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IntroductionCITY OF COMPREHENSIVE ANNUAL FINANCIAL REPORT FISCAL YEAR 2011 July 1, 2010 - June 30, 2011 CITY OF KAL,ISPELL ANNUAL FINANCIAL REPORT TABLE OF CONTENTS Letterof Transmittal............................................................................................................................................ 3-8 Government Finance Officers' Association Certificate of Achievement......................................................... 8a OrganizationalChart........................................................................................................................................... 9 CityElected and Appointed Officials................................................................................................................. 10 FINANCIAL SECTION IndependentAuditor's Report............................................................................................................................11-12 Management's Discussion and Analysis.............................................................................................................13-27 Basic Financial Statements: Government -wide Financial Statements: Statementof Net Assets....................................................................................................................... 28 Statementof Activities......................................................................................................................... 29 Governmental Fund Financial Statements: Balance Sheet — Governmental Funds................................................................................................ 30 Reconciliation of the Balance Sheet — Governmental Funds to the Statement of Net Assets ........ 31 Statement of Revenues, Expenditures, and Changes in Fund Balances — Governmental Funds.. 32 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds to the Statement of Activities..................................................................... 33 Proprietary Fund Financial Statements: BalanceSheet — Proprietary Funds.................................................................................................... 34 Statement of Revenues, Expenses, and Changes in Net Assets — Proprietary Funds ..................... 35 Statementof Cash Flows — Proprietary Funds.................................................................................. 36 Fiduciary Fund Financial Statements: Statement of Fiduciary Net Assets — Fiduciary Funds...................................................................... 37 Notesto the Financial Statements....................................................................................................................... 38-69 Required Supplementary Information other than Management Discussion and Analysis: Schedule of Funding Progress and Employer Contributions — Other Post -Employment HealthcareBenefits........................................................................................................................... 70 Budgetary Comparison Schedule — General and Major Special Revenue Funds ........................... 71 Supplemental Information: Combining and Individual Governmental Fund Statements and Schedules: Combining Balance Sheet — Nonmajor Governmental Funds......................................................... 72-79 Combining Statement of Revenues, Expenditures and Changes in Fund Balances — Nonmajor Governmental Funds.................................................................................................... 80-88 Budgetary Comparison Schedule — MajorDebt Service Fund............................................................................................................... 89 Budgetary Comparison Schedule — NonmajorGovernmental Funds.................................................................................................... 90-115 Combining and Individual Proprietary Fund Statements: Combining Balance Sheet — Nonmajor Proprietary Funds............................................................ 116 Combining Statement of Revenues, Expenditures, and Changes in Net Assets — Nonmajor ProprietaryFunds......................................................................................................................... 117 Combining Statement of Cash Flows — Nonmajor Proprietary Funds .......................................... 118 Combining and Individual Agency Fund Statements: Combining Statement of Fiduciary Net Assets - Agency Funds ..................................................... 119 Combining Statement of Changes in Assets and Liabilities - Agency Funds .............................. 120 Individual Component Unit Statements: Statement of Cash Flows — Kalispell Parking Commission......................................................... 121 CITY OF KALISPELL ANNUAL FINANCIAL REPORT TABLE OF CONTENTS STATISTICAL SECTION Financial Trends NetAssets by Component........................................................................................................................ 122 Changesin Net Assets.............................................................................................................................. 123 FundBalances of Governmental Funds................................................................................................. 124 Changesin Fund Balances, Governmental Funds................................................................................ 125 Revenue Capacity MarketValue of Taxable Property........................................................................................................ 126 Directand Overlapping Property Tax Rates........................................................................................ 127 PrincipalProperty Tax Payers............................................................................................................... 128 Property Tax Levies and Collections..................................................................................................... 129 WaterSold by Type of Customer........................................................................................................... 130 Waterand Sewer Rates........................................................................................................................... 