Northwood Municipal Utility District No. 1

Transcription

1 Harris County, Texas Accountants' Report and Financial Statements

2 Contents Independent Accountants' Report on Financial Statements and Supplementary Information... 1 Management's Discussion and Analysis... 2 Basic Financial Statements Statement of Net Assets (Deficit) and Governmental Funds Balance Sheet... 8 Statement of Activities and Governmental Funds Revenues, Expenditures and Changes in Fund Balances Notes to Financial Statements Required Supplementary Information Budgetary Comparison Schedule General Fund Notes to Required Supplementary Information Supplementary Information Supplementary Schedules Included Within This Report Schedule of Services and Rates Schedule of General Fund Expenditures Analysis of Taxes Levied and Receivable Schedule of Longterm Debt Service Requirements by Years Changes in Longterm Bonded Debt Comparative Schedule of Revenues and Expenditures General Fund and Debt Service Fund Five Years Board Members, Key Personnel and Consultants... 34

3 Board of Directors Northwood Municipal Utility District No. 1 Harris County, Texas Independent Accountants' Report on Financial Statements and Supplementary Information We have audited the accompanying financial statements of the governmental activities and each major fund of Northwood Municipal Utility District No. 1 as of and for the year ended, which collectively comprise the District's basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the District'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. 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 the District's 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 and each major fund of Northwood Municipal Utility District No. 1 as of, and the respective changes in financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the District will continue as a going concern. As discussed in Note 12, the District has a deficit fund balance in its general fund and a net asset deficit in its governmentwide financial statements that raise substantial doubt about its ability to continue as a going concern. The District's plans in regard to these matters are also described in Note 12. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The accompanying management's discussion and analysis and budgetary comparison schedule, as listed in the table of contents, are not a required part of the basic financial statements, but are 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 conducted for the purpose of forming opinions on the District's basic financial statements. We previously expressed unqualified opinions on the 2005 through 2008 basic financial statements. The accompanying supplementary information, as listed in the table of contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the 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. June 29, 2011

4 Management's Discussion and Analysis Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the District's basic financial statements. The District's basic financial statements are comprised of three components: 1) governmentwide financial statements, 2) fund financial statements and 3) notes to financial statements. This report also contains supplementary information required by the Governmental Accounting Standards Board (GASB) and other supplementary information required by the District's state oversight agency, the Texas Commission on Environmental Quality (the Commission). In accordance with required reporting standards, the District reports its financial activities as a specialpurpose government. Specialpurpose governments are governmental entities which engage in a single governmental program, such as the provision of water, sanitary sewer and drainage services. Other activities, such as the provision of recreation facilities and solid waste collection, are minor activities and are not budgeted or accounted for as separate programs. The financial statements of specialpurpose governments combine two types of financial statements into one statement. These two types of financial statements are the governmentwide financial statements and the fund financial statements. The fund financial statements are presented on the left side of the statements, a column for adjustments is to the right of the fund financial statements and the governmentwide financial statements are presented to the right side of the adjustments column. The following sections describe the measurement focus of the two types of statements and the significant differences in the information they provide. Governmentwide Financial Statements The focus of governmentwide financial statements is on the overall financial position and activities of the District. The District's governmentwide financial statements include the statement of net assets and statement of activities, which are prepared using accounting principles that are similar to commercial enterprises. The purpose of the statement of net assets is to attempt to report all of the assets and liabilities of the District. The District reports all of its assets when it acquires or begins to maintain the assets and reports all of its liabilities when they are incurred. The difference between the District's total assets and total liabilities is labeled as net assets and this difference is similar to the total stockholders' equity presented by a commercial enterprise. The purpose of the statement of activities is to present the revenues and expenses of the District. Again, the items presented on the statement of activities are measured in a manner similar to the approach used by a commercial enterprise in that revenues are recognized when earned or established criteria are satisfied and expenses are reported when incurred by the District. All changes in net assets are reported when the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues are reported even when they may not be collected for several months or years after the end of the accounting period and expenses are recorded even though they may not have used cash during the current year. 2

