost of service study for the city’s medical services business-type activity indicated that the utility will require an operating contribution from the city’s general fund of approximately $2 million in future bienniums. In 2012, the Kennewick City Council will be considering funding alternatives that would enable the utility to be self-supporting and eliminate any general fund contribution. The alternatives may include an increase to the existing ambulance utility charge, an increase to ambulance transport rates, or some combination of the two. Without these types of fee changes, the council would be required to evaluate reductions to the level of service provided by the city’s ambulance service or determine the programmatic reductions that would be required in the general fund in order to maintain an ongoing operating contribution for the medical services business-type activity. A copy of the City of Kennewick’s most recent budget document for the 2011/2012 biennium is available upon request and can also be accessed on the city’s web site at http://www.go2kennewick.com. Requests for Information This financial report is designed to provide a general overview of the City of Kennewick’s finances. Questions concerning any of the information provided in this report or request for additional financial information should be addressed to the office of the Finance Director, City of Kennewick, 210 W. 6th Avenue, PO Box 6108, Kennewick, WA 99336. Washington State Auditor's Office 28 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington The notes to the financial statements are an integral part of this statement. Governmental Business-type Activities Activities 2011 2010 2011 2010 ASSETS Current assets: Equity in pooled cash & investments 14,985,446 $ 6,357,327 $ 21,342,773 $ 25,652,158 $ 2,064,491 $ 1,782,842 $ Receivables, net 9,558,848 1,343,023 10,901,871 10,838,896 329,111 398,733 Internal balances 7,963,368 (7,963,368) - - - - Inventories 154,927 327,397 482,324 468,954 20,283 21,939 Prepaid items - 130,230 130,230 124,160 34,403 39,060 Restricted equity in pooled cash & investments 485,977 - 485,977 630,241 - - Total current assets 33,148,566 194,609 33,343,175 37,714,409 2,448,288 2,242,574 Noncurrent assets: Restricted equity in pooled cash & investments 7,182,957 4,593,853 11,776,810 17,940,371 - - Investment in joint ventures 4,705,674 - 4,705,674 4,868,152 - - Capital assets: Land and construction in progress 89,187,208 4,148,312 93,335,520 89,392,789 - - Depreciable capital assets - net 100,929,842 146,490,387 247,420,229 244,143,787 13,579,548 14,032,901 Total noncurrent assets 202,005,681 155,232,552 357,238,233 356,345,099 13,579,548 14,032,901 Total assets 235,154,247 $ 155,427,161 $ 390,581,408 $ 394,059,508 $ 16,027,836 $ 16,275,475 $ LIABILITIES Current liabilities: Accounts payable and accrued items 1,842,957 $ 827,066 $ 2,670,023 $ 6,215,563 $ 166,267 $ 171,001 $ Liabilities payable from restricted assets 485,977 - 485,977 638,986 - - Unearned revenue - 273,837 273,837 552,129 141,279 95,605 Other current liabilities 65,109 15,101 80,210 69,208 - - Current portion of long-term obligations 4,224,886 3,026,742 7,251,628 7,277,883 45,000 - Total current liabilities 6,618,929 4,142,746 10,761,675 14,753,769 352,546 266,606 Noncurrent liabilities: Net pension obligation 17,916 - 17,916 84,778 - - Net post employment benefit obligation 617,224 - 617,224 502,227 - - Noncurrent portion of long-term obligations 33,141,440 29,230,994 62,372,434 67,534,112 12,913,504 12,959,325 Total noncurrent liabilities 33,776,580 29,230,994 63,007,574 68,121,117 12,913,504 12,959,325 Total liabilities 40,395,509 33,373,740 73,769,249 82,874,886 13,266,050 13,225,931 NET ASSETS Invested in capital assets, net of related debt 161,606,903 121,159,008 282,765,911 276,496,599 621,044 1,202,901 Restricted for: Capital projects 946,444 1,322,939 2,269,383 1,964,132 - - Debt service 43,867 1,158,917 1,202,784 1,197,338 - - Grant programs 3,142,028 - 3,142,028 3,085,953 - - Other purposes 260,983 - 260,983 303,629 - - Unrestricted (deficit) 28,758,513 (1,587,443) 27,171,070 28,136,971 2,140,742 1,846,643 Total net assets 194,758,738 122,053,421 316,812,159 311,184,622 2,761,786 3,049,544 Total liabilities and net assets 235,154,247 $ 155,427,161 $ 390,581,408 $ 394,059,508 $ 16,027,836 $ 16,275,475 $ Balance Sheet December 31, 2011 (with comparative totals for 2010) Totals Primary Government Component Unit Public Facilities District Washington State Auditor's Office 29 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Operating Capital Charges for Grants and Grants and Governmental Business-type Functions/Programs Expenses Services Contributions Contributions Activities Activities 2011 2010 2011 2010 Primary government: Governmental activities: General government 4,745,936 $ 1,498,920 $ 1,830,981 $ - $ (1,416,035) $ - $ (1,416,035) $ (6,399,465) $ - $ - $ Public safety 26,119,643 2,145,714 180,999 - (23,792,930) - (23,792,930) (20,135,493) - - Transportation 10,990,550 9,248 2,031,914 4,607,412 (4,341,976) - (4,341,976) 191,815 - - Physical environment 1,952,847 1,595,596 - - (357,251) - (357,251) (169,152) - - Economic environment 1,282,400 89,535 1,066,672 - (126,193) - (126,193) (188,235) - - Culture and recreation 5,527,044 577,177 - - (4,949,867) - (4,949,867) (4,699,168) - - Interest on long-term debt 1,608,027 - - - (1,608,027) - (1,608,027) (1,602,003) - - Total governmental activities 52,226,447 5,916,190 5,110,566 4,607,412 (36,592,279) - (36,592,279) (33,001,701) - - Business-type activities: Water and Sewer 14,518,407 15,169,422 - 2,819,002 - 3,470,017 3,470,017 2,299,503 - - Medical Services 4,482,199 3,022,479 1,738 - - (1,457,982) (1,457,982) (886,618) - - Building Safety 1,148,047 1,159,039 - - - 10,992 10,992 (72,537) - - Stormwater 1,251,620 572,542 - 472,912 - (206,166) (206,166) (422,648) - - Golf Course 271,019 189,569 - - (81,450) (81,450) Coliseum 4,464,243 3,390,428 - - - (1,073,815) (1,073,815) (248,985) - - Total business-type activities 26,135,535 23,503,479 1,738 3,291,914 - 661,596 661,596 668,715 - - Total primary government 78,361,982 $ 29,419,669 $ 5,112,304 $ 7,899,326 $ (36,592,279) $ 661,596 $ (35,930,683) $ (32,332,986) $ - $ - $ Component unit: Public Facilities District 3,637,480 2,335,672 7,888 - - - - - (1,293,920) (1,289,679) Total component unit 3,637,480 $ 2,335,672 $ 7,888 $ - $ - $ - $ - $ - $ (1,293,920) $ (1,289,679) $ General revenues: Property taxes 10,759,727 $ - $ 10,759,727 $ 10,279,405 $ - $ - $ Sales taxes 15,567,650 - 15,567,650 14,205,554 997,620 942,387 Utility taxes 10,933,041 - 10,933,041 10,723,581 - - Real estate excise tax 1,252,925 - 1,252,925 1,406,052 - - Gambling excise tax 947,459 - 947,459 749,091 - - Lodging tax 1,217,838 - 1,217,838 1,137,879 - - Other taxes 460,538 - 460,538 790,899 - - Unrestricted investment earnings 298,070 120,972 419,042 531,247 8,542 15,899 Gain on sale of capital assets - - - - - - Transfers (1,678,948) 1,678,948 - - - - Total general revenues and transfers 39,758,300 1,799,920 41,558,220 39,823,708 1,006,162 958,286 Change in net assets 3,166,021 2,461,516 5,627,537 7,490,722 (287,758) (331,393) Net assets - beginning 191,592,717 119,591,905 311,184,622 303,693,900 3,049,544 3,380,937 Net assets - ending 194,758,738 $ 122,053,421 $ 316,812,159 $ 311,184,622 $ 2,761,786 $ 3,049,544 $ The accompanying notes are an integral part of this statement. Totals Primary Government Component Unit Public Facilities District Statement of Activities For the Year Ended December 31, 2011 (with comparative totals for 2010) Program Revenues Net (Expense) Revenue and Changes in Net Assets Revenue and Changes in Net Assets Net (Expense) Washington State Auditor's Office 30 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Balance Sheet Governmental Funds December 31, 2011 (with comparative totals for 2010) Community Capital General Development Improvement Fund Fund Fund ASSETS Equity in pooled cash & investments 6,447,934 $ 43,577 $ 4,047,600 $ Receivables (net of allowance for uncollectibles) 3,989,707 2,755,184 878,957 Due from other funds - - 3,074,620 Due from other governments 49,091 356,756 - Restricted equity in pooled cash & investments - 79,600 6,842,679 Total assets 10,486,732 $ 3,235,117 $ 14,843,856 $ LIABILITIES AND FUND BALANCES Liabilities: Accounts payable 937,248 $ 49,738 $ 281,050 $ Due to other funds - - 80,000 Due to other governments 8,671 - - Deposits payable 65,109 - - Deferred revenue 3,522,535 3,056,522 774,791 Liabilities payable from restricted assets - - 485,977 Total liabilities 4,533,563 3,106,260 1,621,818 Fund balances: Restricted Debt service - - - Capital - bond issue - - 5,414,728 Community development - 85,506 - Special revenue - - - Committed Coliseum loan - - 2,561,722 Park reserves - - 946,444 Debt service - - - Cash reserve 2,597,500 - - Assigned Capital projects - - 4,299,144 Community development - 43,351 - Debt service - - - Special revenue - - - Unassigned 3,355,669 - - Total fund balances 5,953,169 128,857 13,222,038 Total liabilities and fund balances 10,486,732 $ 3,235,117 $ 14,843,856 $ The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 31 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Other Non-Major Governmental Funds 2011 2010 820,115 $ 11,359,226 $ 13,566,907 $ 521,785 8,145,633 7,794,877 - 3,074,620 4,541,888 967,947 1,373,794 1,384,663 - 6,922,279 13,589,291 2,309,847 $ 30,875,552 $ 40,877,626 $ 324,320 $ 1,592,356 $ 2,488,293 $ 752,103 832,103 202,461 4,095 12,766 7,719 - 65,109 55,295 459,610 7,813,458 7,699,142 - 485,977 622,241 1,540,128 10,801,769 11,075,151 1,971 1,971 1,020 - 5,414,728 12,066,101 - 85,506 115,740 726,792 726,792 949,337 - 2,561,722 4,510,385 - 946,445 877,144 7,446 7,446 4,714 - 2,597,500 2,500,000 - 4,299,144 4,443,392 - 43,351 6,930 34,451 34,451 34,106 243,829 243,829 889,053 (244,770) 3,110,898 3,404,553 769,719 20,073,783 29,802,475 2,309,847 $ 30,875,552 $ 40,877,626 $ Total Governmental Funds Washington State Auditor's Office 32 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Reconciliation of the Balance Sheet to the Government Wide Balance Sheet Governmental Funds December 31, 2011 Total governmental fund balances 20,073,783 $ Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 189,547,177 Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred in the funds. 7,813,459 Internal service funds are used by management to charge the costs of fleet management, central stores and risk management to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net assets. 15,377,542 Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported in the funds. (38,053,223) Net assets of governmental activities 194,758,738 $ The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 33 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the Year Ended December 31, 2011 (with comparative totals for 2010) Community Capital General Development Improvement Fund Fund Fund REVENUES Taxes: Property 10,010,380 $ - $ 13,750 $ Sales 12,673,623 - 2,792,125 Utility 8,380,605 - - Real estate excise tax - - 1,252,925 Gambling tax 947,459 - - Lodging tax - - - Other 530,222 - - Licenses and permits 519,539 - - Intergovernmental 2,187,175 980,363 32,512 Charges for services 4,689,528 - 122,054 Fines and forfeitures 1,238,117 - - Investment earnings 63,864 593 147,112 Rents and leases 157,227 - 19,058 Miscellaneous revenues 193,706 - 341,067 Total revenues 41,591,445 980,956 4,720,603 EXPENDITURES Current : General government 8,324,014 - - Public safety 24,021,137 - - Transportation 1,596,449 - - Physical environment 1,902,910 - - Economic environment 584,242 653,923 - Culture and recreation 3,842,520 - - Debt service: Principal - - 904,593 Interest/issue costs - - 62,031 Advance refunding escrow - - - Capital outlay: General government 9,000 - 392,001 Public safety - - - Transportation - - 1,600,789 Physical environment - - - Economic environment - 17,979 - Culture and recreation - - 5,549,910 Total expenditures 40,280,272 671,902 8,509,324 Excess (deficiency) of revenues over (under) expenditures 1,311,173 309,054 (3,788,721) OTHER FINANCING SOURCES (USES) Transfers in 2,725,600 - 1,790,912 Transfers out (3,999,199) (302,867) (7,015,340) Debt issuance and capital leases - - - Advance refunding escrow - - - Disposition of capital assets - - - Total other financing sources (uses) (1,273,599) (302,867) (5,224,428) Net change in fund balances 37,574 6,187 (9,013,149) Fund balances - beginning 5,915,595 122,670 22,235,187 Fund balances - ending 5,953,169 $ 128,857 $ 13,222,038 $ The accompanying notes are an integral part of this statement. Washington State Auditor's Office 34 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Other Non-Major Governmental Funds 2011 2010 728,173 $ 10,752,303 $ 10,330,215 $ - 15,465,748 14,061,266 2,550,996 10,931,601 10,723,669 - 1,252,925 1,406,052 - 947,459 749,091 1,220,428 1,220,428 1,124,522 - 530,222 493,660 - 519,539 501,484 2,734,757 5,934,807 9,739,782 337,134 5,148,716 5,095,742 - 1,238,117 1,277,547 9,419 220,988 357,523 - 176,285 126,744 93,063 627,836 231,564 7,673,970 54,966,974 56,218,861 - 8,324,014 8,154,952 363,122 24,384,259 23,518,226 4,454,268 6,050,717 3,151,478 - 1,902,910 1,800,332 - 1,238,165 2,333,824 570,794 4,413,314 4,267,031 1,960,000 2,864,593 2,717,037 1,549,805 1,611,836 1,395,238 - - - - 401,001 105,891 - - 5,042 779,423 2,380,212 6,521,874 228,456 228,456 11,043 - 17,979 79,812 - 5,549,910 3,591,185 9,905,868 59,367,366 57,652,965 (2,231,898) (4,400,392) (1,434,104) 4,504,015 9,020,527 10,587,188 (3,094,339) (14,411,745) (12,462,113) 5,799,459 5,799,459 13,580,602 (5,736,541) (5,736,541) - - - 217,956 1,472,594 (5,328,300) 11,923,633 (759,304) (9,728,692) 10,489,529 1,529,023 29,802,475 19,312,946 769,719 $ 20,073,783 $ 29,802,475 $ Governmental Funds Total Washington State Auditor's Office 35 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances - total governmental funds (9,728,692) $ Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which depreciation exceeded capital outlays in the current period. Capital Outlays 8,577,554 $ Depreciation (6,364,751) 2,212,803 The issuance of long-term debt bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amount are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items. 2,801,676 In the statement of activities, developer contributions are reported as income for the City based on the fair market value of these assets. 3,304,951 The statement of activities shows increases and (decreases) in the City's equity (162,478) interest in joint ventures. Some revenues reported in the statement of activities do not provide current financial resources and, therefore, are not reported as revenues in governmental funds. 114,317 Some expenses reported in the statement of activities do require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. 2,254,309 Internal service funds are used by management to charge the costs of certain activities to individual funds. The net revenue of most of these activities are reported with governmental activities. 2,369,135 Change in net assets of governmental activities 3,166,021 $ For the Year Ended December 31, 2011 (with comparative totals for 2010) Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds To the Statement of Activities The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 36 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Budget and Actual Original Final 2011 REVENUES Taxes: Property 19,890,842 $ 19,890,842 $ 10,010,380 $ (9,880,462) $ Sales 21,410,800 21,410,800 12,673,623 (8,737,177) Utility 17,843,400 17,943,400 8,380,605 (9,562,795) Gambling 1,738,000 1,738,000 947,459 (790,541) Other 1,168,000 1,068,000 530,222 (537,778) Licenses and permits 1,055,000 1,055,000 519,539 (535,461) Intergovernmental 3,446,142 3,617,135 2,187,175 (1,429,960) Charges for services 9,127,500 9,206,400 4,689,528 (4,516,872) Fines and forfeitures 2,756,800 2,756,800 1,238,115 (1,518,685) Investment earnings 253,400 253,400 63,864 (189,536) Rents and leases 209,100 209,100 157,227 (51,873) Miscellaneous revenues 452,900 470,400 193,708 (276,692) Total revenues 79,351,884 79,619,277 41,591,445 (38,027,832) EXPENDITURES Current : General government 17,353,542 17,424,412 8,324,014 (9,100,398) Public safety 50,444,046 50,761,382 24,021,136 (26,740,246) Transportation - - 1,596,449 1,596,449 Physical environment 4,218,325 4,218,325 1,902,911 (2,315,414) Economic environment 1,160,402 1,163,467 584,242 (579,225) Culture and recreation 8,170,636 8,184,836 3,842,520 (4,342,316) Debt service: Principal - - - - Interest/issue costs - - - - Capital outlay: General government - - 9,000 9,000 Public safety - - - - Physical environment - - - - Total expenditures 81,346,951 81,752,422 40,280,272 (41,472,150) Excess (deficiency) of revenues over (under) expenditures (1,995,067) (2,133,145) 1,311,173 3,444,318 OTHER FINANCING SOURCES (USES) Transfers in 6,319,585 6,334,585 2,725,600 (3,608,985) Transfers out (3,912,000) (4,484,130) (3,999,199) 484,931 Total other financing sources and uses 2,407,585 1,850,455 (1,273,599) (3,124,054) Net change in fund balances 412,518 (282,690) 37,574 320,264 Fund balances - beginning 4,600,000 5,915,595 5,915,595 - Fund balances - ending 5,012,518 $ 5,632,905 $ 5,953,169 $ 320,264 $ The accompanying notes are an integral part of this statement. General Fund For the Years Ended December 31, 2011, 2010 and 2009 Variance with Final Budget - Over (Under) Statement of Revenues, Expenditures, and Changes in Fund Balances 2011/2012 Biennial Budgeted Amounts Actuals Washington State Auditor's Office 37 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Original Final 2009 2010 18,121,793 $ 18,840,930 $ 9,154,592 $ 9,660,810 $ (25,528) $ 21,518,500 19,638,500 9,605,968 10,112,722 80,190 16,018,500 16,070,750 8,887,234 8,218,749 1,035,233 2,228,000 2,228,000 784,199 749,091 (694,710) 502,000 1,017,100 474,346 493,660 (49,094) 1,156,000 1,156,000 494,921 501,484 (159,595) 3,414,500 4,002,934 2,179,081 1,754,919 (68,934) 8,211,600 8,336,500 4,303,530 4,707,280 674,310 3,059,000 3,059,000 1,361,754 1,277,547 (419,699) 710,000 710,000 131,431 74,705 (503,864) 183,200 183,200 99,481 108,196 24,477 475,000 488,150 202,223 184,233 (101,694) 75,598,093 75,731,064 37,678,760 37,843,396 (208,908) 16,032,182 15,987,631 7,843,205 7,701,644 (442,782) 46,732,359 47,813,366 23,148,688 23,203,176 (1,461,502) - - - - - 4,058,666 3,938,177 1,896,274 1,800,332 (241,571) 1,393,259 1,595,881 814,412 693,772 (87,697) 8,376,721 7,980,585 3,868,873 3,668,026 (443,686) 478,512 - - - - 46,488 46,488 - - (46,488) 32,430 92,330 80,376 - (11,954) 30,000 38,140 38,047 - (93) - - - - - 77,180,617 77,492,598 37,689,875 37,066,950 (2,735,773) (1,582,524) (1,761,534) (11,115) 776,446 2,526,865 5,660,075 6,380,075 2,928,624 3,216,948 (234,503) (3,940,100) (3,622,964) (2,177,282) (2,472,666) (1,026,984) 1,719,975 2,757,111 751,342 744,282 (1,261,487) 137,451 995,577 740,227 1,520,728 1,265,378 1,995,300 1,154,640 1,154,640 1,894,867 - 2,132,751 $ 2,150,217 $ 1,894,867 $ 3,415,595 $ 1,265,378 $ 2009/2010 Biennial Budgeted Amounts Actuals Variance with Final Budget - Over (Under) Washington State Auditor's Office 38 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Budget and Actual Original Final 2011 REVENUES Intergovernmental 1,520,000 $ 2,207,590 $ 980,363 $ (1,227,227) $ Investment earnings 2,500 