1. IntroductionCITY OF
COMPREHENSIVE ANNUAL FINANCIAL REPORT
FISCAL YEAR 2013 July 1, 2012 - June 30, 2013
CITY OF KALISPELL
ANNUAL FINANCIAL REPORT
TABLE OF CONTENTS
INTRODUCTORY SECTION
Letterof Transmittal............................................................................................................................................ 3-8
Government Finance Officers' Association Certificate of Achievement.......................................................... 9
OrganizationalChart............................................................................................................................................ 10
City Elected and Appointed Officials.................................................................................................................. 11
FINANCIAL SECTION
IndependentAuditor's Report.............................................................................................................................12-13
Management's Discussion and Analysis..............................................................................................................14-27
Basic Financial Statements:
Government -wide Financial Statements:
Statementof Net Position.....................................................................................................................
28
Statementof Activities.........................................................................................................................
29
Governmental Fund Financial Statements:
BalanceSheet — Governmental Funds................................................................................................
30
Reconciliation of the Balance Sheet — Governmental Funds to the Statement of Net Position ......
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:
Statement of Net Position — Proprietary Funds.................................................................................
34
Statement of Revenues, Expenses, and Changes in Net Position — Proprietary Funds ..................
35
Statement of Cash Flows — Proprietary Funds..................................................................................
36
Fiduciary Fund Financial Statements:
Statement of Fiduciary Net Position — Fiduciary Funds...................................................................
37
Notes to the Financial Statements............................................................................................................38-75
Required Supplementary Information other than Management Discussion and Analysis:
Schedule of Funding Progress and Employer Contributions — Other Post -Employment
HealthcareBenefits...................................................................................................................
76
Budgetary Comparison Schedule — General and Major Special Revenue Funds.................................77-78
Supplemental Information:
Combining and Individual Governmental Fund Statements and Schedules:
Combining Balance Sheet — Nonmajor Governmental Funds.........................................................
79-85
Combining Statement of Revenues, Expenditures and Changes in Fund Balances —
NonmajorGovernmental Funds....................................................................................................
86-93
Budgetary Comparison Schedule —
MajorDebt Service Funds..............................................................................................................
94
Budgetary Comparison Schedule —
NonmajorGovernmental Funds....................................................................................................95-117
Combining and Individual Proprietary Fund Statements:
Combining Statement of Net Position — Nonmajor Proprietary Funds .........................................
118
Combining Statement of Revenues, Expenditures, and Changes in Fund Net Position — Nonmajor
ProprietaryFunds..........................................................................................................................
119
Combining Statement of Cash Flows — Nonmajor Proprietary Funds ...........................................
120
Combining and Individual Agency Fund Statements:
Combining Statement of Fiduciary Net Position - Agency Funds ..................................................
121
Combining Statement of Changes in Assets and Liabilities - Agency Funds ...............................
122
CITY OF KALISPELL
ANNUAL FINANCIAL REPORT
TABLE OF CONTENTS
STATISTICAL SECTION
Financial Trends
NetPosition by Component..................................................................................................................... 123
Changesin Net Position........................................................................................................................... 124
FundBalances of Governmental Funds................................................................................................. 125
Changes in Fund Balances, Governmental Funds................................................................................. 126
Revenue Capacity
MarketValue of Taxable Property......................................................................................................... 127
Direct and Overlapping Property Tax Rates......................................................................................... 128
PrincipalProperty Tax Payers................................................................................................................ 129
Property Tax Levies and Collections...................................................................................................... 130
Water — Sewer - Sold by Type of Customer........................................................................................... 131
Waterand Sewer Rates........................................................................................................................... 132
Debt Capacity
Ratios of Outstanding Debt by Type...................................................................................................... 133
Ratios of General Bonded Debt Outstanding......................................................................................... 134
LegalDebt Margin Information............................................................................................................. 135
PledgedRevenue Coverage..................................................................................................................... 136
Demographics and Economics
Demographic and Economic Statistics................................................................................................... 137
PrincipalEmployers................................................................................................................................. 138
Operating Section
Full-time Equivalent City Government Employees by Function/Program......................................... 139
Capital Assets Statistics by Function/Program...................................................................................... 140
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS AND SCHEDULE OF EXPENDITURES OF FEDERAL
AWARDS AS REQUIRED BY OMB CIRCULAR A-133
Schedule of Expenditures of Federal Awards................................................................................................... 141
Notes to the Schedule of Expenditures of Federal Awards.............................................................................. 142
Independent Auditor's Report on Compliance with Requirements that could have a Direct and
Material Effect on Each Major Program and on Internal Control over Compliance in
Accordance with OMB Circular A-133................................................................................................. 143-144
Schedule of Findings and Questioned Costs..................................................................................................... 145
Report on Internal Control over Financial Reporting and on Compliance and Other Matters
Based on an Audit of Financial Statements Performed in Accordance with Government
AuditingStandards................................................................................................................................. 146-147
Scheduleof Findings and Responses................................................................................................................. 148
Schedule of Prior Audit Recommendations...................................................................................................... 149
INTRODUCTORY
SECTION
SAL rJ
MONTANA L
February 17, 2014
City of Kalispell
Post Office Box 1997 - Kalispell, Montana 59903-1997
Telephone (406) 758-7701 Fax - (406) 75 8-775 8
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 to be completed within 9 months of the close of
every other fiscal year (by March 31). 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, 2013, 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.
