3. Management's Discussion and AnalysisIII�-��/: "311XLNVaTf.`Ti11f.Y. ► = ► 1 =
As management of the City of Kalispell, we offer readers of the City of Kalispell's financial
statements this narrative overview and analysis of the financial activities of the City of Kalispell
for the fiscal year ended June 30, 2010. We encourage readers to consider the information
presented here in conjunction with additional information that we have furnished in our letter of
transmittal.
FINANCIAL HIGHLIGHTS
The assets of the City of Kalispell exceeded its liabilities at the close of the recent fiscal year
by $163 million (net assets). Of this amount, $12 million (unrestricted net assets) may be
used to meet the government's ongoing obligations to citizens and creditors.
As of the close of fiscal year 2010, the City of Kalispell's governmental funds reported
combined ending net assets of $76.4 million, a decrease of almost 1%.
The City of Kalispell's total net assets decreased by $1 million before restatements. Net
assets of the City's governmental funds decreased $0.7million, while the net assets of
Business -type funds decreased $0.3 million.
Revenues of the governmental funds decreased about $3 million. Capital grants and
contributions were down 65% due mainly to the economy and the lack of development
relating to capital contributions.
Governmental fund expenditures were consistent with the prior fiscal year.
The City of Kalispell's total debt decreased by over $2 million during fiscal year 2010.
Net assets of the City's business -type activities decreased to $72.2 million, down $0.3
million from the prior fiscal year.
In the City's business -type activities, revenues and expenses were consistent with the prior
fiscal year.
EILMIUMMUDMIMMM
There are three main components to the City of Kalispell's financial statements: 1) government -
wide financial statements, 2) fund financial statements, and 3) notes to the financial statements.
Other supplementary material is included in this report in addition to the basic financial
statements themselves. The City of Kalispell intends for this discussion and analysis to be used
in conjunction with the basic financial statements, and other material, as an introduction and also
as a means to help the user better understand the information.
Government -wide Financial Statements
The government -wide financial statements are designed to provide readers with a broad
overview of the City of Kalispell's finances. The way information is presented in these
statements is comparable to how the financial information of a private -sector business would be
presented.
The statement of net assets presents information on all of the City of Kalispell's assets and
liabilities. The difference between these two (assets minus liabilities) is reported as net assets.
Net assets can be a useful tool in evaluating the financial health of an entity. A substantial
decrease in net assets may be a sign of deteriorating financial position.
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The change in net assets during the most recent fiscal period is presented by the statement of
activities. The statement of activities reports changes in net assets at the time the event takes
place without regard to the corresponding cash transaction. This results in some revenues and
expenses being reported in this statement that will not result in cash flow until a future fiscal
period. Some examples of this would be uncollected but earned taxes and earned leave benefits.
The government -wide financial statements of the City of Kalispell are segregated to distinguish
between functions supported predominantly by taxes and intergovernmental revenues
(governmental activities) and those that are intended to recover the majority of their costs
through user fees and charges for services (business -type activities). The governmental activities
of the City of Kalispell include general government/administration, public safety, public works,
culture and recreation, and housing and community development. The business -type activities of
the City of Kalispell include water distribution, sewer collection and treatment, solid waste
collection, and an airport.
The government -wide financial statements include, in addition to the primary government
described in the above paragraph, a legally separate parking commission, and a legally separate
Business Improvement District. The financial information of these component units is reported
separately on the Government -wide financial statements.
Fund Financial Statements
The City of Kalispell, like most other governmental entities, uses fund accounting. Funds are set
up to account for specific activities or objectives of the government. Funds also aide in ensuring
compliance with legal requirements. The City of Kalispell categorizes its funds as either
governmental, proprietary, or fiduciary.
Governmental funds correspond with the functions reported as governmental activities in
the government -wide financial statements. Governmental fund financial statements, by
focusing on near -term inflows and outflows of spendable resources, may be more useful
in evaluating a government's short-term fiscal health than the government -wide financial
statements.
