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5. Notes to the Financial StatementsNOTES TO THE FINANCIAL STATEMENTS CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. 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 City's 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. 37 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 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 2nd Avenue East to 2nd Avenue West between Center Street and 4th 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. 38 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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. 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 Position 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 position 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. 39 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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-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 Street Maintenance Fund (special revenue fund) was established to account for the repairs and other costs incurred in the maintenance of the City's streets. An assessment on the City of Kalispell's tax payers is the main source of revenue for this fund. 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. ►o CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 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. 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. 41 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 All material budget amendments and transfers during FY 2014 are described below: Governmental Funds The City Manager amended the Drug Enforcement Grant fund $1,650 to account for more than expected health insurance cost and shift pay. The City Manager amended the Law Enforcement Grants fund $12,913 to accommodate the expenditure of funds related to a Justice Assistance grant award accepted by the City Council. The Trails fund was amended by the City Manager by $58,224. This was necessitated by the City's grant allotment being increased and project construction accelerated. The Parks in Lieu fund was amended by the City Manager by $11,673. This was necessitated by the City's Trails grant allotment being increased which increased the needed grant matching monies provided by the Parks in Lieu fund. The City Manager amended the 2012 Sidewalk & Curb debt service fund $64. Interest expense was incorrectly budgeted. The SID 343 debt service fund was amended by the City Manager to allow the use of excess funds to pay down the outstanding principal an additional $10,000. Assets, Liabilities, and Net Position 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 RPtwoon 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 receivables/payables (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. CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 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 $218,439 at June 30, 2014. Ambulance accounts receivable $474,867 Times allowance percentage 46% Balance at June 30, 2014 $218,439 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, 2014: Water $ 14,087 Sewer $ 20,579 Contracts The following are contracts payable to the City of Kalispell on June 30, 2014. FUND Source General - Major Governmental Municipal Court Amount $ 41,290 Information Technology - Internal Service Charter (formerly Bresnan) 43,587 Water - Major Proprietary Sewer - Major Proprietary 3. Inventories and Prepaid Items Impact Fees 15,271 Impact Fees 38,801 Total Proprietary 54,072 Total City contracts receivable $ 138,949 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. 43 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 The City pays in advance for Health Insurance and Workers' Compensation. This results in a City asset at June 30. On June 30, 2014, the City reported assets for prepaying expenses in the following funds. FUND Purpose Amount General -Major Governmental Workers Compensation $ 98,174 General - Major Governmental Health Insurance 65,373 Parks Health Insurance 11,938 Ambulance Health Insurance 6,107 Building Department Health Insurance 3,324 Street Maintenance - Major Governmental Health Insurance 11,556 Total Governmental 196,472 Infomiation Technology - Internal Service Health Insurance 4,505 Water -Major Proprietary Health Insurance 12,380 Sewer - Major Proprietary Health Insurance 17,363 Solid Waste Health Insurance 6,495 Total Proprietary 36,238 Total City prepaids $ 237,215 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 position 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. 44 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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 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 Position, 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 Position. 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 30th in the succeeding fiscal year (current). The City also assumes sick leave accumulated as of June 30th 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 position. 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. 