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2006, 09-08 Financial Statements and Federal Single Audit 2005 Washington State Auditor's Office Financial Statements and Federal Single Audit Report City of Spokane Valley Spokane County Audit Period January 1, 2005 through December 31, 2005 Report No. 71383 :�'R "7•s Washington Issue Date � September 8, 2006 r41 State Auditor ` , y '91r71 p Brian Sonntag ti J Y, Washington State Auditor Brian Sonntag September 8, 2006 Mayor and City Council City of Spokane Valley Spokane, Washington Report on Financial Statements and Federal Single Audit Please find attached our report on the City of Spokane Valley's financial statements and compliance with federal laws and regulations. We are issuing this report in order to provide information on the City's financial condition. In addition to this work, we look at other areas of our audit client's operations for compliance with state laws and regulations. The results of that audit will be included in a separately issued accountability report. Sincerely, ,44, .1(;61.7„e_ BRIAN SONNTAG, CGFM STATE AUDITOR Insurance Building,P.O.Box 40021•Olympia,Washington 98504-0021•(360)902-0370•(866)902-3900•TDD Relay(800)833-6388 FAX(360)753-0646•http://www.sao.wa.gov Table of Contents City of Spokane Valley Spokane County January 1, 2005 through December 31, 2005 Federal Summary 1 Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards 2 Independent Auditor's Report on Compliance with Requirements Applicable to its Major Program and Internal Control over Compliance in Accordance with OMB Circular A-133 4 Independent Auditor's Report on Financial Statements 6 Financial Section 8 Federal Summary City of Spokane Valley Spokane County January 1, 2005 through December 31, 2005 The results of our audit of the City of Spokane Valley are summarized below in accordance with U.S. Office of Management and Budget Circular A-133. • An unqualified opinion was issued on the City's financial statements. • We noted no instances of noncompliance that were material to the financial statements of the City. • We issued an unqualified opinion on the City's compliance with requirements applicable to its major federal program. • We reported no findings which are required to be disclosed under OMB Circular A-133. • We noted in our Independent Auditor's Report on Financial Statements that the Schedule of Expenditures of Federal Awards was fairly presented. • The dollar threshold used to distinguish between Type A and Type B programs, as prescribed by OMB Circular A-133, was $300,000. • The City did not qualify as a low-risk auditee under OMB Circular A-133. • The following was a major program during the period under audit: CFDA No. Program Title 14.218 Community Development Block Grants/Entitlement Grants Washington State Auditor's Office 1 Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards City of Spokane Valley Spokane County January 1, 2005 through December 31, 2005 Mayor and City Council City of Spokane Valley Spokane, Washington We have audited the financial statements of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the City of Spokane Valley, Spokane County, Washington, as of and for the year ended December 31, 2005, which collectively comprise the City's basic financial statements and have issued our report thereon dated August 11, 2006. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to the financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit, we considered the City's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements and not to provide an opinion on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving internal control over financial reporting and its operation that we consider to be material weaknesses. COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, the objective of our audit of the financial statements was not to provide an opinion on overall compliance with these provisions. Accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported herein under Government Auditing Standards. Washington State Auditor's Office 2 This report is intended for the information and use of management, the Mayor and City Council, federal awarding agencies and pass-through entities. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. BRIAN SONNTAG, CGFM STATE AUDITOR August 11, 2006 Washington State Auditor's Office 3 Independent Auditor's Report on Compliance with Requirements Applicable to its Major Program and Internal Control over Compliance in Accordance with OMB Circular A-133 City of Spokane Valley Spokane County January 1, 2005 through December 31, 2005 Mayor and City Council City of Spokane Valley Spokane, Washington COMPLIANCE We have audited the compliance of the City of Spokane Valley, Spokane County, Washington, with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to its major federal program for the year ended December 31, 2005. The City's major federal program is identified in the Federal Summary. Compliance with the requirements of laws, regulations, contracts and grants applicable to its major federal program is the responsibility of the City's management. Our responsibility is to express an opinion on the City's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to the financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the City's compliance with those requirements. In our opinion, the City complied, in all material respects, with the requirements referred to above that are applicable to its major federal program for the year ended December 31, 2005. INTERNAL CONTROL OVER COMPLIANCE The management of the City is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the City's internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133. Washington State Auditor's Office 4 Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws, regulations, contracts and grants caused by error or fraud that would be material in relation to a major federal program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over compliance and its operation that we consider to be material weaknesses. This report is intended for the information of management, the Mayor and City Council, federal awarding agencies and pass-through entities. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. BRIAN SONNTAG, CGFM STATE AUDITOR August 11, 2006 Washington State Auditor's Office 5 Independent Auditor's Report on Financial Statements City of Spokane Valley Spokane County January 1, 2005 through December 31, 2005 Mayor and City Council City of Spokane Valley Spokane, Washington We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the City of Spokane Valley, Spokane County, Washington, as of and for the year ended December 31, 2005, which collectively comprise the basic financial statements as listed on page 8. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the City of Spokane Valley, as of December 31, 2005, and the respective changes in financial position and cash flows, where applicable, thereof, and the respective budgetary comparison for the General, Street and Street Capital Projects funds, for the year then ended, in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The management's discussion and analysis on pages 9 through 15 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was performed for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The accompanying Schedule of Expenditures of Federal Washington State Auditor's Office 6 Awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. This schedule is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. BRIAN SONNTAG, CGFM STATE AUDITOR August 11, 2006 Washington State Auditor's Office 7 Financial Section City of Spokane Valley Spokane County January 1, 2005 through December 31, 2005 REQUIRED SUPPLEMENTAL INFORMATION Management's Discussion and Analysis—2005 BASIC FINANCIAL STATEMENTS Statement of Net Assets—2005 Statement of Activities—2005 Balance Sheet—Governmental Funds—2005 Reconciliation of Total Governmental Fund Balances to Net Assets of Governmental Activities—2005 Statement of Revenues, Expenditures and Changes in Fund Balances—Governmental Funds —2005 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds to the Statement of Activities—2005 Statement of Revenues, Expenditures and Changes in Fund Balances — Budget to Actual —General Fund —2005 Statement of Revenues, Expenditures and Changes in Fund Balances — Budget to Actual —Street Fund—2005 Statement of Revenues, Expenditures and Changes in Fund Balances — Budget to Actual —Street Capital Projects Fund—2005 Statement of Net Assets— Proprietary Funds—2005 Proprietary Funds Statement of Revenues, Expenses and Changes in Fund Net Assets — 2005 Statement of Cash Flows— Proprietary Funds—2005 Notes to the Financial Statements—2005 SUPPLEMENTAL INFORMATION Schedule of Expenditures of Federal Awards—2005 Notes to the Schedule of Expenditures of Federal Awards—2005 Washington State Auditor's Office 8 MANAGEMENT'S DISCUSSION AND ANALYSIS This section of the City of Spokane Valley's annual financial report provides a narrative overview of the City's financial activities for the fiscal year ended December 31, 2005 and financial position as of December 31, 2005. This information should be read in conjunction with the preceding letter of transmittal and the financial statements and notes to the financial statements that follow. FINANCIAL HIGHLIGHTS • Net assets, the amount by which total assets exceed total liabilities, equal $83.2 million. A total of 67.3%, or $56.0 million, of total net assets is invested in capital assets, such as streets, land, and buildings, and $7.2 million is restricted for capital projects. Of the remaining net assets, $20.0 million is available to meet the government's ongoing activities and obligations. • The government's net assets increased by $883 thousand in 2005. This increase was a result of higher than anticipated revenues and lower than appropriated expenditures. • Governmental fund balances at year end were $22.4 million. Of the unreserved balance $7.2 million is designated for capital projects with the balance available to fund ongoing activities. • Unreserved fund balance in the general fund was $7.0 million. This represents an increase of $2.6 million over the December 31, 2004 unreserved fund balance. • Total City debt decreased by $165 thousand to $9.12 million during the current fiscal year. The City did not issue any additional debt in 2005. OVERVIEW OF THE FINANCIAL STATEMENTS The City's basic financial statements are presented in three parts: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This section of the management's discussion and analysis is intended to introduce and explain the basic financial statements. Government-wide financial statements The government-wide financial statements are designed to give the reader a picture of the financial condition and activities of the City as a whole. This broad overview is similar to the financial reporting of the private-sector businesses. The government-wide financial statements have separate columns for governmental activities and business-type activities. Governmental activities of the City include general government (finance, executive, human resources), public safety (police), physical environment, economic environment, transportation, mental and physical health, and culture and recreation. The City's business-type activities consist of the stormwater utility. The statement of net assets presents information on all of the City's assets and liabilities, with the difference reported as net assets. This statement is similar to the balance sheet of a private sector business. Over time, increases or decreases in net assets may serve as a useful indicator of improvement or deterioration in the City's overall financial position. The statement of activities presents information showing how the government's net assets changed during the most recent fiscal year. This statement distinguishes revenue generated by specific functions from revenue provided by taxes and other sources not related to a specific function. The revenue generated by the specific functions (charges for services, grants, and contributions) is compared to the expenses for those functions to show how much each function either supports itself or relies on taxes and other general funding sources for