A reconciliation has been prepared to help users more easily compare the governmental
fund balance sheet to the government -wide statement of net assets and the governmental
fund statement of revenues, expenditures, and changes in fund balance to the
government -wide statement of activities. These reconciliations can be useful in
contrasting, comparing and understanding the long-term impact (government -wide
statements) of near -term decisions (governmental fund statements).
The City of Kalispell maintains numerous individual governmental funds. The
governmental fund balance sheet and statement of revenues, expenditures, and changes
in fund balance present information separately only for funds which are considered
major. Major funds are determined by a formula which considers the percentage of total
governmental assets, liabilities, revenues, and expenditures contained in each individual
fund. The City of Kalispell has three major governmental funds; the General Fund
(always a major fund), the Community Development Loan Revolving (special revenue)
Fund, and the Special Improvement District 344 (debt service) Fund. All non -major
funds are presented as a group.
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The City of Kalispell adopts an annual appropriated budget for its funds. A budgetary
comparison statement has been provided for the general fund and the major special
revenue fund to demonstrate compliance with this budget.
The City of Kalispell maintains two different types of proprietary funds. Enterprise
funds and internal service funds. Enterprise funds are used to report the same functions
presented as business -type activities in the government -wide financial statements.
Water, sewer, solid waste, and the airport make up the City of Kalispell's enterprise
funds. The City of Kalispell uses an internal service fund to accumulate and allocate its
data processing transactions internally among its various functions. Under the old
reporting model internal service funds were reported as proprietary funds because they
recovered most of their cost through user fees from other funds. Under this new model
these funds are eliminated through an allocation process and categorized as either a
governmental or business -type activity. Because the City of Kalispell's internal service
fund benefits governmental more so than business -type functions, it has been included
within the governmental activities in the government -wide financial statements.
Information in the proprietary fund financial statements is of the same type as that
provided in the government -wide financial statements, however, it is more detailed.
Individual fund data is provided for the water fund, and the sewer fund. Individual data
is not required for the airport fund or the solid waste fund, because they are not classified
as major funds.
The City of Kalispell maintains two funds to account for resources held by the
government for the benefit of outside parties. These fiduciary funds are not reflected in
the government -wide financial statements because the resources are not available to
support the City of Kalispell's own programs. The City of Kalispell must ensure that the
assets reported in these funds are used for their intended purpose. The accounting
method used for fiduciary funds is similar to that used for proprietary funds.
Notes to the Financial Statements
The information contained in the government -wide and fund financial statements is meant to be
used in concurrence with the notes to the financial statements. The notes present further detail of
the data provided by these statements.
As mentioned prior, net assets can be an important indicator of an entities financial well-being.
For the period ending June 30, 2010, the City of Kalispell's assets exceeded liabilities by $163
million. The City's combined net assets decreased by $1.1 million in fiscal year 2010 compared
to a $2.3 million increase for the prior fiscal year. The reason for this change of $3.4 million is
that the prior year the City of Kalispell acquired substantially more streets as a result of
annexation and development than this year, and therefore the amount of contributed capital in the
governmental funds was $4.8 million higher.
Net assets of the City's governmental activities decreased by 0.9% ($91.6 million compared to
$90.8 million). Unrestricted net assets of governmental activities, the part of net assets that can
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be used to finance day-to-day operations without constraints established by debt covenants,
enabling legislation, or other legal requirements, increased slightly (less than .5%). The net
assets of the City's business -type activities decreased by 0.4% ($72.5 million compared to $72.2
million). Business -type activities unrestricted net assets increased by 5% ($6.1 million compared
to $5.8 million).
