Document Kennewick_doc_a26e155543

Washington State Auditor’s Office Financial Statements and Federal Single Audit Report City of Kennewick Benton County Audit Period January 1, 2008 through December 31, 2008 Report No. 1001885 Issue Date August 3, 2009 ---PAGE BREAK--- August 3, 2009 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. In addition to this work, we look at other areas of our audit client’s operations for compliance with state laws and regulations. The results of that audit will be included in a separately issued accountability report. Sincerely, BRIAN SONNTAG, CGFM STATE AUDITOR 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 Washington State Auditor Brian Sonntag ---PAGE BREAK--- Table of Contents City of Kennewick Benton County January 1, 2008 through December 31, 2008 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 2 Independent Auditor’s Report on Compliance with Requirements Applicable to its Major Program and Internal Control over Compliance in Accordance with OMB Circular 4 Independent Auditor’s Report on Financial Statements 6 Financial Section 8 ---PAGE BREAK--- Federal Summary City of Kennewick Benton County January 1, 2008 through December 31, 2008 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 significant 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 significant deficiencies that we consider to be material weaknesses. We issued an unqualified opinion on the City’s compliance with requirements applicable to its major federal program. We reported no findings that are required to be disclosed under OMB Circular A-133. Identification of Major Programs: The following was a major program during the period under audit: CFDA No. Program Title 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 1 ---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, 2008 through December 31, 2008 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, 2008, which collectively comprise the City‘s basic financial statements, and have issued our report thereon dated June 22, 2009. During the year ended December 31, 2008, the City implemented Governmental Accounting Standards Board Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. The prior year partial comparative totals information has been derived from the City’s 2007 financial statements that we issued our report thereon dated June 27, 2008. 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 control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the City's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the City's financial statements that is more than inconsequential will not be prevented or detected by the City's internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity’s internal control. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that Washington State Auditor's Office 2 ---PAGE BREAK--- might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. 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 22, 2009 Washington State Auditor's Office 3 ---PAGE BREAK--- Independent Auditor’s Report on Compliance with Requirements Applicable to its Major Program and Internal Control over Compliance in Accordance with OMB Circular A-133 City of Kennewick Benton County January 1, 2008 through December 31, 2008 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 are applicable to its major federal program for the year ended December 31, 2008. The City’s major federal program is identified in the Federal Summary. Compliance with the requirements of laws, regulations, contracts and grants applicable to its major federal program is the responsibility of the City’s management. Our responsibility is to express an opinion on the City’s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to 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 requirements referred to above that are applicable to its major federal program for the year ended December 31, 2008. 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, 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. Washington State Auditor's Office 4 ---PAGE BREAK--- A control deficiency in an entity’s internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect noncompliance with a type of compliance requirement of a federal program on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity’s ability to administer a federal program such that there is a more than remote likelihood that noncompliance with a type of compliance requirement of a federal program that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in a more than remote likelihood that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected by the entity’s internal control. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. 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 17, 2009 Washington State Auditor's Office 5 ---PAGE BREAK--- Independent Auditor’s Report on Financial Statements City of Kennewick Benton County January 1, 2008 through December 31, 2008 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, 2008, which collectively comprise the City’s basic financial statements as listed on page 8. 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 2007 financial statements and, in our report dated June 27, 2008, we expressed unqualified opinions on the respective financial statements of the governmental activities, business-type activities, the aggregate discretely presented component unit, each major fund, and 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, 2008, 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 ending December 31, 2007, from which such partial information was derived. As described in Note 18, during the year ended December 31, 2008, the City implemented Governmental Accounting Standards Board Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. 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 Washington State Auditor's Office 6 ---PAGE BREAK--- 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 9 through 27 and pension trust fund information on page 76 and information on post-employment benefits other than pensions on page 77 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 an opinion 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 22, 2009 Washington State Auditor's Office 7 ---PAGE BREAK--- Financial Section City of Kennewick Benton County January 1, 2008 through December 31, 2008 REQUIRED SUPPLEMENTAL INFORMATION Management’s Discussion and Analysis – 2008 BASIC FINANCIAL STATEMENTS Statement of Net Assets – 2008 and 2007 Statement of Activities – 2008 and 2007 Balance Sheet – Governmental Funds – 2008 and 2007 Statement of Revenues, Expenditures and Changes in Fund Balance – Governmental Funds – 2008 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities – 2008 Statement of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual – General Fund – 2008 and 2007 Statement of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual – Community Development Fund – 2008 and 2007 Statement of Net Assets – Proprietary Funds – 2008 and 2007 Reconciliation of the Statement of Net Assets – Proprietary Funds – to the Statement of Net Assets – Business-Type Activities – 2008 Statement of Revenues, Expenses and Changes in Fund Net Assets – Proprietary Funds – 2008 and 2007 Reconciliation of the Statement of Revenues, Expenses and Changes in Fund Net Assets of Proprietary Funds to the Statement of Activities – Business Type Activities – 2008 Statement of Cash Flows – Proprietary Funds – 2008 and 2007 Statement of Fiduciary Net Assets – Fiduciary Funds – 2008 and 2007 Statement of Changes in Fiduciary Net Assets – Fiduciary Funds – 2008 and 2007 Notes to Financial Statements – 2008 REQUIRED SUPPLEMENTAL INFORMATION Firemen’s Pension Fund – 2008 Other Postemployment Benefits – 2008 SUPPLEMENTAL INFORMATION Schedule of Expenditures of Federal Awards – 2008 Notes to the Schedule of Expenditures of Federal Awards – 2008 Washington State Auditor's Office 8 ---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, 2008. The information presented within this overview should be considered in conjunction with our letter of transmittal and the City’s financial statements immediately following this analysis. Financial Highlights  The assets of the City of Kennewick exceeded its liabilities at December 31, 2008 by $297,980,568 (net assets). Of this amount, $19,485,977 (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, 2008 are earmarked by City Council for projects that were scheduled to be completed during the 2007/2008 biennium, but will not be completed until 2009 or later in the 2009/2010 biennium.  The City’s total net assets increased by $10,347,177 in 2008. 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 $31,481,686 greater than the program revenues generated for governmental activities. Program revenues exceeded expenses by $1,974,138 for business-type activities.  As of December 31, 2008, the City of Kennewick’s governmental funds reported combined ending fund balances of $20,797,348, a decrease of $6,857,203 in comparison with the prior year. Approximately 50 percent of this total amount, $10,370,023, represents unreserved fund balance. A significant portion of unreserved fund balance (approximately 35 percent) is needed to meet Council policies that require a minimum fund balance (reserve) in the general fund and cash reserve fund. In addition, a portion of unreserved fund balance as of December 31, 2008 is also earmarked by City Council for projects that were scheduled to be completed during the current 2007/2008 biennium, but will not be completed until 2009.  As of December 31, 2008, unreserved fund balance for the general fund was $1,154,640, or 3 percent of total general fund expenditures and 2.8 percent of total operating fund expenditures (general and street fund), which did not meet the City’s budgetary policy of maintaining fund balance equal to 5 percent of annual operating expenditures for these funds. Additionally, a portion of the unreserved fund balance ($250,400) was designated by management for anticipated retroactive personnel costs for 2008 that will likely be paid during 2009. However, fund balance in the City’s cash reserve fund remained at $2,500,000 as of December 31, 2008. Together these fund balances represent approximately 9 percent of 2008 operating fund expenditures.  The City of Kennewick’s total capital assets increased by $16,340,097 during the year ended December 31, 2008. This increase reflects the tremendous amount of new infrastructure and other capital projects that were either in progress at year-end or completed during the year. These capital projects were funded utilizing a combination of private and public resources. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City of Kennewick’s basic financial statements and as a tool to assist users in their interpretation of them. The City of Kennewick’s basic financial statements are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Washington State Auditor's Office 9 ---PAGE BREAK--- 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. This comparison provides readers with a better understanding of the long-term impacts of near-term financing decisions. Both the governmental balance sheet and governmental fund statement of revenues, expenditures and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City of Kennewick maintains sixteen individual governmental funds. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balance for the general fund, community development fund and the capital improvement fund, all of which have been determined to be major funds. Data from the other governmental funds is combined into a single, aggregated presentation. 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 four enterprise funds to account for its water and sewer utility, ambulance service, building inspection function and coliseum facility operations. Internal service funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the City, or to other governmental units on a cost-reimbursement basis. The Washington State Auditor's Office 10 ---PAGE BREAK--- 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. 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. 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, 2008, the City of Kennewick’s assets exceeded liabilities by $297,980,568. The following is a condensed version of the City’s statement of net assets for the years ended December 31, 2008 and 2007, respectively. Washington State Auditor's Office 11 ---PAGE BREAK--- 2008 2007 2008 2007 2008 2007 Assets Current assets 30,661,514 $ 33,439,180 $ 2,467,373 $ 2,071,416 $ 33,128,887 $ 35,510,596 $ Capital assets 190,901,968 178,653,791 127,735,642 123,643,722 318,637,610 302,297,513 Other noncurrent assets 7,506,024 13,515,285 6,090,339 6,977,042 13,596,363 20,492,327 Total assets 229,069,506 $ 225,608,256 $ 136,293,354 $ 132,692,180 $ 365,362,860 $ 358,300,436 $ Liabilities Current liabilities 6,590,303 $ 6,147,760 $ 3,766,140 $ 3,888,738 $ 10,356,443 $ 10,036,498 $ Noncurrent liabilities 27,658,240 30,213,856 29,367,609 30,416,691 57,025,849 60,630,547 Total liabilities 34,248,543 36,361,616 33,133,749 34,305,429 67,382,292 70,667,045 Net Assets Invested in capital assets, net of related debt 164,906,436 155,629,277 97,410,593 91,905,177 262,317,029 247,534,454 Restricted 11,273,661 12,181,269 4,903,901 6,077,041 16,177,562 18,258,310 Unrestricted (deficit) 18,640,866 21,436,094 845,111 404,533 19,485,977 21,840,627 Total net assets 194,820,963 189,246,640 103,159,605 98,386,751 297,980,568 287,633,391 Total liabilities and net assets 229,069,506 $ 225,608,256 $ 136,293,354 $ 132,692,180 $ 365,362,860 $ 358,300,436 $ City of Kennewick Net Assets Governmental Activities Business-Type Activities Total The majority of the City of Kennewick’s net assets (88 percent) reflects 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, which is $56,320,581. These capital assets are used to provide services to citizens and therefore, it should be noted that these assets are not available for future spending. In addition, it should also be noted that although the City of Kennewick’s investment in its capital assets is reported net of related debt, other resources will be drawn upon to repay this debt, since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the City of Kennewick’s net assets (5.4 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 $19,485,977 may be used to meet the government’s ongoing obligations to citizens and creditors. However, a significant portion of unrestricted net assets as of December 31, 2008 is earmarked by City Council for future projects and other needs of the City for 2009, the first year of the 2009/2010 biennium. As of December 31, 2008, 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 three categories. Business-type activities reported only $845,111 in unrestricted net assets. This relatively low overall balance is attributable to a deficit in the unrestricted net assets for the coliseum business-type activity, which is primarily the result of the fact that the City utilized an interfund loan to finance the acquisition of its coliseum facility, as opposed to external debt. The outstanding balance of this interfund loan, which is just under $5.5 million, is not considered capital related debt under generally accepted accounting principles for purposes of calculating the net assets category of invested in capital, net of related debt. Instead, the interfund loan balance reduces unrestricted net assets, despite the fact that the purpose of the interfund loan was to finance a capital purchase. As mentioned in the financial highlights section of this analysis, the City’s net assets increased by $10,347,177 overall for the year ended December 31, 2008. The majority 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. Washington State Auditor's Office 12 ---PAGE BREAK--- Governmental activities increased the City of Kennewick’s net assets by $5,574,323 during the year ended December 31, 2008, which equates to 54 percent of the overall increase of $10,347,177 for the government as a whole. The prior year’s change in net assets resulting from governmental activities was $11,601,970. Key elements of the current year’s increase in net assets and changes relative to the prior year follow.   Program revenues increased by approximately $3.5 million during 2008 as the result of an increase in capital grants and contributions received in 2008. This increase was driven by a large increase in developer contributions related to residential and commercial development early in 2008 including right of way and infrastructure.  On a full accrual basis, tax revenues increased by only 1.6 percent in 2008 when compared to 2007, which equates to a total increase of just under $592,000. This overall increase consisted of increases of 8.9 percent increase in property tax revenues, .9 percent in sales tax revenues, and 4.1 percent increase in utility tax revenues, which were offset by decreases of 24.5 percent in real estate excise tax and 6.8 percent in other taxes. The increase in property tax revenue for 2008 was primarily the result of $113 million in new construction and $166 million in annexed areas added to the City’s assessed valuation in 2007 for the 2008 tax levy. The minor growth in sales tax revenue generated during the 2008 calendar year was primarily attributable to continued economic development efforts that resulted in new businesses opening within the City during the year. Without the sales tax revenue generated from these new businesses, Washington State Auditor's Office 13 ---PAGE BREAK--- retail activity within the City’s existing sales tax base actually decreased during the year, most likely as a result of the impact that the national recession had on the local economy in the latter half of the year. Retail sales activity within the City of Kennewick decreased in each of the last seven months of 2008 when compared to 2007. Utility tax revenues generated in 2008 experienced slight growth despite declines in utility tax revenues generated from sales of natural gas and electricity, both of which were the result of rate decreases implemented during the year. These decreases were offset by a double digit increase in utility tax generated from the sale of telephone services and more minor increases in cable and garbage collection services during the year. Sales of residential and commercial properties began to decline considerably in the second half of 2008, resulting in a 24.5 percent reduction in real estate excise tax during the year. This is again attributable to the impact of the national recession on the local economy in the latter half of 2008. Revenue generated from other tax sources decreased by 6.8 percent, or roughly $220,000, during 2008 as a result of a decrease in gambling tax revenues, offset by a minor increase in lodging tax revenues. Gambling tax revenues declined due to a reduction in taxes from one of the City’s larger casinos. Gambling taxes continue to be a very volatile tax revenue for the City due to the fact that overall gambling activity in the region tends to remain fairly consistent but does shift between Kennewick and its neighboring cities based on the newly opened or remodeled casinos in each area. Lodging tax revenues increased as a direct result of increased activity in the City’s hotels and reflects an increase in tourism activity during 2008, primarily during the first half of the year.  In 2007, approximately $2.4 million in revenue was generated from the sale of 2 large parcels of city owned land. This was a non-recurring revenue source for the City and as such, no revenue was generated in 2008.  Unrestricted investment earnings decreased by 28.7 percent in 2008 when compared to 2007, or approximately $458,000. This increase is directly tied to interest rates available for the City’s investments, which were significantly lower during 2008 than 2007. 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 2.68 percent during 2008, compared to 5.1 percent for 2007. 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.  