5 Management's Discussion and Analysis (Continued) Although the statement of activities looks different from a commercial enterprise's statement of income, the financial statement is different only in format, not substance. Whereas the bottom line in a commercial enterprise is its net income, the District reports an amount described as change in net assets, essentially the same thing. Fund Financial Statements Unlike governmentwide financial statements, the focus of fund financial statements is directed to specific activities of the District rather than the District as a whole. Except for the general fund, a specific fund is established to satisfy managerial control over resources or to satisfy financerelated legal requirements established by external parties or governmental statutes or regulations. Governmental Funds Governmentalfund financial statements consist of a balance sheet and a statement of revenues, expenditures and changes in fund balances and are prepared on an accounting basis that is significantly different from that used to prepare the governmentwide financial statements. In general, these financial statements have a shortterm emphasis and, for the most part, measure and account for cash and other assets that can easily be converted into cash. For example, amounts reported on the balance sheet include items such as cash and receivables collectible within a very short period of time, but do not include capital assets such as land and water, sewer and drainage systems. Fund liabilities include amounts that are to be paid within a very short period after the end of the fiscal year. The difference between a fund's total assets and total liabilities is labeled the fund balance and generally indicates the amount that can be used to finance the next fiscal year's activities. Likewise, the operating statement for governmental funds reports only those revenues and expenditures that were collected in cash or paid with cash, respectively, during the current period or very shortly after the end of the fiscal year. Because the focus of the governmentwide and fund financial statements is different, there are significant differences between the totals presented in these financial statements. For this reason, there is an analysis in the notes to financial statements that describes the adjustments to fund balances to arrive at net assets presented in the governmental activities column on the statement of net assets. Also, there is an analysis in the notes to financial statements that reconciles the total change in fund balances for all governmental funds to the change in net assets, as reported in the governmental activities column in the statement of activities. Notes to Financial Statements The notes to financial statements provide additional information that is essential to a full understanding of the data found in the governmentwide and fund financial statements. 3

6 Management's Discussion and Analysis (Continued) Financial Analysis of the District as a Whole The District's overall financial position and operations for the past two years are summarized as follows, based on the information included in the governmentwide financial statements. Summary of Net Assets (Deficit) Current and other assets 227, ,581 Capital assets 1,243,954 1,264,907 Total assets 1,471,815 1,369,488 Longterm liabilities 2,255,000 2,255,000 Other liabilities 838, ,828 Total liabilities 3,093,891 2,728,828 Net assets (deficit): Restricted 226,930 65,556 Unrestricted (1,849,006) (1,424,896) Total net assets (deficit) (1,622,076) (1,359,340) The total net assets of the District decreased by 262,736, or about 19 percent. The majority of the decrease in net assets is related to depreciation expense on capital assets, as well as service expenditures exceeding property tax and service revenues. Although the District's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. At, unrestricted net assets were (1,849,006). This amount was negative because not all expenditures from longterm debt were for the acquisition of capital assets. Within Harris County, the county government assumes the maintenance and other incidents of ownership of most storm sewer facilities constructed by the District. Accordingly, these assets are not recorded in the financial statements of the District. In accordance with GASB Statement No. 34, expenditures for bond issuance costs prior to the implementation of GASB Statement No. 34 on July 1, 2003, were not recorded as deferred charges which would offset the related liability of longterm debt. 4

7 Management's Discussion and Analysis (Continued) Summary of Changes in Net Assets (Deficit) Revenues: Property taxes 188,698 46,647 Charges for services 91, ,312 Other revenues 42,614 4,660 Total revenues 322, ,619 Expenses: Services 455, ,259 Depreciation 51,569 51,569 Interest 78,900 78,900 Total expenses 585, ,728 Change in net assets (262,736) (189,109) Net assets (deficit), beginning of year (1,359,340) (1,170,231) Net assets (deficit), end of year (1,622,076) (1,359,340) Financial Analysis of the District's Funds The District's combined fund balances as of the end of the fiscal year ended, were (203,660), a decrease of 250,833 from the prior year. The general fund's fund balance decreased by 294,371, due to service operations expenditures exceeding property tax and service revenues. The debt service fund's fund balance increased by 43,538, due to property tax revenues being higher than expenditures. General Fund Budgetary Highlights There were several differences between the final budgetary amounts and actual amounts. The major differences between budget and actual were due to sewer service revenues and repairs and maintenance expenditures being greater than anticipated. In addition, capital outlay expenditures were not included in the current year budget. The amended fund balance as of, was expected to be (33,648) and the actual end of year fund balance was (288,576). 5