Net Assets
(in Millions)
I
overnmental
Business -type
Activities
Activities
Change
Change
FY10 FY09
Inc(Dec) FY10 FY09
Inc(Dec)
Current and other assets 16.7 15.5
1.2 12.4 13.8
(1.4)
Capital assets 90.5 78.9
11.6 79.9 80.8
(0.9)
Total assets 107.2 94.4
12.8 92.3 ' 94.6
(2.3)
Long-term debt outstanding
Other liabilities
Total liabilities
Net assets:
Invested in capital assets, net of debt
Restricted
Unrestricted (deficit)
Total net assets
14.6 15.7 (1.1) 19.9 20.9 (1.0)
1.8 1.6 0.2 0.2 1.1 (0.9)
16.4 17.3 (0.9) 20.1 22.0 (1.9)
77.7
65.1
12.6 60.4
60.2
0.2
7.2
6.1
1.1 5.7
6.6
(0.9)
5.9
5.9
- 6.1
5.8
0.3
90.8
77.1
13.7 72.2
72.6
(0.4)
Investment in capital assets (e.g., land, buildings, machinery, and equipment), net of any related
debt still outstanding on those assets makes up 84% of the City of Kalispell's net assets. These
capital assets are used to provide services to the citizens of Kalispell and are not spendable.
Therefore, repayment of the debt related to capital assets must be provided from other sources.
Restricted net assets equal $12.9 million or 7% of total net assets. Almost $6 million of this is
restricted in the enterprise funds to remain in compliance with enabling legislation and third
party restrictions. The $7.2 million restricted in governmental activities consists of $0.9 million
for debt service, and $6.3 million for special projects.
The City's total revenues decreased by 8% ($2.9 million), again due to the significant decrease in
contributed capital in the governmental funds. The total cost of all programs and services
increased by less than I %, or about $0.3 million. The analysis below separately considers the
operations of governmental and business -type activities.
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Changes in Net Assets
(in Millions)
Governmental Business -type
Activities Activities
Change Change
FY10 FY09 Inc Dec FY10 FY09 Inc Dec
Revenues
Program revenues (by major source):
Total revenues
Total expenses 21.50 21.80 (0.30) 9.60 9.00 0.60
Excess (deficiency) before
special items and transfers (0.50) 1.90 (2.40) (0.50) 0.30 (0.80)
0.20
Increase (decrease) in net assets (0.70) 1.90 (2.60) (0.30) 0.
Governmental activities. Revenues from governmental activities for the year decreased by
11 % ($2.7 million), and total expenses decreased by 1 % ($0.3 million). Net assets of
governmental activities actually decreased by $2.6 million due to the transfer of some
infrastructure assets to the water and sewer enterprise funds. This compares to a $1.9 million
increase in net assets of governmental activities in fiscal year 2009.
The cost of all governmental activities for fiscal year 2010 was $21.5 million compared to $21.8
million the prior year. Of this cost, our taxpayers paid $6.4 million or 29%. Other cost were
paid by those who directly benefited from the program ($6 million, 28%), and by other
governments and organizations that subsidized certain programs with operating and capital
grants and contributions ($5.5 million, 25%). Overall, the City's revenues from governmental
activities decreased from $23.7 million to $21 million. Again, this is the result of a decrease in
contributed capital (capital grants and contributions revenue).
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The table below presents the cost and net cost (total cost less revenues generated by the activity)
of each of the City's four largest programs; Public Safety (police and fire), Public Works (streets,
light maintenance and signs and signals), Culture and Recreation (parks, urban forestry, pool,
etc.), and Community Development. Net cost shows the financial burden placed on City
taxpayers by each of these functions.
Governmental Activities
(in Millions)
Total Cost Net Cost
of Services of Services
FY10
FY09
FY10
FY09
Public Safety
9.0
9.0
4.8
4.9
Public Works
3.2
2.3
(0.2)
(0.3)
Culture and Recreation
1.9
2.0
1.0
0.7
Community Development
1.6
1.0
0.3
0.2
Other
5.7
7.5
4.1
1.0
Totals
$ 21.4
$ 21.8
$ 10.0
$ 6.5
Business -type activities. Business -type activities decreased the City of Kalispell's net assets by
0.6% or $0.3 million. Revenues decreased 2% ($9.1 million compared to $9.3 million), and
expenses increased of 6% ($9.6 million compared to $9 million). The factors leading to these
results were:
There was a $0.2 million contribution of capital from governmental funds.
Sewer depreciation increased over $7 million due to the reconstructed and expanded
waste water treatment plant.
Charges for services revenue was the same as fiscal year 09.
Investment earnings decreased 50%, attributable to a further decline in interest rates and
decrease in cash balances.