Expenses within governmental activities increased by $6,412,272 in 2008 relative to 2007, which equates to a 15 percent increase. The major factors leading to this overall increase follow. Three of the City’s public safety bargaining units, as well as the City’s Operating Engineer bargaining group, received wage increases for 2008 under the terms of their respective collective bargaining agreements. These increases, coupled with the increase in salary and wage expense associated with a cost of living adjustment that was provided to non-represented employees, resulted in a moderate increase in the City’s overall salary and wage expenses in 2008. Expenses for personnel benefits within governmental activities also increased significantly in 2008 as a result of large increases in employer retirement contribution and medical insurance costs. In July of 2008, employer contribution rates for the Public Employees Retirement System (PERS) retirement system increased by over 35 percent. At that same time, the employer contribution rate for the Law Enforcement Officers’ and Firefighters’ (LEOFF) 2 retirement system also experienced a minor increase of approximately 2 percent. These rate increases resulted in an overall increase of just less than 19 percent in retirement expenses during 2008. Expenses for medical insurance increased during 2008 as a Washington State Auditor's Office 14 ---PAGE BREAK--- result of a double-digit increase in the City’s individual and aggregate stop loss insurance premium and claims trends from the previous 12 months that resulted in projections for significant increases in future medical and prescription costs. As a result of these items, the City was forced to increase its self-insured composite premium by approximately 11.5 percent effective August 1st. This increase followed a 40 percent increase made during August of 2007 for premiums through July of 2008, which resulted in a significant increase in medical costs for 2008. Finally, intergovernmental expenses, which primarily consist of the City’s expenses for its jail and district court services, increased significantly in 2008. The City’s costs for both of these items are based on formulas that allocate the total costs for each service to each participating agency based on utilization. For 2008, the City’s utilization of each service did not fluctuate significantly. However, the total costs incurred by the administering agency to provide these services did increase and the City’s share of these expenses increased proportionately.  Net transfers made from governmental activities to business-type activities increased by approximately $841,000 in 2008. This net increase was attributable to an increase in transfers to the coliseum business-type activity and decreases in the amounts transferred from the City’s water and sewer, building safety and medical services business-type activities to governmental activities for their contributions towards citywide projects. These changes were offset by a reduction in transfers to the medical services business-type activity from governmental activities to subsidize operations and a non-recurring transfer from the water and sewer business-type activity to replenish a reserve established for future sewer back-up costs. The transfer from the general fund (governmental activities) to the coliseum business-type activity for operations increased by just over $162,000 in 2008. This increase was the result of an $88,750 transfer that was made early in 2008 to cover a budget deficit for the facility from 2007 and a similar increase to the 2008 subsidy amount based on revised projections for event revenues and operating costs of the facility. Additionally, transfers from the City’s capital improvement and park development funds (governmental activities) increased by approximately $458,000 to fund a series of critical capital improvement projects at the facility that were completed during the year. During 2008, transfers in to governmental activities from the water and sewer, medical services and building safety business-type activities decreased by just less than $593,000. This decrease was attributable to several one-time transfers that were completed in 2007 to partially fund a land purchase, a citywide records management project and a city hall remodeling project. Transfers from the general fund (governmental activities) to the medical services business-type activity to subsidize its operations decreased by approximately $296,000 in 2008 after City Council authorized the formation of an ambulance utility and a ambulance utility charge that became effective on April 1, 2008. At this same time, fees for an ambulance transport were also reduced significantly. These changes were designed to generate the net revenue the City lost in 2004 when the Washington State Supreme Court ruled that the City’s previous utility charge was an invalid tax and in turn reduce the required subsidy from the general fund back to a level similar to 2004 as well. After implementing these changes on April 1, 2008, the City was able to recoup about 75 percent of the revenue it expected to recover in a full year and the transfer for operations from the general fund was reduced accordingly. Finally, transfers in to governmental activities from the water and sewer business-type activity increased by approximately $75,000 in 2008 as a result of a one-time transfer to replenish a reserve established for future claims related to damages resulting from sewer back-ups that are the responsibility of the City. Washington State Auditor's Office 15 ---PAGE BREAK--- The chart below illustrates the surplus or net subsidy required for different governmental programs. The illustration clearly shows that all governmental programs, with the exception of transportation, were reliant on tax revenues in 2008 to cover the shortfall of program revenues available to cover the costs of providing service to Kennewick’s citizens. The excess of program revenues over expenses for the transportation program in 2008 is attributable to capital contributions of right of way and infrastructure from developers of nearly $7.1 million during the year. However, 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. $0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 General government Public safety Transportation Physical environment Economic environment Culture and recreation Interest on long- term debt Expenses and Program Revenues - Governmental Activities Expenses Program revenues The graph below illustrates different components of the City of Kennewick’s revenues from governmental activities. As the graph illustrates, taxes are the major revenue source, making up approximately 67 percent of the total revenues that support governmental activities. Program revenues, which include charges for services provided as well as operating and capital contributions from external parties, are also a large source of revenue used to support governmental activities, making up approximately 31 percent of total revenues. Washington State Auditor's Office 16 ---PAGE BREAK--- Charges for services $5,026,526 8.8% Operating grants and contributions $4,042,873 7.1% Capital grants and contributions $8,729,387 15.3% Sales taxes $13,867,829 24.3% Utility taxes $9,975,148 17.5% Property taxes $9,741,527 17.1% Real estate excise taxes $1,516,920 2.7% Lodging taxes $1,096,392 1.9% Gambling taxes $885,084 1.6% Other taxes $1,041,658 1.8% Unrestricted investment earnings $1,135,612 2.0% Revenue by Source -Governmental Activities Business-type activities contributed to the City of Kennewick’s net assets by $4,772,854 for the period ended December 31, 2008, accounting for roughly 46 percent of the growth in the City’s net assets. The graph presented below illustrates the excess of program revenues over expenses or expenses in excess of program revenues for each of the City’s business-type activities. Key elements of the current year increase in net assets and changes relative to the prior year follow. $0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 General government Public safety Transportation Physical environment Economic environment Culture and recreation Interest on long- term debt Expenses and Program Revenues - Governmental Activities Expenses Program revenues Washington State Auditor's Office 17 ---PAGE BREAK---  The largest component of revenues for business-type activities, charges for services, increased 2.6 percent in 2008. The water and sewer business-type activity, which contributes most significantly to this revenue category when looking at business-type activities as a whole, experienced an overall increase of approximately 1.8 percent in 2008. This increase was attributable to a .8 percent increase in the number of water and sewer accounts and the revenue generated from an automatic 3.7 percent increase in rates effective in 2008 based on CPI, which was partially offset by a reduction in rate revenue from county customers that were annexed into the City mid-way through 2007. At that time, the surcharge these utility customers paid for water and sewer services was eliminated. Within the medical services business-type activity, charges for services increased by 24 percent overall during 2008. This increase was the result of a new utility charge that was implemented on April 1, 2008 and designed to generate the net revenue the City lost in 2004 when the Washington State Supreme Court ruled that the City’s previous utility charge was an invalid tax. The revenue generated from this new charge from April through December of 2008, coupled with a moderate increase in revenue generated from emergency ambulance transports during the year, resulted in a significant increase in program revenue for the medical services business-type activity in 2008. Charges for services in the building safety business-type activity decreased by 21.2 percent in 2008 as a result of a 16 percent decrease in the number of building permits issued during the year and a 29.6 percent decrease in the value of those permits. The most significant decline was within the category of single family dwellings, which experienced a 30.9 percent decline in the number of permits issued and a 28.4 percent decline overall in the valuation of permits issued. Finally, revenues generated from charges for services were relatively unchanged within the coliseum business-type activity in 2008, despite a decline in the rent revenue generated from events at the facility. This reduction in rent revenue was offset by an increase in the amount of sponsorship revenue generated during the year.  Capital grants and contributions for business-type activities increased by $1.8 million in 2008. The water and sewer business-type activity accounts for all of the capital grants and contributions revenue within the City’s business-type activities. The current year’s increase in this category was attributable to developer contributions in the form of water and sewer infrastructure for new residential and commercial development received primarily in the first half of 2008.  Business-type expenses increased by $1,326,253 overall when compared to 2007, which equates to an increase of 6.8 percent. Expenses for the City’s water and sewer business-type activity increased by $891,905 in 2008, which equated to a 7.1 percent increase. This change was partially attributable to increases in personnel costs for water and sewer employees including negotiated wage increases for contract employees and cost of living wage adjustments provided to non-represented employees, increases in employer retirement contribution rates and medical insurance premium increases. Additionally, depreciation expense increased significantly for the water and sewer business-type activity in 2008 after several large capital projects, including the City’s new water treatment facility, were added as capital assets in 2007, which resulted in the first full year of depreciation in 2008. Expenses for the medical services business-type activity increased during the year by $447,091, or 15 percent. This change was partially attributable to increases in benefit costs for firefighter personnel stemming from increases in employer retirement contribution rates and medical insurance premiums. Additionally, bad debt expense incurred on third party billings for ambulance transports also increased during the year. Washington State Auditor's Office 18 ---PAGE BREAK--- Expenses for the building safety business-type activity increased by $121,865, or 12.6 percent, in 2008 as a result of an increase in personnel costs associated with reallocating a full Captain Inspector position’s salary and benefit costs to this activity that were previously only partially charged to the building safety business-type activity. Additionally, wage costs for building safety employees increased as a result of a cost of living adjustment provided to non-represented employees and benefit costs for retirement and medical insurance increased during the year as well. Expenses for the coliseum business-type activity decreased by $134,608, or 4.6 percent during 2008, which was almost entirely attributable to a decrease in labor costs and expenses for non-capital improvements made to the facility during 2008. The following graph provides an illustration of the different components of the City of Kennewick’s revenues generated from business-type activities. Charges for service, which includes items such as charges for water and sewer services and ambulance services provided, are by far the largest source of revenues for business-type activities, making up 85.4 percent of total revenues. Charges for services $19,916,809 85.40% Operating grants and contributions $1,644 0.01% Capital grants and contributions $2,808,794 12.04% Unrestricted investment earnings 594,555 2.55% Revenue by Source - Business-type Activities Financial Analysis of the Government’s Funds As noted earlier, the City of Kennewick uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds focus on providing information on the City of Kennewick’s near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City’s financing requirements. In particular, unreserved fund balance may serve as a useful measure of the City’s net resources available for spending. As of December 31, 2008, the City of Kennewick’s governmental funds reported combined ending fund balances of $20,797,348, a decrease of $6,857,203 in comparison with the prior year. Approximately 49.9 percent of the total ending fund balance, or $10,370,023, constitutes unreserved fund balance. A significant portion of unreserved fund balance (approximately 35 percent) is needed to meet Council Washington State Auditor's Office 19 ---PAGE BREAK--- policies that require a minimum fund balance (reserve) in the general fund and cash reserve fund. The remainder of fund balance is reserved to indicate that it is not available for new spending because it has been committed; 1) to fund interfund advances made by governmental funds to other non-governmental funds ($5,490,709) for the purpose of purchasing the City’s coliseum facility and is being repaid over the next 17 years, 2) to fund capital projects using restricted resources ($4,848,438), and 3) for other restricted purposes ($88,178) such as grant programs. The general fund is the chief operating fund of the City of Kennewick. As of December 31, 2008, unreserved fund balance in the general fund was $1,154,640. Of this balance, $250,400 was designated by management for anticipated retroactive personnel costs for 2008 that will likely be paid during 2009. A common measure of the general fund’s liquidity is to compare unreserved fund balance to total fund expenditures. Unreserved fund balance represents 3 percent of total general fund expenditures for the year ended December 31, 2008, as compared to 4.7 percent for the year ended December 31, 2007. 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 decreased by $571,400 during 2008. 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 2008, revenues from taxes grew by approximately 4.7 percent within the general fund due to increases in property taxes, sales and use tax and utility taxes. Property taxes allocated to the general fund increased by roughly 8.7 percent, which was attributable to two primary factors. During 2008, the City Council authorized a one-time reallocation of $375,000 in property taxes to the general fund from the park development fund as part of a strategy to balance the City’s 2007/2008 budget within its operating (general and street) funds. This one-time reallocation accounted for roughly 56 percent of the increase in property tax revenues allocated to the general fund for 2008. Additionally, the City’s total 2008 property tax levy increased as a result of growth that occurred in the City during 2007. Roughly $113 million in new construction, $8 million in state assessed utility values and $166 million in assessed value for annexed areas were added to the City’s assessed valuation for the 2008 levy. Sales and use tax revenues receipted into the general fund increased by 4.4 percent in 2008 as a whole. This increase was partially driven by a change in policy that allowed for an increase of $140,000 in the amount of optional sales tax related to economic development receipted into the general fund for 2008. In addition, regular sales tax revenue increased by 2.25 percent in 2008 as a result of continued economic development efforts in addition to moderate growth in “base” retail activity within the City. 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 3.76 percent for the year. However, it is important to note that sales tax received in each of the last 5 months of the year actually decreased when compared to the prior year, most likely as a result of the impact of the national recession on local retail activity. Utility tax revenues increased by 3.3 percent overall in 2008 when including utility tax collected from the City’s water and sewer business-type activity. Utility tax collected on the sales of natural gas decreased by 13.0 percent during the year as a result of changes enacted by Cascade Natural Gas to its rates in November of 2007 that equated to an 18 percent reduction. Utility tax revenue generated from garbage collection services increased 1.8 percent in 2008, primarily due to inflationary increases in garbage collection service rates enacted for the year. Revenue collected for cable television and telephone utility tax increased by 2.8 percent and 16.7 percent, respectively during 2008. However, these increases are somewhat misleading as a major cable provider notified the City early in 2008 of a reporting error that resulted in telephone utility tax being remitted as cable television utility tax during most of 2007. After Washington State Auditor's Office 20 ---PAGE BREAK--- correcting for this error, the actual increases in cable television and telephone utility tax for the year were 10.9 percent and 13.5 percent, respectively. Electric utility tax, which is the City’s largest source of utility tax revenue, experienced a decrease of 4.0 percent in 2008. This decrease was the direct result of a 4.0 percent decrease in Benton PUD electric rates in January of 2008, followed by two temporary rate decreases of 6.9 percent in June and 9.5 percent in November. Both of these temporary rate decreases are related to one-time payments received from Bonneville Power Administration (BPA) as a settlement over litigation associated with its residential exchange program for private utilities and will expire in May of 2009. These rate decreases were partially offset by an increase in consumption during the year.  Revenues in the charges for services category increased by 1.6 percent in 2008. This increase is partially attributable to an increase in revenue received from contracts between the City of Kennewick and the Kennewick School District for school resource officers and instructors at Tri-Tech. These contracts increased in 2008 to reflect increases in the City’s personnel costs for these positions. Additionally, revenue generated from reimbursements from the State and Federal governments for firefighter responses to regional fire mobilizations also increased in 2008. However, additional expenditures for the overtime and travel costs associated with these responses were also incurred during the year. These increases were partially offset by a reduction in the revenue received in the general fund from the park development fund as a reimbursement for personnel costs paid from the general fund for staff time spent designing and managing capital park projects.  Expenditures for personnel services increased 3.0 percent in 2008. This increase is primarily the result of negotiated pay increases for the City’s union personnel and cost of living adjustments for its non- represented employees. However, it is important to note that the City’s Firefighter union completed all of 2008 under the terms of a collective bargaining agreement that expired at the close of 2007. When a new contract that covers 2008 is completed, it will likely include retroactive payment for the year. As a result, a portion of the ending fund balance as of December 31, 2008, was designated in anticipation of this retroactive payment, which would likely occur in 2009.  