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5. Notes to Financial StatementsNOTES TO THE FINANCIAL STATEMENTS CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 WC1110DRR.YIAAQA/11:WelW[0101W0W."WhIITKK11"ChY1001030toIDki The City complies with generally accepted accounting principles (GAAP). GAAP includes all relevant Governmental Accounting Standards Board (GASB) pronouncements. In the government -wide financial statements and the fund financial statements for the proprietary funds, Financial Accounting Standards Board (FASB) pronouncements and Accounting Principles Board (APB) opinions issued on or before November 30, 1989, have been applied unless those pronouncements conflict with or contradict GASB pronouncements, in which case GASB prevails. For enterprise funds GASB statement Nos. 20 and 34 provide the City the option of electing to apply FASB pronouncements issued after November 30, 1989. The City has elected not to apply those pronouncements. In June 2004, the Governmental Accounting Standards Board (GASB) issued Statement No. 45, Accounting and Financial Reporting by Employers for Postretirement Benefits Other Than Pensions. The City implemented this new statement during the year ended June 30, 2011. Certain significant changes in the Statement include the following: 1. Recognition of cost of postemployment benefits on the government -wide financial statements on the accrual basis of accounting instead of the cash basis. 2. Provide information on current values of future benefits, associated liabilities, and summarize major plan provisions and demographics. Financial Reporting Entity In determining the financial reporting entity, the City complies with the provisions for GASB statement No. 14, The Financial Reporting Entity, and includes all component units of which the City appointed a voting majority of the units' board; the City is either able to impose its will on the unit or a financial benefit or burden relationship exists. Primary Government The City of Kalispell is a political subdivision of the State of Montana governed by an elected Mayor and Council duly elected by the registered voters of the City. The City utilizes the City Manager form of government. The City is considered a primary government because it is a general purpose local government. Further, it meets the following criteria: (a) It has a separately elected governing body (b) It is legally separate and (c) It is fiscally independent from the State and other local governments. The accompanying financial statements present the primary government and its component units, entities for which the government is considered to be financially accountable. These financial statements include all funds, agencies, boards, commissions and authorities which meet the criteria for inclusion in the City's financial report. These criteria include financial accountability, appointment of a majority of the secondary government and the financial benefit or burden derived by the primary government from a secondary government. Discretely Presented Component Units Discretely presented component units are separate legal entities that meet the component unit criteria described above but do not meet the criteria for blending. The Cities' discretely presented component units, the Downtown Business Improvement District and the Tourism Business Improvement District are legally separate organizations of the City, but the City is financially accountable. The two component units are reported in a separate columns to emphasize that they are legally separate from the City. 38 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Downtown Business Improvement District On September 2, 2003, by resolution 4828, the City created the Downtown Business Improvement District (BID). The Mayor and City Council appointed the Board of Directors. The City is able to impose its will on the BID as it is authorized to levy assessments to support the activities of the BID. The annual budget of the BID is subject to approval by the City Council. The purpose of said Business Improvement District is to promote the health, safety, prosperity, security and general welfare of the inhabitants of the City of Kalispell and the proposed district, and appears to be of special benefit to the property within the District. The District boundaries are roughly 2"a Avenue East to 2"a Avenue West between Center Street and 4' Street South. Publicly owned property and owner occupied single family dwellings are exempt from the assessments related to the District. Tourism Business Improvement District On May 3, 2010, by resolution 5425, the City created the Tourism Business Improvement District (TBID). The Mayor with the approval of the City Council appointed seven owners of property within the district to act as the Board of Trustees of the District. The City is able to impose its will on the TBID as it is authorized to levy assessments to support the activities of the TBID. The annual budget of the TBID is subject to approval by the City Council. The purpose of said Tourism Business Improvement District is to promote the health, safety, prosperity, security and general welfare of the inhabitants of the City of Kalispell and the proposed district, and appears to be of special benefit to the property within the District. The District is made up of those properties within the corporate limits of the City of Kalispell with five or more rooms providing overnight stays for transient patrons at its business. Basis of Presentation, Measurement Focus, and Basis of Accounting Government -wide Financial Statements The government -wide financial statements (i.e., the Statement of Net Position and the Statement of Activities) report information on all of the nonfiduciary activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business -type activities, which rely to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. Eliminations have been made to minimize the double -counting of business -type activities. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. The general government function of the City includes expenses which are, in essence, indirect expenses of other functions. These expenses are allocated to each related function. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Indirect expenses reported in the statement of activities must be allocated to the different functions of the City. These expenses include administration, data processing, and central garage. The administrative cost allocation is based on each functions percentage of total City expenses. Data processing is allocated based approximately on that functions usage of the City's computer servers. Central garage expenses are allocated to the other functions of the City based on actual invoicing. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government -wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. 39 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Certain eliminations have been made as prescribed by GASB 34 in regards to inter -fund activities, payables and receivables. All internal balances in the Statement of Net Assets have been eliminated except those representing balances between the governmental activities and business -type activities, which are presented as internal balances and eliminated in the total primary government column. In the Statement of Activities, internal service fund transactions have been eliminated; however, those transactions between governmental and business -type activities have not been eliminated. Measurement Focus and Basis of Accounting On the government -wide Statement of Net Position and the Statement of Activities, both governmental and business -type activities are presented using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred, regardless of the timing of the cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. The City generally applies restricted resources to expenses incurred before using unrestricted resources when both restricted and unrestricted net assets are available. The City has chosen not to accrue the interest payable of general long-term debt at year end. This practice results in interest expense reported for governmental activities on the statement of activities to equal the interest expenditure on the statement of revenues, expenditures, and changes in fund balance. Although, this is contrary to full accrual accounting, the City feels that it is immaterial in the presentation of its financial statements. Fund Financial Statements Basis of Presentation Fund financial statements of the City are organized into funds. A fund is an independent fiscal and accounting entity with a self -balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance -related legal and contractual provisions. The minimum number of funds is maintained consistent with legal and managerial requirements. Funds are organized into three categories: governmental, proprietary, and fiduciary. An emphasis is placed on major funds within the governmental and proprietary categories. Each major fund is displayed in a separate column in the governmental funds statements. All of the remaining funds are aggregated and reported in a single column as non -major funds. A fund is considered major if it is the primary operating fund of the City or meets the following criteria: a. Total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise fund are at least 10 percent of the corresponding total for all funds of that category or type; and b. Total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise funds are at least 5 percent of the corresponding total for all governmental and enterprise funds combined. Measurement focus and Basis of Accounting Governmental funds are used to account for the City's general government activities. Governmental fund types use the flow of current financial resources measurement focus and the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual. (i.e., when they are "measurable and available") "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to pay liabilities of the current period. The City considers all revenues available if they are collected within 60 days after year-end. Expenditures are recorded when the related fund liability is incurred except for un- 40 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 matured interest on general long-term debt which is recognized when due, and certain compensated absences and claims and judgments which are recognized when the obligations are expected to be liquidated with expendable available financial resources. Real and personal property taxes, special assessments, charges for current services, and interest earnings are susceptible to accrual. Other receipts and taxes become measurable and available when cash is received by the City and are recognized as revenue at that time. The City recorded real and personal property taxes and assessments levied for the current year as revenue. Taxes and assessments receivable remaining unpaid at year-end and not expected to be collected soon enough thereafter to be available to pay obligations of the current year were recorded as deferred revenue, with a corresponding reduction in revenues, as required by generally accepted accounting principles. In addition, prior period delinquent taxes and assessments collected in the current period were recorded as revenue in the current period as required by generally accepted accounting principles. Entitlements and shared revenues are recorded at the time of receipt or earlier if the susceptible to accrual criteria are met. Expenditure driven grants are recognized as revenue when the qualifying expenditures have been incurred and all other grant requirements have been met. Major Funds The City reports the following major governmental funds: The General Fund is always a major fund. This is the City's primary operating fund and it accounts for all financial resources of the City except those required to be accounted for in other funds. The Airport TIF Fund (special revenue fund) was established to account for the construction and other costs incurred in the construction of projects deemed beneficial to the City's Airport Tax Increment Financing district. A transfer from the Airport TIF debt service fund is the main source of revenue for this fund. The main revenue source for the related debt service fund is tax increment (increased taxable value of the TIF district since base year) The Community Development Loan Revolving Fund (special revenue fund) was originally established to account for a federal Community Development Block Grant. These federal dollars were loaned to businesses and individuals for projects approved by the City's Community Development department. The main revenue source for this fund currently is borrower's principal and interest payments. SID 344 is a debt service fund established to account for the resources accumulated and payments made for principal and interest of the 20 year bonds sold to finance the construction of the Old School Station Industrial and Technology Park. Proprietary funds are accounted for using the accrual basis of accounting. These funds account for operations that are primarily financed by user charges. The flow of economic resources focus concerns determining costs as a means of maintaining the capital investment and management control. Revenues are recognized when earned and expenses are recognized when incurred. Allocations of costs, such as depreciation, are recorded in proprietary funds. Proprietary funds distinguish operating revenues and expenses from non -operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connections with a proprietary fund's principal ongoing operations. The principal operating revenues for enterprise funds are charges to customers for sales and services. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non -operating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. 41 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 The City reports the following major proprietary funds: The Water Fund accounts for the activities of the City's water distribution operations. The Sewer Fund accounts for the activities of the City's sewer collection and treatment operations and includes the storm sewer system. Fiduciary funds account for assets held by the government in a trustee capacity or as an agent on behalf of others. The agency fund is custodial in nature and does not present results of operations or have a measurement focus. Agency funds are accounted for using the modified accrual basis of accounting. This fund is used to account for assets that the City holds for others in an agency capacity. As a general rule the effect of inter -fund activity has been eliminated from the government -wide financial statements, and the internal service funds have been absorbed pro -ratably into governmental -type and business -type activities on the government - wide financial statements. Exceptions to this general rule are charges for services between various functions of the government. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Budget Process An annual appropriated operating budget is adopted each fiscal year for the general fund, special revenue funds, debt service funds and capital projects funds on the modified accrual basis. In addition, a budget is adopted for the enterprise and internal service funds on a full accrual basis. The appropriated budget is prepared by fund, function, and for the general fund and certain other funds, by department. The final budget is legally enacted by the City Council, after holding public hearings as required by State statutes, and within forty-five days of the State providing final shared revenue figures. Budget appropriation transfers may be made between general classifications of salaries and wages, maintenance and operation and capital outlay. Reported budget amounts represent the originally adopted budget as amended by resolution of the City Council. It is management's responsibility to see that the budget is followed to the budgetary line item. The City Council may amend a final budget when shortfalls in budgeted revenues require reductions in approved appropriations to avert deficit spending; when savings result from unanticipated adjustments in projected expenditures; when unanticipated state or federal monies are received; or when a public emergency occurs which could not have been foreseen at the time of adoption. The City Manager is granted budget amendment authority for the expenditure of funds from debt service funds, enterprise funds, internal service funds, trust funds, federal and state grants accepted and approved by the City Council, special assessments, and donations. The procedure to amend the budget in total can be made only after the City prepares a resolution, notice is published of a public hearing, and a public hearing is held in accordance with state law. 42 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 All material budget amendments and transfers during FY 2013 are described below: Governmental Funds The City Manager amended the 2004 Sidewalk & Curb debt service fund $2,286. This was the final year of this S & C and the amendment was needed to close out the fund. The City Manager amended the Westside TIF debt service fund as the fiscal year 2013 interest payment on the new revenue bond issue exceeded budget by $41. The City Manager amended the Cops Hiring Recovery Program (CHRP) Grant Special Revenue fund to account for swing and graveyard pay for the officer paid thru the grant. Accepted a U.S. Department of Transportation grant (fund 2951) and approved appropriation of the $130,462 to continue funding the DUI Court Implementation Program in Kalispell Municipal Court (Resolution No. 5594). Passed Resolution No. 5600 authorizing the Storm Sewer fund to expend $200,000. This is the City's portion of the "Willows" storm water project. Passed Resolution No. 5634 relating to the Airport TIF Special Revenue fund. This $2,166,366 amendment was needed to accommodate the purchase of the permanent easement on the Kidsports property. 43 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Assets, Liabilities, and Net Assets or Equity 1. Cash, Cash Equivalents, and Investments The City's cash and cash equivalents are considered to be cash on hand, demand and time deposits, government backed securities, bonds and warrants, and investments with the State of Montana's short-term investment pool (STIP). The cash resources of the individual funds are combined to form a pool of cash and investments which is managed by the City Treasurer. Investments are carried at cost, which does approximate fair value as described in Note III, A, except for investments in STIP and particular bonds, which are reported at fair value. For purposes of the statement of cash flows, the enterprise and internal services funds consider all funds (including restricted assets) held in the City's cash management pool to be cash equivalents. 2. Receivables Between Funds Transactions between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either interfund receivable s/payable s (i.e., the current portion of interfund loans) or advances to/from other funds (i.e., the non -current portion of interfund loans). All other outstanding balances between funds are reported as due to/from other funds. Advances between funds are offset by a fund balance reserve account in applicable governmental funds to indicate they are not available for appropriation and are not expendable available financial resources. Taxes Property tax levies are set within forty-five days of the State providing shared revenue figures, in connection with the budget process. Real property (and certain attached personal property) taxes are billed within ten days after the third Monday in October and are due in equal installments on November 30 and the following May 31. After those dates, they become delinquent, and a lien is filed upon the property. After three years, the City may exercise the lien and take title to the property. Special assessments are billed in two equal installments due November 30 and the following May 31. Personal property taxes (other than those billed with real estate) are generally billed no later than the second Monday in July (normally in May or June), based on the prior November's levies. Personal property taxes, other than mobile homes, are due thirty days after billing. Mobile home taxes are billed in two halves, the first due thirty days after billing; the second due September 30. The tax billings are considered past due after the respective due dates and are subject to penalty and interest charges. An allowance for uncollectible accounts was not maintained for real and personal property taxes and special assessments receivable. The direct write-off method is used for these accounts. Ambulance An allowance, based on history, for estimated uncollectible accounts receivable of 46% (.46) is maintained for the Ambulance fund. This allowance account has been adjusted to $164,146 at June 30, 2013. Ambulance accounts receivable $356,840 Times allowance percentage 46% @ June 30, 2013 $164,146 44 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Water/Sewer A reserve for estimated uncollectible accounts receivable of 0.5% (005) of metered sales is maintained for the Water Fund and Sewer Fund. The reserve balances are as follows for June 30, 2013: Water $ 12,966 Sewer $ 20,716 Contracts The following are contracts payable to the City of Kalispell on June 30, 2013. FUND Source Amount General - Major Governmental Municipal Court $ 41,445 General - Major Governmental Buffalo Hills Golf Course 16,762 Total Governmental 58,207 Information Technology - Internal Service Charter (formerly Bresnan) 43,980 Water - Major Proprietary Impact Fees 16,931 Sewer - Major Proprietary Impact Fees 48,407 Total Proprietary 65,338 Total City contracts receivable $ 167,525 3. Inventories and Prepaid Items Inventories for materials and supplies for governmental fund types are expended at the time of purchase. Enterprise Fund inventory of materials and supplies are valued at cost and the First -In First -Out (FIFO) method is utilized. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. The City pays in advance for Health Insurance and Workers' Compensation. This results in a City asset at June 30. On June 30, 2013, the City reported assets for prepaying expenses in the following funds. FUND General - Major Governmental General - Major Governmental Parks Ambulance Building Department Street Maintenance Purpose Workers Compensation Health Insurance Health Insurance Health Insurance Health Insurance Health Insurance Total Governmental Information Technology - Internal Service Health Insurance Airport Water - Major Proprietary Sewer - Major Proprietary Solid Waste Health Insurance Health Insurance Health Insurance Health Insurance Total Proprietary Total City prepaids Amount $ 90,655 68,930 11,938 6,107 3,324 11,556 192,510 L,L44 608 12,380 17,363 6,495 36,846 $ 231,600 45 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 4. Restricted Assets Certain proceeds of the City's enterprise fund revenue bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. When an expense is incurred for which both restricted and unrestricted net assets are available, it is the City's policy to first apply the restricted resources. 5. Capital Assets Capital assets, which include property, plant, and equipment, are reported in the applicable governmental or business -type activities columns in the government -wide financial statements. Capital assets are defined by the government as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of five years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. As required by GASB, the City of Kalispell has retroactively reported its streets as part of capital assets in the financial reports for fiscal year 2009. More detailed information on the City's streets and all capital assets can be found in Note D. Capital Assets. Police vehicles are an exception despite a useful life less than 5 years. The City has determined that it is important to capitalize and depreciate these because the total cost, as a group, is substantial. The costs of normal maintenance and repairs that do not add to the value of the assets or extend asset lives are not capitalized. Improvements are capitalized and depreciated over the remaining useful lives of the related assets. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of fixed assets is reflected in the capitalized value of the asset constructed, net of interest earned on the invested proceeds over the same period. Depreciation has been provided for the property, plant and equipment of the City of Kalispell using the straight line method. The useful lives of these assets have been estimated as follows: Buildings 20-50 years Improvements Other than buildings 10-50 years Streets 40 years Machinery, vehicles and equipment 3-20 years Water and Sewer lines, pump stations 10-50 years 6. Compensated Absences It is the City's policy and state law to permit employees to accumulate a limited amount of earned but unused vacation benefits, which will be paid to employees upon separation from City service. Employees are allowed to accumulate and carry over a maximum of two times their annual accumulation of vacation. Any vacation leave time accumulated over this maximum carryover must be used within 90 days of the new calendar year. There is no restriction on the amount of sick leave that may be accumulated. Upon separation, employees are paid 100 percent of accumulated vacation and 25 percent of accumulated sick leave. In fiscal year 2012, the City of Kalispell began offering a voluntary employees beneficiary association (VEBA) plan. A tax- free post -retirement medical expense account used by retirees and their eligible dependents to pay for any eligible medical expenses. The plan is funded by 50% of the employee's unused sick leave at the time of retirement, which is contributed by the City into the plan. The benefit to the retiree of this plan is that they receive two times the amount of unused sick leave at 46 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 retirement, none of which is subject to tax The liability associated with governmental fund -type employees is reported in Governmental Activities column of the Statement of Net Assets, while the liability associated with proprietary fund -type employees is recorded in the respective fund and the Business -type Activities column of the Statement of Net Assets. For the purpose of reporting these compensated absences payable as current or noncurrent, the City assumes all employees will use their vacation accumulated as of June 30' in the succeeding fiscal year (current). The City also assumes sick leave accumulated as of June 30' will remain accumulated in the succeeding fiscal year (noncurrent). 7. Long - Term Obligations In the government -wide financial statements, and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, or proprietary fund type statement of net assets. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are expensed when incurred. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of the debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 8. Net Position/Fund Balance Net position in the government wide and proprietary fund financial statements show the amount of the capital assets less any outstanding debt issued to fund them as "net investment in capital assets." Restricted net position are those that have constraints placed on them either by external parties or imposed by law or enabling legislation. The City implemented GASB Statement 54 for fiscal year 2011. As a result, the classifications for fund balance now used for governmental funds are reported in two general classifications, non -spendable and spendable: Non -spendable represents the portion of fund balance that is not in spendable form such as inventories and prepaids, and, in the general fund, long term notes and loans receivable. Spendable fund balance is further categorized as restricted, committed, assigned, and unassigned. Restricted fund balance contains balances that can be spent only for the specific purposes stipulated by external parties or through enabling legislation. External parties include grantors, debt covenants, votes, and laws and regulations of other governments. Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision -making authority, the City Council. The City Council needs to formally adopt a Resolution in order to establish, modify, or rescind a fund balance commitment. Assigned fund balances are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed. Assignments of fund balance are created by an official who the governing body has delegated the authority to assign amounts to be used for specific purposes. The City Council and City Manager 47 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 individually have the authority to express assignments. In governmental funds other than the general fund, assigned fund balance also represents the remaining amount that is not restricted or committed. Also included in the assigned fund balance for the general fund are assignments for the portion of the current general fund balance that is projected to be used to fund expenditures and other cash outflows in excess of the expected revenues and other cash inflows in the next fiscal year. Unassigned fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications. In other funds, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts have been restricted, committed, or assigned. When both restricted and unrestricted resources are available, spending will occur in the following order, for the identified fund types: General Fund: restricted, committed, assigned, unassigned Special Revenue Funds: restricted, committed, assigned Debt Service Funds: assigned, committed, restricted Capital Project Funds: restricted, committed, assigned 48 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 NOTE 2. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Excess of expenditures over appropriations For the year ended June 30, 2013, all City funds expenditures were less than or equal to budgeted appropriations. B. Deficit Fund Balances The City reports one (1) Fund with a deficit fund balance at June 30, 2013. The "Willows" storm water capital project shows a negative fund balance at June 30'. This is due to the fund recognizing capital expenditures in fiscal year 2013, but the closing on the bond sale being postponed. These are SID bonds to be repaid by the property owners within the district where the construction is taking place. Closing is scheduled for fiscal year 2014. 49 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 NOTE 3. DETAILED NOTES ON ALL FUNDS AND ACCOUNT GROUPS A. Cash and Cash Equivalents Investment Income Income from pooled investments is allocated to the individual funds based on the fund's month end cash balance in relation to total pooled investments. Cash Composition Cash and investments may include cash and cash items; demand, time, savings, and fiscal agent deposits; investments in the State Short -Term Investment Pool (STIP); repurchase agreements; U.S. government treasury bills, notes bonds, and other treasury obligations such as state and local government series; general obligations of certain agencies of the United States such as Federal Home Loan Bank; and U.S. government security money market funds if the fund meets certain conditions. Total City's (primary governmental and component units) composition of cash, deposits and investments at fair value as of June 30, 2013, are as follows: Cash on hand $ 3,730 Cash in banks: Demand Deposits 12,729,314 Bonds/Warrants 27,649 STIP 1,515 Government Backed Securities 10,298,000 Total S23,060, 008 Credit Risk Section 7-6-202, MCA, limits investments of public money of a local government in the following eligible securities: (a) United States government treasury bills, notes and bonds and in the United States treasury obligations, such as state and local government series (SLGLS), separate trading of registered interest and principal of securities (STRIPS), or similar United States treasury obligations; (b) United States treasury receipts in a form evidencing the holder's ownership of future interest or principal payments on specific United States treasury obligations that, in the absence of payment default by the United States, are held in a special custody account by an independent trust company in a certificate or book entry form with the federal reserve bank of New York; or (c) Obligations of the following agencies of the United States, subject to the limitations in subsection 2 (not included): (i) federal home loan bank; (ii) federal national mortgage association; (iii) federal home mortgage corporation; and (iv) federal farm credit bank. With the exception of the assets of a local government group self-insurance program, investments may not have a maturity date exceeding 5 years except when the investment is used in an escrow account to refund an outstanding bond issue in advance. Section 7-6-205 and Section 7-6-206, MCA, state that demand deposits may be placed only in banks and Public money not necessary for immediate use by a county, city, or town that is not invested as authorize in Section 7-6-202 may be placed in time 50 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 or savings deposits with a bank, savings and loan association, or credit union in the state or placed in repurchase agreements as authorized in Section 7-6-213. The City of Kalispell has no investment policy that would further limit its investment choices. The City of Kalispell has the following investments and their related credit risk as reported by Standard and Poor's or Moody's investment service: Short Term Investment Pool (STIP) Credit Quality ratings by the NRSRO as of June 30, 2013: Credit WAM Quality in Security Investment Type Amortized Cost Ratina Days Asset Backed Commercial Paper $ 907,892,295 Al 44 Corporate Commercial Paper 150,768,775 Al 105 Corporate Variable Rate 663,143,336 A3 41 Certificates of Deposit Fixed Rate 50,000,000 Al 222 Certificates of Deposit Variable Rate 435,974,196 A2 35 Other Asset Backed 17,987,295 BBB- NA U.S. Government Agency Fixed 25,000,000 Al 3 U.S. Government Agency Variable 182,700,345 Al 17 Money Market Funds (Unrated) 168,232,935 NR 1 Money Market Funds (Rated) 15,000,000 At+ 1 Structured Investment Vehicles 29,561,449 NR 4 Total Investments $ 2,646,260,626 A2 43 Securities Lending Collateral Investment Pool $ 7,182,928 NR Unaudited financial statements for the State of Montana's Board of Investments are available at 555 Fuller Avenue in Helena, Montana. Custodial Credit Risk Custodial Credit risk is the risk that, in the event of a bank failure, the government's deposits may not be returned to it. The City of Kalispell does not have a deposit policy for custodial credit risk. All deposits are carried at cost plus accrued interest. As of June 30, 2013, the City of Kalispell's bank balance was exposed to custodial credit risk as follows: Depository Account Balance Insured $ 421,814 Collateralized -Collateral held by the pledging bank's trust department, but not in the City's name 12,307,500 Total Deposits $12.729. 114 Deposit Security Section 7-6-207, MCA, states (1) The local governing body may require security only for that portion of the deposits which is not guaranteed or insured according to law and, as to such unguaranteed or uninsured portion, to the extent of: (a) 50% of such deposits if the institution in which the deposit is made has a net worth of total assets ratio of 6% or more; or (b) 100% if the institution in which the deposit is made has a net worth of total assets ratio of less than 6%. 