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5. Notes to Financial StatementsCITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City complies with generally accepted accounting principles (GAAP). GAAP includes all relevant Governmental Accounting Standards Board (GASB) pronouncements. In the government -wide financial statements and the fund financial statements for the proprietary funds, Financial Accounting Standards Board (FASB) pronouncements and Accounting Principles Board (APB) opinions issued on or before November 30, 1989, have been applied unless those pronouncements conflict with or contradict GASB pronouncements, in which case GASB prevails. For enterprise funds GASB statement Nos. 20 and 34 provide the City the option of electing to apply FASB pronouncements issued after November 30, 1989. The City has elected not to apply those pronouncements. In June 2004, the Governmental Accounting Standards Board (GASB) issued Statement No. 45, Accounting and Financial Reporting By Employers for Postretirement Benefits Other Than Pensions. The City is required to implement this new statement during the year ended June 30, 2009. Certain significant changes in the Statement include the following: 1. Recognition of cost of postemployment benefits on the government -wide financial statements on the accrual basis of accounting instead of the cash basis. 2. Provide information on current values of future benefits, associated liabilities, and summarize major plan provisions and demographics. Financial Reporting Entity In determining the financial reporting entity, the city complies with the provisions for GASB statement No. 14, The Financial Reporting Entity, and includes all component units of which the City appointed a voting majority of the units' board; the City is either able to impose it's will on the unit or a financial benefit or burden relationship exists. Primary Government The City of Kalispell is a political subdivision of the State of Montana governed by an elected Mayor and Council duly elected by the registered voters of the City. The City utilizes the City Manager form of government. The City is considered a primary government because it is a general purpose local government. Further, it meets the following criteria: (a) It has a separately elected governing body (b) It is legally separate and (c) It is fiscally independent from the State and other local governments. The accompanying financial statements present the primary government and its component units, entities for which the government is considered to be financially accountable. These financial statements include all funds, agencies, boards, commissions and authorities which meet the criteria for inclusion in the City's financial report. These criteria include financial accountability, appointment of a majority of the secondary government and the financial benefit or burden derived by the primary government from a secondary government. Discretely Presented Component Units Discretely presented component units are separate legal entities that meet the component unit criteria described above but do not meet the criteria for blending. The Cities' two discretely presented component units, the Kalispell Parking Commission, and the Downtown Business Improvement District are legally separate organizations of the City, but the City is financially accountable. The component units are reported in a separate column to emphasize that they are legally separate from the City. Kalispell Parking Commission The Kalispell City Council passed Resolution 4103, a Resolution of intention to create Special Parking District #2 on June 21, 1993. Also passed was Resolution 4104, a resolution of intention to provide for funding the cost of maintaining, IN CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 operating, repairing, and improving Special Parking Maintenance District #2 and Resolution 4105, a Resolution declaring the need for a Parking Commission to function in the City of Kalispell and declaring a jurisdictional area wherein said Parking Commission is authorized to function. The Mayor and City Council appointed the Board of Directors composed of City residents who operate businesses within the district. The Parking Commission opened their doors on February 1st 1994. The City transferred $53,000 in Fiscal 1994 to the district as start up money; no further City funds have been given to the district. It is intended that the Parking Commission be operated as a Proprietary type fund and has been classified as such in the City's financial statements. Downtown Business Improvement District On May 17, 2004, by resolution 4891A, the City created the Downtown Business Improvement District. The purpose of which appears to promote the health, safety, prosperity, security and general welfare of the inhabitants of the City of Kalispell and the proposed district, and appears to be of special benefit to the property within the District. The District boundaries are roughly 2nd Avenue East to 2nd Avenue West between Center Street and 4`b Street South. Publicly owned property and owner occupied single family dwellings are exempt from the assessments related to the District. Basis of Presentation, Measurement Focus, and Basis of Accounting Government -wide Financial Statements The government -wide financial statements (i.e., 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. Eliminations have been made to minimize the double -counting of business -type activities. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. The general government function of the City includes expenses which are, in essence, indirect expenses of other functions. These expenses are allocated to each related function. 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. Indirect expenses reported in the statement of activities must be allocated to the different functions of the City. These expenses include administration, data processing, and central garage. The administrative cost allocation is based on each functions percentage of total City expenses. Data processing is allocated based approximately on that functions usage of the City's computer servers. Central garage expenses are allocated to the other functions of the City based on actual invoicing. 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. Certain eliminations have been made as prescribed by GASB 34 in regards to inter -fund activities, payables and receivables. All internal balances in the Statement of Net Assets have been eliminated except those representing balances between the governmental activities and business -type activities, which are presented as internal balances and eliminated in the total primary government column. In the Statement of Activities, internal service fund transactions have been eliminated; however, We CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 those transactions between governmental and business -type activities have not been eliminated. Measurement Focus and Basis of Accounting On the government -wide Statement of Net Assets and the Statement of Activities, both governmental and business -type activities are presented using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred, regardless of the timing of the 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. The City generally applies restricted resources to expenses incurred before using unrestricted resources when both restricted and unrestricted net assets are available. Fund Financial Statements Basis of Presentation Fund financial statements of the City are organized into funds. A fund is an independent fiscal and accounting entity with a self -balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance -related legal and contractual provisions. The minimum number of funds is maintained consistent with legal and managerial requirements. Funds are organized into three categories: governmental, proprietary, and fiduciary. An emphasis is placed on major funds within the governmental and proprietary categories. Each major fund is displayed in a separate column in the governmental funds statements. All of the remaining funds are aggregated and reported in a single column as non -major funds. A fund is considered major if it is the primary operating fund of the City or meets the following criteria: a. Total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise fund are at least 10 percent of the corresponding total for all funds of that category or type; and b. Total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise funds are at least 5 percent of the corresponding total for all governmental and enterprise funds combined. Measurement focus and Basis of Accounting Governmental funds are used to account for the City's general government activities. Governmental fund types use the flow of current financial resources measurement focus and the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual. (i.e., when they are "measurable and available") "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to pay liabilities of the current period. The City considers all revenues available if they are collected within 60 days after year-end. Expenditures are recorded when the related fund liability is incurred, except for unmatured interest on general long-term debt which is recognized when due, and certain compensated absences and claims and judgements which are recognized when the obligations are expected to be liquidated with expendable available financial resources. Real and personal property taxes, special assessments, charges for current services, and interest earnings are susceptible to accrual. Other receipts and taxes become measurable and available when cash is received by the City and are recognized as revenue at that time. The City recorded real and personal property taxes and assessments levied for the current year as revenue. Taxes and assessments receivable remaining unpaid at year-end and not expected to be collected soon enough thereafter to be available to pay obligations of the current year were recorded as deferred revenue, with a