2,500 593 (1,907) Total revenues 1,522,500 2,210,090 980,956 (1,229,134) EXPENDITURES Current: Economic environment 1,320,000 1,416,410 653,923 (762,487) Capital outlay: Economic environment - 398,110 17,979 (380,131) Total expenditures 1,320,000 1,814,520 671,902 (1,142,618) Excess (deficiency) of revenues over (under) expenditures 202,500 395,570 309,054 (86,516) OTHER FINANCING SOURCES (USES) Transfers in - - - - Transfers out (200,000) (400,000) (302,867) 97,133 Total other financing sources and uses (200,000) (400,000) (302,867) 97,133 Net change in fund balances 2,500 (4,430) 6,187 10,617 Fund balances - beginning 60,000 122,670 122,670 - Fund balances - ending 62,500 $ 118,240 $ 128,857 $ 10,617 $ Community Development Fund For the Years Ended December 31, 2011, 2010 and 2009 Variance with Final Budget - Over (Under) Statement of Revenues, Expenditures, and Changes in Fund Balances Actuals 2011/2012 Biennial Budgeted Amounts The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 39 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Original Final 2009 2010 1,470,000 $ 3,330,624 $ 904,731 $ 1,775,801 $ (650,092) $ - - 1,500 703 2,203 1,470,000 3,330,624 906,231 1,776,504 (647,889) 1,479,666 1,616,080 754,540 1,626,954 765,414 - 1,663,308 138,178 79,812 (1,445,318) 1,479,666 3,279,388 892,718 1,706,766 (679,904) (9,666) 51,236 13,513 69,738 32,015 - - - - - - (77,700) (12,700) (65,000) - - (77,700) (12,700) (65,000) - (9,666) (26,464) 813 4,738 32,015 82,469 117,119 117,119 117,932 117,932 72,803 $ 90,655 $ 117,932 $ 122,670 $ 149,947 $ Variance with Final Budget - Over (Under) Actuals 2009/2010 Biennial Budgeted Amounts Washington State Auditor's Office 40 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Proprietary Funds December 31, 2011 (with comparative totals for 2010) Water and Sewer Coliseum Other Non-Major Enterprise Fund Fund Funds ASSETS Current assets: Equity in pooled cash & investments 7,790,194 $ 481,790 $ 197,340 $ Receivables, net 785,260 61,744 441,687 Due from other funds 1,819,208 - - Due from other governments 31,704 - 22,628 Inventories 269,245 55,851 2,299 Prepaid items 44,014 86,216 - Restricted equity in pooled cash & investments - - - Total current assets 10,739,625 685,601 663,954 Noncurrent assets: Restricted equity in pooled cash & investments 2,481,856 - - Capital assets: Land 1,734,272 1,282,641 - Buildings and improvements 180,209,110 11,742,436 15,692,350 Equipment 7,142,860 3,258,363 223,216 Construction in progress 1,124,911 - 6,488 Less accumulated depreciation (60,318,005) (6,850,773) (4,609,171) Total noncurrent assets 132,375,004 9,432,667 11,312,883 Total Assets 143,114,629 $ 10,118,268 $ 11,976,837 $ LIABILITIES Current liabilities: Accounts payable 136,472 $ 522,313 $ 145,977 $ Due to other funds - 4,061,723 - Accrued interest payable - 22,304 - Compensated absences 177,423 - 158,103 Bonds, notes, and loans payable 2,663,646 - 27,570 Deposits payable 11,900 - 2,392 Other current liabilities - 273,837 809 Total current liabilities 2,989,441 4,880,177 334,851 Noncurrent liabilities: Compensated absences 121,210 - 206,841 Due to other governments 26,782,464 - 6,011 Other noncurrent liabilities 2,114,468 - - Total noncurrent liabilities 29,018,142 - 212,852 Total Liabilities 32,007,583 4,880,177 547,703 NET ASSETS Invested in capital assets, net of related debt 100,447,038 9,432,668 11,279,302 Restricted for: Capital projects 1,322,939 - - Debt service 1,158,917 - - Landfill settlement - - - Unrestricted 8,178,152 (4,194,577) 149,832 Total Net Assets 111,107,046 5,238,091 11,429,134 Total Liabilities and Net Assets 143,114,629 $ 10,118,268 $ 11,976,837 $ The accompanying notes are an integral part of this statement. Business-Type Activities Balance Sheet Enterprise Funds Washington State Auditor's Office 41 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 2011 2010 2011 2010 8,469,324 $ 10,999,836 $ 4,112,197 $ 3,511,349 $ 1,288,691 1,283,449 39,421 100,820 1,819,208 170,961 - - 54,332 275,087 - - 327,395 320,476 154,927 148,475 130,230 124,160 - - - 8,000 - - 12,089,180 13,181,969 4,306,545 3,760,644 2,481,856 2,244,485 260,678 302,902 3,016,913 3,016,912 - - 207,643,896 202,148,011 318,843 318,843 10,624,439 9,983,187 12,516,523 12,001,441 1,131,399 734,736 - - (71,777,949) (66,882,877) (7,559,819) (7,107,423) 153,120,554 151,244,454 5,536,225 5,515,763 165,209,734 $ 164,426,423 $ 9,842,770 $ 9,276,407 $ 804,762 $ 955,942 $ 98,043 $ 161,424 $ 4,061,723 4,510,386 - - 22,304 22,333 - - 335,526 280,081 29,337 23,757 2,691,216 2,871,149 - - 14,292 13,913 - - 274,646 552,129 14,742 - 8,204,469 9,205,933 142,122 185,181 328,051 377,374 43,957 45,082 26,788,475 29,488,950 - - 2,114,468 1,800,000 - - 29,230,994 31,666,324 43,957 45,082 37,435,463 40,872,257 186,079 230,263 121,159,008 116,639,862 5,260,805 5,212,861 1,322,939 1,086,987 - - 1,158,917 1,157,498 - - - - 260,983 303,629 4,133,407 4,669,819 4,134,903 3,529,654 127,774,271 123,554,166 9,656,691 9,046,144 165,209,734 $ 164,426,423 $ 9,842,770 $ 9,276,407 $ Business-Type Activities Governmental Activities Enterprise Funds Internal Service Funds Total Enterprise Funds Washington State Auditor's Office 42 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Amounts reported for business-type activities in the statement of net assets are different because: Net assets - total proprietary funds 127,774,271 $ The accumulated net revenue of certain activities of internal service funds is reported with governmental activities. (5,720,850) Net assets of business-type activities 122,053,421 $ December 31, 2011 Reconciliation of the Balance Sheet - Proprietary Funds To the Balance Sheet - Business-Type Activities The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 43 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Statement of Revenues, Expenses, and Changes in Fund Net Assets Proprietary Funds For the Year Ended December 31, 2011 (with comparative totals for 2010) Water and Sewer Coliseum Other Non-Major Enterprise Fund Fund Funds Operating revenues: Charges for services 15,169,422 $ 3,390,428 $ 4,944,228 $ Total operating revenues 15,169,422 3,390,428 4,944,228 Operating expenses: Maintenance and operations 5,562,599 3,829,471 5,065,415 Administrative and general 1,876,825 - 898,422 Taxes 1,564,485 47,826 92,543 Depreciation 4,146,900 458,151 320,708 Total operating expenses 13,150,809 4,335,448 6,377,088 Operating income (loss) 2,018,613 (945,020) (1,432,860) Nonoperating revenues (expenses): Intergovernmental 849,402 - 40,669 Investment earnings 117,736 - 3,236 Interest expense (466,128) (44,608) (2,864) Miscellaneous nonoperating revenue - - 1,041 Gain (loss) on disposition of assets - - (1,640) Total nonoperating revenue (expenses) 501,010 (44,608) 40,442 Income (loss) before contributions and transfers 2,519,623 (989,628) (1,392,418) Capital contributions 1,969,600 - 433,981 Transfers in - 1,046,696 1,037,845 Transfers out (306,850) - (98,744) Change in net assets 4,182,373 57,068 (19,336) Total net assets - beginning 106,924,673 5,181,023 11,448,470 Total net assets - ending 111,107,046 $ 5,238,091 $ 11,429,134 $ Business-type Activities- Enterprise Funds The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 44 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 2011 2010 2011 2010 23,504,078 $ 23,329,357 $ 2,901,158 $ 2,230,282 $ 23,504,078 23,329,357 2,901,158 2,230,282 14,457,485 13,417,283 5,165,186 2,811,003 2,775,247 2,625,805 12,500 11,650 1,704,854 1,634,709 - - 4,925,759 4,674,909 888,258 857,976 23,863,345 22,352,706 6,065,944 3,680,629 (359,267) 976,651 (3,164,786) (1,450,347) 890,071 97,737 - - 120,972 134,572 33,572 44,968 (513,600) (552,786) (783) - 1,041 - - - (1,640) (16,102) 30,272 (17,452) 496,844 (336,579) 63,061 27,516 137,577 640,072 (3,101,725) (1,422,831) 2,403,581 1,142,903 - - 2,084,541 2,362,523 4,006,200 758,506 (405,594) (956,099) (293,928) (290,000) 4,220,105 3,189,399 610,547 (954,325) 123,554,166 120,364,767 9,046,144 10,000,469 127,774,271 $ 123,554,166 $ 9,656,691 $ 9,046,144 $ Total Internal Service Governmental Activities Total Enterprise Funds Business-type Activities- Enterprise Funds Washington State Auditor's Office 45 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Amounts reported for business-type activities in the statement of activities are different because: Net change in net assets - total proprietary funds 4,220,105 $ The current year net revenue of certain activities of internal service funds is reported with governmental activities. (1,758,589) Change in net assets of business-type activities 2,461,516 $ For the Year Ended December 31, 2011 (with comparative totals for 2010) Reconciliation of the Statement of Revenues, Expenses, and Changes in Fund Net Assets of Proprietary Funds To the Statement of Activities - Business-Type Activities The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 46 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Statement of Cash Flows Proprietary Funds For the Year Ended December 31, 2011 (with comparative totals for 2010) Water and Sewer Coliseum Other Non- Major Enterprise Fund Fund Funds CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 14,527,490 $ 3,051,072 $ 5,044,543 $ Other operating revenue 528,346 - - Payments to suppliers (4,181,817) (2,275,388) (1,833,668) Payments to employees (3,260,603) (1,692,528) (4,197,432) Internal activity - payments to other funds (1,018,925) - (15,984) Net cash provided by (used in) operating activities 6,594,491 (916,844) (1,002,541) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Advances to other fund (148,247) - - Operating subsidies and transfers from other fund - 842,499 975,000 Operating subsidies and transfers to other fund (216,788) - (71,640) Net cash provided by (used in) noncapital financing activities (365,035) 842,499 903,360 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital contributions 214,230 - - Advances to other fund (1,500,000) - - Proceeds from capital debt - - - Purchases of capital assets (4,016,886) (297,239) (472,331) Principal paid on capital debt (2,832,982) (448,663) (53,440) Interest paid on capital debt (466,128) (44,639) (2,864) Proceeds from sale of equipment - - 10,000 Capital grant 665,713 - 1,738 Transfer for capital purposes (90,062) 204,198 457,792 Net cash used in capital and related financing activities (8,026,115) (586,343) (59,105) CASH FLOWS FROM INVESTING ACTIVITIES Interest and dividends 310,832 - 3,660 Net cash provided by investing activities 310,832 - 3,660 Net increase (decrease) in pooled cash and investments (1,485,827) (660,688) (154,626) Balance - beginning of the year 11,757,877 1,142,478 351,966 Balance - end of the year 10,272,050 $ 481,790 $ 197,340 $ Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) 2,018,613 $ (945,020) $ (1,432,860) $ Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Depreciation expense 4,146,900 458,151 320,708 Change in uncollectible accounts 8,291 - (7,063) Change in assets and liabilities: Receivables, net (90,174) (29,264) 104,180 Inventories 2,323 (6,939) (2,299) Prepaid expenses (4,434) (1,635) - Due from other government 243,329 - - Accounts and other payables (37,391) (94,381) 1,868 Unearned revenue 314,471 (310,091) - Accrued expenses (7,437) 12,335 12,925 Net cash provided by (used in) operating activities 6,594,491 $ (916,844) $ (1,002,541) $ Noncash capital activities/developer contributions: 1,755,370 $ - $ 433,981 $ Noncash capital activities/transfer assets from other funds: - - 34,300 The accompanying notes are an integral part of this statement. Business-type Activities - Enterprise Funds Washington State Auditor's Office 47 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 2011 2010 2011 2010 22,623,105 $ 23,121,535 $ 2,928,532 $ 2,286,190 $ 528,346 252,502 5,177 1,986 (8,290,873) (6,305,051) (4,207,709) (2,372,122) (9,150,563) (9,381,374) (1,035,352) (554,569) (1,034,909) (1,475,193) - - 4,675,106 6,212,419 (2,309,352) (638,515) (148,247) 69,039 - - 1,817,499 1,996,360 3,145,150 633,606 (288,428) (858,572) - (290,000) 1,380,824 1,206,827 3,145,150 343,606 214,230 162,186 - - - - - - - 3,025,000 18,000 - (4,786,456) (3,913,676) (1,038,244) (359,850) (3,335,085) (3,386,408) (3,259) - (513,631) (554,847) (783) - - - 108,275 57,602 667,451 97,684 - - 571,928 268,631 601,418 124,900 (7,181,563) (4,301,430) (314,593) (177,348) 314,492 125,828 37,419 44,071 314,492 125,828 37,419 44,071 (2,301,141) 3,243,644 558,624 (428,186) 13,252,321 10,008,677 3,814,251 4,242,437 10,951,180 $ 13,252,321 $ 4,372,875 $ 3,814,251 $ (359,267) $ 976,651 $ (3,164,786) $ (1,450,347) $ 4,925,759 4,674,909 888,258 857,976 1,228 29,844 - - (15,258) (28,586) 32,552 57,892 (6,915) (4,501) (6,451) (3,237) (6,069) (12,112) - - 243,329 (271,101) - - (129,904) 235,825 (63,380) (68,346) 4,380 614,523 - - 17,823 (3,033) 4,455 (32,453) 4,675,106 $ 6,212,419 $ (2,309,352) $ (638,515) $ 2,189,351 $ 980,717 $ - $ - $ 34,300 - - - Totals Totals Business-type Activities Enterprise Funds Governmental Activities Internal Service Funds Washington State Auditor's Office 48 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 2011 2010 2011 2010 ASSETS Equity in pooled cash & investments 1,088,968 $ 919,381 $ 1,423,516 $ 1,286,055 $ Receivables 53,092 48,620 773 1,744 Due from other governments - - 20,504 23,926 Total assets 1,142,060 $ 968,001 $ 1,444,793 $ 1,311,725 $ LIABILITIES Accounts payable 5,024 $ 7,880 $ 210,027 $ 175,267 $ Due to other governments - - 1,189,162 1,119,870 Custodial accounts - - 45,604 16,588 Total liabilities 5,024 7,880 1,444,793 1,311,725 NET ASSETS Held in trust for pension benefits and other purposes 1,137,036 $ 960,121 $ - $ - $ Statement of Fiduciary Net Assets Trust Funds Agency Funds December 31, 2011 Fiduciary Funds The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 49 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 2011 2010 ADDITIONS Contributions: Employer 1,096,729 $ 1,136,801 $ Total contributions 1,096,729 1,136,801 Investment earnings: Interest 9,975 9,086 Total investment earnings 9,975 9,086 Total additions 1,106,704 1,145,887 DEDUCTIONS Benefits 928,783 886,730 Administrative expenses 1,006 608 Total deductions 929,789 887,338 Change in net assets 176,915 258,549 Net assets - beginning 960,121 701,572 Net assets - ending 1,137,036 $ 960,121 $ Trust Funds Statement of Changes in Fiduciary Net Assets Fiduciary Funds For the Year Ended December 31, 2011 (with comparative totals for 2010) The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 50 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington NOTES TO THE FINANCIAL STATEMENTS December 31, 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the City of Kennewick have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The significant accounting policies are described below: A. The Reporting Entity The City of Kennewick was incorporated on February 5, 1904 and operates under the laws of the State of Washington applicable to a Council-Manager form of government. As required by generally accepted accounting principles, the financial statements present the City of Kennewick as a primary government and its component units, entities for which the government is considered to be financially accountable. Blended component units, although legally separate entities, are, in substance, part of the government’s operations. Each discretely presented component unit is reported in a separate column in the government-wide financial statements (see note below for description) to emphasize that it is legally separate from the government. The City's primary government major operations include police and fire protection including emergency medical response, a water and sewer system, a storm drainage system, parks and recreation, street construction and maintenance, planning and zoning, and general administrative functions. The City has no blended component units. The City’s financial statements also include the financial activity of the City of Kennewick Foundation, a legally separate, tax exempt nonprofit corporation that was created solely for the purpose of providing a legal mechanism for the City to receive a gift from a private citizen of approximately 8.18 acres of land including buildings and other facilities situated on the land. The City of Kennewick Foundation was established for the exclusive benefit of the City of Kennewick and therefore meets the criteria established for blending its financial activity with that of a primary government. The Kennewick Public Facilities District (District) was formed in December 2000, with a primary mission to build and operate a regional convention center as allowed by Washington state statute. The Public Facilities District is included in the City’s reporting entity as a discretely presented component unit because of the financial accountability relationship. The City appoints the Public Facilities District five-member board and has the ability to impose its will on the District. The District and the City entered into a lease under which the City provides the land on which the Three Rivers Convention Center is located. The lease has an initial term of fifty years, through April 15, 2053, with renewal options thereafter. The City is waiving rent through April 15, 2026, as an in-kind contribution. During this time, the rent will be valued at 10% of the fair market value of the leasehold real estate as determined by the City, subject to review every five years. Beginning April 15, 2026, the rent will change to $1.00 per year. In addition to the payment of nominal rent, the District will be responsible for all costs of its maintenance, utilities, insurance and operation of the Convention Center. The District and the City of Kennewick entered into an Annual Contribution Agreement in which the City agreed to issue $3,995,000 in construction bonds and to provide annual financial support to the District. Until the year 2027, the City will pay the District an amount equal to $725,000 less (ii) the aggregate debt service payments on the City bonds during a calendar year, and less (iii) the Annual Credit. The Annual Credit is defined as the lesser of $600,000 and (ii) the sum of amounts received Washington State Auditor's Office 51 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington by the District from the Pasco Public Facility District that are in excess of $150,000 annually. During 2027, the City’s payments will be limited to the scheduled debt service on the District’s bonds, reduced by amounts received by the District from the Benton Public Facility District and Pasco Public Facility District. The City of Kennewick has a contingent payment obligation relating to bonds issued by the District for construction of the facility. The District’s first principal payment will be in 2013 and the final maturity of these bonds will occur in 2027. If the District has insufficient funds to make a required debt service payment, the City will make a loan to the District for that purpose. In the event the District lacks sufficient non-voted debt capacity to incur a loan, the City will make the debt service payment and receive a proportionate ownership interest in the facility. The component unit columns in the financial statements include the financial data of the Kennewick Public Facilities District only; therefore segregation of this information separate from the face of the financial