45 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 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 the governing body. The City Council has the authority to express assignments in the General fund. In governmental funds other than the general fund, assigned fund balance 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 NOTE 2. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Excess of expenditures over appropriations For the year ended June 30, 2014, 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, 2014. The SID 344 debt service fund shows a negative fund balance at June 30th. This is due to the fund having more than $1,000,000 of delinquent assessments. For more information on the SID 344 debt service fund see Note E. Long- term Debt, page 55. i, CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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, 2014, are as follows: Cash on hand $ 3,730 Cash in banks: Demand deposits 13,213,501 Bonds/warrants 36,922 STIP 1,518 Government backed securities 13,748,000 Total 27.003.671 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. 47 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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 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) Quality Ratings and Weighted Average Maturity as of June 30, 2014: Credit WAM Quality in Security Investment Type Amortized Cost Rating Days Asset Backed Commercial Paper $ 777,417,680 Al 30 Corporate Commercial Paper 138,958,389 Al 39 Corporate Variable Rate 658,894,083 Al 38 Certificates ofDepos it Fixed Rate 100,000,000 Al 219 Certificates ofDepos it Variable Rate 391,996239 Al+ 32 Other As s et Backed 38,440281 NR NA U.S. Govemment Agency Fixed 75,003275 Al+ 194 U.S. Govemment Agency Variable 200,003,406 Al+ 31 Money Market Funds (Unrated) 133,439,814 NR 1 Money Market Funds (Rated) 21,000,000 A 1+ 1 Total Investments $ 2,535,153,167 Al 43 Securities Lending Collateral Investment Pool $ 1,861,748 NR *As of June 30, 2014, the Securities Lending Quality Trust liquidity pool had an average duration of 41 days and an average weighted final maturity of 114 days for U.S. dollar collateral. The duration pool had an average duration of33 days and an average weighted final maturity of548 days for U.S. dollar collateral. 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, 2014, the City of Kalispell's bank balance was exposed to custodial credit risk as follows: Depository Account Balance Insured $ 215,121 Collateralized -Collateral held by the pledging bank's trust department, but not in the City's name 12,998,380 Total deposits 13213.501 i, CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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%. The amount of collateral held for the City of Kalispell deposits at June 30, 2014, 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, 2014 along with their related interest rates and maturity dates. Investment Interest Rate Maturity Date Amount STIP 0.140/o(varies) varies $ 1,518 Federal Fann Banks 0.9000/0 12/26/ 17 2,000,000 Federal Fame Banks 1.030% 3/ 12/ 18 1,000,000 Federal National Mtg Assn 0.9000/0 10/25/17 1,595,000 Federal Home Loan Bank 1.1000/0 7/10/17 1,000,000 Federal Home Loan Bank 0.750% 4/17/17 250,000 Federal Home Loan Bank 1.0000/0 6/30/17 250,000 Federal Home Loan Bank 2.000% 12/19/18 1,000,000 Federal Home Loan Bank 0.500% 3/12/19 500,000 Federal Home Loan Bank 1.0000/0 4/30/19 750,000 Federal Home Loan Mortgage Corp. 1.250% 1/30/19 1,000,000 Federal National Mtg Assn 0.9000/0 11/7/17 1,405,000 Federal National Mtg Assn 0.700% 11/15/17 1,000,000 Federal National Mtg Assn 1.0000/0 3/27/18 1,750,000 Wells Fargo Bank 0.950% 2/28/18 248,000 S&C Bonds - internal 325%-6.5% varies 36,922 Total $ 13,786,440 M CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 B. Interfund Receivables and Payables (Due to/from Other Funds) The composition of interfund balances and due to/from as of June 30, 2014, was as follows: Receivable Fund Payable Fund Amount Purpose General Fund - Major Governmental Permissive Health - Spec Rev. Fund $ 45,000 Budgeted Transfer SID Revolving - Debt Service Fund SID 344 - Debt Service Fund 208,707 S/T Loan Total - Due To Other Funds (Governmental Funds) $ 253,707 C. Transfers The following is an analysis of transfers between funds during Fiscal Year 2014: From Health Health Parks - in - Lieu Old School Tech TIF Old School Industrial TIF West Side TIF - Special Revenue Airport TIF - Debt Service General - Major Governmental General - Major Governmental General - Major Governmental General - Major Governmental D. Capital Assets To General - Major Governmental Parks CTEP Old School TIF - Debt Service Old School TIF - Debt Service West Side TIF - Debt Service Airport TIF - Special Revenue Ambulance - Special Revenue Drug Grant CHRP Grant Law Enforcement Block Grant Total Capital asset activity for the year ended June 30, 2014 was as follows: Asset Transfers between fund types Amount Purpose $ 660,000 Operations 68,000 Operations 11,672 Match 22,000 Operations 8,797 Operations 32,520 Operations 450,000 Operations 291,796 Operations 55,000 Match 36,436 Match 3,500 Match $ 1,639,721 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 2014 governmental funds contributed capital valued at $218,728 to the Sewer (Storm) Fund. Of this amount, $33,009 was transferred out of governmental activities construction in progress, and $185,719 was an expenditure of the SID 345 Capital Project Fund in fiscal year 2014. 