corresponding reduction in revenues, as required by generally accepted accounting principles. In addition, prior period delinquent taxes and assessments collected in the current period were recorded as revenue in the current period as required by generally accepted 30 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 accounting principles. Entitlements and shared revenues are recorded at the time of receipt or earlier if the susceptible to accrual criteria are met. Expenditure driven grants are recognized as revenue when the qualifying expenditures have been incurred and all other grant requirements have been met. Major Funds The City reports the following major governmental funds: The General Fund is always a major fund. This is the City's primary operating fund and it accounts for all financial resources of the City except those required to be accounted for in other funds. The Community Development Loan Revolving Fund was established to account for the lending and repayment of monies loaned to businesses and individuals for projects approved by the City's Community Development department. SID 344 is a debt service fund established to account for the resources accumulated and payments made for principal and interest on the 20 year bonds sold to finance the construction of the Old School Station Industrial and Technology Park. Proprietary funds are accounted for using the accrual basis of accounting. These funds account for operations that are primarily financed by user charges. The flow of economic resources focus concerns determining costs as a means of maintaining the capital investment and management control. Revenues are recognized when earned and expenses are recognized when incurred. Allocations of costs, such as depreciation, are recorded in proprietary funds. Proprietary funds distinguish operating revenues and expenses from non -operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connections with a proprietary fund's principal ongoing operations. The principal operating revenues for enterprise funds are charges to customers for sales and services. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non -operating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. Major Funds The City reports the following major proprietary funds: The Water Fund accounts for the activities of the City's water distribution operations. The Sewer Fund accounts for the activities of the City's sewer collection and treatment operations and includes the storm sewer system. Fiduciary funds account for assets held by the government in a trustee capacity or as an agent on behalf of others. The agency fund is custodial in nature and does not present results of operations or have a measurement focus. Agency funds are accounted for using the modified accrual basis of accounting. This fund is used to account for assets that the City holds for others in an agency capacity. As a general rule the effect of interfund activity has been eliminated from the government -wide financial statements, and the internal service funds have been absorbed pro -ratably into governmental -type and business -type activities on the government - wide financial statements. Exceptions to this general rule are charges for services between various functions of the government. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. 31 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Budget Process An annual appropriated operating budget is adopted each fiscal year for the general fund, special revenue funds, debt service funds and capital projects funds on the modified accrual basis. In addition, a budget is adopted for the enterprise and internal service funds on a full accrual basis. The appropriated budget is prepared by fund, function, and for the general fund and certain other funds, by department. The final budget is legally enacted by the City Council, after holding public hearings as required by State statutes, and within forty-five days of the State providing final shared revenue figures. Budget appropriation transfers may be made between general classifications of salaries and wages, maintenance and operation and capital outlay. Reported budget amounts represent the originally adopted budget as amended by resolution of the City Council. It is management's responsibility to see that the budget is followed to the budgetary line item. The City Council may amend a final budget when shortfalls in budgeted revenues require reductions in approved appropriations to avert deficit spending; when savings result from unanticipated adjustments in projected expenditures; when unanticipated state or federal monies are received; or when a public emergency occurs which could not have been foreseen at the time of adoption. The procedure to amend the budget in total can be made only after the City prepares a resolution, notice is published of a public hearing, and a public hearing is held in accordance with state law. All material budget amendments and transfers during FY 2009 are described below: Governmental Funds Decreased general fund appropriations by $99,186. Increase of $100,000 in the City Manager budget for severance pay and the recruitment of a new City Manager was offset by decreases to most other general fund departments. Increased general fund appropriations by $130,000 to provide budget authority for underestimated salary expenditures. Moved $315,477 of budget authority from general fund to create a parks fund (special revenue). Proprietary Funds Increased sewer fund appropriations by $500,000 to provide the needed budget authority for the upgrade of the Grandview lift station and necessary pipeline upgrades downstream of the lift station. Component Units Increased the parking commission appropriations by $17,000 for unexpected snow removal expense, legal fees, and to more accurately report depreciation. Assets, Liabilities, and Net Assets or Equity 1. Cash, Cash Equivalents, and Investments The City's cash and cash equivalents are considered to be cash on hand, demand and time deposits, government backed securities, bonds and warrants, and investments with the State of Montana's short-term investment pool (STIP). The cash resources of the individual funds are combined to form a pool of cash and investments which is managed by the City Treasurer. Investments are carried at cost, which does approximate fair value as described in Note III, A, except for investments in STIP and particular bonds, which are reported at fair value. 32 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 For purposes of the statement of cash flows, the enterprise and internal services funds consider all funds (including restricted assets) held in the City's cash management pool to be cash equivalents. 2. Receivables and Payables Transactions between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either interfund receivables/payables (i.e., the current portion of interfund loans) or advances to/from other funds (i.e., the non -current portion of interfund loans). All other outstanding balances between funds are reported as due to/from other funds. Advances between funds are offset by a fund balance reserve account in applicable governmental funds to indicate they are not available for appropriation and are not expendable available financial resources. Property tax levies are set within forty-five days of the State providing shared revenue figures, in connection with the budget process. Real property (and certain attached personal property) taxes are billed within ten days after the third Monday in October and are due in equal installments on November 30 and the following May 31. After those dates, they become delinquent, and a lien is filed upon the property. After three years, the City may exercise the lien and take title to the property. Special assessments are billed in two equal installments due November 30 and the following May 31. Personal property taxes (other than those billed with real estate) are generally billed no later than the second Monday in July (normally in May or June), based on the prior November's levies. Personal property taxes, other than mobile homes, are due thirty days after billing. Mobile home taxes are billed in two halves, the first due thirty days after billing; the second due September 30. The tax billings are considered past due after the respective due dates and are subject to penalty and interest charges. An allowance for uncollectible accounts was not maintained for real and personal property taxes and special assessments receivable. The direct write-off method is used for these accounts. A reserve for estimated uncollectible accounts receivable is maintained for the Water Fund and Sewer Fund. The reserve balances are as follows for June 30, 2009: Water $ 12,000 Sewer $ 16,926 3. Inventories and Prepaid Items Inventories for materials and supplies for governmental fund types are expended at the time of purchase. Enterprise Fund inventory of materials and supplies are valued at cost and the First -In First -Out (FIFO) method is utilized. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. 4. Restricted Assets Certain proceeds of the City's enterprise fund revenue bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. When an expense is incurred for which both restricted and unrestricted net assets are available, it is the City's policy to first apply the restricted resources. 5. Capital Assets Capital assets, which include property, plant, and equipment, are reported in the applicable governmental or business -type activities columns in the government -wide financial statements. Capital assets are defined by the government as assets with 33 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 an initial, individual cost of more than $5,000 and an estimated useful life in excess of five years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. As required by GASB, the City of Kalispell has retroactively reported its streets as part of capital assets in the financial reports for fiscal year 2009. More detailed information on the City's streets and all capital assets can be found in Note D. Capital Assets. The costs of normal maintenance and repairs that do not add to the value of the assets or extend asset lives are not capitalized. Improvements are capitalized and depreciated over the remaining useful lives of the related assets. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of fixed assets is reflected in the capitalized value of the asset constructed, net of interest earned on the invested proceeds over the same period. Depreciation has been provided for the property, plant and equipment of the proprietary funds using the straight line method. The useful lives of these assets have been estimated as follows: Buildings 20-50 years Improvements Other than buildings 10-50 years Streets 20 years Machinery, vehicles and equipment 5-20 years Water and Sewer lines, pump stations 10-50 years 6. Compensated Absences It is the City's policy and state law to permit employees to accumulate a limited amount of earned but unused vacation benefits, which will be paid to employees upon separation from City service. Employees are allowed to accumulate and carry over a maximum of two times their annual accumulation of vacation. Any vacation leave time accumulated over this maximum carryover must be used within 90 days of the new calendar year. There is no restriction on the amount of sick leave that may be accumulated. Upon separation, employees are paid 100 percent of accumulated vacation and 25 percent of accumulated sick leave. The liability associated with governmental fund -type employees is reported in Governmental Activities column of the Statement of Net Assets, while the liability associated with proprietary fund -type employees is recorded in the respective fund and the Business -type Activities column of the Statement of Net Assets. For the purpose of reporting these compensated absences payable as current or noncurrent, the City uses a last in first out assumption. Under this assumption, the only compensated absences the City reports as current are the liabilities associated with employees who will retire within the 12 months following the fiscal year being reported. 7. Long - Term Obligations 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 governmental activities, or proprietary fund type statement of net assets. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are expensed when incurred. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of the debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 34 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 NOTE 2. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Excess of expenditures over appropriations For the year ended June 30, 2009, all City funds expenditures were less than or equal to budgeted appropriations. B. Deficit Fund Balances The following Funds had deficit fund balances at June 30, 2009: Debt Service Funds: 2000 Sidewalk & Curb (1) $ 261 2002 Sidewalk & Curb (1) $ 354 2004 Sidewalk & Curb (1) $ 2359 2005 Sidewalk & Curb (1) $ 1189 Sidewalk & Curb Construction (2) $ 3822 (1) These deficits will be eliminated as delinquent assessments are collected. (2) This deficit will be eliminated as revenue is collected. NOTE 3. DETAILED NOTES ON ALL FUNDS AND ACCOUNT GROUPS A. Cash and Cash Equivalents Investment Income Income from pooled investments is allocated to the individual funds based on the fund's month end cash balance in relation to total pooled investments. Cash Composition Cash and investments may include cash and cash items; demand, time, savings, and fiscal agent deposits; investments in the State Short -Term Investment Pool (STIP); repurchase agreements; U.S. government treasury bills, notes bonds, and other treasury obligations such as state and local government series; general obligations of certain agencies of the United States such as Federal Home Loan Bank; and U.S. government security money market funds if the fund meets certain conditions. Total City's (primary governmental and component units) composition of cash, deposits and investments at fair value as of June 30, 2009, are as follows: Cash on hand $ 3,030 Cash in banks: Demand Deposits 5,748,592 Savings Deposits 36,284 Bonds/Warrants 61,090 STIP 3,898,776 Government Backed Securities 10,115,000 Total $19 862,772 35 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Credit Risk Section 7-6-202, MCA, limits investments of public money of a local government in the following eligible securities: (a) United States government treasury bills, notes and bonds and in the United States treasury obligations, such as state and local government series (SLGLS), separate trading of registered interest and principal of securities (STRIPS), or similar United States treasury obligations; (b) United States treasury receipts in a form evidencing the holder's ownership of future interest or principal payments on specific United States treasury obligations that, in the absence of payment default by the United States, are held in a special custody account by an independent trust company in a certificate or book entry form with the federal reserve bank of New York; or (c) Obligations of the following agencies of the United States, subject to the limitations in subsection 2 (not included): (i) federal home loan bank; (ii) federal national mortgage association; (iii) federal home mortgage corporation; and (iv) federal farm credit bank. With the exception of the assets of a local government group self-insurance program, investments may not have a maturity date exceeding 5 years except when the investment is used in an escrow account to refund an outstanding bond issue in advance. Section 7-6-205 and Section 7-6-206, MCA, state that demand deposits may be placed only in banks and Public money not necessary for immediate use by a county, city, or town that is not invested as authorize in Section 7-6-202 may be placed in time or savings deposits with a bank, savings and loan association, or credit union in the state or placed in repurchase agreements as authorized in Section 7-6-213. The City of Kalispell has no investment policy that would further limit its investment choices. The City of Kalispell has the following investments and their related credit risk as reported by Standard and Poor's or Moody's investment service: Short Term Investment Pool (STEP) Credit Quality ratings by the NRSRO as of June 30, 2009: Security Investment Type Credit Quality Rating Asset Backed Commercial Paper $ 299,326,610 Al Corporate Commercial Paper $ 164,976,250 Al Corporate Fixed $ 36,474,136 A3 Corporate Variable -Rate $ 364,248,333 A3 Certificates of Deposit Fixed $ 25,000,000 Al+ Certificates of Deposit Variable -Rate $ 105,000,000 Al U.S. Government Agency Fixed $ 140,672,204 Al+ U.S. Government Agency Variable -Rate $ 750,530,748 Al+ Money Market Funds (Unrated) $ 121,427,621 NR Money Market Funds (Rated) $ 180,000,000 Al+ Structured Investment Vehicles $ 113,625,566 D Total Investments $2 301 281,468 Al Securities Lending Collateral Investment Pool $ 151.016,485 NR Audited financial statements for the State of Montana's Board of Investments are available at 555 Fuller Avenue in Helena, Montana. 36 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Custodial Credit Risk Custodial Credit risk is the risk that, in the event of a bank failure, the government's deposits may not be returned to it. The City of Kalispell does not have a deposit policy for custodial credit risk. All deposits are carried at cost plus accrued interest. As of June 30, 2009, the City of Kalispell's bank balance was exposed to custodial credit risk as follows: Depository Account Balance Insured $ 299,082 Collateralized -Collateral held by the pledging bank's trust department, but not in the City's name $5,698,729 -Uninsured and uncollateralized $ 452,203 Total Deposits $6,450,014 Deposit Security Section 7-6-207, MCA, states (1) The local governing body may require security only for that portion of the deposits which is not guaranteed or insured according to law and, as to such unguaranteed or uninsured portion, to the extent of: (a) 50% of such deposits if the institution in which the deposit is made has a net worth of total assets ratio of 6% or more; or (b) 100% if the institution in which the deposit is made has a net worth of total assets ratio of less than 6%. The amount of collateral held for the City of Kalispell deposits at June 30, 2009, equaled or exceeded the amount required by State statues. Concentration of Credit Risk The City of Kalispell places no limit on the amount the entity may invest in any one issuer. The City of Kalispell's concentration of credit risk percentages follow for each investment issued that is not issued or explicitly guaranteed by the U.S. government, invested in mutual funds, external investment pools or other pooled investments: Bonds/Warrants % of credit risk <1 % 37 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Interest Rate Risk The City of Kalispell does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. The following is a list of individual investments as of June 30, 2009 along with their related interest rates and maturity dates. Investment Interest Rate Maturity Date Amount STIP 0.784% varies $ 3,898,776 Federal Home Loan Bank 3.14% 2/13/14 $ 1,000,000 Federal Home Loan Mortgage Corp 2.04% 1/6/12 $ 1,890,000 Federal Home Loan Mortgage Corp 2.00% 4/7/14 $ 1,000,000 Federal Home Loan Mortgage Corp 2.000% 4/15/14 $ 1,000,000 Federal Home Loan Mortgage Corp 3.000% 4/30/14 $ 1,000,000 Federal Home Loan Mortgage Corp 2.000% 5/15/14 $ 1,000,000 Federal Home Loan Mortgage Corp 3.250% 6/25/14 $ 500,000 Federal Farm Credit Bank 3.10% 1/30/14 $ 1,000,000 Federal National Mtg Assn 2.00% 4/29/14 $ 1,000,000 Federal National Mtg Assn 2.00% 5/27/14 $ 725,000 S&C Bonds 3.6%-9.5% varies $ 61,090 B. Interfund Receivables and Payables The composition of interfund balances as of June 30, 2009, was as follows: Due to/from other funds: Receivable Fund CD Revolving - Major Governmental UDAG SID - Revolving SID - Revolving SID - Revolving SID - Revolving Payable Fund Street