131 Debt Capacity Ratiosof Outstanding Debt by Type...................................................................................................... 132 Ratios of General Bonded Debt Outstanding........................................................................................ 133 LegalDebt Margin Information............................................................................................................. 134 PledgedRevenue Coverage..................................................................................................................... 135 Demographics and Economics Demographicand Economic Statistics................................................................................................... 136 PrincipalEmployers................................................................................................................. Operating Section Full-time Equivalent City Government Employees by Function/Program......................................... 138 Capital Assets Statistics by Function/Program..................................................................................... 139 REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS AND SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS AS REQUIRED BY OMB CIRCULAR A-133 Scheduleof Expenditures of Federal Awards.................................................................................................. Notes to the Schedule of Expenditures of Federal Awards............................................................................. Independent Auditor's Report on Compliance and on Internal Control over Financial Reporting based on an Audit of Financial Statements Performed in Accordance with Government AuditingStandards................................................................................................................................. Independent Auditor's Report on Compliance with Requirements Applicable to Each Major Program and Internal Control over Compliance in accordance with OMB Circular A-133 ........... Scheduleof Findings and Questioned Costs..................................................................................................... Report on other Compliance, Financial, and Internal Accounting Control Matters ..................................... Reporton Prior Audit Report Recommendations............................................................................................. AuditeeResponse to Findings.............................................................................................................................. 140 141 142-143 144-145 146-147 148 149 150 2 City of Kalispell Post Office Box 1997 - Kalispell, Montana 59903-1997 Telephone (406) 758-7701 Fax - (406) 758-7758 December 23, 2011 To the Honorable Mayor, members of the City Council, and Citizens of the City of Kalispell, Montana: CAFR TRANSMITTAL State law requires that all general-purpose local governments publish within six months of the close of each fiscal year (by December 31) a complete set of financial statements presented in conformity with generally accepted accounting principles (GAAP). State law also requires a biannual audit of these statements in accordance with generally accepted auditing standards by a firm of licensed certified public accountants. It is the belief of the City Council and the Executive staff that an annual audit assures a higher level of financial management and fiscal responsibility. Pursuant to this policy and these requirements, the audited annual financial report for the City of Kalispell, Montana for the fiscal year ended June 30, 2011, is submitted for your review. Management Representation The Finance Office prepared this report. Responsibility for the accuracy and completeness of the presented data, including all disclosures, rests with the City. We believe the data, as presented, is accurate in all material aspects; that it is presented in a manner designed to fairly set forth the financial position and results of operations of the City as measured by the financial activity of its various funds; and that all disclosures necessary to enable the reader to gain an understanding of the City's financial affairs have been included. To provide a reasonable basis for making these representations, management of the City has established and maintained an internal control system designed to ensure that the assets of the City are protected from loss, theft or abuse, and to ensure that adequate accounting data are compiled to allow for the preparation of financial statements in conformity with accounting principles generally accepted in the United States (US GAAP) and to comply with laws and regulations. The system of internal control is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. 3 Independent Auditor Denning, Downey & Associates, CPAs, P.C., a firm of licensed certified public accountants has audited the financial statements of the City. The goal of the independent audit was to provide reasonable assurance that the financial statements of the City for the fiscal year ended June 30, 2011, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditors concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the City's financial statements for the fiscal year ended June 30, 2011, are fairly presented in conformity with US GAAP. The independent auditor's report is presented as a component of the financial section of this report. Federal Single Audit The independent audit of the financial statements of the City was part of a broader, federally mandated "Single Audit" designed to meet the special needs of federal grantor agencies. As part of the City's single audit, tests are made to determine the adequacy of the internal control structure, including that portion related to federal awards. Tests are also made to determine that the fiscal year ended June 30, 2011, provided no instances of material weaknesses in the internal control system or violations of applicable laws and regulations. The City is required to undergo an annual single audit in conformity with the provisions of the Single Audit Act of 1984, as amended in 1996, and the U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-profit Organizations. Information related to this single audit, including the schedule of expenditures federal awards and auditor's reports on internal control and