Personnel benefits increased by 16.8 percent in 2008 as the result of significant increases in the cost of retirement contributions, medical benefits and industrial insurance, which were somewhat offset by a reduction in expenditures for dental benefits during the year. In July of 2008, employer contribution rates for the PERS retirement system increased by over 35 percent. At that same time, the employer contribution rate for the LEOFF 2 retirement system also experienced a minor increase of approximately 2 percent. These rate increases resulted in an overall increase of just less than 19 percent in retirement expenditures during 2008. In addition to retirement contribution rate increases, the City also experienced a significant increase in medical costs during 2008. As a result of a double-digit increase in the City’s individual and aggregate stop loss insurance premium when it was renewed in August of 2008, and claims trends from the previous 12 months that resulted in projections for significant increases in future medical and prescription costs, the City was forced to increase its self-insured composite premium by just under 11.5 percent effective in August of 2008. Unfortunately, this increase followed a 40 percent increase in August of 2007. As a result, the City’s medical costs increased significantly during 2008. Expenditures for industrial insurance (workers’ compensation) also increased in 2008 relative to 2007. This increase was primarily attributable to a six-month partial rate holiday that was enacted by the State for the 2nd half of 2007 in an effort to give employers back excess reserves that had been accumulated over the course of several years. This rate holiday expired on January 1, 2008, resulting in higher costs for industrial insurance for the year. Expenditures for dental insurance decreased by approximately 20 percent in 2008 as a direct result of a reduction in the composite premium charged to departments for their employees. The City Washington State Auditor's Office 21 ---PAGE BREAK--- moved to a new third-party provider for its self-insured dental plan beginning in 2008. The choice was based on the new providers ability to negotiate deeper discounts with providers, which is beneficial to both employees and the City. As a result of this change, projected costs for the year were greatly reduced, which allowed the City to make a corresponding reduction in its composite premium. However, it should be noted that actual claims expenditures for the year exceeded the original projections utilized to calculate the 2008 premium, which resulted in the City using some of the excess reserves available for its self-insured dental plan to pay for claims.  Transfers out, which is another major expenditure of the general fund, increased by 12.3 percent, or $248,000 in 2008 as a result of several factors. Interfund transfers made to the land and facilities division of the capital improvement fund increased by $321,490 in 2008. Several major City facility projects were completed or were underway during 2007 that were not funded with this interfund transfer including the remodel of the Dan Frost Municipal Complex and City Hall. As a result, nearly all of the other facility improvement projects budgeted for the 2007/2008 biennium, and the corresponding interfund transfer from the general fund, were deferred until 2008. Interfund transfers to the capital improvement fund for the City’s police station, Hansen software project and e-timecard project increased in 2008 as a result of the timing of these projects. Because the bulk of the costs associated with these projects were incurred during 2008, the corresponding transfers from each fund that contributed to the projects also occurred during the year. Interfund transfers to the Toyota Center (coliseum fund) also increased in 2008 by approximately $162,000. This increase was the result of an $88,750 transfer that was made early in 2008 to cover a budget deficit for the facility for 2007. Additionally, the 2008 subsidy was increased to better reflect projected event revenues and operating costs of the facility. Operating transfers to the firemen’s pension fund increased by $50,000 in 2008 as a result of increased medical costs for firefighters that retired under the LEOFF 1 or Fire Pension Act retirement systems. Under these state retirement plans, the City is obligated to pay the medical costs for these retirees for life. The increases in interfund transfers outlined above were partially offset by a decrease in the amount of the interfund transfer made to the medical services fund for the year. Early in 2008, City Council authorized the formation of an ambulance utility and a ambulance utility charge effective April 1, 2008. At this same time, ambulance transport fees were also reduced significantly. These changes were designed to generate the net revenue the City lost in 2004 when the Washington State Supreme Court ruled that the City’s previous utility charge was an invalid tax and also to reduce the required subsidy from the general fund to a level similar to 2004 as well. As a result of implementing these changes, the subsidy requirement from the general fund decreased significantly in 2008 when compared to 2007. The community development fund has a total fund balance of $117,118, of which $88,178 is reserved for grant related projects. Fund balance increased by only $265 for the year ended December 31, 2008 in the fund, which is attributable to program expenditures that match grant revenues for the year. The capital improvement fund has a total fund balance of $12,345,889, of which $9,542,919 is reserved for advances to other funds or specific capital projects as spelled out in grant or loan agreements. Fund balance decreased by $4,571,050 for the year, primarily due to expenditures in 2008 to complete the City’s new police station, which was funded with proceeds from a $9.79 million bond issue that was completed during 2006. The proprietary funds of the City of Kennewick are utilized to account for operations of the City that are commercial in nature and are accounted for in a manner more similar to private enterprise. The Washington State Auditor's Office 22 ---PAGE BREAK--- 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 $105,842,890 as of December 31, 2008, which was an increase of $5,351,018 for the year. Of this total, $97,410,593 represented investment in capital, net of related debt and $4,903,901 was restricted for capital projects and debt service, leaving unrestricted net assets of $3,528,396. As outlined within the discussion of business-type activities earlier in this report, the unrestricted net assets 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 funds, had total net assets of $101,953,171 and $3,494,232, respectively, as of December 31, 2008. The water and sewer fund’s net assets consist of $88,542,778 in invested in capital assets, net of related debt, $4,903,901 in restricted net assets for capital projects and debt service, and $8,506,492 in unrestricted net assets. The coliseum fund’s net assets consist of $8,983,599 in invested in capital assets, net of related debt and a deficit of $5,489,367 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, 2008, marks the completion of the City’s 2007/2008 biennial budget cycle. Two budget adjustments were made to the City’s budget during 2008. 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 2008:  The addition of a $970,000 in property tax revenue based on a one-time reallocation of $375,000 in property taxes to the general fund from the park development fund that was authorized by City Council as part of a strategy to balance the City’s 2007/2008 budget within its operating (general and street) funds and increases in the 2007 and 2008 property tax levies as a result of growth that occurred in the City’s assessed valuation in the form of new construction and annexations.  The addition of $395,000 in cable television and telephone utility taxes based on revised projections for the 2007/2008 biennium.  The addition of $415,000 in traffic infraction penalty revenue based on revised projections for the 2007/2008 biennium.  An increase of $284,900 for revenue received from state and federal agencies as a reimbursement for overtime expenditures incurred for fire personnel responding to regional wild fires. This increase in revenue was accompanied by a corresponding increase in budgeted overtime and travel expenditures within the Fire Department.  An increase of $1.4 million for the City’s jail services costs for the 2007/2008 biennium based on revised projections that reflect increases in daily rates for the jail facility and the City’s usage of the jail during the biennium.  An increase in medical costs across all city departments within the general fund of $957,600 based on increases in both actual and projected claims costs and a corresponding increase in the City’s premiums for individual and aggregate stop loss insurance for the plan. Washington State Auditor's Office 23 ---PAGE BREAK---  An increase of $238,000 for the City’s district court costs for the 2007/2008 biennium based on revised projections for the biennium.  An increase of $268,102 for the City’s dispatch costs based on the actual assessments for 2007 and 2008. The 2007 assessment represented a significant increase when compared to the 2006 assessment, which was utilized to project the adopted 2007/2008 budget for dispatch services.  An increase of $158,750 in the budgeted operating transfer (subsidy) from the general fund to the City’s coliseum fund based on the facility’s actual operating deficit for 2007 and the revised projected operating deficit for 2008.  A decrease in multiple line-item budgets across all city departments totaling $716,000 completed as part of a strategy to balance the City’s 2007/2008 budget within its operating (general and street) funds. At the close of 2008, general fund revenues were 98.2 percent of the amounts budgeted for the biennium. Actual expenditures in the general fund for the biennium were at 99.3 percent of the adjusted budget. The City’s general fund’s ending fund balance as of December 31, 2008 was $1,154,640, which is lower than the budgeted ending fund balance for the 2007/2008 biennium and did not meet the City’s budgetary policy to maintain an ending fund balance of at least 5 percent of annual operating expenditures. However, 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 9.2 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, 2008, amounts to approximately $318,638,000 (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 5.4 percent for the year (a 6.9 percent increase in governmental activities and a 3.3 percent increase in business-type activities). 2008 2007 2008 2007 2008 2007 Land 72,067 $ 67,230 $ 2,988 $ 2,115 $ 75,055 $ 69,345 $ Buildings 28,980 15,050 117,906 116,126 146,886 131,176 Improvements other than buildings 5,954 6,188 - - 5,954 6,188 Infrastructure 61,498 50,526 - - 61,498 50,526 Equipment 6,086 5,054 3,796 3,989 9,882 9,043 Construction in progress 16,317 34,606 3,017 1,385 19,334 35,991 Intangibles - - 29 29 29 29 Total capital assets 190,902 $ 178,654 $ 127,736 $ 123,644 $ 318,638 $ 302,298 $ (In thousands) Activities Activities Government City of Kennewick Capital Assets, net of depreciation Total Governmental Business-type 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 major projects to reconstruct a portion of Gage Boulevard and to construct an extension of Steptoe Street from Gage to Clearwater. Construction in progress for these projects and various other street projects was approximately $8.5 million as of December 31, 2008. Washington State Auditor's Office 24 ---PAGE BREAK---  Construction was completed on the City’s new police station was completed during the year. This project was funded with proceeds from limited tax general obligation bonds issued by the City in 2006.  Work was completed on the initial phase of the City’s softball complex project during 2008. The initial phase of this project consisted of 2 ball fields and a modular restroom, as well as site preparation for future expansion. This project was funded with proceeds from limited tax general obligation bonds issued by the City in 2003.  Construction continued on the water and sewer business-type activity’s $6.6 million ranney well improvement project. Additionally, design work began on the City’s $9.6 million wastewater treatment plant project. Additional information about the City’s capital assets can be found in note 6 of this report. Long-term debt: As of December 31, 2008, the City of Kennewick had total outstanding external debt of $58,397,679 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, 2008 and 2007, respectively. 2008 2007 2008 2007 2008 2007 General obligation bonds 20,890,000 $ 22,250,000 $ - $ - $ 20,890,000 $ 22,250,000 $ Notes and loans 7,182,630 8,138,221 30,143,634 31,509,990 37,326,264 39,648,211 Capital leases - 136,131 181,415 228,556 181,415 364,687 28,072,630 $ 30,524,352 $ 30,325,049 $ 31,738,546 $ 58,397,679 $ 62,262,898 $ City of Kennewick Outstanding Debt As of December 31, Activities Activities Totals Governmental Business-type The City of Kennewick’s total debt decreased by $3,865,219 (6.2 percent) during the year ended December 31, 2008. Activity within governmental activities consisted almost entirely of repayment of the City’s outstanding general obligation bonds, notes, loans and capital leases payable. The City incurred $1.1 million in new debt within its business-type activities during the year, which consisted of proceeds from a state public works trust fund loan used to fund the expansion of the City’s water treatment plant. The City last issued bonds in February of 2006. At that time, the City of Kennewick received an A3 underlying rating from Moody’s on its outstanding limited tax general obligation debt. In addition, Moody’s also affirmed an A2 rating on the City’s outstanding unlimited tax general obligation debt at that time. 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, 2008, the City had $41,776 million in non-voted capacity and $84.020 million in voted capacity. Additional information on the City of Kennewick’s long-term debt can be found in note 9 of this report. Washington State Auditor's Office 25 ---PAGE BREAK--- 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, 2008 marked the completion of the City’s 2007/2008 budget cycle. Like many cities located in the State of Washington and across the nation, the City of Kennewick is dealing with significant ongoing budgetary challenges within its operating budget. The recent downturn in the nation’s economy, coupled with the ongoing impacts of citizen initiatives and unfunded mandates from both the federal and state governments, have all contributed to the City’s single biggest budgetary challenge, which is general fund revenues that fall short of meeting the service level expectations of our citizens. The financial results for 2008 reflect the impacts of these challenges on the City’s budget in all funds and reinforce the important role that growth revenues have on the City’s ability to continue to maintain its existing service levels. With the anticipated infusion of an additional $2 billion into the Hanford area budget as a result of the 2009 Economic Stimulus Bill, there is a solid basis for optimism as the City moves into the 2009/2010 biennium. However, if the local economy does not respond quickly to this infusion, the City may be faced with the near-term challenge of determining which of its programs receive continued funding and to what level of service they are funded. The following are key factors that may impact the City’s governmental activities in 2009 and for the remainder of the 2009/2010 biennium:  Although the City of Kennewick and the Tri-Cities as a whole has not been as severely affected by the national recession as other areas across the nation, the City is clearly not completely immune from the recession’s impacts based on the financial results for 2008. The local economy appears to be well positioned for the near future based on the continuation of consistent ongoing federal funding for Hanford in 2009 in conjunction with the additional one-time Economic Stimulus Bill funding for clean-up work at the site that was referred to earlier in this report. However, it will be vital for the City to begin receiving the growth revenues associated with this infusion of federal funding early within the 2009/2010 biennium in order to avoid having to make program reductions. In particular, trends in sales, utility and property tax receipts will continue to be critical due to the City’s dependence on these revenue sources, all of which are directly tied to the overall growth in our community.  In August of 2008, the City was required to increase the internal composite premium for its self- insured medical plan by approximately 11.5 percent based on an increase in the premium for its stop loss insurance and claims trends for the preceding year that indicated a likelihood of future increases. Unfortunately, this premium increase followed a 40 percent increase in August of the previous year. The combination of these two premium increases resulted in a significant budgetary shortfall within the City’s governmental activities and the City as a whole during the 2007/2008 biennium. These significant cost increases, along with very serious concerns about the accuracy of claims processing by the City’s third party administrator, prompted the City to make a decision to move to a more traditional PPO health plan administered by the Association of Washington Cities (AWC) Employee Benefits Trust effective January 1, 2009. Due to collective bargaining obligations, one of the City’s bargaining units will remain on the City’s self-insured plan for 2009. City Staff believes that moving to a more traditional health plan with a significantly larger pool of participants will help to minimize the risk and corresponding volatility in costs associated with its previous self-insured, consumer-driven plan. With medical insurance costs representing a larger portion of the City’s overall benefit expenses and budget as a whole each year, it is critical that the City find a way to minimize the impact of these costs on its budget.  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 possibility, particularly during the current Washington State Auditor's Office 26 ---PAGE BREAK--- national recession, and would have a significant impact on the City of Kennewick if they come to fruition. The following are some factors that may impact the City’s business-type activities in 2009 and for the remainder of the 2009/2010 biennium:  As mentioned earlier in this report, the City’s building safety business-type activity experienced a significant reduction in program (building permit) revenues during 2008 as the result of a 16 percent reduction in the number of building permits issued in 2008 and a 30 percent reduction in the valuation of those permits. In particular, building permits issued for single family residential dwellings, new commercial building construction and commercial improvements all experienced considerable reductions. These trends are primarily the result of the impacts of the national recession on the local economy in the latter half of 2008 and have a significant impact on the building safety business-type activity because of the fact that revenue from building permits is the activity’s sole program revenue source. City staff is cautiously optimistic that the infusion of economic stimulus funding into the Hanford site’s budget will result in a corresponding increase in both residential and commercial building activity within Kennewick. Without such an increase, the building safety business-type activity will likely be required to make program reductions or will require a 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 2009/2010 biennium is available upon request and can also be accessed on the City’s web site at http://www.ci.kennewick.wa.us/Support_Services/AdoptedBudget.asp. Requests for Information This financial report is designed to provide a general overview of the City of Kennewick’s finances. Questions concerning any of the information provided in this report or request for additional financial information should be addressed to the office of the Support Services Executive Director, City of Kennewick, 210 W. 6th Avenue, PO Box 6108, Kennewick, WA 99336. Washington State Auditor's Office 27 ---PAGE BREAK--- Governmental Business-type Activities Activities 2008 2007 2008 2007 ASSETS Current assets: Equity in pooled cash & investments 14,529,937 $ 8,527,276 $ 23,057,213 $ 24,116,014 $ 1,774,267 $ 1,706,967 $ Receivables, net 8,098,778 1,284,320 9,383,098 10,044,362 170,813 159,924 Internal balances 7,853,995 (7,853,995) - - - - Inventories 131,488 335,066 466,554 400,657 - - Prepaid items - 116,043 116,043 130,337 36,897 20,475 Restricted equity in pooled cash & investments 47,316 58,663 105,979 819,226 - - Total current assets 30,661,514 2,467,373 33,128,887 35,510,596 1,981,977 1,887,366 Noncurrent assets: Restricted equity in pooled cash & investments 6,138,007 6,090,339 12,228,346 18,851,625 - - Investment in joint ventures 1,368,017 - 1,368,017 1,640,702 - - Capital assets: Land and construction in progress 88,383,255 6,034,377 94,417,632 105,365,939 - - Depreciable capital assets - net 102,518,713 121,701,265 224,219,978 196,931,574 14,939,607 15,346,041 Total noncurrent assets 198,407,992 133,825,981 332,233,973 322,789,840 14,939,607 15,346,041 Total assets 229,069,506 $ 136,293,354 $ 365,362,860 $ 358,300,436 $ 16,921,584 $ 17,233,407 $ LIABILITIES Current liabilities: Accounts payable and accrued items 2,405,025 $ 634,002 $ 3,039,027 $ 3,186,728 $ 143,922 $ 123,269 $ Unearned revenue - 379,619 379,619 245,712 47,529 48,489 Other current liabilities 58,950 16,700 75,650 73,786 - - Current portion of long-term obligations 4,126,328 2,735,819 6,862,147 6,530,272 - - Total current liabilities 6,590,303 3,766,140 10,356,443 10,036,498 191,451 171,758 Noncurrent liabilities: Net pension obligation 315,459 - 315,459 333,845 - - Net post employment benefit obligation 156,776 - 156,776 - - - Noncurrent portion of long-term obligations 27,186,005 29,367,609 56,553,614 60,296,702 12,974,521 12,982,128 Total noncurrent liabilities 27,658,240 29,367,609 57,025,849 60,630,547 12,974,521 12,982,128 Total liabilities 34,248,543 33,133,749 67,382,292 70,667,045 13,165,972 13,153,886 NET ASSETS Invested in capital assets, net