Maintenance Light Maintenance 2000 S & C 2002 S & C 2004 S & C 2005 S & C Advances to/from other funds: Receivable Fund Payable Fund CD Revolving - Major Governmental Street Maintenance C. Operating Transfers Amount Purpose $ 16,000 S/T Loan $ 14,000 S/T Loan $ 261 S/T Loan $ 580 S/T Loan $ 2,677 S/T Loan $ 1,189 S/T Loan Amount Purpose $ 32,000 UT Loan The following is an analysis of transfers in and out during Fiscal Year 2009: From To Amount Purpose Health General - Major Governmental $ 576,615 Operating SID Revolving General - Major Governmental $ 15,000 Excess Decorative Light Maint. Light Maint. $ 4,547 Close 1999 S & C SID Revolving $ 39 Close Airport TIF - Debt Service Airport TIF - Special Revenue $ 300,000 Operating Westside TIF - Debt Service Westside TIF - Special Revenue $ 350,000 Operating General - Major Governmental Law Enforcement Grant $ 27,000 Match Parks in Lieu ISTEA $ 17,416 Match TOTAL $ 1,290,617 38 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 D. Capital Assets Capital asset activity for the year ended June 30, 2009 was as follows: City of Kalispell streets Streets with a value of $5,189,234 were added to the City's general capital assets, and are contributed capital revenue on the government -wide statement of activities. To arrive at historical cost, the City used the information provided by the outside appraisers (current replacement cost and remaining service life), an assumed 20 year service life, and the Engineering News- Record's construction cost index. The 20 year service life is also being used for depreciation purposes. Streets with a depreciated value of $484,372 were removed from the City's general capital assets. These streets were never City assets and were included in error. The removal of these streets resulted in a restatement of beginning net assets in the statement of activities. Balance Additions / Deductions / Balance Governmental Activities: July 1, 2008 Contributions Restatements Transfers June 30, 2009 Capital assets not being depreciated: Land $ 2,502,775 $ 49,434 $ 2,552,209 Construction in Progress 119,879 105,598 (99,969) 125,508 Total capital assets not being depreciated 2,622,654 155,032 (99,969) 2,677,717 Capital assets being depreciated: Buildings 18,088,360 $ 269,503 18,357,863 Improvements other than buildings 13,606,666 399,625 14,006,291 Machinery and equipment 5,369,535 1,444,093 (362,326) 6,451,302 Infrastructure 74,809,377 5,189,234 (718,038) 79,280,573 Total capital assets being depreciated 111,873,938 7,302,455 (718,038) (362,326) 118,096,029 Less accumulated depreciation for: Buildings (5,347,271) $ (598,553) (5,945,824) Improvements other than buildings (3,259,342) (585,496) (3,844,838) Machinery and equipment (3,145,864) (419,664) 323,930 (3,241,598) Infrastructure (25,421,264) (3,703,693) 233,666 (28,891,291) Total accumulated depreciation (37,173,741) (5,307,406) 233,666 323,930 (41,923,551) Total capital assets being depreciated, net 74,700,197 1,995,049 (484,372) (38,396) 76,172,478 City capital assets, net $ 77,322,851 $ 2,150,081 $ (484,372) $ (138,365) $ 78,850,195 Internal service funds: Data Processing Less accumulated depreciation Internal service funds assets, net Balance July 1, 2008 Additions $ 149,736 $ (117,276) (7,561) $ 32,460 $ (7,561) 39 Balance Deductions June 30, 2009 $ $ 149,736 (124,837) $ $ 24,899 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Balance Additions / Deductions / Balance Business -type activities: July 1, 2008 Contributions Transfers June 30, 2009 Capital assets not being depreciated: Land $ 1,699,194 $ $ 1,699,194 Construction in progress 18,322,889 7,502,164 (4,026,728) 21,798,325 Total capital assets not being depreciated 20,022,083 7,502,164 (4,026,728) 23,497,519 Capital assets being depreciated: Buildings Machinery and equipment Source of supply Pumping plant Treatment plant Transmission and distribution General plant Storm sewer system Total capital assets being depreciated Less accumulated depreciation for: Buildings Machinery and equipment Source of supply Pumping plant Treatment plant Transmission and distribution General plant Storm sewer system Total accumulated depreciation Total capital assets being depreciated, net Business -type activities capital assets, net 316,731 - 316,731 1,666,313 240,394 - 1,906,707 800,943 529,785 3,193,585 4,524,313 2,682,088 43,513 809,842 3,535,443 15,645,253 33,951 15,679,204 46,485,615 517,234 (6,292) 46,996,557 4,051,548 191,068 - 4,242,616 11,217,437 266,041 23,301 11,506,779 82,865,928 1,821,986 4,020,436 88,708,350 (175,540) (15,682) (191,222) (1,083,411) (167,910) - (1,251,321) (396,895) (18,126) (415,021) (993,444) (95,320) (1,088,764) (12,283,094) (701,344) (12,984,438) (9,504,445) (1,309,178) 6,292 (10,807,331) (1,870,825) (201,917) (2,072,742) (2,326,047) (256,984) (2,583,031) (28,633,701) (2,766,461) 6,292 (31,393,870) $ 54,232,227 $ (944,475) $ 4,026,728 $ 57,314,480 $ 74,254,310 $ 6,557,689 $ - $ 80,811,999 Balance Balance Component Unit: July 1, 2008 Additions Deductions June 30, 2009 Parking Commission assets $ 109,098 $ - $ $ 109,098 Less accumulated depreciation (69,076) (7,064) (76,140) Component unit assets, net $ 40,022 $ (7,064) $ $ 32,958 Depreciation was charged to functions/programs of the primary government as follows: Governmental Activities: General Government $ 4,350,959 Public Safety 411,641 Public Works 120,535 Parks and Recreation 422,732 Community Development 1,539 Total Governmental Activities $ 5,307,406 Business-tvoe Activities: Airport $ 100,832 Water 721,830 Sewer 1,793,190 Solid Waste 150,606 Total Business -type Activities $ 2,766,458 The depreciation on the capital assets held by the City's internal service fund is included in general government. RE CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 E. Long -Term Debt During the year ended June 30, 2009, the following changes occurred in liabilities reported in long-term debt: Balance Balance Due within July 1, 2008 Additions Reductions June 30, 2009 1 year (1)G.O. Bonds $ 5,475,000 $ - $ (330,000) $ 5,145,000 $ 340,000 (1,2)Revenue Bonds 4,380,073 (579,197) $ 3,800,876 594,876 (2)SRF 15,244,713 3,903,287 (677,000) $ 18,471,000 691,000 (1)Assessments 5,079,534 8,981 (327,850) $ 4,760,665 328,150 (1)Contract Debt/Loans 2,526,571 - (224,561) $ 2,302,010 212,201 (1)lntermediary Program 777,258 - (16,706) $ 760,552 17,041 (1,2,3,4)Compensated Absences 1,396,604 8,833 - $ 1,405,437 46,083 Total $34,879,753 $ 3,921,101 $ (2,155,314) $ 36,645,540 $ 2,229,351 (1)reported in long-term debt account group (2)reported in enterprise funds (3)reported in component units (4)reported in internal service fund In prior years, the general fund was used to liquidate compensated absences and claims and judgments. General Obligation Bonds — The City issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. General obligation bonds are direct obligations and pledge the full faith and credit of the City. General obligation bonds outstanding as of June 30, 2009 were as follows: Origination Interest Due Principal Annual Balance Purpose Date Rate Term Date Amount Payment 30-Jun-09 Aquatic Facility 4/15/2002 4.2%-4.9% 20 years 2022 $ 3,675,000 varies $ 2,770,000 Fire Station #62 4/1/2005 3%-6.5% 15 years 2020 3,000,000 varies 2,375,000 Total G.O. Bonds $ 6,675,000 $ 5,145,000 Special Assessment Debt — Special assessment bonds are secured by a lien on the assessed properties. The primary source of repayment is the assessments levied against the benefiting properties. However, the City is liable, to an extent, for repayment of these special assessment bonds. The City is authorized by State law to establish and has established a revolving fund to ensure the payment of debt service on the bonds in the event that assessed property owners default. Origination Interest Due Principal Annual Balance Purpose Date Rate Term Date Amount Payment 30-Jun-09 SID341 9/1/1995 6.06% 15 years 2011 $ 100,000 varies $ 10,000 SID342 11/1/1995 6.34% 15 years 2011 209,000 varies 15,000 SID343 6/12/2001 3.6%-5.5% 20 years 2021 1,581,500 varies 830,000 SID344 6/15/2006 3.7%-5.1 % 20 years 2026 4,520,000 varies 3,845,000 2002 S&C 1/2/2003 4.25% 8 years 2011 13,364 varies 3,341 2003 S&C 1/1/2004 4.50% 8 years 2012 13,758 varies 5,161 2004 S&C 1/3/2005 5.00% 8 years 2013 31,693 varies 15,419 2005 S&C 1/3/2006 7.25% 8 years 2014 $ 22,850 varies 14,281 2007 S&C 1/3/2008 6.00% 8 years 2016 $ 15,407 varies 13,481 2008 S&C 1/3/2009 3.50% 8 years 2017 $ 8,981 varies 8,981 Total Special Assessment Bonds $ 6,516,553 $ 4,760,664 41 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 SID's 343 and 344 Assessments In the event that all future and delinquent assessments are paid and that there are no future adjustments to assessments by the City of Kalispell, there is a projected surplus of principal assessments in SID's 343 and 344 of $150,110 and $316,840, respectively. SID 344 Bonds The City of Kalispell entered into a Continuing Disclosure Undertaking dated as of June 29, 2006 with respect to the SID 344 Bonds. As part of the Undertaking, the City covenanted and agreed to provide continuing disclosure of certain financial information, operating data, and timely notices of the occurrence of certain events for the benefit of the Holders of the Bonds in order to assist the Participating Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5), promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Rule"). The Bonds were issued pursuant to Resolution No. 5123, adopted by the City Council of the City on June 19, 2006. Pursuant to Resolution No. 5123, principal of and interest on the Bonds are secured by: (i) special assessments payable by taxpayers in SID 344; (ii) certain tax increment revenues pledged to the Bonds; (iii) a bond reserve account established in the SID 344 fund; (iv) the debt service revolving fund. On the July 1, 2009 payment date for the Bonds, the City used $169,652.02 of the $226,000 in the bond reserve account to fully satisfy the regularly scheduled debt service payment of $318,603.75. The use of the bond reserve monies was necessary