Independent Auditor
Galusha Higgins & Galusha, 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, 2013, are
free of material misstatement. The independent audit involved examining, on a test basis,
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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 unmodified opinion that the City's
financial statements for the fiscal year ended June 30, 2013, 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, 2013, 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 expenditure of 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
and legislative authority are vested in a governing council consisting of the mayor and eight
other members. The governing council is responsible for, among other things, 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.
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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 Downtown Business Improvement District and the Tourism Business Improvement District
are both discretely presented governmental type component units.
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 2013 budget. The City
Manager and Finance Director 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, the airport of special revenue 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
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 fourth year of implementation, the recorded "rate subsidy"
liability is $1,265,329.
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
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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. Columbia
Falls Aluminum Company, which struggled to continue operations for years, is now closed. The
City has, however, started to see an uptick in new construction and home foreclosures have
slowed somewhat. Kalispell Regional Medical Center continues to grow and, although they are
considered not for profit, their expansion helps the City's economy in many other ways.
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 2012 estimated population of Kalispell is 20,487 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 2012 calendar year for City of Kalispell was 9
percent. This compares to 10.7 percent for the 2011 calendar year. A positive adjustment of
almost 20%. The most current unadjusted unemployment rate available (December 2013) for the
City of Kalispell, and Flathead County, is 7.8 percent. In comparison, the State of Montana's
current unemployment rate for the same period is 5.4 percent and the U.S. rate is 6.5%. The
State of Montana's rate is lowered in a large part by the very low unemployment, under 3% in
some counties in far eastern Montana, due to the Bakken oil field boom. The City's
unemployment rate has continued to improve from 13.1 percent high in January of 2011.
According to the United States Census Bureau, the 2012 per capita income for Kalispell was
$22,134, in 2012 inflation -adjusted dollars. This is approximately 14% less than the State of
Montana's estimated per capita income ($25,002) in 2012 inflation -adjusted dollars, and almost
30% less than the Nation's estimated per capita income of $28,051 in 2012 inflation -adjusted
dollars.
Revenue Growth and Reform
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.
IZ
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.
Maior Initiatives
During fiscal year 2014 budget discussions, consideration was given to the concept of privatizing
airport management services as a potential avenue for reducing expenditures within the airport
fund. The City released a Request for Proposal (RFP) for airport management services in
September 2013. On December 2, 2013, the City Council approved an agreement for airport
management services recommended by a 5 person committee. As of January 1, 2014, the City
Airport services are being managed privately.
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 years ended June 30, 2010,
2011 and 2012. Fiscal year ended June 30, 2010 was the I" time that the City of Kalispell had
submitted and achieved this prestigious award. In order to be 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.
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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 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,
/4
4ick Wills
Finance Director
r
Government Finance Officers Association
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, 2012
Executive Director/CEO
�8,'
MUNICIPAL JUDGE
Lori Adams
CITY CLERK
Theresa White
HUMAN RESOUI
Terry Mitton
CITY OF KALISPELL, MONTANA
ORGANIZATIONAL CHART
CITIZENS OF KALISPELL
CITY COUNCIL
CITY MANAGER
Doug Russell
FINANCE
Rick Wills
PUBLIC WORKS INFORMATION
Susie Turner TECHNOLOGY
Erika Hess
IN
PLANNING &
PARKS &
BUILDING
RECREATION
Tom Jentz
Chad Fincher
SAFETY F LEGAL
Charlie Harball
Nasset
PUBLIC SAFETY
FIRE
Dave Dedman
PUBLIC
POLICE
Roger
CITY OF KALISPELL, MONTANA
CITY ELECTED AND APPOINTED OFFICIALS
TERM
ELECTED OFFICIALS EXPIRES
Mayor Tammi E. Fisher 12/2013
Council members:
Kari Gabriel
Ward I
12/2015
Jim Atkinson
Ward III
12/2013
Robert Hafferman
Ward I
12/2013
Randy Kenyon
Ward III
12/2015
Wayne Saverud
Ward II
12/2015
Phil Guiffrida
Ward IV
12/2015
Jeff Zauner
Ward II
12/2013
Tim Kluesner
Ward IV
12/2013
Municipal Court Judge:
Heidi Ulbricht
12/2013
APPOINTED CITY OFFICIALS
City Manager
Doug Russell
Attorney
Charles Harball
City Clerk
Theresa White
Police Chief
Roger Nasset
Fire Chief
Dave Dedman
Finance Director
Rick Wills
Public Works Director
Susie Turner
Parks Director
Chad Fincher
Planning Director
Tom Jentz
Community Development Manager
Katharine Thompson
Human Resource Director
Terry Mitton
City Treasurer
Deb Diest
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