51 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 The amount of collateral held for the City of Kalispell deposits at June 30, 2013, exceeded the amount required by State statues. Concentration of Credit Risk The City of Kalispell places no limit on the amount the entity may invest in any one issuer. The City of Kalispell's concentration of credit risk percentages follow for each investment issued that is not issued or explicitly guaranteed by the U.S. government, invested in mutual funds, external investment pools or other pooled investments: % of credit risk Bonds/Warrants <1% Interest Rate Risk The City of Kalispell does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. The following is a list of individual investments as of June 30, 2013 along with their related interest rates and maturity dates. Investment Interest Rate Maturity Date Amount STIP 0.3%(varies) varies $ 1,515 Federal Farm Banks 0.900% 12/26/17 2,000,000 Federal Farm Banks 1.030% 3/12/18 1,000,000 Federal National Mtg Assn 0.900% 10/25/17 1,595,000 Federal Home Loan Bank 1.100% 7/10/17 1,000,000 Federal Home Loan Bank 3.250% 3/28/16 300,000 Federal National Mtg Assn 0.900% 11/7/17 1,405,000 Federal National Mtg Assn 0.700% 11/15/17 1,000,000 Federal National Mtg Assn 1.000% 3/27/18 1,750,000 Wells Fargo Bank 0.950% 2/28/18 248,000 S&C Bonds - internal 3.25%-7.75% varies 27,649 Total $10,327,164 52 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS RUNE 30, 2013 B. Interfund Receivables and Payables (Due to/from Other Funds) The composition of interfund balances and due to/from as of June 30, 2013, was as follows: Receivable Fund Payable Fund Amount Purpose General Fund Permissive Health - Spec Rev. Fund $ 42,739 S/T Loan General Fund Ambulance - Spec Rev. Fund 15,119 S/T Loan General Fund COPS Grant - Spec Rev. Fund 404,130 S/T Loan General Fund Law Enforcement Grants - Spec Rev. Fund 9,635 S/T Loan General Fund Preserve America Grant - Spec Rev. Fund 6,306 S/T Loan General Fund DUI Court Grant - Spec Rev. Fund 1,025 S/T Loan General Fund Brownfields Grants - Spec Rev. Fund 4,807 S/T Loan General Fund Fire Grants - Spec Rev. Fund 29,906 S/T Loan General Fund Fema Grant - Spec Rev. Fund 190,082 S/T Loan General Fund G.O. Bonds - Debt Serv. Fund 7,894 S/T Loan General Fund Airport TIF - Debt Serv. Fund 64,014 S/T Loan General Fund SID 343 - Debt Serv. Fund 23,022 S/T Loan General Fund SID 344 - Debt Serv. Fund 244,882 S/T Loan Total - Due From Other Funds (Governmental Funds) 1,043,561 Sewer - Enterprise Fund "Willows" Storm Sewer - Capital Proj. Fund 33,009 S/T Loan Total - Due From/Internal Balances (Proprietary Funds/Entity Wide) 33,009 Total - Due To Other Funds (Governmental Funds) $ 1,076,570 C. Transfers The following is an analysis of transfers between funds during Fiscal Year 2013: From Health Health Streets Parks - in - Lieu Old School Tech TIF Old School Industrial TIF West Side TIF - Special Revenue West Side TIF - Capital Project Airport TIF - Debt Service S & C's - Debt Service General - Major Governmental General - Major Governmental General - Major Governmental General - Major Governmental To Amount Purpose General - Major Governmental $ 660,239 Operations Parks 68,000 Operations MACI Grant 75,000 Match CTEP 2,026 Match Old School TIF - Debt Service 25,000 Operations Old School TIF - Debt Service 12,661 Operations West Side TIF - Debt Service 32,000 Operations West Side TIF - Debt Service 889 Close-out Airport TIF - Major Governmental 540,000 Operations SID Revolving - Debt Service 2,285 Close-out FEMA Grant 14,114 Match Drug Grant 55,000 Match CHIRP Grant 20,000 Match Law Enforcement Block Grant 5,000 Match TOTAL $ 1,512,214 53 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 D. Capital Assets Capital asset activity for the year ended June 30, 2013 was as follows Asset Transfers between fund types Capital assets transferred from governmental funds to business -type funds are not reported in the Statement of Revenues, Expenditures, and Changes in Fund Balances, because there has been no flow of current financial resources. It is reported as a transfer for both sides in the Statement of Activities. It is reported as a capital contribution on the Proprietary Funds Statement of Revenues, Expenses, and Changes in Fund Net Position. For fiscal year 2013 governmental funds contributed capital valued at $358,169 to the Water Fund ($265,544) and Airport Fund ($92,625). Of this amount, $248,602 was transferred out of governmental activities construction in progress, and $109,567 was an expenditure of the Westside TIF Capital Project Fund in fiscal year 2013. Asset Restatements /Assets Conveyed to Other Agencies Capital assets restated in governmental funds are not reported in the Statement of Revenues, Expenditures, and Changes in Fund Balances, because there has been no flow of current financial resources. It is reported as a restatement on the Statement of Activities. For fiscal year 2013, there was a capital asset restatement of $143,954 from construction in progress. A $10,000 partial payment on a planned sculpture purchase from fiscal year 2008 was removed. Completing the purchase is no longer in the City's plans. The balance from construction in progress, $133,954, is related to a redesign of Three Mile Drive which was completed in fiscal year 2010. This plan has become obsolete because of the State of Montana building the Kalispell Highway 93 Bypass. In fiscal year 2013, the City of Kalispell, by Resolution No. 5616, approved the conveyance of City's ownership of a portion of the Gateway West Mall and some adjacent property to the Flathead County Economic Development Authority. This resulted in a loss on conveyance of capital asset of $1,139,077 (the depreciated value). Another $6,749 loss on disposal is the result of obsolete/disposed assets not being fully depreciated. Gain / (loss) on the conveyance and/or disposed of capital assets is not displayed prominently on the Statement of Activities so this amount is displayed cumulatively with all other general government expenses. Assets Contributed In fiscal year 2013, Governmental Activities report contributed assets with a value of $19,126. These are sidewalk improvements paid for by homeowner's. In fiscal year 2013, Business -type Activities report contributed assets with a value of $69,330. This consists of two water mains, a fire hydrant, and a sewer main installed and constructed by private developers. Gain (Loss) on Sale/Disposal of Capital Assets In fiscal year 2013, Business -type Activities report loss on disposal of assets of $43,324, the result of overestimating the life of water meters. Residential and commercial meters were replaced with a depreciated value of $43,324. 54 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Balance Balance Governmental Activities: July 1, 2012 Additions Contributions Restatements Transfers Deductions June 30, 2013 Capital assets not being depreciated: Land $ 2,552,209 $ - $ - $ - $ - $ (156,910) $ 2,395,299 Construction in Progress 392,556 38,331 (143,954) (248,602) 38,331 Total capital assets not being depreciated $ 2,944,765 $ 38,331 $ $ (143,954) $ (248,602) $ (156,910) $ 2,433,630 Capital assets being depreciated: Buildings Improvements other than buildings Machinery and equipment General Ambulance Parking Infrastructure Total capital assets being depreciated $ 19,361,951 $ 7,123 $ - $ - $ - $ (2,075,000) $ 17,294,074 15,278,302 133,239 19,126 - - - 15,430,667 6,452,964 1,413,468 - - - (112,214) 7,754,218 398,059 - - - - - 398,059 123,794 - - - - - 123,794 80,419,328 80,419,328 $ 122,034,398 $ 1,553,830 $ 19,126 $ $ $ (2,187,214) $ 121,420,140 Less accumulated depreciation for: Buildings $ (7,264,977) $ (660,877) $ - $ - $ - $ 1,092,833 $ (6,833,021) Improvements otherthan buildings (5,746,769) (654,116) - - - - (6,400,885) Machinery and equipment General (3,848,404) (433,747) - - - 105,464 (4,176,687) Ambulance (344,466) (12,644) - - - - (357,110) Parking (96,606) (7,432) - - - - (104,038) Infrastructure (20,688,756) (2,010,483) (22,699,239) Total accumulated depreciation $ (37,989,978) $ (3,779,299) $ $ $ $ 1,1 88,297 $ (40,570,980) Total capital assets being depreciated, net 84,044,420 (2,225,469) 19,126 (988,917) 80,849,160 City capital assets, net $ 86,989,185 $ (2,187,138) $ 19,126 $ (143,954) $ (248,602) $ (1,145,827) $ 83,282,790 Balance Balance Internal service funds: July 1, 2012 Additions Contributions Restatements Transfers Deductions June 30, 2013 Data Processing $ 172,580 $ 8,599 $ - $ - $ - $ - $ 181,179 Less accumulated depreciation (125,229) (16,071) (141,300) Internal service funds assets, net $ 47,351 $ (7,472) $ $ $ $ $ 39,879 Governmental activities depreciation was charged to functions/programs of the primary government as follows: Governmental Activities: General Government Public Safety Public Works Parks and Recreation Total Governmental Activities $ 2,664,407 472,412 170,068 472,412 $ 3,779,299 55 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Balance Balance Business -type activities: July 1, 2012 Additions Contributions Gain (Loss) Transfers Deductions June 30, 2013 Capital assets not being depreciated: Land Airport $ 1,347,867 $ - $ - $ - $ - $ - $ 1,347,867 Water 105,958 - - - - - 105,958 Sewer 221,513 - - - - - 221,513 Sewer (Storm) 26,550 - - - - - 26,550 Construction in progress Airport 91,808 - - - 92,625 - 184,433 Water 33,495 163,221 - - - (6,473) 190,243 Sewer 50,067 340,960 - - - - 391,027 Sewer (Storm) 98,575 6,851 (98,575) 6,851 Total capital assets not being depreciated $ 1,975,833 $ 511,032 $ $ $ 92,625 $ (105,048) $ 2,474,442 Capital assets being depreciated: Airport $ 1,962,813 $ - $ - $ - $ - $ - $ 1,962,813 Water General Plant 1,327,249 91,946 - (82,196) - - 1,336,999 Source of Supply 4,645,339 - - - - - 4,645,339 Transmision and Distribution 25,101,537 391,456 52,608 (135,996) 265,544 - 25,675,149 Pumping Plant 3,535,443 62,321 - - 6,473 3,604,237 Sewer General Plant 1,162,083 8,389 - (184,998) - - 985,474 Transmision and Distribution 24,031,595 4,850 16,722 - - - 24,053,167 Storm Sewer System 12,310,998 820,574 - - 98,575 13,230,147 Treatment Plant Equipment 465,667 - - - - - 465,667 Treatment Plant 37,869,516 65,786 - - - 37,935,302 Solid Waste Buildings 316,731 - - - - 316,731 Machinery and equipment 1,212,896 34,694 1,247,590 Total capital assets being depreciated $ 113,941,867 $ 1,4 00,016 $ 69,330 $ (403,190) $ 265,544 $ 105,048 $ 115,458,615 Less accumulated depreciation for: Airport $ (656,696) $ (97,918) $ - $ - $ - $ - $ (754,614) Water General Plant (1,051,788) (47,786) - 82,196 - - (1,017,378) Source of Supply (697,781) (97,575) - - - - (795,356) Transmision and Distribution (6,713,267) (601,675) - 92,672 - - (7,222,270) Pumping Plant (1,419,370) (111,003) - - - - (1,530,373) Sewer General Plant (964,513) (38,939) - 184,998 - - (818,454) Transmision and Distribution (7,999,791) (758,790) - - - - (8,758,581) Storm Sewer System (3,406,023) (289,260) - - - - (3,695,283) Treatment Plant Equipment (428,298) (13,545) - - - - (441,843) Treatment Plant (17,142,064) (1,100,408) - - - - (18,242,472) Solid Waste Buildings (238,266) (15,681) - - - - (253,947) Machinery and equipment (874,155) (90,974) (965,129) Total accumulated depreciation $ (41,592,012) $ (3,263,554) $ $ 359,866 $ $ $ (44,495,700) Total capital assets being depreciated, net $ 72,349,855 $ (1,783,538) $ 69,330 $ (43,324) $ 265,544 $ 105,048 $ 70,962,915 Business -type activities capital assets, net $ 74,325,688 $ (1,272,506) $ 69,330 $ (43,324) $ 358,169 $ $ 73,437,357 Business -type activities depreciation was charged to functions/programs of the primary government as follows: Business -type Activities: Airport $ 97,919 Water 858,041 Sewer 2,200,937 Solid Waste 106,657 Total Business -type Activities $ 3,263,554 56 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS RUNE 30, 2013 E. Long -Term Debt During the year ended June 30, 2013, the following changes occurred in liabilities reported in long-term debt: Balance July 1, 2012 Additions Reductions Balance Due within June 30, 2013 1 year Governmental Activities: G.O. Bonds $ 4,145,000 $ - $ (445,000) $ 3,700,000 $ 445,000 Revenue Bonds 1,700,000 (142,000) $ 1,558,000 148,000 Assessments 3,845,329 3,981 (391,663) $ 3,457,647 313,198 Contract Debt/Loans 1,750,206 239,697 (255,668) $ 1,734,235 210,454 Intermediary Program 671,985 - (25,385) $ 646,600 25,621 Compensated Absences 1,217,495 106,636 (41,372) $ 1,282,759 971,988 Governmental Activities Sub Total $ 13,330,015 $ 350,314 $ (1,301,088) $ 12,379,241 $ 2,114,261 Internal Service Funds: Compensated Absences 5,298 7,092 $ 12,390 10,518 Internal Service Funds Sub Total $ 5,298 $ 7,092 $ - $ 12,390 $ 10,518 Business -type Activities Revenue Bonds $ 1,254,000 $ (459,000) $ 795,000 $ 60,000 SRF 16,079,000 536,483 (1,472,000) $ 15,143,483 1,166,000 Compensated Absences 245,117 25,338 (7,223) $ 263,232 155,890 Business -type Activities Sub Total $ 17,578,117 $ 561,821 $ (1,938,223) $ 16,201,715 $ 1,381,890 In prior years, the general fund was used to liquidate compensated absences and claims and judgments. General Obligation Bonds — The City issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. General obligation bonds are direct obligations and pledge the full faith and credit of the City. General obligation bonds outstanding as of June 