compliance with applicable laws and regulations are included in the single audit section of this report. Transmittal Letter GAAP require that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement MD&A and should be read in conjunction with it. The City of Kalispell's MD&A immediately precedes the City's basic financial statements within this report. Profile of the City of Kalispell The City of Kalispell, incorporated in 1892, is the county seat of Flathead County located in the western part of the State of Montana. This historically has been one of the top growth areas in the state. The City of Kalispell is empowered to levy a property tax on both real and personal properties located within its boundaries. It also is empowered by state statute to extend its corporate limits by annexation, which occurs periodically when deemed appropriate by the governing council. The City of Kalispell is operated under the council-manager form of government. Policy -making E and legislative authority are vested in a governing council consisting of the mayor and eight other members. The governing council is responsible, among other things, for passing ordinances, adopting the budget, appointing boards, and hiring the City Manager. The City Manager is responsible for carrying out the policies and ordinances of the governing council, and for overseeing the day-to-day operations of the City. The council is elected on a non -partisan basis. Council members are elected by district to serve four-year staggered terms, with four council members elected every two years. The mayor is elected at large for a four-year term. All significant operations of the City, as defined by the National Council of Governmental Accounting, Statement #3, have been included in the accompanying financial statements. The City provides a full range of municipal services including police, fire, building, planning and zoning, city court, parks and recreation, streets, community development and general administrative services. The City also operates as Enterprise funds: water, sewer, solid waste, and an airport. In addition, the City presents financial data for two component units on the combined statements. The Kalispell Parking Commission is a discretely presented proprietary type component unit. The Downtown Business Improvement District is a discretely presented governmental type component unit. The annual budget serves as the foundation for the City of Kalispell's financial planning and control. All departments of the City of Kalispell are required to submit requests for appropriation to the City Manager. The City Manager uses these requests as the starting point for developing a proposed budget. The City Manager then presents this proposed budget to the council for review. The council is required to hold public hearings on the proposed budget and to adopt a final budget. The appropriated budget is prepared by fund, function, and department. Budgetary control is decentralized to the point that individual department heads are responsible for expending within budgetary limits. Budget to Actual Comparisons The State municipal budget law stipulates that money, other than payments from agency funds, may not be drawn from the treasury of a municipality except pursuant to an appropriation. Therefore, a legally adopted budget is required for all funds, with the exception of agency funds. The City legally adopts a budget for the required funds. Consistent with past years, the City established the legal spending level at the fund level for the fiscal year 2011 budget. The City Manager may make transfers of appropriations within a fund. Transfers between funds, however, require approval of the City Council. Budget -to -actual comparisons are provided in this report for each individual governmental fund for which an appropriated annual budget has been adopted. For the general fund and the community development loan revolving fund, the comparison is part of the required supplementary information. Other Postemployment Benefits — Implied Rate Subsidy Liability The City of Kalispell reported the "implied rate subsidy" liability, required under the Governmental Accounting Standards Board (GASB) Statement No. 45, in this financial report and the related financial statements. Although the City reported this liability, and related 5 expenditures, the City does not agree that this represents a legal liability and further believes that the presentation of this activity in the financial statements will eventually be misleading to the users of the statements. In this, the third year of implementation, the recorded "rate subsidy" liability is $620,022. The City plans to continue funding the employee health insurance plan on a "pay as you go" basis, and does not plan to fund this liability. City management feels it would be fiscally irresponsible to take an amount equal to the actuarially determined liability and place it in an irrevocable trust fund that would never be used and would most likely increase as the City, and the related number of employees serving it, continues to grow. Retirees can leave the plan at anytime and the City would have unwisely used funds collected from its citizens. Insurance rates have been historically set so each plan offered is fiscally sound. Rates can be changed and benefits altered at anytime to ensure the plans remain properly funded. Because the City will not be funding this liability, it will continue to increase, and within a few years, the financial statements will reflect the impact of a very large "implied rate subsidy" liability that does not have legal substance. Management does not feel it has legal substance as nothing in state law or any contractual agreement requires the city to offer the same rates to retirees, spouses and their dependents as other participants. The State of Montana has submitted a request to have GASB reconsider the requirement to report the implied rate subsidy. The City of Kalispell agrees with and supports this request. Factors Affecting Financial Condition The City of Kalispell has not been immune to the effects of the nation-wide economic downturn. Two of the Flathead Valley's core industries have been hit particularly hard. The logging industry is virtually shut down, which trickles down to closures in related industries. Construction is at a stand -still and the real estate market is