statements is not necessary. Complete separate financial statements for the Kennewick Public Facilities District may be obtained at the Three Rivers Convention Center, 7016 W. Grandridge Blvd., Kennewick, Washington. B. Government- Wide and Fund Financial Statements The government-wide financial statements the statement of net assets and the statement of activities) report information on all of the nonfiduciary activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Our policy is to allocate indirect costs to a specific function or segment. Program revenues include 1) charges to customers or applicants who purchase, use or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate financial statements are provided for governmental funds, proprietary funds and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. C. Measurement Focus and Basis of Accounting The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Washington State Auditor's Office 52 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Fiduciary funds account for resources legally held in trust or agency capacity for others and which therefore cannot be used to support the government’s own programs. Trust funds employ the same economic resource measurement focus and accrual basis of accounting as proprietary funds. Agency funds report only assets and liabilities and do not have a measurement focus. They use the accrual basis of accounting to recognize receivables and payables. Governmental fund financial statements are reported using the current financial resources measurement focus and modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, revenues are considered to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Property taxes, licenses, and interest associated within the current period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of special assessment receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received. The City reports the following major governmental funds: General Fund – The government’s primary operating fund. It accounts for all financial resources of the general government not accounted for in another fund. As of December 31, 2011, unassigned fund balance for the general fund was $3,355,669, or 7.6 percent of total reported general fund expenditures and 6.9 percent of total operating fund expenditures (general and street fund), which exceeds the city’s budgetary policy of maintaining fund balance equal to 5 percent of annual operating expenditures for these funds. Special Revenue – Community Development Fund – The fund that accounts for activities primarily funded by the U.S. Department of Housing and Urban Development for CDBG and HOME programs. Capital Projects – Capital Improvement Fund – The fund that accounts for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds and trust funds). The City reports the following major proprietary funds: Water and Sewer Fund – The water and sewer fund operates the water distribution system, the sewer treatment plant, sewage pumping stations and collection systems. Proprietary funds account for operations that are financed and operated in a manner similar to private business enterprises. The intent of the City is that the cost (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. Coliseum Fund – The coliseum fund accounts for activities of the government’s coliseum operations. Additionally, the City reports the following fund types: Internal Service Funds – Account for equipment rental, central stores and risk management functions. Washington State Auditor's Office 53 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Fiduciary Trust Funds – Account for resources legally held in trust or agency capacity for others and which therefore cannot be used to support the government’s own programs. The fiduciary fund category includes two trust funds for 1) firemen’s pension and 2) OPEB and four agency trust funds for 1) payroll clearing fund 2) bi- county police information fund 3) MPD assistant fund and 4) metro drug task force fund. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. As a general rule, the effect of the interfund activity has been eliminated for the government-wide financial statements. Exceptions to this general rule are actual costs and receipts that are not equivalent to overhead (e.g. insurance settlements, claim recoveries, miscellaneous revenues). Amounts reported as program revenues include 1) charges to customers, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than program revenues. General revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenues of the enterprise funds are charges to customers for utility, ambulance, storm water, inspection services, golf course and coliseum sales and services. The principal operating revenues of the internal service funds are charges to customers for supply sales, copier services, fleet management and insurance. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. D. Assets, Liabilities and Equities Equity in Pooled Cash and Investments – The City follows the practice of pooling cash and investments of individual funds for investment purposes. Each fund’s portion of total cash and investments is summarized by fund type in the combined balance sheet as equity in pooled cash and investments. Cash with fiscal agent is disclosed separately on the balance sheet. Cash and Cash Equivalents - It is the City's policy to invest all temporary cash surpluses. At December 31, 2011, the treasurer was holding $27,233,460 in cash on deposit with financial institutions and the State Treasurer’s Investment Pool. The State Investment Pool is considered a cash equivalent. The interest on these balances is prorated to the various funds based on the average balance for each fund. For purposes of the Statement of Cash Flows, the City considers all highly liquid investments (including restricted assets) with a maturity date of three months or less when purchased to be cash equivalents. The City's deposits are entirely covered by federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission Washington State Auditor's Office 54 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Receivables - Taxes receivable consists of property, utility and real estate excise taxes. Customer accounts receivable consists of amounts owed from private individuals or organizations for goods and services. Special assessments receivable consists of assessments that are recorded when levied and are liens against the property benefited. There were no special assessment receivables on December 31, 2011. Accrued interest receivable consists of amounts earned on investments, notes, and contracts at year-end. Amounts Due to and from Other Funds and Governments, Interfund Loans and Advances Receivable – Activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either “interfund loans receivable/payable” or “advances to/from other funds.” All other outstanding balances between funds are reported as “due to/from other funds.” Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as “internal balances.” A separate schedule of interfund loans receivable and payable is furnished in Note 14. Advances between funds, as reported in the fund financial statements, are offset by a fund balance reserve account in applicable governmental funds to indicate that they are not available for appropriation and are not expendable available financial resources. Inventories – There are currently no inventories in governmental funds. Inventories in proprietary funds are valued by the FIFO method (which approximates the market value). Restricted Assets and Liabilities – These accounts contain resources for construction and debt service in enterprise funds. Specific debt service reserve requirements are described in Note 9. The restricted assets of the enterprise funds are composed of pooled cash and investments of $1,158,917 in Debt Service and $1,322,939 Capital Projects. Capital Assets - All capital assets acquired or constructed for general governmental purposes are reported as expenditures in the fund that finances the asset acquisition and capitalized at cost in the government-wide statements. The City's Capital Asset Policy establishes a capitalization limit of $5,000. Donated capital assets are reported at estimated fair market value at the time received. Public domain (infrastructure) general governmental capital assets such as roads, bridges, curbs and gutters, streets and sidewalks are capitalized and depreciated. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Property and equipment acquired by Proprietary and Pension Trust Funds are reported in those funds at cost or at estimated fair market value at time of donation. Construction costs that are reimbursed by users or are financed directly or indirectly by developers and property owners are capitalized and recognized as contributed capital revenue in the Enterprise Fund. Depreciation - Depreciation is provided on capital assets. Depreciation is charged to operations of the Primary Government and Component Unit over the capital assets' estimated useful lives using the straight-line method. The following lives are used: Buildings and Improvements 25 - 50 Years Source of Supply Pumping, Treatment, and Distribution Mains and Reservoirs 13 - 60 Years Lift Stations, Interceptors and Laterals 20 - 75 Years General Plant 10 - 40 Years Vehicles and Motorized Equipment 2 - 20 Years Washington State Auditor's Office 55 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Compensated Absences - Eligible employees can earn vacation leave and sick leave which, if unused, is paid upon termination of employment according to the terms of applicable collective bargaining agreements, personnel rules and regulations, and the employee's length of service. In governmental funds, only liabilities for compensated absences of employees terminated prior to the close of the calendar year that will not be paid until the subsequent year are reported as an expenditure and fund liability in the fund that will pay for them. The remainder of the compensated absence liability is only recognized in the government-wide report. In proprietary funds, compensated absences are recorded as an expense and liability of the fund that will pay for them. Compensated absences are shown as long and short term liabilities based on an estimated amount of annual usage. As of December 31, 2011, the City's compensated absences payable in accordance with GASB Statement No. 16 for all funds amounted to 105,324 hours and $4,105,027. A liability for these amounts are to be reported in the governmental funds only if they have matured, for example, as a result of employee resignations and retirements. Long-Term Liabilities – In the government-wide financial statements, and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable government activities, business-type activities, or proprietary fund type statement of net assets. Bond premiums and discounts are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issue costs are reported as deferred charges and amortized over the term of the related debt. Long-term obligations used to finance Proprietary Fund operations and payable from revenue of the Proprietary Funds are accounted for in the applicable fund. See Note 10. Deferred Revenues - Deferred Revenues are those revenues that are measurable but not yet available, under the modified accrual basis of accounting. Accordingly, they are not recorded as revenue. The balance sheet records the receivable, but includes deferred revenue as its offset. The City recognized the following deferred items in 2011: 1. Uncollected property taxes levied. 2. Unbilled special assessments levied against benefited property for the cost of local improvements. An allowance for uncollectibles is not necessary since the assessments are liens against the property benefited. 3. Contracts receivable for real estate sales. Fund Balance – Fund balance has been redefined by GASB 54 to establish fund balance classifications that comprise a hierarchy based primarily on the extent to which the City is bound to observe constraints imposed upon the use of the resources reported in governmental funds. 1. The restricted fund balance is used to describe the portion of fund balance that reflects constraints placed on the use of resources externally imposed by creditors, grantors, contributors; or imposed by law through constitutional provisions or enabling legislation. 2. The committed fund balance can only be used for specific purposes pursuant to constraints imposed by formal action of the government’s highest level of decision-making authority. Committed amounts cannot be used for any other purpose unless the government removes or changes the specified by taking the same type of action (i.e. resolution, ordinance). 3. The assigned fund balance classification of fund balances are constrained by the government’s intent to be used for specific purposes, but aren’t restricted or committed. Intent should be expressed by the governing body itself or an official committee. Washington State Auditor's Office 56 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 4. The unassigned classification of fund balances is the residual classification for the government’s general fund and includes all spendable amounts not contained in the other classifications. In other funds, the unassigned classification will be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned. NOTE 2 – RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS A. Explanation of Certain Differences between the Governmental Funds Balance Sheet and the Government-Wide Statement of Net Assets. The governmental fund balance sheet includes a reconciliation between fund balance - total governmental funds and net assets - governmental activities as reported in the government wide statement of net assets. One element of that reconciliation explains that "long-term liabilities", including bonds payable, are not due and payable in the current period and therefore not reported in the funds. The details of this $38,053,223 difference are following. Bonds and Notes Payable $ 29,545,000 Bond Premium 702,848 Unamortized Refunding Gain (586,817) Public Works Trust Fund Loans Payable 3,895,616 Water Pollution Control RF Loan 68,228 Frost Facility Loan 300,000 Net Pension Obligation 17,916 Net OPEB Obligation 617,224 Accrued Interest 125,051 Compensated Absences 3,368,157 $ 38,053,223 Other long-term assets are not available to pay for current-period expenditures and, therefore are deferred in the funds. The following table details the $7,813,459 difference. Operating Grant - Economic Environment $ 3,056,522 Interfund Loan Interest 10,237 Nuisance Abatement 17,262 Public Safety 248,094 Miscellaneous Receivables 24,962 Sales Tax 2,837,227 Motor Vehicle Fuel Tax 109,830 Utility Tax 697,398 Hotel/Motel Tax 101,031 Liquor Excise Tax 87,915 Gambling Tax 234,360 Property Tax 388,621 $ 7,813,459 Washington State Auditor's Office 57 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. The following table details the $189,547,177 difference. Land $75,845,243 Depreciable Assets 170,772,073 Depreciation (75,117,778) Construction in Progress 13,341,965 Joint Ventures 4,705,674 $189,547,177 B. Explanation of Certain Differences between the Government Funds Statement of Revenues, Expenditures, and Changes in Fund Balances and the Government-Wide Statement of Activities. Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. The table below details the differences from capital activity in the current year. Capital Outlays $8,577,554 Depreciation (6,364,751) $2,212,803 The issuance of long-term debt bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items and is as follows: Debt Proceeds ($5,799,458) Debt Retired 2,864,593 Refunding 5,736,541 $2,801,676 Some revenues reported in the statement of activities do not provide current financial resources and, therefore, are not reported as revenues in governmental funds. Property Taxes $7,425 Sales Tax 101,902 Utility Tax 1,441 Lodging Tax (2,590) Other Tax (69,684) Licenses & Permits (750) Public Safety (8,556) Contract Receivable 86,309 Washington State Auditor's Office 58 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Interest Receivable (1,130) Miscellaneous Receivable (50) $114,317 Some expenses reported in the statement of activities do not require the use of current financial resources, and, therefore, are not reported as expenditures in the governmental funds. Compensated Absences ($188,534) Net Pension Obligation (48,135) Legal Settlement 2,467,748 Interest on Long Term Debt 3,809 Amortized Bond Premium 45,460 Amortized Refunding Interest (26,039) $2,254,309 Internal service funds are used by management to charge the costs of certain activities, such as insurance, supplies and fleet maintenance to individual funds. These are shown on the following table. Internal Service Fund Operating Costs ($1,917,609) Transfer of Equipment to Internal Service Funds 510,631 Investment Earnings 33,572 Disposition of Capital Assets 30,275 Transfers 3,712,266 $2,369,135 NOTE 3 - STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary Information The City of Kennewick follows these procedures in establishing the budgetary data reflected in the financial statements: 1. Prior to November 1 in even-numbered years, the City Manager submits to the City Council a proposed operating budget for the biennial period commencing the following January 1. The operating budget includes proposed expenditures and their means of financing. 2. Public hearings are conducted at regular Council meetings to obtain taxpayer comments. 3. During December, the biennial budget is legally enacted through passage of an ordinance. 4. The adopted biennial budget constitutes the legal authority for expenditures. The level of control at which expenditures may not legally exceed appropriations is the fund. Revisions that alter the total expenditures of any fund must be approved by the City Council and adopted by ordinance. The City's biennial budget was amended three times during 2011. The financial statements present the amended budget as approved. Washington State Auditor's Office 59 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington 5. All appropriations, except for debt service and capital projects, lapse at the end of the biennium. 