30, 2013 were as follows: Purpose Pool/Fire Hall Refunding Origination Interest Date Rate Term 6/13/2012 1%-2% 10 years Total G.O. Bonds 57 Due Principal Annual Balance Date Amount Payment 30-Jun-13 2022 $4,145,000 varies $3,700,000 $ 4,145, 000 $ 3, 700, 000 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Special Assessment Debt — Special assessment bonds are secured by a lien on the assessed properties. The primary source of repayment is the assessments levied against the benefiting properties. However, the City is liable, to an extent, for repayment of these special assessment bonds. The City is authorized by State law to establish and has established a revolving fund to ensure the payment of debt service on the bonds in the event that assessed property owners default. Origination Interest Due Principal Annual Balance Purpose Date Rate Term Date Amount Payment 30-Jun-13 SID343 6/12/2001 3.6%-5.5% 20 years 2021 1,581,500 varies 485,000 SID344 6/15/2006 3.7%-5.1% 20 years 2026 4,520,000 varies 2,945,000 2005 S&C 1/3/2006 7.25% 8 years 2014 22,850 varies 2,856 2007 S&C 1/3/2008 6.00% 8 years 2016 15,407 varies 5,778 2008 S&C 1/3/2009 3.50% 8 years 2017 8,981 varies 4,490 2009 S&C 1/4/2010 3.50% 8 years 2018 7,629 varies 4,768 2010 S&C 1/6/2011 3.00% 8 years 2019 942 varies 706 2011 S&C 1/6/2012 3.25% 8 years 2020 5,792 varies 5,068 2012 S&C 4/12/2013 3.25% 8 years 2021 3,981 varies 3,981 Total Special Assessment Bonds $ 6,167,082 $ 3,457,647 SID's 343 Assessments In the event that all future and delinquent assessments are paid and that there are no future adjustments to assessments by the City of Kalispell, there is a projected surplus of principal assessments in SID 343 of $61,117. SID 344 Bonds The City of Kalispell entered into a Continuing Disclosure Undertaking dated as of June 29, 2006 with respect to the SID 344 Bonds. As part of the Undertaking, the City covenanted and agreed to provide continuing disclosure of certain financial information, operating data, and timely notices of the occurrence of certain events for the benefit of the Holders of the Bonds in order to assist the Participating Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b) (5), promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Rule"). The Bonds were issued pursuant to Resolution No. 5123, adopted by the City Council of the City on June 19, 2006. Pursuant to Resolution No. 5123, principal of and interest on the Bonds are secured by: (i) special assessments payable by taxpayers in SID 344; (ii) certain tax increment revenues pledged to the Bonds; (iii) a bond reserve account ($226,000) established in the SID 344 fund; (iv) the debt service revolving fund ($226,000). On the July 1, 2013 payment date for the Bonds, the City used $244,882 of the $452,000 in the SID 344 bond reserve accounts to fully satisfy the regularly scheduled debt service payment of $376,733. The use of the bond reserve monies was necessary because the largest property owner in SID 344 (currently the owner of 11 of the 17 total parcels in SID 344) had not paid 2008/2009/2010/2011/2012 Special Assessments when due, and the available Special Assessments and Tax Increments were insufficient to fully satisfy the regularly scheduled payment. The City has determined that the use of bond reserve monies constitutes a material event (as defined by the Rule and the Undertaking) because it is an unscheduled draw on the reserves reflecting financial difficulties for the Bonds. At June 30, 2013, $0 is in the SID 344 bond reserve account, and $207,118 is in the debt service revolving fund available to pay future debt service on the bonds. 58 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Revenue Bonds — Revenue bonds are directly related to and expected to be paid from the proprietary fund. The 2005 Airport Tax Increment bonds and the 2012 West Side Tax Increment bonds are accounted for in the Government -wide financial statements and are paid directly from tax increment in the district. Purpose Governmental Activities: 2005A - Airport T I F 2012 - West Side TIF Governmental Activities Sub Total Business -type Activities: 2004 Water Refunding Business -type Activities Sub Total Issue Interest Date Rate Term Sep-05 3.8%-4.40% 10 years Mar-12 variable 25 years May-04 2.5%-4.85% 20 years Total Revenue Bonds Final Bonds Maturity Issued Balance 30-Jun-13 2020 1,445,000 1,070,000 2037 500,000 488,000 1,945,000 1,558,000 2024 1,840,000 795,000 $ 1,840,000 $ 795,000 $ 3,785,000 $ 2,353,000 Significant Provisions of the Series 2005 Airport Urban Renewal Tax Increment Bond Reserve Account — The City shall maintain a debt service reserve account with a balance equal to the lesser of: (i) ten percent of the sum of the original principal amounts of each series of Bonds of which any Bond is Outstanding or (ii) the maximum amount of principal and interest due on the Outstanding Bonds (giving effect to any mandatory sinking fund redemption) in the then current or any future calendar year. Maximum amount of principal and interest due in any future fiscal year $182,700 City's Reserve $184,875 Significant Provisions of the Series 2012 West Side Urban Renewal Tax Increment Note The Note matures on January 1, 2037, and is subject to redemption, at the option of the City, in whole or in part, on July 1, 2014. Interest on the note is variable and adjusts at a rate equal to the Prime Rate as published in the Wall Street Journal plus .75% on each interest payment date for the Note. Reserve Account — The City is not required to maintain a debt service reserve account related to the Series 2012 West Side Urban Renewal Tax Increment Note. Water Debt Required Information Debt Service Account - Monthly an amount equal to not less than 1/6 of the interest due within the next six months and 1/12 of the principal to become due within the next twelve months shall be credited to the debt service account. The debt service account was zero as of June 30, 2013, as all debt service payments were made as of the end of the fiscal year, leaving no accrued interest or principal balance. Reserve Account - The City shall keep in the reserve account an amount equal to the lesser of 10% of the original principal or the maximum amount of principal and interest required in the current or any subsequent fiscal year. For the Water fund the City complies with the 10% of the original principle. 10% of Original Principal $ 411,000 Total Reserve Requirement $ 411,000 Reserve balance 6/30/13 $ 411258 59 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Property Insurance - The City will cause all buildings, properties, fixtures, and equipment to be kept insured in amounts that are ordinarily carried. Liability Insurance - The City will carry insurance against liability of the City and its employees. Rates and Charges — Rates and charges will be made and kept sufficient to provide gross income and revenues adequate to pay promptly the reasonable and current expenses of operating and maintaining the system and to produce in each fiscal year net revenues in excess of such current expenses, equal to 125% of the maximum amount of principal and interest payable from the Revenue Bond Account in any subsequent fiscal year. Cash Flow Coverage Water Service Charges $2,593,314 *Misc. Revenue $ 181,829 Total Operating Revenue $2,775,143 Less: Operating Expense (excludes depreciation) $1,710,665 Available for Debt Service $1,064,478 —10%of original principal $ 411,000 Coverage FY13 259% *includes interest revenue **includes all water fund borrowings State Revolving Fund — the City has six (6) loan agreements with the State Revolving Fund (SRF). These obligations are to be repaid from the operating income of the fund. Water and Sewer Debt Refinanced On August 20, 2012, by Resolution No. 5576 and Resolution No. 5577, the City Council approved the refinancing of most of the debt of the Water fund and all of the debt of the Sewer Funds. Resolution No. 5576 related to first amended and restated water system revenue bonds (DNRC Drinking Water State Revolving Loan Program); amending authorizing resolutions adopted March 5, 2001, June 4, 2007, and September 4, 2007, and bonds. Refunded principal of the three bond issues was $404,000, $526,000 and $1,340,000, respectively. Total Water fund debt service related to these issues, prior to refinancing was $2,857,582. After the refinancing was completed on August 30, 2012, total Water fund debt service related to these issues was 2,558,345. Net savings from refinancing the Water fund debt will be $299,237. Resolution No. 5577 related to first amended and restated sewer system revenue bonds (DNRC Water Pollution Control State Revolving Loan Program); amending authorizing resolutions adopted July 6, 2004, and October 15, 2007, and bonds. Refunded principal of the two bond issues was $1,009,000 and $13,026,000, respectively. Total Sewer fund debt service related to these issues, prior to refinancing was $18,370,225. After the refinancing was completed on August 30, 2012, total Sewer fund debt service related to these issues was 16,290,310. Net savings from refinancing the Sewer fund debt will be $2,079,915. SRF LOANS Interest Amount Outstanding Purpose Origination Rate Term Borrowed 30-Jun-13 *2013 Sewer- WWTP Digester Lid FY13 3.00% 20 years $ 1,271,000 $ 132,483 2012 Sewer Refunding FY13 2.25% 12 years 1,009,000 935,000 2012 Water Refunding FY13 1.25% 3 years 526,000 353,000 2012 Water Refunding FY13 2.25% 15 years 1,340,000 1,264,000 2012 Water Refunding FY13 2.00% 8 years $ 404,000 $ 360,000 2012 Sewer Refunding FY13 2.25% 15 years 12,827,000 12,099,000 Total SRF Loans $ 17,377,000 $ 15,143,483 *the City of Kalispell entered into this loan agreement with the State Revolving Fund Program (DNRC) on June 10, 2013. As of June 30, 2013, the City had only drawn $132,483. The balance will be drawn in FY 2014. 60 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Sewer Debt Required Information Operating Reserve — The city shall keep in the operating reserve account an amount equal to one month's operating expenses. As of June 30, 2013, the operating reserve account contains $190,000. Debt Service Account - Monthly an amount equal to not less than 1/6 of the interest due within the next six months and 1/12 of the principal to become due within the next twelve months shall be credited to the debt service account. The debt service account was zero as of June 30, 2013, as all debt service payments were made as of the end of the fiscal year, leaving no accrued interest or principal balance. Reserve Account - The City shall keep in the reserve account an amount equal to the lesser of 10% of the original principal, the maximum amount of principal and interest required in the current or any subsequent fiscal year, or 125% of the average debt service payable in any fiscal year. The City is in compliance with the maximum amount of principal and interest required in the current or any subsequent year. As of June 30, 2013, the debt service reserve account contains $1,119,062. Rates and Charges — Rates and charges will be made and kept sufficient to provide gross income and revenues adequate to pay promptly the reasonable and current expenses of operating and maintaining the system and to produce in each fiscal year net revenues in excess of such current expenses, equal to 125% of the maximum amount of principal and interest payable from the Revenue Bond Account in any subsequent fiscal year. Cash Flow Coverage *Operating Revenue $5,038,453 Impact Fees Pledged for Debt $ 250,000 Total $ 5,288,453 Less: Operating Expense (excludes depreciation) $ 2,699,909 Available for Debt Service $2,588,544 —Maximum Debt Service $1,119,062 Coverage FY13 231% *includes interest revenue —does not include the FY13 Digester Lid SRF Loan - at June 30, 2012, City had only drawn a $132,483 advance toward the total borrowing of $1,271,000. $9,749 of this draw was to fund the bond reserve account. Debt service on the Digester Lid SRF Loan will be approx. $85,000/yr. Loans/Contracted Debt Governmental Funds Origination Interest Due Principal Balance Purpose Date Rate** Term Date Amount 30-Jun-13 BOI:City Hall HVAC 7/16/2004 varies 10 years 2/15/ 0014 1 11,836 25,040 BOI Fire Truck 4/22/2005 varies 10 years 8/15/2015 279,900 80,177 BOI :Bucket Truck 