8 Management's Discussion and Analysis (Continued) Capital Assets and Related Debt Capital Assets Capital assets held by the District at the end of the current and previous fiscal years are summarized below: Capital Assets (Net of Accumulated Depreciation) Land and improvements 199, ,582 Construction in progress 30,616 Water facilities 516, ,099 Wastewater facilities 497, ,226 Total capital assets 1,243,954 1,264,907 During the current year, additions to capital assets were as follows: Construction in progress, engineering fees related to rehabilitation of force main 30,616 Debt The changes in the debt position of the District during the fiscal year ended, are summarized as follows: Longterm debt payable, beginning and end of year 2,255,000 At, the District had 16,690,000 of unlimited tax bonds authorized but unissued for the purposes of acquiring, constructing and improving the water, sanitary sewer and drainage systems within the District. The District's bonds are not rated. Other Relevant Factors Relationship to the City of Houston Under existing Texas law, since the District lies wholly within the extraterritorial jurisdiction of the City of Houston (the City), the District must conform to the City ordinance consenting to the creation of the District. In addition, the District may be annexed by the City without the District's consent. If the District is annexed, the City must assume the District's assets and obligations (including the bonded indebtedness) and abolish the District within 90 days. 6

9 Management's Discussion and Analysis (Continued) Plan of Reorganization On September 6, 1996, the District filed a voluntary petition to reorganize under Chapter 9 of the Federal Bankruptcy Code. The First Amended Plan of Adjustment (the Plan) was filed on March 13, On October 31, 1996, the Bankruptcy Court entered an order granting the relief sought, which was retroactive to the petition date. On May 15, 1998, the Plan was confirmed by the United States Bankruptcy Court, Southern District of Texas, Houston Division. The accompanying financial statements reflect this debt adjustment. 7

10 Statement of Net Assets (Deficit) and Governmental Funds Balance Sheet Assets Debt Statement General Service of Net Fund Fund Total Adjustments Assets Cash 35,254 4,160 39,414 39,414 Receivables: Property taxes 28, , , ,096 Service accounts 14,616 14,616 14,616 Accrued penalty and interest 28,265 28,265 Interfund receivable 6,744 87,500 94,244 (94,244) Prepaid expenditures 3,470 3,470 3,470 Capital assets (net of accumulated depreciation): Land and improvements 199, ,582 Construction in progress 30,616 30,616 Infrastructure 1,013,756 1,013,756 Total assets 88, , ,840 1,177,975 1,471,815 See Notes to Financial Statements 8

11 Statement of Net Assets (Deficit) and Governmental Funds Balance Sheet (Continued) Liabilities Debt Statement General Service of Net Fund Fund Total Adjustments Assets Accounts payable 253, ,933 21, ,229 Accrued expenses 556, ,435 Customer deposits 6,174 6,174 6,174 Operating deposits Due to others Deferred property tax revenue 28, , ,096 (142,096) Interfund payable 87,500 6,744 94,244 (94,244) Longterm liabilities, due after one year 2,255,000 2,255,000 Total liabilities 377, , ,500 2,596,391 3,093,891 Fund Balances/Net Assets (Deficit) Fund balances: Reserved for debt service 84,916 84,916 (84,916) Unreserved (288,576) (288,576) 288,576 Total fund balances (288,576) 84,916 (203,660) 203,660 0 Total liabilities and fund balances 88, , ,840 Net assets (deficit): Restricted for debt service 226, ,930 Unrestricted (1,849,006) (1,849,006) Total net assets (deficit) (1,622,076) (1,622,076) See Notes to Financial Statements 9