support. All activity on the statement is reported on the accrual basis of accounting, requiring that revenues are reported when they are earned and expenses are reported when they are incurred, regardless of when cash is received or disbursed. Items such as uncollected taxes, unpaid vendor invoices for goods or services received during the year, and earned but unused vacation leave are included in the statement of activities as revenue and expenses even though no cash has changed hands. Washington State Auditor's Office 9 The government-wide financial statements can be found immediately following this Management Discussion and Analysis (MD&A). Fund financial statements The annual financial report includes fund financial statements in addition to the government-wide financial statements. While the government-wide statements present the City's finances based on the type of activity, general government versus business-type, the fund financial statements are presented by fund type such as the general fund, special revenue funds, and proprietary funds. A fund is a fiscal and accounting entity with a self- balancing set of accounts used to account for specific activities or meet certain objectives. Funds are often set up in accordance with special regulations, restrictions or limitations. The City of Spokane Valley, like other state and local governments, use fund accounting to ensure and show compliance with finance-related legal requirements. The City's funds are divided into two categories, governmental and proprietary. Governmental funds are used to account for essentially the same functions as are reported as governmental activities in the government-wide financial statements. The basis of accounting is different between the governmental fund statements and the government-wide financial statements. The governmental fund statements focus on near term revenues/financial resources and expenditures while the government-wide financial statements include both near term and long term revenues/financial resources and expenses. The information in the governmental fund statements can be used to evaluate the City's near term financing requirements and immediate fiscal health. Comparing the governmental fund statements with the government- wide statements can help the reader better understand the long term impact of the City's current year financing decisions. To assist in this comparison, reconciliations between the governmental fund statements and the government-wide financial statements are included with the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances. The City of Spokane Valley maintains nineteen individual governmental funds. The City's three major governmental funds, the general fund, street fund, and street capital projects fund are presented separately in the governmental fund balance sheet and the governmental fund statement of revenues, expenditures and changes in fund balances. The remaining governmental funds are combined into a single column labeled other governmental funds. Individual fund data for each of the other governmental funds can be found in the combining statements later on in this report. The City maintains budgetary control over its operating funds through the adoption of an annual budget. Budgets are adopted at the fund level and according to state law. A budgetary comparison statement is presented for the major funds as a basic financial statement. Other budgetary comparison schedules are included following the other governmental funds' combining statements in this report. Proprietary funds are used by governments to account for their business-type activities. Business-type activities provide specific goods or services to a group of customers that are paid for by fees charged to those customers. There is a direct relationship between the fees paid and services received. The City of Spokane Valley has two types of proprietary funds, enterprise funds and internal service funds. Enterprise funds are used to account for goods and services provided to citizens. Internal service funds are used to account for goods and services provided internally to various City departments. Enterprise funds of the City are used to report the same functions presented as business-type activities in the government-wide statements with the fund statements providing more detail then is reported in the government- wide statements. The enterprise fund statements provide information for the City's stormwater utility. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City's various functions. The City uses internal service funds to account for its fleet of vehicles, computer equipment, and insurance claims. Internal service fund assets and liabilities are predominantly governmental and have been included in the governmental activities column of the government-wide statement of net assets. Notes to the financial statements The notes to the financial statements provide additional information that is important to a full understanding of the data in the government-wide and fund financial statements. The notes are located immediately following the basic financial statements. Washington State Auditor's Office 10 Other information The combining statements for other governmental funds and internal service funds are presented immediately following the required supplementary information. GOVERNMENT-WIDE FINANCIAL ANALYSIS Statement of Net Assets The statement of net assets can serve as a useful indicator of the City's financial position. The City's financial position improved during the year ended December 31, 2005, as net assets increased by $883 thousand. The City of Spokane Valley's net assets at December 31, 2005 total $83,266,106. Following is a condensed version of the government-wide statement of net assets. Table 1 City of Spokane Valley's Net Assets (in thousands) Governmental Business-Type Total Primary Activities Activities Government 2005 2004 2005 2004 2005 2004 Current and other assets $ 28,167 $ 20,830 $ 1,397 $ 1,345 $ 29,564 $ 22,175 Capital assets (net of depreciation) 65,326 71,433 - - 65,326 71,433 Total assets 93,493 92,263 1,397 1,345 94,890 93,608 Long-term liabilities 9,297 9,488 - - 9,297 9,488 Other liabilities 2,208 1,662 119 75 2,327 1,737 Total liabilities 11,505 11,150 119 75 11,624 11,225 Net assets: Invested in capital assets, net of related debt 56,028 62,079 - - 56,028 62,079 Restricted 7,248 7,994 - - 7,248 7,994 Unrestricted 18,712 11,040 1,278 1,270 19,990 12,310 Total net assets $ 81,988 $ 81,113 $ 1,278 $ 1,270 $ 83,266 $ 82,383 The largest component of the City's net assets, 67.3% or $56.0 million, is its investment in capital assets net of any related outstanding debt issued to acquire those assets. These capital assets such as streets, bridges, parks, and equipment, are used to provide services to the citizens. Consequently, these assets are not available to sell and convert to cash for future spending. The majority of these assets were donated by Spokane County at the time of incorporation. Approximately 8.7% or $7.2 million of the total net assets of the City are earmarked for construction projects such as street and infrastructure construction. These assets for construction come from dedicated taxes. Other functions of the City may access the remaining net assets of$19.9 million to meet ongoing obligations to citizens and creditors. Examples of other City obligations which these net assets may be used for are public safety, employee salaries, park maintenance, and ongoing street maintenance (street sweeping, lane striping, resurfacing). At the end of the fiscal year, the City of Spokane Valley reported positive balances in all three categories of net assets, for the government as a whole, as well as for the separate governmental and business-type activities. Changes in net assets The changes in net assets table illustrates the increases or decreases in net assets of the City resulting from its operating activities. The City of Spokane Valley's net assets increased approximately$883 thousand in 2005. Washington State Auditor's Office 11 Following is a condensed version of the City's changes in net assets. The table shows the revenues, expenses, and related changes in net assets in tabular form for the governmental activities separate from the business- type activities. Table 2 Change in City of Spokane Valley's Net Assets (in thousands) Governmental Business-Type Total Primary Activities Activities Government 2005 2004 2005 2004 2005 2004 Revenues: Program Revenues" Charges for services $ 4,803 $ 3,119 $ 1,252 $ 777 6,055 $ 3,896 Operating grants &contributions 84 90 - - 84 90 Capital grants & contributions 1,393 11,690 - - 1,393 11,690 General Revenues: Property taxes 9,549 8,981 - - 9,549 8,981 Sales taxes 18,648 16,532 - - 18,648 16,532 Excise taxes 5,741 5,796 - - 5,740 5,796 Other taxes 1,534 1,103 - - 1,534 1,103 Loss on disposal of capital assets (62) (10) - - (62) (10) Investment interest 562 233 36 13 598 246 Total revenues 42,252 47,534 1,288 790 43,539 48,324 Expenses: General government 3,471 3,360 - - 3,471 3,360 Public safety 15,934 13,328 - - 15,934 13,328 Physical environment 986 1,124 - - 986 1,124 Transportation 14,944 13,361 - - 14,944 13,361 Economic environment 2,020 1,562 2,020 1,562 Mental and physical health 44 43 - - 44 43 Culture and recreation 3,785 3,444 - - 3,785 3,444 Interest on long-term debt 450 513 - - 450 513 Sewer - - - 2 - 2 Stormwater management - - 1,023 75 1,023 75 Total expenses 41,634 36,735 1,023 77 42,657 36,812 Increase in net assets before transfers 618 10,799 265 713 883 11,512 Transfers 258 237 (258) (237) - - Increase in net assets 876 11,036 7 476 883 11,512 Net assets- beginning 81,113 70,077 1,270 794 82,383 70,871 Total net assets $ 81,989 $ 81,113 $ 1,277 $ 1,270 $ 83,266 $82,383 Governmental activities contributed $876 thousand of the total change in net assets of $883 thousand. Key elements of the increase are as follows: • Sales taxes accounted for approximately $18.6 million in revenues in year 2005. The City received $9.5 million in property taxes. Other taxes received were real estate excise taxes ($2.5 million), motor vehicle fuel taxes ($1.8 million), and hotel/motel room taxes ($ 388 thousand). • This being the third year of incorporation the City aggressively monitored contract service costs and staffing levels. The net result was a third year unrestricted reserve of $22.4 million for governmental activities. Business-type activities of the City's stormwater utility increased the City of Spokane Valley's net assets by $7.7 thousand, accounting for.87% of the total growth in the government's net assets. Washington State Auditor's Office 12 Key element of this increase is as follows: • The Stormwater Management fund accounted for the entire increase of $7.7 thousand. The primary revenue source is a stormwater management fee imposed upon real property. FINANCIAL ANALYSIS OF THE CITY'S FUNDS As discussed earlier, the City of Spokane Valley uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds The purpose of the City's governmental funds is to report on near term revenues/financial resources and expenditures. This information helps determine the City's financial requirements in the near future. In particular, unreserved fund balance is a good indicator of the City's resources available for spending at the end of the year. At the end of the current year the City's combined ending governmental fund balance was $22.4 million. Of the total ending fund balance, $7.2 million is earmarked for capital construction projects, $8.2 million resides with special revenue funds, and the General fund has an unreserved fund balance of$7.0 million. Major governmental funds The general fund is the primary operating fund of the City through which all receipts and payments of ordinary City operations are processed, unless they are required to be accounted for in another fund. Taxes are the major revenue source however the city did not receive property tax in its first year of incorporation. At the end of 2005 the fund balance of the general fund was $7.0 million. The general fund increased fund balance by $2.3 million for the year ended December 31, 2005. Revenues exceeded projections by $3.8 million primarily from increased sales tax revenues. Expenditures were $3.4 million less than budget primarily