6. The City budgets all funds in accordance with the Optional Municipal Code 35A.33 of the Revised Code of Washington. Biennially appropriated budgets are adopted for the General and Special Revenue Funds on the modified accrual basis of accounting. Proprietary Funds are budgeted on the accrual basis. There are no differences between the budgetary basis and generally accepted accounting principles. Budgets which are established for Debt Service, Capital Projects and Proprietary Funds are "management budgets" and as such are not reported in the CAFR. B. Encumbrance Accounting For budget control purposes, the City utilizes an encumbrance accounting procedure through an automated centralized purchasing system. Encumbrances are made at the time goods or services are requisitioned based upon estimated or known costs. Upon payment, this encumbered value is reversed and the actual cost recorded. Outstanding encumbrances at the end of the biennium are canceled and must be re-budgeted in the following biennium or absorbed in that period's established appropriations. The outstanding encumbrances for 2011 are not reservations of fund balance and are not recorded as expenditures unless susceptible to accrual. At year-end, the City had open purchase orders in the amount of $3,523,035 recorded in memorandum records. C. Budget Revision During 2011/2012 biennium, the biennial budget was revised as shown below: Washington State Auditor's Office 60 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Original Amended Biennial Total Biennial Budget Revisions Budget General Fund 87,771,469 $ 1,597,989 $ 89,369,458 $ Street Fund 3,906,458 - 3,906,458 Arterial Street Fund 2,600,000 1,373,183 3,973,183 Urban Arterial Street Fund 9,850,000 1,512,827 11,362,827 Capital Improvement Fund 28,854,468 9,644,832 38,499,300 Water & Sewer Fund 41,650,938 4,564,971 46,215,909 Medical Services Fund 8,016,000 115,973 8,131,973 Building Safety Fund 2,406,052 3,151 2,409,203 Coliseum Fund 8,258,219 (15,147) 8,243,072 Stormwater Utility 3,407,646 49,633 3,457,279 Columbia Park Golf Course 450,000 - 450,000 Equipment Rental Fund 8,322,900 (275,571) 8,047,329 Central Stores Fund 2,664,315 22,275 2,686,590 Risk Management Fund 723,260 3,060,069 3,783,329 Debt Service Fund 6,930,743 (15,736) 6,915,007 LID Guaranty Fund 34,150 (44) 34,106 BI-PIN Operations Fund 592,972 18,330 611,302 Community Development Fund 1,582,500 750,259 2,332,759 MPD Assistant Operations Fund 69,563 - 69,563 Asset Forfeiture Fund 73,550 28,410 101,960 Public Safety Fund 5,503,304 - 5,503,304 Solid Waste/Environmental Fund 397,000 53,164 450,164 Cash Reserve Fund 2,500,000 - 2,500,000 Lodging Tax Fund 2,406,760 28,064 2,434,824 Fire Pension Fund 1,041,700 1,270 1,042,970 OPEB Trust Fund 2,255,550 (15,699) 2,239,851 Total 232,269,517 $ 22,502,203 $ 254,771,720 $ NOTE 4 – EQUITY IN CASH, DEPOSITS AND INVESTMENTS A. Cash and Deposits At year-end, the carrying amount of the City’s cash balances was $772,977, which consisted of $615,376 per the City’s checking account bank balances, deposits in transit of $195,305, $52,441 in cash drawers and advance travel funds, less outstanding checks of $90,145. No deposits were uninsured or uncollateralized. Insurance coverage up to $100,000 is through the Federal Deposit Insurance Corporation (FDIC) and the Washington Public Deposit Protection Commission for amounts over $100,000. Under State statute, members of a multiple-financial institution collateral pool, may be assessed losses on a prorated basis if the pool’s collateral provides insufficient coverage. Deposits collateralized Washington State Auditor's Office 61 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington in the multiple-institution collateral pool are considered insured, and therefore not exposed to custodial credit risk. The following is a summary of cash and deposits as of December 31, 2011: Item Checking Accounts Deposits $ 720,536 Cash in Change Funds 32,441 Cash in Advance Travel Funds 20,000 $ 772,977 B. Investments All of the City's investments are stated at amortized cost, except in the case of the State Treasurer’s Investment Pool. The City’s deposits in the State Treasurer’s investment pool are reported based on the pool’s share price since it is a 2a7-like pool. The fair value of the positions in the State Treasurer’s Investment Pool is the same as the value of the pool shares. The State Treasurer’s Investment Pool was formed under and is regulated by the Revised Code of Washington. As of December 31, 2011, the City had the following investments: Interest rate risk - Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. In accordance with its investment policy, the City manages its exposure to declines in fair value by limiting the maturity of investments to five years, unless matched to a specific cash flow. In addition, to achieve its financial objective of maintaining liquidity to meet all operating requirements, the City typically selects investments that have much shorter average maturities. Credit risk - Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. As required by state law and local ordinances, all investments of the City’s funds (except as noted) are obligations of the U.S. Government, U.S. agency issues, the State Treasurer’s Investment Pool or certificates of deposit with Washington State banks. The City has no investment policy that would further limit its investment choices. As of December 31, 2011, the City’s investments in agency securities were all rated AAA. The State Treasurer’s Investment Pool is unrated. The credit risk of the State Treasurer’s Investment Pool is limited as most investments are either obligations of the U.S. Government, government sponsored enterprises, or insured demand deposit accounts and certificates of deposit. Investments or deposits held by the State Pool are all classified as category 1 risk level investments. They are either insured or held by a third-party custody provider in the State Pool’s name. Concentration of credit risk - Concentration of credit risk is the risk of loss attributed to the magnitude of a government’s investment in a single issuer. The City’s investment policy does not allow for an investment in any one security type or financial institution that is in excess of fifty percent of total investments. The City’s investments in which more than five percent is invested in any single issuer as of December 31, 2011 are shown in the following table. Weighted Average Investment Type Book Value Fair Value Maturity (Years) U.S. Agency Securities $8,875,000 $8,904,663 4.21 State Treasurer's Investment Pool 26,460,483 26,460,483 0.09 Total $35,335,483 $35,365,146 Portfolio weighted average maturity 1.13 Washington State Auditor's Office 62 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Concentration of Credit Risk as a Percentage of Total Investments Issuer Book Value Federal National Mortgage Association $4,000,000 11% Federal Home Loan Mortgage Corp 2,000,000 6% Federal Home Loan Bank 2,000,000 6% Custodial credit risk - The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty, the system will not be able to recover the value of its investments that are in the possession of an outside party. By City policy, all security transactions are settled “delivery versus payment”. This means that payment is made simultaneously with the receipt of the security. These securities are delivered to the City’s safekeeping bank. NOTE 5 - PROPERTY TAXES The County Treasurer acts as an agent to collect property taxes levied in the County for all taxing authorities. Collections are distributed to the City on a daily basis by the County Treasurer in compliance with RCW 84.56.230. Property Tax Calendar January 1 Taxes are levied and become an enforceable lien against properties. February 14 Tax bills are mailed. April 30 First of two equal installment payments is due. May 31 Assessed value of property established for next year’s levy at 100 percent of market value. October 31 Second installment is due. Property taxes are recorded as a receivable and deferred revenue when levied. No allowance for uncollectible taxes is established because delinquent taxes are considered fully collectible. Prior year tax levies were recorded using the same principal. The City may levy up to $3.60 per $1,000 of assessed valuation for general governmental services. For Kennewick, this limit has been reduced to $3.10 per $1,000 of assessed valuation to reflect the City’s annexation to the Kennewick Library District. The levy rate is also subject to the following limitations: A. The Washington State Constitution limits total regular property taxes to 1% of assessed valuation or $10 per $1,000 of value. If the taxes of all districts exceed this amount, each is proportionately reduced until the total is at or below the 1% limit. B. Washington State law in RCW 84.55.010 limits the growth of non-voted property taxes to the lesser of 1% per year, or the Implicit Price Deflator. Adjustments for new construction are excluded from this calculation. As a code city, Kennewick must adopt a separate ordinance or resolution authorizing a property tax increase in both dollars and percentage to be filed with the County by November 30th. The City's regular levy for 2011 was $2.1593 per $1,000, on an assessed valuation of $4,858,964,663, for a total regular levy of $10,492,011. The City dedicated $114,000 of the regular levy to the Firemen's Pension Fund. Washington State Auditor's Office 63 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Special levies approved by the voters are not subject to the limitations listed above. In 2011, the City levied an additional $.0831 per $1,000 for the 1996 voted-approved G.O. bond issue for a total additional levy of $401,000. NOTE 6 - CAPITAL ASSETS Capital assets activity for the year ended December 31, 2011 was as follows: Balance Balance Governmental Activities 12/31/2010 Additions Deletions 12/31/2011 Non-depreciable capital assets: Land (including ROW) 73,384,964 $ 2,460,279 $ - $ 75,845,243 $ Construction in Progress 12,256,178 8,135,360 (7,049,573) 13,341,965 Subtotal non-depreciable capital assets 85,641,142 10,595,639 (7,049,573) 89,187,208 Depreciable capital assets: Buildings 37,224,266 296,449 - 37,520,715 Improvements other than buildings 15,935,096 132,711 - 16,067,807 Infrastructure 106,632,065 7,684,411 - 114,316,476 Equipment 14,964,485 1,261,116 (523,162) 15,702,439 Subtotal depreciable capital assets 174,755,912 9,374,687 (523,162) 183,607,437 Accumulated Depreciation: Buildings (9,463,754) (739,699) - (10,203,453) Improvements other than buildings (4,066,694) (595,637) - (4,662,331) Infrastructure (53,891,461) (4,669,618) - (58,561,079) Equipment (8,438,539) (1,248,055) 435,862 (9,250,732) Subtotal accumulated depreciation (75,860,448) (7,253,009) 435,862 (82,677,595) Governmental activities capital assets, net 184,536,606 $ 12,717,317 $ (7,136,873) $ 190,117,050 $ Washington State Auditor's Office 64 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Depreciation is summarized as follows: Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of the capital assets of business-type activities is included as part of the capitalized value of the assets constructed. The City has active construction projects as of December 31, 2011. At year-end the City’s significant commitments with contractors are as shown on the following schedule. Balance Balance Business-Type Activities 12/31/2010 Additions Deletions 12/31/2011 Non-depreciable capital assets: Land 2,987,734 $ - $ - $ 2,987,734 $ Intangible 29,179 - - 29,179 Construction in Progress 734,736 968,725 (572,062) 1,131,399 Subtotal non-depreciable capital assets 3,751,649 968,725 (572,062) 4,148,312 Depreciable capital assets: Buildings and improvements 201,711,549 5,932,348 - 207,643,897 Equipment 10,419,650 247,116 (42,326) 10,624,440 Subtotal depreciable capital assets 212,131,199 6,179,464 (42,326) 218,268,337 Accumulated Depreciation: Buildings and improvements (60,145,164) (4,618,970) - (64,764,134) Equipment (6,737,714) (306,789) 30,687 (7,013,816) Subtotal accumulated depreciation (66,882,878) (4,925,759) 30,687 (71,777,950) Business-type activities capital assets, net 148,999,970 $ 2,222,430 $ (583,701) $ 150,638,699 $ Governmental activities: General Government 506,650 $ Security of Persons & Property 1,020,156 Physical Environment 137,610 Transportation 4,741,175 Economic Environment 42,170 Culture & Recreation 805,248 Total 7,253,009 $ Business-type activities: Water and sewer service 4,146,900 $ Medical service 10,237 Coliseum service 458,151 Stormwater service 310,471 Total 4,925,759 $ Project Expenditures as of 12/31/2011 Remaining Commitment Major Funds Eastgate Park 129,470 $ 5,530 $ Southridge Blvd - Hildebrand/27th 25,179 162,580 Zone 5 Reservoir 1,747,336 52,664 1,901,985 $ 220,774 $ Washington State Auditor's Office 65 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington NOTE 7 - PENSION PLANS Substantially all City full-time and qualifying part-time employees participate in one of the following statewide local government retirement systems administered by the Department of Retirement Systems, under cost- sharing multiple-employer public employee defined benefit and defined contribution retirement plans. The Department of Retirement Systems (DRS), a department within the primary government of the State of Washington, issues a publicly available comprehensive annual financial report (CAFR) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement Systems, Communications Unit, P.O. Box 48380, Olympia, WA 98504-8380; or it may be downloaded from the DRS website at www.drs.wa.gov. The following disclosures are made pursuant to GASB Statement 27, Accounting for Pensions by State and Local Government Employers and No. 50 Pension Disclosures, an Amendment of GASB Statements No. 25 and No. 27. A. Public Employees' Retirement System (PERS) Plans 1, 2 and 3 Plan Description The Legislature established PERS in 1947. Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals, and Superior courts (other than judges currently in the Judicial Retirement System); employees of legislative committees; community and technical colleges, college and university employees not participating in higher education retirement programs; judges of district and municipal courts; and employees of local governments. PERS retirement benefit provisions are established in Chapters 41.34 and 41.40 RCW and may be amended only by the State Legislature. PERS is a cost-sharing multiple-employer retirement system comprised of three separate plans for membership purposes: Plans 1 and 2 are defined benefit plans and Plan 3 is a defined benefit plan with a defined contribution component. PERS members who joined the system by September 30, 1977 are Plan 1 members. Those who joined on or after October 1, 1977 and by either, February 28, 2002 for state and higher education employees, or August 31, 2002 for local government employees, are Plan 2 members unless they exercised an option to transfer their membership to Plan 3. PERS members joining the system on or after March 1, 2002 for state and higher education employees, or September 1, 2002 for local government employees have the irrevocable option of choosing membership in either PERS Plan 2 or PERS Plan 3. The option must be exercised within 90 days of employment. An employee is reported in Plan 2 until a choice is made. Employees who fail to choose within 90 days default to PERS Plan 3. Notwithstanding, PERS Plan 2 and Plan 3 members may opt out of plan membership if terminally ill, with less than five years to live. PERS Plan 1 and Plan 2 defined benefit retirement benefits are financed from a combination of investment earnings and employer and employee contributions. PERS Plan 1 members are vested after the completion of five years of eligible service. Plan 1 members are eligible for retirement after 30 years of service, or at the age of 60 with five years of service, or at the age of 55 with 25 years of service. The benefit is two percent of the average final compensation (AFC) per year of service. (AFC is the average of the 24 consecutive highest-paid service credit months.) The retirement benefit may not exceed 60 percent of AFC. The benefit is subject to a minimum for PERS Plan 1 retirees who have 25 years of service and have been retired 20 years, or who have 20 years of service and have been retired 25 years. Plan 1 members retiring from inactive status prior to the age of 65 may receive actuarially reduced benefits. If a survivor option is chosen, the benefit is further reduced. A cost-of- living allowance (COLA) was granted at age 66 based upon years of service times the COLA amount. This benefit was eliminated by the Legislature, effective July 1, 2011. Plan 1 members may elect to receive an optional COLA that provides an automatic annual adjustment based on the Consumer Price Index. The Washington State Auditor's Office 66 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington adjustment is capped at three percent annually. To offset the cost of this annual adjustment, the benefit is reduced. PERS Plan 1 provides duty and non-duty disability benefits. Duty disability retirement benefits for disablement prior to the age of 60 consist of a temporary life annuity payable to the age of 60. The allowance amount is $350 a month, or two-thirds of the AFC, whichever is less. The benefit is reduced by any workers’ compensation benefit and is payable as long as the member remains disabled or until the member attains the age of 60. A member with five years of covered employment is eligible for non-duty disability retirement. Prior to the age of 55, the allowance amount is two percent of the AFC for each year of service reduced by two percent for each year that the member’s age is less than 65. The total benefit is limited to 60 percent of the AFC and is actuarially reduced to reflect the choice of a survivor option. A cost-of-living allowance was granted at age 66 based upon years of service times the COLA amount. This benefit was eliminated by the Legislature, effective July 1, 2011. Plan 1 members may elect to receive an optional COLA that provides an automatic annual adjustment based on the Consumer Price Index. The adjustment is capped at 3 percent annually. To offset the cost of this annual adjustment, the benefit is reduced. PERS Plan 1 members can receive credit for military service. Members can also purchase up to 24 months of service credit lost because of an on-the-job injury. PERS Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members are eligible for normal retirement at the age of 65 with five years of service. The benefit is two percent of the AFC per year of service. (AFC is the average of the 60 consecutive highest-paid service months.) PERS Plan 2 members who have at least 20 years of service credit and are 55 years of age or older are eligible for early retirement with a reduced benefit. The benefit is reduced by an early retirement factor (ERF) that varies according to age, for each year before age 65. PERS Plan 2 members who have 30 or more years of service credit and are at least 55 years old can retire under one of two provisions: with a benefit that is reduced by 3 percent for each year before age 65 or with a benefit that has a smaller (or no) reduction (depending on age) that imposes stricter return-to-work rules. PERS Plan 2 retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option. There is no cap on years of service credit; and a cost-of-living allowance is granted (based on the Consumer Price Index), capped at three percent annually. The surviving spouse or eligible child or children of a PERS Plan 2 member who dies after leaving eligible employment having earned ten years of service credit may request a refund of the member’s accumulated contributions. PERS Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component and member contributions finance a defined contribution component. The defined benefit portion provides a benefit that is one percent of the AFC per year of service. (AFC is the average of the 60 consecutive highest-paid service months.) Effective June 7, 2006, PERS Plan 3 members are vested in the defined benefit portion of their plan after ten years of service; or after five years of service, if twelve months of that service are earned after age 44; or after five service credit years earned in PERS Plan 2 prior to June 1, 2003. Plan 3 members