12 Statement of Activities and Governmental Funds Revenues, Expenditures and Changes in Fund Balances Year Ended Debt Statement General Service of Fund Fund Total Adjustments Activities Revenues Property taxes 12,823 51,294 64, , ,698 City of Houston tax rebate 7,681 7,681 7,681 Water service 32,749 32,749 32,749 Sewer service 58,850 58,850 58,850 Penalty and interest 1,048 5,835 6,883 18,300 25,183 Investment income Other income 9,560 9,560 9,560 Total revenues 122,714 57, , , ,911 Expenditures/Expenses Service operations: Purchased services 21,296 21,296 Professional fees 46,235 1,918 48,153 33,635 81,788 Contracted services 20,040 7,369 27,409 27,409 Utilities 30,575 30,575 30,575 Repairs and maintenance 268, , ,177 Other expenditures 21,442 4,491 25,933 25,933 Capital outlay 30,616 30,616 (30,616) Depreciation 51,569 51,569 Debt service, interest 78,900 78,900 Total expenditures/expenses 417,085 13, , , ,647 Excess (Deficiency) of Revenues Over Expenditures (294,371) 43,538 (250,833) 250,833 Change in Net Assets (262,736) (262,736) Fund Balances/Net Assets (Deficit) Beginning of year 5,795 41,378 47,173 (1,359,340) End of year (288,576) 84,916 (203,660) 0 (1,622,076) See Notes to Financial Statements 10

13 Notes to Financial Statements Note 1: Nature of Operations and Summary of Significant Accounting Policies Northwood Municipal Utility District No. 1 (the District) was created by an order of the Texas Water Rights Commission, now known as the Texas Commission on Environmental Quality (the Commission), effective August 7, 1985, in accordance with the Texas Water Code, Chapter 54. The District operates in accordance with Chapters 49 and 54 of the Texas Water Code and is subject to the continuing supervision of the Commission. The principal functions of the District are to finance, construct, own and operate waterworks, wastewater and drainage facilities, and to provide such facilities and services to the customers of the District. The District is governed by a Board of Directors consisting of five individuals who are residents or owners of property within the District and are elected by voters within the District. The Board of Directors sets the policies of the District. The accounting and reporting policies of the District conform to accounting principles generally accepted in the United States of America for state and local governments, as defined by the Governmental Accounting Standards Board. The following is a summary of the significant accounting and reporting policies of the District: Reporting Entity The accompanying governmentwide financial statements present the financial statements of the District. There are no component units that are legally separate entities for which the District is considered to be financially accountable. Accountability is defined as the District's substantive appointment of the majority of the component unit's governing board. Furthermore, to be financially accountable, the District must be able to impose its will upon the component unit or there must be a possibility that the component unit may provide specific financial benefits to, or impose specific financial burdens on, the District. Governmentwide and Fund Financial Statements In accordance with required reporting standards, the District reports its financial activities as a specialpurpose government. Specialpurpose governments are governmental entities which engage in a single governmental program, the provision of water, wastewater, drainage and other related services. The financial statements of specialpurpose governments combine two types of financial statements into one statement. These two types of financial statements are the governmentwide financial statements and the fund financial statements. The fund financial statements are presented with a column for adjustments to convert to the governmentwide financial statements. The governmentwide financial statements report information on all of the activities of the District. As a general rule, the effect of interfund activity has been eliminated from the governmentwide financial statements. Governmental activities generally are financed through taxes, charges for services and intergovernmental revenues. The statement of activities reflects the revenues and expenses of the District. 11

14 Notes to Financial Statements The fund financial statements provide information about the District's governmental funds. Separate statements for each governmental fund are presented. The emphasis of fund financial statements is directed to specific activities of the District. The District reports the general fund as a major governmental fund. It is the District's primary operating fund. It accounts for all financial resources of the District, except those required to be accounted for in another fund. The District has elected to report its debt service fund as a major fund. The debt service fund accounts for the accumulation of financial resources for, and the payment of, general longterm debt principal, interest and other costs. The primary source of revenue is property taxes. Subsequent to the Chapter 9 bankruptcy proceeding, the resources of the debt service fund are not restricted solely for payment to the bondholders. Measurement Focus and Basis of Accounting Governmentwide Financial Statements The governmentwide financial statements are reported using the economic resources measurement focus and accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of the timing of related cash flows. Nonexchange transactions, in which the District receives (or gives) value without directly giving (or receiving) equal value in exchange, include property taxes and donations. Recognition standards are based on the characteristics and classes of nonexchange transactions. Revenues from property taxes are recognized in the period for which the taxes are levied. Intergovernmental revenues are recognized as revenues, net of estimated refunds and uncollectible amounts, in the accounting period when an enforceable legal claim to the assets arises and the use of resources is required or is first permitted. Donations are recognized as revenues, net of estimated uncollectible amounts, as soon as all eligibility requirements imposed by the provider have been met. Amounts received before all eligibility requirements have been met are reported as deferred revenues. Fund Financial Statements Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and liabilities are generally included on the balance sheet. The statement of governmental funds revenues, expenditures and changes in fund balances presents increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in spendable resources. General capital asset acquisitions are reported as expenditures and proceeds of longterm debt are reported as other financing sources. Under the modified accrual basis of accounting, revenues are recognized when both measurable and available. The District considers revenues reported in the governmental funds to be available if they are collectible within 60 days after yearend. Principal 12