because the largest property owner in SID 344 (currently the owner of 12 of the 17 total parcels in SID 344) had not paid 2008/2009 Special Assessments when due on November 30, 2008 and May 31, 2009 and the available Special Assessments and Tax Increments were insufficient to fully satisfy the regularly scheduled payment. The City has determined that the use of bond reserve monies constitutes a material event (as defined by the Rule and the Undertaking) because it is an unscheduled draw on the reserves reflecting financial difficulties for the Bonds. At June 30, 2009, $56,348 is in the SID 344 bond reserve account, and $241,031 is in the debt service revolving fund available to pay future debt service on the bonds. In October 2009, Lot 2 of Special Improvement District 344 was sold. The purchaser of Lot 2 made a $250,000 prepaid tax payment. The seller used the proceeds to bring the taxes current on 6 of the remaining unsold lots. The City used a portion of these payments to replenish the bond reserve account to its required amount of $226,000. Revenue Bonds — Revenue bonds are directly related to and expected to be paid from the proprietary fund. The 2000 Westside Tax Increment bonds and the 2005 Airport Tax Increment bonds are accounted for in the Government -wide financial statements. Issue Interest Final Bonds Balance Purpose Date Rate Term Maturity Issued 30-Jun-09 2001 Water Jun-01 4.00% 20 years 2021 $ 761,000 $ 517,000 2004 Water Refunding May-04 2.5%-4.85% 20 years 2024 1,840,000 1,190,000 2002 Sewer/WWTP Apr-02 1.8%-4.1 % 9 years 2011 2,355,000 450,000 2000 Westside TIF Mar-00 6.21% 10 years 2010 2,500,000 78,876 2005A - Airport TIF Sep-05 3.8%-4.40% 10 years 2020 1,445,000 1,445,000 2005B - Airport TIF Sep-05 3.55%-3.95% 5 years 2010 555,000 120,000 Total Revenue Bonds $ 9,456,000 $ 3,800,876 IVA CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Significant Provisions of the Series 2005 Airport Urban Renewal Tax Increment Bond Reserve Account — The City shall maintain a debt service reserve account with a balance equal to the lesser of: (i) ten percent of the sum of the original principal amounts of each series of Bonds of which any Bond is Outstanding or (ii) the maximum amount of principal and interest due on the Outstanding Bonds (giving effect to any mandatory sinking fund redemption) in the then current or any future calendar year. Maximum amount of principal and interest due in any future fiscal year $184,875 City's Reserve $184,875 Significant Provisions of the Series 2000 Westside Urban Renewal Tax Increment Bond Reserve Account — The City shall keep in the reserve account an amount equal to the maximum amount of principal and interest due on all outstanding bonds of the Westside Tax Increment District in the Then current or any future fiscal year. O/S Bond Max Principal and Debt Due in any future fiscal year $82,569 City's Reserve $82,569 Significant Provisions of the Water System Revenue Bonds Debt Service Account - Monthly an amount equal to not less than 1/6 of the interest due within the next six months and 1/12 of the principal to become due within the next twelve months shall be credited to the debt service account. The debt service account was zero as of June 30, 2009, as all debt service payments were made as of the end of the fiscal year, leaving no accrued interest or principal balance. Reserve Account - The City shall keep in the reserve account an amount equal to the lesser of 10% of the original principal or the maximum amount of principal and interest required in the current or any subsequent fiscal year. For the Water fund the City complies with the maximum amount of principal and interest required in the current or any subsequent fiscal year. Maximum Principal and Interest $ 510,611 Total Reserve Requirement $ 510,611 Reserve balance 6/30/09 515,449 Property Insurance - The City will cause all buildings, properties, fixtures, and equipment to be kept insured in amounts that are ordinarily carried. Liability Insurance - The City will carry insurance against liability of the City and its employees. 43 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Rates and Charges — Rates and charges will be made and kept sufficient to provide gross income and revenues adequate to pay promptly the reasonable and current expenses of operating and maintaining the system and to produce in each fiscal year net revenues in excess of such current expenses, equal to 125% of the maximum amount of principal and interest payable from the Revenue Bond Account in any subsequent fiscal year. Cash Flow Coverage *Water Service Charges $2,709,543 Misc. Revenue 129,317 Total Operating Revenue $2,838,860 Less: Operating Expense (before depreciation) 1,701,204 Available for Debt Service $1,137, 556 **Maximum Debt Service $ 510,611 Coverage FY09 223% *includes interest revenue **includes all debt service needs of the water fund Sewer Revenue Bonds Ordinances and Required Information Operating Reserve — The city shall keep in the operating reserve account an amount equal to one month's operating expenses. As of June 30, 2009, the operating reserve account contains $213,000. Debt Service Account - Monthly an amount equal to not less than 1/6 of the interest due within the next six months and 1/12 of the principal to become due within the next twelve months shall be credited to the debt service account. The debt service account was zero as of June 30, 2009, as all debt service payments were made as of the end of the fiscal year, leaving no accrued interest or principal balance. Reserve Account - The City shall keep in the reserve account an amount equal to the lesser of 10% of the original principal, the maximum amount of principal and interest required in the current or any subsequent fiscal year, or 125% of the average debt service payable in any fiscal year. The City is in compliance with the maximum amount of principal and interest required in the current or any subsequent year. As of June 30, 2009, the debt service reserve account contains $1,371,162. Rates and Charges — Rates and charges will be made and kept sufficient to provide gross income and revenues adequate to pay promptly the reasonable and current expenses of operating and maintaining the system and to produce in each fiscal year net revenues in excess of such current expenses, equal to 125% of the maximum amount of principal and interest payable from the Revenue Bond Account in any subsequent fiscal year. Cash Flow Coverage *Operating Revenue $4,484,110 Impact Fees pledged for debt service 250,000 Less: Operating Expense (before depreciation) 2,975,746 Available for Debt Service $1.758. 664 **Maximum Debt Service $1,356,624 Coverage FY09 129% *includes interest revenue **includes all debt service needs of the sewer fund 44 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 State Revolving Fund — the City has five (5) loan agreements with the State Revolving Fund (SRF). These obligations are to be repaid from the operating income of the fund. SRF LOANS Purpose Sewer- WWTP (construction) Sewer (Highway 93 S extension) Water 2007 'A' (refinance) Water 2007'B' (well, storage, distribution) Sewer - W WTP (expansion) Loans/Contracted Debt Governmental Funds Purpose *Board of Housing BOI:City Hall HVAC BOI:Fire Truck BOI:Tractor/Mower Rocky Mtn Bank - Fire Truck Capital One Public Funding - 201 1st Ave E -City Hall USDA: Intermediary Relending Program Relending Program Interest Origination Rate Term FY92 4.00% 20 years FY04 3.75% 20 years FY07 3.75% 8 years FY08 3.75% 20 years FY08 3.75% 20 years Total SRF Loans Amount Borrowed $ 3,913,425 1,475,860 1,283,159 1,500,000 14,470,000 $ 22,642,444 Outstanding 30-Jun-09 Origination Interest Due Principal Balance Date Rate** Term Date Amount 30-Jun-09 3/1/1995 6.00% 30 years 2/1/2025 $ 271,000 $ 197,722 7/16/2004 varies 10 years 2/15/2014 151,836 88,154 4/22/2005 varies 10 years 8/15/2015 279,900 193,705 12/23/2004 varies 5 years 2/15/2010 77,425 17,024 3/7/2008 3.95% 10 years 3/1/2018 575,000 527,500 10/25/2007 4.85% 12 years 9/15/2019 1,420,165 1,277,906 Total BOI loans/contracted debt 2,775,326 2,302,011 10/12/2004 1.00% 30 years 10/12/2034 520,000 503,052 11/27/2006 1.00% 30 years 11/27/2036 257,500 257,500 Total loans/contracted debt $ 3,552,826 $ 3,062,563 BOI - Board of Investments Intercap Loan Program *The board of housing loan is paid from the proceeds of the rents on the Courtyard Apartments per the agreement with Northwest Human Resources. $ 922,000 1,199,000 997,000 1,445,000 13,908,000 $18,471,000 Compensated Absences Payable — compensated absences payable, which represent vacation, sick leave and compensatory time earned by employees, and is payable upon termination, were as follows: Governmental Funds $1,078,917 Enterprise Funds 314,181 Data Processing Fund 7,422 Parking Commission 4,917 Total $ 1,405,437 45 CITY OF KAL,ISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Requirements to amortize debt The annual requirements to amortize all long-term debt outstanding, excluding compensated absences payable, as of June 30, 2009, were as follows: SPECIAL G.O. ASSESSMENT CONTRACTED REVENUE FOR FISCAL BONDS BONDS LOANS/DEBT BONDS YEAR ENDED PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST TOTAL 2010 340,000 216,045 328,150 221,170 920,242 797,783 594,876 158,330 3,576,596 2011 355,000 203,645 333,150 206,784 947,419 762,509 533,000 134,758 3,476,264 2012 365,000 190,288 316,480 192,111 1,222,118 723,803 219,000 113,830 3,342,630 2013 385,000 176,573 314,760 178,232 1,159,146 674,897 226,000 105,215 3,219,822 2014 395,000 161,618 310,905 164,196 1,296,022 632,405 237,000 96,195 3,293,341 2015-2019 2,255,000 547,343 1,532,220 608,353 6,322,591 2,417,664 1,330,000 324,283 15,337,454 2020-2024 1,050,000 89,045 1,165,000 294,883 5,913,906 1,263,710 661,000 71,788 10,509,332 2025-2029 460,000 35,190 3,540,619 246,965 4,282,774 2030-2034 157,555 7,455 165,010 2035-2039 53,944 887 54,831 TOTAL 5,145,000 1,584,557 4,760,665 1,900,919 21,533,562 7,528,078 3,800,876 1,004,399 $47,258,055 F. State -Wide Retirement