1. Introductory SectionCITY OF
COMPREHENSIVE ANNUAL FINANCIAL REPORT
FISCAL YFAR 2014 July 1, 2013 - Jane 3% 2014
CITY OF KALISPELL
ANNUAL FINANCIAL REPORT
TABLE OF CONTENTS
INTRODUCTORY SECTION
Letterof Transmittal............................................................................................................................................ 3-7
Government Finance Officers' Association Certificate of Achievement.......................................................... 8
OrganizationalChart........................................................................................................................................... 9
City Elected and Appointed Officials.................................................................................................................. 10
FINANCIAL SECTION
IndependentAuditor's Report............................................................................................................................11-12
Management's Discussion and Analysis.............................................................................................................13-26
Basic Financial Statements:
Government -wide Financial Statements:
Statementof Net Position.....................................................................................................................
27
Statementof Activities.........................................................................................................................
28
Governmental Fund Financial Statements:
BalanceSheet — Governmental Funds................................................................................................
29
Reconciliation of the Balance Sheet — Governmental Funds to the Statement of Net Position......
30
Statement of Revenues, Expenditures, and Changes in Fund Balances — Governmental Funds..
31
Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances -
Governmental Funds to the Statement of Activities......................................................................
32
Proprietary Fund Financial Statements:
Statement of Net Position — Proprietary Funds.................................................................................
33
Statement of Revenues, Expenses, and Changes in Fund Net Position — Proprietary Funds........
34
Statement of Cash Flows — Proprietary Funds..................................................................................
35
Fiduciary Fund Financial Statements:
Statement of Fiduciary Net Position — Fiduciary Funds...................................................................
36
Notes to the Financial Statements............................................................................................................37-73
Required Supplementary Information other than Management Discussion and Analysis:
Schedule of Funding Progress and Employer Contributions — Other Post -Employment
HealthcareBenefits.............................................................................................................................................................
74
Budgetary Comparison Schedule — General and Major Special Revenue Funds................................75-77
Supplemental Information:
Combining and Individual Governmental Fund Statements and Schedules:
Combining Balance Sheet — Nonmajor Governmental Funds.........................................................78-83
Combining Statement of Revenues, Expenditures and Changes in Fund Balances —
NonmajorGovernmental Funds....................................................................................................
84-91
Budgetary Comparison Schedule —
MajorDebt Service Funds..............................................................................................................
92
Budgetary Comparison Schedule —
NonmajorGovernmental Funds....................................................................................................93-114
Combining and Individual Proprietary Fund Statements:
Combining Statement of Net Position — Nonmajor Proprietary Funds .........................................
115
Combining Statement of Revenues, Expenditures, and Changes in Fund Net Position — Nonmajor
ProprietaryFunds..........................................................................................................................
116
Combining Statement of Cash Flows — Nonmajor Proprietary Funds ..........................................
117
Combining and Individual Agency Fund Statements:
Combining Statement of Fiduciary Net Position - Agency Funds ..................................................
118
Combining Statement of Changes in Assets and Liabilities - Agency Funds ..............................