in the area of general government functions. The street fund has a fund balance of $3.9 million, an increase of $600 thousand for the year. The primary source of revenue for the street fund is motor fuel tax. Road maintenance costs were $2.1 million under the original budget projection. The Street Capital Projects fund has an ending fund balance of $5 thousand. Construction costs were approximately $998 thousand for the year. These projects were mostly funded with grant funds and transfers from other City Funds. Proprietary funds The City of Spokane Valley's proprietary fund statements provide the same type of information found in the government-wide financial statements, but in more detail. Factors concerning the finances of the City's proprietary funds have been already been addressed in the discussion of the City's business-type activities. GENERAL FUND BUDGETARY HIGHLIGHTS The City Council amended the revenue and expenditure budgets during 2005. The amendments recognized additional unrestricted fund balance carried over from 2004, service fees from building permits/planning fees, grant proceeds and additional sales tax receipts. Expenditure appropriations increased for street projects, CenterPlace construction and for the creation of reserves for CenterPlace operations, parks capital improvements, civic facilities, extraordinary winter weather operations and a service level stabilization fund. Actual revenues were $3.8 million higher than the final 2005 revenue budget. The largest portion of this positive variance was taxes of$2.5 million more than the final budget. Actual expenditures were $3.4 million less than the final 2005 expenditure budget. General government expenditures of $3.1 million less than the budgeted amount account for the largest portion of this positive variance. Actual other financing uses were $1.1 million more than the final 2005 budget. This negative variance was due to transfers out being $1.1 million more than budgeted. Overall, there was a positive variance of$6.0 million over the final 2005 budget. Washington State Auditor's Office 13 During 2003 and 2004 revenues were conservatively projected and expenditures were estimated on the high side as city staff settled into new positions with the new city. This conservative approach and a booming economy (building permits, sales tax) resulted in significant increases in fund balance during 2004 and 2005. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets The City of Spokane Valley's investment in capital assets, including construction in progress, for its governmental type activities as of December 31, 2005 amounts to $65.3 million, net of accumulated depreciation. This investment in capital assets includes land, buildings, improvements, machinery and equipment, construction in progress, and infrastructure. The year-end balance represents a net decrease (additions less retirements and depreciation) of$6.1 million from the end of last year. Additional information can be found in Note 5 of this report. Major additions to capital assets during the fiscal year included the following: • Spokane County donated $310 thousand dollars in street improvements related to the valley road and valley sewering projects. An additional $2.4 million of city funds were expended for street improvements in 2005. • Additional equipment purchases related to the start-up of new city totaled $316 thousand. The equipment included vehicles, computers, telephone system and leasehold improvements for city hall. • Construction in progress for the CenterPlace Regional Recreation Center totaled $3.4 million dollars. The CenterPlace facility was completed in 2005 at a total cost of$9.6 million. Bond sale proceeds were used early in the project, but, $452,000 in donations remained unspent at year end. The following table provides a listing of the capital assets (net of accumulated depreciation) at December 31, 2005. Governmental Activities Land $ 1,597,585 Buildings 9,797,701 Other improvements 814,569 Infrastructure 45,292,497 Machinery and equipment 644,467 Construction in progress 7,179,352 Total $ 65,326,171 Long-Term Debt At the end of the current fiscal year, the City of Spokane Valley has total bonded debt outstanding of $9,120,000. This amount is backed by the full faith and credit of the City (general obligation bonds) with debt service fully funded by general government revenues. Under State of Washington statutes general obligation indebtedness for general purposes pursuant to a vote of the electorate is limited to 2'h% of actual value of taxable property located within the City. Non-voted general purpose indebtedness is limited to 1.5% of assessed valuation and the combination of voted and non-voted general purpose indebtedness cannot exceed 2.5% of assessed valuation. The assessed valuation of the City for the year 2005 for purposes of determining the legal debt margin is $5,056,951,058. Remaining debt capacities for the City for general voted and non-voted purposes (2 '%%) is limited to $117,180,600. The City of Spokane Valley maintains an A3 rating from Moody's for its non-voted general obligation debt. Additional information regarding the debt limitations and capacities can be found in Note 11 and in the Statistical Section of this report. Washington State Auditor's Office 14 ECONOMIC FACTORS AND NEXT YEARS' BUDGETS AND RATES Several factors that affect the economic climate in the City of Spokane Valley were considered when preparing the City's 2006 budget. The outlook for the regional economy was weighed in relation to its expected impact on the City of Spokane Valley. The character of the City, including its current and future business activity and its attraction as a place to live, was evaluated. Based on the budget analysis, the City's future is promising. Healthy economic numbers emerged in 2005 including 5,700 new jobs in Spokane County, with the unemployment rate dropping to 5.9%. Single family dwelling permits in the Spokane area surged to 2,517 while the number of single family dwelling sales topped 8,300. Both numbers reflect the highest tally in the last ten years. The City of Spokane Valley's assessed value climbed 11% to $5.05 billion in 2005. An increase of another 10% is expected during 2006. The City of Spokane Valley's 2006 property tax rate is expected to remain very close to the 2005 level of$1.60/thousand dollars of assessed value. A county wide real estate excise tax generated $2.5 million in receipts for city capital projects during 2005. Sales tax receipts are expected to grow at a 5% rate in 2006. The City received $16.8 million in sales tax in 2005. The City contracts with Spokane County for a majority of city services including public safety and street maintenance. Parks maintenance is provided by a private landscape maintenance firm. This has allowed the City with a population of 85,010, to hold the number of full-time employees near 60. A moderate cost increase is expected in service contracts in 2006. These factors were considered when the City adopted the 2006 budget. No general fund tax increases were made in 2005, nor were any anticipated in the 2006 budget. Expenditures were budgeted at levels to maintain services at the 2005 level. REQUESTS FOR FINANCIAL INFORMATION This financial report is designed to provide a general overview of the City of Spokane Valley's finances and to demonstrate the City's accountability. If you have questions about this report or need would like to request additional information, contact the City's Finance Department, 11707 E. Sprague Ave, Suite 106, Spokane Valley, Washington 99206. Washington State Auditor's Office 15 Statement of Net Assets December 31, 2005 Primary Government Governmental Business Type Activities Activities Total Assets: Current assets: Cash, cash equivalents and pooled investments $ 22,657,004 $ 1,212,287 $ 23,869,291 Receivables (net): Taxes 4,325,621 70,480 4,396,101 Accounts 1,298,731 - 1,298,731 Internal balances (113,816) 113,816 - Total current assets 28,167,540 1,396,583 29,564,123 Capital assets (net of accumulated depreciation): Land 1,597,585 - 1,597,585 Building and system 9,797,700 - 9,797,700 Improvements other than buildings 814,569 - 814,569 Machinery & equipment 644,467 - 644,467 Infrastructure 45,292,497 - 45,292,497 Construction in progress 7,179,352 - 7,179,352 Total capital assets 65,326,170 - 65,326,170 Total assets 93,493,710 1,396,583 94,890,293 Liabilities: Current liabilities: Accounts payable 516,216 15,667 531,883 Taxes payable 26,071 - 26,071 Accrued liabilities 217,298 - 217,298 Bonds & deposits payable 93,524 103,520 197,044 Other current liabilities 1,354,083 - 1,354,083 Total current liabilities 2,207,192 119,187 2,326,379 Noncurrent liabilities: Due within one year 175,000 - 175,000 Due in more than one year 9,122,808 - 9,122,808 Total noncurrent liabilities 9,297,808 - 9,297,808 Total liabilities 11,505,000 119,187 11,624,187 Net assets: Invested in capital assets net of related debt 56,028,362 - 56,028,362 Restricted for: Capital Projects 7,248,194 - 7,248,194 Unrestricted 18,712,154 1,277,396 19,989,550 Total net assets $ 81,988,710 $ 1,277,396 $ 83,266,106 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 16 Cr—) Cr—) O Cr—) O V ('') O ('') ('') ('') O L() CO N m O) O) N- CO CO LO 0) O CO N- CO CO (') .— N LO LO N 0) V V N O 0) O to N— V O V — — OO) CO CO CO COLOO) — N ' V O) N- CU Na:O V CD Na:N- O) Na: O) O) N Na: O) N- O CO C'T N 0) 0 C'T N CO 4 OI L() CO LO CO V V - N N N LO V V LC) CO 0) O CO cO CO CO V CO In CO V CO( N N In CD In In O CO CO N (o V• (') .- (v) L() L() O) CO-L() CO N (0 N ~ '- c) c) ,_ co co co z C Co ER Ea CD a) CD CEa) (a Cl) Q- — v— CO O) O O CO O) U L> + y 1 ' ' ' ' ' ' ' ' CO CO CO ' ' ' ' ' LO CO N— 1"-- CO CO Cl)C y r N N N CO LO N CO (a O O > N N N N N N N N i 7 Q N al m ER ER N d In In O In O) .,--j ('') O ('� (.,----3- N L() CO N— N O) N L() N CO O +, CO LO 0) O CO N- CO CO CO CO LO LO N 0) V LO 0) CO O O v— y N— V O V '— v— 0 0) ' ' N— '— CO LO 0) v- CO CO LO V 0 Cl)CD Cl) .- V O V N V N-O) Ni= V O) N- O c, N N N- O) L() (') cp Q- E ±+ N— LO CO N— CO V V V LO LO V V V CO CO CO LO N N� CO WC > V N� CO LO CO t CO CO In Cp In In N N CO 0) L ++ (v) -• CO '— CO L() L() O) CO LO ' CO oo co co Z >O Q 0 Ea Ea c 0 0 1 1 1 W 1 I co C a3 al 7 O) CO N N O Q _a (0 N ('') ('') Cl al C 'L N- O co 0 Ea Ea a) u) N = u) V V V + N O> 0 C 1 1 1 co 1 1 IN , , co 14 CI O .a N Q 0 (n as+ a) rn 0 L C a) d) N a 0 (fl (fl co W .2 L L CO '1- O N— 0) CO CO In (C (C O N c0 In O O c0 Q c c% C +' N 11■ 0 ' O (') ' CO ' N ' V O O V (6 O a) N U) u) U O CO N V c N N L() o (/) (n >' E a) '> co O O '— O L() L() L() D N 0 a) L .— .— .— V CO N N O X O (6 +�+ co N r ('') V r r CO (6 (A a) (n O) a) O 0 (n a) p co a) c (n 0 in X 7 (n Q i CD c 0 7 (6 -p X N CO (6 (a C O) ,� LO CO - CO LO V O O 0) CO CO N C > (C6 6 •<ci D a) .O C 0 CO N— — 0) 0) N— N� CO CO 0) 0) CO a) N r •V V In 0) r 0) 0) r r 0) > a) w a) O a) (p CD 0)(6 (6 (a u) V CO c, O) V V O) V N N CO 2 a) .0 S U E w w N- (') a0 V V a0 V (') N N In (6 X N N V O O• O O V (O O O (D N 0 N1cnWOJ a�i o 0 (n co (6 LD - N co .— .— N > (6 (n (n a) c co co W E a) a) a) Ea (s3 CD Z Z C (a a) (a co co u) a) a) c >_ > a) .0 E a�i °) (a a) .