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IntroductionCITY OF AUDITED ANNUAL FINANCIAL REPORT FISCAL YEAR 2009 July 1, 2008 - June 30, 2009 CITY OF KALISPELL ANNUAL FINANCIAL REPORT TABLE OF CONTENTS INTRODUCTORY SECTION Letterof Transmittal............................................................................................................................................ 2-4 ElectedOfficials.................................................................................................................................................... 5 FINANCIAL SECTION Management's Discussion and Analysis............................................................................................................. 6-15 IndependentAuditor's Report...........................................................................................................................16-17 Basic Financial Statements: Government -wide Financial Statements: Statementof Net Assets....................................................................................................................... 18 Statementof Activities......................................................................................................................... 19 Fund Financial Statements: Balance Sheet — Governmental Funds................................................................................................ 20 Reconciliation of the Balance Sheet — Governmental Funds to the Statement of Net Assets ........ 21 Statement of Revenues, Expenditures, and Changes in Fund Balances — Governmental Funds.. 22 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds to the Statement of Activities..................................................................... 23 BalanceSheet — Proprietary Funds.................................................................................................... 24 Statement of Revenues, Expenses, and Changes in Net Assets — Proprietary Funds ..................... 25 Statement of Cash Flows — Proprietary Funds.................................................................................. 26 Statement of Fiduciary Net Assets — Fiduciary Funds...................................................................... 27 Notesto the Financial Statements............................................................................................................ 28-56 Required Supplementary Information: Single Audit Section: Schedule of Expenditures of Federal Awards................................................................................... 57 Notes to the Schedule of Expenditures of Federal Awards............................................................... 58 Budgetary Comparison Schedule — General and Major Special Revenue Funds ........................... 59 Schedule of Funding Progress and Employer Contributions — Other Post -Employment HealthcareBenefits.......................................................................................................................... 60 Report on Compliance and on Internal Control over Financial Reporting based on an Audit of Financial Statements Performed in Accordance with Government AuditingStandards......................................................................................................................... 61-62 Report on Compliance with Requirements Applicable to Each Major Program and Internal Control over Compliance in accordance with OMB Circular A-133......................................... 63-64 Schedule of Findings and Questioned Costs....................................................................................... 65-66 Report on other Compliance, Financial, and Internal Accounting Control Matters ..................... 67 Report on Prior Audit Report Recommendations............................................................................. 68 Supplementary Information: Combining and Individual Fund Statements and Schedules: Combining Balance Sheet — Nonmajor Governmental Funds.......................................................... 69-76 Combining Statement of Revenues, Expenditures and Changes in Fund Balances — Budget and Actual - Nonmajor Governmental Funds................................................................... 77-93 Budgetary Comparison Schedule — MajorDebt Service Fund................................................................................................................. 94 Combining Balance Sheet — Nonmajor Enterprise Funds................................................................ 95 Combining Statement of Revenues, Expenditures, and Changes in Net Assets — Nonmajor EnterpriseFunds.............................................................................................................................. 96 Combining Statement of Cash Flows — Nonmajor Enterprise Funds .............................................. 97 MISCELLANEOUS STATISTICS................................................................................................................... 98 1 all In flel"Ill m OK" r77 The City f Kalispell Incorporated 1892 Telephone (406) 758-7700 FAX (406) 758-7758 Post Office Box 1997 Kalispell, MT 59903-1997 December 9, 2009 To the Honorable Mayor, members of the City Council, and Citizens of the City of Kalispell, Montana: State law requires that all general-purpose local governments publish within six months of the close of each fiscal year a complete set of financial statements presented in conformity with generally accepted accounting principles (GAAP) and audited in accordance with generally accepted auditing standards by a firm of licensed certified public accountants. Pursuant to that requirement, the annual financial report for the City of Kalispell, Montana for the fiscal year ended June 30, 2008, is submitted for your review. The Finance Office prepared this report. Responsibility for the accuracy and completeness of the presented data, including all disclosures, rests with the City. We believe the data, as presented, is accurate in all material aspects; that it is presented in a manner designed to fairly set forth the financial position and results of operations of the City as measured by the financial activity of its various funds; and that all disclosures necessary to enable the reader to gain an understanding of the City's financial affairs have been included. GAAP require that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement MD&A and should be read in conjunction with it. The City of Kalispell's MD&A immediately precedes the City's basic financial statement within this report. Reporting Entity and Services Provided The City of Kalispell, incorporated in 1892, is located in the western part of the state, which is considered to be one of the top growth areas in the state. The City of Kalispell is empowered to levy a property tax on both real and personal properties located within its boundaries. It also is empowered by state statute to extend its corporate limits by annexation, which occurs periodically when deemed appropriate by the governing council. The City of Kalispell is operated under the council-manager form of government. Policy -making and legislative authority are vested in a governing council consisting of the mayor and eight other members. The governing council is responsible, among other things, for passing ordinances, adopting the budget, appointing boards, and hiring the City