119
CITY OF KALISPELL
ANNUAL FINANCIAL REPORT
TABLE OF CONTENTS
STATISTICAL SECTION
Financial Trends
NetPosition by Component..................................................................................................................... 120
Changesin Net Position........................................................................................................................... 121
FundBalances of Governmental Funds................................................................................................. 122
Changes in Fund Balances, Governmental Funds................................................................................ 123
Revenue Capacity
MarketValue of Taxable Property......................................................................................................... 124
Direct and Overlapping Property Tax Rates......................................................................................... 125
PrincipalProperty Tax Payers............................................................................................................... 126
Property Tax Levies and Collections...................................................................................................... 127
Water — Sewer - Sold by Type of Customer........................................................................................... 128
Waterand Sewer Rates........................................................................................................................... 129
Debt Capacity
Ratios of Outstanding Debt by Type...................................................................................................... 130
Ratios of General Bonded Debt Outstanding........................................................................................ 131
LegalDebt Margin Information............................................................................................................. 132
PledgedRevenue Coverage..................................................................................................................... 133
Demographics and Economics
Demographic and Economic Statistics................................................................................................... 134
PrincipalEmployers................................................................................................................................ 135
Operating Section
Full-time Equivalent City Government Employees by Function/Program......................................... 136
Capital Assets Statistics by Function/Program..................................................................................... 137
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS AND SCHEDULE OF EXPENDITURES OF FEDERAL
AWARDS AS REQUIRED BY OMB CIRCULAR A-133
Schedule of Expenditures of Federal Awards.................................................................................................. 138
Note to the Schedule of Expenditures of Federal Awards............................................................................... 139
Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and
Other Matters Based on an Audit of Financial Statements Performed in Accordance with
GovernmentAuditing Standards........................................................................................................... 140-141
Independent Auditor's Report on Compliance for Each Major Program and Report on Internal Control
over Compliance in Accordance with OMB Circular A-133................................................................ 142-143
Schedule of Findings and Questioned Costs..................................................................................................... 144-145
2
INTRODUCTORY
SECTION
Ac� City of Kalispell
r R Post Office Box 1997 —Kalispell, Montana 59903-1997
I Vi"'�� , Telephone (406) 758-7701 Fax — (406) 758-7758
MONI ) La�
December 29, 2014
To the Honorable Mayor, members of the City Council, and Citizens of the City of Kalispell, Montana:
CAFR TRANSMITTAL
State law requires that all general-purpose local governments publish within six months of the close of
each fiscal year (by December 31) a complete set of financial statements presented in conformity with
generally accepted accounting principles (GAAP). State law also requires a biannual audit of these
statements in accordance with generally accepted auditing standards by a firm of licensed certified public
accountants to be completed within 9 months of the close of every other fiscal year (by March 31). It is
the belief of the City Council and the Executive staff that an annual audit assures a higher level of
financial management and fiscal responsibility. Pursuant to this policy and these requirements, the
audited annual financial report for the City of Kalispell, Montana for the fiscal year ended June 30, 2014,
is submitted for your review.
Management Representation
The Finance Office prepared this report. Responsibility for the accuracy and completeness of the
presented data, including all disclosures, rests with the City. We believe the data, as presented, is
accurate in all material aspects; that it is presented in a manner designed to fairly set forth the financial
position and results of operations of the City as measured by the financial activity of its various funds;
and that all disclosures necessary to enable the reader to gain an understanding of the City's financial
affairs have been included.
To provide a reasonable basis for making these representations, management of the City has established
and maintained an internal control system designed to ensure that the assets of the City are protected
from loss, theft or abuse, and to ensure that adequate accounting data are compiled to allow for the
preparation of financial statements in conformity with accounting principles generally accepted in the
United States (US GAAP) and to comply with laws and regulations. The system of internal control is
designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of
reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be
derived; and (2) the valuation of costs and benefits requires estimates and judgments by management.
Independent Auditor
Galusha Higgins & Galusha, P.C., a firm of licensed certified public accountants has audited the
financial statements of the City. The goal of the independent audit was to provide reasonable assurance
that the financial statements of the City for the fiscal year ended June 30, 2014, are free of material
misstatement. The independent audit involved examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements; assessing the accounting principles used and
significant estimates made by management; and evaluating the overall financial statement presentation.
The independent auditors concluded, based upon the audit, that there was a reasonable basis for
rendering an unmodified opinion that the City's financial statements for the fiscal year ended June 30,
2014, are fairly presented in conformity with US GAAP. The independent auditor's report is presented
as a component of the financial section of this report.
Federal Single Audit
The independent audit of the financial statements of the City was part of a broader, federally mandated
"Single Audit" designed to meet the special needs of federal grantor agencies.
As part of the City's single audit, tests are made to determine the adequacy of the internal control
structure, including that portion related to federal awards. Tests are also made to determine that the
fiscal year ended June 30, 2014, provided no instances of material weaknesses in the internal control
system or violations of applicable laws and regulations.