-i.7) °) c _c CO _ E c is To c c E O E iri a) Q � a� a�i E c •o a) a) aa) c •ca rn +; C O w i E > c u) •U > C C T O 03 E a) a) o > _c a) C E O a) > (a O Po > T'> ,o C Q O a) (6 C O C L > 0 L C O) (6 N -t .UC (C6 (6 O O) Q (6 C } 2 C d O E N .O .0 �' O (6 2 N 6 to (6 • p O > C.DN1NIHW � U c � U7 (o a� 9 co O D 0 CC c E CD m I— CD LL• O (- Washington State Auditor's Office 17 Balance Sheet Governmental Funds December 31, 2005 Street Other Total General Street Capital Governmental Governmental Fund Fund Projects Funds Funds Assets: Cash, cash equivalents and pooled investments $ 5,939,973 $ 3,863,896 $ 1,315 $ 12,100,086 $ 21,905,270 Receivables (net) Taxes 2,054,663 115,501 - 185,471 2,355,635 Accounts 18,887 161,661 149,411 805,128 1,135,087 Interfund loan receivable - 397,432 - - 397,432 Due from other funds 861,500 2,879 740,459 544,970 2,149,808 Due from other governments 159,508 - - - 159,508 Total assets $ 9,034,531 $ 4,541,369 $ 891,185 $ 13,635,655 $ 28,102,740 Liabilities and fund balances: Liabilities: Accounts payable 9,114 461,698 - 40,112 510,924 Taxes payable 25,160 911 - - 26,071 Interfund loan payable - - - 397,432 397,432 Due to other funds 67,869 48,803 540,741 1,674,081 2,331,494 Due to other governments 1,354,083 - - - 1,354,083 Bonds&deposits payable 93,524 - - - 93,524 Other accrued liabilities 177,443 6,454 13,564 - 197,461 Deferred revenues 259,838 115,501 331,867 5,125 712,331 Total Liabilities 1,987,031 633,367 886,172 2,116,750 5,623,320 Fund Balances: Reserved for: CenterPlace Operating - - - - - Unreserved, reported in: General Fund 7,047,500 - - - 7,047,500 Special Revenue - 3,908,002 - 4,275,724 8,183,726 Capital Projects - - 5,013 7,243,181 7,248,194 Total fund balances 7,047,500 3,908,002 5,013 11,518,905 22,479,420 Total liabilities&fund balances $ 9,034,531 $ 4,541,369 $ 891,185 $ 13,635,655 $ 28,102,740 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 18 Reconciliation of Total Governmental Fund Balances to Net Assets of Governmental Activities For the Year Ended December 31, 2005 Total government fund balances $ 22,479,420 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds. 64,981,928 These assets consist of: Land 1,597,585 Construction in progress 7,179,352 Buildings 10,580,288 Improvements other than buildings 2,123,571 Machinery and equipment-General Government 403,057 Infrastructure 204,266,709 Less: Accumulated Depreciation (161,168,634) Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of timing of related 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 the eligibility requirements imposed by the provider have been met. These revenues are therefore not reported in the funds. 1,974,122 These revenues consist of: Sales and use tax 1,778,805 Excise tax 11,000 Other taxes 180,181 Investment earnings 4,136 Long-term liabilities, including bonds payable are not due and payable in the current period and therefore are not reported in the funds. (8,108,375) These long-term liabilities consist of: Bonds payable (9,174,632) Accrued interest (19,837) Compensated absences (123,176) Deferred revenue 1,209,270 Internal service funds are used by management to charge the costs of certain activities, such as equipment rental, self-insurance, information technology and facility services to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net assets. 661,615 Net assets of governmental activities $ 81,988,710 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 19 Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the Year Ended December 31, 2005 Street Other Total General Street Capital Governmental Governmental Fund Fund Projects Funds Funds Revenues: Taxes $ 27,377,073 $ - $ - $ 2,885,613 $ 30,262,686 Licenses and permits 2,406,520 - - - 2,406,520 Intergovernmental revenues 1,309,330 1,528,434 147,028 1,623,055 4,607,847 Charges for services 895,974 - - - 895,974 Fines and forfeitures 1,180,016 - - - 1,180,016 Miscellaneous 448,841 104,052 5,013 405,870 963,776 Total revenues 33,617,754 1,632,486 152,041 4,914,538 40,316,819 Expenditures: Current: General government 2,712,687 - - - 2,712,687 Public safety 15,926,633 - - - 15,926,633 Physical environment 953,622 - - - 953,622 Transportation 34,300 2,891,865 - - 2,926,165 Economic environment 1,787,569 - - 250,014 2,037,583 Mental and physical health 44,174 - - - 44,174 Culture and recreation 3,642,988 - - - 3,642,988 Debt Service: Principal - - - 165,000 165,000 Interest - - - 430,143 430,143 Capital Outlay 191,145 - 997,977 4,903,027 6,092,149 Total expenditures 25,293,118 2,891,865 997,977 5,748,184 34,931,144 Excess(deficiency)of revenue over(under)expenditures 8,324,636 (1,259,379) (845,936) (833,646) 5,385,675 Other financing sources(uses): Contributions - - 23,680 - 23,680 Transfers in 187,100 2,000,000 825,448 5,073,264 8,085,812 Transfers out (6,257,696) (140,516) - (1,555,807) (7,954,019) Total other financing sources(uses) (6,070,596) 1,859,484 849,128 3,517,457 155,473 Net change in fund balance 2,254,040 600,105 3,192 2,683,811 5,541,148 Fund balance- beginning 4,793,460 3,307,897 1,821 8,835,094 16,938,272 Fund balance-ending $ 7,047,500 $ 3,908,002 $ 5,013 $ 11,518,905 $ 22,479,420 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 20 Reconciliation of the Statement of Revenues, Expenditures,and Changes in Fund Balances Governmental Funds to the Statement of Activities For the Year Ended December 31,2005 Net change in fund blances-total governmental funds $ 5,541,148 Amounts reported for governmental activities in the statement of activites are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of these assets is allocated over their useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. (6,937,697) This is comprised of: Capital outlays 5,634,320 Current year depreciation (12,572,017) The net effect of certain differences between fund financial statements and the Statement of Activities. Governmental funds use the current financial resources measurement focus and the modified accrual basis of accounting. Whereas,the Statement of Activities uses the economic resources measurement focus and the accrual basis of accounting. (291,391) Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 2,686,453 This is comprised of: Deferred taxes 712,331 Sales and use tax 1,778,805 Excise tax 11,000 Other taxes 180,181 Investment earnings 4,136 Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net assets. Repayment of long-term debt is an expenditure in the governmental funds, yet, the repayment reduces long-term liabilities in the statement of net assets. This is the amount by which repayments exceeded proceeds. 169,845 This is comprised of: Repayment of long-term debt. 169,845 Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in the governmental funds. (143,013) This is comprised of: Accrued interest expense (19,837) Accrued compensating absence expense (123,176) Internal service funds are used by management to charge the cost of certain activities,such as equipment rental,self-insurance, information technology and facility services to the individual funds. The net revenue(expense)of these internal service funds is reported with governmental activities. (149,943) Change in net assets of governmental activities $ 875,402 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 21 General Fund Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual For the Year Ended December 31,2005 Variance with Final Budget Budgeted Amounts Actual Amounts Positive Original Final Budgetary Basis (Negative) Revenues: Taxes $ 23,860,316 $ 24,858,316 $ 27,377,073 $ 2,518,757 Licenses and permits 1,415,491 2,015,491 2,406,520 391,029 Intergovernmental revenues 1,256,709 1,256,709 1,309,330 52,621 Charges for services 514,057 528,801 895,974 367,173 Fines and forfeitures 1,137,052 1,137,052 1,180,016 42,964 Miscellaneous 37,400 37,400 448,841 411,441 Total revenues 28,221,025 29,833,769 33,617,754 3,783,985 Expenditures: Current: General government 4,643,232 5,843,977 2,712,687 3,131,290 Public safety 15,711,424 15,711,424 15,926,633 (215,209) Physical environment 842,908 914,408 953,622 (39,214) Transportation 36,000 36,000 34,300 1,700 Economic environment 1,634,116 1,710,866 1,787,569 (76,703) Mental and physical health 44,000 44,000 44,174 (174) Culture and recreation 4,183,635 4,223,635 3,642,988 580,647 Debt service: Principal 1,259,105 - - - Interest 75,000 - - - Capital outlay 78,745 250,000 191,145 58,855 Total expenditures 28,508,165 28,734,310 25,293,118 3,441,192 Excess (deficiency)of revenue over(under)expenditures (287,140) 1,099,459 8,324,636 7,225,177 Other financing sources (uses): Transfers in 287,140 272,396 187,100 (85,296) Transfers out - (5,156,105) (6,257,696) (1,101,591) Total other financing sources(uses) 287,140 (4,883,709) (6,070,596) (1,186,887) Net change in fund balance - (3,784,250) 2,254,040 6,038,290 Fund balance-beginning - 3,784,250 4,793,460 1,009,210 Fund balance-ending $ - $ - $ 7,047,500 $ 7,047,500 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 22 Street Fund Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual For the Year Ended December 31, 2005 Variance with Final Budget Budgeted Amounts Actual Amounts Positive Original Final Budgetary Basis (Negative) Revenues: Taxes $ - $ - $ - $ - Intergovernmental revenues 1,203,004 2,444,053 1,528,434 (915,619) Miscellaneous 75,000 75,000 104,052 29,052 Total revenues 1,278,004 2,519,053 1,632,486 (886,567) Expenditures: Current: Transportation 3,150,926 5,636,018 2,891,865 2,744,153 Total expenditures 3,150,926 5,636,018 2,891,865 2,744,153 Excess (deficiency)of revenue over(under)expenditures (1,872,922) (3,116,965) (1,259,379) 1,857,586 Other financing sources (uses): Transfers in 1,284,105 3,284,105 2,000,000 (1,284,105) Transfers out (167,140) (167,140) (140,516) 26,624 Total other financing sources (uses) 1,116,965 3,116,965 1,859,484 (1,257,481) Net change in fund balance (755,957) - 600,105 600,105 Fund balance- beginning - - 3,307,897 - Fund balance- ending $ (755,957) $ - $ 3,908,002 $ 600,105 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 23 Street Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual For the Year Ended December 31, 2005 Variance with Final Budget Budgeted Amounts Actual Amounts Positive Original Final Budgetary Basis (Negative) Revenues: Intergovernmental $ - $ - $ 147,028 $ 147,028 Miscellaneous - - 5,013 5,013 Total revenues - - 152,041 152,041 Expenditures: Capital outlay 933,000 4,262,330 997,977 3,264,353 Total expenditures 933,000 4,262,330 997,977 3,264,353 Excess (deficiency) of revenue over(under) expenditures (933,000) (4,262,330) (845,936) 3,416,394 Other financing sources (uses): Contributions - 2,987,030 23,680 (2,963,350) Transfers in 993,000 1,275,300 825,448 (449,852) Total other financing sources (uses) 993,000 4,262,330 849,128 (3,413,202) Net change in fund balance - - 3,192 3,192 Fund balance - beginning - - 1,821 - Fund balance - ending $ - $ - $ 5,013 $ 3,192 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 24 Statement of Net Assets Proprietary Funds December 31, 2005 Business-type Activities -Enterprise Funds Non Major Fund Governmental Activities - Stormwater Internal Service Management Funds Assets: Current assets Cash, cash equivalents and pooled investments $ 1,212,287 $ 751,734 Assessments receivables (net) 70,480 - Due from other funds 113,816 67,869 Total current assets 1,396,583 819,603 Noncurrent assets: Capital assets: Machinery & Equipment - 698,300 Less accumulated depreciation - (354,057) Total capital assets (net of accumulated depreciation) - 344,243 Total noncurrent assets - 344,243 Total assets 1,396,583 1,163,846 Liabilities: Current Liabilities: Accounts payable 15,667 5,292 Deposits and other payables 103,520 - Deferred revenue - 496,939 Total liabilities 119,187 502,231 Net Assets: Invested in capital assets - 344,243 Unrestricted 1,277,396 317,372 Total net assets $ 1,277,396 $ 661,615 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 25 Statement of Revenues, Expenses, and Changes in Fund Net Assets Proprietary Funds For the Year Ended December 31, 2005 Business-type Activities -Enterprise Funds Non Major Governmental Fund Activities - Stormwater Internal Service Management Funds Operating Revenues: Charges for services $ 1,252,006 $ 211,270 Total operating revenues 1,252,006 211,270 Operating Expenses: Operations 1,022,193 110,314 Depreciation - 195,813 Total Operating expenses 1,022,193 306,127 Operating income 229,813 (94,857) Nonoperating revenues (expenses): Interest income 35,586 7,056 Loss on disposal of assets - (62,142) Total nonoperating revenues(expenses) 35,586 (55,086) Income before contributions and transfers 265,399 (149,943) Contributions and transfers: Transfers in - - Transfers out (257,692) - Capital Contributions - 125,899 Change in net assets 7,707 (24,044) Net assets beginning of the year 1,269,689 685,659 Net assets end of year $ 1,277,396 $ 661,615 The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 26 Statement of Cash Flows Proprietary Funds For the Year Ended December 31, 2005 Non Major Fund Governmental Activities- Stormwater Internal Service Management Funds Cash flows from operating activities: Cash received from customers and users $ 1,255,132 $ 708,209 Receipts from interfund services provided - - Payments to suppliers and for services (1,046,484) (119,685) Net cash provided(used)by operating activities 208,648 588,524 Cash flows from noncapital financing activities: Transfers