12/30/2010 varies 5years 2/15/2016 28,300 17,235 BOI Mover 3/4/2011 varies 5 years 2/15/2016 71,220 43,491 BOI:Dump Truck 6/15/2012 varies 5 years 2/15/2017 124,865 111,339 BOI:Compactor 12/30/2011 varies 5 years 2/15/2017 45,928 36,979 BOI: Stumper 2/1/2013 varies 5 years 2/15/2018 20,000 20,000 BOI: P/U &Tractor 2/1/2013 varies 5 years 2/15/2018 45,000 45,000 BOI: Dump Trucks (2) 5/24/2013 varies 5 years 2/15/2018 174,698 174,698 Rocky Mtn Bank - Fire Truck 3/7/2008 3.95% 10 years 3/1/2018 575,000 315,250 Capital One Public Funding - 2011stAve E- City Hall 10/25/2007 4.85% 12years 9/15/2019 1,420,165 865,026 Sub total BOI loanstcontracted debt 2,936,912 1,734,235 USDA: Intermediary Relending Program 10/12/2004 1.00% 30 years 10/12/2034 520,000 433,920 Relending Program 11/27/2006 1.00% 30 years 11/27/2036 257,500 212,680 Sub total USDA Intermediary 777,500 646,600 Total loanstcontracted debt $ 3,714,412 $ 2,380,835 BOI - Board of Investments Intercap Loan Program 61 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Requirements to amortize debt The annual requirements to amortize all long-term debt outstanding, excluding compensated absences payable, as of June 30, 2013, were as follows: Governmental Activities: SPECIAL G.O. ASSESSMENT CONTRACTED INTERMEDIARY REVENUE FOR FISCAL BONDS BONDS LOANS/DEBT LOAN PROGRAM BONDS YEAR ENDED PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST TOTAL 2014 445,000 56,913 313,198 171,362 326,645 58,159 25,621 6,467 148,000 64,890 1,616,255 2015 450,000 52,463 310,342 157,224 327,892 48,759 25,878 6,210 153,000 58,903 1,590,671 2016 455,000 47,963 310,342 143,068 313,454 38,842 26,960 6,044 159,000 52,563 1,553,236 2017 465,000 41,138 308,416 128,687 285,596 28,766 27,230 5,774 164,500 45,913 1,501,020 2018 470,000 34,163 307,293 114,196 256,480 18,617 27,502 5,502 175,000 45,913 1,454,666 2019-2023 1,415,000 59,613 1,218,056 354,881 224,168 10,959 141,690 23,329 425,000 99,738 3,972,434 2024-2028 690,000 70,380 148,917 16,101 104,000 58,680 1,088,078 2029-2033 156,514 8,505 125,500 36,300 326,819 2034-2038 66,288 1,297 104,000 9,600 181,185 TOTAL 3,700,000 292,253 3,457,647 1,139,798 1,734,235 204,102 646,600 79,229 1,558,000 472,500 13,284,364 Business -type Activities: SRF REVENUE FOR FISCAL LOANS BONDS YEAR ENDED 2014 2015 2016 2017 2018 2019-2023 2024-2028 TOTAL PRINCIPAL INTEREST PRINCIPAL INTEREST TOTAL 1,166,000 327,525 60,000 36,795 1,590,320 1,192,000 304,099 60,000 34,275 1,590,374 1,020,483 280,732 65,000 31,695 1,397,910 1,008,000 258,552 65,000 28,835 1,360,387 1,030,000 235,868 70,000 25,943 1,361,811 5,379,000 823,426 385,000 79,295 6,666,721 4,348,000 219,781 90,000 4,365 4,662,146 15,143,483 2,449,983 795,000 241,203 18,629,669 62 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 F. State -Wide Retirement Plans Substantially all full-time City employees are eligible for one of three retirement plans: Montana Public Employees' Retirement System (PERS); Municipal Police Officer's Retirement System (MPORS): and the Firefighters' Unified Retirement System (FURS). The plans are established by State law and administered by the State of Montana. The plans are cost -sharing multiple -employer defined benefit and/or defined contribution plans that provide retirement, disability and death benefits to plan members and beneficiaries. The City had a total payroll of $9,940,007 for FY13, of which $9,444,893 is covered by PERS, MPORS, or FURS. Contribution rates for the plans are required and determined by State law. The contribution rates, expressed as a percentage of covered payroll for the fiscal year ended June 30, 2013, were: PERS MPORS FURS Employee 6.90%-7.90% 9.00% 10.70% Employer 7.07% 14.41% 14.36% State 0.10% 29.37% 32.61% The State contribution to firefighter and police retirement qualifies as an on behalf payment. In fiscal year 2013, the State of Montana contributed $597,601 to firefighter retirement and $594,027 to police retirement. These amounts have been recorded in the City's financial statements. The Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for all three plans. That report may be obtained by writing to Public Employees Retirement Division, P. O. Box 200131, Helena, MT 58620-0131 or by calling 1-406-444-3154. The City's contributions for the years ending June 30, 2011, 2012 and 2013, as listed below, were equal to the required contributions for each year. PERS 2011 $ 382,595 2012 $ 363,551 2013 $ 373,843 MPORS FURS $ 286,797 $ 256,369 $ 293,843 $ 247,995 $ 291,452 $ 263,157 63 PARKING COMM $ 3,633 $ 4,103 N/A CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 G. Post Employment Health Insurance Benefits Terminated employees may remain on the City's health insurance plan for up to 18 months if they pay the monthly premiums. This benefit is required under federal C.O.B.R.A. law. In accordance with Montana State law (see below), retirees may remain on the City's health plan as long as they wish, at a rate that does not cover all of the related costs. This results in the reporting of an implied rate subsidy in the financial statements and footnotes. The City's contract with Allegiance Benefits details the plan eligibility. MMIA is the administrator of the benefit plan which covers both active and retired members. The City's retirees may continue coverage for themselves and their covered eligible dependents if they are eligible for public employees' retirement by virtue of their employment with the City of Kalispell. The City's current labor contracts do not include any obligations for payments to retirees. Montana Codes Annotated (MCA) Section 2-18-704 states (1) an insurance contract or plan issued under this part must contain provisions that permit: (a) The member of a group who retires from active service under the appropriate retirement provisions of a defined benefit plan provided by law or, in the case of the defined contribution plan provided in Title 19, chapter 3, part 21, a member with at least 5 years of service and who is a least age 50 while in covered employment to remain a member of the group until the member becomes eligible for medicare under the federal Health Insurance for the Aged Act, 42 U.S. C. 1395, as amended, unless the member is a participant in another group plan with substantially the same or greater benefits at an equivalent cost or group plan with substantially the same or greater benefits at an equivalent cost; (b) The surviving spouse of a member to remain a member of the group as long as the spouse is eligible for retirement benefits accrued by the deceased member as provided by law unless the spouse is eligible for medicare under the federal Health Insurance for the Aged Act or unless the spouse has or is eligible for equivalent insurance coverage as provided in subsection (1)(a); (c) The surviving children of a member to remain members of the group as long as they are eligible for retirement benefits accrued by the deceased member as provide by law unless they have equivalent coverage in subsection (1)(a) or are eligible for insurance coverage by virtue of the employment of a surviving parent or legal guardian. For FY2013, the City of Kalispell has recorded other post employment benefits in the governmental funds. This recording resulted in an expense of $307,647 on the statement of activities, governmental activities, general government. OPEB is recorded on an accrual basis in the governmental funds. Other post employment benefits expenses were also recorded in the water fund ($36,918), and sewer fund ($21,682). In prior years, the City of Kalispell considered other post employment benefits of the water fund and sewer fund immaterial. In fiscal year 2013, these unrecognized OPEB expenditures resulted in prior period adjustments in the water fund ($90,627) and sewer fund ($53,226). Funding Policy. The plan is unfunded by the City and plan members receiving benefits contribute 100 percent of their cost of the benefits on a pay-as-you-go basis. The City plan's administratively established retiree medical, dental and vision premiums vary between $415 and $1,665 per month depending on the medical plan selected, family coverage, and Medicare eligibility. The plan provides different coinsurance amounts depending on whether members use preferred, non -preferred, or other hospitals. For fiscal year ended June 30, 2013, the City has 12 retired members receiving benefits. Annual OPEB Cost and Net OPEB Obligation. The City's annual other post -employment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC). The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. 64 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 The following table shows the components of the City's annual OPEB cost for the year, the amount implicitly contributed to the plan, and changes in the City's net OPEB obligation to the Retiree Health Plan: Annual required contribution/Annual OPEB Cost (Expense) Interest on beginning of year net OPEB obligation Adjustment to the Annual Required Contribution Annual OPEB Cost Contributions made (implicit) Net OPEB obligation - beginning of year Net OPEB obligation - end of year Governmental Business -type Total Activities Acitivities $333,826 $280,414 $53,412 $39,919 $33,532 $6,387 -$53,629 -$45,048 -$8,581 $320,116 $268,897 $51,219 $46,131 $38,750 $7,381 $899,082 $755,229 $143,853 $1,265,329 $1,062,876 $202,453 The June 30, 2013 year-end OPEB obligation is reported in the City's funds as follows: Functions/Programs Net OPEB Obligation Primary Government: Governmental activities: General government $1,062,876 Total governmental activities 1,062,876 Business -type activities: Water Sewer Total primary government 127,545 74,908 Total business -type activities 202,453 $1,265,329 Funded Status and Funding Progress. The projection of future benefit payments for an ongoing plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. The City has elected not to fund this liability. Actuarial Methods and Assumptions. As of June 30, 2013 (most current information), the City's actuarially accrued liability (AAL) for benefits was $2,311,036. The AAL by status breakdown is shown below: SCHEDULE OF FUNDING PROGRESS Actuarial Actuarial UAAL as a Actuarial Value of Accrued Unfunded Percentage of Valuation Assets Liability (AAL) AAL (UAAL) Covered Covered Payroll Retiree Medical Plan Date (b) (a) (a - b) Funded Ratio(a / b ) Payroll ( c) (( a - b ) / c ) 6/30/2013 $ - $ 2,311,036 $ 2,311,036 0.0% Not Available Not Available 65 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Fiscal Fiscal Fiscal Fiscal Fiscal 2009 2010 2011 2012 2013 Active participants: $ 1,450,472 N/A $ 1,284,463 N/A $1,616,159 Retirees, Dependents, and Surviving Spouses: $ 1,558,443 N/A $ 861,059 N/A $ 694,877 Total AAL $ 3,008,915 N/A $ 2,145,522 N/A $ 2,311,036 Normal Cost Impact on Statement of Activities Annual OPEB Cost Impact on Statement of Net Assets Assumed Contributions Net OPEB Obligation at June 30 Participant Information Active participants: Retirees, Dependents, and Surviving Spouses: Total $ 170,429 N/A $ 105,750 N/A $ 191,764 $ 282,232 $282,232 $ 247,511 $ 247,511 $ 333,826 $ - $ - $ 72,790 $ 73,206 $ (46,131) $ 282,232 $566,853 $ 734,256 $ 899,082 $1,265,329 172 N/A 172 N/A 179 31 N/A 16 N/A 12 203 N/A 188 N/A 191 The following key assumptions were chosen by the City: 1. Discount Rate: 4.44% 2. Healthcare (inflation) Trend Rates: 7% as of July 1, 2013 reduced linearly to 5% by fiscal year 2018, and remaining at 5% thereafter. 3. Retirees are required to pay 100% of the total premium developed for the active population. 4. Program valued as it stands today. 5. Expected Long Term Rate of Return on Assets: N/A 6. Participation Rate: 20% of future retirees are assumed to elect medical coverage. 70% of the future retirees who elect medical coverage and are married are assumed to elect spousal coverage as well. 7. Marital Assumption: For future retirees, 60% are assumed to be married, and males are assumed to be 3 years older than females. 8. Amortization method: 30 year open (level dollar). Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Examples, as detailed above, include assumptions about future employment, mortality, and the healthcare cost trend. Actuarially determined amounts are subject to continual revisions as actual results are compared with past expectations, and new estimates are made about the future. Actuarial calculations reflect a long-term perspective. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, is designed to present multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial liabilities for benefits. The City of Kalispell has elected not to fund this liability. The benefits the plan is expected to provide are assigned to appropriate accounting periods using the Projected Unit Credit cost method as described under Governmental Accounting Standards Board Statement No. 45. For each participant, an actuarial present value of benefit total payments is determined as of the measurement date. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. 66 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 H. Amounts Due From/To other Governments On June 30, 2013, the amounts due from other governments consisted of the following: General Fund Due from: Amount State of Montana -Video License Fee $ 125 Flathead County -Taxes 465,782 Sub Total $ 465.907 Special Revenue Funds Due from: Amount State of Montana-SB372 Reimb. $ 54,986 State of Montana -Preserve America Grant $ 6,306 Flathead County -Taxes $ 396,026 Flathead County -EMS Levy $ 42,099 U.S. Dept. of H. U. D. $ 26,918 Flathead County Sheriff Dept. $ 4,303 State of Montana-MDOT $ 9,220 U.S Dept. of Homeland Sec. $ 276,179 EPA $ 55,659 U.S. Dept. of Justice -Grants $ 548,711 Sub Total $1,420,407 Debt Service Funds Due from: Amount Flathead County -Taxes $ 198,879 Total Governmental Funds $ 2,085,193 Enterprise Funds Due from: Amount Flathead County -Taxes 157,694 Total Business -type Funds $ 157,694 Total City of Kalispell $ 2,242,887 67 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 I. Restricted Cash/Investments The following restricted cash/investments were held as of June 30, 2013. These amounts are reported within the cash/investment account on the Combined Balance Sheet. RESTRICTED CASH: Business-tvoe Activities Water Bond Reserve (includes SRF & BOI) Plant Investment/Impact Fees (1) Sewer Operating Reserve (2) Bond Contingency Plant Investment/Impact Fees (sanitary) (1) Plant Investment/Impact Fees (treatment plant) (1) Plant Investment/Impact Fees (storm) (1) Treatment Plant Replacement (3) Total business -type activities restricted cash/investments Governmental Activities Impact Fees Growth related Capital Urban Forestry Developers (4) Debt Service Airport TIF Bond Reserve Debt Service SID 343 Bond Reserve Debt Service SID 344 Bond Reserve Debt Service Revolving Fund Total governmental activities restricted cash/investments Total restricted cash/investments 1-Jul-12 Additions Subtractions 30-Jun-13 $ 460,119 $ (48,861) $ 411,258 475,913 252,698 (144,010) 584,601 190,000 190,000 1,332,469 9,749 (223,156) 1,119,062 1,862,927 169,895 (34,682) 1,998,140 334,230 217,995 (238,059) 314,166 671,921 193,804 865,725 969,880 421,069 (138,867) 1,252,082 6,297,459 1,265,210 (827,635) 6,735,034 281,732 93,154 (35,411) 339,475 94,906 - (3,876) 91,030 184,875 184,875 79,075 79,075 109,217 493,516 (376,733) 226,000 226,000 - - 226,000 975,805 586,670 (416,020) 1,146,455 $ 7,273,264 $ 1,851,880 $ (1,243,655) $ 7,881,489 (1) Plant investment/impact fee cash. Montana State legislation regulating impact fees to fund capital improvements, MCA 7-6-1601 through 7-6-1604 (see 7-6-1603 below related to expending impact fees), became effective April 19, 2005 and sets forth the procedures and requirements for the imposition of impact fees by local governments. On October 16, 2006, by ordinance no. 1587, the Kalispell City Council authorized and established the procedure and imposition of impact fees to fund capital improvements related to additional capacity (growth). MCA 7-6-1603 states that "the collection and expenditure of impact fees must be reasonably related to the benefits accruing to the development paying the impact fees..." (2) Sewer operating reserve cash is restricted by ordinance no. 859 (1 month operating expenses). (3) Treatment plant replacement cash is restricted by an agreement with Flathead County Water District (third party). (4) Urban forestry receives cash from developers to be used to plant trees in new city developments (third party). J. Restatements During the 2013 fiscal year, the following adjustments relating to prior years' transactions were made to fund balance or retained earnings accounts. Fund Fema Grant - Golf Course Subtotal - Governmental Fund Financials Governmental Funds - Community Development Governmental Funds Total Statement of Activities - Gov'tal Funds Water Fund Sewer Fund Solid Waste Total Proprietary funds/Business-type activities Amount Reason $ (14,114) Prior period revenue overstated $ (14,114) $ 1,212,995 Prior period revenues understated $ (143,954) Construction in progress/Other assets - obsolete $ 1,054,927 $ (90,627) Expense of a prior period - OPEB $ (53,226) Expense of a prior period - OPEB $ (654) Revenue of a prior period refunded $ (144,507) 68 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 FEMA Grant Restatement On June 30, 2012, the City of Kalispell estimated receiving $204,197 from FEMA related to the erosion issue at Buffalo Hills Golf Course. That amount was booked as a revenue and due from other government. On July 25, 2013, actual amount received was $190,083. Hampstead Partners Loan Restatement In prior periods, the City of Kalispell considered the collection of these loans uncertain because of the length of time before any principal payment is required, the maturity dates of the loans. Collection of the interest was also considered uncertain as it is only payable to the extent there is surplus cash, and none has been collected to date. For fiscal year 2013, the City of Kalispell, for purposes of reporting, will now consider these loans and the accrued interest related to the loans, fully collectible. A prior period adjustment of $1,212,994 on the government -wide statement of activities has been made to recognize all prior year's revenue associated with these loans. More information related to the Hampstead Partners loans can be found in Note O. Deferred Revenue. K. Joint Ventures Joint ventures are independently constituted entities generally created by two or more governments for a specific purpose which are subject to joint control, in which the participating governments retain 1) an ongoing financial interest or 2) an ongoing financial responsibility. 1. City -County Health Department The City -County Health Department is operated under an interlocal agreement between Flathead County and the City of Kalispell. The Department operates under the supervision and control of the City -County Health Board. The Board consists of seven members, six of whom are appointed by the Board of County Commissioners. The Department is financed, in addition to revenue generated by providing health services, by the City and the County levying an identical mill levy, up to 5 mills, in order that all property within the City of Kalispell and all property in Flathead County outside the City limits are taxed equally. The operation is accounted for in the County Health Fund and is included in the general purpose financial statements of Flathead County within the Special Revenue Fund. 2. 911 Dispatch Center The 911 Dispatch Center is operated under an interlocal agreement between Flathead County, the City of Columbia Falls, the City of Whitefish, and the City of Kalispell. The Center operates under the supervision and control of the Flathead Emergency Communications Center Board. The Board consists of six members, the Flathead County Sheriff, a County Commissioner chosen by the Board of County Commissioners, the County Attorney or other elected County officer, and an elected official or designee from each of the cities of Kalispell, Whitefish, and Columbia Falls. The Department is financed by funds received by all members from the State (9-1-1 fees) pursuant to Section 10-4-302, M.C.A. Any additional operating funds needed will be shared proportionally by all members. Under the supervision of the Board, the Director shall hire and direct staff to carry out the responsibilities of the County's Office of Emergency Services and the Flathead County Fire Service Area. 69 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 L. County Provided Services The City of Kalispell is provided various financial services by Flathead County. The County serves as cashier and treasurer for the City for tax assessment collections and other revenues received by the County which are subject to distribution to the various taxing jurisdictions located in the County. The collections made by the County on behalf of the City are accounted for in an agency fund in the City's name and are periodically remitted to the City by the County Treasurer. The County charges the City for fees associated with City Special Assessments. M. Risk Management The City faces a considerable number of risks of loss, including a) damage to and loss of property and contents, b) employee torts, c) professional liability, i.e., errors and omissions, d) environmental damage, e) workers' compensation, i.e. employee injuries, and f) medical insurance costs of employees. A variety of methods are used to provide insurance for these risks. Commercial policies, transferring all risks of loss, except for relatively small deductible amounts are purchased for property and content damage and professional liabilities. The City participates in two statewide public risk pools operated by the Montana Municipal Insurance Authority, for workers' compensation and for tort liability coverage. Employee medical insurance is provided through a state-wide health insurance pool administered by MMIA. Given the lack of coverage available, the City has no coverage for potential losses from environmental damages. Effective July 1, 1987 The City of Kalispell joined with other Montana cities to form the Montana Municipal Insurance Authority, a self-insurance pool offering Worker's Compensation and Liability Coverage. Both public entity risk pools currently operate as common risk management and insurance programs for the member governments. The liability limits for damages in tort action are $750,000 per claim and $1.5 million per occurrence with an $11,250 deductible per occurrence. State tort law limits the City's liability to $1.5 million. The city pays an annual premium for its employee injury insurance coverage, which is allocated to the employer funds based on total salaries and wages. The agreements for formation of the pools provide that they will be self-sustaining through member premiums. The tort liability plan and workers' compensation program issued bonds in the amount of $4.41 million and $7.610 million, respectively, to immediately finance the necessary insurance reserves. All members signed a contingent note for a pro rata share of this liability in case operating revenue was insufficient to cover the debt service. The City's share is $201,445 for liability and $281,715 for Workers' Compensation to finance the necessary insurance reserves. Based on the plan's current financial position, the City doesn't expect to make any payment on these notes. Separate financial statements are available from the Montana Municipal Insurance Authority. On October 1, 2004, Kalispell signed a 5 year agreement with many other Montana Cities, and through the Montana Municipal Insurance Authority, to create a state wide health insurance pool. The City pays the total monthly premium for employees who only choose to cover themselves. For employees who choose to cover additional dependents, the City pays a percentage of the extra costs. N. Pending Litigation The following is a list of litigation pending against the City and the amount of damages claimed by the Plaintiff. The City Attorney has made no evaluation as to the outcome of each case. The City has liability insurance that may cover all or part of the damages. Accordingly, no provision has been made in the financial statements for these contingent liabilities. Damages Loss Litigant Requested Potential Famous Dave's $ 720,000 unknown Brown $ unspecified unknown Burke $ unspecified unknown 70 Status Filed Filed Not Filed CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 O. Deferred