The City is required to undergo an annual single audit in conformity with the provisions of the Single
Audit Act of 1984, as amended in 1996, and the U.S. Office of Management and Budget Circular A-133,
Audits of States, Local Governments, and Non-profit Organizations. Information related to this single
audit, including the schedule of expenditure of federal awards and auditor's reports on internal control
and compliance with applicable laws and regulations are included in the single audit section of this
report.
Transmittal Letter
GAAP require that management provide a narrative introduction, overview, and analysis to accompany
the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This
letter of transmittal is designed to complement MD&A and should be read in conjunction with it. The
City of Kalispell's MD&A immediately precedes the City's basic financial statements within this report.
Profile of the City of Kalispell
The City of Kalispell, incorporated in 1892, is the county seat of Flathead County located in the western
part of the State of Montana. This historically has been one of the top growth areas in the state. The
City of Kalispell is empowered to levy a property tax on both real and personal properties located within
its boundaries. It also is empowered by state statute to extend its corporate limits by annexation, which
occurs periodically when deemed appropriate by the governing council.
The City of Kalispell is operated under the council-manager form of government. Policy -making and
legislative authority are vested in a governing council consisting of the mayor and eight other members.
The governing council is responsible for, among other things, passing ordinances, adopting the budget,
appointing boards, and hiring the City Manager. The City Manager is responsible for carrying out the
policies and ordinances of the governing council, and for overseeing the day-to-day operations of the
City. The council is elected on a non -partisan basis. Council members are elected by district to serve
four-year staggered terms, with four council members elected every two years. The mayor is elected at
large for a four-year term.
All significant operations of the City, as defined by the National Council of Governmental Accounting,
Statement #3, have been included in the accompanying financial statements. The City provides a full
range of municipal services including police, fire, building, planning and zoning, city court, parks and
recreation, streets, community development and general administrative services. The City also operates
as Enterprise funds: water, sewer, solid waste, and an airport.
In addition, the City presents financial data for two component units on the combined statements. The
Downtown Business Improvement District and the Tourism Business Improvement District are both
discretely presented governmental type component units.
The annual budget serves as the foundation for the City of Kalispell's financial planning and control. All
departments of the City of Kalispell are required to submit requests for appropriation to the City
Manager. The City Manager uses these requests as the starting point for developing a proposed budget.
The City Manager then presents this proposed budget to the council for review.
4
The council is required to hold public hearings on the proposed budget and to adopt a final budget.
The appropriated budget is prepared by fund, function, and department. Budgetary control is
decentralized to the point that individual department heads are responsible for expending within
budgetary limits.
Budget to Actual Comparisons
The State municipal budget law stipulates that money, other than payments from agency funds, may not
be drawn from the treasury of a municipality except pursuant to an appropriation. Therefore, a legally
adopted budget is required for all funds, with the exception of agency funds. The City legally adopts a
budget for the required funds. Consistent with past years, the City established the legal spending level at
the fund level for the fiscal year 2014 budget. The City Manager and Finance Director may make
transfers of appropriations within a fund. Transfers between funds, however, require approval of the
City Council. Budget -to -actual comparisons are provided in this report for each individual governmental
fund for which an appropriated annual budget has been adopted. For the general fund, the street
maintenance special revenue fund and the community development loan revolving fund, the comparison
is part of the required supplementary information.
Other Postemployment Benefits — Implied Rate Subsidy Liability
The City of Kalispell reported the "implied rate subsidy" liability, required under the Governmental
Accounting Standards Board (GASB) Statement No. 45, in this financial report and the related financial
statements. Although the City reported this liability, and related expenditures, the City does not agree
that this represents a legal liability and further believes that the presentation of this activity in the
financial statements will eventually be misleading to the users of the statements. In this, the fifth year of
implementation, the recorded "rate subsidy" liability is $1,518,327.