in(out) (233,384) - Net cash provided(used)by noncapital and related financing activities (233,384) - Cash flows from capital and related financing activities: Acquisition of capital assets (24,308) - Net cash provided(used)by capital and related financing activities (24,308) - Cash flows from investing activities: Interest received 35,586 7,056 Net cash provided(used)by investing activities 35,586 7,056 Net increase in cash&cash equivalents (13,458) 595,580 Cash&cash equivalents,January 1,2005 1,225,745 156,154 Cash&cash equivalents, December 31,2005 $ 1,212,287 $ 751,734 Reconciliation of operating income to net cash provided (used)by operating activities: Operating income(loss) $ 229,813 $ (94,857) Adjustments to reconcile operating income to net cash provided(used)by operating activities: Depreciation - 195,813 Changes in assets and liabilities: (Increase)decrease in assessments receivable (5,762) - (Increase)decrease in due from other funds (59,811) (12,663) Increase(decrease)in accounts payable (27,012) (2,000) Increase(decrease)in deposits/other payables 71,420 - Increase(decrease)in due to other government 5,292 Increase(decrease)in deferred revenue - 496,939 Total adjustments (21,165) 683,381 Net cash provided(used)by operating activities $ 208,648 $ 588,524 Noncash investing,capital,and financing activities: Contributions of capital assets from other funds - 125,899 Transfer of capital assets to other funds 24,308 - The notes to the financial statements are an integral part of this statement. Washington State Auditor's Office 27 NOTES TO THE FINANCIAL STATEMENTS December 31, 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES The City of Spokane Valley was incorporated on March 31, 2003. The City operates under a Council— Manager form of government. The City's major operations, as authorized under the laws of the State of Washington applicable to a non-charter code city, include planning & zoning, public safety, public works, and recreation & culture. On May 10, 2005 an election was held that annexed library services to the Spokane County Library District. The district will assume responsibility for all city library services on January 1, 2006. The accounting and reporting policies of the City relate to the funds included in the accompanying financial statements which conform to generally accepted accounting principles (GAAP) applicable to state and local governments. GAAP for local governments include those principles prescribed by the Governmental Accounting Standards Board (GASB), the Financial Accounting Standards Board (FASB), when applicable, and the American Institute of Certified Public Accountants (AICPA) pronouncements that have been made applicable by GASB Statements or Interpretation. A. Reporting Entity As required by GAAP the City's financial statements present the City of Spokane Valley — the primary government. There are no component units (either blended or discretely presented) included in these statements. B. Government-Wide and Fund Financial Statements The City's basic financial statements include both government-wide (reporting the City as a whole) and fund financial statements (reporting the City's major funds). Both the government-wide and fund financial statements categorize primary activities as either government or business-type. The government-wide financial statements (i.e., the statement of net assets and the statement of changes in net assets) report information on all of the nonfiduciary activities of the primary government. 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. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. 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 as general revenues. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds. The city has no fiduciary funds. Major individual funds are reported as separate columns while the remaining funds are combined for presentation purposes in the governmental funds statements and the proprietary funds statements. C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are proprietary funds. Under this approach, revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related 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 the eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable Washington State Auditor's Office 28 and available. Revenues are considered to be available when they are collectable within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within 30 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments are recorded only when the payment is due. Property taxes, franchise taxes, licenses, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of special assessments receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the government. The city reports the following major governmental funds: The General Fund is the City's primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. The Street Fund is responsible for the maintenance of all city streets and bridges. Also, construction activities for city streets are coordinated through this fund. The Street Capital Projects Fund accounts for monies used to finance the six year transportation improvement plan. Revenues are transfers from the Arterial Street Fund, Capital Projects Fund, Special Capital Projects Fund and Street Bond Fund. The city reports the following non major proprietary fund: The Stormwater Management Fund accounts for the receipt and expenditure of the stormwater management fee. The expenditures are used for stormwater control construction and management. Additionally, the government reports the following fund types: Special revenue funds account for arterial street construction and maintenance, hotel/motel tax revenues and expenditures, CenterPlace operating reserve, Service level stabilization reserve, winter weather reserve and revenues &expenditures for paths and trails maintenance. Debt service funds account for the resources accumulated and payments made for principal and interest on general government debt except those to be accounted for in another fund. Capital project funds account for the acquisition or development of capital facilities for governmental activities. Their major sources of revenues are from proceeds of general obligation bonds, grants from other agencies and contributions from other funds. Internal service funds account for data processing, equipment/vehicle replacement and risk management services provided to other departments on a cost reimbursement basis. Private-standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. As a general rule interfund activity has been eliminated from the government-wide financial statements. Exceptions are payments in lieu of taxes, external type transactions within internal service funds (revenues and expenses for interest or services to other governmental organizations) and other charges for wastewater or stormwater services. Elimination of these charges would distort the direct cost and program revenues reported for these functions. Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions, including Washington State Auditor's Office 29 special assessments. Internally dedicated resources are reported as general revenues rather than program revenues. Likewise, general revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principle operating revenues of the stormwater enterprise fund is a stormwater assessment fee. Operating expenses of enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, and then unrestricted resources as they are needed. D. Assets, Liabilities, & Fund Equity 1. Cash and Cash Equivalents The City considers all highly liquid assets including demand deposits, money market accounts, CD's, investment in the State Treasurer's Investment Pool, and short-term investments with a maturity of three months or less from the date of acquisition as cash and cash equivalents. These amounts are classified on the balance sheet or in the statement of net assets within cash and cash equivalents in the various funds. The interest on these investments is prorated to the applicable funds. 2. Investments— (Refer to Note 3). 3. Receivables and Payables Taxes receivable consists of property taxes and related interest and penalties. Accrued interest receivable consists of amounts earned on investments, notes, and contracts. Accrued interest payable consists of amounts owed on notes, loans, and contracts. Customer accounts receivable/payable consist of amounts owed from/to private individuals or organizations for goods and services including amounts owed. If the transactions are with another governmental unit, it is accounted for within "due from/to other governments". Receivables have been reported net of estimated uncollectible accounts. Because property taxes and special assessments are considered liens on property, no estimated uncollectible amounts are established. Activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to either "due to/from other funds" (i.e., the current portion of interfund loans) or "interfund loans receivable/payable" (i.e., the non-current portion of interfund loans). All other outstanding balances between the governmental activities and business-type activities are reported in the government-wide financial statements as "internal balances". (Refer to Note 8.) Advances, between funds, as reported in the fund financial statements, are offset by a fund balance reserve account in applicable governmental funds to indicate that they are not available for appropriation and are not expendable available financial resources. In the government-wide financial statements, and proprietary fund types in the fund financial statements, long- term liabilities are reported in applicable governmental activities, business-type activities, or proprietary fund type statement of net assets. 4. Inventories and prepaid items Reported inventories in governmental funds consist of expendable supplies held for consumption. The cost thereof has been recorded as an expenditure at the time individual inventory items were purchased (purchase method). Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both the government-wide and fund statements. Washington State Auditor's Office 30 5. Capital Assets and Deprecation (Refer to Note 5). 6. Long-term Debt Liabilities for long-term debt are recorded in the government-wide statement of net assets and in the proprietary funds balance sheet. The liabilities include bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds. Bonds payable are reported net of the applicable bond premium or discount. Issuance costs are reported as deferred charges. Long-term debt outstanding at year end is outlined in Note 10. For governmental funds financial statements, bond issuance costs are expended at the time of issuance. Bond premiums and discounts are deferred and amortized over the life of the bonds. Bond proceeds are reported as an other financing source net of the applicable premium or discount. Issuance costs, even if withheld from the actual net proceeds received, are reported as debt service expenditures. The nature of debt in the governmental activity is specific to a program and, therefore; debt service costs are not an allocated expense. 7. Deferred Revenues The deferred revenues account is used to offset receivables established in the governmental fund financial statements for certain revenues that are measurable but not considered available to finance payment of current obligations, and, therefore, not susceptible to accrual on the modified accrual basis. When the receivable amounts are collected in future periods, this liability account is reduced and corresponding revenue is recorded. Deferred revenues represented in this manner on the accompanying financial statements are uncollected property taxes levied and uncollected road taxes levied. 8. Compensated Absences Compensated absences are absences for which employees will be paid, such as vacation and sick leave. Vacation pay, which may be accumulated up to 360 hours, is payable upon resignation, retirement, or death. All vacation pay is accrued when incurred in the government-wide, proprietary and fund financial statements. An additional amount has been accrued for the city's share of deferred compensation and Medicare taxes related to the vacation accrual. A liability for these amounts is reported in the government fund statements only if they have matured, for example, as a result of employee resignations and retirements. 