Document Kennewick_doc_5566c1ec31

Washington State Auditor’s Office Financial Statements and Federal Single Audit Report City of Kennewick Benton County Audit Period January 1, 2010 through December 31, 2010 Report No. 1006077 Issue Date August 8, 2011 ---PAGE BREAK--- August 8, 2011 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, 2010 through December 31, 2010 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, 2010 through December 31, 2010 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 each of its major federal programs. 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 were major programs during the period under audit: CFDA No. Program Title 14.228 Community Development Block Grants/State's Program 20.205 Highway Planning and Construction 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, 2010 through December 31, 2010 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, 2010, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 28, 2011. The prior year partial comparative information has been derived from the City’s 2009 financial statements that we issued our reports dated June 28, 2010. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to the 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. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Washington State Auditor's Office 3 ---PAGE BREAK--- 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 28, 2011 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, 2010 through December 31, 2010 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 each of its major federal programs for the year ended December 31, 2010. The City’s major federal programs are identified in the Federal Summary. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs 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 the 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 each of its major federal programs for the year ended December 31, 2010. 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 July 18, 2011 Washington State Auditor's Office 6 ---PAGE BREAK--- Independent Auditor’s Report on Financial Statements City of Kennewick Benton County January 1, 2010 through December 31, 2010 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, 2010, 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 partial comparative information has been derived from the City’s 2009 financial statements and, in our report dated June 28, 2010, 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, 2010, and the respective changes in financial position and, where applicable, cash flows thereof, and the respective budgetary comparison for the General 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, 2009, from which such partial information was derived. Washington State Auditor's Office 7 ---PAGE BREAK--- 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. The management’s discussion and analysis on pages 10 through 31, firemen’s pension fund on page 92 and information on other postemployment benefits (LEOFF 1 Retiree Medical) on page 93 are not a required part of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. 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 has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. BRIAN SONNTAG, CGFM STATE AUDITOR June 28, 2011 Washington State Auditor's Office 8 ---PAGE BREAK--- Financial Section City of Kennewick Benton County January 1, 2010 through December 31, 2010 REQUIRED SUPPLEMENTAL INFORMATION Management’s Discussion and Analysis – 2010 BASIC FINANCIAL STATEMENTS Statement of Net Assets – 2010 and 2009 Statement of Activities – 2010 and 2009 Balance Sheet – Governmental Funds – 2010 and 2009 Reconciliation of the Balance Sheet to the Government Wide Statement of Net Assets – Governmental Funds – 2010 Statement of Revenues, Expenditures and Changes in Fund Balances – Governmental Funds – 2010 and 2009 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities – 2010 Statement of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual – General Fund – 2010, 2009, 2008 and 2007 Statement of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual – Community Development Fund – 2010, 2009, 2008 and 2007 Balance Sheet – Proprietary Funds – 2010 and 2009 Reconciliation of the Balance Sheet – Proprietary Funds – to the Balance Sheet – Business-Type Funds – 2010 Statement of Revenues, Expenses and Changes in Fund Net Assets – Proprietary Funds – 2010 and 2009 Reconciliation of the Statement of Revenues, Expenses, and Changes in Fund Net Assets of Proprietary Funds to the Statement of Activities – Business-Type Activities – 2010 Statement of Cash Flows – Proprietary Funds – 2010 and 2009 Statement of Fiduciary Net Assets – Fiduciary Funds – 2010 and 2009 Statement of Changes in Fiduciary Net Assets – Fiduciary Funds – 2010 and 2009 Notes to Financial Statements – 2010 REQUIRED SUPPLEMENTAL INFORMATION Firemen’s Pension Fund – 2010 Other Postemployment Benefits (LEOFF I Retiree Medical) – 2010 SUPPLEMENTAL INFORMATION Schedule of Expenditures of Federal Awards – 2010 Notes to the Schedule of Expenditures of Federal Awards - 2010 Washington State Auditor's Office 9 ---PAGE BREAK--- 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, which can be found in this report, 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, 2010 by $311,184,622 (net assets). Of this amount, $28,136,971 (unrestricted net assets) may be used to meet the city’s ongoing obligations to citizens and creditors. However, a portion of unrestricted net assets as of December 31, 2010 are earmarked by City Council for projects that were in progress at the end of 2010, but will not be completed until 2011 or beyond. ♦ The city’s total net assets increased by $7,490,722 in 2010. 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 $33,001,701 greater than the program revenues generated for governmental activities. Program revenues exceeded expenses by $668,715 for business-type activities. ♦ As of December 31, 2010, the City of Kennewick’s governmental funds reported combined ending fund balances of $29,802,475, an increase of $10,489,529 in comparison with the prior year. Approximately 41 percent of this total amount, $12,233,105, represents unreserved fund balance. A significant portion of unreserved fund balance (approximately 37 percent) is needed to meet Council policies that require a minimum fund balance (reserve) in the general fund and cash reserve funds combined. Additionally, a small portion of unreserved fund balance as of December 31, 2010 is also earmarked by City Council for projects that were scheduled to be completed during the 2009/2010 biennium, but will not be completed until 2011 or beyond. ♦ As of December 31, 2010, unreserved fund balance for the general fund was $3,415,595, or 8.6 percent of total general fund expenditures and 8.2 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, fund balance in the city’s cash reserve fund remained at $2,500,000 as of December 31, 2010. Together these fund balances represent approximately 14.3 percent of 2010 operating funds expenditures. ♦ The City of Kennewick’s total capital assets increased by $4,922,910 during the year ended December 31, 2010. 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 increased by $11,129,511 during the year ended December 31, 2010. This increase reflects the city’s issuance of $13,665,000 in general obligation bonds for its Southridge Local Revitalization Financing (LRF) project as w ell as an additional $3,025,000 in state public works trust fund loans in the water and sewer business-type activity utilized for upgrades to the city’s wastewater plant. Washington State Auditor's Office 10 ---PAGE BREAK--- 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. 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 government-wide statements can be found in this report. 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. T his 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 sixteen individual governmental funds. I nformation 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 in this report. Washington State Auditor's Office 11 ---PAGE BREAK--- 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 basic governmental fund financial statements can be found in this report. 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 five enterprise funds to account for its water and sewer utility, ambulance service, building inspection function, coliseum facility operations and stormwater utility. 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 in this report. The basic proprietary fund statements can be found in this report. 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 basic fiduciary fund financial statements can be found in this report. 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. The notes to the financial statements can be found in this report. 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. C ombining and individual fund statements can be found in this report. Washington State Auditor's Office 12 ---PAGE BREAK--- 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, 2010, the City of Kennewick’s assets exceeded liabilities by $311,184,622. The following is a condensed version of the city’s statement of net assets for the years ended December 31, 2010 and 2009, respectively. 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 $57,039,977. 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. I n 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 $28,136,971 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, 2010 is earmarked by City Council for future projects and other needs of the city for its 2011/2012 biennium. As of December 31, 2010, 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. 2010 2009 2010 2009 2010 2009 Assets Current assets 34,808,778 $ 30,729,834 $ 2,905,631 $ (124,531) $ 37,714,409 $ 30,605,303 $ Capital assets 184,536,606 179,817,079 148,999,970 148,796,587 333,536,576 328,613,666 Other noncurrent assets 18,760,345 7,286,884 4,048,178 4,045,214 22,808,523 11,332,098 Total assets 238,105,729 $ 217,833,797 $ 155,953,779 $ 152,717,270 $ 394,059,508 $ 370,551,067 $ Liabilities Current liabilities 10,058,224 $ 5,772,825 $ 4,695,545 $ 4,020,336 $ 14,753,769 $ 9,793,161 $ Noncurrent liabilities 36,454,788 25,749,264 31,666,329 31,314,742 68,121,117 57,064,006 Total liabilities 46,513,012 31,522,089 36,361,874 35,335,078 82,874,886 66,857,167 Net Assets Invested in capital assets, net of related debt 159,856,733 156,258,231 116,639,866 117,072,647 276,496,599 273,330,878 Restricted 4,306,567 3,903,139 2,244,485 2,090,032 6,551,052 5,993,171 Unrestricted (deficit) 27,429,417 26,150,338 707,554 (1,780,487) 28,136,971 24,369,851 Total net assets 191,592,717 186,311,708 119,591,905 117,382,192 311,184,622 303,693,900 Total liabilities and net assets 238,105,729 $ 217,833,797 $ 155,953,779 $ 152,717,270 $ 394,059,508 $ 370,551,067 $ City of Kennewick Statement of Net Assets Governmental Activities Business-Type Activities Total Washington State Auditor's Office 13 ---PAGE BREAK--- As mentioned in the financial highlights section of this analysis, the city’s net assets increased by $7,490,722 overall for the year ended December 31, 2010. 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 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 $5,281,009 during the year ended December 31, 2010, which equated to 70.5 percent of the overall increase of $7,490,722 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 increased by approximately $4.8 million during 2010 as the result of a significant increase in operating and capital grants and contributions received by the city during the year. This increase was partially attributable to developer contributions of right of way and other infrastructure in 2010 related to residential and commercial development activity. A dditionally, the city experienced a significant increase in capital grants for road construction during 2010. 2010 2009 2010 2009 2010 2009 Revenues Program revenues: Charges for services 5,767,630 $ 5,305,858 $ 23,563,839 $ 21,296,241 $ 29,331,469 $ 26,602,099 $ Operating grants and contributions 6,103,229 5,213,421 97,737 34,386 6,200,966 5,247,807 Capital grants and contributions 5,548,392 2,625,573 1,142,903 1,713,426 6,691,295 4,338,999 General revenues: Property taxes 10,279,405 10,150,832 - - 10,279,405 10,150,832 Sales taxes 14,205,554 13,509,115 - - 14,205,554 13,509,115 Utility taxes 10,723,581 11,656,614 - - 10,723,581 11,656,614 Real estate excise tax 1,406,052 1,215,835 - - 1,406,052 1,215,835 Gambling excise tax 749,091 784,199 - - 749,091 784,199 Lodging tax 1,137,879 1,031,013 - - 1,137,879 1,031,013 Other taxes 790,899 475,568 - - 790,899 475,568 Gain on sale of capital assets - 174,543 - - - 174,543 Unrestricted investment earnings 396,668 579,127 134,579 336,505 531,247 915,632 Total revenues 57,108,380 52,721,698 24,939,058 23,380,558 82,047,438 76,102,256 Expenses: General government 9,225,038 7,493,615 - - 9,225,038 7,493,615 Public safety 22,433,245 23,853,761 - - 22,433,245 23,853,761 Transportation 7,687,655 7,285,954 - - 7,687,655 7,285,954 Physical environment 1,816,213 1,946,895 - - 1,816,213 1,946,895 Economic environment 2,462,264 1,571,991 - - 2,462,264 1,571,991 Culture and recreation 5,194,534 5,294,988 - - 5,194,534 5,294,988 Interest on long-term debt 1,602,003 1,068,538 - - 1,602,003 1,068,538 Water and Sewer - - 13,862,434 13,428,742 13,862,434 13,428,742 Medical Services - - 3,960,511 3,680,664 3,960,511 3,680,664 Building Safety - - 1,020,997 1,006,417 1,020,997 1,006,417 Stormwater - - 1,064,695 564,626 1,064,695 564,626 Coliseum - - 4,227,127 3,192,733 4,227,127 3,192,733 Total expenses 50,420,952 48,515,742 24,135,764 21,873,182 74,556,716 70,388,924 Increase in net assets before transfers 6,687,428 4,205,956 803,294 1,507,376 7,490,722 5,713,332 Transfers (1,406,419) (12,715,211) 1,406,419 12,715,211 - - Increase (decrease) in net assets 5,281,009 (8,509,255) 2,209,713 14,222,587 7,490,722 5,713,332 Net assets - beginning 186,311,708 194,820,963 117,382,192 103,159,605 303,693,900 297,980,568 Net assets - ending 191,592,717 $ 186,311,708 $ 119,591,905 $ 117,382,192 $ 311,184,622 $ 303,693,900 $ Governmental Activities Business-Type Activities Total City of Kennewick Changes in Net Assets Washington State Auditor's Office 14 ---PAGE BREAK--- ♦ On a full accrual basis, tax revenues increased by 1.2 percent in 2010 when compared to 2009, which equates to a total increase of $469,285. This overall increase was comprised of a 1.2 percent increase in property tax revenues, a 5.2 percent increase in sales tax, a 15.6 percent increase in real estate excise tax and a 10.4 percent increase in lodging tax, which were offset by an 8 percent decrease in utility tax revenues and a 4.5 percent decrease in gambling excise tax revenue. The increase in property tax revenue for 2010 was attributable to $71.8 million in new construction that was added to the city’s assessed valuation in 2009 for the 2010 tax levy. Unlike most years in the recent past, the city’s 2010 levy did not reflect a 1 percent increase to its base levy, which is the maximum increase allowed under state law. This was due to the fact that the implicit price deflator (IPD) for July of 2009 was negative. Under state law, the city can increase its base levy by the lesser of 1 percent or the percentage increase in the IPD. In most years, this makes the effective limit 1 percent. However, for its 2010 levy, the city was only able to avoid taking a reduction to its base levy after the City Council passed a resolution declaring a substantial need for a 0 percent increase. Sales tax revenue, which is the city’s largest source of tax revenue, increased by 5.2 percent when compared to 2009. This increase was partially attributable to the fact that there was a much lower base for comparison in 2010 after receipts of regular and optional sales and use tax declined by just under 2.6 percent in 2009 on a full accrual basis, which was attributable to the impact of the national recession on local consumerism. However, when evaluating the overall trends in 2010 for this revenue source, it is important to consider that the city lost one of its largest taxpayers in early 2010 when an auto dealership relocated to a neighboring city. Considering the loss of sales and use tax revenue resulting from this relocation, there was true growth in the city’s base sales and use tax revenue during 2010. Sales of residential and commercial properties increased in 2010, which led to a 15.6 percent increase in real estate excise tax revenue for the year. S imilar to the discussion provided above regarding the city’s sales tax revenue trends, there was a much lower base for comparison for real estate excise tax in 2010, due to the fact that revenue from this source declined by 19.9 percent in 2009. Lodging tax revenue experienced an increase of 10.4 percent in 2010 due to the addition of a new hotel in Kennewick and an overall increase in tourism activity within the region that resulted in a greater number of hotel stays during the year. Utility tax revenues decreased by 8 percent overall in 2010. This decrease was driven by significant declines in utility tax generated from sales of natural gas, cable television and telephone services, partially offset by a large increase in utility tax revenue generated from sales of electricity, which is the largest source of utility tax for the city. Utility tax receipts from natural gas declined by approximately 24 percent in 2010, which was the direct result of rate changes enacted by Cascade Natural Gas. Effective August 1, 2009, natural gas rates were lowered by 13 – 15 percent across all customer classes. Additionally, effective November 1, 2010, rates were decreased again by 9 – 10 percent across all customer classes. Utility tax generated from cable television services declined by approximately 25 percent in 2010, which is attributable to a reduction in tax received from the city’s primary cable provider. Beginning late in 2009, the provider stopped remitting tax on the gross revenue generated from cable modem services in accordance with federal and state law. Utility tax generated from telephone services decreased by 15.6 percent in 2010, which is primarily the result of a large one-time payment of back taxes from a cellular service provider in April of 2009. Without this one-time payment in 2009, utility tax generated from telephone services would have remained flat in 2010. A dditionally, the city is working with legal counsel and other local Washington State Auditor's Office 15 ---PAGE BREAK--- jurisdictions to address recent interpretations by telephone and cellular phone service providers that portions of their services are not subject to the city’s telephone utility tax as a result of the Internet Freedom Act. In the interim, many providers have ceased remitting utility tax on the revenues generated from these services. The declines in utility tax outlined above were offset by a 7.4 percent increase in electric utility tax, which is attributable to two primary factors. First, the Benton PUD enacted a 4.6 percent rate increase on January 1, 2010 for residential customers as a result of increased power costs from Bonneville Power Association (BPA). Additionally, two temporary rate reductions enacted during 2008 by the PUD expired on May 31, 2009. These rate reductions were associated with two lump sum payments the PUD received from the BPA related to litigation over its residential exchange program, which the PUD elected to pass along to its customers in the form of temporary rate reductions Finally, gambling tax revenues decreased by 4.5 percent during 2010, primarily as a result of a reduction in gambling tax collected from card rooms. This reduction was attributable to delinquent taxes from two of the city’s major casinos as well as the closure of a casino in the latter half of 2009. ♦ In 2009, approximately $175,000 in revenue was generated from the sale of a parcel of city owned land and sales of scrap material. No such sales occurred during 2010, which led to the reduction in revenue from this source experienced in 2010. ♦ Unrestricted investment earnings decreased by 31 percent in 2010 w hen compared to 2009, or approximately $182,000. This decrease is directly tied to interest rates available for the city’s investment portfolio, which were significantly lower during 2010 than 2009. 