1. 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
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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.
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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
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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
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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.
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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
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