Revenue Taxes Receivable The following governmental funds had taxes receivable at June 30, 2013. FUND Source Amount General - Major Governmental Taxes $ 575,727 Westside TIF Taxes 7,321 Parks Taxes 50,167 Old School'Tech" TIF Taxes 57,777 Old School "Ind" TIF Taxes 8,792 Health Levy Taxes 72,873 Light District Taxes 20,322 Street Maintenance Taxes 90,099 Forestry Taxes 12,364 G.O. Bonds Taxes 53,676 Airport TIF Taxes 59,740 S & C's Taxes 866 SID 344 - Major Governmental Taxes 770,752 Current Portion 1,780,476 S & C's Taxes 27,529 SID 343 Taxes 575,624 SID 344 - Major Governmental Taxes 2,711,418 Non current Portion 3,314,571 Total Governmental Funds $ 5,095,047 Accounts Receivable At June 30, 2013 the Ambulance fund had accounts receivable deferred net of $189,349. Total net accounts receivable of the Ambulance fund is $192,694. The difference is the result of $3,345 being receivable prior to the Ambulance fund conversion from a proprietary fund to a special revenue fund. Loans Receivable Community Development Loan Revolving The City entered into a community development program, which includes funding from a community development block grant, to make available to eligible applicants (low -to -moderate income residents), a loan for at least one-half of the required rehabilitation cost. These funds from the City, together with loans from the First Federal Savings Bank (now Glacier Bank) of Montana, the lender, must provide the total funds required for the purchase and rehabilitation of the housing unit. At the time the bank loans are closed with the borrower, the proceeds of the City's loan will be deposited into the borrower's construction account at First Federal (Glacier). The City's loan is secured by the property, and filed in a third lien position. Repayment of the City loan will not begin until 30 days after the Lender's loan (second lien) for construction of the unit has been paid off. The City's loan is interest free until such time as repayment begins. The maximum amount of a private lender loan cannot exceed $20,000 per property with a ten-year pay back. In addition, when an owner -occupant is unable to afford a private lender loan at the pre -determined interest rate agreed to by the City and lender, he or she may qualify for City financing. The City may provide a direct loan of up to $25,000 with a varying interest rate (as low as zero percent) or with a longer amortization period (maximum of fifteen years) or a deferred loan to be repaid simultaneously, at a later date, with a balloon payment, or to be released at the end of ten years. The City has $44,134 recorded as housing rehab loans receivable as of June 30, 2013 in the Community Development Loan 71 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 Revolving Fund. The above mentioned loans are offset with deferred revenue accounts. Uncollected receivables in governmental funds are offset with deferred revenue accounts as explained in the "basis of accounting". Other loans receivable of the Community Development Loan Revolving Fund: A 15 year loan at 5% to Flathead Health and Fitness in November 2004. Original Loan amount $ 74,250 June 30, 2013 balance $ 39,770 Hampstead Partners In August of 2002, the City of Kalispell entered into two (2) notes receivable agreements with 2" a Avenue West Partners, L.P. (Hampstead Partners) for property on 2" a Avenue West in Kalispell. The property consists of a 40-unit low-income apartment complex known as 2"a Avenue West Independent Living Center. As stipulated in the agreement, this property is restricted as low income housing, and shall remain as such for a period of thirty-five years. One of these notes is for $480,000, and bears interest at 1% per annum. The second of these notes is for $400,000, and bears interest at 4.81% per annum. These loans mature on February 28, 2032. Payments of interest on the note are due on or before the last day of the taxable year, to the extent there is surplus cash, as defined by the note. Unpaid interest shall accrue until paid, but not compound on the first loan. Payments of principal are not required until the maturity date of the loans. The notes are secured by a deed of trust on the property. Accrued interest as of June 30, 2013, is $52,455, and $252,673, respectively. Community Development Block Grant Economic Development Program In fiscal year 2007, the City entered into a community development program with funding from a community development block grant economic development program. Eligibility for these low interest loans is tied to the creation of jobs within Kalispell with a percentage of the jobs created to be filled by low and moderate -income persons. The following loans have been made by the City using the economic development program funds A 15 year loan at 6.5% to Distinctive Countertops in July 2006. Original Loan amount $ 25,000 June 30, 2013 balance $ 22,785 A 15 year loan at 5% to Distinctive Countertops in October 2006. Original Loan amount $ 288,619 June 30, 2013 balance $ 271,893 A 7 year loan at 7% to the Kalispell Hotel (Hilton) in July 2007. Original Loan amount $ 150,000 June 30, 2013 balance $ 30,402 A 15 year loan at 6% to AGAPE Home Care in May 2009. Original Loan amount $ 42,500 June 30, 2013 balance $ 28,565 A 10 year loan at 3% to Norm's News in June 2013. Original Loan amount $ 50,000 June 30, 2013 balance $ 48,202 72 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 A 10 year loan at 3% to Smith/Red & Black in June 2013. Original Loan amount $ 50,000 June 30, 2013 balance $ 49,616 Rural Development Loan Revolving On May 5, 2003, the City Council passed Resolution No. 4780 establishing an Economic Development Revolving Loan Fund (ED RLF) for small business retention and expansion. The resolution also created an Economic Development Loan Review Committee to process all applications for assistance. Additionally, on August 16, 2004 and again on November 6, 2006, the City Council, by Resolution No. 4929 and 5158, respectively, authorized the City Manager to enter into loan agreements with the United States Department of Agriculture, Rural Development office, in the amount of $520,000 and $750,000. These monies will be used to assist in the retention and expansion of small business, which may stimulate economic development activity by assisting the private sector where a funding gap exists and alternative sources of public and private financing are not adequate. The following loans have been made by the City using the Rural Development funds: A 15 year loan at 5% to Flathead Health and Fitness in November 2004. Original Loan amount $ 90,750 June 30, 2013 balance $ 46,899 A 7 year loan at 6.25% to Little Caesar's in March 2006. Original Loan amount $ 37,500 June 30, 2013 balance $ 0 A 15 year loan at 6.5% to Distinctive Countertops in July 2006. Original Loan amount $ 150,000 June 30, 2013 balance $ 139,962 A 10 year loan at 7% to Crossroads Realty in June 2007. Original Loan amount $ 150,000 June 30, 2013 balance $ 120,231 A 7 year loan at 7% to the Kalispell Hotel (Hilton) in July 2007. Original Loan amount $ 150,000 June 30, 2013 balance $ 30,403 A 7 year loan at 7% to Unfinished Furniture Creations in April 2006. Original Loan amount $ 50,000 June 30, 2013 balance $ 6,900 *The balance of this loan $35,425 was forgiven. The defaulting parties (Bott/Thomas) agreed and signed promissory notes for $5000 each. A 6 month loan at 5.25% to Glacier Valley Endodontics, Inc. in January 2012. Original Loan amount $ 35,000 June 30, 2013 balance $ 32,266 73 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 A 10 year loan at 5.29% to Parkman Properties, LLC (The Edge Salon), in February 2012. Original Loan amount $ 77,000 June 30, 2013 balance $ 69,446 A 10 year loan at 3% to Whipps, LLC in December 2011. Original Loan amount $ 50,000 June 30, 2013 balance $ 43,421 A 10 year loan at 3% to Bill and Jana Goodman in June 2013. Original Loan amount $ 34,660 June 30, 2013 balance $ 31,897 UDAG The following loan was made by the City using Urban Development Assistance Grant (UDAG) funds: A 20 year redevelopment loan at 5% with Big Sky Manor in August 1999. Original Loan amount $ 124,000 June 30, 2013 balance $ 52,699 SUMMARY COMMUNITY DEVELOPMENT LOANS RECEIVABLE From To Amount Purpose CD Loan Revolving - Major Governmental Various $ 44,134 Housing Rehab CD Loan Revolving - Major Governmental Flathead Health and Fitness 39,770 Small Business CD Loan Revolving - Major Governmental Distinctive Countertops 22,785 Jobs CD Loan Revolving - Major Governmental Distinctive Countertops 271,893 Jobs CD Loan Revolving - Major Governmental Kalispell Hotel - Hilton 30,402 Jobs CD Loan Revolving - Major Governmental AGAPE Home Care 28,565 Jobs CD Loan Revolving - Major Governmental Norm's News 48,202 Jobs CD Loan Revolving - Major Governmental Smith/Red & Black 49,616 Jobs CD Loan Revolving - Major Governmental Hampstead Partners* 880,000 Low Income Housing CD Loan Revolving - Major Governmental Hampstead Partners - Interest Portion* 305,128 Low Income Housing Subtotal Major Fund 1,720,495 UDAG Big Sky Manor 52,699 Urban Dev. Assistance Rural Development Loan Revolving Flathead Health and Fitness 46,899 Small Business Rural Development Loan Revolving Distinctive Countertops 139,962 Small Business Rural Development Loan Revolving Crossroads Realty 120,231 Small Business Rural Development Loan Revolving Kalispell Hotel - Hilton 30,403 Small Business Rural Development Loan Revolving Unfinished Furniture - Bott/Thomas 6,900 Small Business Rural Development Loan Revolving Glacier Valley Endodontics, Inc 32,266 Small Business Rural Development Loan Revolving Parkman Properties, LLC 69,446 Small Business Rural Development Loan Revolving Whipps, LLC 43,421 Small Business Rural Development Loan Revolving Bill and Jana Goodman 31,897 Small Business Subtotal Other Governmental Funds 574,124 Total Governmental Funds $ 2,294,619 *Long Term Loans Receivable - Matures 2032 74 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2013 P. City Court Contracts Receivable Contracts receivable of the City Court, because of the uncertainty regarding when and if they will be collected, are no longer booked as an asset on the balance sheet of the General Fund. These receivables, at June 30, 2013, amounted to $2,186,537. Q. Wastewater Treatment Plant agreement with Evergreen The City of Kalispell entered into an Interlocal Agreement with the Evergreen Sewer District 41 for treatment of sewage from the district at the City's plant. The Evergreen district sewer went into operation in July 1994. The City bills Evergreen monthly for debt service at 12% of the principle and interest due for the plant. The City also bills for maintenance and operation and replacement costs per the agreement based on metered flows. Evergreen Sewer District has an equity interest in the replacement account carried on the City's books. The balance of the account as of June 30, 2013 is $1,252,082 of which Evergreen's interest is $293,432. R. Subsequent Events Assessments and fees In August of 2013, the City Council voted to raise some fees related to commercial solid waste removal and assessments related to street maintenance. These increased fees are expected to add approximately $25,000 revenue to the solid waste department and $173,500 revenue to the street maintenance department. Kalispell City Airport 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. Union Contracts At a City Council meeting on October 7, 2013, the Council unanimously approved a new contract between the City of Kalispell and Members of the International Association of Firefighters Local Union 4547. This 3 year contract, fiscal years 2014, 2015, and 2016, includes 2% base salary adjustments in fiscal year 2015 and 2016, and various language adjustments. Fiscal impact is estimated to be $22,000 in fiscal year 2014, $62,000 in fiscal year 2015, and $65,000 in fiscal year 2016. Water System Impact Fees At a City Council meeting on November 4, 2013, by Resolution No. 5654, the Council approved the 2013 Water Impact Fee Report and adjustments to the Kalispell Water System Impact Fees. This resolution increases the water impact fees charged to fund capital improvements related to expansion. Total amount of the increase was 16%, from $2,213/ERU to $2,567/ERU. 75