are immediately vested in the defined contribution portion of their plan. Vested Plan 3 members are eligible for normal retirement at age 65, or they may retire early with the following conditions and benefits: If they have at least ten service credit years and are 55 years old, the benefit is reduced by an ERF that varies with age, for each year before age 65. Washington State Auditor's Office 67 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington If they have 30 service credit years and are at least 55 years old, they have the choice of a benefit that is reduced by 3 percent for each year before age 65; or a benefit with a smaller (or no) reduction factor (depending on age) that imposes stricter return-to-work rules. PERS Plan 3 defined benefit retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option. There is no cap on years of service credit and Plan 3 provides the same cost-of-living allowance as Plan 2. PERS Plan 3 defined contribution retirement benefits are solely dependent upon contributions and the results of investment activities. The defined contribution portion can be distributed in accordance with an option selected by the member, either as a lump sum or pursuant to other options authorized by the Director of the Department of Retirement Systems. PERS Plan 2 and Plan 3 provide disability benefits. There is no minimum amount of service credit required for eligibility. The Plan 2 benefit amount is two percent of the AFC per year of service. For Plan 3, the benefit amount is one percent of the AFC per year of service. These disability benefit amounts are actuarially reduced for each year that the member’s age is less than 65, and to reflect the choice of a survivor option. There is no cap on years of service credit, and a cost-of-living allowance is granted (based on the Consumer Price Index) capped at 3 percent annually. PERS Plan 2 and Plan 3 members may have up to ten years of interruptive military service credit; five years at no cost and five years that may be purchased by paying the required contributions. Effective July 24, 2005, a member who becomes totally incapacitated for continued employment while serving the uniformed services, or a surviving spouse or eligible children, may apply for interruptive military service credit. Additionally, PERS Plan 2 and Plan 3 members can also purchase up to 24 months of service credit lost because of an on-the-job injury. PERS members may also purchase up to five years of additional service credit once eligible for retirement. This credit can only be purchased at the time of retirement and can be used only to provide the member with a annuity that is paid in addition to the member’s retirement benefit. Beneficiaries of a PERS Plan 2 or Plan 3 member with ten years of service who is killed in the course of employment receive retirement benefits without actuarial reduction, if the member was not at normal retirement age at death. This provision applies to any member killed in the course of employment, on or after June 10, 2004, if found eligible by the Department of Labor and Industries. A one-time duty-related death benefit is provided to the estate (or duly designated nominee) of a PERS member who dies in the line of service as a result of injuries sustained in the course of employment, or if the death resulted from an occupational disease or infection that arose naturally and proximately out of said member’s covered employment, if found eligible by the Department of Labor and Industries. There are 1,197 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans of June 30, 2010: Retirees and beneficiaries receiving benefits 76,899 Terminated plan members entitled to but not yet receiving benefits 28,860 Active plan members vested 105,521 Active plan members non-vested 51,005 Total 262,285 Funding Policy Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates, Plan 2 employer and employee contribution rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at 6 percent for state agencies and local government unit employees, and at 7.5 percent for state government elected officials. The employer and employee contribution rates for Washington State Auditor's Office 68 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. All employers are required to contribute at the level established by the Legislature. Under PERS Plan 3, employer contributions finance the defined benefit portion of the plan and member contributions finance the defined contribution portion. The Director of the Department of Retirement Systems sets Plan 3 employee contribution rates. Six rate options are available ranging from 5 percent to 15 percent; two of the options are graduated rates dependent on the employee’s age. As a result of the implementation of the Judicial Benefit Multiplier Program in January 2007, a second tier of employer and employee rates was developed to fund, along with investment earnings, the increased retirement benefits of those justices and judges that participate in the program. The methods used to determine the contribution requirements are established under state statute in accordance with Chapters 41.40 and 41.45 RCW. The required contribution rates expressed as a percentage of current year covered payroll, as of December 31, 2011 were: PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer* 7.25% 7.25% 7.25% Employee 6.00% 4.64% * The employer rates include the employer administrative expense fee currently set at 0.16%. The employer rate for state elected officials is 10.80% for Plan 1, 7.25% for Plan 2 and Plan 3. Plan 3 defined benefit portion only. The employee rate for state elected officials is 7.50% for Plan 1 and 4.64% for Plan 2. Variable from 5% minimum to 15% maximum based on rate selected by the PERS 3 member. Both the City and the employees made the required contributions. The City's required contributions for the years ending December 31 were as follows: PERS Plan 1 PERS Plan 2 PERS Plan 3 2011 $26,228 $575,993 $172,773 2010 29,986 499,447 136,701 2009 50,493 649,650 173,774 B. Law Enforcement Officers and Fire Fighters Retirement System (LEOFF) Plans 1 and 2 Plan Description The Legislature established LEOFF in 1970. Membership in the system includes all full-time, fully compensated, local law enforcement commissioned officers, firefighters and, as of July 24, 2005, emergency medical technicians. LEOFF membership is comprised primarily of non-state employees, with Department of Fish and Wildlife enforcement officers, who were first included prospectively effective July 27, 2003, being an exception. LEOFF retirement benefit provisions are established in Chapter 41.26 RCW and may be amended only by the State Legislature. LEOFF is a cost-sharing multiple-employer retirement system comprised of two separate defined benefit plans. LEOFF members who joined the system by September 30, 1977 are Plan 1 members. Those who joined on or after October 1, 1977 are Plan 2 members. LEOFF defined benefit retirement benefits are financed from a combination of investment earnings, employer and employee contributions, and a special funding situation in which the state pays through state legislative appropriations. Effective July 1, 2003, the LEOFF Plan 2 Retirement Board was established by Initiative 790 to provide governance of LEOFF Plan 2. The Board’s duties include adopting contribution rates and recommending policy changes to the Legislature for the LEOFF Plan 2 retirement plan. Washington State Auditor's Office 69 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington LEOFF defined benefit retirement benefits are financed from a combination of investments earnings, employer and employee contributions, and a special funding situation in which the state pays through state legislative appropriations. LEOFF retirement benefit provisions are established in state statute and may be amended only by the State Legislature. LEOFF Plan 1 members are vested after the completion of 5 years of eligible service. Plan 1 members are eligible to retire with five years of service at age 50. The benefit per year of service calculated as a percent of final average salary is as follows: Term of Percent of Final Service Average Salary 20 or more years 2.0% 10 but less than 20 years 1.5% 5 but less than 10 years 1.0% The final average salary is the basic salary received at the time of retirement, provided a member has held the same position or rank for 12 months preceding the date of retirement. Otherwise, it is the average of the highest consecutive 24 months’ salary within the last 10 years of service. A cost-of-living allowance is granted based on the Consumer Price Index. LEOFF Plan 1 provides death and disability benefits. Death benefits for survivors of Plan 1 members on active duty consist of the following: If eligible spouse, 50 percent of the FAS, plus 5 percent of FAS for each eligible surviving child, with a limitation on the combined allowances of 60 percent of the FAS; or If no eligible spouse, eligible children receive 30 percent of FAS for the first child plus 10 percent for each additional child, subject to a 60 percent limitation of FAS, divided equally. A one-time duty-related death benefit is provided to the estate (or duly designated nominee) of a LEOFF Plan 1 member who dies as a result of injuries or illness sustained in the course of employment, if found eligible by the Department of Labor and Industries. The LEOFF Plan 1 disability allowance is 50 percent of the FAS plus 5 percent for each child up to a maximum of 60 percent. Upon recovery from disability before the age of 50, a member is restored to service with full credit for service while disabled. Upon recovery after the age of 50, the benefit continues as the greater of the member’s disability allowance or service retirement allowance. LEOFF Plan 1 members may purchase up to five years of additional service credit once eligible for retirement. This 21 credit can only be purchased at the time of retirement and can be used only to provide the member with a annuity that is paid in addition to the member’s allowance. LEOFF Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members may retire at the age of 50 with 20 years of service, or at the age of 53 with five years of service, with an allowance of 2 percent of the FAS per year of service. (FAS is based on the highest consecutive 60 months.) Plan 2 members who retire prior to the age of 53 receive reduced benefits. Benefits are actuarially reduced for each year that the benefit commences prior to age 53 and to reflect the choice of a survivor option. If the member has at least 20 years of service and is age 50, the reduction is 3 percent for each year prior to age 53. A cost-of-living allowance is granted (based on the Consumer Price Index), capped at 3 percent annually. LEOFF Plan 2 provides disability benefits. There is no minimum amount of service credit required for eligibility. The Plan 2 allowance amount is 2 percent of the FAS for each year of service. Benefits are actuarially reduced for each year that the member’s age is less than 53, unless the disability is duty-related, and to reflect the choice of a survivor option. If the member has at least 20 years of service and is age 50, the reduction is 3 percent for each year prior to age 53. A catastrophic Washington State Auditor's Office 70 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington disability benefit equal to 70 percent of their FAS, subject to offsets for workers’ compensation and Social Security disability benefits received, is also available to those LEOFF Plan 2 members who are severely disabled in the line of duty and incapable of future substantial gainful employment in any capacity. Effective June 2010, benefits to LEOFF Plan 2 members who are catastrophically disabled include payment of eligible health care insurance premiums. Members of LEOFF Plan 2 who leave service because of a line of duty disability are allowed to withdraw 150 percent of accumulated member contributions. This withdrawal benefit is not subject to federal income tax. Alternatively, members of LEOFF Plan 2 who leave service because of a line of duty disability may be eligible to receive a retirement allowance of at least 10 percent of FAS and 2 percent per year of service beyond five years. The first 10 percent of the FAS is not subject to federal income tax. LEOFF Plan 2 retirees may return to work in an eligible position covered by another retirement system, choose membership in that system and suspend their pension benefits, or not choose membership and continue receiving pension benefits without interruption. LEOFF Plan 2 members who apply for retirement may purchase up to five years of additional service credit. The cost of this credit is the actuarial equivalent of the resulting increase in the member’s benefit. LEOFF Plan 2 members can receive service credit for military service that interrupts employment. Additionally, LEOFF Plan 2 members who become totally incapacitated for continued employment while servicing in the uniformed services may apply for interruptive military service credit. Should any such member die during this active duty, the member’s surviving spouse or eligible child(ren) may purchase service credit on behalf of the deceased member. LEOFF Plan 2 members may also purchase up to 24 consecutive months of service credit for each period of temporary duty disability. Beneficiaries of a LEOFF Plan 2 member who is killed in the course of employment receive retirement benefits without actuarial reduction, if found eligible by the Director of the Department of Labor and Industries. Benefits to eligible surviving spouses and dependent children of LEOFF Plan 2 members killed in the course of employment include the payment of on-going health care insurance premiums paid to the Washington state Health Care Authority. A one-time duty-related death benefit is provided to the estate (or duly designated nominee) of a LEOFF Plan 2 member who dies as a result of injuries or illness sustained in the course of employment, if found eligible by the Department of Labor and Industries. There are 374 participating employers in LEOFF. Membership in LEOFF consisted of the following as of the latest actuarial valuation date for the plans at June 30, 2010: Retirees and beneficiaries receiving benefits 9,647 Terminated plan members entitled to but not yet receiving benefits 782 Active plan members vested 13,420 Active plan members non-vested 3,656 Total 27,505 Washington State Auditor's Office 71 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Funding Policy Starting on July 1, 2000, Plan 1 employers and employees will contribute zero percent as long as the plan remains fully funded. Employer and employee rates are developed by the Office of the State Actuary to fully fund the plan. LEOFF Plan 2 employers and employees are required to pay at the level adopted by the LEOFF 2 Retirement Board. The Legislature, by means of a special funding arrangement, appropriated money from the state General Fund to supplement the current service liability and fund the prior service costs of LEOFF Plan 2 in accordance with the requirements of the Pension Funding Council and the LEOFF Plan 2 retirement Board. However, this special funding situation is not mandated by the state constitution and this funding requirement could be returned to the employers by a change of statute. The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2011 were as follows: LEOFF Plan 1 LEOFF Plan 2 Employer* 0.16% 5.24%** Employee 0.00% 8.46% State NA 3.38% * The employer rates include the employer administrative expense fee currently set at 0.16%. The employer rate for ports and universities is 8.62%. Both the City and the employees made the required contributions. The City's required contributions for the years ended December 31 were: LEOFF Plan 1 LEOFF Plan 2 2011 $ 179 $806,251 2010 214 748,956 2009 338 758,123 Postemployment Benefits Plan 1 members who take service or disability retirements are eligible to have 100% of their medical expenses paid by the City. These expenses are reduced by amounts received or eligible to be received under Workers' Compensation, Medicare, or insurance provided by another employer and are paid at the discretion of the local disability board. The disability board has authority to designate the provider of the services. As of December 31, 2011 there were 49 retirees collecting health benefits under the LEOFF system. The total cost for this postemployment benefit was $796,313 for 2011. Funding for these costs is provided from the proceeds of a 6.5% utility tax assessed on water and sewer sales that was implemented beginning in 2009 and is dedicated for LEOFF 1 retiree medical costs. The projected revenue from this utility tax is expected to mirror the City’s LEOFF 1 retiree medical costs over future years. As the City’s obligations for these costs are reduced, the utility tax rate will also be reduced, until such time that it is completely eliminated. C. Firemen's Pension Fund The City administers a closed, small single-employer defined benefit plan called Firemen's Pension Fund. The plan is shown as a trust fund in the financial reports of the City of Kennewick. Washington State Auditor's Office 72 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington GASB Statements No. 25 and 27 require the performance of biennial actuarial valuations. The most recent actuarial study of the system was performed to determine the funding requirements as of January 1, 2010. This plan was not audited; however, a copy of the review can be obtained by request at the following address: City of Kennewick, 210 W. 6th Ave., Kennewick WA, 99336. The City of Kennewick’s obligations under the Firemen’s Pension Fund are limited to pension benefits provided to firefighters retired prior to March 1, 1970. As of December 31, 2011, there were 11 retirees and 2 survivors covered by the Fund, all of which were drawing pension benefits. To meet these obligations, the City may contribute annually to the Fund the amount raised by levying all or part of a tax of up to $0.45 per $1,000 of true and fair market value, the maximum provided by law for maintaining the Fund. Contributions also include donations and income from state fire insurance premium collection. All actuarial calculations are based on RCW 41.16 and 41.18, the statutes establishing the Firefighter’s Pension Fund, and RCW 41.26, the statute establishing the Washington Law Enforcement Officers’ and Firefighters’ Retirement System. Benefit provisions are established in state statute and may be amended only by the State Legislature. Each retiree receives the greater of the benefit payable under the Washington Law Enforcement Officers’ and Firefighters’ Retirement System and the benefits available under the provisions of prior law. Where benefits under the old law exceed those under the new for any firefighter, the excess benefits are paid from the Firefighter’s Pension Fund of the city employing them on March 1, 1970. For a service retirement the member’s benefit is 50% of salary plus an additional 2% for each year of service in excess of 25 years. The maximum benefit is 60% of salary. The survivor benefit is the same as the member’s: if spouse – same plus additional 5% of salary per child, if no spouse – 30% of salary for first child, 10% for each additional child. The maximum benefit in