There were no rate increases in any of the business -type funds.
Governmental Funds
The focus of the City of Kalispell's governmental funds is to provide information on near -term
inflows, outflows, and balances of spendable resources (fund balance). Unreserved fund balance
is a useful tool when assessing the net resources a government has available to spend at the end
of a fiscal period.
At the end of fiscal year 2010, the City of Kalispell's governmental funds reported combined
ending fund balances of $8 million, an increase of $1.5 million in comparison with the prior
fiscal year. Of the ending fund balance, $0.9 million is reserved for either debt service or
advances and, therefore, is not available for new spending. Below is a short analysis of each
major governmental fund.
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The general fund is the chief operating fund of the City of Kalispell. At the end of fiscal year
2010 unreserved fund balance of the general fund was $0.8 million, more than doubling the
amount at the end of fiscal year 2009, mainly due to a 5% reduction in cost associated with
public safety ($6.6 million compared to $7 million). At the end of fiscal year 2010, unreserved
fund balance represents 8% of total general fund expenditures. General fund expenditures
decreased in almost all programs, and revenues remained consistent when considering the effects
of the parks department now being accounted for in a special revenue fund.
The Community Development Loan Revolving fund is a special revenue fund used to make low
interest housing and commercial loans within a designated area. Principal and interest from
these loans or the purchase and subsequent resale of a fixed asset are the only sources of revenue
in this fund. At June 30, 2010, the fund balance of this fund was $0.3 million, a 15% increase
from fiscal year 2009.
Special Improvement District 344 (debt service) fund was established by the City of Kalispell in
fiscal year 2006 for the purpose of servicing the debt attributable to the construction of the
infrastructure needed in the industrial/commercial development known as Old School Station.
Fund balance at June 30, 2010, for SID 344 was $0.3 million, an increase of 384% from fiscal
year 2009. The reason for this substantial increase in fund balance is a landowner's prepayment
of multiple years' taxes.
10000000
9000000
6000000
7000000
6000000
5000000
4000000
3000000
20000GO
1000000
Expenses and Program Revenues -Governmental Activities for fiscal year 2010
gen gov't pub safety pub works culture/rec comm dev debt service
Activity
17
Revenue by Source -Governmental Activities fiscal year 2010
Other
3%
Capital
grants/contributions
8%
,erating
:ontributions
18%
GENERAL FUND BUDGETARY HIGHLIGHTS
The City of Kalispell's general fund expenditures budget for fiscal year 2010 was $10,408,115.
Actual expenditures for the year were $9,577,879, a favorable variance of $830,236. Actual
revenues of the general fund were $9,983,600, which failed to meet the budgeted amount of
$10,480,220, an unfavorable variance of $496,620.
Proprietary Funds
The City of Kalispell's proprietary funds financial statements provide the same type of
information found in the government -wide financial statements, but in more detail.
Unrestricted net assets of all proprietary funds at the end of the fiscal year amounted to $6.1
million. Of this amount, $3.2 million was attributable to the water fund and $2.3 million to the
sewer fund. The decrease in total net assets of all proprietary funds equaled $0.3 million. The
water fund increase in net assets for fiscal year 2010 was $0.6 million. $0.1 million of this was
attributable to operations (operating income). The sewer funds net assets decreased $0.8 million,
however, operations of the sewer fund showed expenses exceeding revenues by $1.2 million.
Other factors concerning the finances of the water and sewer funds have already been addressed
in the discussion of the City of Kalispell's business -type activities.
In
7000000
6000000
5000"
4000000
3000000
2000000
1000000
Expenses and Program Revenues - Buslness-type Activities for fiscal year 2010
airport eater see solid waste
gre
Activity
Revenues by Source - Business -type Activities for fiscal year 2010
Investment/other
Earnings
Capital 4
IM
Capital Assets
At the end of 2010, the City of Kalispell has $170.3 million, net of depreciation, invested in a
broad range of capital assets, including police and fire equipment, streets, buildings, land, park
facilities, garbage collection equipment, and water and sewer lines. The City of Kalispell as of
June 30, 2010, in accordance with GASB, has booked all infrastructure, including streets.