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 .26 percent during 2010, compared to .70 percent for 2009. Additionally, the city’s yield on its investments in agency securities also declined considerably during the year, particularly 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 $1,905,210 in 2010 relative to 2009, which equates to a 3.9 percent increase. This increase was primarily attributable to a $2.47 million legal settlement related to a lawsuit involving a claim of breach of contract on the part of the city that was reached early in 2011, prior to the issuance of this report. However, as the underlying event leading to this settlement occurred prior to December 31, 2010, the liability for this settlement is reflected in the financial results for 2010. W ithout this one-time item, expenses within governmental activities decreased by $562,529, or 1.2 percent. This reduction was predominately attributable to a reduction in personnel expenses for the city in 2010 within its governmental activities. Some of the major factors leading to this overall decrease follow. Expenses for salaries and wages decreased by 0.2 percent in 2010, or about $33,000. This minor decrease was attributable to several factors. Washington State Auditor's Office 16 ---PAGE BREAK--- First, the city eliminated 20 vacant full-time positions during the course of 2009, 15 of which were paid out of its governmental activities. Of the positions eliminated, 6 were officially eliminated in the fall of 2009 as part of the budget balancing strategies that were designed to stabilize the city’s financial condition within its governmental activities. The city experienced a full year of expense savings in 2010 from these eliminated positions, which lowered personnel costs significantly for the year. The factors outlined above that led to reductions in personnel expenses in 2010 were largely offset by the increases in personnel expenses associated with negotiated pay increases for the city’s union personnel and a cost of living increase and scheduled step increases for its non-represented employees. Expenses for personnel benefits decreased by 5.5 percent in 2010, or approximately $410,000. This overall reduction was attributable to three main factors. First, as outlined above within the discussion of changes in salary and wage expenses, the city eliminated 20 vacant full-time positions during the course of 2009, 15 of which were paid from within governmental activities. Six of the positions were officially eliminated late in 2009 and were filled for a portion of the year prior to that. The city experienced a full year of benefit expense savings in 2010 from these eliminated positions, which lowered benefit expenses considerably in 2010. In addition, expenses for medical insurance decreased by 7.0 percent in 2010 within governmental activities, despite a 10 percent increase in medical insurance premiums effective January 1, 2010. In the fall of 2008, the city chose to discontinue its self-insured/consumer-driven medical plan administered by United Healthcare (UHC) and move to a more traditional medical plan offered through the Association of Washington Cities (AWC) Employee Benefit Trust. Unfortunately, due to the city’s poor claims experience while on its previous plan, AWC assessed a 15 percent premium surcharge to the city for the first several months of 2009 to join the plan. Additionally, the city’s firefighter union employees did not move to the AWC plan in 2009 as a result of ongoing negotiations for their 2008-2010 labor contract, which did not settle until the fall of 2009. Due to the reduction in the number of employees covered on the self-insured plan with UHC, the administrative and overall cost per employee for the city’s firefighters increased significantly. The removal of the premium surcharge for a full year in 2010, coupled with the savings realized by moving the city’s firefighter union to the AWC plan in 2010, resulted in a significant savings in medical insurance expense during the year. Lastly, the city experienced an 11.1 p ercent reduction in expenses for employer retirement contributions in 2010. This decrease was the result of a reduction in the employer contribution rates for the PERS II and III retirement plans in July of 2009. At that time, employer contribution rates were reduced from 8.31 percent to 5.29 p ercent due to legislation that changed the actuarial methodology and assumptions used by the State Actuary’s Office to calculate pension rates. In 2010, the city’s retirement contributions for its PERS II and III employees were based on this lower rate for the entire year, which resulted in much lower pension costs overall. Net transfers made from governmental activities to business-type activities decreased by $11,308,791 in 2010. The majority of this decrease was attributable to a one-time transfer of $11,484,435 in capital assets from governmental activities to the city’s newly formed stormwater business-type activity in 2009. Absent this one-time transfer, the net change in transfers made from governmental activities to business-type activities actually increased by $175,643 in 2010. This net increase was attributable to increases in transfers to the medical services and building safety business-type activities for operational needs, a net decrease in transfers to the coliseum business-type activity for Washington State Auditor's Office 17 ---PAGE BREAK--- operational needs, capital projects and debt service, and a decrease in the amount transferred from the city’s water and sewer business-type activity to governmental activities for its contributions towards personnel costs and capital projects. Transfers from governmental activities to the medical services business-type activity increased by $91,000 in 2010. This increase was not attributable to the need for a greater operating subsidy for the medical services business-type activity, as the net operating loss for the activity was actually significantly lower in 2010 than in 2009. Instead, the increase in transfers was the result of a decision by the city to increase the cash reserves of the utility as of December 31, 2010. Transfers from governmental activities to the building safety business-type activity increased by $100,000 in 2010. This increase was necessary to subsidize the operating loss the activity incurred in 2010 and replenish the activity’s cash reserves, which had been depleted as a result of declines in building permit revenue over the course of the last 3 years. Although the number of building permits issued during 2010 increased by 16 percent with a corresponding 20 percent increase in their value, total building permit revenue is still well below its peak levels experienced in 2007. In total, transfers from governmental activities to the coliseum business-type activity decreased by less than $178,000 in 2010. Transfers from governmental activities to the coliseum business- type activity for operations decreased by approximately $17,000 in 2010 as a result of improved operating results for the facility in 2010. Additionally, transfers from governmental activities to fund capital improvements at the facility decreased by approximately $261,000 in 2010, which was attributable to several large capital projects that were completed during the previous year. F inally, transfers from governmental activities for interfund debt service associated with the acquisition of the facility increased by $100,000 in 2010 based on a budgetary policy change to make an additional one- time transfer to pay down the debt used to acquire the facility using excess lodging tax proceeds that were available. Lastly, transfers from the water and sewer business-type activity to governmental activities for a capital project and the activity’s share of personnel costs paid directly from governmental activities decreased by just over $224,000 in 2010. The majority of this overall decrease was attributable to a 2009 capital project where the water and sewer business-type activity reimbursed the city’s governmental activities for its portion of a street reconstruction project that was completed to replace water and sewer infrastructure located under the street. The following chart illustrates the surplus or net subsidy required for different governmental programs. The illustration clearly shows that all governmental programs were reliant on tax revenues in 2010 to cover the shortfall of program revenues available to fund the costs of providing service to Kennewick’s citizens. The excess of program revenues over expenses for the transportation program in 2010 was partially attributable to capital contributions of right of way and infrastructure from developers of nearly $1.25 million during the year. H owever, several of the transportation program’s costs and the infrastructure donated by developers are capitalized on the government-wide statements. Over time, these capitalized costs will be depreciated, which will significantly add to the costs of this activity. Ultimately, general taxes will be required to subsidize the ongoing maintenance and operation for the city’s transportation program. Washington State Auditor's Office 18 ---PAGE BREAK--- Washington State Auditor's Office 19 ---PAGE BREAK--- Washington State Auditor's Office 20 ---PAGE BREAK--- commercial and other non-residential customers. In 2010, the utility collected a full year’s worth of revenue, as opposed to only 7 months in 2009. As a result, charges for service in the stormwater business-type activity increased by 74 percent in 2010. Finally, revenues generated from charges for services increased by 73 percent within the coliseum business-type activity in 2010, which was partially attributable to an increase in revenue generated from events at the facility during the year. Additionally, and to a larger extent, the facility’s food and beverage services, which were previously contracted out, were taken over by the management company running the facility on behalf of the city in the summer of 2009. As a result, the gross revenue from food and beverage services is now reflected within the operating revenues of this business-type activity and 2010 reflects a full year’s worth of activity. ♦ Capital grants and contributions for business-type activities decreased by $570,523 in 2010. The water and sewer business-type activity accounts for the majority of capital grants and contributions revenue within the city’s business-type activities. The current year’s decrease in this category was attributable to a reduction in developer contributions in the form of water and sewer infrastructure in 2010. ♦ Business-type expenses increased by $2,262,582 overall when compared to 2009, which equates to an increase of 10.3 percent. Expenses for the city’s water and sewer business-type activity increased by $433,692 in 2010, which equated to an increase of 3.2 percent. This change was primarily attributable to increases in operating costs such as electricity. The administrative and general expenses for this activity actually decreased by 4.2 percent for the year. Expenses for the medical services business-type activity increased during 2010 by $279,847, or 7.6 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 inflationary increases in the cost of medical supplies. Expenses for the building safety business-type activity increased by only $14,580, or 1.4 percent, in 2010. This relatively small increase was attributable to a reorganization of the activity’s personnel in 2009 after the city’s Building Safety Manager retired early in 2009. As a result of this reorganization, the city was able to eliminate a Building Inspector position and the ongoing savings generated from these changes allowed the activity’s expenses to remain relatively flat in 2010. Expenses for the coliseum business-type activity increased by $1,034,394, or 32.4 percent during 2010. This overall increase was primarily the result of a large increase in expenses related to providing food and beverage services at the city’s coliseum facility. As mentioned previously in this section, the facility’s food and beverage services, which were previously contracted out, were taken over by the management company running the facility on behalf of the city in the summer of 2009. As a result, the gross expenses associated with providing food and beverage services at the facility for a full year were reflected in the 2010 expenses of this business-type activity. Lastly, expenses for the city’s stormwater business-type activity increased by $500,069, o r 88.6 percent, in 2010. As previously discussed, this utility was formed in June of 2009 to account for the costs associated with maintaining the city’s stormwater infrastructure in compliance with state and federal regulations. The significant increase in expenses for the utility in 2010 is reflective of the fact that the utility operated for a full year in 2010. Washington State Auditor's Office 21 ---PAGE BREAK--- Washington State Auditor's Office 22 ---PAGE BREAK--- The general fund is the chief operating fund of the City of Kennewick. A s of December 31, 2010 , unreserved fund balance in the general fund was $3,415,595. A common measure of the general fund’s liquidity is to compare unreserved fund balance to total fund expenditures. Unreserved fund balance represents 8.6 percent of total general fund expenditures for the year ended December 31, 2010, as compared to 4.8 percent for the year ended December 31, 2009. It should be noted that the city also continues to maintain a $2.5 million reserve fund for unanticipated changes in revenues and expenditures. The fund balance of the City of Kennewick’s general fund increased by $1,520,728 during 2010. 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 71 percent of the fund’s total sources of revenue. In 2010, revenues from taxes grew by approximately 1.1 percent overall within the general fund due to increases in revenue from property and sales taxes. These increases were offset by an overall reduction in utility taxes and gambling tax for the year. Property taxes allocated to the general fund increased by roughly 5.5 percent, which was attributable to growth that occurred in the city during 2009. In total, the city’s 2010 property tax levy increased by just under $161,000. As mentioned earlier in this report under the analysis of changes in net assets for governmental activities, the increase experienced in the City’s property tax revenue was generated as a result of $71.8 million in new construction that was added to the city’s assessed valuation in 2009 for the 2010 levy. Unlike most levy years, the city was unable to increase its 2010 levy by the 1 p ercent maximum allowed under state law. Sales and use tax revenues receipted into the general fund increased by 5.3 percent in 2010 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 4.57 percent in 2010. As outlined in greater detail within the analysis of the change in net assets for governmental activities, this increase was partially attributable to the fact that there was a much lower base for comparison in 2010 and moderate growth in the city’s base sales and use tax revenue. 