either case is 60% of salary. For a duty disability retirement the member must be disabled for a six-month waiting period, during which time salary is payable from the Fund. The amount of the benefit is 50% of salary plus an additional 5% for each unmarried child under the age of 18. For a non-duty disability retirement the member must be disabled after a 90-day waiting period, during which time salary is payable from the Fund. For non- duty related disability the benefit is the same as duty related disability. For both the duty related and non-duty related disabilities the survivor benefits to spouse and/or child are as follows: Percentage of salary: 33.3% to widow only 45.8% to widow and one child 47.6% to widow and two children 50.0% to widow and three children 33.3% to children only For purposes of retirement benefit payments, salaries are escalated in proportion to the current salary of the rank from which the firefighter retired. After April 25, 1973, a minimum benefit of $300 per month to all retired firefighters and their survivors apply. A funeral benefit of $500 is provided to defray funeral expenses. The cash balance at December 31, 2011 was $715,370 and retirement pensions in 2011 totaled $132,470. The annual required contribution was computed using the entry age normal cost method. Under this method the projected benefits are allocated on a level basis as a percentage of salary over the earnings of each individual between entry age and assumed exit age. Washington State Auditor's Office 73 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington The annual pension cost (APC) and net pension obligation (NPO) are shown on the following schedule as of December 31: 2009 2010 2011 Annual normal cost at beg. of year (BOY) - $ - $ - $ Amortization of UAAL (BOY) 143,451 110,888 110,888 Interest to end of year (EOY) 7,173 4,436 4,436 Annual required contribution (ARC) 150,624 115,324 115,324 Interest on NPO 15,773 8,759 3,391 Adjustment to ARC (23,433) (15,493) (6,207) Annual pension cost (APC) 142,964 108,590 112,508 Total contributions 239,451 242,784 179,370 Change in NPO (96,487) (134,194) (66,862) NPO at BOY 315,459 218,972 84,778 NPO at EOY 218,972 84,778 17,916 Fiscal Year Ending The following schedule shows the three-year trend beginning with 2009 as of December 31: Annual Contribution as Net Pension Pension Cost a Percentage Obligation Year (APC) of APC (NPO) 2011 112,508 159% 17,916 2010 108,590 224% 84,778 2009 142,964 167% 218,972 The following schedule shows the annual development of pension cost as of December 31: Annual Interest Annual Required On ARC Pension Total Change in NPO Amortization Amortization Ending Year Contribution NPO Adjustment Cost (APC) Contributions NPO Balance Gain/Loss Factor of Gain/Loss Balance 2011 115,324 3,391 6,207 112,508 179,370 (66,862) 17,916 (64,046) 13.6593 6,207 17,916 2010 115,324 8,759 15,493 108,590 242,784 (134,194) 84,778 (127,460) 14.1339 15,493 84,778 2009 150,624 15,773 23,433 142,964 239,451 (96,487) 218,972 (88,827) 13.4622 23,433 218,972 2008 150,624 16,692 24,155 143,161 161,547 (18,386) 315,459 (10,922) 13.8212 24,155 315,459 2007 157,014 20,951 28,044 149,921 197,000 (47,079) 333,845 (39,986) 13.5832 28,044 333,845 2006 157,014 12,944 16,962 152,996 7,414 145,582 380,924 149,600 13.8750 16,962 380,924 Investment earnings are assumed to accrue at an annual rate of 4.0%. Salary and postretirement benefit increases are each estimated at 3.9% per annum. The inflation rate is assumed to increase at 2.8% per annum. The unfunded actuarial accrued liability is amortized as a level dollar amount over a closed 30-year period beginning January 1, 2000. All assets are carried on a market value basis and a 4.0% discount rate was used. Washington State Auditor's Office 74 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington D. Statewide City Employees Retirement System Prior to 1972, all full-time City employees, except firemen, were covered by Statewide City Employees Retirement System, a contributory plan. PERS absorbed this retirement system in January 1972. The City pays defined benefits for one pensioner, which totaled $2,604 in 2011. NOTE 8 - SELF INSURANCE The City is exposed to various risks of loss related to torts; theft, damage, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City established the Risk Management Fund (an Internal Service Fund) to account for and finance its uninsured losses. Chapter 48.62 RCW authorizes the governing body of any one or more governmental entities to form together into or join a pool or organization for the joint purchasing of insurance, and/or joint self-insuring, and/or joint hiring or contracting for risk management services to the same extent they may individually purchase insurance, self-insurance, or hire or contract for risk management services. An agreement to form a pool arrangement was made pursuant to the provisions of Chapter 39.34 RCW, the Interlocal Cooperation Act. On September 1, 2004 the City of Kennewick became an associate member of the Cities Insurance Association of Washington (CIAW) for handling all liability claims. Since CIAW is a cooperative program that belongs to a pool, there is a joint liability spread among the participating members for any given claim. The pool allows members to jointly purchase insurance coverage and they provide related services, such as administration, risk management and claims administration. Liability coverage for Public Officials is executed on a “claims made basis” and all other coverage is carried out on an “occurrence basis”. Effective September 1, 2010 all CIAW associate members became full members, CIAW currently has 254 members. The pool acquires liability insurance through Munich Reinsurance America that are subject to a per-occurrence deductible of $100,000. The City of Kennewick is responsible for the first $25,000 of the deductible amount of each claim, while the pool is responsible for the remaining $75,000. The City of Kennewick also has an Annual Aggregate Stop Loss of $100,000 on liability claims. Insurance carriers cover insured losses over $100,000 to the limits of each policy. Since the pool is a cooperative program, there is a joint liability among the participating members towards the sharing of the pool’s portion of the deductible. The pool also purchases a Stop Loss Policy in the amount of $2,545,000 in 2011 to cap the total claims paid by the pool in any one year. As of September 1, 2011 the general liability coverage limit was increased to $20,000,000 per occurrence. Terrorism coverage was added as well as punitive damage coverage of $50,000 per occurrence. Each regular member pays the pool an amount that covers the member’s share of unrestricted reserves. Members contract to remain in the pool for a minimum of one year, and must give notice before August 31 before terminating participation the following September 1. The Interlocal Governmental Agreement is renewed automatically each year. Even after termination, a member remains responsible for contributions to the pool for any unresolved, unreported, and in-process claims for the period they were a signatory to the Interlocal Governmental Agreement. Canfield & Associates has been contracted to perform claims administration, claims adjustment and loss prevention for the pool. The pool is fully funded by its member participants. Fees paid to the third party administrator under this arrangement for the year ended August 31, 2010 and 2011 were $1,389,379 and $827,729 respectively. A governing board is selected by the membership and is responsible for conducting the business affairs of the pool. The Board of Directors has contracted with Canfield & Associates to perform the day-to-day administration of the pool and therefore the pool has no employees. Copies of the pool’s annual report may be obtained by writing to 451 Diamond Drive, Ephrata, WA 98823. Washington State Auditor's Office 75 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington The City of Kennewick also contracted with F. M. Global Insurance Company of Bellevue, Washington on September 1, 2004 to handle all property, boiler and machinery claims. In general, claim deductibles are $25,000 per occurrence. The City paid $78,985 to F. M. Global Insurance Company for their services in 2011. On December 18, 1979, the City established a self-insurance program for unemployment compensation, which is reported in the Risk Management Fund. Various City funds are charged premiums. During 1983, self-insurance for sewer back-up claims was added to the Risk Management Fund. The source of revenue was a two percent surcharge added to sewer fees. The surcharge was eliminated on January 1, 1988 at which time the reserve was determined to be self-sustaining. In 1996, an unusual influx of claims was submitted and the Water/Sewer Fund contributed a one-time sum of $100,000 to the reserve, an additional contribution was made during 2008 of $75,000. Future claims will continue to be monitored and the two percent surcharge may be reinstated if it is deemed necessary. Reserves at December 31, 2011 were $75,925. During 1986, a program to provide for self-insured retention was added to the Risk Management Fund. The source of revenue was operating transfers from various City funds. During 1992, self-insurance for employee dental claims was added to the Risk Management Fund. Various City funds are charged for premiums. In March of 1998 individual stop loss insurance for dental claims was dropped because it was never used and it was estimated it would not likely be needed in the future. Cash reserves available for claims on December 31, 2011, were $178,934 and the liability for claims incurred but not reported (IBNR) was $32,847 on that date. Management estimates unpaid claims based upon historical trends. Expenditures were not adjusted due to salvage or subrogation in 2011. During 2005, self-insurance for employee medical, prescription and vision claims was added to the Risk Management Fund. Various City funds were charged for premiums. From August of 2005 stop loss premiums have been paid to protect against excessive costly claims. The City opted out of the medical self- insurance plan for the majority of its employees and moved to a more traditional plan effective January 1, 2009. However, due to collective bargaining constraints, the City’s firefighter union employees did not move to the new plan until January 1, 2010. Medical insurance claims for 2009 were paid through July of 2010. The change in aggregate liability for the Risk Management Fund for the prior and current fiscal years is as follows: Beginning Claims Claims Ending Beginning Claims Claims Ending Balance Incurred Payments Balance Balance Incurred Payments Balance General Liabilities - $ - $ - $ - $ - $ - $ - $ - $ Unemployment Claims - 97,320 (97,320) - - 75,925 (75,925) - Medical Claims 107,270 77,917 (185,187) - - - - - Dental Claims 33,667 451,772 (451,950) 33,489 33,489 394,586 (395,228) 32,847 140,937 $ 627,009 $ (734,457) $ 33,489 $ 33,489 $ 470,511 $ (471,153) $ 32,847 $ 2010 2011 During 2005, funds earmarked for the Pasco landfill settlement were reserved in the Risk Management Fund. This amount represents the City’s portion of a larger settlement that was agreed upon by the group of entities participating in the landfill clean up ordered by the Department of Ecology. These funds will be used for future legal costs or to offset additional clean-up efforts. Cash reserves available for claims on December 31, 2011, were $260,983. Washington State Auditor's Office 76 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington During 2002 the City enrolled in the Department of Labor and Industries Retrospective Rating plan for industrial insurance through participation in the Building Industry Association of Washington’s (BIAW) group plan. The City insures itself for workplace injuries by participating in the State’s Workers Compensation program. The Retrospective Rating plan is an optional financial incentive program, which rewards employers who minimize their industrial insurance losses. During 2011 the City received refunds totaling $27,341 from BIAW. Beginning in July 2011 the City switched to the Association of Washington Cities (AWC) Retrospective Rating Plan and paid $19,315 to AWC to administer this program for the remainder of 2011. During 2011, the city paid a settlement of $2,467,738.60 on a lawsuit involving a claim of breach of contract on the part of the city made by a developer stemming from a dispute over a development option agreement. Because the claim centered on a claim of breach of contract, the settlement was not covered under the city’s insurance program. NOTE 9 - LONG-TERM DEBT AND CAPITAL LEASES General Obligation Bonds The City issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. Bonded indebtedness has also been entered into this year and in prior years to advance refund bonds. Currently, general obligation bonds are outstanding for general government activities only. General obligation bonds currently outstanding are as follows: Issuance Final Debt Amount Installments Maturity Interest Rates Outstanding 2005 GO Refunding Bonds 3,285,000 $ $80,000 - $385,000 12/01/16 3.0% - 4.5% 1,770,000 $ 2003A GO Bonds 3,995,000 $ $260,000 - $535,000 12/01/13 2.0% - 3.625% 935,000 2003B GO Bonds 8,700,000 $ $310,000 - $640,000 12/01/23 2.0% - 5.0% 785,000 2011 GO Refunding Bonds 03B 5,330,000 $ $5,000 - $425,000 12/01/23 - 4.0% 5,325,000 2006 GO Bonds 9,790,000 $ $270,000 - $705,000 12/01/25 3.75% - 5.0% 7,695,000 2010A GO Bonds 1,840,000 $ $250,000 - $415,000 12/01/14 3.00% 1,210,000 2010B GO Bonds 11,825,000 $ $425,000 - $830,000 12/01/34 3.45% - 6.323% 11,825,000 29,545,000 $ Annual debt service requirements to maturity for general obligation bonds are as follows: 2012 2013 2014 2015 2016 2017-2021 2022-2026 2027-2031 2032-2034 Total Principal 2,070,000 1,995,000 1,660,000 1,730,000 1,785,000 7,845,000 6,675,000 3,395,000 2,390,000 $29,545,000 Interest 1,366,881 1,292,881 1,214,381 1,150,356 1,081,519 4,406,417 2,653,755 1,406,807 306,349 $14,879,348 Year Ended December 31 Refunding Bonds The City issued $5,330,000 of general obligation refunding bonds. The Bonds were used to provide funds to establish an irrevocable trust escrow to advance refund $5,210,000 of the City’s outstanding 2003B General Obligation Bonds. The proceeds of the Bonds, together with a City contribution were used to purchase State and Local Government Series (SLGS) Securities. The maturing principal of the securities, interest earning and cash balance will remain in the escrow account until the call provision for the 2003B bond issue allows the City Washington State Auditor's Office 77 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington to retire the debt, which is December 1, 2013. The total cost of the refunding exceeded the net carrying amount of the old debt, which will be amortized over the remaining life of the new debt. The advance refunding was undertaken to reduce total debt service payments over the next eleven years. With the interest rates on the new debt - as opposed to the old debt of (3.5% - the City will recognize lower interest payments over the outstanding life of the bonds for a net present value savings of $282,510. Special Assessment Bonds Local improvement districts (LID's) are created for the primary purposes of constructing streets, storm drainage, sidewalk, street lighting, water, and sewer improvements. The principal and interest on the bond issues are expected to be paid solely from special assessments collected. The assessments are liens against the property and are subject to foreclosure. Under the provisions of the City's LID bond ordinances, special assessment bonds are called annually with no premium as cash accumulates in the related Debt Service Fund. The bonds are called on the interest payment date in numerical order. If the available cash exceeds the annual debt service requirements, additional bonds may be redeemed prior to their stated maturity date. The LID Guaranty Fund guarantees all unpaid special assessment bonds. State law requires that the Guaranty Fund maintain a balance of at least 10% of the outstanding obligations guaranteed by the fund in any single year. This balance is established and maintained by a tax levy not to exceed 12% of the amount guaranteed. Debt Limit Capacities The City's limitation on bond issues is established by State law and is calculated using a formula based on a percentage of assessed valuation (AV) of taxable property. The three specific debt capacities defined, their assessed value limitation and their remaining capacities at December 31, 2011 are as follows: Remaining Purpose % of Av Capacity Notes General Government 2 1/2% $ 95,995,000 ($45,420,000 is Councilmanic) Park and Open Space 2 1/2% 126,539,000 Utility 2 1/2% 126,539,000 Notes and Loans Payable The City has taken advantage of low interest loans through the State of Washington for the financing of street and utility projects for both general government and business-type activities. The City also has entered into a loan with Cascade Columbia Foods, LLC, a Washington limited liability company to purchase land that is located next to the Frost Facility. Annual debt service requirements to maturity for notes payable are as follows: Washington State Auditor's Office 78 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Year Ending December 31 Principal Interest Principal Interest 2012 827,191 $ 48,059 $ 2,663,881 $ 415,563 $ 2013 599,319 35,992 2,691,901 369,800 2014 549,123 27,522 2,718,198 322,691 2015 449,123 22,882 2,749,942 279,462 2016 449,123 18,391 2,782,197 224,249 2017 - 2021 1,389,966 30,684 9,949,275 497,387 2022 - 2026 - - 5,316,176 1,554,144 2027 - 2028 - - 580,551 580,600 4,263,844 $ 183,530 $ 29,452,121 $ 4,243,897 $ Governmental Activities Business-type Activities Outstanding notes and loans are shown on the following table for both governmental and business activities as of December 31, 2011. At Dec emb er 31, 2011 , restri cted assets in proprietary funds contain $1,158,917 in reserves as required by the SRF loan agreement. Arbitrage Issuance Final Debt Amount Installments Maturity Interest Rates Outstanding Business-type Activities: PWTF - 19th Avenue 24,542 $ 3,068 $ 07/01/13 1.00% 6,135 $ PWTF - Water System Imp 6,856,358 368,669 07/01/16 1.00% 1,843,350 PWTF - Wastewater Lagoon 2,450,000 130,464 07/01/20 1.00% 1,174,181 PWTF - Misc W/S Imp 3,000,000 159,375 07/01/21 0.50% 1,593,755 PWTF - Advanced Water Treatment 9,500,000 531,250 07/01/25 0.50% 7,437,500 PWTF - Waste Wtr Plant-Const 5,500,000 290,278 07/01/28 0.50% 4,934,722 CERB - Welch's Project 125,000 4,689 - 9,338 01/01/21 4.70% 88,139 - LID Manual & Demo Project 390,000 45,179 12/31/19 1.40% 4,838 - Wellhead Area Retrofit 690,000 79,936 12/31/16 1.40% 1,173 SRF - Drinking Water 4,040,000 212,632 10/01/24 1.50% 2,764,208 SRF - Water Treatment Facility 4,080,000 240,833 10/01/23 1.00% 2,719,998 SRF - Ranney Improvements 3,030,000 173,030 10/01/25 1.50% 2,206,051 SRF - Wastewater Treatment Facility 10,063,642 479,167 - 748,141 05/31/17 4.50% 4,678,071 Total Business-type Activities 29,452,121 $ Purpose Issuance Final Debt Amount Installments Maturity Interest Rates Outstanding Governmental Activities: PWTF - 10th-Olympia/SR395 3,045,552 $ 159,645 $ 07/01/12 1.00% 159,648 $ PWTF - 19th Avenue 967,770 