9. Fund Balance Designations and Reservations In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. E. Revenues, Expenditures, and Expenses 1. Program Revenues Program revenues include charges for services to customers for goods or services provided, operating grants and contributions, and nonoperating grants and contributions within the Government-wide Statement of Activities. Charges for services include business licenses, construction permits, and recreation program fees. 2. General Revenues Property taxes, retail taxes, business taxes, excise taxes, and associated penalties & interest, and interest & investment earnings are classified as general revenues within the Government-wide Statement of Activities. 3. Interfund Transfers Permanent reallocations of resources between funds of the reporting entity are classified as interfund transfers. For the purposes of the Government-wide Statement of Activities, all interfund transfers between individual governmental funds have been eliminated. Washington State Auditor's Office 31 4. Expenses/Expenditures Expenses in the Government-wide Statement of Activities are reported by function as a governmental activity (general government, security of persons & property, physical environment, transportation, economic environment, culture & recreation, or interest on long-term debt) or business-type activity (wastewater, or stormwater). Certain indirect costs are included in program expenses by function. In the fund financial statements, expenditures of governmental funds are classified current by function, debt service principle and interest payments, or purchases of capital items. Proprietary expenditures are classified as operating or non- operating. 5. Operating and Nonoperating Revenues and Expenses Operating revenues and expenses for proprietary funds are those that result from providing services and producing and delivering goods and/or services in connection to the proprietary fund's principal ongoing operations. It also includes all revenues and expenses not related to capital and related financing, non-capital financing, or investing activities. All revenue and expenses not meeting this definition are nonoperating revenues and expenses. NOTE 2 - STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Scope of Budget Annual appropriated budgets are adopted for all funds on a basis consistent with generally accepted accounting principals. Legal budgetary control is established at the fund level. Subsidiary revenue and expenditure ledgers are used to compare the budgeted amounts with actual revenues and expenditures. As a management control device, the subsidiary ledgers are used to monitor expenditures for individual functions and activities by object class. B. Procedures for Adopting the Original Budget The City's budget procedures are mandated by the Revised Code of Washington 35A.33. The following are key procedural steps in the City's budget development process. Note that the process and dates are for the 2007 budget process and may be changed for future processes: • In April, the official "budget call" required by State law is made to all department directors or fund managers. Budget development instructions and other materials are provided to the departments at this time. • In June departments submit revenue and expenditure estimates to the Finance department. The City Council and City management staff discuss City goals and priorities and reaffirm overall City priorities, vision, and mission at a mid-year retreat. Additional policy guidance is provided throughout the year. • In July the Finance department submits the preliminary budget to the City Manager. • In August the City Manager submits estimates on 2006 revenues and preliminary 2007 revenues and expenditures to Council. • During September, preliminary budget documents were prepared, printed and filed with City Clerk. This proposed budget is presented to the City Clerk and copies are made available to the public. The Council set the dates of the preliminary and final budget hearings. • Before December 31st the City Council, by a majority vote, will adopt the budget by ordinance, establishing the budget appropriation for the year. • The approved budget is published and distributed during the first quarter of the following year. Copies are made available to the public. • Quarterly budget monitoring reports are published by the Finance Department to report on actual performance compared to budget estimates and to identify any remedial actions that may be needed. Washington State Auditor's Office 32 C. Amending the Budget The budget, as adopted, constitutes the legal authority for expenditures. The City's budget is adopted at the fund level, so that expenditures may not legally exceed appropriations at that level of detail. The City Manager is authorized to transfer budgeted amounts within a fund; however, any revisions that alter the total expenditures of a fund, or that effect the number of authorized employee positions, salary ranges, or other conditions of employment must be approved by the City Council. When the City Council determines that it is in the best interest of the City to increase or decrease the appropriation for a particular fund, it may do so by ordinance approved by one more than the majority after holding a public hearing. The City's budget was amended two times during the fiscal year. The financial statements contain the original and final budget information. The original budget is the first complete appropriated budget. The final budget is the original budget adjusted by all reserves, transfers, allocations, supplemental appropriations, and other legally authorized changes. All appropriations lapse at year end. Unexpended resources must be reappropriated in the subsequent period. D. Compliance There have been no material violations of finance-related legal or contractual provisions, and there have been no expenditures exceeding legal appropriations in any of the funds of the City. E. Deficit Fund Balances As of December 31, 2005 a deficit fund balance of$52 exists in the Barker Bridge Construction Fund. This fund accounts for the construction costs of the Barker Bridge reconstruction which is financed through a federal grant. The deficit will be eliminated when the grant funds are received. NOTE 3 - DEPOSITS AND INVESTMENTS A. Deposits The City's deposits and certificates of deposit are entirely covered by the federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). The PDPC is a statutory authority established under Chapter 39.58 of the Revised Code of Washington. B. Investments As required by state law, all investments of the City's funds are obligations of the U.S. Government, U.S. agency issues, obligations of the State of Washington, general obligation of Washington State municipalities (the State Treasurer's Local Government Investment Pool (LGIP), or certificate of deposit with Washington State banks and savings and loan institutions. The Washington Local Government Investment Pool operates in a manner consistent with the SEC's Rule 2a-7 of the Investment Company Act of 1940. The fair value of the portfolio is calculated by the master custodian or by an independent pricing service under contract with the State Treasurer's Office. The fair value of the City's position in the State of Washington Local Government Investment Pool is the same as the value of the pool shares Investments are shown on entity-wide Statement of Net Assets at fair market value or 2a7-like-pools at amortized cost. Investments are reported within Cash & Investments of Governmental Activities and within Cash &Cash Equivalents of Business-type Activities. The City's investments are categorized to give an indication of risk assumed at year-end. The following summary shows the City's investments at year-end categorized by risk. • Category 1 includes investments that are insured, registered or held by the City or its agent in the City's name. Washington State Auditor's Office 33 • Category 2 includes uninsured and unregistered investments, which are held by the counterparty's trust department or agent in the City's name. • Category 3 includes uninsured and unregistered investments for which the securities are held by the counterparty's trust department or agent, but not in the City's name. The City had no Category 1, 2, or 3 type investments in their investment portfolio as of December 31, 2005. C. Deposit and Investment Reconciliation Amounts reported in the fund statements are as follows: Fair Value Carrying Cash Amount Investments Equivalents Investments Not Subject to Credit Risk State Investment Pool $ 18,615,404 - $ 18,615,404 Money Market Account 4,492,121 - 4,492,121 Total Investments Not Subject to Credit Risk $ 23,107,525 - $ 23,107,525 NOTE 4 -PROPERTY TAXES The County Treasurer acts as an agent to collect property taxes levied in the county for all taxing authorities. The County Assessor is responsible for determining what the individual property taxes are, based upon the monies requested by the taxing districts and the assessed valuation within these districts. Taxes are levied annually on January 1 on property values listed as of the prior May 31. Assessed values are established by the County Assessor at 100 percent of fair market value. A revaluation of all property is required every four years. Taxes are due in two equal installments on April 30 and October 31. Tax liens are automatic at the point the taxes are levied. Property taxes levied for the current year are recorded as a receivable when levied, offset by deferred revenue. During the year, property tax revenues are recognized when cash is collected. At year-end, property tax revenues are recognized for collections to be distributed by the County Treasurer in January. No allowance for uncollectible taxes is established because delinquent taxes are considered fully collectible The tax rate for general City operations is limited by State law (RCW 84.52.043) to $3.60 per $1,000 of assessed valuation, deducting from there the levy of $1.50 by the Spokane County Fire Districts #1 and #8, which leaves the City with the authority to levy$2.10 for its own purposes. This amount may be reduced for any of the following reasons: (1) The Washington State Constitution limits the total regular property taxes to one percent of assessed valuation or$10 per$1,000 of value. If the taxes of all districts exceed this amount, each is proportionately reduced until the total is at or below the one-percent limit. (2) Initiative 747 passed by the voters in November of 2001 limits the amount by which a taxing jurisdiction can increase the amount of its regular property tax levy to the lesser of the Implicit Price Deflator (IPD) or one percent, plus adjustments for new construction and annexations. Tax increases higher than one percent must be approved by the voters at an election held according to RCW 84.55.050. A simple majority vote is required. (3) The City may voluntarily levy taxes below the legal limit. For 2005, the City levied $9,555,798 on an assessed valuation of$4,533,703,249. NOTE 5 -CAPITAL ASSETS AND DEPRECIATION Capital assets, which include property, plant, equipment, and infrastructure assets (e.g. roads, bridges, sidewalks, an similar items), are reported in the applicable governmental or business-type columns in the government-wide financial statements. The City defines capital assets as assets with an initial, individual cost of Washington State Auditor's Office 34 more than $5,000 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Other donated assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed. A summary of changes in governmental capital assets follows: Donated capital assets received from Spokane County at the time of incorporation were recorded at cost and the accumulated depreciation at the time of transfer. These assets are shown as capital contributions on the statement of activities. The following schedule details the assets transferred during the year ended December 31, 2003. Capital Assets Donated From Spokane County Historical Accumulated Depreciated Cost Depreciation Cost Infrastructure Roadways $ 187,732,531 $ 127,418,027 $60,314,504 Signs,signals, beacons 9,056,000 