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 5.0 percent for the year. Utility tax revenues decreased by 7.5 percent overall in 2010. As explained in greater detail earlier in this report within the discussion of the change in net assets for governmental activities, this overall decrease was driven by significant declines in utility tax generated from sales of natural gas, cable television and telephone services, partially offset by a significant increase in utility tax revenue generated from sales of electricity, which is the largest source of utility tax for the city. Finally, gambling tax revenues decreased by 4.5 percent during 2010, primarily as a result of a reduction in gambling tax collected from card rooms. This reduction was attributable to delinquent taxes from two of the city’s major casinos as well as the closure of a casino in the latter half of 2009. ♦ Intergovernmental revenues receipted into the general fund decreased by 19.5 percent, or approximately $424,000, in 2010. The most significant factor leading to this was a large decline in the revenue received from federal grants for the city’s Police Department. A significant portion of the federal grant revenue received in 2009 was funded through the American Recovery and Reinvestment Act (ARRA). Without the infusion of federal funding available under ARRA, the revenue received from federal grants returned to normal levels in 2010. Additionally, intergovernmental revenue declined in 2010 due to a recent state court case that allowed “base charges” to be excluded from gross revenue subject to public utility Washington State Auditor's Office 23 ---PAGE BREAK--- district privilege tax. The case resulted in a refund owed to public utility districts for the portion of the privilege tax remitted from 2004-2009. T his refund was applied against the city’s 2010 PUD privilege tax distribution, which reduced it significantly. ♦ Revenues in the charges for services category increased by 9.4 percent in 2010, or approximately $400,000. The overall increase in revenue experienced within this category during the year reflects a significant increase in engineering services revenue as well as revenue generated through charges to other local governments for shared resources. ♦ Transfers to the general fund increased by 9.8 percent, or approximately $288,000, in 2010. 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. As outlined earlier in this report, utility taxes collected for natural gas and telephone services declined significantly in 2010, which resulted in a corresponding decrease to the operating transfer received from the public safety fund during the year despite an increase in electric utility tax. This category also includes transfers from enterprise (business-type) funds to pay for their share of personnel costs paid from the general fund for the city’s Administrative Services Support Team (ASST) and other resources shared citywide, which increased in 2010. And lastly, this category included a one- time transfer of $290,000 in 2010 from the equipment rental fund related to the savings associated with the decision not to replace two brush trucks scheduled for replacement during the year within the fire department. ♦ Expenditures for salary and wages paid from the general fund decreased by 0.2 percent in 2010, or approximately $33,000. This minor increase was attributable to several factors. First, as explained in more detail earlier in this report within the analysis of the change in net assets for governmental activities, the city eliminated 20 vacant full-time positions during the course of 2009, 12 of which were paid out of its general fund. The city experienced a full year of expenditure savings in 2010 from these eliminated positions, which lowered personnel costs significantly for the year. A portion of the overall decrease in 2010 was also attributable to retroactive payments associated with the settlement of the city’s 2008-2010 collective bargaining agreement with its firefighter union in 2009. The city’s firefighter union operated during all of 2008 and a significant portion of 2009 under the terms of a collective bargaining agreement that expired at the close of 2007. As a result, when the 2008-2010 contract was finalized in 2009, the group received a retroactive payment back to the expiration date of the previous contract, which inflated total expenditures for personnel services in 2009 considerably. Lastly, the factors outlined above that led to reductions in personnel expenditures in 2010 were largely offset by the increases in personnel expenditures associated with negotiated pay increases for the city’s union personnel and a cost of living increase and scheduled step increases for its non-represented employees. ♦ Expenditures for personnel benefits decreased by 5.5 percent in 2010, or approximately $410,000. This overall reduction was attributable to three main factors. First, as outlined above within the discussion of changes in personnel expenditures, the city eliminated 20 vacant full-time positions during the course of 2009, 12 of which were paid out of its general fund. Six of the positions were officially eliminated late in 2009 and were filled for a portion of the year prior to Washington State Auditor's Office 24 ---PAGE BREAK--- that. T he city experienced a full year of benefit expenditure savings in 2010 from these eliminated positions, which lowered costs within the personnel benefits expenditure category significantly for the year. In addition, as outlined in greater detail earlier in this report, expenditures for medical insurance decreased by 7.0 percent in 2010, despite a 10 percent increase in medical insurance premiums effective January 1, 2010, which was the result of the City moving to a new medical plan for the majority of its employees in 2009. Lastly, as also mentioned earlier in this report, the city experienced an 11.1 percent reduction in expenditures for employer retirement contributions in 2010 based on changes to the actuarial methodology and assumptions utilized by the State Actuary to calculate pension rates, which resulted in lower employer rates starting in July of 2009. ♦ Expenditures for intergovernmental services in the general fund increased by 2.8 percent in 2010, or approximately $143,000. This overall increase was the result of several factors. First, the city’s costs for jail services increased in 2010 by 18.1 percent, or approximately $397,000. This was attributable to a 12 percent increase in the prisoner bed day rate charged by the County, which was required to offset a reduction in contract housing revenue collected by the jail from other cities as well as the state and federal governments for their use of prisoner beds in the facility. The significant increase to the city’s bed day rate was partially offset by a 6 percent reduction in the number of prisoner bed days utilized by the city during the year. As outlined earlier in this report, the city experienced a large increase in proceeds from federal grants during 2009, in part due to programs funded through American Reinvestment and Recovery Act (ARRA). The city passed through a considerable amount of these grant proceeds to sub-recipient agencies in 2009, which is reflected within this category of expenditures. In 2010, the city did not receive a similar level of federal funding and as a result, its expenditures for the pass-through of grant proceeds declined significantly. Additionally, the city’s costs for district court services declined by 5.6 percent in 2010 based on a reduction to the city’s allocation of district court’s total costs, which is based on its caseload as a percentage of the caseload for all agencies that utilize the court’s services. Lastly, the city experienced a relatively large increase in expenditures in 2009 for election support as a result of having both a primary and general election during the year. Without these items in 2010, the city was able to save approximately $50,000 in election support costs. ♦ Transfers out, which is another major expenditure of the general fund, increased by 13.6 percent, or approximately $296,000 in 2010, as a result of several factors. In 2009, the Kennewick City Council enacted a budget policy stating that the city would evaluate making a $1 m illion transfer annually from the general fund to the capital improvement fund in order to implement council priority capital programs. This policy was implemented in conjunction with several other policy changes that were designed to be revenue neutral to the general fund, but provided greater flexibility in the city’s overall budget. In 2009, as part of a strategy implemented to balance the city’s general fund budget and stabilize the city’s overall financial position, the $1 million transfer was not completed. In 2010, the city was able to complete this transfer, which was the primary factor in an $842,000 increase in the total amount transferred from the general fund to the capital improvement fund for the year. Washington State Auditor's Office 25 ---PAGE BREAK--- Transfers to the medical services fund increased by approximately $91,000 in 2010, which was primarily attributable to a decision to increase operating cash reserves within the utility at the close of the year. Transfers to the building safety fund increased by $100,000 in 2010. Historically, the city’s general fund has not provided an operating subsidy to this enterprise fund. 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 fund’s existing reserves to meet operating costs. Although building permit revenue increased by approximately 16 percent in 2010, it still remained well below levels experienced prior to 2008. Without any remaining reserves to help offset this revenue shortfall, an operating subsidy from the general fund was required. Transfers from the general fund to the risk management fund decreased by approximately $202,000 in 2010. This decrease was entirely attributable to a one-time transfer completed in 2009 for the general fund’s share of medical run-out claims paid in 2009 related to the city’s self-insured medical program that was terminated for most city employees as of December 31, 2008. Interfund transfers to the equipment rental fund decreased by approximately $479,000 in 2010, which was the direct result of a reduction in transfers made for the city’s police fleet replacement. In 2009, the city made a decision to fund its scheduled police fleet replacement internally as opposed to utilizing the state’s Local Lease Financing program, as i t had historically done. T he city anticipated paying approximately $478,500 in debt service payments during the 2009/2010 biennium if it financed the police fleet externally. I nstead, the city utilized available reserves in the equipment rental fund to purchase the fleet replacement and then transferred the funds previously earmarked in the general fund for debt service to the equipment rental fund to replenish its reserves. Due to the fact that the vehicles were all purchased in 2009, the full amount scheduled for the 2009/2010 biennium was transferred in 2009, resulting in no transfer in 2010. The community development fund has a total fund balance of $122,670, of which $115,740 is reserved for grant related projects, with the remaining balance representing unreserved fund balance. Fund balance increased by only $4,738 for the year ended December 31, 2010 in the fund, which indicates that the fund’s financial condition improved during the year. The capital improvement fund has a total fund balance of $19,107,490, of which $16,576,486 is reserved for advances to other funds or specific capital projects as spelled out in grant or loan agreements. Overall fund balance increased by $8,415,805 for the year, primarily due to the city’s issuance of $13,665,000 in limited tax general obligation bonds in 2010 for projects in its Southridge Local Revitalization Area (LRA). A t the conclusion of 2010, only $1,782,741 of these bond proceeds had been expended. Additionally, $2,206,320 of bond proceeds remaining from a city bond i ssue in 2003 w ere expended during 2010. Unreserved, undesignated fund balance in the capital improvement fund decreased by $921,378 during 2010, which indicates that the fund’s financial condition deteriorated during the year. However, this decline in fund balance was anticipated based on a s trategic decision to utilize unreserved fund balance to fund the completion of several high priority capital projects in 2010. 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 m anner 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 $123,554,161 as of December 31, 2010, which was an increase of $3,189,394 for the year. Of the total net assets for proprietary funds, $116,639,862 represented investment in capital, net of related debt and $2,244,485 was restricted for capital projects and debt service, leaving unrestricted net assets of $4,669,814. The unrestricted net assets Washington State Auditor's Office 26 ---PAGE BREAK--- in 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. The city’s water and sewer and coliseum funds, which are its major enterprise funds, had total net assets of $106,924,668 and $5,181,023, respectively, as of December 31, 2010. The water and sewer fund’s net assets consist of $95,988,695 in invested in capital assets, net of related debt, $2,244,485 in restricted net assets for capital projects and debt service, and $8,691,488 in unrestricted net assets. The coliseum fund’s net assets consist of $9,593,579 in invested in capital assets, net of related debt and a deficit of $4,412,556 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, 2010, marks the completion of the city’s 2009/2010 biennial budget cycle. Two budget adjustments were made to the city’s budget during 2010. The budgetary comparison statements for the general fund provide more detail on these adjustments and can be found in this report. The following are some of the major adjustments to the general fund budget during 2010: ♦ The reduction of $1,130,000 in retail sales and use tax based on revised projections for the 2009/2010 biennium that reflect the impacts of the national recession on local consumerism. ♦ The addition of $650,000 in transfers in to the general fund from the city’s public safety fund. This increase was primarily the result of a large one-time payment of back taxes owed from a provider of cellular telephone services that actually occurred in 2009, but was not adjusted in the city’s 2009/2010 biennial budget until 2010. ♦ A combination of revenue and expenditure adjustments based on a series of budget balancing strategies implemented late in 2009 that were designed to balance the city’s 2009/2010 biennial budget and strengthen the city’s financial position for the future. The net impact of these strategies to the city’s general fund was approximately $2.1 million, which consisted of the elimination of six vacant positions in the general fund, a reduction to the budgeted non-contract cost of living adjustment for 2010 and deferral of one-time capital expenditures funded through the general fund. ♦ A reduction of approximately $354,000 in budgeted expenditures for employer retirement contributions based on l egislation that resulted in a change to the actuarial methodology and assumptions used by the State Actuary to calculate pension rates for members of the state’s PERS retirement system. ♦ A reduction of approximately $138,000 in budgeted medical costs due to savings resulting from the city’s transition to a new health care insurance provider from its own self-insured medical plan in 2009. Washington State Auditor's Office 27 ---PAGE BREAK--- ♦ An increase of approximately $110,000 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. At the close of 2010, general fund revenues were 99.5 percent of the amounts budgeted for the 2009/2010 biennium. Actual expenditures in the general fund for the biennium were 97.9 percent of the adjusted budget. The city’s general fund had an ending fund balance of $3,415,596 as of December 31, 2010, which was higher than the budgeted ending fund balance for the 2009/2010 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 $2.5 million. Together these fund balances represent 14.3 percent of annual operating expenditures. 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, 2010, amounts to approximately $333,537,000 (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 1.5 percent for the year (a 2.6 percent decrease in governmental activities and a 0.1 percent increase in business-type activities). 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 major project to construct Steptoe Street from Gage to Center Parkway. Construction in progress for these projects and various other street projects was approximately $7.4 million as of December 31, 2010. 2010 2009 2010 2009 2010 2009 Land 73,385 $ 72,453 $ 2,988 $ 2,988 $ 76,373 $ 75,441 $ Buildings 27,761 28,500 141,294 134,880 169,055 163,380 Improvements other than buildings 11,868 12,432 - - 11,868 12,432 Infrastructure 52,741 53,078 - - 52,741 53,078 Equipment 6,526 6,954 3,955 4,143 10,481 11,097 Construction in progress 12,256 6,400 734 6,757 12,990 13,157 Intangibles - - 29 29 29 29 Total capital assets 184,537 $ 179,817 $ 149,000 $ 148,797 $ 333,537 $ 328,614 $ (In thousands) Activities Activities Government City of Kennewick Capital Assets, net of depreciation Total Governmental Business-type Washington State Auditor's Office 28 ---PAGE BREAK--- ♦ Several projects were underway at the close of 2010 in the city’s Southridge Local Revitalization Area (LRA), which are funded with bonds issued by the city under the state’s Local Revitalization Financing (LRF) program. Projects that were underway included Phase II of the city’s Southridge Sports Complex, as well as design work and right of way acquisition for several street and road construction projects in the LRA. ♦ Construction was completed on the city’s $7.4 million wastewater treatment plant project. In addition, the city began construction of a new reservoir in the southern section of the city. Additional information about the city’s capital assets can be found in note 6 in this report. Long-term debt: As of December 31, 2010, the City of Kennewick had total outstanding external debt of $68,913,537 in its governmental and business-type activities. This entire amount represents debt backed with the full faith and credit of the city. The following table is a summary of the City of Kennewick’s outstanding debt for the years ended December 31, 2010 and 2009, respectively. The City of Kennewick’s total debt increased by $11,129,509 (19.3 percent) during the year ended December 31, 2010 . A ctivity within governmental activities during 2010 i ncluded the issuance of $13,665,000 of limited tax general obligation bonds for projects in its Southridge area associated with the State of Washington’s LRF program. Under the LRF program, the city will receive a $500,000 contribution from the state each fiscal year that is dedicated towards the debt service on the city’s LRF bonds. The state’s contribution is generated through the sales and property tax increments generated for the state within the city’s LRA. The city also incurred $3,025,000 in new debt within its business-type activities during the year, which consisted of proceeds from a st ate public works trust fund loan, which was used to fund the city’s wastewater treatment plant upgrade. As mentioned earlier in this section, the city issued $13,665,000 in limited tax general obligation bonds during 2010. A t that time, the city received an A+ rating on t hese bonds from Standard & Poor’s. Additionally, as a result of implementing its global ratings scale, Moody’s Investor Service modified the city’s previous underlying rating of A3 to A1 on its other outstanding limited tax general obligation debt and Aa3 on its outstanding unlimited tax general obligation debt. 2010 2009 2010 2009 2010 2009 General obligation bonds 31,385,000 $ 19,470,000 $ - $ - $ 31,385,000 $ 19,470,000 $ Notes and loans 5,168,437 6,135,474 32,279,090 32,046,292 37,447,527 38,181,766 Capital leases - - 81,010 132,262 81,010 132,262 36,553,437 $ 25,605,474 $ 32,360,100 $ 32,178,554 $ 68,913,537 $ 57,784,028 $ City of Kennewick Outstanding Debt As of December 31, Activities Activities Totals Governmental Business-type Washington State Auditor's Office 29 ---PAGE BREAK--- 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, 2010, t he city had $40.3 million in non-voted capacity and $88.4 million in voted capacity. Additional information on the City of Kennewick’s long-term debt can be found in note 9 of this report on pages 88-91. 