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 2014, there was a capital asset restatement of $5,175 from construction in progress. This $5,175 was a fiscal year 2013 payment towards an updated Airport Master Plan. 50 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 On November 5, 2013, a special election was held within the City of Kalispell for the voters to consider Referendum No. 103, a referendum to repeal City of Kalispell Resolution No. 5572. Resolution No. 5572 related to the development of the City Airport in collaboration with the Federal Aviation Administration to arc B-II standards. Referendum No. 103 repealed Resolution No. 5572, and the Airport Master Plan update was abandoned. 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 transaction resulted in a loss on conveyance of capital asset of $166,975 (the depreciated value). Another $11,648 loss on disposal is the result of obsolete/disposed assets not being fully depreciated. Gain / (loss) on the conveyance and/or disposal of capital assets is not displayed prominently on the Statement of Activities so this amount is displayed cumulatively with other expenses. Assets Contributed In fiscal year 2014, Governmental Activities report contributed assets with a value of $912,834. Streets valued at $904,631 were contributed by developers. The balance ($8,203) are sidewalk improvements paid for by homeowner's. In fiscal year 2014, Business -type Activities report contributed assets from private sources with a value of $766,541. The Water fund received contributions from developers in the amount of $562,610. Contributed to the Water fund were thirty-one (31) new fire hydrants ($111,211), and seven (7) water mains ($451,399). The Sewer fund received contributions from developers in the amount of $203,931. Contributed to the Sewer fund were three (3) sanitary mains ($67,519), a lift station ($46,952), and four (4) storm sewer mains ($89,460). In fiscal year 2014, Business -type Activities report contributed assets from other governments with a value of $160,546. The Montana Department of Transportation contributed to the City's cost to relocate a water and sewer main. The MDOT's share of these projects were $114,544 and $46,002, respectively. Gain (Loss) on Sale/Disposal of Capital Assets In fiscal year 2014, Business -type Activities report loss on disposal of assets of $24,773, the result of overestimating the life of water meters. Residential and commercial meters were replaced with a depreciated value of $24,773. 51 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 Balance Balance Governmental Activities: July 1, 2013 Additions Contnbutions Restatements Transfers Deductions June 30, 2014 Capital assets not being depreciated: Land $ 2,395,299 $ - $ - $ - $ - $ - $ 2,395,299 Construction in Progress 38,331 22,155 (5,175) (33,009) (147) 22,155 Total capital assets not being depreciated $ 2,433,630 $ 22,155 $ $ (5,175) $ (33,009) $ (147) $ 2,417,454 Capital assets being depreciated: Buildings $ 17,294,074 $ - $ - $ - $ (130,435) $ - $ 17,163,639 Improvements other than buildings 15,430,667 302,345 8,203 - - (278,291) 15,462,924 Machinery and equipment General 7,754,218 693,925 - - (55,267) (255,228) 8,137,648 Ambulance 398,059 - - - - - 398,059 Parking 123,794 - - - - - 123,794 Infrastructure 80,419,328 904,631 81,323,959 Total capital assets being depreciated $ 121,420,140 $ 996,270 $ 912,834 $ $ (185,702) $ (533,519) $ 122,610,023 Less accumulated depreciation for: Buildings $ (6,833,021) $ (591,127) $ - $ - $ 130,435 $ - $ (7,293,713) Improvements other than buildings (6,400,885) (609,951) - - - 111,317 (6,899,519) Machinery and equipment General (4,176,687) (488,147) - - 44,017 243,580 (4,377,237) Ambulance (357,110) (12,645) - - - - (369,755) Parking (104,038) (6,758) - - - - (110,796) Infrastructure (22,699,239) (2,010,496) (24,709,735) Total accumulated depreciation $ (40,570,980) $ (3,719,124) $ S $ 174,452 $ 354,897 $ (43,760,755) Total capital assets being depreciated, net 80,849,160 (2,722,854) 912,834 (11,250) (178,622) 78,849,268 City capital assets, net S 93,282,790 $ (2,700,699) S 912,834 S (5,175) $ (44,259) $ (178,769) $ 81,266,722 Balance Balance Internal Service Funds: July 1, 2013 Additions Contributions Restatements Transfers Deductions June 30, 2014 Information Technology $ 181,179 $ 2,671 $ - $ - $ - $ - $ 183,850 Less accumulated depreciation - Information Technology (141,300) (13,731) - - - - (155,031) Central Garage - 44,827 - - 185,702 - 230,529 Less accumulated depreciation - Central Garage (2,089) (174,452) (176,541) Internal service funds assets, net S 39,879 S 31,678 $ $ S 11,250 $ $ 82,807 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 $ 2,524,969 514,745 220,768 458,642 $ 3,719,124 52 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 Balance Cain (Loss)/ Balance Business -type activities: July 1, 2013 Additions Contributions Restatement Transfers Deductions June 30, 2014 Capital assets not being depreciated: Land Airport $ 1,347,867 $ - $ - $ - $ - $ - $ 1,347,867 Water 105,958 - - - - - 105,958 Sewer 221,513 - - - - - 221,513 Sewer(Stomr) 26,550 - - - - - 26,550 Construction in progress Airport 184,433 - - (184,433) - - - Water 190,243 5,679 - - - (190,243) 5,679 Sewer 391,027 70,928 - - - (389,823) 72,132 Sewer (Stomr) 6,851 (6,851) Total capital assets not being depreciated $ 2,474,442 $ 76,607 $ $ (184,433) $ $ (586,917) $ 1,779,699 Capital assets being depreciated: Airport $ 1,962,813 $ - $ - $ - $ - $ - $ 1,962,813 Water General Plant 1,336,999 39,904 - - - - 1,376,903 Source of Supply 4,645,339 104,272 - - - - 4,749,611 Transnision and Distribution 25,675,149 643,814 677,154 - (102,251) 26,893,866 Pumping Plant 3,604,237 - - - - - 3,604,237 Sewer General Plant 985,474 16,715 - - - - 1,002,189 Transnision and Distribution 24,053,167 61,177 160,473 - - (2,797) 24,272,020 Storm Sewer System 13,230,147 484,383 308,188 - - - 14,022,718 Treatment Plant Equipment 465,667 - - - - - 465,667 Treatment Plant 37,935,302 1,206,609 - - - - 39,141,911 Solid Waste Buildings 316,731 - - - - - 316,731 Machinery and equipment 1,247,590 453,598 1,701,188 Total capital assets being depreciated $ 115,458,615 $ 3,010,472 $ 1,145,815 $ $ $ (105,048) $ 119,509,854 Less accumulated depreciation for: Airport $ (754,614) $ (96,461) $ - $ - $ - $ - $ (851,075) Water General Plant (1,017,378) (47,366) - - - - (1,064,744) Source of Supply (795,356) (97,574) - - - - (892,930) Transnision and Distribution (7,222,270) (603,665) - - - 77,478 (7,748,457) Pumping Plant (1,530,373) (112,445) - - - - (1,642,818) Sewer General Plant (818,454) (38,387) - - - - (856,841) Transnision and Distribution (8,758,581) (758,185) - - - 2,797 (9,513,969) Storm Sewer System (3,695,283) (328,829) - - - - (4,024,112) Treatment Plant Equipment (441,843) (2,623) - - - - (444,466) Treatment Plant (18,242,472) (839,519) - - - - (19,081,991) Solid Waste Buildings (253,947) (9,356) - - - - (263,303) Machinery and equipment (965,129) (83,296) (1,048,425) Total accumulated depreciation $ (44,495,700) $ (3,017,706) $ $ $ $ 80,275 $ (47,433,131) Total capital assets being depreciated, net $ 70,962,915 $ (7,234) $ 1,145,815 $ $ $ (24,773) $ 72,076,723 Business -type activities capital assets, net $ 73,437,357 $ 69,373 $ 1,145,815 $ (184,433) $ $ (611,690) $ 73,856,422 Business -type activities depreciation was charged to functions/programs of the primary government as follows: Business -type Activities: Airport $ 96,461 Water 861,050 Sewer 1,967,543 Solid Waste 92,652 Total Business -type Activities $ 3,017,706 53 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 E. Long -Term Debt During the year ended June 30, 2014, the following changes occurred in liabilities reported in long-term debt: Balance July 1, 2013 Additions Reductions Balance Due within June 30, 2014 1 year Governmental Activities: G.O. Bonds $ 3,700,000 $ $ (445,000) $ 3,255,000 $ 450,000 Revenue Bonds 1,558,000 (148,000) 1,410,000 153,000 Assessments 3,457,647 259,472 (324,197) 3,392,922 326,526 Contract Debt/Loans 1,734,235 144,151 (321,396) 1,556,990 361,792 Intermediary Program 646,600 - (25,622) 620,978 25,878 Compensated Absences 1,282,759 48,160 (57,763) 1,273,156 930,037 Governmental Activities Sub Total $ 12,379,241 $ 451,783 $ (1,321,978) $ 11,509,046 $ 2,247,233 Internal Service Funds: Compensated Absences 12,390 10,912 $ 23,302 17,486 Internal Service Funds Sub Total $ 12,390 $ 10,912 $ $ 23,302 $ 17,486 Business -type Activities Revenue Bonds $ 795,000 $ - $ (60,000) $ 735,000 $ 60,000 SRF 15,143,483 955,199 (1,166,000) 14,932,682 1,182,000 Contract Debt/Loans - 172,988 172,988 18,833 Compensated Absences 263,232 19,542 (13,832) 268,942 185,815 Business -type Activities Sub Total $ 16,201,715 $ 1,147,729 $ (1,239,832) $ 16,109,612 $ 1,446,648 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, 2014 were as follows: Origination Interest Purpose Date Rate Term Pool/Fire Hall Refunding 6/13/2012 1%-2% 10 years Total G.O. Bonds 54 Due Principal Date Amount 2022 $ 4,145,000 $ 4,145,000 Annual Balance Payment June 30, 2014 varies $ 3,255,000 $ 3,255,000 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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 June 30, 2014 SID343 6/12/2001 3.6%-5.5% 20 years 2021 $ 1,581,500 varies $ 395,000 SID344 6/15/2006 3.7%-5.1% 20 years 2026 4,520,000 varies 2,720,000 SID345 5/15/2014 3.00% 15 years 2029 242,000 varies 241,000 2007 S&C 1/3/2008 6.00% 8 years 2016 15,407 varies 3,851 2008 S&C 1/3/2009 3.50% 8 years 2017 8,981 varies 3,368 2009 S&C 1/4/2010 3.50% 8 years 2018 7,629 varies 3,815 2010 S&C 1/6/2011 3.00% 8 years 2019 942 varies 588 2011 S&C 1/6/2012 3.25% 8 years 2020 5,792 varies 4,344 2012 S&C 4/12/2013 3.25% 8 years 2021 3,981 varies 3,484 2013 S&C 1/2/2014 3.25% 8 years 2022 17,472 varies 17,472 Total Special Assessment Bonds $ 6,403,704 $ 3,392,922 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 $95,241. 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, 2014 payment date for the Bonds, the City used $367,283 of the $384,576 in the SID 344 bond reserve accounts to fully satisfy the regularly scheduled debt service payment of $367,283. 