50,194 07/01/13 1.00% 100,389 PWTF - Comp Street Imp I 3,817,100 203,264 07/01/18 1.00% 1,422,842 PWTF - Comp Street Imp II 4,550,000 215,526 07/01/20 1.00% 2,212,737 - Comp Sewer 300,000 33,753 03/25/13 0.50% 68,228 Frost Facility Loan 600,000 100,000 01/15/14 3.63% 300,000 Total Governmental Activities 4,263,844 $ Purpose Washington State Auditor's Office 79 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Federal Tax Reform Act of 1986 requires issuers of tax-exempt debt to make payments to the United States Treasury of investment income received at yields that exceed the issuer’s tax exempt borrowing rates. The U.S. Treasury requires payment every five years. The City issued bonds for capital projects of $8,700,000 on December 1, 2003. The City is subject to arbitrage requirements for this issue, since it does not qualify for any of the “safe harbor” exemptions. As of December 31, 2011, there was no liability for rebatable arbitrage for this bond issue. Capital Leases The City had two outstanding lease agreements as of December 31, 2011. The City entered into a lease agreement during 2002 through the state’s LOCAL lease program to finance the purchase of a fire truck. The amount financed was $456,000, with a ten-year term and 4.22% interest rate. Payments are to be made from the Medical Services Fund. This lease qualifies as a capital lease for accounting purposes and, therefore, has been recorded at the present value of the future minimum lease payments as of the inception date. The asset acquired through the capital lease, the future minimum lease obligation and the net present value of the minimum lease payments as of December 31, 2011 are on the following schedule. Business-type Business-Type Leased Equipment Activities Year Ending December 31 Activities Fire Truck 456,000 $ 2012 28,152 $ Less: Accumulated Depreciation (428,430) Total minimum lease payments 28,152 $ 27,570 $ Less: amount representing interest (582) Present value of minimum lease payments 27,570 $ The second lease the City entered into was for the purchase of a police vehicle during 2011 for $18,000 through Enterprise Fleet Management. The lease was intended to be a short-term financing mechanism and the vehicle was purchased in February 2012. The asset acquired through the capital lease, the future minimum lease obligation and the net present value of the minimum lease payments as of December 31, 2011 are reported on the following schedule. Business-type Business-Type Leased Equipment Activities Year Ending December 31 Activities Metro Vehicle 18,000 $ 2012 15,659 $ Less: Accumulated Depreciation (2,475) Total minimum lease payments 15,659 $ 15,525 $ Less: amount representing interest (134) Present value of minimum lease payments 15,525 $ Washington State Auditor's Office 80 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington NOTE 10 – CHANGES IN LONG-TERM LIABILITIES The following table shows a summary of changes in long-term liabilities for the year ended December 31, 2011: Internal service funds predominantly serve the governmental funds. Accordingly, long-term liabilities for them are included as part of the above totals for governmental activities. The above amounts include $73,294 of internal services funds compensated absences. The biosolids reserve was established to pay for future maintenance costs associated with the periodic removal of biosolids from the sewer system. Liabilities for compensated absences are liquidated using resources from the fund to which the employee terminating service previously charged his or her salary and benefit costs. Prior year liquidation of governmental fund compensated absences has been paid primarily from General Fund operating revenues. Beginning Balance Additions Reductions Ending Balance Due Within One Year Business-type Activities: Notes and loans payable 32,279,090 $ 6,011 $ 2,832,980 $ 29,452,121 $ 2,663,646 $ Capital leases 81,010 - 53,440 27,570 27,570 Biosolids reserve 1,800,000 315,000 531 2,114,469 - Compensated absences 657,456 887,536 881,417 663,575 335,526 Business-type activity Long-term liabilities 34,817,556 $ 1,208,547 $ 3,768,368 $ 32,257,735 $ 3,026,742 $ Beginning Balance Additions Reductions Ending Balance Due Within One Year Governmental Activities: Bonds and notes payable: General obligation bonds 31,385,000 $ 5,330,000 $ 7,170,000 $ 29,545,000 $ 2,070,000 $ Notes and loans 5,168,437 - 904,594 4,263,843 827,191 Total bonds and notes payable 36,553,437 5,330,000 8,074,594 33,808,843 2,897,191 Adjust for deferred amounts: For issuance premium 278,850 469,458 45,459 702,849 - Net effect of refunding bond issue (86,314) (526,542) (26,039) (586,817) - Net pension obligation 84,778 112,508 179,370 17,916 - OPEB payable 502,227 114,997 - 617,224 - Capital leases - 18,000 2,475 15,525 15,525 Compensated absences 3,248,463 3,220,646 3,027,658 3,441,451 1,327,695 Governmental activity Long-term liabilities 40,581,441 $ 8,739,067 $ 11,303,517 $ 38,016,991 $ 4,240,411 $ Washington State Auditor's Office 81 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington NOTE 11 – CONTINGENT LIABILITIES AND LITIGATION Contingent Liabilities The City has received several Federal and State grants for specific purposes, which are subject to review and audit by the grantor agencies. Such audits could lead to requests for reimbursement to grantor agencies for expenditures disallowed under the terms of the grant. Based upon experience, City Management believes such disallowance, if any, will be immaterial. Litigation The City, in the normal course of its activities, is involved in various claims and litigation. The City currently has claims and lawsuits pending, which could ultimately result in liability for the City over the next few years. The amount of these claims cannot be reasonably estimated at this time and management estimates that claims not covered by insurance resulting from such litigation would not materially affect the financial statements of the City. In December of 2009, the City received a demand letter from a local digital subscriber line (DSL) internet provider requesting a refund of utility tax paid by it to the City for its sales between 2005 and 2009. At this juncture, the City is still in the process of reviewing this claim to determine its validity and the City’s financial exposure, if any. In October of 2010, the City received a claim from a cellular telephone service provider requesting a refund of utility tax paid by it to the City for portions of its sales from November of 2005 through August of 2010. At this juncture, the City is still in the process of reviewing this claim to determine its validity and the City’s financial exposure, if any. NOTE 12 - COMMITMENTS The City capitalizes equipment obtained by financing lease agreements. The liability for these leases and annual amortization requirements are disclosed in Note 9. Pension and other post employment benefit (OPEB) commitments are discussed in Notes 7 and 18, respectively. NOTE 13 – RECEIVABLE AND PAYABLE BALANCES A. Receivables at December 31, 2011 are shown on the following schedule: Nonmajor Community Capital Nonmajor Proprietary Internal Receivables General Development Improvement Govt'l Funds Water/Sewer Coliseum Fund Service Fund Total Interest 7,650 $ 69 $ 21,638 $ 1,223 $ 18,879 $ - $ 271 $ 4,909 $ 54,639 $ Taxes 3,724,365 - 852,765 519,362 - - - - 5,096,492 Accounts 257,693 2,755,115 517,444 1,204 813,763 61,744 584,879 34,512 5,026,354 Due from other governments 49,091 356,757 - 967,946 31,704 - 22,628 - 1,428,128 Gross Receivables 4,038,799 3,111,941 1,391,847 1,489,735 864,346 61,744 607,778 39,421 11,605,613 Less: allowance for uncollectible accounts - - - - (47,383) - (143,464) - (190,847) Net Total Receivables 4,038,799 $ 3,111,941 $ 1,391,847 $ 1,489,735 $ 816,963 $ 61,744 $ 464,314 $ 39,421 $ 11,414,766 $ Washington State Auditor's Office 82 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington B. Payables at December 31, 2011 are shown on the following page: Nonmajor Community Capital Nonmajor Proprietary Internal Payables General Development Improvement Govt'l Funds Water/Sewer Coliseum Fund Service Fund Total Interest - $ - $ - $ - $ - $ 22,304 $ - $ - $ 22,304 $ Claims and judgements - - - - - - - 32,847 32,847 Accounts 357,405 48,172 763,491 301,551 75,976 304,960 55,859 70,309 1,977,723 Salaries and benefits 575,194 1,565 22,769 60,496 58,708 90,118 9,630 818,480 Taxes 4,649 - - - - 18,822 - - 23,471 Retainage - - 3,536 - - - - - 3,536 Due to other governments 8,670 - - 4,095 - 139,823 - - 152,588 Total Govt'l & Bus Activities 945,918 $ 49,737 $ 767,027 $ 328,415 $ 136,472 $ 544,617 $ 145,977 $ 112,786 $ 3,030,949 $ Reconciliation of financial statements to governmental wide financial statements: Accrued long term interest 125,051 $ - - - - - - - 125,051 Net Total Payables 1,070,969 $ 49,737 $ 767,027 $ 328,415 $ 136,472 $ 544,617 $ 145,977 $ 112,786 $ 3,156,000 $ NOTE 14 - INTERFUND TRANSACTIONS Interfund transactions are classified as follows: 1. Transactions that would be treated as revenues, expenditures or expenses if they involved external organizations, such as buying goods and services or payments in lieu of taxes, are similarly treated when they involve other funds of the City. 2. Transfers to support the operations of other funds are recorded as "Transfers" and classified as "Other Financing Sources or Uses" in the fund statements. Transfers between governmental or proprietary funds are netted as part of the reconciliation to the government-wide financial statements. 3. Capital contributions to enterprise or internal service funds, transfers of capital assets between proprietary and governmental funds, transfers to establish or reduce working capital in other funds, and transfers of remaining balances when funds are closed are classified as non-operating revenue. 4. Loans between funds are classified as interfund loans receivable and payable or as advances to and from other funds in the fund statements. Interfund loans do not affect total fund equity, but advances to other funds are offset by a reservation of fund equity. Loans and Advances are subject to elimination upon consolidation. As of December 31, 2011 outstanding interfund balances (resulting from various interfund transactions): Due from Due to Interfund Loans Purpose - Due to other funds other funds other funds Capital Improvement Fund Land Purchase 2,561,725 $ 80,000 $ Capital Improvement Fund Capital Construction 512,895 - Water & Sewer Fund 1,819,207 - Other Non-Major Govt'l Funds Capital Construction - 752,102 Coliseum Fund Capital Construction - 4,061,725 Total 4,893,827 $ 4,893,827 $ Washington State Auditor's Office 83 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Interfund Transfers Purpose - Transfers out Transfers in Transfers out General Fund Operations Transfers (Routine) 2,725,600 $ - $ General Fund Capital Transfers (Non-routine) - 1,500,000 General Fund Settlement (Non-routine) - 650,000 General Fund Operations Transfer (Golf Course) - 75,000 General Fund Operations Transfer (Ambulance) - 850,000 General Fund Operations Transfer (Coliseum) - 249,199 General Fund Operations Transfer (Risk - 675,000 Community Development Fund Capital (Non-routine) - 302,867 Capital Improvement Fund Capital Transfers (Non-routine) 1,790,911 2,385,915 Capital Improvement Fund Debt Service (Routine) - 2,809,274 Capital Improvement Fund Settlement (Non-routine) - 1,820,150 Bond Redemption Fund Debt Service (Routine) 2,809,274 - Other Non-Major Govt'l Funds Operations Transfers (Routine) - 2,490,039 Other Non-Major Govt'l Funds Capital Transfers (Non-routine) 1,694,741 604,300 Water/Sewer Fund Operations Transfers (Routine) - 166,788 Water/Sewer Fund Capital Transfers (Non-routine) - 140,061 Coliseum Fund Capital Transfers (Non-routine) 1,046,697 - Other Non-Major Enterprise Funds Operations Transfers (Routine) 1,037,845 53,774 Other Non-Major Enterprise Funds Capital Transfers (Non-routine) - 44,970 Internal Service Funds Operations Transfers (Routine) 675,000 - Internal Service Funds Settlement (Non-routine) 2,470,150 - Internal Service Funds Capital Transfers (Non-routine) 861,049 293,930 Total 15,111,267 $ 15,111,267 $ NOTE 15 - SEGMENT INFORMATION FOR ENTERPRISE FUNDS The City maintains six Enterprise Funds that provide ambulance service, building inspection services, water and sewer utility services, stormwater utility service, the operation of a golf course, and the operation of the coliseum. The only fund that meets the criteria for segment reporting is a major fund and therefore the required segment information can be found on the Proprietary Fund statements. NOTE 16 - ECONOMIC DEVELOPMENT CORPORATION The City of Kennewick established the Economic Development Corporation (EDC) in August 1982, under the provisions of Title 39, Chapter 84 of the Revised Code of Washington. The EDC was established for the purposes of facilitating local economic development and employment opportunities through the financing of industrial development facilities using non-recourse revenue bonds. The EDC entered into an agreement with a non-governmental third party to provide financing through non- recourse revenue bonds, Series 1984, issued in the principal amount of $1,500,000 on August 2, 1984. Debt service on this issue was completed in July 2004. The bonds did not constitute indebtedness of either the City or the State and were secured solely by revenues derived from the organization on whose behalf the bonds were issued. The EDC is a discretely presented component unit of the City of Kennewick. It has a separate and distinct governing authority, which is appointed by the City. The City has no governing authority over the day-to-day operating decisions of the EDC; all obligations of the EDC are paid by user fees. The EDC is fiscally dependent upon the City as all bond issues must be approved by the City of Kennewick. The lack of any assets, liabilities or operating activities for 2011 precludes the need to include a separate column in the City's financial statements. Washington State Auditor's Office 84 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington NOTE 17 - JOINT VENTURES A. Benton County Emergency Services Benton County Emergency Services (BCES), providing public safety communications and emergency management services, was formed January 1, 1997 when an Interlocal Agreement was entered into by the cities of Kennewick, Richland, West Richland, Benton City, Prosser and Benton County. The new Interlocal superseded the Interlocal Agreements previously associated with Benton County Emergency Management and Southeast Communications Center. The new Interlocal Agreement shall continue indefinitely, unless terminated by a participant. Benton County Emergency Services is served by an Executive Board composed of the City Managers of Kennewick and Richland, City Administrators for Prosser and West Richland, a Councilmember from Benton City and a Benton County Commissioner. Benton County Emergency Services is comprised of three Divisions: Southeast Communications Center (SECOMM), Benton County Emergency Management (BCEM) and 800 MHz Radio. 1. SECOMM The Southeast Communications Center provides public safety communications services to three principal participating jurisdictions: The cities of Kennewick and Richland and Benton County. The three principal participating jurisdictions own an equal share of net assets. Allocation of financial participation among the three principle jurisdictions is based on an equal share of capital expense and an equal share of predetermined fixed costs, direct costs and percent of use. The Southeast Communications Center also provides public safety communications services via contract to the City of West Richland, Benton County Fire Protection District Service contract agencies are assessed on a cost per capita or cost per call basis. 2. BCEM Benton County Emergency Management provides disaster response planning, event and response coordination and disaster recovery for Benton County and its political subdivisions per RCW 38.52. Four grant programs fund BCEM: Radiological Emergency Preparedness, DOE Emergency Preparedness, Chemical Stockpile Emergency Preparedness and State and Local Government Assistance program. The six participating jurisdictions own an equal share of net assets unless otherwise defined in the grant programs. Financial participation for Benton County and the cities of Kennewick, Richland, West Richland, Prosser and Benton City are allocated based on an equal share of a predetermined basic charge and a value determined by percent of population and assessed value. 3. 