of related debt 164,906,436 97,410,593 262,317,029 247,534,454 2,109,607 2,516,041 Restricted for: Capital projects 8,117,058 3,743,627 11,860,685 12,883,249 - - Debt service 22,714 1,160,274 1,182,988 1,227,971 - - Grant programs 2,843,050 - 2,843,050 2,838,429 - - Other purposes 290,839 - 290,839 1,308,661 - - Unrestricted (deficit) 18,640,866 845,111 19,485,977 21,840,627 1,646,005 1,563,480 Total net assets 194,820,963 103,159,605 297,980,568 287,633,391 3,755,612 4,079,521 Total liabilities and net assets 229,069,506 $ 136,293,354 $ 365,362,860 $ 358,300,436 $ 16,921,584 $ 17,233,407 $ The accompanying notes are an integral part of this statement. Statement of Net Assets December 31, 2008 (with comparative totals for 2007) Totals Primary Government Component Unit Public Facilities District Washington State Auditor's Office 28 ---PAGE BREAK--- Operating Capital Charges for Grants and Grants and Governmental Business-type Functions/Programs Expenses Services Contributions Contributions Activities Activities 2008 2007 2008 2007 Primary government: Governmental activities: General government 7,203,903 $ 1,288,357 $ 199,518 $ 109,482 $ (5,606,546) $ - $ (5,606,546) $ (4,037,371) $ - $ - $ Public safety 24,161,484 2,122,047 834,219 - (21,205,218) - (21,205,218) (18,819,207) - - Transportation 8,033,491 32,523 2,109,549 8,603,342 2,711,923 - 2,711,923 446,875 - - Physical environment 1,693,773 984,807 - 7,753 (701,213) - (701,213) (803,806) - - Economic environment 1,633,463 86,946 831,321 - (715,196) - (715,196) (16,489) - - Culture and recreation 5,505,989 511,846 68,266 8,810 (4,917,067) - (4,917,067) (4,285,727) - - Interest on long-term debt 1,048,369 - - - (1,048,369) - (1,048,369) (1,083,271) - - Total governmental activities 49,280,472 5,026,526 4,042,873 8,729,387 (31,481,686) - (31,481,686) (28,598,996) - - Business-type activities: Water and Sewer 13,467,168 14,735,345 - 2,808,794 - 4,076,971 4,076,971 2,869,245 - - Medical Services 3,423,474 2,464,657 1,644 - - (957,173) (957,173) (986,916) - - Building Safety 1,091,083 883,230 - - - (207,853) (207,853) 151,303 - - Coliseum 2,771,384 1,833,577 - - - (937,807) (937,807) (1,070,703) - - Total business-type activities 20,753,109 19,916,809 1,644 2,808,794 - 1,974,138 1,974,138 962,929 - - Total primary government 70,033,581 $ 24,943,335 $ 4,044,517 $ 11,538,181 $ (31,481,686) $ 1,974,138 $ (29,507,548) $ (27,636,067) $ - $ - $ Component unit: Public Facilities District 2,283,165 880,002 79,004 - - - - - (1,324,159) (1,459,616) Total component unit 2,283,165 $ 880,002 $ 79,004 $ - $ - $ - $ - $ - $ (1,324,159) $ (1,459,616) $ General revenues: Property taxes 9,741,527 $ - $ 9,741,527 $ 8,946,701 $ - $ - $ Sales taxes 13,867,829 - 13,867,829 13,746,944 955,453 878,462 Utility taxes 9,975,148 - 9,975,148 9,586,440 - - Real estate excise tax 1,516,920 - 1,516,920 2,009,593 - - Privilege tax 551,689 - 551,689 540,610 - - Gambling excise tax 885,084 - 885,084 1,009,661 - - Lodging tax 1,096,392 - 1,096,392 1,010,628 - - Other taxes 489,969 - 489,969 682,315 - - Unrestricted investment earnings 1,135,612 594,555 1,730,167 2,149,365 44,796 79,132 Gain on sale of capital assets - - - 2,437,082 - - Transfers (2,204,161) 2,204,161 - - - - Total general revenues and transfers 37,056,009 2,798,716 39,854,725 42,119,339 1,000,249 957,594 Change in net assets 5,574,323 4,772,854 10,347,177 14,483,272 (323,910) (502,022) Net assets - beginning 189,246,640 98,386,751 287,633,391 273,150,119 4,079,522 4,581,543 Net assets - ending 194,820,963 $ 103,159,605 $ 297,980,568 $ 287,633,391 $ 3,755,612 $ 4,079,521 $ The accompanying notes are an integral part of this statement. Statement of Activities For the Year Ended December 31, 2008 (with comparative totals for 2007) 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 29 ---PAGE BREAK--- Balance Sheet Governmental Funds December 31, 2008 (with comparative totals for 2007) Other Community Capital Non-Major General Development Improvement Governmental Fund Fund Fund Funds 2008 2007 ASSETS Equity in pooled cash & investments 1,909,004 $ 46,919 $ 3,062,910 $ 6,297,904 $ 11,316,737 $ 11,577,328 $ Receivables (net of allowance for uncollectibles) 3,197,705 2,359,379 1,303,998 594,711 7,455,793 7,611,633 Due from other funds - - 5,490,710 - 5,490,710 5,875,257 Due from other governments 21,255 480,794 - 86,902 588,951 571,818 Restricted equity in pooled cash & investments - 92,190 4,402,806 829,863 5,324,859 11,735,647 Total assets 5,127,964 $ 2,979,282 $ 14,260,424 $ 7,809,380 $ 30,177,050 $ 37,371,683 $ LIABILITIES AND FUND BALANCES Liabilities: Accounts payable 995,931 $ 100,879 $ 237,082 $ 153,649 $ 1,487,541 $ 1,618,801 $ Due to other funds - - 320,000 - 320,000 400,000 Due to other governments 304 6,413 42,949 2,250 51,916 47,980 Deposits payable 58,950 - - - 58,950 53,486 Deferred revenue 2,918,139 2,754,872 1,270,880 470,088 7,413,979 7,579,737 Liabilities payable from restricted assets - - 43,624 3,692 47,316 17,128 Total liabilities 3,973,324 2,862,164 1,914,535 629,679 9,379,702 9,717,132 Fund balances: Reserved for: Advances - - 5,490,709 - 5,490,709 5,875,257 Capital improvements - - 4,052,210 796,228 4,848,438 10,520,607 Grant programs - 88,178 - - 88,178 88,855 Unreserved, designated for retro personnel costs 250,400 - - - 250,400 - Unreserved, undesignated reported in: General fund 904,240 - - - 904,240 1,726,040 Special revenue funds - 28,940 - 3,624,401 3,653,341 4,946,536 Debt service funds - - - 70,030 70,030 67,697 Capital projects funds - - 2,802,970 2,689,042 5,492,012 4,429,559 Total fund balances 1,154,640 117,118 12,345,889 7,179,701 20,797,348 27,654,551 Total liabilities and fund balances 5,127,964 $ 2,979,282 $ 14,260,424 $ 7,809,380 $ 30,177,050 $ 37,371,683 $ Total governmental fund balances 20,797,348 $ Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 186,891,639 Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred in the funds. 7,413,979 Internal service funds are used by management to charge the costs of fleet management, central stores and risk management to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net assets. 11,517,201 Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported in the funds. (31,799,204) Net assets of governmental activities 194,820,963 $ - $ The accompanying notes are an integral part of this statement. Total Governmental Funds Washington State Auditor's Office 30 ---PAGE BREAK--- Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the Year Ended December 31, 2008 (with comparative totals for 2007) Other Community Capital Non-Major General Development Improvement Governmental Fund Fund Fund Funds 2008 2007 REVENUES Taxes: Property 8,413,425 $ - $ - $ 1,244,776 $ 9,658,201 $ 8,985,679 $ Sales 9,725,428 - 4,220,837 - 13,946,265 13,623,826 Utility 7,716,794 - - 2,221,041 9,937,835 9,633,156 Real estate excise tax - - - 1,516,920 1,516,920 2,009,594 Gambling Tax 885,084 - - - 885,084 1,009,661 Lodging Tax - - - 709,095 709,095 678,436 Other 235,278 - - 611,266 846,544 999,859 Licenses and permits 487,225 - - - 487,225 516,951 Intergovernmental 1,694,908 826,023 7,753 3,324,115 5,852,799 8,829,998 Charges for services 4,285,889 - - 439,020 4,724,909 4,998,733 Fines and forfeitures 1,356,092 - - - 1,356,092 1,359,808 Investment earnings 277,400 2,190 362,814 238,804 881,208 1,265,779 Rents and leases 89,155 - 8,000 9,474 106,629 93,307 Miscellaneous revenues 230,044 - 58,753 23,133 311,930 269,186 Total revenues 35,396,722 828,213 4,658,157 10,337,644 51,220,736 54,273,973 EXPENDITURES Current : General government 7,339,845 - 458,496 290,798 8,089,139 7,188,182 Public safety 22,046,341 - 584,344 15,946 22,646,631 21,203,821 Transportation - - 1,100,181 2,468,167 3,568,348 2,436,115 Physical environment 1,692,066 - - - 1,692,066 1,757,805 Economic environment 737,618 830,447 - 12,272 1,580,337 1,311,467 Culture and recreation 4,016,705 - - 790,197 4,806,902 4,653,226 Debt service: Principal 136,130 - 959,704 1,360,000 2,455,834 2,548,892 Interest/issue costs 2,351 - 126,475 923,937 1,052,763 1,099,034 Capital outlay: General government 16,215 - 570,015 - 586,230 2,422,847 Public safety - - 4,135,972 - 4,135,972 5,369,095 Transportation - - 1,025,933 3,185,075 4,211,008 6,794,092 Economic environment - 7,362 - - 7,362 137,861 Culture and recreation - - 168,567 643,116 811,683 2,972,207 Total expenditures 35,987,271 837,809 9,129,687 9,689,508 55,644,275 59,894,644 Excess (deficiency) of revenues over (under) expenditures (590,549) (9,596) (4,471,530) 648,136 (4,423,539) (5,620,671) OTHER FINANCING SOURCES (USES) Transfers in 2,406,041 9,861 1,876,906 2,652,592 6,945,400 7,482,723 Transfers out (2,386,892) - (1,980,541) (5,015,746) (9,383,179) (8,943,751) Debt issuance and capital leases - - 4,115 - 4,115 615,854 Disposition of capital assets - - - - - 2,321,953 Total other financing sources (uses) 19,149 9,861 (99,520) (2,363,154) (2,433,664) 1,476,779 Net change in fund balances (571,400) 265 (4,571,050) (1,715,018) (6,857,203) (4,143,892) Fund balances - beginning 1,726,040 116,853 16,916,939 8,894,719 27,654,551 31,798,443 Fund balances - ending 1,154,640 $ 117,118 $ 12,345,889 $ 7,179,701 $ 20,797,348 $ 27,654,551 $ The accompanying notes are an integral part of this statement. Governmental Funds Total Washington State Auditor's Office 31 ---PAGE BREAK--- Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances - total governmental funds (6,857,203) $ 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 capital outlays exceeded depreciation in the current period. 4,196,319 The issuance of long-term debt bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amount are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items. 2,451,719 In the statement of activities, developer contributions are reported as income for the City based on the fair market value of these assets. 7,084,954 The statement of activities shows increases and (decreases) in joint venture notes. (272,685) Some revenues reported in the statement of activities do not provide current financial resources and, therefore, are not reported as revenues in governmental funds. (165,758) 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 governmental funds. (306,153) 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. (556,870) Change in net assets of governmental activities 5,574,323 $ The accompanying notes are an integral part of this statement. For the Year Ended December 31, 2008 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 32 ---PAGE BREAK--- Budget and Actual Original Final 2008 2007 REVENUES Taxes: Property 15,383,637 $ 16,095,699 $ 8,413,425 $ 7,742,989 $ 60,715 $ Sales 18,554,474 19,142,574 9,725,428 9,313,938 (103,208) Utility 15,645,471 16,040,471 7,716,794 7,471,060 (852,617) Gambling 1,333,401 1,823,056 885,084 1,009,661 71,689 Other 814,896 520,241 235,278 219,004 (65,959) Licenses and permits 1,130,715 1,130,715 487,225 516,951 (126,539) Intergovernmental 2,988,406 3,387,739 1,694,908 1,681,892 (10,939) Charges for services 8,045,477 8,462,947 4,285,889 4,220,141 43,083 Fines and forfeitures 2,296,134 2,711,134 1,356,092 1,359,808 4,766 Investment earnings 594,048 594,048 277,400 322,029 5,381 Rents and leases 191,793 191,793 89,155 84,197 (18,441) Miscellaneous revenues 202,788 437,728 230,044 180,747 (26,937) Total revenues 67,181,240 70,538,145 35,396,722 34,122,417 (1,019,006) EXPENDITURES Current : General government 13,367,066 14,081,047 7,339,845 6,590,021 (151,181) Public safety 40,833,005 43,433,400 22,046,341 21,161,659 (225,400) Physical environment 3,512,842 3,654,316 1,692,066 1,757,805 (204,445) Economic environment 1,515,895 1,545,177 737,618 737,592 (69,967) Culture and recreation 8,343,389 8,407,478 4,016,705 3,850,620 (540,153) Debt service: Principal 401,500 401,500 136,130 265,365 Interest/issue costs 13,945 13,945 2,351 11,595 1 Capital outlay: General government 352,979 239,339 16,215 42,334 (180,790) Public safety - 5,805 - 1,113 (4,692) Physical environment - - - - - Total expenditures 68,340,621 71,782,007 35,987,271 34,418,104 (1,376,632) Excess (deficiency) of revenues over (under) expenditures (1,159,381) (1,243,862) (590,549) (295,687) 357,626 OTHER FINANCING SOURCES (USES) Transfers in 4,996,037 5,091,870 2,406,041 2,347,094 (338,735) Transfers out (3,745,855) (3,641,762) (2,386,892) (2,138,611) (883,741) Proceeds from capital lease - - - - - Total other financing sources and uses 1,250,182 1,450,108 19,149 208,483 (1,222,476) Net change in fund balances 90,801 206,246 (571,400) (87,204) (864,850) Fund balances - beginning 1,838,198 1,813,244 1,726,040 1,813,244 - Fund balances - ending 1,928,999 $ 2,019,490 $ 1,154,640 $ 1,726,040 $ (864,850) $ The accompanying notes are an integral part of this statement. General Fund For the Years Ended December 31, 2008 and 2007 Variance with Final Budget - Over (Under) Statement of Revenues, Expenditures, and Changes in Fund Balances 2007/2008 Biennial Budgeted Amounts Actuals Washington State Auditor's Office 33 ---PAGE BREAK--- Budget and Actual Original Final 2008 2007 REVENUES Intergovernmental 1,611,480 $ 2,324,497 $ 826,023 $ 1,050,480 $ (447,994) $ Investment earnings - - 2,190 2,442 4,632 Total revenues 1,611,480 2,324,497 828,213 1,052,922 (443,362) EXPENDITURES Current: Economic environment 1,451,208 959,753 465,135 295,048 (199,570) Capital outlay: Economic environment - 887,734 372,674 271,937 (243,123) Total expenditures 1,451,208 1,847,487 837,809 566,985 (442,693) Excess (deficiency) of revenues over (under) expenditures 160,272 477,010 (9,596) 485,937 (669) OTHER FINANCING SOURCES (USES) Transfers in - - 9,861 - 9,861 Transfers out (200,000) (562,076) - (536,619) 25,457 Total other financing sources and uses (200,000) (562,076) 9,861 (536,619) 35,318 Net change in fund balances (39,728) (85,066) 265 (50,682) 34,649 Fund balances - beginning 80,044 167,535 116,853 167,535 - Fund balances - ending 40,316 $ 82,469 $ 117,118 $ 116,853 $ 34,649 $ The accompanying notes are an integral part of this statement. Budgeted Amounts Community Development Fund For the Years Ended December 31, 2008 and 2007 Variance with Final Budget - Over (Under) Statement of Revenues, Expenditures, and Changes in Fund Balances Actuals 2007/2008 Biennial Washington State Auditor's Office 34 ---PAGE BREAK--- Proprietary Funds December 31, 2008 (with comparative totals for 2007) Water and Sewer Coliseum Other Non- Major Enterprise Fund Fund Funds 2008 2007 2008 2007 ASSETS Current assets: Equity in pooled cash & investments 7,479,833 $ 531,341 $ 516,102 $ 8,527,276 $ 7,727,074 $ 3,213,200 $ 4,811,612 $ Receivables, net 739,220 178,196 366,904 1,284,320 1,437,900 50,160 375,031 Due from other funds 320,000 - - 320,000 400,000 - - Due from other governments - - - - 47,980 3,874 - Inventories 329,149 5,917 - 335,066 268,177 131,488 132,480 Prepaid items 38,944 77,099 - 116,043 130,337 - - Restricted equity in pooled cash & investments 58,663 - - 58,663 40,326 Total current assets 8,965,809 792,553 883,006 10,641,368 10,051,794 3,398,722 5,319,123 Noncurrent assets: Restricted equity in pooled cash & investments 6,090,339 - - 6,090,339 6,977,042 860,464 917,834 Capital assets: Land 1,705,093 1,282,641 - 2,987,734 2,114,819 - - Buildings and improvements 155,640,291 10,683,238 - 166,323,529 160,892,666 318,843 318,843 Equipment 7,122,921 2,645,131 224,842 9,992,894 9,911,728 12,485,246 11,073,772 Construction in progress 2,869,237 148,227 - 3,017,464 1,385,528 - - Less accumulated depreciation (48,651,129) (5,775,638) (159,212) (54,585,979) (50,661,019) (7,425,743) (6,981,171) Total noncurrent assets 124,776,752 8,983,599 65,630 133,825,981 130,620,764 6,238,810 5,329,278 Total Assets 133,742,561 $ 9,776,152 $ 948,636 $ 144,467,349 $ 140,672,558 $ 9,637,532 $ 10,648,401 $ LIABILITIES Current liabilities: Accounts payable 151,410 $ 384,137 $ 71,001 $ 606,548 $ 732,917 $ 728,850 $ 605,919 $ Due to other funds - 5,490,710 - 5,490,710 5,875,257 - - Accrued interest payable - 27,454 - 27,454 70,187 - - Compensated absences 121,904 - 157,964 279,868 291,015 43,765 30,311 Bonds, notes, and loans payable 2,357,645 - 49,153 2,406,798 2,528,607 - - Deposits payable 16,700 - - 16,700 20,300 - - Other current liabilities - 379,619 - 379,619 245,712 - - Total current liabilities 2,647,659 6,281,920 278,118 9,207,697 9,763,995 772,615 636,230 Noncurrent liabilities: Compensated absences 155,741 - 142,770 298,511 306,753 31,002 43,221 Due to other governments 27,785,990 - 132,261 27,918,251 29,209,938 - - Other noncurrent liabilities 1,200,000 - - 1,200,000 900,000 - - Total noncurrent liabilities 29,141,731 - 275,031 29,416,762 30,416,691 31,002 43,221 Total Liabilities 31,789,390 6,281,920 553,149 38,624,459 40,180,686 803,617 679,451 NET ASSETS Invested in capital assets, net of related debt 88,542,778 8,983,599 (115,784) 97,410,593 91,905,177 5,378,346 4,411,444 Restricted for: Capital projects 3,743,627 - - 3,743,627 4,916,768 - - Debt service 1,160,274 - - 1,160,274 1,160,274 - - Landfill settlement - - - - - 355,502 357,406 Unrestricted 8,506,492 (5,489,367) 511,271 3,528,396 2,509,653 3,100,067 5,200,100 Total Net Assets 101,953,171 3,494,232 395,487 105,842,890 100,491,872 8,833,915 9,968,950 Total Liabilities and Net Assets 133,742,561 $ 9,776,152 $ 948,636 $ 144,467,349 $ 140,672,558 $ 9,637,532 $ 10,648,401 $ The accompanying notes are an integral part of this statement. Governmental Activities Statement of Net Assets Enterprise Funds Enterprise Funds Internal Service Funds Total Enterprise Funds Business-Type Activities Business-Type Activities Washington State Auditor's Office 35 ---PAGE BREAK--- Amounts reported for business-type activities in the statement of net assets are different because: Net assets - total proprietary funds 105,842,890 $ The acumulated net revenue of certain activities of internal service funds is reported with governmental activities. (2,683,285) Net assets of business-type activities 103,159,605 $ The accompanying notes are an integral part of this statement. For the Year Ended December 31, 2008 Reconciliation of the Statement of Net Assets - Proprietary Funds To the Statement of Net Assets - Business-Type Activities Washington State Auditor's Office 36 ---PAGE BREAK--- Statement of Revenues, Expenses, and Changes in Fund Net Assets Proprietary Funds For the Year Ended December 31, 2008 (with comparative totals for 2007) Water and Sewer Coliseum Other Non-Major Enterprise Fund Fund Funds 2008 2007 2008 2007 Operating revenues: Charges for services 14,735,345 $ 1,833,577 $ 3,348,027 $ 19,916,949 $ 19,421,391 $ 7,657,121 $ 7,388,938 $ Total operating revenues 14,735,345 1,833,577 3,348,027 19,916,949 19,421,391 7,657,121 7,388,938 Operating expenses: Maintenance and operations 5,425,489 2,243,026 3,646,107 11,314,622 11,126,927 8,913,771 7,075,237 Administrative and general 2,217,526 - 582,488 2,800,014 2,590,064 11,000 11,000 Taxes 1,480,888 48,803 - 1,529,691 1,455,465 - - Depreciation 3,501,310 425,487 15,711 3,942,508 3,437,486 818,258 928,700 Total operating expenses 12,625,213 2,717,316 4,244,306 19,586,835 18,609,942 9,743,029 8,014,937 Operating income (loss) 2,110,132 (883,739) (896,279) 330,114 811,449 (2,085,908) (625,999) Nonoperating revenues (expenses): Intergovernmental - - 1,644 1,644 1,439 611,898 612,296 Investment earnings 570,045 - 24,373 594,418 555,620 183,204 261,268 Interest expense (524,881) (54,068) (9,163) (588,112) (634,863) - - Gain (loss) on disposition of assets - - - - - (77,846) (53,467) Total nonoperating revenue (expenses) 45,164 (54,068) 16,854 7,950 (77,804) 717,256 820,097 Income (loss) before contributions and transfers 2,155,296 (937,807) (879,425) 338,064 733,645 (1,368,652) 194,098 Capital grants - - - - 318,679 - - Capital contributions 2,808,794 - - 2,808,794 648,276 - - Transfers in - 1,614,526 721,510 2,336,036 2,012,191 268,501 148,274 Transfers out (93,376) - (38,500) (131,876) (649,438) (34,884) (50,000) Change in net assets 4,870,714 676,719 (196,415) 5,351,018 3,063,353 (1,135,035) 292,372 Total net assets - beginning 97,082,457 2,817,513 591,902 100,491,872 97,428,519 9,968,950 9,676,578 Total net assets - ending 101,953,171 $ 3,494,232 $ 395,487 $ 105,842,890 $ 100,491,872 $ 8,833,915 $ 9,968,950 $ Total Internal Service Governmental Activities Total Enterprise Funds Business-type Activities- Enterprise Funds Business-type Activities- Enterprise Funds Washington State Auditor's Office 37 ---PAGE BREAK--- Amounts reported for business-type activities in the statement of activities are different because: Net change in net assets - total proprietary funds 5,351,018 $ The current year net revenue of certain activities of internal service funds is reported with governmental activities. (578,164) Change in net assets of business-type activities 4,772,854 $ The accompanying notes are an integral part of this statement. For the Year Ended December 31, 2008 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 38 ---PAGE BREAK--- Statement of Cash Flows Proprietary Funds For the Year Ended December 31, 2008 (with comparative totals for 2007) Water and Sewer Coliseum Other Non- Major Enterprise Fund Fund Funds 2008 2007 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 14,154,882 $ 1,862,445 $ 3,506,118 $ 19,523,445 $ 18,672,336 $ 7,963,571 $ 7,046,298 $ Other operating revenue 720,383 - - 720,383 