The City plans to continue funding the employee health insurance plan on a "pay as you go" basis, and
does not plan to fund this liability. City management feels it would be fiscally irresponsible to take an
amount equal to the actuarially determined liability and place it in an irrevocable trust fund that would
never be used and would most likely increase as the City, and the related number of employees serving
it, continues to grow. Retirees can leave the plan at anytime and the City would have unwisely used
funds collected from its citizens. Insurance rates have been historically set so each plan offered is
fiscally sound. Rates can be changed and benefits altered at anytime to ensure the plans remain properly
funded.
Because the City will not be funding this liability, it will continue to increase, and within a few years, the
financial statements will reflect the impact of a very large "implied rate subsidy" liability that does not
have legal substance. Management does not feel it has legal substance as nothing in state law or any
contractual agreement requires the city to offer the same rates to retirees, spouses and their dependents as
other participants. The State of Montana has submitted a request to have GASB reconsider the
requirement to report the implied rate subsidy. The City of Kalispell agrees with and supports this
request.
Factors Affecting Financial Condition
The City of Kalispell has not been immune to the effects of the nation-wide economic downturn. Two of
the Flathead Valley's core industries have been hit particularly hard. The logging industry is virtually
shut down, which trickles down to closures in related industries. Columbia Falls Aluminum Company,
which struggled to continue operations for years, is now closed. The City has, however, started to see an
uptick in new construction and home foreclosures have slowed somewhat. Kalispell Regional Medical
Center continues to grow and, although they are considered not for profit, their expansion helps the
City's economy in many other ways.
Montana experienced a population increase between the 2000 and 2010 census of 9.7%. Kalispell,
however, experienced an increase of 40.1%, while Flathead County experienced growth equal to 22.1%.
The July 1, 2013 estimated population of Kalispell is 20,972 according to the U.S. Census Bureau, an
increase of 1,045 from the 2010 census population of 19,927.
The unadjusted unemployment rate for the 2013 calendar year for City of Kalispell was 7.9%. This
compares to 9% for the 2012 calendar year. A positive adjustment of over 10%. The most current
unadjusted unemployment rate available (October 2014) for the City of Kalispell, and Flathead County,
is 5.1%. In comparison, the State of Montana's current unemployment rate for the same period is 3.8%
and the U.S. rate is 5.5%. The State of Montana's rate is lowered in a large part by the very low
unemployment, under 2% in some counties in far eastern Montana, due to the Bakken oil field boom.
The City's unemployment rate has continued to improve from 13.1% high in January of 2011.
According to the United States Census Bureau, the 2012 per capita income, the most current information
available, for Kalispell was $22,134, in 2012 inflation -adjusted dollars. This is approximately 14% less
than the State of Montana's estimated per capita income of $25,002 in 2012 inflation -adjusted dollars,
and almost 30% less than the Nation's estimated per capita income of $28,051 in 2012 inflation -adjusted
dollars.
Revenue Growth and Reform
City revenues can be considered statutorily limited, circumstantial or discretionary. The City has very
little control over the growth of restricted and circumstantial revenues. Although the City `controls' the
growth or discretionary revenue, it is still subject to typical community pressures for conservative
growth.
Since November 1986 and the passage of Initiative 105, which limited certain property taxes to the 1986
levels, the ability of the City to raise revenue for basic services is increasingly difficult. Then, the
legislature, with S13184, lowered tax rates forcing the City to increase mill levies to maintain the same
level of revenue. The City's cash reserves in most funds vary between 10% and 20% of appropriations.
State law allows for reserves of 50%. Reserves provide for cash flow between tax revenue receipts to
keep the City from having to borrow funds for operations.
Additional revenues generated by increased taxable valuation come with the additional costs of an
increased service area. The City of Kalispell's Police and Fire Departments, Courts system, Building
Department, Public Works and Parks have felt the increased pressure from the influx of people to
Flathead County. These pressures impact the budgets of all departments.