15 Notes to Financial Statements revenue sources considered susceptible to accrual include taxes, charges for services and investment income. Other revenues are considered to be measurable and available only when cash is received by the District. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general longterm debt, which are recognized as expenditures when payment is due. Interfund Transactions Transfers from one fund to another fund are reported as interfund receivables and payables if there is intent to repay the amount and if there is the ability to repay the advance on a timely basis. Operating transfers represent legally authorized transfers from the fund receiving resources to the fund through which the resources are to be expended. Pension Costs The District does not participate in a pension plan and, therefore, has no pension costs. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses/expenditures during the reporting period. Actual results could differ from those estimates. Investments and Investment Income Investments in certificates of deposit, mutual funds, U.S. Government and agency securities, and pooled funds which have a remaining maturity of one year or less at the date of purchase are recorded at amortized cost. All other investments are carried at fair value. Fair value is determined using quoted market values. Investment income includes dividends and interest income and the net change for the year in the fair value of investments carried at fair value. Investment income is credited to the fund in which the investment is recorded. Property Taxes An appraisal district annually prepares appraisal records listing all property within the District and the appraised value of each parcel or item as of January 1. Additionally, on January 1, a tax lien attaches to property to secure the payment of all taxes, penalty and interest ultimately imposed for the year on the property. After the District receives its certified appraisal roll from the appraisal 13

16 Notes to Financial Statements district, the rate of taxation is set by the Board of Directors of the District based upon the aggregate appraisal value. Taxes are due October 1 or when billed, whichever is later, and become delinquent after January 31 of the following year. In the governmental funds, property taxes are measurable when levied even though not available. As a result, at, property taxes receivable and related deferred revenues have been recorded in the governmental funds. In the governmentwide statement of net assets, property taxes are considered earned in the budget year for which they are levied. In addition to property taxes levied, any delinquent taxes are recorded net of amounts considered uncollectible. Capital Assets Capital assets, which include property, plant, equipment and infrastructure, are reported in the governmentwide financial statements. Capital assets are defined by the District as assets with an individual cost of 5,000 or more and an estimated useful life of two years or more. Purchased or constructed capital assets are reported at cost or estimated historical cost. Donated capital assets are recorded at their estimated fair value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend the asset lives are not capitalized. Capital assets are depreciated using the straightline method over their estimated useful lives as follows: Years Water production and distribution facilities 1045 Wastewater collection and treatment facilities 1045 Longterm Obligations In the governmentwide financial statements, longterm debt and other longterm obligations are reported as liabilities. For debt issued after June 30, 2003, gains on refundings are generally deferred and amortized using the effective interest rate method over the life of the bonds. Longterm debt is reported net of the unamortized gain on refundings. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the related debt using the effective interest rate method. Bonds payable issued after June 30, 2003, are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing 14

17 Notes to Financial Statements sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Net Assets (Deficit)/Fund Balance Fund balances and net assets are reported as restricted when constraints placed on them are either externally imposed by creditors, grantors, contributors, or laws or regulations of other governments, or are imposed by law through constitutional provisions or enabling legislation. When both restricted and unrestricted resources are available for use, generally, it is the District's policy to use restricted resources first. The components of unrestricted net assets (deficit) at, are as follows: General fund, unrestricted fund balance, including deferred taxes (260,229) Accrued expenses (577,731) Longterm debt in excess of capital assets (1,011,046) Total (1,849,006) The District has financed drainage facilities which have been assumed by Harris County for maintenance and other incidents of ownership which has caused longterm debt to be in excess of capital assets. Reconciliation of Governmentwide and Fund Financial Statements Amounts reported for net assets of governmental activities in the statement of net assets and fund balances in the governmental funds balance sheet are different because: Capital assets used in governmental activities are not financial resources and are not reported in the funds. 1,243,954 Property taxes are not recognized until collected in the funds. 142,096 Penalty and interest on delinquent taxes is not receivable in the current period and is not reportable in the funds. 28,265 15