1,071,432 4,023 2,618 Payments to suppliers (4,659,170) (1,654,216) (1,271,920) (7,585,306) (6,765,287) (8,263,964) (714,001) Payments to employees (3,259,310) (838,865) (2,925,103) (7,023,278) (7,491,994) (539,524) (6,300,383) Internal activity - payments to other funds (983,740) - - (983,740) (931,358) - - Net cash provided by (used in) operating activities 5,973,045 (630,636) (690,905) 4,651,504 4,555,129 (835,894) 34,532 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Advances to other fund 80,000 - - 80,000 (172,634) - - Operating subsidies and transfers from other fund - 1,614,526 721,510 2,336,036 2,012,191 40,116 - Operating subsidies and transfers to other fund - - - - - - (50,000) Net cash provided by (used in) noncapital financing activities 80,000 1,614,526 721,510 2,416,036 1,839,557 40,116 (50,000) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital contributions 2,808,794 - - 2,808,794 966,955 - - Capital replacement charges - - - - - 805,401 760,570 Proceeds from capital debt 1,100,000 - - 1,100,000 5,311,459 - - Purchases of capital assets (7,399,222) (635,205) - (8,034,427) (5,067,689) (1,881,836) (500,351) Principal paid on capital debt (2,466,354) (384,547) (47,141) (2,898,042) (2,729,150) - - Interest paid on capital debt (524,883) (58,753) (9,163) (592,799) (639,532) - - Proceeds from sale of equipment - - - - - 18,829 94,441 Capital grant - - 1,644 1,644 1,439 - - Transfer for capital purposes (93,375) - (38,500) (131,875) (649,437) - - Net cash provided by (used in) capital and related financing activities (6,575,040) (1,078,505) (93,160) (7,746,705) (2,805,955) (1,057,606) 354,660 CASH FLOWS FROM INVESTING ACTIVITIES Interest and dividends 585,863 - 25,138 611,001 543,270 197,602 260,677 Net cash provided by investing activities 585,863 - 25,138 611,001 543,270 197,602 260,677 Net increase (decrease) in pooled cash and investments 63,868 (94,615) (37,417) (68,164) 4,132,001 (1,655,782) 599,869 Balances - beginning of the year 13,564,967 625,956 553,519 14,744,442 10,612,441 5,729,446 5,129,577 Balance - end of the year 13,628,835 $ 531,341 $ 516,102 $ 14,676,278 $ 14,744,442 $ 4,073,664 $ 5,729,446 $ Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) 2,110,132 $ (883,739) $ (896,279) $ 330,114 $ 811,449 $ (2,085,908) $ (625,999) $ Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Depreciation expense 3,501,310 425,487 15,711 3,942,508 3,437,486 818,258 928,700 Change in uncollectible accounts 1,088 - (120,000) (118,912) 3,541 - - Change in assets and liabilities: Receivables, net 90,853 (112,892) 278,092 256,053 144,078 310,472 (340,021) Inventories (60,976) - - (60,976) (39,488) 990 (10,255) Prepaid expenses 2,474 5,903 - 8,377 (11,951) - - Due from other government's 47,980 - - 47,980 114,441 - - Accounts and other payables 25,276 (213,508) 5,869 (182,363) (216,286) 120,981 76,881 Unearned revenue 300,000 144,267 - 444,267 359,313 - - Accrued expenses (45,092) 3,846 25,702 (15,544) (47,454) (687) 5,226 Net cash provided by (used in) operating activities 5,973,045 $ (630,636) $ (690,905) $ 4,651,504 $ 4,555,129 $ (835,894) $ 34,532 $ Noncash capital activities/developer contributions: 2,808,794 $ - - 2,808,794 $ - - - The accompanying notes are an integral part of this statement. Totals Totals Business-type Activities - Enterprise Funds Business-type Activities Enterprise Funds Governmental Activities Internal Service Funds Washington State Auditor's Office 39 ---PAGE BREAK--- 2008 2007 2008 2007 ASSETS Equity in pooled cash & investments 407,950 $ 338,137 $ 909,428 $ 947,729 $ Receivables - - 1,798 2,695 Investments, at fair value - - - 9,097 Total assets 407,950 $ 338,137 $ 911,226 $ 959,521 $ LIABILITIES Accounts payable 3,613 $ 32 $ 117,128 $ 157,122 $ Due to other governments - - 794,098 802,399 Total liabilities 3,613 32 911,226 959,521 NET ASSETS Held in trust for pension benefits and other purposes 404,337 $ 338,105 $ - $ - $ The accompanying notes are an integral part of this statement. Statement of Fiduciary Net Assets Firemen's Pension Trust Fund Agency Funds For the Year Ended December 31, 2008 Fiduciary Funds Washington State Auditor's Office 40 ---PAGE BREAK--- 2008 2007 ADDITIONS Contributions: Employer 596,419 $ 543,988 $ Total contributions 596,419 543,988 Investment earnings: Interest 10,242 8,187 Net increase in the fair value of investments - 2,627 Total investment earnings 10,242 10,814 Total additions 606,661 554,802 DEDUCTIONS Benefits 528,342 463,062 Administrative expenses 12,087 4,123 Total deductions 540,429 467,185 Change in net assets 66,232 87,617 Net assets - beginning 338,105 250,488 Net assets - ending 404,337 $ 338,105 $ The accompanying notes are an integral part of this statement. Trust Fund Statement of Changes in Fiduciary Net Assets Fiduciary Funds Firemen's Pension For the year ended December 31, 2008 Washington State Auditor's Office 41 ---PAGE BREAK--- NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the City of Kennewick have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The significant accounting policies are described below: A. The Reporting Entity The City of Kennewick was incorporated on February 5, 1904 and operates under the laws of the State of Washington applicable to a Council-Manager form of government. As required by generally accepted accounting principles, the financial statements present the City of Kennewick as a primary government and its component units, entities for which the government is considered to be financially accountable. Blended component units, although legally separate entities, are, in substance, part of the government’s operations. Each discretely presented component unit is reported in a separate column in the government-wide financial statements (see note below for description) to emphasize that it is legally separate from the government. The City's primary government major operations include police and fire protection including emergency medical response, a water and sewer system, parks and recreation, street construction and maintenance, planning and zoning, and general administrative functions. 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 Kennewick Public Facilities District is included in the City’s reporting entity as a discretely presented component unit because of the financial accountability relationship. The City appoints the Public Facilities District five-member board and has the ability to impose its will on the District. The District and the City of Kennewick 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 ten percent of the fair market value of the leasehold real estate as determined by the City, subject to review every five years. Beginning April 15, 2026, the rent will change to $1.00 per year. In addition to the payment of nominal rent, the District will be responsible for all costs of its maintenance, utilities, insurance and operation of the Convention Center. The District and the City of Kennewick entered into an Annual Contribution Agreement in which the City agreed to issue $3,995,000 in construction bonds and to provide annual financial support to the District. Until the year 2027, the City will pay the District an amount equal to $725,000 less (ii) the aggregate debt service payments on the City bonds during a calendar year, and less (iii) the Annual Credit. The Annual Credit is defined as the lesser of $600,000 and (ii) the sum of amounts received 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. Washington State Auditor's Office 42 ---PAGE BREAK--- 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 2010 and the final maturity of these bonds will occur in 2027. If the District has insufficient funds to make a required debt service payment, the City will make a loan to the District for that purpose. In the event the District lacks sufficient non-voted debt capacity to incur a loan, the City will make the debt service payment and receive a proportionate ownership interest in the facility. The component unit columns in the financial statements include the financial data of the Kennewick Public Facilities District only; therefore segregation of this information separate from the face of the financial statements is not necessary. Complete separate financial statements for the Kennewick Public Facilities District may be obtained at the Three Rivers Convention Center, 7016 W. Grandridge Blvd., Kennewick, Washington. B. Government- Wide and Fund Financial Statements The government-wide financial statements the statement of net assets and the statement of activities) report information on all of the nonfiduciary activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Our policy is to allocate indirect costs to a specific function or segment. Program revenues include 1) charges to customers or applicants who purchase, use or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate financial statements are provided for governmental funds, proprietary funds and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. C. Measurement Focus and Basis of Accounting The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Fiduciary funds account for resources legally held in trust or agency capacity for others and which therefore cannot be used to support the government’s own programs. Trust funds employ the same economic resource measurement focus and accrual basis of accounting as proprietary funds. Agency funds report only assets and liabilities and do not have a measurement focus. They use the accrual basis of accounting to recognize receivables and payables. Governmental fund financial statements are reported using the current financial resources measurement focus and modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are Washington State Auditor's Office 43 ---PAGE BREAK--- 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 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 pension trust fund and three agency trust funds for 1) payroll clearing fund 2) bi-county police information fund and 3) emergency medical services fund. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. As a general rule, the effect of the interfund activity has been eliminated for the government-wide financial statements. Exceptions to this general rule are actual costs and receipts that are not equivalent to overhead (e.g. insurance settlements, claim recoveries, miscellaneous revenues). Washington State Auditor's Office 44 ---PAGE BREAK--- Amounts reported as program revenues include 1) charges to customers, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than program revenues. General revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenues of the enterprise funds are charges to customers for utility, ambulance, 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 nonoperating revenues and expenses. D. Assets, Liabilities and Equities Equity in Pooled Cash and Investments – The City follows the practice of pooling cash and investments of individual funds for investment purposes. Each fund’s portion of total cash and investments is summarized by fund type in the combined balance sheet as equity in pooled cash and investments. Cash with fiscal agent is disclosed separately on the balance sheet. Cash and Cash Equivalents - It is the City's policy to invest all temporary cash surpluses. At December 31, 2008, the treasurer was holding $8,722,495 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, 2008. 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 13. 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). Washington State Auditor's Office 45 ---PAGE BREAK--- 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 $1,160,274 in Debt Service and $3,743,627 Capital Projects. Capital Assets - All capital assets acquired or constructed for general governmental purposes are reported as expenditures in the fund that finances the asset acquisition and capitalized at cost in the government-wide statements. The City's Capital Asset Policy establishes a capitalization limit of $5,000. Donated capital assets are reported at estimated fair market value at the time received. Public domain (infrastructure) general governmental capital assets such as roads, bridges, curbs and gutters, streets and sidewalks are capitalized and depreciated. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Property and equipment acquired by Proprietary and Pension Trust Funds are reported in those funds at cost or at estimated fair market value at time of donation. Construction costs of water and sewer lines that are reimbursed by users or that 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. In proprietary funds, compensated absences are recorded as an expense and liability of the fund that will pay for them. Compensated absences are shown as long and short term liabilities based on an estimated amount of annual usage. As of December 31, 2008, the City's compensated absences payable in accordance with GASB Statement No. 16 for all funds amounted to 103,407 hours and $3,575,494. 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. Washington State Auditor's Office 46 ---PAGE BREAK--- Deferred Revenues - Deferred Revenues are those revenues that are measurable but not yet available, under the modified accrual basis of accounting. Accordingly, they are not recorded as revenue. The balance sheet records the receivable, but includes deferred revenue as its offset. The City recognized the following deferred items in 2008: 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. NOTE 2 – RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS A. Explanation of Certain Differences between the Governmental Funds Balance Sheet and the Government-Wide Statement of Net Assets. The governmental fund balance sheet includes a reconciliation between fund balance - total governmental funds and net assets - governmental activities as reported in the government wide statement of net assets. One element of that reconciliation explains that "long-term liabilities", including bonds payable, are not due and payable in the current period and therefore not reported in the funds. The details of this $31,799,204 difference are shown below. Bonds and Notes Payable $ 20,890,000 Bond Premium 265,830 Unamortized Refunding Interest (120,840) Public Works Trust Fund Loans Payable 6,311,755 Water Pollution Control RF Loan 270,876 Frost Facility Loan 600,000 Net Pension Obligation 315,459 Net OPEB Obligation 156,776 Claims and Judgments 97,598 Accrued Interest 89,403 Compensated Absences 2,922,347 $ 31,799,204 Washington State Auditor's Office 47 ---PAGE BREAK--- Other long-term assets are not available to pay for current-period expenditures and, therefore are deferred in the funds. The details of this $7,413,979 difference are listed below. Operating Grant - Economic Environment $ 2,754,872 Interfund Loan Interest 48,120 Contracts Receivable 435,513 Nuisance Abatement 41,130 Public Safety 3,895 Miscellaneous Receivables 17,897 Sales Tax 2,523,793 Motor Vehicle Fuel Tax 113,287 Utility Tax 865,623 Hotel/Motel Tax 123,372 Liquor Excise Tax 78,609 Admissions Tax 11,431 Property Tax 396,437 $ 7,413,979 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 amount by which capital outlays exceeded depreciation in the current period. Capital Outlays $9,752,255 Depreciation (5,555,682) Cost of Assets Sold (254) $4,196,319 The issuance of long-term debt bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items and is as follows: Debt Proceeds ($4,115) Debt Retired 2,455,834 $2,451,719 Washington State Auditor's Office 48 ---PAGE BREAK--- 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 ($83,326) Sales Tax 78,436 Utility Tax (37,313) Other Tax (30,722) Public Safety 30,737 Developer Contributions 229,201 Community Development Receivables (5,298) Accounts Receivable – Alarm Violations (520) Miscellaneous Receivable (15,437) $165,758 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 ($80,216) Net Pension Obligation (138,390) Claims and Judgments (97,598) Interest on Long Term Debt 4,394 Amortized Bond Premium 22,921 Amortized Refunding Interest (17,264) ($306,153) Internal service funds are used by management to charge the costs of certain activities, such as insurance, supplies and fleet maintenance to individual funds. Internal Service Fund Operating Costs ($1,507,744) Transfer of Equipment to Internal Service Funds 611,898 Investment Earnings 183,205 Disposition of Fixed Assets (77,846) Transfers 233,617 ($556,870) NOTE 3 - STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary Information The City of Kennewick follows these procedures in establishing the budgetary data reflected in the financial statements: 1. Prior to November 1 in even-numbered years, the City Manager submits to the City Council a proposed operating budget for the biennial period commencing the following January 1. The operating budget includes proposed expenditures and their means of financing. 2. Public hearings are conducted at regular Council meetings to obtain taxpayer comments. Washington State Auditor's Office 49 ---PAGE BREAK--- 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 2008, and twice in 2007. 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. 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 2008 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 $4,607,282 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. Washington State Auditor's Office 50 ---PAGE BREAK--- D. Budget Revisions During 2008, the biennial budget was revised as shown on the following schedule: 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 $1,310,867, which consisted of $1,341,293 per the City’s checking account bank balances, deposits in transit of $122,492, $48,518 in cash drawers and advance travel funds, less outstanding checks of $201,436. No deposits were uninsured or uncollateralized. Insurance coverage up to $100,000 is through the Federal Deposit Insurance Corporation (FDIC) and the Washington Public Deposit Protection Commission for amounts over $100,000. Under State statute, members of a multiple-financial institution collateral pool, may be assessed losses on a prorated basis if the pool’s collateral provides insufficient coverage. Deposits collateralized in the multiple-institution collateral pool are considered insured, and therefore not exposed to custodial credit risk. Original Amended Biennial 2007 2008 Biennial Budget Revisions Revisions Budget GENERAL GOV'T OPERATIONS General Fund 74,015,475 $ 751,434 $ 2,676,350 $ 77,443,259 $ Street Fund 4,995,341 (15,000) (262,062) 4,718,279 Subtotal 79,010,816 736,434 2,414,288 82,161,538 CAPITAL PROJECTS Arterial Street Fund 4,157,428 728,694 285,000 5,171,122 Urban Arterial Street Fund 290,000 6,806,449 2,612,478 9,708,927 Capital Improvement Fund 18,643,993 19,176,741 563,286 38,384,020 Park Development/Const Fund 5,843,555 2,920,232 151,539 8,915,326 Library Construction Fund - 4,669 - 4,669 ENTERPRISE & INTERNAL SERVICE Water & Sewer Fund 38,400,579 5,209,077 3,930,000 47,539,656 Medical Services Fund 6,803,000 (77,850) 58,000 6,783,150 Building Safety Fund 2,454,653 171,680 161,250 2,787,583 Coliseum Fund 5,404,623 220,194 383,869 6,008,686 Equipment Rental Fund 7,533,034 502,235 8,750 8,044,019 Central Stores Fund 685,295 13,138 - 698,433 Risk Management Fund 11,307,590 (699,839) 3,611,810 14,219,561 DEBT SERVICE Debt Service Fund 4,767,100 (61,910) - 4,705,190 LID Guaranty Fund 12,715 187 - 12,902 SPECIAL REVENUE BI-PIN Operations Fund 507,931 (4,424) - 503,507 Community Development Fund 1,691,524 732,053 68,455 2,492,032 EMS Operations Fund 244,123 - (165,317) 78,806 Asset Forfeiture Fund 101,730 (18,385) - 83,345 Public Safety Fund 4,626,037 - 95,833 4,721,870 Solid Waste/Environmental Fund 221,119 20,552 - 241,671 Cash Reserve Fund 2,500,000 - - 2,500,000 Lodging Tax Fund 1,849,972 17,069 210,000 2,077,041 Total 197,056,817 $ 36,396,996 $ 14,389,241 $ 247,843,054 $ Washington State Auditor's Office 51 ---PAGE BREAK--- The following is a summary of cash and deposits as of December 31, 2008: Item Checking Accounts $ 1,262,349 Deposits: Cash in Change Funds 28,518 Cash in Advance Travel Funds 20,000 $1,310,867 B. Investments All of the City's investments are stated at amortized cost, except in the case of the State Treasurer’s Investment Pool. The City’s deposits in the State Treasurer’s investment pool are reported based on the pool’s share price since it is a 2a7-like pool. The fair value of the positions in the State Treasurer’s Investment Pool is the same as the value of the pool shares. The State Treasurer’s Investment Pool was formed under and is regulated by the Revised Code of Washington. As of December 31, 2008, the City had the following investments: Investment Type Book Value Fair Value Weighted Average Maturity (Years) U.S. Agency Securities 24,984,073 $ 25,461,855 $ 3.6 Certificates of Deposit 3,000,000 3,000,000 0.89 State Treasurer's Investment Pool 7,411,628 7,411,628 0.18 Total 35,395,701 $ 35,873,483 $ Portfolio weighted average maturity 2.65 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, 2008, the City’s investments in agency securities were all rated AAA. The State Treasurer’s Investment Pool is unrated. The credit risk of the State Treasurer’s Investment Pool is limited as most investments are either obligations of the U.S. Government, government sponsored enterprises, or insured demand deposit accounts and certificates of deposit. Investments or deposits held by the State Pool are all classified as category 1 risk level investments. They are either insured or held by a third-party custody provider in the State Pool’s name. Concentration of credit risk. Concentration of credit risk is the risk of loss attributed to the magnitude of a government’s investment in a single issuer. The City’s investment policy does not allow for an investment in any one security type or financial institution that is in excess of fifty percent of total investments. The City’s investments in which more than five percent is invested in any single issuer as of December 31, 2008 are shown in the following table. Washington State Auditor's Office 52 ---PAGE BREAK--- Concentration of Credit Risk as a Percentage of Total Investments Issuer Book Value Federal Home Loan Bank $13,980,623 40% Federal Home Loan Mortgage Corporation 6,999,250 20% Federal National Mortgage Association 4,004,200 11% Bank of America 2,000,000 6% Custodial credit risk. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty, the system will not be able to recover the value of its investments that are in the possession of an outside party. By City policy, all security transactions are settled “delivery versus payment”. This means that payment is made simultaneously with the receipt of the security. These securities are delivered to the City’s safekeeping bank. NOTE 5 - PROPERTY TAXES The County Treasurer acts as an agent to collect property taxes levied in the County for all taxing authorities. Collections are distributed to the City on a daily basis by the County Treasurer in compliance with RCW 84.56.230. Property Tax Calendar January 1 Taxes are levied and become an enforceable lien against properties. February 14 Tax bills are mailed. April 30 First of two equal installment payments is due. May 31 Assessed value of property established for next year’s levy at 100 percent of market value. October 31 Second installment is due. Property taxes are recorded as a receivable and deferred revenue when levied. No allowance for uncollectible taxes is established because delinquent taxes are considered fully collectible. Prior year tax levies were recorded using the same principal. The City may levy up to $3.60 per $1,000 of assessed valuation for general governmental services. For Kennewick, this limit has been reduced to $3.10 per $1,000 of assessed valuation to reflect the City’s annexation to the Kennewick Library District. The levy rate is also subject to the following limitations: A. The Washington State Constitution limits total regular property taxes to 1% of assessed valuation or $10 per $1,000 of value. If the taxes of all districts exceed this amount, each is proportionately reduced until the total is at or below the 1% limit. B. Washington State law in RCW 84.55.010 limits the growth of non-voted property taxes to the lesser of 1% per year, or the Implicit Price Deflator. Adjustments for new construction are excluded from this calculation. As a code city, Kennewick must adopt a separate ordinance or resolution authorizing a property tax increase in both dollars and percentage to be filed with the County by November 30th. The City's regular levy for 2008 was $2.3425 per $1,000, on an assessed valuation of $4,090,528,449, for a total regular levy of $9,582,055. The City dedicated $208,000 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 2008, the City levied an additional $.0973 per $1,000 for the 1996 voted-approved G.O. bond issue for a total additional levy of $395,000 for 2008. Washington State Auditor's Office 53 ---PAGE BREAK--- NOTE 6 - CAPITAL ASSETS Capital assets activity for the year ended December 31, 2008 was as follows: Balance Balance Governmental Activities 12/31/2007 Additions Deletions 12/31/2008 Non-depreciable capital assets: Land (including ROW) 67,229,962 $ 4,836,693 $ - $ 72,066,655 $ Construction in Progress 34,606,451 9,046,889 (27,336,740) 16,316,600 Subtotal non-depreciable capital assets 101,836,413 13,883,582 (27,336,740) 88,383,255 Depreciable capital assets: Buildings 22,302,064 14,661,931 - 36,963,995 Improvements other than buildings 8,761,443 81,079 - 8,842,522 Infrastructure 94,686,754 15,328,137 - 110,014,891 Equipment 12,718,435 2,106,057 (597,775) 14,226,717 Subtotal depreciable capital assets 138,468,696 32,177,204 (597,775) 170,048,125 Accumulated Depreciation: Buildings (7,252,092) (732,263) - (7,984,355) Improvements other than buildings (2,573,259) (315,315) - (2,888,574) Infrastructure (44,160,578) (4,355,743) - (48,516,321) Equipment (7,665,388) (970,620) 495,846 (8,140,162) Subtotal accumulated depreciation (61,651,317) (6,373,941) 495,846 (67,529,412) Governmental activities capital assets, net 178,653,792 $ 39,686,845 $ (27,438,669) $ 190,901,968 $ Balance Balance Business-Type Activities 12/31/2007 Additions Deletions 12/31/2008 Non-depreciable capital assets: Land 2,114,819 $ 872,915 $ - $ 2,987,734 $ Intangible 29,179 - - 29,179 Construction in Progress 1,385,528 3,823,062 (2,191,126) 3,017,464 Subtotal non-depreciable capital assets 3,529,526 4,695,977 (2,191,126) 6,034,377 Depreciable capital assets: Buildings and improvements 160,863,488 5,430,864 - 166,294,352 Equipment 9,911,728 98,714 (17,547) 9,992,895 Subtotal depreciable capital assets 170,775,216 5,529,578 (17,547) 176,287,247 Accumulated Depreciation: Buildings and improvements (44,737,546) (3,651,068) - (48,388,614) Equipment (5,923,474) (292,037) 18,143 (6,197,368) Subtotal accumulated depreciation (50,661,020) (3,943,105) 18,143 (54,585,982) Business-type activities capital assets, net 123,643,722 $ 6,282,450 $ (2,190,530) $ 127,735,642 $ Washington State Auditor's Office 54 ---PAGE BREAK--- Depreciation is summarized as follows: Governmental activities: General Government 387,064 $ Security of Persons & Property 756,641 Physical Environment 167,963 Transportation 4,486,630 Economic Environment 23,696 Culture & Recreation 551,947 Total 6,373,941 $ Business-type activities: Water and sewer service 3,501,310 $ Medical service 13,411 Protective inspection service 2,896 Coliseum service 425,488 Total 3,943,105 $ Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of the capital assets of business-type activities is included as part of the capitalized value of the assets constructed. The City has active construction projects as of December 31, 2008. 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 department within the primary government of the State of Washington, issues a publicly available comprehensive annual financial report (CAFR) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained from the Department of Retirement Systems, Communications Unit, P.O. Box 48380, Olympia, WA 98504-8380. Project Expenditures as of 12/31/2008 Remaining Commitment Citywide Flashing Yellow Arrow Implementation 209,369 $ 12,631 $ City Facility Paving - 46,131 Commercial Street Overlays 81,332 23,668 Street Lighting - Misc Locations 147,001 24,999 Traffic Control Devices 19,976 2,355 Traffic Volume Counts 8,522 16,478 Fire Stations - 98,884 Hansen Park - 2,895 Columbia Park River Levee Improvements 58,353 11,647 Ranney Well Upgrade 1,827,386 3,660,214 2,351,939 $ 3,899,902 $ Washington State Auditor's Office 55 ---PAGE BREAK--- The following disclosures are made pursuant to GASB Statement 27, Accounting for Pensions by State and Local Government Employers. 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 in national higher education retirement programs; judges of district and municipal courts; and employees of local governments. PERS participants who joined the system by September 30, 1977, are Plan 1 members. Those who joined on or after October 1, 1977 and by either, February 28, 2002 for state and higher education employees, or August 31, 2002 for local government employees, are plan 2 members unless they 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 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 defined benefit retirement benefits are financed from a combination of investment earnings and employer and employee contributions. PERS retirement benefit provisions are established in state statute 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 5 years of service, or at the age of 55 with 25 years of service. The annual pension is 2 percent of the average final compensation (AFC) per year of service, capped at 60 percent. The AFC is based on the greatest compensation during any 24 eligible consecutive compensation months. Plan 1 members who retire from inactive status prior to the age of 65 may receive actuarially reduced benefits. The benefit is actuarially reduced to reflect the choice of a survivor option. A cost-of living allowance (COLA) is granted at age 66 based upon years of service times the COLA amount, increased by three percent annually. Plan 1 members may also elect to receive an additional COLA amount that provides an automatic annual adjustment based on the Consumer Price Index. The adjustment is capped at three percent annually. To offset the cost of this annual adjustment, the benefit is reduced. Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members may retire at the age of 65 with 5 years of service with an allowance of 2 percent of the AFC per year of service. The AFC is based on the greatest compensation during any eligible consecutive 60- month period. Plan 2 members who retire prior to the age of 65 receive reduced benefits. If retirement is at 55 or older with at least 30 years of service, a three percent per year reduction applies; otherwise an actuarial reduction will apply. The benefit is also actuarially reduced 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. 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 calculated at 1 percent of the AFC per year of service. The AFC is based on the greatest compensation during any eligible consecutive 60-month period. Effective June 7, 2006, Washington State Auditor's Office 56 ---PAGE BREAK--- Plan 3 members are vested in the defined benefit portion of their plan after ten years of service; or after five years if twelve months of that service are earned after age 44; or after five service 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 to retire with full benefits at age 65, or at age 55 with 10 years of service. Retirements prior to the age of 65 receive reduced benefits. If retirement is at age 55 or older with at least 30 years of service, a 3 percent per year reduction applies; otherwise an actuarial reduction will apply. The benefit is also actuarially reduced to reflect the choice 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. 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 Employee Retirement Benefits Board. There are 1,190 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans of June 30, 2007: Retirees and beneficiaries receiving benefits 71,244 Terminated plan members entitled to but not yet receiving benefits 26,583 Active plan members vested 105,447 Active plan members nonvested 52,575 Total 255,849 Funding Policy Each biennium the state Pension Funding Council adopts Plan 1 employer contribution rates and Plan 2 employer and employee contribution rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at 6 percent for state agencies and local government unit employees, and 7.5 percent for state government elected officials. The employer and employee contribution rates for Plan 2 and employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. All employers are required to contribute at the level established by the Legislature. Under PERS Plan 3, employer contributions finance the defined benefit portion of the plan, and member contributions finance the defined contribution portion. The Employee Retirement Benefits Board sets Plan 3 employee contribution rates. Six rate options are available ranging from 5 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 of the Revised Code of Washington (RCW). The required contribution rates expressed as a percentage of current year covered payroll, as of December 31, 2008 were: PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer* 8.31% 8.31% 8.31% Employee 6.00% 5.45% * The employer rates include the employer administrative expense fee currently set at 0.16%. The employer rate for state elected officials is 12.39% for Plan 1, 8.31% 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 5.45% for Plan 2. Variable from 5.0% minimum to 15% maximum based on rate selected by the PERS 3 member. Washington State Auditor's Office 57 ---PAGE BREAK--- 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 2008 $125,552 $671,970 $183,581 2007 67,614 509,120 129,525 2006 63,421 257,074 69,330 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, the LEOFF Plan 2 Retirement Board was established by Initiative 790 to provide governance of LEOFF Plan 2. The Board’s duties include adopting contribution rates and recommending policy changes to the Legislature for the LEOFF Plan 2 retirement plan. LEOFF defined benefit retirement benefits are financed from a combination of investments earnings, employer and employee contributions, and a special funding situation in which the state pays through state legislative appropriations. LEOFF retirement benefit provisions are established in state statute and may be amended only by the State Legislature. LEOFF Plan 1 members are vested after the completion of 5 years of eligible service. Plan 1 members are eligible to retire with five years of service at age 50. The benefit per year of service calculated as a percent of final average salary is as follows: Term of Percent of Final Service Average Salary 20 or more years 2.0% 10 but less than 20 years 1.5% 5 but less than 10 years 1.0% The final average salary is the basic salary received at the time of retirement, provided a member has held the same position or rank for 12 months preceding the date of retirement. Otherwise, it is the average of the highest consecutive 24 months’ salary within the last 10 years of service. A cost-of-living allowance is granted based on the Consumer Price Index. LEOFF Plan 2 retirement benefits are vested after an employee completes five years of eligible service. Plan 2 members may retire at the age of 50 with 20 years of service or at 53 with 5 years of service, with an allowance of 2 percent of the final average salary per year of service. The final average salary is based on the highest consecutive 60 months. Plan 2 retirements prior to the age of 53 are reduced 3 percent for each year that the benefit commences prior to age 53 receive reduced benefits. Benefits are actuarially reduced for each year 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 three percent for each year prior to age 53. 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. Washington State Auditor's Office 58 ---PAGE BREAK--- There are 374 participating employers in LEOFF. Membership in LEOFF consisted of the following as of the latest actuarial valuation date for the plans at June 30, 2007: Retirees and beneficiaries receiving benefits 9,085 Terminated plan members entitled to but not yet receiving benefits 633 Active plan members vested 12,904 Active plan members non-vested 3,708 Total 26,330 Funding Policy Starting on July 1, 2000, Plan 1 employers and employees will contribute zero percent as long as the plan remains fully funded. Employer and employee rates are developed by the Office of the State Actuary to fully fund the plan. LEOFF Plan 2 employers and employees are required to pay at the level adopted by the LEOFF 2 Retirement Board. All employers are required to contribute at the level required by state law. The Legislature has the ability, by means of a special 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 retirement Board. However, this special funding situation is not mandated by the state constitution and this funding requirement could be returned to the employers by a change of statute. The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2008 were as follows: LEOFF Plan 1 LEOFF Plan 2 Employer* 0.16% 5.46%** Employee 0.00% 8.83% State NA 3.53% * The employer rates include the employer administrative expense fee currently set at 0.16%. The employer rate for ports and universities is 8.99%. 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 2008 $ 348 $682,146 2007 566 641,597 2006 196 564,645 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, 2008 there were 23 retired police officers collecting health benefits under the LEOFF system. The total cost for this postemployment benefit was $332,562 for 2008. No assets were specifically allocated for postemployment benefits and expenses are funded on a "pay as you go" basis by the General Fund. An explanation of retired fire fighters health benefits is explained in Section C of this note. Washington State Auditor's Office 59 ---PAGE BREAK--- 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. The most recent actuarial study of the system was done by Milliman & Robertson, Inc., to determine the funding requirements as of January 1, 2008. The City of Kennewick’s obligations under the Firemen’s Pension Fund are limited to the benefits provided to firefighters retired prior to March 1, 1970. As of December 31, 2008, there were 15 individuals covered by the Fund, all of which were drawing benefits. To meet these obligations, the City may contribute annually to the Fund the amount raised by levying all or part of a tax of up to $0.45 per $1,000 of true and fair market value, the maximum provided by law for maintaining the Fund. Contributions also include donations and income from state fire insurance premium collection. All actuarial calculations are based on RCW 41.16 and 41.18, the statutes establishing the Firefighter’s Pension Fund, and RCW 41.26, the statute establishing the Washington Law Enforcement Officers’ and Firefighters’ Retirement System. Benefit provisions are established in state statute and may be amended only by the State Legislature. Each retiree receives the greater of the benefit payable under the Washington Law Enforcement Officers’ and Firefighters’ Retirement System and the benefits available under the provisions of prior law. Where benefits under the old law exceed those under the new for any firefighter, the excess benefits are paid from the Firefighter’s Pension Fund of the city employing them on March 1, 1970. For a service retirement the member’s benefit is 50% of salary plus an additional 2% for each year of service in excess of 25 years. The maximum benefit is 60% of salary. The survivor benefit is the same as the member’s: if spouse – same plus additional 5% of salary per child, if no spouse – 30% of salary for first child, 10% for each additional child. The maximum benefit in either case is 60% of salary. For a duty disability retirement the member must be disabled for a six-month waiting period, during which time salary is payable from the Fund. The amount of the benefit is 50% of salary plus an additional 5% for each unmarried child under the age of 18. For a non-duty disability retirement the member must be disabled after a 90-day waiting period, during which time salary is payable from the Fund. For non-duty related disability the benefit is the same as duty related disability. For both the duty related and non-duty related disabilities the survivor benefits to spouse and/or child are as follows: Percentage of salary: 33.3% to widow only 45.8% to widow and one child 47.6% to widow and two children 50.0% to widow and three children 33.3% to children only For purposes of retirement benefit payments, salaries are escalated in proportion to the current salary of the rank from which the firefighter retired. After April 25, 1973, a minimum benefit of $300 per month to all retired firefighters and their survivors apply. A funeral benefit of $500 is provided to defray funeral expenses. The annual required contribution was computed using the entry age normal cost method. Under this method the projected benefits are allocated on a level basis as a percentage of salary over the earnings of each individual between entry age and assumed exit age. Washington State Auditor's Office 60 ---PAGE BREAK--- The annual pension cost (APC) and net pension obligation (NPO) are shown on the following schedule as of December 31: Fiscal Year Ending 2004 2005 2006 2007 2008 Annual normal cost at beg. of year (BOY) $ - $ - $ - $ - $ - Amortization of UAAL (BOY) 98,406 98,406 148,828 148,828 143,451 Interest to end of year (EOY) 6,396 6,396 8,186 8,186 7,173 Annual required contribution (ARC) 104,802 104,802 157,014 157,014 150,624 Interest on NPO (5,002) (3,131) 12,944 20,951 16,692 Adjustment to ARC 5,831 3,708 (16,962) (28,044) 24,155 Annual pension cost (APC) 105,631 105,379 152,962 149,921 143,161 Total contributions 76,847 (178,130) 7,414 197,000 161,547 Change in NPO 28,784 283,509 145,582 (47,079) (18,386) NPO at BOY (76,951) (48,167) 235,342 380,924 333,845 NPO at EOY (48,167) 235,342 380,924 333,845 315,459 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 5.5%. Future salaries and postretirement benefits are assumed to increase at the rate of 4.0% per annum. The CPI was assumed to increase at the rate of 3.0% per annum. The following schedule shows the three-year trend beginning with 2006 as of December 31: Annual Contribution as Net Pension Pension Cost a Percentage Obligation Year (APC) of APC (NPO) 2008 143,161 145% 315,459 2007 149,921 131% 333,845 2006 152,996 5% 380,924 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 Contributio n NPO Adjustme nt Cost (APC) Contributions NPO Balance Gain/Loss Factor of Gain/Loss Balance 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) Washington State Auditor's Office 61 ---PAGE BREAK--- Investment earnings are assumed to accrue at an annual rate of 6.5%. Salary and postretirement benefit increases are each estimated at 4.0% per annum. The inflation rate is assumed to increase at 3.0% perannum. 