CITY OF KALISPELL'S CAPITAL ASSETS
(NET OF DEPRECIATION)
Governmental Business -type Total
Major capital asset events during the fiscal year 2010 included the following:
➢ Purchased large vacuum street sweeper, paid for 87% with federal grant.
➢ Continued work on the Woodland Connector Trails.
➢ Storm drain improvements at Willow Glen Drive and Stillwater Road valued at $375,452.
➢ Phase 1 of Southeast storm drain improvements at a cost of $177,414.
➢ Upgraded Grandview sewage lift station and gravity main at a cost of $628,107.
➢ Developer's installed 5 new fire hydrants valued at $16,923.
➢ 2,208 linear feet of new water main valued at $72,184 was installed and contributed to the
City by developers.
➢ The water department replaced 393 meters, and installed 82 new meters.
➢ 3,263 linear feet of new sewer main valued at $102,034 was installed and contributed to the
City by developers.
➢ Completed and put in service the expanded waste water treatment plant.
➢ Paved 13 alleys (over 4000' ).
➢ Replaced almost 1200' of sidewalks.
➢ Street department purchased 4 used plow trucks and a used grader.
➢ Worked with the Montana Department of Transportation to relocate and extend utilities
(water, sewer, and storm) as part of the Highway 93 Bypass project.
Debt
At the end of fiscal year 2010, the City of Kalispell had total long-term debt outstanding of $33
million. Of this amount, $4.8 million comprises debt backed by the full faith and credit of the
government and $3.2 million represents bonds secured solely by specified revenue sources (i.e.,
revenue bonds). The remainder consists of $17.8 million outstanding on State Revolving Fund
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loans for construction/expansion of the wastewater treatment plant, the extension of sewer lines
south on Highway 93, and the construction of a water storage facility and the related
distribution/supply system. There is also $4.4 million of special assessment debt for which the
City of Kalispell is liable in the event of default by the property owners subject to the
assessment, and $2.8 of loans for the purchase of other property and equipment.
CITY OF KALISPELL'S OUTSTANDING DEBT
Governmental Business -type Total
activities activities
General obligation bonds $ 4,805,000
SRF loans 17,780,000 18,471,000 $ 17,780,000 $ 18,471,000
Assessments $ 4.410,462 4.760.664 $ 4.410.462 $ 4.760.664
Total $ 13,493,802 $ 14,612,103 $ 19,541,000 $ 20,628.000 $ 33,034,802 $ 35,240.103
Other obligations of the City of Kalispell include accrued vacation pay and sick leave
(compensated absences). More detailed information about the City's long-term liabilities is
presented in the notes to the financial statements.
The City's elected and appointed officials considered many factors when setting the fiscal year
2011 budget, tax rates, and fees that will be charged for the business -type activities. These
factors include: Capital needs; inflation; status of the City's agreements with the bargaining
units; local economics, including the citizen's ability to pay.
➢ Flathead County's unemployment rate (unadjusted) stood at 11.5% as of June of 2010, which
is 20% above the June 2009 rate of 9.6 percent. This is worse than the State's unemployment
rate of 7.3%, and the Nation's rate of 9.6 percent.
➢ Applications for building permits and other internal indicators of growth remained low in
fiscal year 2010. Short-term future forecast are not favorable.
➢ The rapid population growth which Flathead County and Northwest Montana experienced for
many years has slowed considerably.
➢ Energy costs continue to rise.
➢ Cost of labor, health, liability, and property insurance continue to rise.
During fiscal year 2010, unreserved fund balance in the General Fund increased to $0.8 million.
The City of Kalispell has not appropriated any of this amount for spending in the 2011 fiscal
year budget. The City has determined that preserving this available fund balance/reserve is
necessary. The City continues to levy the maximum mills permitted by law.
Request for Information
This financial report is designed to provide a general overview of the City of Kalispell's finances
for all those with an interest in the government's finances. Questions concerning any of the
information provided in this report or requests for additional financial information should be
addressed to the City of Kalispell, Finance Director, P.O. Box 1997, Kalispell, MT 59903-1997.
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