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, 2010 marks the completion of the city’s 2009/2010 budget cycle. Despite an extremely turbulent national economy, the local economy has remained relatively stable over the past two years. Although it has certainly not been completely insulated from the impacts of the national recession, the economy in Kennewick and the greater Tri-Cities area has outpaced most of the state and many areas in the nation over the course of the 2009/2010 biennium. This has primarily been attributable to consistent ongoing federal funding for the Hanford area clean-up and a one-time infusion of approximately $2 billion in federal stimulus funding earmarked for the same purpose. However, despite a relatively stable economy, the city continues to face a number of ongoing budgetary challenges, particularly within its general and street funds (operating funds). The ongoing impacts of citizen initiatives and unfunded mandates from both the federal and state governments continue to make it difficult to maintain the level of service our citizens expect within the resources available to the city. These challenges led to the elimination of 20 full-time positions during the 2009/2010 biennium and 26 positions overall since 2004. Additionally, the city was required to implement a series of other budget balancing strategies late in 2009 designed to balance the 2009/2010 budget and strengthen the city’s financial position for the future. The financial results for 2010 outlined in this discussion reflect the relative stability and continued growth in Kennewick’s economy during the year and demonstrate the positive results of the strategic budget balancing strategies that were implemented late in 2009. However, many of the fundamental budgetary challenges that existed for the city prior to the national recession still remain. The following are key factors that may impact the city’s governmental activities in 2011 and for the remainder of the 2011/2012 biennium: ♦ 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. This has primarily been attributable to consistent ongoing federal funding for the Hanford area clean-up and approximately $2 billion in one-time federal stimulus funding that accelerated this clean-up effort greatly. However, with spending of the $2 billion in federal stimulus now winding down, it will be imperative for the city to closely monitor its economic trends in anticipation of a potential downturn in the local economy and strategically plan for the impacts of a reduction in Hanford employment. 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 is projecting severe deficits for its upcoming biennial budget cycle starting in July of 2011. The state is currently projecting a $5.1 billion deficit for its 2011-2013 biennium. In order to address this deficit, it is likely that the state will be making severe programmatic cuts, which will have an impact on the citizens of Kennewick, as well as the city itself. Additionally, the city anticipates that it will be impacted financially in the form Washington State Auditor's Office 30 ---PAGE BREAK--- of reductions to state shared revenues, increased user fees for state services and permits, and unfunded mandates as the state shifts responsibility for providing certain services to local governments without providing a corresponding funding source. ♦ 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 order to qualify for the $500,000 award, the city must demonstrate that the state has received an increase in sales and property tax receipts in the prior calendar year equal to the award amount. The city is also required to issue bonds to pay for projects in the revitalization area and apply the state’s award toward the debt service on those bonds. The issuance of approximately $13.665 m illion in limited tax general obligation bonds was completed in March of 2010 for several key projects in the revitalization area and the city was able to demonstrate that the necessary tax increments were generated in 2010 to qualify for the state’s award in 2011. The success of this program is critical to the future development of the Southridge area and overall economic growth of Kennewick. ♦ Washington has seen a wave of initiatives and anti-tax measures over the past several years including limitations on property taxes and the elimination of vehicle excise tax and license fees. Future initiatives involving further reductions in tax revenues are a distinct possibility and would have a significant impact on the City of Kennewick’s ability to continue providing its current level of service to citizens if they come to fruition. The following are some factors that may impact the city’s business-type activities in 2011 and for the remainder of the 2011/2012 biennium: • As mentioned earlier in this report, the city’s building safety business-type activity has experienced a significant reduction in program (building permit) revenues over the course of the last three years. Although building permit revenue increased by 16 percent during 2010, it still remained well below its peak activity in 2007. These trends are attributable to the impacts of the national recession on the local economy and specifically on the availability of credit for residential and commercial developers. City staff is optimistic that the trends in building activity experienced in 2010 will continue in 2011. There are several large projects that are expected to occur in 2011 including the construction of a new hospital complex in the city’s Southridge area. However, without a return to pre-recession levels of building activity, the building safety business-type activity will likely be required to make program reductions or will require an ongoing subsidy from the city’s general fund, which is already facing its own budget constraints. 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 g eneral 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 31 ---PAGE BREAK--- Governmental Business-type Activities Activities 2010 2009 2010 2009 ASSETS Current assets: Equity in pooled cash & investments 16,456,015 $ 9,196,143 $ 25,652,158 $ 20,139,811 $ 1,782,842 $ 1,786,201 $ Receivables, net 9,280,360 1,558,536 10,838,896 9,891,660 398,733 319,030 Internal balances 8,301,687 (8,301,687) - - - - Inventories 148,475 320,479 468,954 461,217 21,939 33,487 Prepaid items - 124,160 124,160 112,048 39,060 29,895 Restricted equity in pooled cash & investments 622,241 8,000 630,241 567 - - Total current assets 34,808,778 2,905,631 37,714,409 30,605,303 2,242,574 2,168,613 Noncurrent assets: Restricted equity in pooled cash & investments 13,892,193 4,048,178 17,940,371 8,742,570 - - Investment in joint ventures 4,868,152 - 4,868,152 2,589,528 - - Capital assets: Land and construction in progress 85,641,140 3,751,649 89,392,789 88,627,457 - - Depreciable capital assets - net 98,895,466 145,248,321 244,143,787 239,986,209 14,032,901 14,486,254 Total noncurrent assets 203,296,951 153,048,148 356,345,099 339,945,764 14,032,901 14,486,254 Total assets 238,105,729 $ 155,953,779 $ 394,059,508 $ 370,551,067 $ 16,275,475 $ 16,654,867 $ LIABILITIES Current liabilities: Accounts payable and accrued items 5,245,290 $ 970,273 $ 6,215,563 $ 2,441,582 $ 171,001 $ 174,824 $ Liabilities payable from restricted assets 630,986 8,000 638,986 - - - Unearned revenue - 552,129 552,129 257,856 95,605 132,185 Other current liabilities 55,295 13,913 69,208 96,815 - - Current portion of long-term obligations 4,126,653 3,151,230 7,277,883 6,996,908 - - Total current liabili ies 10,058,224 4,695,545 14,753,769 9,793,161 266,606 307,009 Noncurrent liabilities: Net pension obligation 84,778 - 84,778 218,972 - - Net post employment benefit obligation 502,227 - 502,227 342,412 - - Noncurrent portion of long-term obligations 35,867,783 31,666,329 67,534,112 56,502,622 12,959,325 12,966,921 Total noncurrent liabilities 36,454,788 31,666,329 68,121,117 57,064,006 12,959,325 12,966,921 Total liabilities 46,513,012 36,361,874 82,874,886 66,857,167 13,225,931 13,273,930 NET ASSETS Invested in capital assets, net of related debt 159,856,733 116,639,866 276,496,599 273,330,878 1,202,901 1,656,254 Restricted for: Capital projects 877,145 1,086,987 1,964,132 1,775,380 - - Debt service 39,840 1,157,498 1,197,338 1,209,455 - - Grant programs 3,085,953 - 3,085,953 2,673,849 - - Other purposes 303,629 - 303,629 334,487 - - Unrestricted (deficit) 27,429,417 707,554 28,136,971 24,369,851 1,846,643 1,724,683 Total net assets 191,592,717 119,591,905 311,184,622 303,693,900 3,049,544 3,380,937 Total liabilities and net assets 238,105,729 $ 155,953,779 $ 394,059,508 $ 370,551,067 $ 16,275,475 $ 16,654,867 $ The accompanying notes are an integral part of this statement. Statement of Net Assets December 31, 2010 (with comparative totals for 2009) Totals Primary Government Component Unit Public Facilities District Washington State Auditor's Office 32 ---PAGE BREAK--- Operating Capital Charges for Grants and Grants and Governmental Business-type Functions/Programs Expenses Services Contributions Contributions Activities Activities 2010 2009 2010 2009 Primary government: Governmental activities: General government 9,225,038 $ 1,134,062 $ 1,622,393 $ 69,118 $ (6,399,465) $ - $ (6,399,465) $ (5,415,752) $ - $ - $ Public safety 22,433,245 2,117,031 180,721 - (20,135,493) - (20,135,493) (20,417,740) - - Transportation 7,687,655 311,383 2,124,524 5,443,563 191,815 - 191,815 (2,698,665) - - Physical environment 1,816,213 1,618,447 - 28,614 (169,152) - (169,152) (647,494) - - Economic environment 2,462,264 91,341 2,175,591 7,097 (188,235) - (188,235) (746,804) - - Culture and recrea ion 5,194,534 495,366 - - (4,699,168) - (4,699,168) (4,375,897) - - Interest on long-term debt 1,602,003 - - - (1,602,003) - (1,602,003) (1,068,538) - - Total governmental activities 50,420,952 5,767,630 6,103,229 5,548,392 (33,001,701) - (33,001,701) (35,370,890) - - Business-type activities: Water and Sewer 13,862,434 15,012,065 95,497 1,054,375 - 2,299,503 2,299,503 3,249,695 - - Medical Services 3,960,511 3,071,707 2,186 - - (886,618) (886,618) (741,707) - - Building Safety 1,020,997 948,460 - - - (72,537) (72,537) (188,712) - - Stormwater 1,064,695 553,465 54 88,528 - (422,648) (422,648) (247,169) - - Coliseum 4,227,127 3,978,142 - - - (248,985) (248,985) (901,236) - - Total business-type activities 24,135,764 23,563,839 97,737 1,142,903 - 668,715 668,715 1,170,871 - - Total primary government 74,556,716 $ 29,331,469 $ 6,200,966 $ 6,691,295 $ (33,001,701) $ 668,715 $ (32,332,986) $ (34,200,019) $ - $ - $ Component unit: Public Facilities District 3,433,419 2,109,879 33,861 - - - - - (1,289,679) (1,291,442) Total component unit 3,433,419 $ 2,109,879 $ 33,861 $ - $ - $ - $ - $ - $ (1,289,679) $ (1,291,442) $ General revenues: P roperty taxes 10,279,405 $ - $ 10,279,405 $ 10,150,832 $ - $ - $ S ales taxes 14,205,554 - 14,205,554 13,509,115 942,387 878,464 Utility taxes 10,723,581 - 10,723,581 11,656,614 - - R eal estate excise tax 1,406,052 - 1,406,052 1,215,835 - - G ambling excise tax 749,091 - 749,091 784,199 - - L odging tax 1,137,879 - 1,137,879 1,031,013 - - O ther taxes 790,899 - 790,899 475,568 - - U nrestricted investment earnings 396,668 134,579 531,247 915,632 15,899 38,303 G ain on sale of capital assets - - - 174,543 - - Transfers (1,406,419) 1,406,419 - - - - T otal general revenues and transfers 38,282,710 1,540,998 39,823,708 39,913,351 958,286 916,767 C hange in net assets 5,281,009 2,209,713 7,490,722 5,713,332 (331,393) (374,675) Net assets - beginning 186,311,708 117,382,192 303,693,900 297,980,568 3,380,937 3,755,612 Net assets - ending 191,592,717 $ 119,591,905 $ 311,184,622 $ 303,693,900 $ 3,049,544 $ 3,380,937 $ The accompanying notes are an integral part of this statement. Statement of Activities For the Year Ended December 31, 2010 (with comparative totals for 2009) Program Revenues Net (Expense) Revenue and Changes in Net Assets Revenue and Changes in Net Assets Net (Expense) Totals Primary Government Component Unit Public Facilities District Washington State Auditor's Office 33 ---PAGE BREAK--- Balance Sheet Governmental Funds December 31, 2010 (with comparative totals for 2009) Other Community Capital Non-Major General Development Improvement Governmental Fund Fund Fund Funds 2010 2009 ASSETS Equity in pooled cash & investments 4,514,428 $ 2,619 $ 3,482,483 $ 5,567,377 $ 13,566,907 $ 11,502,991 $ Receivables (net of allowance for uncollectibles) 3,691,568 2,669,775 869,645 563,889 7,794,877 7,151,871 Due from other funds 21,500 - 4,520,388 - 4,541,888 5,698,912 Due from other governments 32,227 514,242 6,862 831,332 1,384,663 1,352,076 Restricted equity in pooled cash & investments - 5,327 12,658,026 925,938 13,589,291 3,128,843 Total assets 8,259,723 $ 3,191,963 $ 21,537,404 $ 7,888,536 $ 40,877,626 $ 28,834,693 $ LIABILITIES AND FUND BALANCES Liabili ies: Accounts payable 1,360,963 $ 67,580 $ 807,192 $ 252,558 $ 2,488,293 $ 1,415,207 $ Due to o her funds - 31,500 160,000 10,961 202,461 885,567 Due to other governments 3,589 - - 4,130 7,719 3,719 Deposits payable 55,295 - - - 55,295 83,315 Deferred revenue 3,424,281 2,970,213 840,481 464,167 7,699,142 7,133,939 Liabilities payable from restricted assets - - 622,241 - 622,241 - Total liabilities 4,844,128 3,069,293 2,429,914 731,816 11,075,151 9,521,747 Fund balances: Reserved for: Advances - - 4,510,385 - 4,510,385 5,053,345 Capital improvements - - 12,066,101 877,144 12,943,245 3,031,580 Grant programs - 115,740 - - 115,740 103,426 Unreserved, undesignated reported in: General fund 3,415,595 - - - 3,415,595 1,894,867 Special revenue funds - 6,930 - 4,338,390 4,345,320 4,025,627 Debt service funds - - - 39,840 39,840 49,181 Capital projects funds - - 2,531,004 1,901,346 4,432,350 5,154,920 Total fund balances 3,415,595 122,670 19,107,490 7,156,720 29,802,475 19,312,946 Total liabilities and fund balances 8,259,723 $ 3,191,963 $ 21,537,404 $ 7,888,536 $ 40,877,626 $ 28,834,693 $ The accompanying notes are an integral part of this statement. Total Governmental Funds Washington State Auditor's Office 34 ---PAGE BREAK--- Reconciliation of the Balance Sheet to the Government Wide Statement of Net Assets Governmental Funds December 31, 2010 Total governmental fund balances 29,802,475 $ Amounts reported for governmental activities in the statement of net assets ar e different because: C apital assets used in governmental activities are not financial resources a nd, therefore, are not reported in the funds. 184,191,897 O ther long-term assets are not available to pay for current-period e xpenditures and, therefore, are deferred in the funds. 7,699,142 I nternal service funds are used by management to charge the costs of f leet management, central stores and risk management to individual f unds. The assets and liabilities of the internal service funds are i ncluded in governmental activities in the statement of net assets. 