Plans Substantially all full-time City employees are eligible for one of three retirement plans: Montana Public Employees' Retirement System (PERS); Municipal Police Officer's Retirement System (MPORS): and the Firefighters' Unified Retirement System (FURS). The plans are established by State law and administered by the State of Montana. The plans are cost -sharing multiple -employer defined benefit and/or defined contribution plans that provide retirement, disability and death benefits to plan members and beneficiaries. The City had a total payroll of $10,455,230 for FY09, of which $9,993,776 is covered by PERS, MPORS, or FURS. Component Unit payroll covered by PERS was $52,840 for the Parking Commission. Contribution rates for the plans are required and determined by State law. The contribution rates, expressed as a percentage of covered payroll for the fiscal year ended June 30, 2009, were: PERS MPORS FURS Employee 6.9% 9% 10.7% Employer 6.94% 14.41 % 14.36% State 0.1% 29.37% 32.61% The State contribution qualifies as an on behalf payment. These amounts have been recorded in the City's financial statements. The Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for all three plans. That report may be obtained by writing to Public Employees Retirement Division, P. O. Box 200131, Helena, MT 58620-0131 or by calling 1-406-444-3154. The City's contributions for the years ending June 30, 2007, 2008 and 2009, as listed below, were equal to the required contributions for each year. PERS 2007 $ 313,175 2008 $ 383,694 2009 $ 397,550 MPORS FURS $ 221,686 $ 266,289 $ 253,371 $ 284,147 $ 266,802 $ 285,567 .e PARKING COMM $ 3,324 $ 3,817 $ 3,664 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 G. Post Employment Health Insurance Benefits Terminated employees may remain on the City's health insurance plan for up to 18 months if they pay the monthly, premiums. This benefit is required under federal C.O.B.R.A. law. In accordance with Montana State law (see below), retirees may remain on the City's health plan as long as they wish, at a rate that does not cover all of the related costs. This results in the reporting of an implied rate subsidy in the financial statements and footnotes. The City's contract with Allegiance Benefits details the plan eligibility. MMIA is the administrator of the benefit plan which covers both active and retired members. The City's retirees may continue coverage for themselves and their covered eligible dependents if they are eligible for public employees' retirement by virtue of their employment with the City of Kalispell. The City's current labor contracts do not include any obligations for payments to retirees. Montana Codes Annotated (MCA) Section 2-18-704 states (1) An insurance contract or plan issued under this part must contain provisions that permit: (a) The member of a group who retires from active service under the appropriate retirement provisions of a defined benefit plan provided by law or, in the case of the defined contribution plan provided in Title 19, chapter 3, part 21, a member with at least 5 years of service and who is a least age 50 while in covered employment to remain a member of the group until the member becomes eligible for medicare under the federal Health Insurance for the Aged Act, 42 U.S. C. 1395, as amended, unless the member is a participant in another group plan with substantially the same or greater benefits at an equivalent cost or group plan with substantially the same or greater benefits at an equivalent cost; (b) The surviving spouse of a member to remain a member of the group as long as the spouse is eligible for retirement benefits accrued by the deceased member as provided by law unless the spouse is eligible for medicare under the federal Health Insurance for the Aged Act or unless the spouse has or is eligible for equivalent insurance coverage as provided in subsection (1)(a); (c) The surviving children of a member to remain members of the group as long as they are eligible for retirement benefits accrued by the deceased member as provide by law unless they have equivalent coverage in subsection (1)(a) or are eligible for insurance coverage by virtue of the employment of a surviving parent or legal guardian. The City of Kalispell does not consider its liability for other post employment benefits material and has elected not to report OPEB in any funds. Funding Policy. The plan is unfunded by the City and plan members receiving benefits contribute 100 percent of their cost of the benefits on a pay-as-you-go basis. For fiscal year ended June 30, 2009, the City has 31 retired members receiving benefits. Annual OPEB Cost and Net OPEC Obligation. The City's annual other post -employment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC). The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The following table shows the components of the City's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the City's net OPEB obligation to the Retiree Health Plan: Annual required contribution/Annual OPEB Cost (Expense) $282,232 Contributions made 0 Increase in net OPEB obligation 282,232 Net OPEB obligation - beginning of year 0 Net OPEB obligation - end of year $282,232 47 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 The City's annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for fiscal year ended June 30, 2009, were as follows: Fiscal Year Annual Ended OPEB Cost June 30, 2009 $282,232 Percentage of Annual OPEB Cost Contributed 0.00% Net OPEB Obligation $282,232 The June 30, 2009 year-end OPEB obligation is reported in the City's funds as follows: Functions/Programs Expenses Primary Government: Governmental activities: General government $237,300 Total governmental activities 237,300 Business -type activities: Water Sewer Total primary government 23,195 21,737 Total business -type activities 44,932 $282,232 Actuarial Methods and Assumptions. As of July 1, 2008, the City's actuarially accrued liability (AAL) for benefits was $3,008,915. The AAL by status breakdown is shown below: Active participants: $ 1,450,472 Retirees, Dependents, and Surviving Spouses: $ 1,558,443 Total AAL $ 3,008,915 Normal Cost $ 170,429 Participant Information Active participants: 172 Retirees, Dependents, and Surviving Spouses: 31 Total 203 The following key assumptions were chosen by the City: 1. Discount Rate: 4.25% 2. Expected Long Term Rate of Return on Assets: N/A 3. Healthcare and Retiree Contribution Trend Rates: 7.6% as of July 1, 2008 reduced linearly to 5% by fiscal year 2014, and remaining at 5% thereafter. 4. Participation Rate: 30% of future retirees are assumed to elect medical coverage. 70% of the future retirees who elect medical coverage and are married are assumed to elect spousal coverage as well. 5. Marital Assumption: For future retirees, 60% are assumed to be married, and males are assumed to be 3 years older than females. M. CITY OF KAL,ISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Examples, as detailed above, include assumptions about future employment, mortality, and the healthcare cost trend. Actuarially determined amounts are subject to continual revisions as actual results are compared with past expectations, and new estimates are made about the future. Actuarial calculations reflect a long-term perspective. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, is designed to present multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial liabilities for benefits. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and 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 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. H. Amounts Due From and Due To other Governments On June 30, 2009, the amounts due from and due to other governments consisted of the following: General Fund Due from: Amount State of Montana -STEP Grant $ 3,564 State of Montana -License Fee $ 300 Flathead County -Taxes 857 Total $ 4,721 Special Revenue Funds Due from: Amount State of Montana -Court Grant $ 13,823 State of Montana-ISTEA $ 35,315 Flathead County -Taxes $ 164,165 Total $ 213,303 Debt Service Funds Due from: Amount Flathead County -Taxes $ 154,208 Enterprise Funds Due from: Amount Flathead County -Taxes 109,162 $ 109,162 49 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 I. Restricted Cash/Investments The following restricted cash/investments were held as of June 30, 2009. These amounts are reported within the cash/investment account on the Combined Balance Sheet. Business -type Activities 1-Jul-08 Additions Subtractions 30-Jun-09 Water Bond Reserve (includes SRF & BOI) $ 515,449 $ - $ - $ 515,449 Plant Investmentlmpact Fees 1,085,220 313,583 (722,375) 676,428 Sewer Operating Reserve 213,000 - - 213,000 Bond Contingency 1,433,696 - (62,534) 1,371,162 Plant InvestmenUlmpact Fees (sanitary) 1,988,945 220,944 (148,564) 2,061,325 Plant InvestmenUlmpact Fees (treatment plant) 3,418,894 4,183,833 (6,910,000) 692,727 Plant Investment/Impact Fees (storm) 444,632 211,653 - 656,285 Treatment Plant Replacement 747,283 408,175 (768,109) 387,349 Total business -type activities restricted cash/investments 9,847,119 5,338,188 (8,611,582) 6,573,725 Governmental Activities Impact Fees Capital 242,063 106,055 (177,131) 170,987 Urban Forestry Developers 148,777 - (20,954) 127,823 Debt Service Bond Reserve 267,443 145,872 413,315 Total governmental activities restricted cashAnvestments 658,283 251,927 (198,085) 712,125 Total restricted cash/investments $ 10,505,402 $ 5,590,115 $ (8,809,667) $ 7,285,850 Plant investment/impact fee cash is from new services and is restricted to be used only for capital (state law). Operating reserve cash is restricted according to bond agreement (third party). Treatment plant replacement cash is restricted by an agreement with Evergreen (third party). Urban forestry receives cash from developers to be used to plant trees in new city developments (third party). Plant investment/impact fees. Montana State legislation regulating impact fees to fund capital improvements, MCA 7-6-1601 through 7-6-1604 (see 7-6-1603 below related to expending impact fees), became