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 2008/2009/2010/2011/2012/2013 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, 2014, $0 is in the SID 344 bond reserve account, and $17,293 is in the debt service revolving fund available to pay future debt service on the bonds. 55 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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 TIF 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% 10years Mar-12 variable 25 years May-04 2.5%-4.85% 20 years Total Revenue Bonds Final Bonds Balance Maturity Issued June 30, 2014 2020 $ 1,445,000 $ 935,000 2037 500,000 475,000 1,945,000 1,410,000 2024 $ 1,840,000 $ 735,000 1,840,000 735,000 $ 3,785,000 $ 2,145,000 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, 2014, 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 6/30/14 411 258 W CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 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 $ 2,821,327 *Misc. Revenue 192,301 Total Operating Revenue 3,013,628 Less: Operating Expense (excludes depreciation) 1,674,693 Available for Debt Service $ 1,338,935 ** 10% of original principal $ 411,000 Coverage FY14 326% *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. 57 SRFLOANS 2013 Sewer- WWTP Digester Lid 2012 Sewer Refunding 2012 Water Refunding 2012 Water Refunding 2012 Water Refunding 2012 Sewer Refunding Sewer Debt Required Information CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 Interest Amount Outstanding Origination Rate Term Borrowed June 30, 2014 FY13 3.00% 20years $ 1,087,682 $ 1,039,682 FY13 2.25% 12years 1,009,000 859,000 FY13 1.25% 3 years 526,000 178,000 FY13 2.25% 15years 1,340,000 1,186,000 FY13 2.00% 8 years 404,000 315,000 FY13 2.25% 15 years 12,827,000 11,355,000 Total SRF Loans $ 17,193,682 $ 14,932,682 Operating Reserve - The city shall keep in the operating reserve account an amount equal to one month's operating expenses. As of June 30, 2014, 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, 2014, 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 ($1,492,368), the maximum amount of principal and interest required in the current or any subsequent fiscal year ($1,181,028), or 125% of the average debt service payable in any fiscal year ($15,507,202 / 19 years = $816,169). The City is in compliance with the 125% of the average debt service payable in any fiscal year. As of June 30, 2014, the debt service reserve account contains $1,109,313. 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 $ 5,026,026 Impact Fees Pledged for Debt 250,000 Total 5,276,026 Uss: Operating Expense (excludes depreciation) 2,841,589 Available for Debt Service $ 2,434,437 **Maximum Debt Service $ 1,181,028 Coverage FY14 206% *includes interest revenue **includes all sewer fund borrowings 58 Loans/Contracted Debt Purpose Business -type Activities BOI:Garbage Truck Governmental Activities BOI:City Hall I VAC BOI:Fire Truck BOI:Bucket Truck BOI:Mower BOI:Dump Truck BOI:Compactor BOI: Stumper BOI: P/U & Tractor BOI: Dump Trucks (2) BOI:Boom Truck BOI: Dump Trucks (2) Rocky Mtn Bank- Fire Truck Capital One Public Funding - 201 1st Ave E- City Hall USDA:Intermediary Relending Program Relending Program CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 Origination Interest Due Principal Balance Date Rate* * Term Date Amount June 30, 2014 varies 5 years $ 172,988 $ 172,988 Totalloans/contracted debt - Business -type Activities $ 172,988 $ 172,988 7/16/2004 varies 10years 2/15/2014 $ 151,836 $ 8,175 4/22/2005 varies 10years 8/15/2015 279,900 49,023 12/30/2010 varies 5years 2/15/2016 28,300 11,575 3/4/2011 varies 5years 2/15/2016 71,220 29,250 6/15/2012 varies 5years 2/15/2017 124,865 84,023 12/30/2011 varies 5years 2/15/2017 45,928 27,971 2/1/2013 varies 5years 2/15/2018 20,000 16,090 2/1/2013 varies 5years 2/15/2018 45,000 36,201 5/24/2013 varies 5years 2/15/2018 174,698 155,679 8/23/2013 varies 5years 2/15/2018 97,651 86,992 2/28/2014 varies 5years 2/15/2019 46,500 46,500 3/7/2008 3.95% 10years 3/1/2018 575,000 256,675 10/25/2007 4.85% 12years 9/15/2019 1,420,165 748,836 Sub total BOI loans/contracted debt $ 3,081,063 $ 1,556,990 10/12/2004 1.00% 30 years 10/12/2034 $ 520,000 $ 416,185 11/27/2006 1.00% 30 years 11/27/2036 257,500 204,793 Sub total USDA Intermediary 777,500 620,978 Total loans/contracted debt - Governmental Activities $ 3,858,563 $ 2,177,968 BOI - Board of luvestments Intercap Loan Program "variable rate Requirements to amortize debt The annual requirements to amortize all long-term debt outstanding, excluding compensated absences payable, as of June 30, 2014, were as follows: 59 Governmental Activities G.O. FORFISCAL BONDS YEAR ENDED PRINCIPAL INTEREST 2015 $ 450,000 $ 52,463 2016 455,000 47,963 2017 465,000 41,138 2018 470,000 34,163 2019 475,000 27,113 2020-2024 940,000 32,500 2025-2029 2030-2034 2035-2039 TOTAL $ 3,255,000 $ 235,340 Bus Ines s-type Activities CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 SPECIAL ASSESSMENT CONTRACTED INTERMEDIARY BONDS LOANSIDEBT LOAN PROGRAM PRINCIPAL INTEREST $ 326,526 $ 165,201 326,526 150,270 324,599 135,397 323,477 120,416 317,523 105,246 1,222,271 311,365 552,000 42,900 $ 3,392,922 $ 1,030,795 REVENUE BONDS PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST TOTAL $ 361,792 $ 49,464 $ 25,878 $ 6,210 $ 153,000 $ 58,903 $ 1,649,437 348,030 40,647 26,960 6,044 159,000 52,563 1,613,003 320,867 29,935 27,229 5,774 164,500 45,913 1,560,352 292,662 19,218 27,502 5,502 175,000 38,948 1,506,888 157,119 9,222 27,777 5,227 181,000 31,618 1,336,845 76,520 1,856 143,107 21,912 263,500 81,460 3,094,491 150,406 14,612 107,500 54,520 921,938 158,079 6,940 131,000 31,280 327,299 34,040 541 75,500 5,440 115,521 S 1,556,990 S 150,342 $ 620,979 $ 72,762 $1,410,000 $ 400,645 $ 12,125,774 SRF REVENUE INTERMEDIARY FOR FISCAL LOANS BONDS LOAN PROGRAM YEARENDED PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST TOTAL 2015 $ 1,182,000 $ 340,429 $ 60,000 $ 34,275 $ 18,833 $ 1,171 $ 1,636,708 2016 1,026,000 315,607 65,000 31,695 37,963 1,927 1,478,192 2017 1,051,000 291,912 65,000 28,835 38,343 1,452 1,476,542 2018 1,074,000 267,668 70,000 25,943 38,728 973 1,477,312 2019 1,100,000 242,875 70,000 22,793 39,121 489 1,475,278 2020-2024 5,698,000 827,400 405,000 60,868 6,991,268 2025-2029 3,523,000 205,267 3,728,267 2030-2034 278,682 21,840 300,522 TOTAL $14,932,682 $2,512,998 $ 735,000 $ 204,409 $ 172,988 $ 6,012 $ 18,564,089 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 $10,144,997 for FY14, of which $9,630,801 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, 2014, were: PERS MPORS FURS Employee 7.90% 9.00% 10.70% Employer 8.17% 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 2014, the State of Montana contributed $605,019 to firefighter retirement and $591,273 to police retirement. These on -behalf retirement amounts have been recorded in the City's financial statements. CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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, 2012, 2013 and 2014, as listed below, were equal to the required contributions for each year. PERS MPORS FURS PARKING COMM 2012 $ 363,551 $ 293,843 $ 247,995 $ 4,103 2013 $ 373,843 $ 291,452 $ 263,157 N/A 2014 $ 441,777 $ 290,377 $ 266,423 N/A 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 FY2014, 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. 61 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 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, 2014, 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. 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) Increase in net OPEB obligation Net OPEB obligation - beginning of year Net OPEB obligation - end of year Governmental Business -type Total Activities Acitivities $ 333,826 $ 280,414 $ 53,412 56,181 47,192 8,989 (75,476) (63,400) (12,076) 314,531 264,206 50,325 (61,533) (51,688) (9,845) 252,998 212,518 40,480 1,265,329 1,062,876 202,453 $1,518,327 $ 1,275,394 $ 242,933 The June 30, 2014 year-end OPEB obligation is reported in the City's funds as follows: Functions/Programs Expenses Primary Government: Governmental activities: General government $212,518 Total governmental activities 212,518 Business -type activities: Water 25,502 Sewer 14,978 Total business -type activities 40,480 Total primary government $252,998 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. 62 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 Actuarial Actuarial UAAL as a Actuarial Value of Accrued Unfunded Covered Percentage of Valuation Assets Liability (AAL) AAL (UAAL) Funded Ratio Payroll Covered Payroll Date (b) (a) (a-b) (a/b) (c) ((a-b)/c) 6/30/2009 $ - $ 3,008,915 $ 3,008,915 0.00/0 Not Available Not Available 6/30/2011 $ - $ 2,145,522 $ 2,145,522 0.0% $ 8,831,832 24.3% 6/30/2013 $ - $ 2,311,036 $ 2,311,036 0.0% $ 10,995,940 21.0% 63 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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: Active participants: Retirees, Dependents, and Surviving Spouses Total AAL Nomrd Cost Impact on Statement of Activities Annual OPEB Cost Impact on Statement of Net Position Assumed Contributions Percentage of Annual OPEB Cost contributed Net OPEB Obligation at June 30 Participant Infonration Active participants: Retirees, Dependents, and Surviving Spouses Total Fiscal Fiscal Fiscal ?01? ?011 M14 1V/A a 1,b1b,llY 1V/A N/A 694,877 N/A N/A $ 2,311,036 N/A N/A $ 191,764 N/A $ 238,032 $ 320,116 $ 314,531 $ 73,206 $ (46,131) $ 61,533 31% -14% 20% $ 899,082 $ 1,265,329 $ 1,518,327 N/A 179 N/A N/A 12 N/A 1V/A IYl 1V/A 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. 64 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 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. H. Amounts Due From/To other Governments On June 30, 2014, the amounts due from other governments consisted of the following: General Fund Debt Service Funds Due from: Amount Due from: Amount State of Montana -Video License Fee $ 725 Flathead County -Taxes $ 128,956 Flathead County -Taxes 485,633 Sub Total $ 486,358 Total Governmental Funds $ 1,188,269 Special Revenue Funds Enterprise Funds Due from: Amount Due from: Amount State of Montana -Preserve America Grant $ 1,375 Flathead County -Taxes $ 189,189 Flathead County -Taxes 467,518 Total Business -type Funds $ 189,189 Flathead County Sheriff Dept. State of Montana-MDOT EPA 2,085 83,044 18,933 Sub Total $ 572,955 I. Restricted Cash/Investments Total