13,008,404 L ong-term liabilities, including bonds payable, are not due and payable i n the current period and, therefore, are not reported in the funds. (43,109,201) N et assets of governmental activi ies 191,592,717 $ The accompanying notes are an intergral part of this statement. Washington State Auditor's Office 35 ---PAGE BREAK--- Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the Year Ended December 31, 2010 (with comparative totals for 2009) Other Community Capital Non-Major General Development Improvement Governmental Fund Fund Fund Funds 2010 2009 REVENUES Taxes: Property 9,660,810 $ - $ - $ 669,405 $ 10,330,215 $ 10,114,725 $ Sales 10,112,722 - 3,948,544 - 14,061,266 13,441,870 Utility 8,218,749 - - 2,504,920 10,723,669 11,578,098 Real estate excise tax - - - 1,406,052 1,406,052 1,215,835 Gambling tax 749,091 - - - 749,091 784,199 Lodging tax - - - 1,124,522 1,124,522 1,064,121 Other 493,660 - - - 493,660 474,885 Licenses and permits 501,484 - - - 501,484 494,921 Intergovernmental 1,754,919 1,775,801 104,829 6,104,233 9,739,782 6,725,381 Charges for services 4,707,280 - - 388,462 5,095,742 4,796,629 Fines and forfeitures 1,277,547 - - - 1,277,547 1,361,754 Investment earnings 74,705 703 234,693 47,422 357,523 460,442 Rents and leases 108,196 - 8,280 10,268 126,744 117,802 Miscellaneous revenues 184,233 - - 47,331 231,564 323,258 Total revenues 37,843 396 1,776,504 4,296,346 12 302,615 56,218,861 52,953 920 EXPENDITURES Current : General government 7,701,644 - 453,308 - 8,154,952 8,342,112 Public safety 23,203,176 - - 315,050 23,518,226 24,470,959 Transportation - - 345,142 2,806,336 3,151,478 2,726,287 Physical environment 1,800,332 - - - 1,800,332 1,896,274 Economic environment 693,772 1,626,954 - 13,098 2,333,824 1,578,599 Culture and recreation 3,668,026 - - 599,005 4,267,031 4,505,659 Debt service: Principal - - 967,037 1,750,000 2,717,037 2,467,157 Interest/issue costs - - 234,699 1,160,539 1,395,238 1,077,870 Capital outlay: General government - - 105,891 - 105,891 171,550 Public safety - - 5,042 - 5,042 545,466 Transportation - - 1,441,942 5,079,932 6,521,874 3,568,387 Physical environment - - - 11,043 11,043 - Economic environment - 79,812 - - 79,812 138,178 Culture and recreation - - 3,548,355 42 830 3,591,185 916,799 Total expenditures 37,066,950 1,706,766 7,101,416 11,777,833 57,652,965 52,405,297 Excess (deficiency) of revenues over (under) expenditures 776,446 69,738 (2,805,070) 524,782 (1,434,104) 548,623 OTHER FINANCING SOURCES (USES) Transfers in 3,216,948 - 2,201,367 5,168,873 10,587,188 7,875,581 Transfers out (2,472,666) (65,000) (4,937,025) (4,987,422) (12,462,113) (10,292,689) Debt issuance and capital leases - - 13,738,577 (157,975) 13,580,602 - Disposition of capital assets - - 217,956 - 217,956 384,079 Total other financing sources (uses) 744,282 (65,000) 11,220,875 23,476 11,923,633 (2,033,029) Net change in fund balances 1,520,728 4,738 8,415,805 548,258 10,489,529 (1,484,406) Fund balances - beginning 1,894,867 117,932 10,691,685 6,608,462 19,312,946 20,797,352 Fund balances - ending 3,415 595 $ 122,670 $ 19,107,490 $ 7,156,720 $ 29,802,475 $ 19,312 946 $ The accompanying notes are an integral part of this statement. Governmental Funds Total Washington State Auditor's Office 36 ---PAGE BREAK--- Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances - total governmental funds 10,489,529 $ 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 10,314,847 $ Depreciation (6,220,186) Costs of Assets Sold (4,417) 4,090,244 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. (11,021,540) In the statement of activities, developer contributions are reported as income for the City based on the fair market value of these assets. 1,252,470 The statement of activities shows increases and (decreases) in the City's equity 2,278,624 intereset 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. 565,201 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. (2,398,880) 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. 25,361 Change in net assets of governmental activities 5,281,009 $ The accompanying notes are an integral part of this statement. December 31, 2010 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds To the Statement of Activities Washington State Auditor's Office 37 ---PAGE BREAK--- Budget and Actual Original Final 2009 2010 Original Final 2007 2008 REVENUES Taxes: Property 18,121,793 $ 18,840,930 $ 9,154,592 $ 9,660,810 $ (25,528) $ 15,383,637 $ 16,095,699 $ 7,742,989 $ 8,413,425 $ 60,715 $ Sales 21,518,500 19,638,500 9,605,968 10,112,722 80,190 18,554,474 19,142,574 9,313,938 9,725,428 (103,208) Utility 16,018,500 16,070,750 8,887,234 8,218,749 1,035,233 15,645,471 16,040,471 7,471,060 7,716,794 (852,617) Gambling 2,228,000 2,228,000 784,199 749,091 (694,710) 1,333,401 1,823,056 1,009,661 885,084 71,689 Other 502,000 1,017,100 474,346 493,660 (49,094) 814,896 520,241 219,004 235,278 (65,959) Licenses and permits 1,156,000 1,156,000 494,921 501,484 (159,595) 1,130,715 1,130,715 516,951 487,225 (126,539) Intergovernmental 3,414,500 4,002,934 2,179,081 1,754,919 (68,934) 2,988,406 3,387,739 1,681,892 1,694,908 (10,939) Charges for services 8,211,600 8,336,500 4,303,530 4,707,280 674,310 8,045,477 8,462,947 4,220,141 4,285,889 43,083 Fines and forfeitures 3,059,000 3,059,000 1,361,754 1,277,547 (419,699) 2,296,134 2,711,134 1,359,808 1,356,092 4,766 Investment earnings 710,000 710,000 131,431 74,705 (503,864) 594,048 594,048 322,029 277,400 5,381 Rents and leases 183,200 183,200 99,481 108,196 24,477 191,793 191,793 84,197 89,155 (18,441) Miscellaneous revenues 475,000 488,150 202,223 184,233 (101,694) 202,788 437,728 180,747 230,044 (26,937) Total revenues 75,598,093 75,731,064 37,678,760 37,843,396 (208,908) 67,181,240 70,538,145 34,122,417 35,396,722 (1,019,006) EXPENDITURES Current : General government 16,032,182 15,987,631 7,843,205 7,701,644 (442,782) 13,367,066 14,081,047 6,590,021 7,339,845 (151,181) Public safety 46,732,359 47,813,366 23,148,688 23,203,176 (1,461,502) 40,833,005 43,433,400 21,161,659 22,046,341 (225,400) Physical environment 4,058,666 3,938,177 1,896,274 1,800,332 (241,571) 3,512,842 3,654,316 1,757,805 1,692,066 (204,445) Economic environment 1,393,259 1,595,881 814,412 693,772 (87,697) 1,515,895 1,545,177 737,592 737,618 (69,967) Culture and recreation 8,376,721 7,980,585 3,868,873 3,668,026 (443,686) 8,343,389 8,407,478 3,850,616 4,016,705 (540,157) Debt service: Principal 478,512 - - - - 401,500 401,500 265,370 136,130 - Interest/issue costs 46,488 46,488 - - (46,488) 13,945 13,945 11,594 2,351 - Capital outlay: General government 32,430 92,330 80,376 - (11,954) 352,979 239,339 42,334 16,215 (180,790) Public safety 30,000 38,140 38,047 - (93) - 5,805 1,113 - (4,692) Physical environment - - - - - - - - - - Total expenditures 77,180,617 77,492,598 37,689,875 37,066,950 (2,735,773) 68,340,621 71,782,007 34,418,104 35,987,271 (1,376,632) Excess (deficiency) of revenues over (under) expenditures (1,582,524) (1,761,534) (11,115) 776,446 2,526,865 (1,159,381) (1,243,862) (295,687) (590,549) 357,626 OTHER FINANCING SOURCES (USES) Transfers in 5,660,075 6,380,075 2,928,624 3,216,948 (234,503) 4,996,037 5,091,870 2,347,094 2,406,041 (338,735) Transfers out (3,940,100) (3,622,964) (2,177,282) (2,472,666) (1,026,984) (3,745,855) (3,641,762) (2,138,611) (2,386,892) (883,741) Total other financing sources and uses 1,719,975 2,757,111 751,342 744,282 (1,261,487) 1,250,182 1,450,108 208,483 19,149 (1,222,476) Net change in fund balances 137,451 995,577 740,227 1,520,728 1,265,378 90,801 206,246 (87,204) (571,400) (864,850) Fund balances - beginning 1,995,300 1,154,640 1,154,640 1,894,867 - 1,838,198 1,813,244 1,813,244 1,726,040 - Fund balances - ending 2,132,751 $ 2,150,217 $ 1,894,867 $ 3,415,595 $ 1,265,378 $ 1,928,999 $ 2,019,490 $ 1,726,040 $ 1,154,640 $ (864,850) $ The accompanying notes are an integral part of this statement. Budgeted Amounts Actuals 2007/2008 Biennial Budgeted Amounts Actuals Variance with Final Budget - Over (Under) General Fund For the Years Ended December 31, 2010 and 2009 Variance with Final Budget - Over (Under) Statement of Revenues, Expenditures, and Changes in Fund Balances 2009/2010 Biennial Washington State Auditor's Office 38 ---PAGE BREAK--- Budget and Actual Original Final 2009 2010 Original Final 2007 2008 REVENUES Intergovernmental 1,470,000 $ 3,330,624 $ 904,731 $ 1,775,801 $ (650,092) $ 1,611,480 $ 2,324,497 $ 1,050,480 $ 826,023 $ (447,994) $ Investment earnings - - 1,500 703 2,203 - - 2,442 2,190 4,632 Total revenues 1,470,000 3,330,624 906,231 1,776,504 (647,889) 1,611,480 2,324,497 1,052,922 828,213 (443,362) EXPENDITURES Current: Economic environment 1,479,666 1,616,080 754,540 1,626,954 765,414 1,451,208 959,753 295,048 465,135 (199,570) Capital outlay: Economic environment - 1,663,308 138,178 79,812 (1,445,318) - 887,734 271,937 372,674 (243,123) Total expenditures 1,479,666 3,279,388 892,718 1,706,766 (679,904) 1,451,208 1,847,487 566,985 837,809 (442,693) Excess (deficiency) of revenues over (under) expenditures (9,666) 51,236 13,513 69,738 32,015 160,272 477,010 485,937 (9,596) (669) OTHER FINANCING SOURCES (USES) Transfers in - - - - - - - - 9,862 9,862 Transfers out - (77,700) (12,700) (65,000) - (200,000) (562,076) (536,619) - 25,457 Total other financing sources and uses - (77,700) (12,700) (65,000) - (200,000) (562,076) (536,619) 9,862 25,457 Net change in fund balances (9,666) (26,464) 813 4,738 32,015 (39,728) (85,066) (50,682) 266 24,788 Fund balances - beginning 82,469 117,119 117,119 117,932 - 80,044 167,535 167,535 116,853 116,853 Fund balances - ending 72,803 $ 90,655 $ 117,932 $ 122,670 $ 32,015 $ 40,316 $ 82,469 $ 116,853 $ 117,119 $ 141,641 $ The accompanying notes are an integral part of this statement. Community Development Fund For the Years Ended December 31, 2010 and 2009 Variance with Final Budget - Over (Under) Statement of Revenues, Expenditures, and Changes in Fund Balances Actuals 2009/2010 Biennial Budgeted Amounts Variance with Final Budget - Over (Under) Actuals 2007/2008 Biennial Budgeted Amounts Washington State Auditor's Office 39 ---PAGE BREAK--- Proprietary Funds December 31, 2010 (with comparative totals for 2009) Water and Sewer Coliseum Other Non-Major Enterprise Fund Fund Funds 2010 2009 2010 2009 ASSETS Current assets: Equity in pooled cash & investments 7,709,699 $ 1,142,478 $ 351,966 $ 9,204,143 $ 5,963,463 $ 3,511,349 $ 3,907,101 $ Receivables, net 712,785 32,480 538,184 1,283,449 1,275,965 100,820 107,817 Due from other funds 170,961 - - 170,961 240,000 - - Due from other governments 275,033 - 54 275,087 3,931 - - Inventories 271,565 48,911 - 320,476 315,979 148,475 145,238 Prepaid items 39,580 84,580 - 124,160 112,048 - - Restricted equity in pooled cash & investments 8,000 - - 8,000 567 - - Total current assets 9,187,623 1,308,449 890,204 11,386,276 7,911,953 3,760,644 4,160,156 Noncurrent assets: Restricted equity in pooled cash & investments 4,040,178 - - 4,040,178 4,044,647 302,902 335,336 Capital assets: Land 1,734,271 1,282,641 - 3,016,912 3,016,913 - - Buildings and improvements 175,527,179 11,387,925 15,232,907 202,148,011 190,910,865 318,843 318,843 Equipment 6,755,077 3,003,268 224,842 9,983,187 10,334,567 12,001,441 12,535,881 Construction in progress 422,369 312,367 - 734,736 6,757,372 - - Less accumulated depreciation (56,171,105) (6,392,622) (4,319,150) (66,882,877) (62,223,130) (7,107,423) (7,018,678) Total noncurrent assets 132,307,969 9,593,579 11,138,599 153,040,147 152,841,234 5,515,763 6,171,382 Total Assets 141,495,592 $ 10,902,028 $ 12,028,803 $ 164,426,423 $ 160,753,187 $ 9,276,407 $ 10,331,538 $ The accompanying notes are an integral part of this statement. Business-Type Activities Business-Type Activities Governmental Activities Balance Sheet Enterprise Funds Enterprise Funds Internal Service Funds Total Enterprise Funds Washington State Auditor's Office 40 ---PAGE BREAK--- Proprietary Funds December 31, 2010 (with comparative totals for 2009) Water and Sewer Coliseum Other Non-Major Enterprise Fund Fund Funds 2010 2009 2010 2009 Business-Type Activities Business-Type Activities Governmental Activities Balance Sheet Enterprise Funds Enterprise Funds Internal Service Funds Total Enterprise Funds LIABILITIES Current liabilities: Accounts payable 171,849 $ 636,157 $ 147,936 $ 955,942 $ 688,415 $ 161,424 $ 229,776 $ Due to other funds - 4,510,386 - 4,510,386 5,053,342 - - Accrued interest payable - 22,333 - 22,333 24,395 - - Compensated absences 137,714 - 142,367 280,081 337,455 23,757 34,549 Bonds, notes, and loans payable 2,817,708 - 53,441 2,871,149 2,698,715 - - Deposits payable 13,913 - - 13,913 13,500 - - Other current liabilities - 552,129 - 552,129 257,856 - - Total current liabilities 3,141,184 5,721,005 343,744 9,205,933 9,073,678 185,181 264,325 Noncurrent liabilities: Compensated absences 168,355 - 209,019 377,374 334,902 45,082 66,744 Due to other governments 29,461,385 - 27,570 29,488,955 29,479,840 - - Other noncurrent liabilities 1,800,000 - - 1,800,000 1,500,000 - - Total noncurrent liabilities 31,429,740 - 236,589 31,666,329 31,314,742 45,082 66,744 Total Liabilities 34,570,924 5,721,005 580,333 40,872,262 40,388,420 230,263 331,069 NET ASSETS Invested in capital assets, net of related debt 95,988,695 9,593,579 11,057,588 116,639,862 117,072,647 5,212,861 5,836,047 Restricted for: Capital projects 1,086,987 - - 1,086,987 929,758 - - Debt service 1,157,498 - - 1,157,498 1,160,274 - - Landfill settlement - - - - - 303,629 334,487 Unrestricted 8,691,488 (4,412,556) 390,882 4,669,814 1,202,088 3,529,654 3,829,935 Total Net Assets 106,924,668 5,181,023 11,448,470 123,554,161 120,364,767 9,046,144 10,000,469 Total Liabilities and Net Assets 141,495,592 $ 10,902,028 $ 12,028,803 $ 164,426,423 $ 160,753,187 $ 9,276,407 $ 10,331,538 $ The accompanying notes are an integral part of this statement. Washington State Auditor's Office 41 ---PAGE BREAK--- Amounts reported for business-type activities in the statement of net assets are different because: Net assets - total proprietary funds 123,554,161 $ The accumulated net revenue of certain activities of internal service funds is reported with governmental activities. (3,962,256) Net assets of business-type activities 119,591,905 $ The accompanying notes are an integral part of this statement. December 31, 2010 Reconciliation of the Balance Sheet - Proprietary Funds To the Balance Sheet - Business-Type Activities Washington State Auditor's Office 42 ---PAGE BREAK--- Statement of Revenues, Expenses, and Changes in Fund Net Assets Proprietary Funds For the Year Ended December 31, 2010 (with comparative totals for 2009) Water and Sewer Coliseum Other Non-Major Enterprise Fund Fund Funds 2010 2009 2010 2009 Operating revenues: Charges for services 14,777,583 $ 3,978,142 $ 4,573,632 $ 23,329,357 $ 21,296,216 $ 1,549,837 $ 4,062,442 $ Total operating revenues 14,777,583 3,978,142 4,573,632 23,329,357 21,296,216 1,549,837 4,062,442 Operating expenses: Maintenance and operations 5,229,418 3,694,705 4,493,160 13,417,283 12,447,658 2,811,003 4,078,107 Administrative and general 2,052,659 - 573,146 2,625,805 2,729,020 11,650 11,650 Taxes 1,513,320 25,533 95,856 1,634,709 1,577,028 - - Depreciation 3,920,148 442,505 312,256 4,674,909 4,254,840 857,976 763,655 Total operating expenses 12,715,545 4,162,743 5,474,418 22,352,706 21,008,546 3,680,629 4,853,412 Operating income (loss) 2,062,038 (184,601) (900,786) 976,651 287,670 (2,130,792) (790,970) Nonoperating revenues (expenses): Intergovernmental 95,497 - 2,240 97,737 34,386 680,445 625,799 Investment earnings 132,799 - 1,773 134,572 336,509 44,968 93,682 Interest expense (499,452) (48,282) (5,052) (552,786) (565,350) - - Miscellaneous nonoperating revenue - - - - 25 - - Gain (loss) on disposition of assets - (16,102) - (16,102) - (17,452) 23,878 Total nonoperating revenue (expenses) (271,156) (64,384) (1,039) (336,579) (194,430) 707,961 743,359 Income (loss) before contributions and transfers 1,790,882 (248,985) (901,825) 640,072 93,240 (1,422,831) (47,611) Capital contributions 1,054,375 - 88,528 1,142,903 13,197,861 - 27,832 Transfers in - 1,329,523 1,033,000 2,362,523 2,074,489 758,506 1,190,888 Transfers out (811,710) - (144,394) (956,104) (843,713) (290,000) (4,554) Change in net assets 2,033,547 1,080,538 75,309 3,189,394 14,521,877 (954,325) 1,166,555 Total net assets - beginning 104,891,121 4,100,485 11,373,161 120,364,767 105,842,890 10,000,469 8,833,914 Total net assets - ending 106,924,668 $ 5,181,023 $ 11,448,470 $ 123,554,161 $ 120,364,767 $ 9,046,144 $ 10,000,469 $ The accompanying notes are an integral part of this statement. Total Internal Service Governmental Activities Total Enterprise Funds Business-type Activities- Enterprise Funds Business-type Activities- Enterprise Funds Washington State Auditor's Office 43 ---PAGE BREAK--- Amounts reported for business-type activities in the statement of activities are different because: Net change in net assets - total proprietary funds 3,189,394 $ The current year net revenue of certain activities of internal service funds is reported with governmental activities. (979,681) Change in net assets of business-type activities 2,209,713 $ The accompanying notes are an integral part of this statement. December 31, 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 Washington State Auditor's Office 44 ---PAGE BREAK--- Statement of Cash Flows Proprietary Funds For the Year Ended December 31, 2010 (with comparative totals for 2009) Water and Sewer Coliseum Other Non- Major Enterprise Fund Fund Funds 2010 2009 2010 2009 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 14,259,220 $ 4,372,912 $ 4,489,403 $ 23,121,535 $ 20,551,602 $ 1,605,745 $ 3,980,846 $ Other operating revenue 252,502 - - 252,502 574,884 1,986 11,188 Payments to suppliers (2,811,176) (2,129,092) (1,364,783) (6,305,051) (7,039,359) (2,372,122) (3,754,542) Payments to employees (4,184,979) (1,473,482) (3,722,913) (9,381,374) (8,048,386) (554,569) (817,645) Internal activity - payments to other funds (1,456,312) - (18,881) (1,475,193) (1,179,792) - - Net cash provided by (used in) operating activities 6,059,255 770,338 (617,174) 6,212,419 4,858,949 (1,318,960) (580,153) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Advances to other fund 69,039 - - 69,039 80,000 - - Operating subsidies and transfers from other fund - 963,360 1,033,000 1,996,360 2,074,489 633,606 636,500 Operating subsidies and transfers to other fund (742,082) - (116,490) (858,572) (442,315) (290,000) (4,554) Net cash provided by (used in) noncapital financing activities (673,043) 963,360 916,510 1,206,827 1,712,174 343,606 631,946 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital contributions 162,186 - - 162,186 - - - Capital replacement charges - - - - - 680,445 625,799 Proceeds from capital debt 3,025,000 - - 3,025,000 4,337,922 - - Purchases of capital assets (2,987,137) (926,539) - (3,913,676) (12,117,927) (359,850) (1,297,323) Principal paid on capital debt (2,792,199) (542,957) (51,252) (3,386,408) (2,921,784) - - Interest paid on capital debt (499,452) (50,343) (5,052) (554,847) (568,410) - - Proceeds from sale of equipment - - - - - 57,602 127,680 Capital grant 95,498 - 2,186 97,684 34,386 - - Transfer for capital purposes (69,628) 366,163 (27,904) 268,631 (401,398) 124,900 554,388 Net cash provided by (used in) capital and related financing activities (3,065,732) (1,153,676) (82,022) (4,301,430) (11,637,211) 503,097 10,544 Totals Totals Business-type Activities - Enterprise Funds Business-type Activities Enterprise Funds Governmental Activities Internal Service Funds Washington State Auditor's Office 45 ---PAGE BREAK--- Statement of Cash Flows Proprietary Funds For the Year Ended December 31, 2010 (with comparative totals for 2009) Water and Sewer Coliseum Other Non- Major Enterprise Fund Fund Funds 2010 2009 2010 2009 Totals Totals Business-type Activities - Enterprise Funds Business-type Activities Enterprise Funds Governmental Activities Internal Service