effective April 19,2005 and sets forth the procedures and requirements for the imposition of impact fees by local governments. On October 16, 2006, by ordinance no. 1587, the Kalispell City Council authorized and established the procedure and imposition of impact fees to fund capital improvements related to additional capacity (growth). MCA 7-6-1603 states that "the collection and expenditure of impact fees must be reasonably related to the benefits accruing to the development paying the impact fees..." J. Restatements During the current fiscal year, the following adjustments relating to prior years' transactions were made to fund balance and retained earnings accounts. Fund General - major General - major Ambulance - nonmajor governmental CD Operations - nonmajor governmental RD Loan Revolving 61-01 - nonmajor governmental RD Loan Revolving 61-02 - nonmajor governmental Drug Grant - nonmajor governmental CDBG Economic Development - nonmajor governmental Water - major enterprise Governmental Funds Amount Reason $ 2,585 Prior Fiscal Year Expenditure Correction $ (10,722) Prior Fiscal Year Expenditure Correction $ (100,010) Prior Fiscal Year Revenue Correction $ 23,700 Prior Fiscal Year Revenue Correction $ (41,260) Change in accounting $ 41,260 Change in accounting $ (2,585) Prior Fiscal Year Revenue Correction $ (23,700) Prior Fiscal Year Expenditure Correction $ (7,780) Prior Fiscal Year Revenue Correction $ (522,769) Prior Fiscal Year Capital Asset Correction 50 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 K. Joint Ventures Joint ventures are independently constituted entities generally created by two or more governments for a specific purpose which are subject to joint control, in which the participating governments retain 1) an ongoing financial interest or 2) an ongoing financial responsibility. 1. City -County Health Department The City -County Health Department is operated under an interlocal agreement between Flathead County and the City of Kalispell. The Department operates under the supervision and control of the City -County Health Board. The Board consists of seven members, six of whom are appointed by the Board of County Commissioners. The Department is financed, in addition to revenue generated by providing health services, by the City and the County levying an identical mill levy, up to 5 mills, in order that all property within the City of Kalispell and all property in Flathead County outside the City limits are taxed equally. The operation is accounted for in the City Health Fund and is included in the general purpose financial statements of Flathead County within the Special Revenue Fund. 2. Courtyard Apartments/Northwest Montana Human Resources The City entered into an agreement with Northwest Montana Human Resources for a joint venture construction project of the Courtyard Apartments. The City owns 16 units of the apartment complex built with Home Grant and CDGB funds. NWMHR has built 16 units also. The agreement provides for the management of the housing complex for low income housing. All operations and maintenance of the housing complex are managed by Northwest Montana Human Resources. NWMHR maintains a trust fiord in the City's name to record the revenues and expenses of the housing complex. As of June 30, 2009 the equity in the fund was $36,284. The debt payments on the mortgage are paid from the proceeds of the rents by NWMHR. The principal balance is recorded on the City's books in the Government -wide financial statements. The original amount of the loan was $271,000. The balance as of June 30, 2009 is $197,722. 3. 911 Dispatch Center The 911 Dispatch Center is operated under an interlocal agreement between Flathead County, the City of Columbia Falls, the City of Whitefish, and the City of Kalispell. The Center operates under the supervision and control of the Flathead Emergency Communications Center Board. The Board consists of six members, the Flathead County Sheriff, a County Commissioner chosen by the Board of County Commissioners, the County Attorney or other elected County officer, and an elected official or designee from each of the cities of Kalispell, Whitefish, and Columbia Falls. The Department is financed by funds received by all members from the State (9-1-1 fees) pursuant to Section 10-4-302, M.C.A. Any additional operating funds needed will be shared proportionally by all members. Under the supervision of the Board, the Director shall hire and direct staff to carry out the responsibilities of the County's Office of Emergency Services and the Flathead County Fire Service Area. L. County Provided Services The City of Kalispell is provided various financial services by Flathead County. The County serves as cashier and treasurer for the City for tax assessment collections and other revenues received by the County which are subject to distribution to the various taxing jurisdictions located in the County. The collections made by the County on behalf of the City are accounted for in an agency fund in the City's name and are periodically remitted to the City by the County Treasurer. The County charges the City for fees associated with City Special Assessments. 51 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 M. Risk Management The City faces a considerable number of risks of loss, including a) damage to and loss of property and contents, b) employee torts, c) professional liability, i.e., errors and omissions, d) environmental damage, e) workers' compensation, i.e. employee injuries, and f) medical insurance costs of employees. A variety of methods are used to provide insurance for these risks. Commercial policies, transferring all risks of loss, except for relatively small deductible amounts are purchased for property and content damage and professional liabilities. The City participates in two statewide public risk pools operated by the Montana Municipal Insurance Authority, for workers' compensation and for tort liability coverage. Employee medical insurance is provided through a state-wide health insurance pool administered by MMIA. Given the lack of coverage available, the City has no coverage for potential losses from environmental damages. Effective July 1, 1987 The City of Kalispell joined with other Montana cities to form the Montana Municipal Insurance Authority, a self-insurance pool offering Worker's Compensation and Liability Coverage. Both public entity risk pools currently operate as common risk management and insurance programs for the member governments. The liability limits for damages in tort action are $750,000 per claim and $1.5 million per occurrence with an $11,250 deductible per occurrence. State tort law limits the City's liability to $1.5 million. The city pays an annual premium for its employee injury insurance coverage, which is allocated to the employer funds based on total salaries and wages. The agreements for formation of the pools provide that they will be self-sustaining through member premiums. The tort liability plan and workers' compensation program issued bonds in the amount of $4.41 million and $7.610 million, respectively, to immediately finance the necessary insurance reserves. All members signed a contingent note for a pro rata share of this liability in case operating revenue was insufficient to cover the debt service. The City's share is $201,445 for liability and $281,715 for Workers' Compensation to finance the necessary insurance reserves. Based on the plan's current financial position, the City doesn't expect to make any payment on these notes. Separate financial statements are available from the Montana Municipal Insurance Authority. On October 1, 2004, Kalispell signed a 5 year agreement with many other Montana Cities, and through the Montana Municipal Insurance Authority, to create a state wide health insurance pool. The City pays the total monthly premium for employees who only choose to cover themselves. For employees who choose to cover additional dependents, the City pays a percentage of the extra costs. N. Pending Litigation The following is a list of litigation pending against the City and the amount of damages claimed by the Plaintiff. The City Attorney has made no evaluation as to the outcome of each case. The City has liability insurance that may cover all or part of the damages. Accordingly, no provision has been made in the financial statements for these contingent liabilities. Damages Loss Litigant Requested Potential" Olson $ 1,000 unknown Kruckenberg <10,000 unknown Talmadge >10,000 unknown Lucas >10,000 unknown Glick, Ron >10,000 unknown Worth, Donna >10,000 unknown 52 Status Justice Court District Court Supreme Court District Court District Court 9th Circuit Court of Appeals CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 O. Loans Receivable Community Development Loan Revolving The City entered into a community development program, which includes funding from a community development block grant, to make available to eligible applicants (low -to -moderate income residents), a loan for at least one-half of the required rehabilitation cost. These funds from the City, together with loans from the First Federal Savings Bank (now Glacier Bank) of Montana, the lender, must provide the total funds required for the purchase and rehabilitation of the housing unit. At the time the bank loans are closed with the borrower, the proceeds of the City's loan will be deposited into the borrower's construction account at First Federal. The City's loan is secured by the property, and filed in a third lien position. Repayment of the City loan will not begin until 30 days after the Lender's loan (second lien) for construction of the unit has been paid off. The City's loan is interest free until such time as repayment begins. The maximum amount of a private lender loan cannot exceed $20,000 per property with a ten-year pay back. In addition, when an owner -occupant is unable to afford a private lender loan at the pre -determined interest rate agreed to by the City and lender, he or she may qualify for City financing. The City may