800 MHz Radio 800 MHz Radio provides communication infrastructure and technology for the dispatching of public safety agencies throughout Benton County. The 11 participating agencies including Benton County Sheriff and Public Works, the cities of Kennewick, Richland, West Richland and Prosser, Benton County Fire Districts 1, 2 and 4, Benton PUD and Columbia Dive and Rescue are assessed an annual fee per radio to fund system maintenance. Washington State Auditor's Office 85 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Effective January 1, 1997, the City of Richland assumed responsibility for operation of Benton County Emergency Services. As the Operating Jurisdiction, Richland provides all necessary administrative services for the operation of BCES. On December 31, 2011, the City of Kennewick's equity interest in SECOMM was $833,339, $81,043 in BCEM, and $3,475,887 in 800 MHz Radio. This equity is reported as an investment in joint ventures in the government-wide statement of net assets. The change in equity is reflected in the government- wide statement of activities under Public Safety. The City does not anticipate any income distributions from BCES since charges are assessed only to recover anticipated expenses. Complete and separate financial statements for BCES, as SECOMM and BCEM, may be obtained at the City of Richland, 505 Swift Blvd., Richland, Washington. B. Bi-County Police Information Network The Bi-County Police Information Network (BI-PIN) was established November 24, 1982, when an Interlocal Agreement was entered into by seven participating municipal corporations; the cities of Kennewick, Pasco, Richland, Connell and West Richland, and Benton and Franklin Counties. BI-PIN was established to assist the participating police and sheriff's departments in the deterrence and solution of criminal incidents. BI-PIN is served by an Executive Committee composed of the City Manager of each of the cities and a member from each of the Boards of County Commissioners of Benton and Franklin Counties. A liaison from the Bi-County Chiefs and Sheriffs is an ex officio, non-voting member. The allocation of financial participation among the participating jurisdictions is based upon the approved budget for that year and is billed quarterly in advance to each agency. On dissolution of the Interlocal Agreement, the net assets will be shared based upon participant contribution. Effective January 1, 1992, the City of Kennewick assumed responsibility for operation of the BI-PIN system. As the Operating Jurisdiction, Kennewick provides all necessary support services for the operation of BI-PIN such as accounting, legal services, risk management and information systems. The total amount paid by BI-PIN in 2011 for these transactions was $118,999. The City of Kennewick's equity interest in BI-PIN was $247,065 on December 31, 2011, which is reported as an investment in joint ventures in the government-wide statement of net assets. The change in equity is reflected in the government-wide statement of activities under Public Safety. The City does not anticipate any income distributions from BI-PIN since charges are assessed only to recover anticipated expenses. Complete separate financial statements for BI-PIN may be obtained at the City of Kennewick, 210 W. 6th Ave., Kennewick, Washington, 99336. C. Metro Drug Forfeiture Fund The Metropolitan Controlled Substance Enforcement Group (Metro) was established prior to 1987, when an Interlocal Agreement was entered into by six participating municipal corporations, the cities of Kennewick, Pasco, Richland, and West Richland, and Benton and Franklin Counties. Metro was established to account for the proceeds of forfeitures, federal grants, and court ordered contributions, and to facilitate the disbursement of those proceeds for the purpose of drug enforcement and investigations. Metro is served by an Executive Committee composed of the City Manager or designee of each of the cities and a member from each of the Boards of County Commissioners of Benton and Franklin Counties. In addition, a Governing Board consisting of the Chiefs of Police from the cities and the Sheriffs from the counties administers daily activity. Washington State Auditor's Office 86 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Effective July 1, 2009, the City of Kennewick assumed responsibility for the operation of Metro. As the Operating Jurisdiction, Kennewick provides accounting services for the operation of Metro. The City of Kennewick's equity interest in Metro was $68,339 on June 30, 2011, which is reported as an investment in joint ventures in the government-wide statement of net assets. The change in equity is reflected in the government-wide statement of activities under Public Safety. The City does not anticipate any income distributions from Metro. Complete separate financial statements for Metro may be obtained at the City of Kennewick, 210 West Sixth Avenue, Kennewick, Washington NOTE 18 - OTHER POSTEMPLOYMENT BENEFITS (OPEB) PLAN In addition to the pension benefits outlined in Note 7, the City of Kennewick provides post-retirement health care benefits in accordance with state statute for retired police officers and firefighters who are eligible under the Law Enforcement Officers’ and Firefighters’ (LEOFF) plan 1 retirement system. As of December 31, 2011, the City had 48 individuals that met the eligibility requirements of this retirement plan. A. Plan Description As required by the Revised Code of Washington (RCW), Chapter 41.26, the City provides lifetime medical care for members of the LEOFF retirement system that were hired prior to October 1, 1977 (LEOFF Plan 1 members). The members’ necessary hospital, medical, and nursing home care expenses not payable from Medicare, insurance provided by another employer, another pension plan, or any other similar source are covered. B. Funding Policy Pursuant to state statute, the city reimburses 100% of authorized LEOFF 1 retiree healthcare costs. The city pays a insurance premium to cover each retiree under its medical insurance program as well as any remaining eligible out of pocket expenses. Employer contributions are financed on a pay- as-you-go basis. Beginning in 2009, the city’s costs for health insurance and other medical costs for retired firefighters and law enforcement officers were paid for out of its Other Post Employment Benefits (OPEB) Trust Fund. Funding for these costs is provided from the proceeds of a 6.5% utility tax assessed on water and sewer sales that was implemented beginning in 2009 and is dedicated for LEOFF 1 retiree medical costs. The projected revenue from this utility tax is expected to mirror the city’s LEOFF 1 retiree medical costs over future years. As the city’s obligations for these costs are reduced, the utility tax rate will also be reduced, until such time that it is completely eliminated. As of December 31, 2011, the city’s OPEB Trust Fund had accumulated a fund balance of $420,829. Although the accumulated balance is not considered to be an OPEB contribution because of the fact that the city has not established an irrevocable trust, these funds are designated for the city’s OPEB costs. C. Annual OPEB Cost and Net OPEB Obligation The city’s annual OPEB cost is calculated based upon the annual required contribution (ARC), an amount actuarially determined in accordance with the parameters of Governmental Accounting Standards Board (GASB) Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize any unfunded actuarial liability over a period of thirty years as of January 1, 2011. The City has elected to calculate the ARC and related information using the alternative measurement method permitted by GASB Statement 45 for employers with plans of less than one hundred members. The following table shows the Washington State Auditor's Office 87 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington components of the City’s annual OPEB cost, contributions made by the City, and changes to the net OPEB obligation for the years ending December 31, 2008, 2009, 2010 and 2011, respectively. As the year ending December 31, 2008, was the City’s first year of implementation for GASB Statement 45, annual OPEB cost was equal to the ARC for the year. 2008 2009 2010 2011 Annual Required Contribution (ARC)* 912,123 $ 921,747 $ 933,497 $ 918,218 $ Interest on net OPEB obligation** - 7,055 15,409 22,600 Adjustment to the ARC*** - (9,624) (21,374) (29,508) Annual OPEB cost (expense) 912,123 919,178 927,532 911,310 Contributions made (755,347) (733,542) (767,717) (796,313) Increase in net OPEB obligation 156,776 185,636 159,815 114,997 Net OPEB obligation - beginning of year - 156,776 342,412 502,227 Net OPEB obligation - end of year 156,776 $ 342,412 $ 502,227 $ 617,224 $ The City’s OPEB cost, the percentage of OPEB cost contributed to the plan, and the net OPEB obligation for the years ending December 31, 2008, 2009, 2010 and 2011, respectively, were as follows: Fiscal Year Ended Annual OPEB Cost Percentage of Annual OPEB Cost Contributed Net OPEB Obligation 12/31/11 $911,310 87.4% $617,224 12/31/10 $927,532 82.8% $502,227 12/31/09 $919,178 79.8% $342,412 12/31/08 $912,123 82.8% $156,776 D. Funding Status and Funding Progress As of January 1, 2011, the most recent actuarial valuation date, the plan was 0% funded. The actuarial accrued liability (AAL) for benefits was $14,742,851 and the actuarial value of plan assets was resulting in an unfunded actuarial accrued liability (UAAL) of $14,742,851. The covered payroll (annual payroll of active employees covered by the plan) was $107,148, and the ratio of the UAAL to the covered payroll was 13,659 percent. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. E. Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. Washington State Auditor's Office 88 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington The City of Kennewick used the alternative measurement method permitted under GASB Statement No. 45. A single retirement age of 56.24 was assumed for all active members for the purpose of determining the actuarial accrued liability. Termination and mortality rates were assumed to follow the LEOFF 1 termination and mortality rates used in the September 30, 2009 actuarial valuation report issued by the Office of the State Actuary (OSA). Healthcare costs and trends were determined by Milliman and used by OSA in the state-wide LEOFF 1 medical study performed in 2011. The results were based on grouped data with 4 active groupings and 4 inactive groupings. The actuarial cost method used to determine the actuarial accrued liability was Projected Unit Credit. The AAL and NOO are amortized on an open basis as a level dollar over 30 years. These assumptions are individually and collectively reasonable for the purposes of this valuation. NOTE 19 – ASSOCIATION OF WASHINGTON CITIES EMPLOYEE BENEFIT TRUST A. Trust Description The City is a Participating Employer in the Association of Washington Cities Employee Benefits Trust (“Trust”), a cost-sharing multiple-employer welfare plan administered by the Association of Washington Cities. The Trust provides medical benefits to certain eligible retired employees of Participating Employers and their eligible family members. Under Article VII of the Trust document, the Trustees have the authority and power to amend the amount and the nature of the medical and other benefits provided by the Trust. The Trust issues a publicly available financial report that includes financial statements and required supplementary information for the Trust. That report, along with a copy of the Trust document, may be obtained by writing to the Trust at 1076 Franklin Street SE, Olympia, WA 98501-1346, or by calling 1-[PHONE REDACTED]. Funding Policy The Trust provides that contribution requirements of Participating Employers and of participating employees, retirees and other beneficiaries, if any, are established and may be amended by the Board of Trustees of the Trust. In 2011, retirees of the City receiving medical benefits from the Trust contributed $751.55 per month for non-Medicare enrolled retiree-only coverage, $1,507.70 per month for non-Medicare enrolled retiree and spouse coverage, $1,161.90 for Medicare enrolled retiree and non-Medicare enrolled spouse (or non-Medicare enrolled retiree and Medicare-enrolled spouse) and $825.35for Medicare-enrolled retiree and spouse coverage. Participating Employers are not contractually required to contribute at a rate assessed each year by the Trust for non-LEOFF I retirees. The retiree pays for 100% of the premium. NOTE 20 - OTHER DISCLOSURES Comparative Data/Reclassifications Comparative total data for the prior year is presented on both government-wide and fund financial statements in order to provide an understanding of the changes in the financial position and operations of these funds. Also, certain amounts presented in the prior year data have been reclassified for consistency purposes on the government-wide statement of net assets with no impact on ending total net assets. Arterial Street Fund – Has been moved from a Special Revenue Fund into the Street Fund. The motor vehicle fuel tax, the foundation for creating this fund, has been moved into the Street Fund. The fund was also administering a street maintenance program, including pavement preservation, which was funded through transfers from the Capital Improvement Fund. The transfers from the Capital Improvement Fund have been set aside for this program, although there is no restriction on spending them, therefore, the Arterial Street Fund no longer qualifies as a Special Revenue Fund. Washington State Auditor's Office 89 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Solid Waste Fund – Has been moved into the Capital Improvement Fund. Special revenue funds require that a restricted or committed revenue source must be the foundation for the fund. Although we do receive these revenues from garbage companies, the revenues are received under a contract for the gross revenue derived from the sale of recyclable material. The gross revenue is in exchange for the franchise for collection of solid waste. Although these funds have been set aside in the Solid Waste Fund, there is no restriction on spending them. Cash Reserve Fund – Has been moved from a Special Revenue Fund into the General Fund. The City authorized the cash reserve for revenue stabilization and contingencies equal to $2,500,000, the classification of this reserve is “committed”. Beginning in 2011, the City will increase the cash reserve annually by CPI, not less than per year with tax revenues. The cash reserve is to provide a fiscal means for the City to respond to potential adversities such as public emergencies, natural disasters or similarly major, unanticipated projects or circumstances, that were not foreseen when the biennial budget was prepared. Required Supplementary Information Firemen’s Pension Fund The following is a schedule of contributions from the employer and other contributing entities for the Firemen’s Pension Fund: Annual Fiscal Actual Fire Actual Required Percentage of Year Insurance Employer Total Contribution ARC Ending Premiums Contributions Contributions (ARC) Contributed 12/31/2011 $66,376 $112,994 $179,370 $115,324 155% 12/31/2010 64,392 178,392 242,784 115,324 211% 12/31/2009 60,473 178,978 239,451 150,624 159% 12/31/2008 63,419 98,128 161,547 150,624 107% 12/31/2007 60,988 136,012 197,000 157,014 125% 12/31/2006 55,586 (48,172) 7,414 157,014 5% Schedule of funding progress for the Firemen’s Pension Fund (In Thousands): Actuarial Accrued Unfunded Actuarial UAAL as a Actuarial Value Liabilities Accrued Liabilities Percentage of Valuation Date of Assets Entry Age (UAAL) Funded Ratio Covered Payroll Covered Payroll January 1, 2010 $ 531 $ 2,038 $ 1,507 26% $ - 0% January 1, 2008 338 2,321 1,983 15% - 0% January 1, 2006 341 2,406 2,065 14% - 0% Washington State Auditor's Office 90 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Required Supplementary Information Other Postemployment Benefits (LEOFF 1 Retiree Medical) Schedule of employer contributions for other postemployment benefits – LEOFF 1 Retiree Medical: Fiscal Year Ending Employer Contributions Annual Required Contribution Percentage of ARC Contributed December 31, 2011 $796,313 $918,218 86.7% December 31, 2010 $767,717 $933,497 82.2% December 31, 2009 $733,542 $921,747 79.6% December 31, 2008 $755,347 $912,123 82.8% Schedule of funding progress for other postemployment benefits – LEOFF 1 Retiree Medical: Actuarial Unfunded Actuarial UAAL as a Actuarial Value Accrued Accrued Liability Percentage of Valuation Date* of Assets Liability (AAL) (UAAL) Funded Ratio Covered Payroll Covered Payroll January 1, 2011 $ - $14,742,851 $14,742,851 0% $107,148 13659.33% January 1, 2008 $ - $14,354,560 $14,354,560 0% $202,912 7074.28% *January 1, 2008 represented the first valuation for the City’s LEOFF 1 Retiree Medical OPEB plan. As a result, only two dates are listed in the schedule of funding progress. Washington State Auditor's Office 91 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Expenditures of Federal Awards Year Ended December 31, 2011 Grantor/ Federal Current Pass-Through Grantor CFDA Other Identification Year Program Title Number Number Expenditures U.S. Department of Housing and Urban Development 2010 Community Development Block Grant (Direct) 14.218 B-10-MC-53-0001 565,381 $ Passed through WA State Department of Commerce: Community Development Block Grant (CDBG) Neighborhood Stabilization Program (NSP) 14.228 08-F6401-031 66,409 Total U.S. Dept of Housing and Urban Development 631,790 U.S. Department of Energy ARRA-Energy Efficiency & Conservation Block Grant Program 81.128 DE-SC0002581 24,642 Total U.S. Dept of Energy 24,642 U.S. Department of Justice Bulletproof Vest Partnership Program 16.607 9,718 Anti-Gang Initiative 16.609 F09-34023-002 7,470 16.609 F10-34023-002 23,000 16.609 F11-34023-002 1,466 Total CFDA Number 16.609 31,936 Passed through City of Seattle and Internet Crimes Against Children Task Force 16.543 2009-MC-CW-K016 12,000 Office of Juvenile Justive and Delinquency Prevention - Missing Children's Assistance Edward Byrne Memorial Justice Assistance Grant Program 16.738 2010-DJBX-0207 5,700 16.738 2011-DJBX-2271 42,746 Passed through WA State Dept. of Commerce and Metro Drug Task Force: Edward Byrne Memorial Justice Assistance Grant Program 16.738 M10-34021012 18,198 16.738 M11-34021012 21,471 Total CFDA Number 16.738 88,115 Passed through WASPC, Franklin County and Metro Drug Task Force: Office of Community Oriented Policing Services/WA State Methamphetamine Initiative 16.710 WSMI10104 401 Public Safety Partnerships and Community Policing Grants Passed through WA State Patrol and Metro Drug Task Force: Domestic Cannabis Eradication/Suppression 16.999 C110870FED 466 Passed through Metro Drug Task Force: Organized Crime Drug Enforcement Task Forces (OCDETF) - DEA 16.999 PA-WAE-0095 776 U.S. Marshals Service - Fugitive Task Force 16.999 0324A A3403FWF4014R 19,959 Federal Bureau of Investigation - Tri City Violent Crime Task Force 16.999 281D-SE-C93759 5,489 Total CFDA Number 16.999 26,690 Total U.S. Dept of Justice 168,860 U.S. Department of Transportation Passed-through WA State Traffic Safety Commission: Alcohol Traffic Safety & Drunk Driving Prevention Incentive Grants I 20.601 3,633 Alcohol Impaired Driving Counter Measures Incentive Grants I State and Community Highway Safety 20.600 8,629 Occupant Protection Incentive Grants 20.602 3,133 Total Department of Transportation 15,395 Federal Highway Administration Highway Planning and Construction Recovery Passed-through WA State Dept of Transportation: Highway Planning and Construction 20.205 STPUS - 3453(002) 236,174 20.205 STPUS - 3406(008) 898,270 20.205 STPE - 0610(002) 62,677 20.205 STPH - 3413(005) 9,617 Total CFDA Number 20.205 1,206,738 TOTAL EXPENDITURES OF FEDERAL AWARDS 2,047,425 $ The accompanying notes are an integral part of this schedule. Washington State Auditor's Office 92 ---PAGE BREAK--- 2011Comprehensive Annual Financial Report City of Kennewick, Washington Notes to Financial Assistance Schedules Year Ended December 31, 2011 NOTE 1 - BASIS OF ACCOUNTING NOTE 2 - PROGRAM COSTS The Grant award was increased to provide additional available funding, 2010 expenditures that didn't originally qualify because of insufficient funding, now are and, are reported as 2011 expenditures. NOTE 3 - AMOUNTS AWARDED TO SUBRECIPIENTS NOTE 4 - AMERICAN RECOVERY AND REINVESTMENT ACT (ARRA) of 2009 ARRA - Energy Efficiency & Conservation Block Grant Program The Schedule of Financial Assistance is prepared on the same basis of accounting as the City's financial statements. The City uses a modified accrual basis of accounting in all of the related Governmental funds and full accrual in the Proprietary funds. The amounts shown as current expenditures represent only the portion of expenses paid for with Federal, State or Local grants. Actual program costs, including the City's portion, may be more than reported. Expenditures for the following programs were funded by ARRA: Included in the total amount expended for the Anti-Gang Intiative and the Edward Byrne Memorial Justice Assistance Grant Programs is $41,883 that was passed through to subrecipients that administered their own projects. Washington State Auditor's Office 93 ---PAGE BREAK--- (SAO FACTS.DOC - Rev. 09/11) ABOUT THE STATE AUDITOR'S OFFICE The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four-year terms. Our mission is to work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Brian Sonntag, CGFM Chief of Staff Ted Rutt Deputy Chief of Staff Doug Cochran Chief Policy Advisor Jerry Pugnetti Director of Audit Chuck Pfeil, CPA Director of Performance Audit Larisa Benson Director of Special Investigations Jim Brittain, CPA Director for Legal Affairs Jan Jutte, CPA, CGFM Director of Quality Assurance Ivan Dansereau Local Government Liaison Mike Murphy Communications Director Mindy Chambers Public Records Officer Mary Leider Main number (360) 902-0370 Toll-free Citizen Hotline (866) 902-3900 Website www.sao.wa.gov Subscription Service