Funds CASH FLOWS FROM INVESTING ACTIVITIES Interest and dividends 124,031 - 1,797 125,828 398,487 44,071 106,436 Net cash provided by investing activities 124,031 - 1,797 125,828 398,487 44,071 106,436 Net increase (decrease) in pooled cash and investments 2,444,511 580,022 219,111 3,243,644 (4,667,601) (428,186) 168,773 Balance - beginning of the year 9,313,366 562,456 132,855 10,008,677 14,676,278 4,242,437 4,073,664 Balance - end of the year 11,757,877 $ 1,142,478 $ 351,966 $ 13,252,321 $ 10,008,677 $ 3,814,251 $ 4,242,437 $ Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) 2,062,038 $ (184,601) $ (900,786) $ 976,651 $ 287,670 $ (2,130,792) $ (790,970) $ Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Depreciation expense 3,920,148 442,505 312,256 4,674,909 4,254,840 857,976 763,655 Change in uncollectible accounts (180) - 30,024 29,844 15,374 - - Change in assets and liabilities: Receivables, net 5,420 80,247 (114,253) (28,586) (68,965) 57,892 (70,410) Inventories 2,915 (7,416) - (4,501) 19,087 (3,237) (13,750) Prepaid expenses (962) (11,150) - (12,112) 3,995 - - Due from other government (271,101) - - (271,101) (3,931) - - Accounts and other payables 55,964 124,361 55,500 235,825 69,107 (68,346) (499,076) Unearned revenue 300,000 314,523 - 614,523 187,794 - - Accrued expenses (14,987) 11,869 85 (3,033) 93,978 (32,453) 30,398 Net cash provided by (used in) operating activities 6,059,255 $ 770,338 $ (617,174) $ 6,212,419 $ 4,858,949 $ (1,318,960) $ (580,153) $ Noncash capital activities/developer contributions: 892,189 $ - $ 88,528 $ 980,717 $ - $ - $ 27,832 $ Noncash capital activities/transfer assets from Govt'l Fund: - - - - 11,484,435 - - The accompanying notes are an integral part of this statement. Washington State Auditor's Office 46 ---PAGE BREAK--- 2010 2009 2010 2009 ASSETS Equity in pooled cash & investments 919,381 $ 658,145 $ 1,286,055 $ 1,105,478 $ Receivables 48,620 47,028 1,744 978 Due from other governments - - 23,926 100,456 Total assets 968,001 $ 705,173 $ 1,311,725 $ 1,206,912 $ LIABILITIES Accounts payable 7,880 $ 3,601 $ 175,267 $ 146,777 $ Due to other governments - - 1,119,870 1,046,758 Deferred revenue - - 16,588 13,377 Total liabilities 7,880 3,601 1,311,725 1,206,912 NET ASSETS Held in trust for pension benefits and other purposes 960,121 $ 701,572 $ - $ - $ The accompanying notes are an integral part of this statement. Statement of Fiduciary Net Assets Trust Funds Agency Funds December 31, 2010 Fiduciary Funds Washington State Auditor's Office 47 ---PAGE BREAK--- 2010 2009 ADDITIONS Contributions: Employer 1,136,801 $ 1,141,737 $ Total contributions 1,136,801 1,141,737 Investment earnings: Interest 9,086 13,985 Total investment earnings 9,086 13,985 Total additions 1,145,887 1,155,722 DEDUCTIONS Benefits 886,730 858,465 Administrative expenses 608 22 Total deductions 887,338 858,487 Change in net assets 258,549 297,235 Net assets - beginning 701,572 404,337 Net assets - ending 960,121 $ 701,572 $ The accompanying notes are an integral part of this statement. Trust Funds Statement of Changes in Fiduciary Net Assets Fiduciary Funds For the Year Ended December 31, 2010 (with comparative totals for 2009) Washington State Auditor's Office 48 ---PAGE BREAK--- City of Kennewick, Washington NOTES TO THE FINANCIAL STATEMENTS December 31, 2010 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 a nd operates under the laws of the State of Washington applicable to a Council-Manager form of government. A s 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 sep arate 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 w ater 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 d iscretely 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 Washington State Auditor's Office 49 ---PAGE BREAK--- City of Kennewick, Washington 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. T he Annual Credit is defined as the lesser of $600,000 a nd (ii) the sum of amounts received 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 $12,830,000 in 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. I f 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 sep arate columns in the fund financial statements. Washington State Auditor's Office 50 ---PAGE BREAK--- City of Kennewick, Washington 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. 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 p roprietary 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. • Special Revenue – Community Development Fund – The fund that accounts for proceeds of specific revenue sources (other than those for major capital projects) that are restricted legally to expenditures for specified purposes of community development. • 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 Washington State Auditor's Office 51 ---PAGE BREAK--- City of Kennewick, Washington 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. • 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) emergency medical services fund and 4) metro drug task force fund. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, g enerally 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. G eneral revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from nonoperating items. O perating 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, and inspection services 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. Washington State Auditor's Office 52 ---PAGE BREAK--- City of Kennewick, Washington 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, 2010, the treasurer was holding $27,441,516 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 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, 2010. 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 $1,157,498 in Debt Service and $1,086,987 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 Washington State Auditor's Office 53 ---PAGE BREAK--- City of Kennewick, Washington 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 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. I n 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, 2010, the City's compensated absences payable in accordance with GASB Statement No. 16 for all funds amounted to 103,877 hours and $3,905,919. 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, as well as issuance costs, 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 Washington State Auditor's Office 54 ---PAGE BREAK--- City of Kennewick, Washington City recognized the following deferred items in 2010: 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 Equity – In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. At December 31, 2010, there was a deficit net assets balance in one of the City’s enterprise funds. Management is monitoring the activities of this fund to correct the situation in the subsequent year. 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 r econciliation 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 $43,109,201 difference are shown below. Bonds and Notes Payable $ 31,385,000 Bond Premium 278,850 Unamortized Refunding Interest (86,314) Public Works Trust Fund Loans Payable 4,632,322 Water Pollution Control RF Loan 136,115 Frost Facility Loan 400,000 Net Pension Obligation 84,778 Net OPEB Obligation 502,227 Accrued Legal Settlement 2,467,739 Accrued Interest 128,860 Compensated Absences 3,179,624 $ 43,109,201 Washington State Auditor's Office 55 ---PAGE BREAK--- City of Kennewick, Washington 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 $7,699,142 difference. Operating Grant - Economic Environment $ 2,970,213 Interfund Loan Interest 11,369 Nuisance Abatement 18,215 Public Safety 245,242 Miscellaneous Receivables 33,364 Sales Tax 2,735,325 Motor Vehicle Fuel Tax 115,073 Utility Tax 698,809 Hotel/Motel Tax 103,621 Liquor Excise Tax 83,218 Gambling Tax 303,498 Property Tax 381,195 $ 7,699,142 Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. The following table details the $184,191,897 difference. Land $73,384,964 Depreciable Assets 162,435,632 Depreciation (68,753,027) Construction in Progress 12,256,176 Joint Ventures 4,868,152 $184,191,897 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 following table details the reporting differences from capital activity in the current year. Capital Outlays $10,314,847 Depreciation (6,220,186) Cost of Assets Sold (4,417) $4,090,244 Washington State Auditor's Office 56 ---PAGE BREAK--- City of Kennewick, Washington 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. N either transaction, however, has any effect on net assets. A lso, 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 ($13,738,577) Debt Retired 2,717,037 ($11,021,540) 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 ($50,810) Sales Tax 144,288 Utility Tax (88) Lodging Tax 13,357 Other Tax 297,239 Licenses & Permits 1,635 Public Safety (18,624) Contract Receivable (217,757) Community Development Receivables 399,790 Interest Receivable (5,821) Miscellaneous Receivable 1,992 $565,201 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 $122,895 Net Pension Obligation (25,621) Interest on Long Term Debt (48,790) Accrued Legal Settlement (2,467,739) Amortized Bond Premium 37,638 Amortized Refunding Interest (17,263) ($2,398,880) Washington State Auditor's Office 57 ---PAGE BREAK--- City of Kennewick, Washington 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 ($1,151,104) Transfer of Equipment to Internal Service Funds 680,445 Investment Earnings 44,968 Disposition of Capital Assets (17,452) Transfers 468,504 $25,361 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 i n 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 twice during 2009, and twice during 2010. The financial statements present the amended budget as approved. 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. Washington State Auditor's Office 58 ---PAGE BREAK--- City of Kennewick, Washington 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 2010 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 $1,492,992 recorded in memorandum records. C. Excess of Expenditures over Appropriations There have been no material violations of finance-related legal or contractual provisions in any of the funds of the City. D. Budget Revisions During the 2009/2010 biennium, the biennial budget was revised as shown on the following schedule: Washington State Auditor's Office 59 ---PAGE BREAK--- City of Kennewick, Washington 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 $2,380,155, which consisted of $2,058,538 per the City’s checking account bank balances, deposits in transit of $398,261, $61,391 in cash drawers and advance travel funds, less outstanding checks of $138,035. 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. Original Amended Biennial Total Biennial Budget Revisions Budget General Fund 83,253,468 $ 12,311 $ 83,265,779 $ Street Fund 4,141,707 30,863 4,172,570 Arterial Street Fund 2,345,385 1,469,754 3,815,139 Urban Arterial Street Fund 3,648,430 6,866,602 10,515,032 Capital Improvement Fund 22,553,232 16,669,791 39,223,023 Park Development/Const Fund 10,100,752 (3,446,419) 6,654,333 Water & Sewer Fund 54,021,450 (272,237) 53,749,213 Medical Services Fund 7,301,519 212,432 7,513,951 Building Safety Fund 2,590,101 27,453 2,617,554 Coliseum Fund 5,191,520 4,177,943 9,369,463 Stormwater Utility 2,067,000 - 2,067,000 Equipment Rental Fund 8,302,750 (805,201) 7,497,549 Central Stores Fund 673,758 963 674,721 Risk Management Fund 14,909,843 223,067 15,132,910 Debt Service Fund 4,788,446 604,463 5,392,909 LID Guaranty Fund 12,902 19,922 32,824 BI-PIN Operations Fund 551,257 3,574 554,831 Community Development Fund 1,552,469 1,895,274 3,447,743 MPD Assistant Operations Fund 68,372 - 68,372 Asset Forfeiture Fund 59,050 2,912 61,962 Public Safety Fund 4,798,000 650,000 5,448,000 Solid Waste/Environmental Fund 313,671 36,466 350,137 Cash Reserve Fund 2,500,000 - 2,500,000 Lodging Tax Fund 2,529,570 (13,669) 2,515,901 Total 238,274,652 $ 28,366,264 $ 266,640,916 $ Washington State Auditor's Office 60 ---PAGE BREAK--- City of Kennewick, Washington 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 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, 2010: Item Checking Accounts Deposits $ 2,318,764 Cash in Change Funds 41,391 Cash in Advance Travel Funds 20,000 $ 2,380,155 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 2 a7-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, 2010, the City had the following investments: Investment Type Book Value Fair Value Weighted Average Maturity (Years) U.S. Agency Securities 18,986,688 $ 19,030,465 $ 4.04 State Treasurer's Investment Pool 25,061,361 25,061,361 0.15 Total 44,048,049 $ 44,091,826 $ Portfolio weighted average maturity 1.83 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, 2010, 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. Washington State Auditor's Office 61 ---PAGE BREAK--- City of Kennewick, Washington 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, 2010 are shown in the following table. Concentration of Credit Risk as a Percentage of Total Investments Issuer Book Value Federal National Mortgage Association $10,000,000 23% Federal Home Loan Mortgage Corp 5,993,000 14% Federal Home Loan Bank 2,993,688 7% 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. N o 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 pe r $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: Washington State Auditor's Office 62 ---PAGE BREAK--- City of Kennewick, Washington 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 2010 was $2.1684 per $1,000, on an assessed valuation of $4,682,066,943, for a total regular levy of $10,152,724. The City dedicated $179,000 of the regular levy to the Firemen's Pension Fund. Special levies approved by the voters are not subject to the limitations listed above. In 2010, the City levied an additional $.0850 per $1,000 for the 1996 voted-approved G.O. bond issue for a total additional levy of $395,000. NOTE 6 - CAPITAL ASSETS Balance Balance Governmental Activities 12/31/2009 Additions Deletions 12/31/2010 Non-depreciable capital assets: Land (including ROW) 72,452,599 $ 932,365 $ - $ 73,384,964 $ Construction in Progress 6,400,572 10,759,513 (4,903,907) 12,256,178 Subtotal non-depreciable capital assets 78,853,171 11,691,878 (4,903,907) 85,641,142 Depreciable capital assets: Buildings 37,224,266 - - 37,224,266 Improvements other than buildings 15,904,734 30,362 - 15,935,096 Infrastructure 102,451,616 4,180,449 - 106,632,065 Equipment 14,960,861 928,383 (924,759) 14,964,485 Subtotal depreciable capital assets 170,541,477 5,139,194 (924,759) 174,755,912 Accumulated Depreciation: Buildings (8,724,054) (739,700) - (9,463,754) Improvements other than buildings (3,472,385) (594,309) - (4,066,694) Infrastructure (49,374,120) (4,517,341) - (53,891,461) Equipment (8,007,010) (1,226,812) 795,283 (8,438,539) Subtotal accumulated depreciation (69,577,569) (7,078,162) 795,283 (75,860,448) Governmental activities capital assets, net 179,817,079 $ 9,752,910 $ (5,033,383) $ 184,536,606 $ Washington State Auditor's Office 63 ---PAGE BREAK--- City of Kennewick, Washington Capital assets activity for the year ended December 31, 2010 was as follows: 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. Balance Balance Business-Type Activities 12/31/2009 Additions Deletions 12/31/2010 Non-depreciable capital assets: Land 2,987,734 $ - $ - $ 2,987,734 $ Intangible 29,179 - - 29,179 Construction in Progress 6,757,372 3,533,989 (9,556,625) 734,736 Subtotal non-depreciable capital assets 9,774,285 3,533,989 (9,556,625) 3,751,649 Depreciable capital assets: Buildings and improvements 190,910,865 10,813,996 (13,312) 201,711,549 Equipment 10,334,567 103,035 (17,952) 10,419,650 Subtotal depreciable capital assets 201,245,432 10,917,031 (31,264) 212,131,199 Accumulated Depreciation: Buildings and improvements (55,758,059) (4,389,766) 2,661 (60,145,164) Equipment (6,465,071) (285,143) 12,500 (6,737,714) Subtotal accumulated depreciation (62,223,130) (4,674,909) 15,161 (66,882,878) Business-type activities capital assets, net 148,796,587 $ 9,776,111 $ (9,572,728) $ 148,999,970 $ Governmental activities: General Government 516,370 $ Security of Persons & Property 997,364 Physical Environment 123,715 Transportation 4,589,077 Economic Environment 42,243 Culture & Recreation 809,393 Total 7,078,162 $ Business-type activities: Water and sewer service 3,920,148 $ Medical service 13,411 Coliseum service 442,505 Stormwater service 298,845 Total 4,674,909 $ Washington State Auditor's Office 64 ---PAGE BREAK--- City of Kennewick, Washington The City has active construction projects as of December 31, 2010. At year-end the City’s commitments with contractors are as shown on the following schedule. 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 d epartment 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 from the 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. 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 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. Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals, and Superior courts (other than judges in a judicial retirement system); employees of legislative committees; community and technical colleges, college and university employees not participating in national higher education retirement programs; judges of district and municipal courts; and employees of local governments. 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 f or local government employees, are plan 2 members unless they exercise an option to transfer their membership to Plan 3. PERS participants 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 Project Expenditures as of 12/31/2010 Remaining Commitment Steptoe St - Phase 1 3,369,713 $ 641,368 $ Misc Street Projects - 27,950 Misc Traffic Signals or Roundabouts 22,910 19,055 Southridge Softball Complex 973,869 172,121 Civic Center Softball Complex 3,500 291 Grant Match - Streets 7,960 4,040 4,377,952 $ 864,825 $ Washington State Auditor's Office 65 ---PAGE BREAK--- City of Kennewick, Washington 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 retirement benefit provisions are established in Chapters 41.34 a nd 41.40 R CW and may be amended only by the State Legislature. 