provide a direct loan of up to $25,000 with a varying interest rate (as low as zero percent) or with a longer amortization period (maximum of fifteen years) or a deferred loan to be repaid simultaneously, at a later date, with a balloon payment, or to be released at the end of ten years. The City has $57,823 recorded as housing rehab loans receivable as of June 30, 2009 in the Community Development Loan Revolving Fund. The above mentioned loans are offset with deferred revenue accounts. Uncollected receivables in governmental funds are offset with deferred revenue accounts as explained in the "basis of accounting". Other loans receivable of the Community Development Loan Revolving Fund: A 15 year loan at 3% to Center Street Plaza in April of 1999. Original Loan amount $ 70,529 June 30, 2009 balance $ 25,776 A 15 year loan at 5% to Flathead Health and Fitness in November 2004. Original Loan amount $ 74,250 June 30, 2009 balance $ 58,280 Community Development Block Grant Economic Development Program In fiscal year 2007, the City entered into a community development program with funding from a community development block grant economic development program. Eligibility for these low interest loans is tied to the creation of jobs within Kalispell with a percentage of the jobs created to be filled by low and moderate -income persons. The following loan has been made by the City using the economic development program funds: A 15 year loan at 6.5% to Distinctive Countertops in July 2006. Original Loan amount $ 25,000 June 30, 2009 balance $ 23,285 A 15 year loan at 5% to Distinctive Countertops in October 2006. Original Loan amount $ 288,619 June 30, 2009 balance $ 271,893 A 7 year loan at 7% to the Kalispell Hotel (Hilton) in July 2007. Original Loan amount $ 150,000 June 30, 2009 balance $ 117,701 53 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 A15 year loan at 6% to AGAPE Home Care in May 2009. Original Loan amount $ 42,500 June 30, 2009 balance $ 42,354 Rural Development Loan Revolving On May 5, 2003, the City Council passed Resolution No. 4780 establishing an Economic Development Revolving Loan Fund (ED RLF) for small business retention and expansion. The resolution also created an Economic Development Loan Review Committee to process all applications for assistance. Additionally, on August 16, 2004 and again on November 6, 2006, the City Council, by Resolution No. 4929 and 5158, respectively, authorized the City Manager to enter into loan agreements with the United States Department of Agriculture, Rural Development office, in the amount of $520,000 and $750,000. These monies will be used to assist in the retention and expansion of small business, which may stimulate economic development activity by assisting the private sector where a funding gap exists and alternative sources of public and private financing are not adequate. The following loans have been made by the City using the Rural Development funds: A 15 year loan at 5% to Flathead Health and Fitness in November 2004. Original Loan amount $ 90,750 June 30, 2009 balance $ 69,564 A 7 year loan at 6.25% to Little Caesar's in March 2006. Original Loan amount $ 37,500 June 30, 2009 balance $ 20,662 A 15 year loan at 6.5% to Distinctive Countertops in July 2006. Original Loan amount $ 150,000 June 30, 2009 balance $ 139,462 A 10 year loan at 7% to Crossroads Realty in June 2007. Original Loan amount $ 150,000 June 30, 2009 balance $ 136,004 A 7 year loan at 7% to the Kalispell Hotel (Hilton) in July 2007. Original Loan amount $ 150,000 June 30, 2009 balance $ 117,701 A 7 year loan at 7% to Unfinished Furniture Creations in April 2006. Original Loan amount $ 50,000 June 30, 2009 balance $ 9,100 *The balance of this loan $35,425 was forgiven. The defaulting parties (Bott/Thomas) agreed and signed promissory notes for $5000 each. UDAG The following loan was made by the City using Urban Development Assistance Grant (UDAG) funds: A 20 year redevelopment loan at 5% with Big Sky Manor in August 1999. Original Loan amount $ 124,000 June 30, 2009 balance $ 78,699 54 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 P. City Court Contracts Receivable Contracts receivable of the City Court, because of the uncertainty regarding when and if they will be collected, are no longer booked as an asset on the balance sheet of the General Fund. These receivables, at June 30, 2009, amounted to $1,479,220. Q. Wastewater Treatment Plant agreement with Evergreen The City of Kalispell entered into an Interlocal Agreement with the Evergreen Sewer District #1 for treatment of sewage from the district at the City's plant. The Evergreen district sewer went into operation in July 1994. The City bills Evergreen monthly for debt service at 22% of the principle and interest due for the plant. The City also bills for maintenance and operation and replacement costs per the agreement based on metered flows. Evergreen Sewer District has an equity interest in the replacement account carried on the City's books. The balance of the account as of June 30, 2009 is $387,349 of which Evergreen's interest is $148,849. R. Gateway West Mall Flathead County Economic Development Authority, Flathead County and the City of Kalispell entered into an inter -local agreement to purchase 59,000 square feet of the Gateway West Mall for $2.5 million and sign a ten-year lease with Stream International, Ltd. The City of Kalispell agreed to acquire the property by issuing a $2.5 million tax increment urban renewal bond. The City then conveyed the property to the Authority as "tenants in common". The County through the Authority became vested with an undivided 37% interest in the property with the City vested with the remaining 63% interest. As a result of this conveyance, the Authority recognized its portion of the building and the related debt on their books. The Authority is responsible for the operation maintenance of the property during the term of the initial ten-year lease. The Authority is also responsible for the carrying of property insurance against the property. The City has agreed to reimburse the Authority for its proportionate share of these costs. The Authority has agreed to levy up to two mills or $156,000 for the term of the bond, and has pledged $30,567 of the revenue generated each year to be remitted to the City of Kalispell in two equal installments of $15,284 that will be used toward the retirement of the tax increment bond. The authority shall also set up and contribute $3,000 to a building reserve fund each year of the lease. The reserve will be used for any repair or construction work deemed necessary in maintaining the property. The City issued the tax increment bonds in its name and agrees to be punctual in all debt payments, and will keep all proper records and meet all necessary requirements of the bond resolution. The City shall also set up and contribute $5,000 to a building reserve fund for each year of the lease. The reserve will be used for any repair or construction work deemed necessary in maintaining the property. The Authority shall manage this building reserve. The City has pledged the following revenues towards the repayment of the $2.5 million bond: 1. Tax increment money generated from the Westside Tax Increment District until the City reaches their share of the debt payment or $52,000. 2. The Authority's annual contribution of $30,567. The County has agreed that it will approve the Authority's levy for an ad valorem property tax of up to two mills on all taxable property in the County, until the tax increment bond is paid. Within 180 days of the payment in full of the Bond, either the authority or the City may give notice to each other of intent to 55 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 purchase the property. The purchase price to be paid will be equal to the total debt service paid by the other party. The Authority has the first option of buying the property from the City. If neither the Authority nor the City wants to purchase the property outright, then the City has granted American Capital a right of first refusal to purchase the property. The proceeds from the sale of the property shall be distributed based on the equity interest each entity holds. In August of 2003, Stream International closed their computer support call center in the Gateway West Mall building, and subsequently bought out the remaining portion of their 10 year contract with the City. In February of 2004 the City entered into an agreement with TeleTech Holdings, Inc. TeleTech, which will operate a call -in center, similar to Stream's operation, entered into a lease structured similar to Stream's. Rent abatement is tied to jobs created and maintained and pay. TeleTech will also pay the guaranteed minimum tax payment of $140,000/year. This ensures that the City will be able to meet its portion of the debt obligation related to the Gateway West Mall building. S. Long Term Loans Receivable Communitv Develonment Loan Revolvin Hampstead Partners In August of 2002, the City of Kalispell entered into two (2) notes receivable agreements with 2nd Avenue West Partners, L.P. (Hampstead Partners) for property on 2nd Avenue West in Kalispell. The property consists of a 40-unit low-income apartment complex known as 2nd Avenue West Independent Living Center. As stipulated in the agreement, this property is restricted as low income housing, and shall remain as such for a period of thirty-five years. One of these notes is for $480,000, and bears interest at 1% per annum. The second of these notes is for $400,000, and bears interest at 4.81% per annum. These loans mature on February 28, 2032. Payments of interest on the note are due on or before the last day of the taxable year, to the extent there is surplus cash, as defined by the note. Unpaid interest shall accrue until paid, but not compound on the first loan. Payments of principal are not required until the maturity date of the loans. The notes are secured by a deed of trust on the property. Accrued interest as of June 30, 2009, is $33,255, and $123,448, respectively. 56