4,528,000 4,528,000 Crosswalks 130,084 13,008 117,076 Bridges 5,633,979 2,808,112 2,825,867 Total Infrastructure 202,552,594 134,767,147 67,785,447 Parks Land 1,548,655 - 1,548,655 Buildings 898,729 609,824 288,905 Improvements other buildings 2,123,571 1,059,298 1,064,273 Machinery and equipment 3,337 3,003 334 Total parks assets 4,574,292 1,672,125 2,902,167 Total County assets donated $207,126,886 $ 136,439272 $ 70,687,614 A summary of changes in governmental capital assets follows: Beginning Ending Balance Balance Governmental activities: 01/01/05 Increases Decreases 12/31/05 Capital assets, not being depreciated: Land $ 1,597,585 $ - $ - $ 1,597,585 Construction in progress 11,186,032 6,211,415 10,218,095 7,179,352 Total capital assets, not being depreciated 12,783,617 6,211,415 10,218,095 8,776,937 Capital assets, being depreciated: Buildings and leasehold improvements 944,297 9,635,991 - 10,580,288 Improvements other buildings 2,123,571 - - 2,123,571 Infrastructure 203,684,605 582,104 - 204,266,709 Machinery and equipment 904,722 315,903 119,269 1,101,356 Total capital assets, being depreciated 207,657,195 10,533,998 119,269 218,071,924 Less accumulated depreciation for: Buildings and leasehold improvements 622,841 159,746 - 782,587 Improvements other buildings 1,156,427 152,575 - 1,309,002 Infrastructure 146,959,405 12,014,807 - 158,974,212 Machinery and equipment 269,127 244,889 57,127 456,889 Total accumulated depreciation 149,007,800 12,572,017 57,127 161,522,690 Total assets being depreciated, net 58,649,395 10,533,998 12,634,159 56,549,234 Governmental activities capital assets, net $ 71,433,012 $16,745,413 $22,852,254 $65,326,171 Washington State Auditor's Office 35 Business-type activities: The city has no business-type capital assets. Depreciation Property, plant, and equipment of the primary government is depreciated using the straight line method over the estimated service life as follows: Buildings and improvements 10-60 years Infrastructure 40 years Light/Heavy Transportation Equipment 5-10 years Other Equipment 2-20 years Office Equipment 3-5 years Computer Equipment 3-5 years Depreciation expense was charged to functions/programs of the primary government as follows: Governmental Activities General government services $ 363,344 Public safety 10,023 Physical environment 14,105 Transportation 12,014,808 Economic environment 16,292 Culture and recreation 153,445 Total depreciation —governmental activities $ 12,572,017 Construction commitments The City of Spokane Valley has active construction projects as of December 31, 2005. The projects include various street construction projects. At year end the City's commitments with contractors are as follows: Remaining Spent-to-Date Commitments Various street construction projects $ 7,179,352 $ 648,937 The various street construction projects are being funded by state and local grants, as well as, existing resources in various City Funds. NOTE 6 - PENSION PLANS Substantially all City of Spokane Valley full-time and qualifying part-time employees participate in one of the following statewide retirement systems administered by the Washington State Department of Retirement Systems, under cost-sharing multiple-employer public employee defined benefit and defined contribution retirement plans. The Department of Retirement Systems (DRS), a department with the primary government of the State of Washington, issues a publicly available comprehensive annual financial report (CAFR) than includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement Systems, Communications Unit, P.O. Box 48380, Olympia, WA 98504-8380. The following disclosures are made pursuant to GASB Statement 27, Accounting for Pensions by State and Local Government Employers. Public Employees' Retirement System (PERS) Plans 1, 2, and 3 Plan Description PERS is a cost-sharing multiple-employer retirement system comprised of three separate plans for membership purposes; Plans 1 and 2 are defined benefit plans and Plan 3 is a combination defined benefit/defined contribution plan. Membership in the system includes; elected officials, state employees, employees of the Supreme, Appeals, and Superior courts (other than judges in a judicial retirement system), employees of legislative committees, community and technical colleges, college and university employees (not in national higher education retirement programs), judges of district and municipal courts, and employees of local Washington State Auditor's Office 36 governments. PERS participants who joined the system by September 30, 1977 are Plan 1 members. Those joined on or after August 31,2002 for local government employees, are Plan 2 members unless they exercise an option to transfer their membership to Plan 3. PERS participants joining the system on or after September 1, 2002 for local government employees have the option of choosing membership in either PERS Plan 2 or PERS Plan 3. The option must be exercised within 90 days of employment. An employee is reported in Plan 2 until a choice is made. Employees who fail to choose within 90 days default to PERS Plan 3. PERS defined benefit retirement benefits are financed from a combination of investment earnings and employer and employee contributions. Retirement benefit provisions are established in state statute and may be amended by the State Legislature. Plan 1 retirement benefits are vested after an employee completes five year of eligible service. Plan 1 members are eligible for retirement at any age after 30 years of service, or at age 60 with five years of service or at the age of 55 with 25 years of service. The annual pension is 2 percent of the average final compensation per year of service, capped at 60 percent. The average final compensation is based on the greatest compensation during any 24 eligible consecutive compensation months. If qualified, after reaching the age of 66 a cost-of- living allowance is granted based on years of service and is capped at 3 percent annually. Plan 2 retirement benefits are vested after an employee completes five years of eligible service. Plan 2 members may retire at the age of 65 with five years of service, or at the age of 55 with 20 years of service, with an allowance of 2 percent of the average final compensation per year of service. The average final compensation is based on the greatest compensation during any eligible consecutive 60-months period. Plan 2 retirements prior to the age of 65 receive reduced benefits. If retirement is at age 55 or older with at least 30 years of service, a 3 percent per year reduction applies; otherwise an actuarial reduction will apply. There is no cap on years of service credit; and a cost-of-living allowance is granted (indexed to the Seattle Consumer Price Index), capped at 3 percent annually. Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component, and member contributions finance a defined contributions component. The defined benefit portion provides a benefit calculated at 1 percent of the average final compensation per year of service. The average final compensation is based on the greatest compensation during any eligible consecutive 60-month period. Plan 3 members become eligible for retirement if they have: at least ten years of service; or five years including twelve months that were earned after age 54; or five service credit years earned in PERS Plan 2 prior to June 1, 2003. Plan 3 retirements prior to age 65 receive reduced benefits. If retirement is at age 55 or older with at least 30 years of service, a 3 percent per year reduction applies; otherwise an actuarial reduction will apply. There is no cap on years of service credit; and Plan 3 provides the same cost-of-living allowance as Plan 2. The defined contribution portion can be distributed in accordance with an option selected by the member, either as a lump sum or pursuant to other options authorized by the Employee Retirement Benefits Board. There are 1,168 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans of September 30, 2004: Retirees and Beneficiaries Receiving Benefits 66,896 Terminated Plan Members Entitled to But Not Yet Receiving Benefits 21,031 Active Plan Members Vested 103,039 Active Plan Members Nonvested 53,217 Total 244,183 Funding Policy Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates, Plan 2 employer and employee contribution rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at 6 percent for state agencies and local government unit employees, and 7.5 percent for state government elected officers. The employer and employee contribution rates for Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and defined benefit portion of Plan 3. All employers are required to contribute at the level established by the Legislature. PERS Plan 3 defined contribution is a non-contributing plan for employers. Employees who participate in the defined contribution portion of PERS Plan 3 do not contribute to the defined benefit portion of PERS Plan 3. The Employee Retirement Benefits Board set Plan 3 employee contribution rates. Six rate options are available ranging from 5 to 15 percent; two of the options have graduated rates dependant on the Washington State Auditor's Office 37 employee's age. The methods used to determine the contribution requirements are established under state statute in accordance with chapters 41.40 and 41.45 RCW. PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer* 2.44% 2.44% 2.44%** Employee 6.00% 2.25% *** * The employer rates include the employer administrative expense fee currently set at 0.19%. ** Plan 3 defined benefit portion only. ***Variable form 5.0% minimum to 15.0%maximum based on rate selected by PERS 3 member. Both the City of Spokane Valley and the employees made the required contributions. The City of Spokane Valley required contributions for the years ending December 31 were as follows. PERS Plan 1 PERS Plan 2 PERS Plan 3 2005 Employer Contributions $1,765 $ 33,018 $10,185 2004 Employer Contributions 1,284 18,910 7,315 2003 Employer Contributions 276 10,567 3,448 NOTE 7— RISK MANAGEMENT The City of Spokane Valley is exposed to financial loss resulting from City-caused damage to property or persons, bodily injuries or illness of employees, and unemployment compensation. The City is insured by the Washington Cities Insurance Authority (WCIA) for general liability and property damage coverage. The City uses the Washington State Department of Labor and Industries Insurance Services for coverage to pay for medical care for job-related injuries and illnesses, and wage replacement when the injury or illness is serious enough to miss work. The City is self-insured for unemployment compensation benefits. The Risk Management Fund is used to account for, and finance the liability and unemployment insurance costs. All departments of the City make payments through interfund assessments to the fund on estimates of the amounts needed to pay prior and current year claims. The Washington Cities Insurance Authority (WCIA) was originally formed on January 1, 1981 utilizing Chapter 48.62 RCW (self-insurance regulation) and Chapter 39.34 RCW (Interlocal Cooperation Act) for the purpose of providing a pooling mechanism for jointly purchasing insurance,jointly self-insuring, and/or jointly contracting for risk management services. WCIA has a total of 108 members. New members initially contract for a three-year term, and thereafter automatically renew on an annual basis. A one-year withdrawal notice is required before membership can be terminated. Termination does not relieve a former member from its unresolved loss history incurred during membership. Liability coverage is written on an occurrence basis, without deductibles. Coverage includes general, automobile, police professional, public officials' errors and omissions, stopgap, and employee benefits liability. Limits are $3 million per occurrence self insured layer, and $11 million per occurrence in the re-insured excess layer with no annual aggregate except $10 million per member for public officials errors and omissions. The excess layer is insured by the purchase of reinsurance and insurance. Total limits are $14 million per occurrence. The Board of Directors determines the limits and terms of coverage annually. Insurance coverage for property, automobile physical damage, fidelity, inland marine, and