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 5.5% discount rate was used. D. Statewide City Employees Retirement System Prior to 1972, all full-time City employees, except firemen, were covered by Statewide City Employees Retirement System, a contributory plan. PERS absorbed this retirement system in January 1972. The City pays defined benefits for one pensioner, which totaled $2,604 in 2008. NOTE 8 - SELF INSURANCE The City is exposed to various risks of loss related to torts; theft, damage, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City established the Risk Management Fund (an Internal Service Fund) to account for and finance its uninsured losses. Chapter 48.62 RCW authorizes the governing body of any one or more governmental entities to form together into or join a pool or organization for the joint purchasing of insurance, and/or joint self-insuring, and/or joint hiring or contracting for risk management services to the same extent they may individually purchase insurance, self-insurance, or hire or contract for risk management services. An agreement to form a pool arrangement was made pursuant to the provisions of Chapter 39.34 RCW, the Interlocal Cooperation Act On September 1, 2004 the City of Kennewick became a member of the Cities Insurance Association of Washington (CIAW) for handling all liability claims. Since CIAW is a cooperative program that belongs to a pool, there is a joint liability spread among the participating members for any given claim. The pool allows members to jointly purchase insurance coverage and they provide related services, such as administration, risk management and claims administration. Liability coverage for Public Officials is executed on a “claims made basis” and all other coverage is carried out on an “occurrence basis”. Currently, the CIAW has 95 member cities and 161 associate members. The pool acquires liability insurance from unrelated underwriters that are subject to a per-occurrence deductible of $100,000. Members are responsible for the first $1,000 of the deductible amount of each claim, while the pool is responsible for the remaining $99,000. 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 $99,000 portion of the deductible. The pool, however, purchases a Stop Loss Policy in the amount of $5,500,000 to eliminate any risk to members and funds the stop loss in the budget. Each new member now pays the pool an administrative fee. This amount 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 and claims paid to the third party administrator under this arrangement for the year ended December 31, 2007 and 2008 were $1,242,382 and $1,321,289 respectively. A governing board is selected by the membership and is responsible for conducting the business affairs of the pool. The Board of Directors has contracted with Canfield & Associates to perform the day-to-day administration of the pool and therefore the pool has no employees. Copies of the pool’s annual report may be obtained by writing to 451 Diamond Drive, Ephrata, WA 98823. Washington State Auditor's Office 62 ---PAGE BREAK--- 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 $63,806 to F. M. Global Insurance Company for their services in 2008. The City incurred an unfavorable verdict in a lawsuit involving a claim of negligence on the part of the City in 2005. The jury awarded $524,000 of which the City was responsible for $174,500, the City appealed the case but recorded a liability in the Risk Management Fund upon the first judgment. The City’s appeal was unsuccessful and the City paid this claim, plus accrued interest, in November 2008. The change in aggregate liability for the Risk Management Fund for the prior and current fiscal years is as follows: 2007 2008 Beginning Claims Claim Ending Beginning Claims Claim Ending Balance Incurred Payments Balance Balance Incurred Payments Balance General Liabilities $174,500 $ - $ - $174,500 $174,500 $ - $ (174,500) $ - Unemployment Claims - 39,080 (39,080) - - 43,617 (43,617) - Medical Claims 250,107 4,816,523 (4,761,080) 305,550 305,550 6,555,678 (6,231,383) 629,845 Dental Claims 56,299 335,745 (340,384) 51,660 51,660 397,506 (415,752) 33,414 Total $480,906 $5,191,348 $(5,140,544) $531,710 $531,710 $6,996,801 $(6,865,252) $663,259 On December 18, 1979, the City established a self-insurance program for unemployment compensation, which is reported in the Risk Management Fund. Various City funds are charged premiums. During 1983, self-insurance for sewer back-up claims was added to the Risk Management Fund. The source of revenue was a two percent surcharge added to sewer fees. The surcharge was eliminated on January 1, 1988 at which time the reserve was determined to be self-sustaining. In 1996, an unusual influx of claims was submitted and the Water/Sewer Fund contributed a one-time sum of $100,000 to the reserve, an additional contribution was made during 2008 of $75,000. Future claims will continue to be monitored and the two percent surcharge may be reinstated if it is deemed necessary. Reserves at December 31, 2008 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. Reserves at December 31, 2008, were $15,665. 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, 2008, were $192,573 and the liability for claims incurred but not reported (IBNR) was $33,414 on that date. Management estimates unpaid claims based upon historical trends. Expenditures were not adjusted due to salvage or subrogation in 2008. During 2005, self-insurance for employee medical, prescription and vision claims was added to the Risk Management Fund. Various City funds are charged for premiums. From August of 2005 stop loss premiums have been paid to protect against excessive costly claims. A stop loss insurance claim is made only if expenses incurred by each insured employee or dependent exceed $125,000 or if aggregate medical, vision and prescription annual cost exceed expected claims by 25%. Cash reserves available for claims on December 31, 2008, were $314,432 and the liability for claims incurred but not reported (IBNR) was $629,845 on that date. Management estimates unpaid claims based upon historical trends. Expenditures were not adjusted due to salvage or subrogation in 2008. 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. Washington State Auditor's Office 63 ---PAGE BREAK--- However, due to collective bargaining constraints, the City’s firefighter union employees did not move to the new plan and will remain on the self insured plan during 2009. 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, 2008, were $355,502. During 2002 the City enrolled in the Department of Labor and Industries Retrospective Rating plan for industrial insurance through participation in the Building Industry Association of Washington’s (BIAW) group plan. The City insures itself for workplace injuries by participating in the State’s Workers Compensation program. The Retrospective Rating plan is an optional financial incentive program, which rewards employers who minimize their industrial insurance losses. The City paid $6,462 to Building Industry Association of Washington in 2008 to help administer this program. 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 2008 the City received refunds totaling $37,214. 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. 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: Special Assessment Bonds Local improvement districts (LID's) are created for the primary purposes of constructing streets, storm drainage, sidewalk, light, 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. Year Ending December 31 Principal Interest 2009 1,420,000 880,723 2010 1,500,000 830,129 2011 1,575,000 776,279 2012 1,650,000 718,248 2013 1,560,000 656,848 2014 - 2018 5,870,000 2,361,563 2019 - 2023 5,935,000 1,081,390 2024 - 2025 1,380,000 83,400 $20,890,000 $7,388,577 Governmental Activities Issuance Final Debt Amount Installments Maturity Interest Rates Oustanding Governmental activities: 2005 GO refunding bonds 3,285,000 $ $80,000 - $385,000 12/2/2016 3.0 - 4.5% 2,665,000 $ 2003A GO bonds - convention center 3,995,000 $ $260,000 - $535,000 12/1/2013 2.0 - 3.625% 2,315,000 2003B GO bonds - capital projects 8,700,000 $ $310,000 - $640,000 12/1/2023 2.0 - 5.0% 7,075,000 2006 GO bonds - police station 9,790,000 $ $270,000 - $705,000 12/1/2025 3.75 - 5.0% 8,835,000 20,890,000 $ Purpose Washington State Auditor's Office 64 ---PAGE BREAK--- Under the provisions of the City's LID bond ordinances, special assessment bonds are called annually with no premium as cash accumulates in the related Debt Service Fund. The bonds are called on the interest payment date in numerical order. If the available cash exceeds the annual debt service requirements, additional bonds may be redeemed prior to their stated maturity date. The LID Guaranty Fund guarantees all unpaid special assessment bonds. State law requires that the Guaranty Fund maintain a balance of at least 10% of the outstanding obligations guaranteed by the fund in any single year. This balance is established and maintained by a tax levy not to exceed 12% of the amount guaranteed. There are no outstanding special assessment bonds at December 31, 2008. Notes and Loans Payable The City has taken advantage of low interest loans through the State of Washington for the financing of street and utility projects for both general government and business-type activities. The City also has entered into a loan with Cascade Columbia Foods, LLC, a Washington limited liability company to purchase land that is located next to the Frost Facility. Outstanding notes and loans are shown below for both governmental and business activities as of December 31, 2008. Issuance Final Debt Amount Installments Maturity Interest Rates Outstanding Governmental Activities: PWTF - West 10th Ave 1,485,000 $ 80,457 $ 07/01/09 3.00% 80,456 $ PWTF - W Hood/S Ely 1,492,148 77,742 07/01/11 2.00% 233,228 PWTF - 10th-Olympia/SR395 3,045,552 159,645 07/01/12 1.00% 638,583 PWTF - Washington St 1,189,303 62,783 07/01/10 2.00% 125,565 PWTF - 19th Avenue 967,770 50,194 07/01/13 1.00% 250,972 PWTF - Comp Street Imp I 3,817,100 203,264 07/01/18 1.00% 2,032,634 PWTF - Comp Street Imp II 4,550,000 215,526 07/01/20 1.00% 2,950,316 Water Pollution Control Revolving Loan 300,000 33,753 03/25/13 0.50% 270,876 Frost Facility Loan 600,000 100,000 01/15/14 3.63% 600,000 Total Governmental Activities 7,182,630 $ Purpose Washington State Auditor's Office 65 ---PAGE BREAK--- Annual debt service requirements to maturity for notes payable are as follows: At December 31, 2008, restricted assets in proprietary funds contain $1,160,274 in reserves as required by the SRF loan agreement. Capital Leases The City had two outstanding lease agreements through the state’s LOCAL lease program during 2008. The leases have provided financing for police vehicle purchases, and the purchase of a fire truck. The City entered into a lease agreement during 2005 to finance the purchase of police vehicles. The amount financed was $784,000, with a three-year term and 3.45377% interest rate. Payments are to be made from the General Fund. 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. Year Ending December 31 Principal Interest Principal Interest 2009 1,047,157 92,038 2,357,645 502,063 2010 967,037 76,098 2,381,987 461,500 2011 904,593 61,766 2,407,496 439,374 2012 827,191 48,059 2,273,037 396,626 2013 599,318 35,992 2,301,057 352,193 2014 - 2018 2,345,616 92,103 11,222,338 1,054,262 2019 - 2023 491,718 7,376 5,677,838 810,446 2024 - 2028 - - 1,522,237 1,473,773 $7,182,630 $413,432 $30,143,634 $5,490,237 Governmental Activities Business-type Activities Issuance Final Debt Amount Installments Maturity Interest Rates Outstanding Business-type Activities: PWTF - Water Lines $639,664 $33,695 07/01/11 1.00% 101,083 $ PWTF - 19th Avenue 24,542 3,068 07/01/13 1.00% 15,339 PWTF - Water System Imp 6,856,358 368,669 07/01/16 1.00% 2,949,357 PWTF - Wastewater Lagoon 2,450,000 130,464 07/01/20 1.00% 1,565,573 PWTF - Misc W/S Imp 3,000,000 159,375 07/01/21 0.50% 2,071,875 PWTF - Advanced Water Treatment 9,500,000 531,250 07/01/25 0.50% 8,500,000 PWTF - Waste Wtr Plant-Precon 510,000 127,500 - 184,167 07/01/11 0.50% 382,500 PWTF - Waste Wtr Plant-Const 5,500,000 275,000 07/01/28 0.50% 1,100,000 CERB - Welch' s Project 125,000 4,689 - 9,338 01/01/21 4.70% 103,569 SRF - Drinking Water 4,040,000 212,632 10/01/24 1.50% 3,402,104 SRF - Water Treatment Facility 4,080,000 240,833 10/01/23 1.00% 3,399,999 SRF - Ranney Improvements 3,030,000 173,030 10/01/25 1.50% 294,156 SRF - Wastewater Treatment Facility 10,063,642 479,167 - 748,141 05/31/17 4.50% 6,258,079 Total Business-type Activities 30,143,634 $ Purpose Washington State Auditor's Office 66 ---PAGE BREAK--- These leases qualify as capital leases for accounting purposes and, therefore, have been recorded at the present value of their future minimum lease payments as of the inception date. The assets acquired through capital leases are as follows: Governmental Business-type Activites Activities Vehicles 784,000 $ 456,000 $ Less: Accumulated Depreciation (784,000) (274,585) - $ 181,415 $ The future minimum lease obligation and the net present value of these minimum lease payments as of December 31, 2008 are shown on the following page: Business-type Year Ending December 31 Activities 2009 56,304 $ 2010 56,304 2011 56,304 2012 28,152 Total minimum lease payments 197,064 $ Less: amount representing interest (15,649) Present value of minimum lease payments 181,415 $ 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, 2008 are as follows: Remaining Purpose % of Av Capacity Notes General Government 2 1/2% $84,020,000 ($41,776,000 is Councilmanic) Park and Open Space 2 1/2% 109,342,000 Utility 2 1/2% 109,342,000 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. The rebatable arbitrage on this issue as of December 1, 2008 was $11,810. The City also issued $9,790,000 in bonds for a new police station on February 1, 2006. The City will be subject to arbitrage requirements for this issue, since it does not qualify for any of the “safe harbor” exemptions. The estimated rebatable arbitrage on this issue as of December 31, 2008 was $98,000. NOTE 10 – CHANGES IN LONG-TERM LIABILITIES The table on the following page shows a summary of changes in long-term liabilities for the year ended December 31, 2008: Washington State Auditor's Office 67 ---PAGE BREAK--- Beginning Balance Additions Reductions Ending Balance Due Within One Year Governmental Activities: Bonds and notes payable: General obligation bonds 22,250,000 $ - $ 1,360,000 $ 20,890,000 $ 1,420,000 $ Notes and loans 8,138,221 4,115 959,706 7,182,630 1,047,156 Total bonds and notes payable 30,388,221 4,115 2,319,706 28,072,630 2,467,156 Adjust for deferred amounts: For issuance premium 288,751 - 22,921 265,830 - Net effect of refunding bond issue (138,103) - (17,263) (120,840) - Claims & Judgements - 97,598 - 97,598 - Capital leases 136,131 - 136,131 - - Compensated absences 2,915,664 1,785,426 1,703,974 2,997,116 1,659,171 Governmental activity Long-term liabilities 33,590,664 $ 1,887,139 $ 4,165,469 $ 31,312,334 $ 4,126,327 $ Beginning Balance Additions Reductions Ending Balance Due Within One Year Business-type Activities: Notes and loans payable 31,509,990 $ 1,100,000 $ 2,466,356 $ 30,143,634 $ 2,406,798 $ Capital leases 228,556 - 47,141 181,415 49,153 Biosolids reserve 900,000 300,000 - 1,200,000 - Compensated absences 597,767 508,873 528,262 578,378 279,868 Business-type activity Long-term liabilities 33,236,313 $ 1,908,873 $ 3,041,759 $ 32,103,427 $ 2,735,819 $ Internal service funds predominantly serve the governmental funds. Accordingly, long-term liabilities for them are included as part of the above totals for governmental activities. The above amounts include $73,532 of internal services funds compensated absences. The biosolid 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. 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. Washington State Auditor's Office 68 ---PAGE BREAK--- Additionally, as of December 31, 2008, the City was involved in litigation stemming from a dispute with a developer over a development option agreement. Negotiations broke down related to the specific location of the development outlined in the agreement and the City chose not to extend the development option when it lapsed. The plaintiffs claim that they had final approval to move forward with the development and have sued the City alleging damages of not less than $5,000,000 based on 11 separate causes of action. Punitive damages and attorney fees were requested as well. As of December 31, 2008, all but 2 of the causes of action had been dismissed in federal district court and the likelihood of an unfavorable outcome for the City on this matter that would have a material cost to the City was considered to be remote. Early in 2009, the federal district court dismissed another of the 2 remaining causes of action, but declined to address the remaining breach of contract claim and instead sent it back to state court for consideration. Please see note 19 for disclosure of a subsequent event related to this matter. NOTE 12 - COMMITMENTS The City capitalizes equipment obtained by financing lease agreements. The liability for these leases and annual amortization requirements are disclosed in Note 9. Pension commitments are discussed in Note 7. NOTE 13 – RECEIVABLE AND PAYABLE BALANCES A. Receivables at December 31, 2008 were as follows: B. Payables at December 31, 2008 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 10,813 $ 595 $ 91,239 $ 41,243 $ 78,760 $ - $ 2,985 $ 20,610 $ 246,245 $ Taxes 2,969,782 - 775,836 545,087 - - - - 4,290,705 Accounts 217,112 2,314,265 1,411 8,381 684,861 178,196 483,919 29,548 3,917,693 Contracts - 44,520 435,512 - - - - - 480,032 Due from other governments 21,255 480,794 - 86,902 - - - 3,874 592,824 Gross Receivables 3,218,962 2,840,174 1,303,998 681,613 763,621 178,196 486,904 54,032 9,527,499 Less: allowance for uncollectible accounts - - - - (24,401) - (120,000) - (144,401) Net Total Receivables 3,218,962 $ 2,840,174 $ 1,303,998 $ 681,613 $ 739,220 $ 178,196 $ 366,904 $ 54,032 $ 9,383,098 $ Nonmajor Community Capital Nonmajor Proprietary Internal Payables General Development Improvement Govt' l Funds Water/Sewer Coliseum Fund Service Fund Total Interest - $ - $ - $ - $ - $ 27,454 $ - $ - $ 27,454 $ Claims and judgements - - - - - - - 663,259 663,259 Accounts 541,039 98,955 276,427 96,637 101,161 368,796 10,455 54,324 1,547,794 Salaries and benefits 507,429 1,924 60,704 66,949 - 60,546 11,267 708,819 Taxes 6,413 - - - - 15,341 - - 21,754 Retainage - - 4,281 - - - - - 4,281 Due to other governments 304 6,413 42,949 2,250 - - - - 51,916 Total Govt' l & Bus Activities 1,055,185 $ 107,292 $ 323,657 $ 159,591 $ 168,110 $ 411,591 $ 71,001 $ 728,850 $ 3,025,277 $ Reconciliation of financial statements to governmental wide financial statements: Accrued long term interest 89,400 - - - - - - - 89,400 Net Total Payables 1,144,585 $ 107,292 $ 323,657 $ 159,591 $ 168,110 $ 411,591 $ 71,001 $ 728,850 $ 3,114,677 $ Washington State Auditor's Office 69 ---PAGE BREAK--- NOTE 14 - INTERFUND TRANSACTIONS Interfund transactions are classified as follows: 1. Transactions that would be treated as revenues, expenditures or expenses if they involved external organizations, such as buying goods and services or payments in lieu of taxes, are similarly treated when they involve other funds of the City. 2. Transfers to support the operations of other funds are recorded as "Transfers" and classified as "Other Financing Sources or Uses" in the fund statements. Transfers between governmental or proprietary funds are netted as part of the reconciliation to the government-wide financial statements. 3. Capital contributions to enterprise or internal service funds, transfers of capital assets between proprietary and governmental funds, transfers to establish or reduce working capital in other funds, and transfers of remaining balances when funds are closed are classified as non-operating revenue. 