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 2 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) is granted at age 66 based upon years of service times the COLA amount, which is increased 3 percent annually. Plan 1 members may also 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 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 2 percent of the AFC for each year of service reduced by 2 percent for each year that the member’s age is less than 55. The total benefit is limited to 60 percent of the AFC and is actuarially reduced to reflect the choice of a su rvivor option. A cost-of living allowance is granted at age 66 based upon years of service times the COLA amount (based on the consumer Price Index), 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 while actively serving in the military, if such credit makes them eligible to retire. 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 2 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. Washington State Auditor's Office 66 ---PAGE BREAK--- City of Kennewick, Washington 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. • 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. T here 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. 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. Effective July 22, 2007, said refund (adjusted as needed for specified legal reductions) is increased from 100 percent to 200 percent of the accumulated contributions if the member’s death occurs in the uniformed service to the United States while participating in Operation Enduring Freedom or Persian Gulf, Operation Iraqi Freedom. 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 1 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. • 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 de fined contribution retirement benefits are solely dependent upon 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. Washington State Auditor's Office 67 ---PAGE BREAK--- City of Kennewick, Washington 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 2 percent of the AFC per year of service. For Plan 3, the benefit amount is 1 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 r esult 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 1,189 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans of June 30, 2009: Retirees and beneficiaries receiving benefits 74,857 Terminated plan members entitled to but not yet receiving benefits 28,074 Active plan members vested 105,339 Active plan members non-vested 53,896 Total 262,166 Funding Policy Each biennium, the state Pension Funding Council adopts Plan 1 e mployer contribution rates, Plan 2 e mployer and employee contribution rates, and Plan 3 e mployer 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 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 Washington State Auditor's Office 68 ---PAGE BREAK--- City of Kennewick, Washington 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 p ercentage of current year covered payroll, as of December 31, 2010 were: PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer* 5.31% 5.31% 5.31% Employee 6.00% 3.90% * The employer rates include the employer administrative expense fee currently set at 0.16%. The employer rate for state elected officials is 7.89% for Plan 1, 5.31% 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 3.90% for Plan 2. Variable from 5% minimum to 15% maximum based on r ate 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 2010 $29,986 $499,447 $136,701 2009 50,493 649,650 173,774 2008 125,552 671,970 183,581 B. Law Enforcement Officers and Fire Fighters Retirement System (LEOFF) Plans 1 and 2 Plan Description LEOFF is a cost-sharing multiple-employer retirement system comprised of two separate defined benefit plans. LEOFF participants 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. Membership in the system includes all full-time, fully compensated, local law enforcement officers and firefighters and, as of July 24, 2005, those emergency medical technicians who were given the option and chose LEOFF Plan 2 membership. LEOFF membership is comprised primarily of non-state employees, with the Department of Fish and Wildlife enforcement officers, who were first included prospectively effective July 27, 2003 being an exception. Effective July 1, 2003, t he 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--- 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. P lan 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 p rovides 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. Washington State Auditor's Office 70 ---PAGE BREAK--- City of Kennewick, Washington LEOFF Plan 2 p rovides disability benefits. There is no m inimum 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 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 m embers 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 purchase service credit for military service that interrupts employment. Additionally, LEOFF Plan 2 m embers 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 r esult of injuries or illness sustained in the course of employment, if found eligible by the Department of Labor and Industries. Washington State Auditor's Office 71 ---PAGE BREAK--- City of Kennewick, Washington There are 372 participating employers in LEOFF. M embership in LEOFF consisted of the following as of the latest actuarial valuation date for the plans at June 30, 2009: Retirees and beneficiaries receiving benefits 9,454 Terminated plan members entitled to but not yet receiving benefits 674 Active plan members vested 13,363 Active plan members non-vested 3,944 Total 27,435 Funding Policy Starting on July 1, 2000, P lan 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. All employers are required to contribute at the level required by state law. T he Legislature has the ability, by means of a sp ecial funding arrangement, to appropriate 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 r etirement Board. H owever, 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, 2010 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 2010 $ 214 $748,956 2009 338 758,123 2008 348 682,146 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, 2010 there were 51 retirees collecting health benefits under the LEOFF system. Washington State Auditor's Office 72 ---PAGE BREAK--- City of Kennewick, Washington The total cost for this postemployment benefit was $767,717 for 2010. 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. GASB Statements No. 25 and 27 require the performance of biennial actuarial valuations. T he most recent actuarial study of the system was performed to determine the funding requirements as of January 1, 2010. T his plan was not audited; however, a copy of the review can be obtained by request at the following address: City of Kennewick 210 West 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. A s of December 31, 2010, t here 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, t he 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 Washington State Auditor's Office 73 ---PAGE BREAK--- City of Kennewick, Washington 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, 2010 w as $660,685 and retirement pensions in 2010 t otaled $119,012. 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. The annual pension cost (APC) and net pension obligation (NPO) are shown on t he following schedule as of December 31: 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. Future investment earnings are assumed to accrue at an annual rate of 4.0%. Future salaries and postretirement benefits are assumed to increase at the rate of 3.9% per annum. The CPI was assumed to increase at the rate of 2.8% per annum. 2006 2007 2008 2009 2010 Annual normal cost at beg. of year (BOY) $ - $ - $ - - $ - $ Amortization of UAAL (BOY) 148,828 148,828 143,451 143,451 110,888 Interest to end of year (EOY) 8,186 8,186 7,173 7,173 4,436 Annual required contribution (ARC) 157,014 157,014 150,624 150,624 115,324 Interest on NPO 12,944 20,951 16,692 15,773 8,759 Adjustment to ARC (16,962) (28,044) (24,155) (23,433) (15,493) Annual pension cost (APC) 152,996 149,921 143,161 142,964 108,590 Total contributions 7,414 197,000 161,547 239,451 242,784 Change in NPO 145,582 (47,079) (18,386) (96,487) (134,194) NPO at BOY 235,342 380,924 333,845 315,459 218,972 NPO at EOY 380,924 333,845 315,459 218,972 84,778 Fiscal Year Ending Washington State Auditor's Office 74 ---PAGE BREAK--- City of Kennewick, Washington The following schedule shows the three-year trend beginning with 2008 as of December 31: Annual Contribution as Net Pension Pension Cost a Percentage Obligation Year (APC) of APC (NPO) 2010 108,590 224% 84,778 2009 142,964 167% 218,972 2008 143,161 113% 315,459 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 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 2005 104,802 (3,131) (3,708) 105,379 (178,130) 283,509 235,342 282,932 12.9907 (3,708) 235,342 2004 104,802 (5,002) (5,831) 105,631 76,847 28,784 (48,167) 27,955 13.1979 (5,831) (48,167) 2003 58,274 (4,697) (5,232) 58,809 68,659 (9,850) (76,951) (10,385) 12.8258 (5,232) (76,951) 2002 58,274 (4,199) (4,619) 58,694 65,807 (7,113) (67,101) (7,533) 12.9867 (4,619) (67,101) 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. D. Statewide City Employees Retirement System Prior to 1972, a ll 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 2010. 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. Washington State Auditor's Office 75 ---PAGE BREAK--- City of Kennewick, Washington Chapter 48.62 R CW 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 t he 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. L iability 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 256 members. The pool acquires liability insurance through Munich Reinsurance America that are subject to a p er- 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 l iability 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 $3,200,000 to cap the total claims paid by the pool in any one year. 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, 2009 and 2010 were each $1,389,379. 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. 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 $68,754 to F. M. Global Insurance Company for their services in 2010. On December 18, 1979, t he City established a self-insurance program for unemployment compensation, which is reported in the Risk Management Fund. Various City funds are charged premiums. Washington State Auditor's Office 76 ---PAGE BREAK--- City of Kennewick, Washington During 1983, s elf-insurance for sewer back-up claims was added to the Risk Management Fund. T he 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, 2010 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, 2010, were $123,540 and the liability for claims incurred but not reported (IBNR) was $33,489 on that date. Management estimates unpaid claims based upon historical trends. Expenditures were not adjusted due to salvage or subrogation in 2010. 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: 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, 2010, were $303,629. 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 Beginning Claims Claims Ending Beginning Claims Claims Ending Balance Incurred Payments Balance Balance Incurred Payments Balance General Liabilities - $ - $ - $ - $ - $ - $ - $ - $ Unemployment Claims - 86,131 (86,131) - - 97,320 (97,320) - Medical Claims 629,845 1,068,987 (1,591,562) 107,270 107,270 77,917 (185,187) - Dental Claims 33,414 499,437 (499,184) 33,667 33,667 451,772 (451,950) 33,489 663,259 $ 1,654,555 $ (2,176,877) $ 140,937 $ 140,937 $ 627,009 $ (734,457) $ 33,489 $ 2009 2010 Washington State Auditor's Office 77 ---PAGE BREAK--- City of Kennewick, Washington rewards employers who minimize their industrial insurance losses. The City paid $5,899 to Building Industry Association of Washington in 2010 to help administer this program for 2010 and 2011. For 3 years after the coverage period, Labor and Industries calculates premium adjustments over the City’s experience rating period. If losses for the coverage period are less than paid premiums, portions of premiums are refunded through the BIAW group plan. During 2010 the City received refunds totaling $5,540. There have been no settlements in excess of insurance coverage under the City’s risk management programs during the last four calendar years. However, as described in Note 20, there was a claim settled in 2011 that is excluded from insurance policy coverage. NOTE 9 - LONG-TERM DEBT AND CAPITAL LEASE General Obligation Bonds The City issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. In March of 2010, the City of Kennewick issued $13,665,000 in limited tax general obligation bonds to pay for improvements to its Southridge Sports Complex, the design and construction of two vehicle and bike lanes along Hildebrand Boulevard, and other various infrastructure improvements to the Southridge area. Bonded indebtedness has also been entered into 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: Annual debt service requirements to maturity for general obligation bonds are as follows: Issuance Final Debt Amount Installments Maturity Interest Rates Oustanding 2005 GO refunding bonds 3,285,000 $ $80,000 - $385,000 12/2/2016 3.0 - 4.5% 2,080,000 $ 2003A GO bonds - convention center 3,995,000 $ $260,000 - $535,000 12/1/2013 2.0 - 3.625% 1,430,000 2003B GO bonds - capital projects 8,700,000 $ $310,000 - $640,000 12/1/2023 2.0 - 5.0% 6,370,000 2006 GO bonds - police station 9,790,000 $ $270,000 - $705,000 12/1/2025 3.75 - 5.0% 8,090,000 2010A GO bonds - local revitalization 1,840,000 $ $250,000 - $415,000 12/2/2014 3.00% 1,590,000 2010B GO bonds - local revitalization 11,825,000 $ $425,000 - $830,000 12/3/2025 3.45 - 6.323% 11,825,000 31,385,000 $ 2011 2012 2013 2014 2015 2016-2020 2021-2025 2026-2030 2031-2034 Total Principal 1,955,000 2,040,000 1,965,000 1,630,000 1,705,000 7,905,000 7,795,000 3,265,000 3,125,000 $31,385,000 Interest 1,492,852 1,423,421 1,350,321 1,272,721 1,201,296 4,907,412 3,045,907 1,608,355 503,943 $16,806,230 Year Ended December 31 Washington State Auditor's Office 78 ---PAGE BREAK--- City of Kennewick, Washington 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. S tate 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. There are no outstanding special assessment bonds at December 31, 2010. 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, 2010 are as follows: Remaining Purpose % of Av Capacity Notes General Government 2 1/2% $ 88,320,000 ($40,017,000 is Councilmanic) Park and Open Space 2 1/2% 121,474,000 Utility 2 1/2% 121,474,000 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. T he 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: Year Ending December 31 Principal Interest Principal Interest 2011 904,593 61,766 2,832,986 461,186 2012 827,191 48,059 2,663,646 415,560 2013 599,319 35,992 2,691,666 369,797 2014 549,123 27,522 2,717,963 322,688 2015 449,123 22,882 2,748,740 279,445 2016 - 2020 1,839,089 49,075 11,141,069 668,858 2021 - 2025 - - 6,612,190 1,314,403 2026 - 2028 - - 870,829 873,061 $5,168,437 $245,296 $32,279,090 $4,704,998 Governmental Activities Business-type Activities Washington State Auditor's Office 79 ---PAGE BREAK--- City of Kennewick, Washington Outstanding notes and loans are shown on the following table for both governmental and business activities as of December 31, 2010. At December 31, 2010, restricted assets in proprietary funds contain $1,157,498 in reserves as required by the SRF loan agreement. Capital Leases The City had one outstanding lease agreements through the state’s LOCAL lease program during 2010. The lease provided financing for the purchase of a fire truck. Issuance Final Debt Amount Installments Maturity Interest Rates Outstanding Governmental Activities: PWTF - W Hood/S Ely 1,492,148 $ 77,742 $ 07/01/11 2.00% 77,744 $ PWTF - 10th-Olympia/SR395 3,045,552 159,645 07/01/12 1.00% 319,293 PWTF - 19th Avenue 967,770 50,194 07/01/13 1.00% 150,583 PWTF - Comp Street Imp I 3,817,100 203,264 07/01/18 1.00% 1,626,106 PWTF - Comp Street Imp II 4,550,000 215,526 07/01/20 1.00% 2,458,596 Water Pollution Control Revolving Loan 300,000 33,753 03/25/13 0.50% 136,115 Frost Facility Loan 600,000 100,000 01/15/14 3.63% 400,000 Total Governmental Activities 5,168,437 $ Purpose Issuance Final Debt Amount Installments Maturity Interest Rates Outstanding Business-type Activities: PWTF - Water Lines $639,664 $33,695 07/01/11 1.00% 33,693 $ PWTF - 19th Avenue 24,542 3,068 07/01/13 1.00% 9,203 PWTF - Water System Imp 6,856,358 368,669 07/01/16 1.00% 2,212,019 PWTF - Wastewater Lagoon 2,450,000 130,464 07/01/20 1.00% 1,304,645 PWTF - Misc W/S Imp 3,000,000 159,375 07/01/21 0.50% 1,753,125 PWTF - Advanced Water Treatment 9,500,000 531,250 07/01/25 0.50% 7,968,750 PWTF - Waste Wtr Plant-Precon 510,000 127,500 - 184,167 07/01/11 0.50% 162,383 PWTF - Waste Wtr Plant-Const 5,500,000 290,278 07/01/28 0.50% 5,225,000 CERB - Welch's Project 125,000 4,689 - 9,338 01/01/21 4.70% 93,520 SRF - Drinking Water 4,040,000 212,632 10/01/24 1.50% 2,976,840 SRF - Water Treatment Facility 4,080,000 240,833 10/01/23 1.00% 2,946,665 SRF - Ranney Improvements 3,030,000 173,030 10/01/25 1.50% 2,363,626 SRF - Wastewater Treatment Facility 10,063,642 479,167 - 748,141 05/31/17 4.50% 5,229,621 Total Business-type Activities 32,279,090 $ Purpose Washington State Auditor's Office 80 ---PAGE BREAK--- City of Kennewick, Washington The City entered into a lease agreement during 2002 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 capital leases for accounting purposes and, therefore, has been recorded at the present value of their 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 these minimum lease payments as of December 31, 2010 are on the following schedule. Arbitrage 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, 2010, t here was no liability for rebatable arbitrage for this bond issue. 