boiler and machinery are purchased on a group basis. Various deductibles may apply by type of coverage. Property insurance and auto physical damage are self-funded from the members' deductible to $250,000 and $500,000 effective July 1, 2004 for all perils other than flood and earthquake and insured above that amount by the purchase of reinsurance. In-house services include risk management consultation, loss control field services, claims and litigation administration and loss analyses. WCIA contracts for the claims investigation consultants for personnel issues and land use problems, insurance brokerage and lobbyist services. WCIA is fully funded by its members, who make annual assessments on prospectively rate basis, as determined by an outside independent actuary. The assessments cover loss, loss adjustment, and administrative expenses. As outlined in the Interlocal, WCIA retains the right to additionally assess the membership for any funding shortfall. Washington State Auditor's Office 38 An investment committee, using investment brokers produces additional revenue by investment of WCIA's assets in financial instruments which comply with State guidelines. These revenues directly offset portions of the membership's annual assessment. A Board of Directors governs WCIA which is comprised of one designated representative from each member. The Board elects an Executive Committee and appoints a Treasurer to provide general policy direction for the organization. The WCIA Executive Director reports to the Executive Committee and is responsible for conducting the day to day operations of the WCIA. The City is self-insured on a reimbursement basis for unemployment compensation. The City incurred $5,392 in claims for unemployment compensation in 2005. NOTE 8- INTERFUND BALANCES AND TRANSFERS Interfund Balances Loans between funds are classified as interfund loans receivable or payable on the fund financial statements. Within the city, one fund may borrow from another when specifically authorized by the Finance Director. At December 31, 2005, Fund 306 (CDBG Block Grant Fund) owed Fund 101 Street Fund) $400,312 in principal and accrued interest. Due to other funds and due from other funds result from goods issued, work performed or services rendered to or for the benefit of another fund of the same government. The amount of interfund loans payable within one year is also included in due to and due from other funds. Due to other fund and due from other fund balances at December 31, 2005 were: Due From Due To Other Funds Other Funds General Fund $ 861,500 $ 67,869 Street Fund 2,879 48,803 Street Capital Projects Fund 740,459 540,740 Nonmajor governmental funds 544,970 1,674,081 Proprietary funds 113,816 - Internal service funds 67,869 - Total government wide $ 2,331,493 $2,331,493 Interfund transfers are the flow of assets with a reciprocal return of assets, goods, or services in return. The City uses transfers to (1) move revenues from the fund that stature or budget requires to collect them to the fund that statute or budget requires to expend them, (2) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, and (3) use unrestricted revenues collected in the general and street funds to finance various programs accounted for in other funds in accordance with budgetary authorizations. Interfund transfer activity for the year is as follows: Transfers Out Street I Nonmajor Stormwater General Capital Street Governmental Management Total Fund Projects Fund Funds Fund Transfers In: General Fund $ 187,100 $ - $ - $ 91,713 $ 68,156 $ 27,231 Street Fund 2,000,000 2,000,000 - - - - Arterial Street Fund 134,941 - - - 134,941 - CenterPlace Op. Res. 300,000 300,000 - - - - Service Level Stabilization 2,306,105 2,306,105 - - - - Winter Weather Reserve 500,000 500,000 - - - - Debt Service Fund 185,090 - - - 185,090 - Street Capital Projects 825,448 - - 48,803 570,492 206,153 Street Bond Fund 81,028 - - - 81,028 - CD Block Grant Fund 127,986 - - - 127,986 - Capital Grants Fund 388,114 - - - 388,114 - Parks Capital Projects 550,000 550,000 - - - - Civic Building Reserve 500,000 500,000 - - -E.R. &R. Fund 125,899 101,591 - - - 24,308 Total $8,211 711 $6257696 $ - $140516 $ 1555807 $257 692 Washington State Auditor's Office 39 NOTE 9—SHORT-TERM DEBT As of December 31, 2005, the city had no short-term debt. NOTE 10— LONG-TERM DEBT AND LEASES General Obligation Bonds The City issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. General obligation bonds have been issued for governmental-type activities. General obligation bonds are direct obligations and pledge the full faith and credit of the government. General obligation bonds are either created by 3/ 5th majority vote of the people and, therefore, financed by a special tax levy; or created by ordinance, adopted by the City Council, and normally financed from general revenues (councilmanic bonds). General obligation bonds currently outstanding are as follows: In 2003 the City issued $9,430,000 in councilmanic bonds to finance the construction of the CenterPlace Community Center and for various street construction projects. The City does expect to receive intergovernmental payments from the Spokane Public Facilities District pursuant to an interlocal agreement dated as of July 2003, which if and when received by the City will be available for debt service associated with the Center for up to $7 million of bonds. General obligation bonds currently outstanding are as follows: Debt Name of Issuance Purpose Interest Rate Outstanding 2003 LTGO Bonds Governmental Activities 2.00% -5.00% $ 9,120,000 The annual debt service requirements to maturity for general obligation bonds are as follows: Governmental Activities Total Principal Interest Requirements 2006 175,000 414,535 589,535 2007 185,000 411,035 596,035 2008 190,000 406,872 596,872 2009 205,000 401,173 606,173 2010 210,000 395,022 605,022 2011-2015 1,275,000 1,837,113 3,112,113 2016-2020 1,810,000 1,540,545 3,350,545 2021-2025 2,530,000 1,011,250 3,541,250 2026-2030 1,880,000 414,750 2,294,750 2031-2033 660,000 65,500 725,500 $ 9,120,000 $ 6,897,795 $ 16,017,795 Long-term debt on the Statement of Net Assets is presented net of any premium/discount incurred at the time of issuance. The 2003 LTGO Bonds were sold at a premium of$124,321 and were reported at the net amount of $9,554,321. The premium will be amortized over the life of the bonds. Changes in Long-Term Liabilities During the year ended December 31, 2005, the following changes occurred in long-term liabilities: Balance Balance Due Within Jan. 1, 2005 Additions Reductions Dec. 31, 2005 One Year Governmental Activities: General Obligation Bonds $9,285,000 $ - . $165,000 $9,120,000 $ 175,000 Compensated Absences 83,843 39,333 - 123,176 - Governmental Activity Long-Term Liabilities $ 9,368,843 $ 39,333 $ 165,000. $9,243,176 $ 175,000 Washington State Auditor's Office 40 Legal Debt Margin RCW 39.36.020 provides cities with three segments of debt capacity, each equal to two and one-half percent of the city's assessed valuation, for a total debt capacity of seven and one-half percent. The assessed valuation of the City for the year 2005 for purposes of determining the legal debt margin is $5,056,951,058. Under State of Washington statutes general obligation indebtedness pursuant to a vote of the electorate is limited to 2'/2% of actual value of taxable property located within the City. Indebtedness without a vote of the people is limited to 11/2% of actual value subject to the limitation that total general purpose indebtedness may not exceed 21/2% of total valuation. There is a 2'/2% limitation each for utility purposes and open space and park facilities purposes. The remaining debt capacities of the City are as follows: Amount General Purposes Voted and Non-voted Debt—2'/2% (1) $ 117,180,600 Utility Voted Debt—2'/2% 126,423,776 Open Space and Park Facilities Voted Debt-2'/2% 126,423,776 Total Remaining Debt Capacity $ 370,028,152 (1) Includes $66,611,090 debt capacity for non-voted debt. Leases Capital Leases The City had no capital leases as of December 31, 2005. Operating Leases The City entered into a six year operating lease agreement with Northwest Christian Schools for the rental of office space. The lease commenced on February 1, 2003. Rental rates vary between $15.15 and $16.75 per square foot per annum. Lease payments for the year ended December 31, 2005 amounted to $291,636. Schedule of Minimum Future Rental Payments Year Ended Dec. 31 Amount 2006 $ 296,429 2007 305,034 2008 314,091 2009 324,491 2010 80,548 Total minimum future rental payments $1,320,593 NOTE 11 —SUBSEQUENT EVENT On February 23, 2006, a building and horse stables at Valley Mission Park sustained fire and water damage. The City expects to receive approximately $109,000 in insurance proceeds for this damage. The City has not determined whether it will repair damage to the building and horse stables which have a depreciated book value of approximately$87,000. On July 18, 2006, the City and The Washington State Council of County and City Employees (Local 270-V, AFSCME) signed the first collective bargaining agreement. This agreement is effective July 16, 2006 to December 31, 2006, and includes a 6% wage increase for covered employees. Additionally, the parties signed a second collective bargaining agreement effective January 1, 2007 to December 31, 2009. This second agreement provides for wage increases of 2.5% on January 1 of each year of the contract for all covered employees NOTE 12 - CONTINGENCIES AND LITIGATION In the normal course of governmental operations the City has claims filed against it for various losses related to tort actions for such things as wrongful acts, injuries, or damages for which a civil action can be brought, and other routine legal proceedings. At any given point in time, there is a recurring volume of tort and other claims for compensation and damages against the City, which could impact expenditures. The City's Risk Management Washington State Auditor's Office 41 fund provides for these claims, and insurance is available to pay a portion of damages for certain types of claims. The collective impact of these claims is not likely to have a material impact on the City's financial position. The City participates in a number of federal-and-state assisted programs. These grants are subject to audit by the grantors or their representatives. Such audits could result in requests for reimbursement to grantor agencies for expenditures disallowed under the terms of the grants. City management does not believe that such disallowances, if any, will be material. Washington State Auditor's Office 42 CD CD A A o co CO LO c c N cr roN- ¥ - no ¥ AOO o o 00 CD 0) CD CD CO 0) 0) oCoo \ AAonoC + CV- "0 ■ I- CD 7 Q CO \ / § m m m m m § . . . . c _ cu 0. k w b % m m m m EA- CD 0 (NI (NI oonrnn � (NI cr ro — ¥ — no ¥ AOO 0) f i co o 0) CD CD CO 0) 0) 05. E $ - Lt) ) / / / = 7 � � r � A N- U m m m m da- d' ��N- � § CD CD � 0 0 0 0 t RR 0 / / / / / E _ E r r = 0 0 0 0 A00000n Utz / / cDcr) 2 iiiii'a L k kRRRRR ± 66 OWWWWWE a o_ o SSSSSSS ■ C i E / / 9 9 9 9 9 9 9 f 2 b / / \ \ \ \ \ \ \ o E 2 § / « Cl ■ m 2 £ 2 e ° ° \ ' \ > ok E 0 § \ o / o = k u c ° c 15 2 - CZ 0 § 0 \ co \ ± w / Z. x � . \ o § $ / 12 c E x o L 4- § C I E a 2 % \ \ f \ o � ■ � o 77 = 2 o co \ _ o I— 7 = 7 0 I a _ k \ -0 k § ° •d Et \ \ \ \ • Et -5-.) e � 2 ~ c / d >= 3E / 6 < § o a) _ o ± o = 2 C § o w 0 — § ƒ m > e 2 a) < c @ o / 2 k § $ .- — S = ■ c Q (.9 ® ƒ U % i = / k « \ \ - \ asƒ = : N- / / / \ k 7 = k / \ \ � >� 07CI 0 / = I- 0. m • ts o f b ° 13 2 7 7 ( E \ b _i § CD Cl. � c = — ° a > o = E = o - < 2 £ E ■ 2 0 _ = o ■ < a) k a \ a / O 1- \ a ƒ > <Q1 O < co 0 / Washington State Auditor's of 43 CITY OF SPOKANE VALLEY,WASHINGTON Notes to the Schedule of Expenditures of Federal Awards Note 1 —Basis of Accounting The Schedule of Expenditures of Federal Awards is prepared on the same basis of accounting as the City's financial statements. The accrual basis of accounting is used for all funds except the governmental funds which use the modified accrual basis of accounting. Note 2—Program Costs The amounts shown as current expenditures represent only the federal portion of program costs. Actual program costs, including the City's portion, may be more than shown. Washington State Auditor's Office 44