4. Loans between funds are classified as interfund loans receivable and payable or as advances to and from other funds in the fund statements. Interfund loans do not affect total fund equity, but advances to other funds are offset by a reservation of fund equity. Loans and Advances are subject to elimination upon consolidation. As of December 31, 2008 outstanding interfund balances (resulting from various interfund transactions were as follows: Due from Due to Interfund Loans Purpose - Due to other funds other funds other funds Capital Improvement Fund Land Purchase 5,490,709 $ 320,000 $ Water & Sewer Fund 320,000 - Coliseum Fund Capital Construction - 5,490,709 Total 5,810,709 $ 5,810,709 $ Interfund Transfers Purpose - Transfers out Transfers in Transfers out General Fund Operations Transfers (Routine) 2,406,041 $ - $ General Fund Capital Transfers (Non-routine) - 481,513 General Fund Debt Service (Routine) - 673,469 General Fund Operations Transfer (Ambulance) - 721,510 General Fund Operations Transfer (Coliseum) - 510,401 Community Development Fund Street Improvements (Non-routine) 9,861 - Capital Improvement Fund Transfers (Routine) 725,000 450,000 Capital Improvement Fund Capital Transfers (Non-routine) 1,130,155 559,050 Capital Improvement Fund Debt Service (Routine) 21,750 971,492 Other Non-Major Govt' l Funds Operations Transfers (Routine) 450,000 2,849,341 Other Non-Major Govt' l Funds Capital Transfers (Non-routine) 316,617 1,925,389 Other Non-Major Govt' l Funds Debt Service (Routine) 1,885,979 241,016 Water/Sewer Fund Capital Transfers (Non-routine) - 93,375 Coliseum Fund Capital Transfers (Non-routine) 1,614,526 - Other Non-Major Enterprise Funds Operations Transfers (Routine) 721,510 - Other Non-Major Enterprise Funds Capital Transfers (Non-routine) - 38,500 Internal Service Funds Capital Transfers (Non-routine) 268,501 34,884 Total 9,549,940 $ 9,549,940 $ Washington State Auditor's Office 70 ---PAGE BREAK--- NOTE 15 - SEGMENT INFORMATION FOR ENTERPRISE FUNDS The City maintains four Enterprise Funds that provide ambulance service, building inspection services, water and sewer utility services, and the operation of the coliseum. The only fund that meets the criteria for segment reporting is a major fund and therefore the required segment information can be found on the Proprietary Fund statements. NOTE 16 - ECONOMIC DEVELOPMENT CORPORATION The City of Kennewick established the Economic Development Corporation (EDC) in August 1982, under the provisions of Title 39, Chapter 84 of the Revised Code of Washington. The EDC was established for the purposes of facilitating local economic development and employment opportunities through the financing of industrial development facilities using non-recourse revenue bonds. The EDC entered into an agreement with a non-governmental third party to provide financing through non- recourse revenue bonds, Series 1984, issued in the principal amount of $1,500,000 on August 2, 1984. Debt service on this issue was completed in July 2004. The bonds did not constitute indebtedness of either the City or the State and were secured solely by revenues derived from the organization on whose behalf the bonds were issued. The EDC is a discretely presented component unit of the City of Kennewick. It has a separate and distinct governing authority, which is appointed by the City. The City has no governing authority over the day-to-day operating decisions of the EDC; all obligations of the EDC are paid by user fees. The EDC is fiscally dependent upon the City as all bond issues must be approved by the City of Kennewick. The lack of any assets, liabilities or operating activities for 2008 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. The new Interlocal superseded the Interlocal Agreements previously associated with Benton County Emergency Management and Southeast Communications Center. The new Interlocal Agreement shall continue indefinitely, unless terminated by a participant. Benton County Emergency Services is served by an Executive Board composed of the City Managers of Kennewick and Richland, City Administrators for Prosser and West Richland, a Councilmember from Benton City and a Benton County Commissioner. Benton County Emergency Services is comprised of three Divisions: Southeast Communications Center (SECOMM), Benton County Emergency Management (BCEM) and 800 MHz Radio. 1. SECOMM The Southeast Communications Center provides public safety communications services to three principal participating jurisdictions: The cities of Kennewick and Richland and Benton County. The three principal participating jurisdictions own an equal share of net assets. Allocation of financial participation among the three principle jurisdictions is based on an equal share of capital expense and an equal share of predetermined fixed costs, direct costs and percent of use. Washington State Auditor's Office 71 ---PAGE BREAK--- The Southeast Communications Center also provides public safety communications services via contract to the City of West Richland, Benton County Fire Protection District Service contract agencies are assessed on a cost per capita or cost per call basis. 2. BCEM Benton County Emergency Management provides disaster response planning, event and response coordination and disaster recovery for Benton County and its political subdivisions per RCW 38.52. Four grant programs fund BCEM: Radiological Emergency Preparedness, DOE Emergency Preparedness, Chemical Stockpile Emergency Preparedness and State and Local Government Assistance program. The six participating jurisdictions own an equal share of net assets unless otherwise defined in the grant programs. Financial participation for Benton County and the cities of Kennewick, Richland, West Richland, Prosser and Benton City are allocated based on an equal share of a predetermined basic charge and a value determined by percent of population and assessed value. 3. 800 MHz Radio 800 MHz Radio provides communication infrastructure and technology for the dispatching of public safety agencies throughout Benton County. The 11 participating agencies including Benton County Sheriff and Public Works, the cities of Kennewick, Richland, West Richland and Prosser, Benton County Fire Districts 1, 2 and 4, Benton PUD and Columbia Dive and Rescue are assessed an annual fee per radio to fund system maintenance. Effective January 1, 1997, the City of Richland assumed responsibility for operation of Benton County Emergency Services. As the Operating Jurisdiction, Richland provides all necessary administrative services for the operation of BCES. On December 31, 2008, the City of Kennewick's equity interest in SECOMM was $626,197, $105,984 in BCEM, and $174,980 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. The allocation of financial participation among the participating jurisdictions is based upon the approved budget for that year and is billed quarterly in advance to each agency. On dissolution of the Interlocal Agreement, the net assets will be shared based upon participant contribution. Effective January 1, 1992, the City of Kennewick assumed responsibility for operation of the BI-PIN system. As the Operating Jurisdiction, Kennewick provides all necessary support services for the operation of BI-PIN such as accounting, legal services, risk management and information systems. The total amount paid by BI-PIN in 2008 for these transactions was $126,785. Washington State Auditor's Office 72 ---PAGE BREAK--- The City of Kennewick's equity interest in BI-PIN was $429,775 on December 31, 2008, 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 member from each of the Boards of County Commissioners of Benton and Franklin Counties. In addition, a Governing Board consisting of the Chiefs of Police from the cities and the Sheriffs from the counties administers daily activity. Effective January 1, 1990, the City of Pasco assumed responsibility for the operation of Metro. As the Operating Jurisdiction, Pasco provides accounting services for the operation of Metro. The City of Kennewick's equity interest in Metro was $31,081 on June 30, 2008, 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 Pasco, 525 North Third Street, Pasco, Washington. D. Emergency Medical Services The Emergency Medical Services (EMS) joint venture was dissolved in the fall of 2007, at which time the net assets were distributed based on the direction of the EMS Administrative Board. In conjunction with the dissolution of EMS, the City of Kennewick entered into a series of Interlocal Agreements with each participating agency to provide oversight for the administrative clerical support for the emergency medical services Medical Program Director (MPD) for Benton and Franklin Counties. 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, 2008, the City had 51 individuals that met the eligibility requirements of this retirement plan. A. Plan Description As required by the Revised Code of Washington (RCW), Chapter 41.26, the City provides lifetime medical care for members of the LEOFF retirement system that were hired prior to October 1, 1977 (LEOFF Plan 1 members). The members’ necessary hospital, medical, and nursing home care expenses not payable from Medicare, insurance provided by another employer, another pension plan, or any other similar source are covered. The City provides medical insurance for its eligible retirees under its medical insurance program. Under authorization of the LEOFF Disability Board, Washington State Auditor's Office 73 ---PAGE BREAK--- direct payment is made for any other eligible retiree medical expenses not covered by standard medical insurance. B. Funding Policy Pursuant to state statute, the City reimburses 100% of authorized LEOFF 1 retiree healthcare costs. The City pays a insurance premium to cover each retiree under its medical insurance program as well as any remaining eligible out of pocket expenses. Employer contributions are financed on a pay-as-you-go basis. In 2008, the City’s costs for health insurance and other medical costs for retired firefighters were paid for out of its Firemen’s Pension Trust Fund, while these same costs for retired law enforcement officers were paid from the General Fund. Effective January 1, 2009, these costs will be paid out of the City’s Other Postemployment Benefits Trust Fund and will be funded utilizing the proceeds of a newly authorized 6.5% utility tax assessed on water and sewer sales that is dedicated for this purpose. The projected revenue from this utility tax is expected to mirror the City’s LEOFF 1 retiree medical costs in 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. 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. The City has elected to calculate the ARC and related information using the alternative measurement method permitted by GASB Statement 45 for employers with plans of less than one hundred members. The following table shows the components of the City’s annual OPEB cost for the year, the amounts actually contributed to the plan, and changes in the City’s Net OPEB obligation. As this is the City’s first year of implementation for GASB Statement 45, the City’s annual OPEB cost was equal to the ARC. 2008 Annual required contribution $912,123 Interest on net OPEB obligation - Adjustment to the ARC - Annual OPEB cost (expense) 912,123 Contributions made 755,347 Increase in net OPEB obligation 156,776 Net OPEB obligation – beginning of the year - Net OPEB obligation – end of the year $156,776 The City’s OPEB cost, the percentage of OPEB cost contributed to the plan, and the net OPEB obligation for 2008 were as follows: Fiscal Year Ended Annual OPEB Cost Percentage of Annual OPEB Cost Contributed Net OPEB Obligation 12/31/08 $912,123 82.8% $156,776 D. Funding Status and Funding Progress As of January 1, 2008, the 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. Washington State Auditor's Office 74 ---PAGE BREAK--- 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. NOTE 19 - OTHER DISCLOSURES Comparative Data/Reclassifications Comparative total data for the prior year is presented on both government-wide and fund financial statements in order to provide an understanding of the changes in the financial position and operations of these funds. Also, certain amounts presented in the prior year data have been reclassified for consistency purposes on the government-wide statement of net assets with no impact on ending total net assets. Subsequent Event 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 in the case. The City will be appealing the jury’s verdict and the matter is expected to be ongoing for at least another year. Washington State Auditor's Office 75 ---PAGE BREAK--- 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 12/31/2008 $63,419 $ 98,128 $ 161,547 $150,624 107% 12/31/2007 60,988 136,012 197,000 157,014 118% 12/31/2006 55,586 (48,172) 7,414 157,014 5% 12/31/2005 50,546 (228,676) (178,130) 104,802 (170%) 12/31/2004 50,847 26,000 76,847 104,802 73% 12/31/2003 42,659 26,000 68,659 58,274 118% 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, 2008 $ 341 $ 2,406 $2,065 14% $ - 0% January 1, 2006 341 2,406 2,065 14% - 0% January 1, 2004 940 2,239 1,299 42% - 0% January 1, 2002 1,285 1,992 707 65% - 0% Washington State Auditor's Office 76 ---PAGE BREAK--- Required Supplementary Information Other Postemployment Benefits (LEOFF 1 Retiree Medical) 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 is the first year of OPEB implementation. As a result, only one year of funding progress is shown. Washington State Auditor's Office 77 ---PAGE BREAK--- Expenditures of Federal Awards Year Ended December 31, 2008 Grantor/ Federal Current Pass-Through Grantor CFDA Other Identification Year Program Title Number Number Expenditures U.S. Department of Housing and Urban Development 2007 Community Development Block Grant (Direct) 14.218 B-07-MC-53-0001 374,175 2008 Community Development Block Grant (Direct) 14.218 B-08-MC-53-0001 206,429 Total U.S. Dept of Housing and Urban Development 580,604 Environmental Protection Agency Passed through WA State DCTED and Public Works Board: Drinking Water Revolving Loan 66.468 02-065102-023 311,459 Total Environmental Protection Agency 311,459 U.S. Department of Homeland Security Passed through Benton County Emergency Management Law Enforcement Terrorism Prevention Program (LETPP) 97.074 2007-GE-T7-017 28,759 Total U.S. Dept of Homeland Security 28,759 U.S. Department of the Interior, National Park Service Passed through WA State Recreation and Conservation Funding Board (RCFB) Outdoor Recreation_Acquisition, Development and Planning 15.916 05-1025D 18,800 Total U.S. Dept of the Interior, National Park Service 18,800 U.S. Department of Justice Bulletproof Vest Partnership 16.607 6,047 Anti-Gang Initiative 16.744 F07-66206205 18,320 Edward Byrne Memorial Justice Assitance Grant Program 16.738 2005DJBX0572 6,116 Edward Byrne Memorial Justice Assitance Grant Program 16.738 2007DJBX0496 28,623 Edward Byrne Memorial Justice Assitance Grant Program 16.738 2008DJBX0178 6,112 Total CFDA Number 16.738 40,851 Passed through WA State DCTED and City of Pasco: Edward Byrne Memorial Formula Grant Program 16.579 F00-67420013 10,522 Total U.S. Dept of Justice 75,740 U.S. Department of Transportation Passed through WA State Traffic Safety Commission: State and Community Highway Safety 20.600 4,699 Alcohol Traffic Safety and Drunk Driving Prevention Incentive Grants 20.601 2,595 Occupant Protection 20.602 6,908 Passed through Federal Highway Administration and WA State Department of Transportation: Highway Planning & Construction - 10 th Ave/Columbia Center Blvd/Edison St 20.205 STPUS - 3408(003) 11,752 Highway Planning & Construction - Citywide Flashing Yellow Arrow Implementation Project 20.205 STPH - 000S(201) 293,246 Highway Planning & Construction - Edison St & Metaline Ave 20.205 STPH - 3413(005) 10,122 Highway Planning & Construction - SR395/27th & 36th Intersections 20.205 STPUS - 9903(008) 6,816 Highway Planning & Construction - Gage Blvd/Center Parkway Extension 20.205 REV-STPUS-9903(007) 501,184 Total CFDA Number 20.205 823,120 Total U.S. Dept of Transportation 837,322 TOTAL EXPENDITURES OF FEDERAL AWARDS $1,852,684 The accompanying notes are an integral part of this schedule. Washington State Auditor's Office 78 ---PAGE BREAK--- Notes to Financial Assistance Schedules Year Ended December 31, 2008 NOTE 1 - BASIS OF ACCOUNTING NOTE 2 - PROGRAM COSTS NOTE 3 - HIGHWAY PLANNING & CONSTRUCTION PROJECT 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. On March 25, 2008 Washington State Department of Transportation issued Local Agency Agreement Supple-ment Number 7, for Federal Aid Project REV-STPUS-9903(007), Center Parkway Extension/Gage Blvd. Widening. The supplement obligated additional direct allocation funds for the final design, right-of-way and construction of Phase 2B, in the amount of $1,015,883, of which $407,039 were used for 2007 expenditures. The 2007 expenditures were not included on the 2007 Schedule of Expenditures of Federal Awards because they were not allowable at the time. These expenditures have been included on the 2008 Schedule of Expenditures of Federal Awards. Washington State Auditor's Office 79 ---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 Web Site www.sao.wa.gov Subscription Service ---PAGE BREAK--- Washington State Auditor’s Office Accountability Audit Report City of Kennewick Benton County Report Date November 24, 2009 Report No. 1002635 Issue Date December 14, 2009 ---PAGE BREAK--- Washington State Auditor Brian Sonntag December 14, 2009 City Council City of Kennewick Kennewick, Washington Report on Accountability We appreciate the opportunity to work in cooperation with your City to promote accountability, integrity and openness in government. The State Auditor’s Office takes seriously our role to advocate for government accountability and transparency and to promote positive change. Please find attached our report on the City of Kennewick’s accountability and compliance with state laws and regulations and its own policies and procedures. Thank you for working with us to ensure the efficient and effective use of public resources. Sincerely, BRIAN SONNTAG, CGFM STATE AUDITOR 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 November 24, 2009 Audit Summary 1 Related Reports 2 Description of the City 3 ---PAGE BREAK--- Washington State Auditor’s Office 1 Audit Summary City of Kennewick Benton County November 24, 2009 ABOUT THE AUDIT This report contains the results of our independent accountability audit of the City of Kennewick for the period from January 1, 2008, through December 31, 2008. We evaluated internal controls and performed audit procedures on the activities of the City. We also determined whether the City complied with state laws and regulations and its own policies and procedures. In keeping with general auditing practices, we do not examine every transaction, activity or area. Instead, the areas examined were those representing the highest risk of noncompliance, misappropriation or misuse. The following areas were examined during this audit period:  Ambulance billing  Cash receipting  Safeguarding of assets  Building permits  Open public meetings/records laws  Police – citations/investigative money  Disbursements/expenditures  Payroll/personnel  Travel expenditures  Utility billing  Procurement cards  Analytical trends of financial statement balances RESULTS In the areas we examined, the City’s internal controls were adequate to safeguard public assets. The City also complied with state laws and regulations and its own policies and procedures in the areas we examined. ---PAGE BREAK--- Washington State Auditor’s Office 2 Related Reports City of Kennewick Benton County November 24, 2009 FINANCIAL Our opinion on the City’s financial statements and compliance with federal grant program requirements is provided in a separate report, which includes the City’s financial statements. FEDERAL GRANT PROGRAMS We evaluated internal controls and tested compliance with the federal program requirements, as applicable, for the City’s major federal program, which is listed in the Federal Summary section of the financial statement and single audit report. ---PAGE BREAK--- Washington State Auditor’s Office 3 Description of the City City of Kennewick Benton County November 24, 2009 ABOUT THE CITY The City of Kennewick serves approximately 67,180 citizens in Benton County. The City provides an array of services including water, sewer, police, fire, parks and recreation, senior center, public improvements, and planning and economic development. The City contracts for solid waste collection and disposal services and the Mid-Columbia Regional Library District provides library services. The Toyota Center Coliseum and Arena are also owned by the City. An elected, seven-member Council governs the City. The Council then selects one of its Members to serve as Mayor. The Council also appoints a Manager to oversee the City’s daily operations as well as its approximately 350 full- and part-time employees. The City has a two-year adjusted budget of approximately $248 million. ELECTED OFFICIALS These officials served during the audit period: City Council: James R. Beaver, Mayor Margery A. Price, Mayor Pro Tem James Hampstead Thomas Moak R.E. “Bob” Olson Paul Parish Bob Parks APPOINTED OFFICIALS City Manager Robert Hammond ---PAGE BREAK--- Washington State Auditor’s Office 4 CITY CONTACT INFORMATION Address: City of Kennewick P.O. Box 6108 Kennewick, WA 99336 Phone: (509) 585-4200 Web site: www.ci.kennewick.wa.us AUDIT HISTORY We audit the City annually. This is the 12th consecutive audit with no findings. City officials have always been responsive to prior audit recommendations. We believe this reflects the City’s commitment to maintaining a strong financial system and establishing public accountability. ---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 Web Site www.sao.wa.gov Subscription Service