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, 2010: Business-type Business-Type Leased Equipment Activities Year Ending December 31 Activities Fire Truck 456,000 $ 2011 56,304 $ Less: Accumulated Depreciation (374,990) 2012 28,152 81,010 $ Total minimum lease payments 84,456 $ Less: amount representing interest (3,446) Present value of minimum lease payments 81,010 $ Beginning Balance Additions Reductions Ending Balance Due Within One Year Business-type Activities: Notes and loans payable 32,046,290 $ 3,025,000 $ 2,792,200 $ 32,279,090 $ 2,817,710 $ Capital leases 132,262 - 51,252 81,010 53,440 Biosolids reserve 1,500,000 300,000 - 1,800,000 - Compensated absences 672,357 602,620 617,521 657,456 280,080 Business-type activity Long-term liabilities 34,350,909 $ 3,927,620 $ 3,460,973 $ 34,817,556 $ 3,151,230 $ Washington State Auditor's Office 81 ---PAGE BREAK--- City of Kennewick, Washington 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 $68,839 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. 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 June of 2009, the City of Kennewick incurred an unfavorable verdict in 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. The jury in the case awarded $3,000,000 in damages to the plaintiff. The case was Beginning Balance Additions Reductions Ending Balance Due Within One Year Governmental Activities: Bonds and notes payable: General obligation bonds 19,470,000 $ 13,665,000 $ 1,750,000 $ 31,385,000 $ 1,955,000 $ Notes and loans 6,135,474 - 967,037 5,168,437 904,593 Total bonds and notes payable 25,605,474 13,665,000 2,717,037 36,553,437 2,859,593 Adjust for deferred amounts: For issuance premium 242,909 73,577 37,636 278,850 - Net effect of refunding bond issue (103,577) - (17,263) (86,314) - Net pension obligation 218,972 108,590 242,784 84,778 - OPEB payable 342,412 927,532 767,717 502,227 - Compensated absences 3,403,812 1,719,237 1,874,586 3,248,463 1,267,060 Governmental activity Long-term liabilities 29,710,002 $ 16,493,936 $ 5,622,497 $ 40,581,441 $ 4,126,653 $ Washington State Auditor's Office 82 ---PAGE BREAK--- City of Kennewick, Washington appealed to the Division Three Court of Appeals and the City was awaiting the outcome of its appeal as of December 31, 2010. Please see Note 20 for further information on a subsequent event related to this matter. 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. P ension 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, 2010 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 16,912 $ 145 $ 50,534 $ 9,129 $ 28,285 $ - $ 694 $ 8,756 $ 114,455 $ Taxes 3,480,403 - 819,112 544,021 - - - - 4,843,536 Accounts 194,255 2,625,110 - 10,739 723,592 32,480 688,016 92,064 4,366,256 Contracts - 44,520 - - - - - - 44,520 Due from other governments 32,227 514,242 6,862 831,332 275,033 - 54 - 1,659,748 Gross Receivables 3,723,797 3,184,017 876,508 1,395,221 1,026,910 32,480 688,764 100,820 11,028,515 L ess: allowance for uncollectible accounts - - - - (39,092) - (150,527) - (189,619) Net Total Receivables 3,723,797 $ 3,184,017 $ 876,508 $ 1,395,221 $ 987,818 $ 32,480 $ 538,237 $ 100,820 $ 10,838,896 $ Washington State Auditor's Office 83 ---PAGE BREAK--- City of Kennewick, Washington B. Payables at December 31, 2010 are shown on the following schedule: NOTE 14 - INTERFUND TRANSACTIONS Interfund transactions are classified as follows: 1. Transactions that would be treated as r evenues, 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. Nonmajor Community Capital Nonmajor Proprietary Internal Payables General Development Improvement Govt'l Funds Water/Sewer Coliseum Fund Service Fund Total Interest - $ - $ - $ - $ - $ 22,333 $ - $ - $ 22,333 $ Claims and judgements - - - - - - - 33,489 33,489 Accounts 771,281 65,139 1,429,433 229,348 105,527 462,225 67,363 117,679 3,247,995 Salaries and benefits 584,533 2,441 23,210 66,323 - 80,572 10,256 767,335 Taxes 5,149 - - - - 25,097 - - 30,246 Retainage - - - - - - - - - Due to other governments 3,589 - - 4,130 - 148,835 - - 156,552 Total Govt'l & Bus Activities 1,364,552 $ 67,580 $ 1,429,433 $ 256,688 $ 171,850 $ 658,490 $ 147,935 $ 161,424 $ 4,257,950 $ Reconciliation of financial statements to governmental wide financial statements: Accrued long term interest 128,860 - - - - - - - 128,860 Net Total Payables 1,493,412 $ 67,580 $ 1,429,433 $ 256,688 $ 171,850 $ 658,490 $ 147,935 $ 161,424 $ 4,386,810 $ Washington State Auditor's Office 84 ---PAGE BREAK--- City of Kennewick, Washington As of December 31, 20 10 outstanding interfund balances (resulting from various interfund transactions) were as follows: NOTE 15 - SEGMENT INFORMATION FOR ENTERPRISE FUNDS The City maintains five Enterprise Funds that provide ambulance service, building inspection services, water and sewer utility services, stormwater utility service, 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. Interfund Transfers Purpose - Transfers out Transfers in Transfers out General Fund Operations Transfers (Routine) 3,216,948 $ - $ General Fund Capital Transfers (Non-routine) - 1,161,000 General Fund Operations Transfer (Building Safety) - 100,000 General Fund Operations Transfer (Ambulance) - 558,000 General Fund Operations Transfer (Coliseum) - 270,060 General Fund Operations Transfer (Risk 383,606 Community Development Fund Street Improvements (Non-routine) - 65,000 Capital Improvement Fund Transfers (Routine) 725,000 450,000 Capital Improvement Fund Capital Transfers (Non-routine) 1,476,367 2,225,408 Capital Improvement Fund Debt Service (Routine) - 2,261,617 Other Non-Major Govt'l Funds Operations Transfers (Routine) 450,000 2,504,920 Other Non-Major Govt'l Funds Capital Transfers (Non-routine) 2,213,154 2,238,400 Other Non-Major Govt'l Funds Debt Service (Routine) 2,505,718 244,102 Water/Sewer Fund Capital Transfers (Non-routine) - 811,712 Coliseum Fund Capital Transfers (Non-routine) 1,329,523 - Other Non-Major Enterprise Funds Operations Transfers (Routine) 1,033,000 66,322 Other Non-Major Enterprise Funds Capital Transfers (Non-routine) - 78,069 Internal Service Funds Operations Transfers (Routine) 633,606 - Internal Service Funds Capital Transfers (Non-routine) 124,900 290,000 Total 13,708,216 $ 13,708,216 $ Due from Due to Interfund Loans Purpose - Due to other funds other funds other funds General Fund 21,500 $ - $ Community Development Admin/OH - 31,500 Capital Improvement Fund Land Purchase 4,520,388 160,000 Water & Sewer Fund 170,961 - Other Non-Major Govt'l Funds Capital Construction - 10,961 Coliseum Fund Capital Construction - 4,510,388 Total 4,712,849 $ 4,712,849 $ Washington State Auditor's Office 85 ---PAGE BREAK--- City of Kennewick, Washington 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 2010 precludes the need to include a separate column in the City's financial statements. 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. T he 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: T he 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. Washington State Auditor's Office 86 ---PAGE BREAK--- City of Kennewick, Washington 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. T he 11 pa rticipating agencies including Benton County Sheriff and Public Works, the cities of Kennewick, Richland, West Richland and Prosser, Benton County Fire Districts 1, 2 a nd 4, B enton PUD and Columbia Dive and Rescue are assessed an annual fee per radio to fund system maintenance. Effective January 1, 1997, t he City of Richland assumed responsibility for operation of Benton County Emergency Services. A s the Operating Jurisdiction, Richland provides all necessary administrative services for the operation of BCES. On December 31, 2010, the City of Kennewick's equity interest in SECOMM was $668,237, $90,314 in BCEM, and $3,745,625 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 five participating municipal corporations; the cities of Kennewick, Pasco and 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. Washington State Auditor's Office 87 ---PAGE BREAK--- City of Kennewick, Washington The allocation of financial participation among the participating jurisdictions is based upon t he 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, t he 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 acco unting, legal services, risk management and information systems. The total amount paid by BI-PIN in 2010 for these transactions was $118,999. The City of Kennewick's equity interest in BI-PIN was $309,104 on December 31, 2010, 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 West Sixth Avenue, Kennewick, Washington. 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 m ember 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. 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 $54,871 on June 30, 2010, 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, 2010, the City had 51 individuals that met the eligibility requirements of this retirement plan. A. Plan Description Washington State Auditor's Office 88 ---PAGE BREAK--- City of Kennewick, Washington 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 m 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, 2010, the City’s OPEB Trust Fund had accumulated a fund balance of $297,851. 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, 2008. T he 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 components of the City’s annual OPEB cost, contributions made by t he City, and changes to the net OPEB obligation for the years ending December 31, 2008, 2009 and 2010, respectively. As the year ending December 31, 2008, w as 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 Annual required contribution $912,123 $921,747 $933,497 Interest on net OPEB obligation - 7,055 15,409 Adjustment to the ARC - 9,624 21,374 Annual OPEB cost (expense) 912,123 919,178 927,532 Contributions made 755,347 733,542 767,717 Increase in net OPEB obligation 156,776 185,636 159,815 Net OPEB obligation – beginning of the year - 156,776 342,412 Net OPEB obligation – end of the year $156,776 $342,412 $502,227 Washington State Auditor's Office 89 ---PAGE BREAK--- City of Kennewick, Washington 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 and 2010, respectively, were as follows: Fiscal Year Ended Annual OPEB Cost Percentage of Annual OPEB Cost Contributed Net OPEB Obligation 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, 2008, t he most recent actuarial valuation date, the plan was 0% funded. The actuarial accrued liability (AAL) for benefits was $14,354,560 and the actuarial value of plan assets was resulting in an unfunded actuarial accrued liability (UAAL) of $14,354,560. The covered payroll (annual payroll of active employees covered by the plan) was $202,912, and the ratio of the UAAL to the covered payroll was 7074 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. The City of Kennewick used the alternative measurement method permitted under GASB Statement No. 45. A single retirement age of 56.22 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, 2006 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 2007. These trends include projected medical inflation of 8.5% for 2008, reducing down to 5% by 2015. An inflation rate of 4.5% was utilized for long term care. 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. Other actuarial assumptions included a 4.5% discount rate and a 3.5% rate of inflation. These assumptions are individually and collectively reasonable for the purposes of this valuation. Washington State Auditor's Office 90 ---PAGE BREAK--- City of Kennewick, Washington NOTE 19 – ASSOCIATION OF WASHINGTON CITIES EMPLOYEE BENEFIT TRUST (“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. U nder 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 2010, retirees of the City receiving medical benefits from the Trust contributed $668.43 per month for non-Medicare enrolled retiree-only coverage, $1,339.17 per month for non-Medicare enrolled retiree and spouse coverage, $1,033.25 for Medicare enrolled retiree and non-Medicare enrolled spouse (or non-Medicare enrolled retiree and Medicare-enrolled spouse) and $731.95 for 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 bot h 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. Subsequent Event As described in Note 11, the City of Kennewick incurred an unfavorable verdict in June of 2009 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. The jury in the case awarded $3,000,000 in damages to the plaintiff. The case was appealed to the Division Three Court of Appeals and the City was awaiting the outcome of its appeal as of December 31, 2010. In February of 2011, the Court of Appeals returned a 2-1 verdict in favor of the plaintiff. The City subsequently entered into mediation with the plaintiff in an effort to resolve the claim while also filing a motion for reconsideration with the Court of Appeals, which was later denied. On April 19, 2011, the City Council made a formal settlement offer to the plaintiff, which was accepted on April 25, 2011. A settlement of $2,467,738.60 was paid on April 29, 2011. As the underlying event leading to this lawsuit occurred prior to December 31, 2010, the settlement is reflected as a liability and expense of the city’s governmental activities on the government-wide financial statements for the year ended December 31, 2010. Washington State Auditor's Office 91 ---PAGE BREAK--- City of Kennewick, Washington 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 12/31/2010 $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% 12/31/2005 50,546 (228,676) (178,130) 104,802 (170%) 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 92 ---PAGE BREAK--- 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, 2010 $767,717 $927,532 82.8% December 31, 2009 $733,542 $919,178 79.8% 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, 2008 $ - $14,354,560 $14,354,560 0% $202,912 7074.28% *This represents the first valuation for the City’s LEOFF 1 Retiree Medical OPEB plan. As a result, only one date is listed in the schedule of funding progress. Washington State Auditor's Office 93 ---PAGE BREAK--- Expenditures of Federal Awards Year Ended December 31, 2010 Grantor/ Federal Current Pass-Through Grantor CFDA Other Identification Year Program Title Number Number Expenditures U S Department of Housing and Urban Development 2008 Community Development Block Grant (Direct) 14.218 B-08-MC-53-0001 56,335 $ 2009 Community Development Block Grant (Direct) 14.218 B-09-MC-53-0001 558,163 2010 Community Development Block Grant (Direct) 14.218 B-10-MC-53-0001 68,618 Total CFDA Number 14.218 683,116 Passed through WA State Department of Commerce: Community Development Block Grant (CDBG) Neighborhood Stabilization Program (NSP) 14.228 08-F6401-031 410,674 ARRA - Community Development Block Grant Entitlement Grants (CDBG-R)(Recovery Act Funded) 14.253 B-09-MY-53-0001 5,856 Total U.S. Dept of Housing and Urban Development 1,099,646 U S Department of Agriculture Cooperative Forestry Assistance 10.664 200 Total U.S. Dept of Agriculture 200 U S Department of Energy ARRA-Energy Efficiency & Conservation Block Grant Program 81.128 DE-SC0002581 10,614 Total U.S. Dept of Energy 10,614 U S Department of Homeland Security Disaster Grants - Public Assistance (Presidentially Declared Disasters) 97 036 D09-444 100 Total U.S. Dept of Homeland Security 100 U S Department of Justice Bulletproof Vest Partnership Program 16 607 13,748 Anti-Gang Initiative 16 609 F09-34023-002 27,530 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 34,976 Passed through WA State Dept of Commerce and Metro Drug Task Force: Edward Byrne Memorial Justice Assistance Grant Program 16 738 M09-34021012 18,741 16 738 M10-34021012 17,287 Total CFDA Number 16 738 71,004 Passed through WASPC, Franklin County and Metro Drug Task Force: Office of Community Oriented Policing Services/WA State Methamphetamine Initiative 16 710 WSMI09104 277 Public Safety Partnerships and Community Policing Grants Passed through WA State Patrol and Metro Drug Task Force: Domestic Cannabis Eradication/Suppression 16 999 C100953FED 539 Passed through Metro Drug Task Force: Organized Crime Drug Enforcement Task Forces (OCDETF) - DEA 16 999 PA-WAE-0095 2,871 Passed through Metro Drug Task Force: Organized Crime Drug Enforcement Task Forces (OCDETF) - DEA 16 999 PA-WAE-0097 2,630 U S Marshals Service - Fugitive Task Force 16 999 0324A A3403FWF4014R 22,721 Federal Bureau of Investigation - Tri City Violent Crime Task Force 16 999 281D-SE-C93759 10,350 Total CFDA Number 16 999 39,111 Total U.S. Dept of Justice 163,670 Washington State Auditor's Office 94 ---PAGE BREAK--- Expenditures of Federal Awards Year Ended December 31, 2010 Grantor/ Federal Current Pass-Through Grantor CFDA Other Identification Year Program Title Number Number Expenditures U S Department of Transportation Passed-through WA State Traffic Safety Commission: Alcohol Traffic Safety & Drunk Driving Prevention Incentive Grants I 20 601 4,983 Alcohol Impaired Driving Counter Measures Incentive Grants I State and Community Highway Safety 20 600 8,966 Occupant Protection Incentive Grants 20 602 770 Total Department of Transportation 14,719 Federal Highway Administration Highway Planning and Construction Recovery Passed-through WA State Dept of Transportation: Highway Planning and Construction 20.205 STPUS-3453(002) 2,996,484 Highway Planning and Construction 20.205 STPH - 3413(005) 864,595 Total Highway and Planning and Construction Grants 3,861,079 TOTAL EXPENDITURES OF FEDERAL AWARDS 5,150,028 $ The accompanying notes are an integral part of this schedule. Washington State Auditor's Office 95 ---PAGE BREAK--- Notes to Financial Assistance Schedules Year Ended December 31, 2010 NOTE 1 - BASIS OF ACCOUNTING NOTE 2 - PROGRAM COSTS NOTE 3 - AMOUNTS AWARDED TO SUBRECIPIENTS NOTE 4 - AMERICAN RECOVERY AND REINVESTMENT ACT (ARRA) of 2009 ARRA - Community Development Block Grant Entitlement Grants (CDBG-R) 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 $25,827 that was passed through to subrecipients that administered their own projects. Washington State Auditor's Office 96 ---PAGE BREAK--- (SAO FACTS.DOC - Rev. 06/09) 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 in cooperation 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 our 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 continue to refine our reporting efforts to ensure the results of our audits are useful and understandable. 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 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