City of Kalispell $ 1,377,458 The following restricted cash/investments were held as of June 30, 2014. These amounts are reported within the cash/investment account on the Combined Balance Sheet. RFSTRICTFD CASH: Business -tune Activities Water Bond Reserve (includes SRF & BOI) Plant Investment/ImpactFees (1) Sewer Operating Reserve (2) Bond Contingency Plant Investment/ImpactFees (sanitary)(1) Plant Investment/ImpactFees (treatment plant) (1) Plant Investment/ImpactFees (storm)(1) Treatment Plant Replacement (3) Total business -type activities restricted cash/investments Governmental Activities Impact Fees Growth related Capital (1) Urban Forestry Developers (4) Debt Service Airport TIF Bond Reserve Debt Service SID 343 Bond Reserve Debt Service SID 34413ond Reserve Debt Service SID 345 Bond Reserve Debt Service Revolving Fund - SID 344 Bond Reserve Debt Service Revolving Fund - SID 345 Bond Reserve Total governmental activities restricted cash/investments Totalrestricted cash/investments July 1, 2013 Additions Subtractions June 30, 2014 $ 411,258 $ - $ - $ 411,258 584,601 465,842 (161,361) 889,082 190,000 - - 190,000 1,119,062 - (9,749) 1,109,313 1,998,140 235,813 (49,383) 2,184,570 314,166 334,385 (239,138) 409,413 865,725 271,679 (80,566) 1,056,838 1,252,082 420,359 (140,568) 1,531,873 6,735,034 1,728,078 (680,765) 7,782,347 339,475 156,133 (42,987) 452,621 91,030 8,812 (7,560) 92,282 184,875 - - 184,875 79,075 - (21,280) 57,795 226,000 158,576 (384,576) - - 11,172 - 11,172 226,000 18,882 (227,589) 17,293 - 12.100 - 12.100 1,146,455 365,675 (683,992) 828,138 $ 7,881,489 $ 2,093,753 $ (1,364,757) $ 8,610,485 65 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 (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 ply). (4) Urban forestry receives cash from developers to be used to plant trees in new city developments (third ply). J. Restatements During the 2014 fiscal year, the following adjustments relating to prior years' transactions were made to fund balance or retained earnings accounts. Fund Amount Reason Law Enforcement Grants $ (3,051) Prior period revenues overstated Subtotal - Governmental Fund Financials (3,051) Governmental Funds - Construction in Progress (5,175) Construction in progress - obsolete Total Statement of Activities - Gov'tal Funds $ (8,226) Water Fund - Major Proprietary $ (5,500) Prior period revenues overstated Sewer Fund - Major Proprietary 5,500 Prior period revenues understated Airport Fund (184,433) Construction in progress - obsolete Total Proprietary funds/Business-type activities $ (184,433) Airport Fund Restatement On November 5, 2013, a special election was held within the City of Kalispell for the voters to consider Referendum No. 103, a referendum to repeal City of Kalispell Resolution No. 5572. Resolution No. 5572 related to the development of the City Airport in collaboration with the Federal Aviation Administration to arc B-II standards. Referendum No. 103 repealed Resolution No. 5572, and the Airport Master Plan update was abandoned. For fiscal year 2014, there was a capital asset restatement of $184,433 from construction in progress in the Airport fund. This $184,433 consisted of $35,700 related to the acquisition of property necessitated by the Airport Master Plan update and $92,625 related to the preparation of the Airport Master Plan update. •: CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 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. 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 i) 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. 67 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 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 Brown unspecified Burke unspecified Thomas / Burke unspecified Robbins unspecified Saxby $ 500 Potential Status not likely Litigation ongoing unknown Litigation ongoing unknown Litigation ongoing not likely Complaint filed and served unknown Awaiting decision M. CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS DUNE 30, 2014 O. Unavailable Revenue Taxes Receivable The following governmental funds had taxes receivable at June 30, 2014. FUND Source Amount General - Major Governmental Taxes $ 743,100 Westside TIF Taxes (1,244) Parks Taxes 45,398 Old School "Tech" TIF Taxes 74,269 Old School "Ind" TIF Taxes 19,519 Health Levy Taxes 91,105 Light District Taxes 20,679 Street Maintenance - Major Governmental Taxes 88,497 Forestry Taxes 10,602 G.O. Bonds Taxes 71,819 Airport TIF Taxes 51,284 S & C's Taxes 404 SID 344 - Major Governmental Taxes 1,039,424 Current Portion 2,254,856 S & C's Taxes 36,913 SID 343 Taxes 503,671 SID 344 - Major Governmental Taxes 2,502,847 SID 345 Taxes 241,000 Non current Portion 3,284,431 Total Governmental Funds $ 5,539,287 P. Accounts Receivable At June 30, 2014 the Ambulance fund had accounts receivable deferred net of $253,083. Total net accounts receivable of the Ambulance fund is $256,428. 