Manager. The City Manager is responsible for carrying out the policies and ordinances of the governing council, and for overseeing the day-to- day operations of the City. The council is elected on a non -partisan basis. Council members are elected by district to serve four-year staggered terms, with four council members elected every two years. The mayor is elected at large for a four-year term. All significant operations of the City, as defined by the National Council of Governmental Accounting, Statement #3, have been included in the accompanying financial statements. The City provides a full range of municipal services including police, fire, building safety, planning and zoning, city court, parks and recreation, streets, community development and general administrative services. The City also operates as Enterprise funds: water, sewer, solid waste, and an airport. In addition, the City presents financial data for two component units on the combined statements. The Kalispell Parking Commission is a discretely presented proprietary type component unit. The Downtown Business Improvement District is a discretely presented governmental type component unit. The annual budget serves as the foundation for the City of Kalispell's financial planning and control. All departments of the City of Kalispell are required to submit requests for appropriation to the City Manager. The City Manager uses these requests as the starting point for developing a proposed budget. The City Manager then presents this proposed budget to the council for review. The council is required to hold public hearings on the proposed budget and to adopt a final budget. The appropriated budget is prepared by fund, function, and department. Budget -to -actual comparisons are provided in this report for each individual governmental fund for which an appropriated annual budget has been adopted. For the general fund and any major special revenue fund, the comparison is part of the basic financial statements. Accounting System and Budgetary Control The City's accounting records for general governmental operations are maintained on a modified accrual basis. Under this method, revenues are recorded when measurable and available; expenditures are recorded when services or goods are received and the liabilities are incurred. Accounting records for enterprise funds are recorded on the accrual basis. Under this method, revenues are recorded when the services are performed; expenditures are recorded when the goods or services are received and the liabilities are incurred. In developing the City's accounting system, consideration is given to the adequacy of internal accounting controls. Internal controls are designed to provide reasonable assurance regarding the safeguarding of assets and the accuracy and reliability of accounting data used for preparing financial data and maintaining accountability for assets. Budgetary control is maintained by an annual appropriation system. The Mayor and Council evaluate the budget proposals of the various City departments to determine the appropriate level of the operating and public service programs. After giving due consideration to the input received from the citizens, the City Council adopts the budget. The budget is controlled through an on line accounting system. The control is decentralized to the point that individual department heads are responsible for expending within budgetary limits. Cash Management The City's demand deposits are interest bearing money market accounts. The City also utilizes the Statewide Investment Pool (S.T.I.P), and obligations of the U.S. Treasury for cash temporarily idle during the year. Rates of return vary based on markets. Insurance The City joined other Montana cities and towns to form a self-insurance pool offering worker's compensation and liability coverage. On October 1, 2004, MMIA established, and the City joined, the Employee Benefits Program for its members, providing a more affordable health and dental insurance option for members to offer their employees. Postemployment Benefits The City of Kalispell provides pension benefits for substantially all of its full-time employees. These benefits are provided through the Montana Public Employees' Retirement System (PERS); Municipal Police Officer's Retirement System (MPORS): and the Firefighters' Unified Retirement System (FURS). The City of Kalispell has no obligation in connection with employee benefits offered through this plan beyond its matching contributions. Additional information on the City of Kalispell's pension arrangements can be found in the notes to the financial statements. Prospects for the Future Since November 1986 and the passage of Initiative 105, which limited certain property taxes to the 1986 levels, the ability of the City to raise revenue for basic services is increasingly difficult. Then, the legislature, with SB 184, lowered tax rates forcing the City to increase mill levies to maintain the same level of revenue. The City's cash reserves in most funds vary between 10% and 20% of appropriations. State law allows for reserves of 50%. Reserves provide for cash flow between tax revenue receipts to keep the City from having to borrow funds for operations. Additional revenues generated by increased taxable valuation come with the additional costs of an increased service area. The City of Kalispell's Police and Fire Departments, Courts system, Building Department, Public Works and Parks have felt the increased pressure from the influx of people to Flathead County. These pressures impact the budgets of all departments. The outlook for the City of Kalispell is to continue providing basic services while looking for additional ways to fund the increasing costs of those services. Acknowledgments In conclusion, I am able to report that, although the general fund is struggling to deal with the increased cost associated with the City's growth, overall the City of Kalispell is in good financial condition. I wish to express my thanks to Amy Robertson and Deb Deist of the finance department as well as the administrative staff of the various departments. Without your help and input this report would not be possible. I would also like to give recognition to the mayor, governing council, and the city manager for their consistent support for maintaining the highest standards in the management of the City of Kalispell's finances. In accordance with Section 7-6-4111, MCA I hereby transmit the City of Kalispell Annual Financial Report as of June 30, 2009 for the fiscal year then ended. Date 11 Res ctfully submitted, Rick Wills Assistant Finance Director CITY OF KALISPELL ANNUAL FINANCIAL REPORT JUNE 30, 2009 ELECTED OFFICIALS Manager/Council form of Government Mayor Pamela B. Kennedy 12/2009 Council members: Kari Gabriel Ward I 12/2011 Jim Atkinson Ward III 12/2009 Robert Hafferman Ward I 12/2009 Randy Kenyon Ward III 12/2011 Wayne Saverud Ward II 12/2011 M. Duane Larson Ward IV 12/2011 Hank Olsen Ward II 12/2009 Tim Kluesner Ward IV 12/2009 Other City Officials: City Manager Myrt Webb Attorney Charles Harball Police Chief Roger Nasset Acting Fire Chief Dan Diehl Finance Director Amy Robertson City Treasurer Deb Diest City Judge Heidi Ulbricht Public Works Director James Hansz Parks Director Michael Baker Community Development Director Kellie Danielson Planning Director Tom Jentz Human Resource Director Terry Mitton Assistant Finance Director Rick Wills E