filled with foreclosures. Columbia Falls Aluminum Company, which struggled to continue operations for years, is now closed. Montana experienced a population increase between the 2000 and 2010 census of 9.7 percent. Kalispell, however, experienced an increase of 40.1 percent, while Flathead County experienced growth equal to 22.1 percent. The 2010 population of Kalispell is 19,927 according to the U.S. Census Bureau, which represents a reduction from the estimated 2009 population of 21,640. The unadjusted unemployment rate for the 2010 calendar year for Flathead County (City of Kalispell data is unavailable) was 11.8 percent. This is up .9 percent from one year ago. The current unemployment rate for Flathead County (September 2011) is 9.9 percent. The State's current unemployment rate is 6.8 percent and the nation's is 9 percent. The good news is that Flathead County's unemployment rate has fallen from 14.1 percent in January of 2011. According to the United States Census Bureau, the estimated 2009 per capita income for Kalispell was $21,572, in 2009 inflation -adjusted dollars. This is approximately 20% less than the nation's estimated per capita income. no Revenue Growth and Deform City revenues can be considered statutorily limited, circumstantial or discretionary. The City has very little control over the growth of restricted and circumstantial revenues. Although the City `controls' the growth or discretionary revenue, it is still subject to typical community pressures for conservative growth. Since November 1986 and the passage of Initiative 105, which limited certain property taxes to the 1986 levels, the ability of the City to raise revenue for basic services is increasingly difficult. Then, the legislature, with S13184, lowered tax rates forcing the City to increase mill levies to maintain the same level of revenue. The City's cash reserves in most funds vary between 10% and 20% of appropriations. State law allows for reserves of 50%. Reserves provide for cash flow between tax revenue receipts to keep the City from having to borrow funds for operations. Additional revenues generated by increased taxable valuation come with the additional costs of an increased service area. The City of Kalispell's Police and Fire Departments, Courts system, Building Department, Public Works and Parks have felt the increased pressure from the influx of people to Flathead County. These pressures impact the budgets of all departments. The Montana constitution and state law require periodic reappraisal of property in the interest of equal taxation (15-7-111, MCA). The State of Montana, through the Department of Revenue (DOR), is responsible for valuing all taxable real and personal property. Once every six years, the DOR is required by state law to conduct a reappraisal of residential, commercial, industrial, agricultural and forestland property in the state. The most recent reappraisal cycle began on January 1, 2003 and was completed on July 1, 2008. New reappraisal values were used for property tax purposes in tax year 2009 (fiscal year 2010). By law, reappraisal values will be phased -in at the rate of one -sixth each year. Statewide, commercial and residential property values rose 43% and 54% respectively. In Flathead County, reappraisals resulted in property value increases of 41% for commercial property, and 66% for residential property. Major Initiatives The City Council held a public hearing regarding a proposed modification and expansion of the West Side Urban Renewal District. The current District is debt free after paying off the original bonds in fiscal year 2010. Currently, the City is exploring the possibility of expanding the district to the east somewhat along the City's railroad corridor. Any expansion would probably include removal of the railroad tracks and the relocation of businesses using the tracks. The proposed new district would include and create opportunity in part of the City of Kalispell's downtown core area. Awards and Acknowledgments The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Kalispell for its comprehensive annual financial report for the fiscal year ended June 30, 2010. This was the Vt time that the City of Kalispell has achieved this prestigious award. In order to be 7 awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program's requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. The completion of the Annual Financial Report on a timely basis was made possible by the entire staff of the Finance Department and the cooperation of the administrative staff of all City departments. I would also like to give recognition to the mayor, governing council, and the city manager for their consistent support for maintaining the highest standards in the management of the City of Kalispell's finances. Respectfully submitted, Amy Robertson Finance Director Certificate of Achievement for Excellence in Financial Reporting Presented to City of Kalispell Montana For its Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2010 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards in government accounting and financial reporting. r�r(rn CTdTtc;' — ANT t IWO � i� President RPQ�T�k 5EAL Executive Director WIC MUNICIPAL JUDGE Heidi Ulbricht CITY OF KALISPELL, MONTANA ORGANIZATIONAL CHART CITY CLERK Theresa White CITY MANAGER Jane Howington AIRPORT I I FINANCE Fred Lelstiko Amy Robertson HUMAN RESOURCES PUBLIC WORKS INFORMATION TerryMitton Bill Shaw TECHNOLOGY Erika Hess PLANNING & PARKS & BUILDING RECREATION Tom Jentz Mike Baker PUBLIC POLICE Roger SAFETY Nasset LEGAL Charlie Harball PUBLIC SAFETY FIRE Dave Dedman IX, U M 9 �UN L I UJ 0 M V TERM RLECTED OFFICIALS EXPIRES Mayor Tammi E. Fisher 12/2013 � �11 �. I �-, Mari Gabriel Ward 1 12/2011 Jim Atkinson Ward 111 12/2013 Robert Hafferman Ward 1 12/2013 Randy Kenyon and 111 12/2011 Wayne Saverud Ward 11 12/2011 M. Duane Larson Ward IV 12/2011 JeffZauner Ward 11 12/2013 Tim Kluesner Ward IV 12/2013 Municipal Court Judge: Heidi Ulbricht 12/2013 City Manager Jane Howington Attorney Charles Harball City Clerk Theresa White Police Chief Roger Nasset Fire Chief Vacant Finance Director Amy Robertson Public Works Director Bill Shaw Parks Director Michael Baker Airport Manager Fred Leistiko Planning Director Tom Jentz Human Resource Director Terry Mitton City Treasurer Deb Diest Assistant Finance Director Rick Wills 10