The Montana constitution and state law require periodic reappraisal of property in the interest of equal
taxation (15-7-111, MCA). The State of Montana, through the Department of Revenue (DOR), is
responsible for valuing all taxable real and personal property. Once every six years, the DOR is required
by state law to conduct a reappraisal of residential, commercial, industrial, agricultural and forestland
property in the state.
The most recent reappraisal cycle began on January 1, 2003 and was completed on July 1, 2008. New
reappraisal values were used for property tax purposes in tax year 2009 (fiscal year 2010). By law,
reappraisal values will be phased -in at the rate of one -sixth each year. Statewide, commercial and
residential property values rose 43% and 54% respectively. In Flathead County, reappraisals resulted in
property value increases of 41% for commercial property, and 66% for residential property.
Maior Initiatives
On April 21, 2014, the City Council voted unanimously to annex 40.69 acres located on the east side of
Whitefish Stage Road, north of East Oregon Street, and west of East Oregon Lane (formerly McElroy -
Wilkins gravel pit). The owner of this property, Flathead County Economic Development Authority,
intends to develop a rail -served industrial park that will be the new home of several of the rail -served
industrial business that are currently located within the City of Kalispell's Core Area, as well as provide
additional rail -served industrial land for other business ventures. The proposed rail -served industrial
park and relocation of industrial uses out of the Core Area will facilitate removal of the railroad tracks
from the Core Area and encourage commercial investment in the recently expanded Westside Urban
Renewal Tax -Increment Finance (TIF) District.
Awards and Acknowledgments
The Government Finance Officers Association of the United States and Canada (GFOA) awarded a
Certificate of Achievement for Excellence in Financial Reporting to the City of Kalispell for its
comprehensive annual financial report for the fiscal years ended June 30, 2010, 2011, 2012 and 2013.
This was the 4"' consecutive year that the City of Kalispell had submitted and achieved this prestigious
award. In order to be awarded a Certificate of Achievement, a government must publish an easily
readable and efficiently organized comprehensive annual financial report. This report must satisfy both
generally accepted accounting principles and applicable legal requirements. A Certificate of
Achievement is valid for a period of one year only. We believe that our current comprehensive annual
financial report continues to meet the Certificate of Achievement Program's requirements and we are
submitting it to the GFOA to determine its eligibility for another certificate.
The completion of the Annual Financial Report on a timely basis was made possible by the entire staff of
the Finance Department and the cooperation of all City departments. I would also like to give
recognition to the mayor, governing council, and the city manager for their consistent support for
maintaining the highest standards in the management of the City of Kalispell's finances.
PkW
lly submitted,
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Finance Director
VA
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Government Finance Officers Association
Certificate of
Achievement
for Excellence
in Financial
Reporting
Presented to
City of Kalispell
Montana
For its Comprehensive Annual
Financial Report
for the Fiscal Year Ended
June 30, 2013
VIA
Executive Director/CEO
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CITY OF KALISPELL, MONTANA
CITY ELECTED AND APPOINTED OFFICIALS
TERM
ELECTED OFFICIALS EXPIRES
Mayor Mark Johnson 12/2017
Council members:
Kari Gabriel
Ward I
12/2015
Jim Atkinson
Ward
III
12/2017
Sandy Carlson
Ward
I
12/2017
Rod Kuntz
Ward
III
12/2015
Wayne Saverud
Ward
II
12/2015
Phil Guiffrida
Ward
IV
12/2015
Chad Graham
Ward
II
12/2017
Tim Kluesner
Ward
IV
12/2017
Municipal Court Judge:
Lori Adams
12/2017
APPOINTED CITY OFFICIALS
City Manager
Attorney
City Clerk
Police Chief
Fire Chief
Finance Director
Public Works Director
Parks Director
Planning Director
Community Development Manager
Human Resource Director
City Treasurer
10
Doug Russell
Charles Harball
Aimee Brunckhorst
Roger Nasset
Dave Dedman
Rick Wills
Susie Turner
Chad Fincher
Tom Jentz
Katharine Thompson
Terry Milton
Deb Diest