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. CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 The City has $38,402 recorded as housing rehab loans receivable as of June 30, 2014 in the Community Development Loan 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, 2014 balance $ 35,492 Hampstead Partners In August of 2002, the City of Kalispell entered into two notes receivable agreements with 2nd Avenue West Partners, L.P. (Hampstead Partners) for property on 2nd Avenue West in Kalispell. The property consists of a 40- unit low-income apartment complex known as 2nd 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, 2014, is $57,255, and $284,067, 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, 2014 balance $ 21,618 A 15 year loan at 5% to Distinctive Countertops in October 2006. Original Loan amount $ 288,619 June 30, 2014 balance $ 257,664 A 7 year loan at 7% to the Kalispell Hotel (Hilton) in July 2007. Original Loan amount $ 150,000 June 30, 2014 balance $ 2,254 A 15 year loan at 6% to AGAPE Home Care in May 2009. Original Loan amount $ 42,500 June 30, 2014 balance $ 26,130 A 10 year loan at 3% to Norm's News in January 2013. Original Loan amount $ 50,000 June 30, 2014 balance $ 39,584 70 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 A 10 year loan at 3% to Smith/Red & Black in May 2013. Original Loan amount $ 50,000 June 30, 2014 balance $ 45,251 A 10 year loan at 3% to Wheaton's in April 2014. Original Loan amount $ 31,500 June 30, 2014 balance $ 31,274 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, 2014 balance $ 41,598 A 15 year loan at 6.5% to Distinctive Countertops in July 2006. Original Loan amount $ 150,000 June 30, 2014 balance $ 133,180 A 10 year loan at 7% to Crossroads Realty in June 2007. Original Loan amount $ 150,000 June 30, 2014 balance $ 114,704 A 7 year loan at 7% to the Kalispell Hotel (Hilton) in July 2007. Original Loan amount $ 150,000 June 30, 2014 balance $ 2,255 A 7 year loan at 7% to Unfinished Furniture Creations in April 2006. Original Loan amount $ 50,000 June 30, 2014 balance $ 5,000 *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, 2014 balance $ 29,385 A 10 year loan at 5.29% to Parkman Properties, LLC (The Edge Salon), in February 2012. Original Loan amount $ 77,000 June 30, 2014 balance $ 62,484 71 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 A 10 year loan at 3% to Whipps, LLC in December 2011. Original Loan amount $ 50,000 June 30, 2014 balance $ 38,868 A 10 year loan at 3% to Bill and Jana Goodman in June 2013. Original Loan amount $ 34,660 June 30, 2014 balance $ 28,796 A 15 year loan at 6% to Tree Frog Tavern in July 2013. Original Loan amount $ 50,000 June 30, 2014 balance $ 48,151 A 15 year loan at 6% to Tiebuckers, Inc. in July 2013. Original Loan amount $ 50,000 June 30, 2014 balance $ 48,151 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, 2014 balance $ 44,717 72 CITY OF KALISPELL NOTES TO FINANCIAL STATEMENTS JUNE 30, 2014 SUMMARY COMMUNITY DEVELOPMENT LOANS RECEIVABLE From To CD Loan Revolving #1 -Major Governmental Various CD Loan Revolving #1 -Major Governmental Flathead Health and Fitness CD Loan Revolving #1 -Major Governmental Distinctive Countertops CD Loan Revolving #1- Major Governmental KalispellHotel- Hilton CD Loan Revolving #1 - Major Governmental AGAPEHome Care CD Loan Revolving #1 -Major Governmental Norm's News CD Loan Revolving #1 - Major Governmental Smith/Red & Black CD Loan Revolving #1 - Major Governmental Wheatons CD Loan Revolving # 1 - Major Governmental CD Loan Revolving # 1 - Major Governmental CD Loan Revolving #2 UDAG Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving Rural Development Loan Revolving *Long Term Loans Receivable -Matures 2032 P. City Court Contracts Receivable Hampstead Partners* Hampstead Partners -Interest Portion* Subtotal Major Fund Distinctive Countertops Big Sky Manor Flathead Health and Fitness Distinctive Countertops Crossroads Realty Kalispell Hotel - Hilton Unfinished Furniture - Bott/Thomas Glacier Valley Endodontics, Inc Parkman Properties, LLC Whipps, LLC Bill and Jana Goodman Tree Frog Tavern Tiebuckeis, Inc. Subtotal Other Governmental Funds Total Governmental Funds Amount Purpose $ 38,402 Housing Rehab 35,492 Small Business 21,618 Jobs 2,254 Jobs 26,130 Jobs 39,584 Jobs 45,251 Jobs 31,274 Jobs 880,000 Low Income Housing 341,322 Low Income Housing 1,461,327 257,664 Jobs 44,717 Urban Dev. Assistance 41,598 Small Business 133,180 Small Business 114,704 Small Business 2,255 Small Business 5,000 Small Business 29,385 Small Business 62,484 Small Business 38,868 Small Business 28,796 Small Business 48,151 Small Business 48,151 Small Business 854,953 $ 2,316,280 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, 2014, amounted to $2,264,298. Q. Wastewater Treatment Plant agreement with Evergreen The City of Kalispell entered into an Interlocal Agreement with the Evergreen Sewer District #1 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, 2014 is $1,531,873 of which Evergreen's interest is $339,122. R. Subsequent Events On July 7, 2014, at a regular meeting, Council voted unanimously to ratify the collective bargaining agreement between the City and the AFSCME Union, Local 256. The prior agreement expired at the end of fiscal year 2014. The new agreement is for the three year term covering fiscal years 15, 16, and 17. Estimated financial impact of the agreement is $92,000, $95,000 and $39,000 for fiscal year 2015, 2016 and 2017, respectively. 73