18 Notes to Financial Statements Accrued expenses are not payable with current financial resources and are not reported in the funds. (577,731) Longterm debt obligations are not due and payable in the current period and are not reported in the funds. (2,255,000) Adjustment to fund balance to arrive at net assets. (1,418,416) Amounts reported for change in net assets of governmental activities in the statement of activities are different from change in fund balance in the governmental funds statement of revenues, expenditures and changes in fund balances because: Change in fund balance. (250,833) Governmental funds report capital outlays as expenditures. However, for governmentwide financial statements, the cost of capitalized assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which depreciation expense exceeded capital outlay expenditures in the current period. (20,953) Revenues that do not provide current financial resources are not reported as revenues for the funds but are reported as revenues in the statement of activities. 142,881 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 governmental funds. (133,831) Change in net assets of governmental activities. (262,736) Note 2: Deposits, Investments and Investment Income Deposits Custodial credit risk is the risk that, in the event of a bank failure, a government's deposits may not be returned to it. The District's deposit policy for custodial credit risk requires compliance with the provisions of state law. State law requires collateralization of all deposits with federal depository insurance; a surety bond; bonds and other obligations of the U.S. Treasury, U.S. agencies or instrumentalities of the State of Texas; or certain collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States. 16

19 Notes to Financial Statements At, none of the District's bank balances were exposed to custodial credit risk. Investments The District may legally invest in obligations of the United States or its agencies and instrumentalities, direct obligations of Texas or its agencies or instrumentalities, collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, other obligations guaranteed as to principal and interest by the United States or their agencies and instrumentalities, obligations of states, agencies and counties and other political subdivisions with an investment rating not less than "A," certificates of deposit of financial institutions domiciled in Texas, and certain bankers' acceptances, repurchase agreements, mutual funds, commercial paper, guaranteed investment contracts and investment pools. The District had no investments at. Investment Income Investment income of 190 for the year ended, consisted of interest income. Note 3: Capital Assets A summary of changes in capital assets for the year ended, is presented below: Governmental Activities Balances, Beginning of Year Additions Balances, End of Year Capital assets, nondepreciable: Land and improvements 199, ,582 Construction in progress 30,616 30,616 Total capital assets, nondepreciable 199,582 30, ,198 Capital assets, depreciable: Water production and distribution facilities 1,383,418 1,383,418 Wastewater collection and treatment facilities 1,460,516 1,460,516 Total capital assets, depreciable 2,843, ,843,934 Less accumulated depreciation: Water production and distribution facilities (841,319) (25,801) (867,120) Wastewater collection and treatment facilities (937,290) (25,768) (963,058) Total accumulated depreciation (1,778,609) (51,569) (1,830,178) Total governmental activities, net 1,264,907 (20,953) 1,243,954 17

20 Notes to Financial Statements Note 4: Plan of Reorganization On September 6, 1996, the District filed a voluntary petition to reorganize under Chapter 9 of the Federal Bankruptcy Code. On October 31, 1996, the Bankruptcy Court entered an order granting the relief sought, which was retroactive to the petition date. The First Amended Plan of Adjustment (the Plan) was filed on March 13, On May 15, 1998, the Plan was confirmed by the United States Bankruptcy Court, Southern District of Texas, Houston Division. Under the terms of the Plan, the District issued refunding bonds in the amount of 3,995,000. The bonds were issued to the Purchaser under the Sale of Bonds and Purchase of Land Agreement approved in the Plan. The proceeds from this sale were deposited into a Refunding Bond Retirement Fund established by the District and used to refund the entire remaining principal of the Series 1986 Bond Issue, including any issuance costs associated with the refunding issue. Each bondholder received 3,190 for each 5,000 principal amount of bond, or 0.64 to the dollar. Payments received were applied as follows: to prepetition accrued interest, 1, to postpetition accrued interest and 1, to the principal balance. No additional payments will be made to the bondholders. The refunding bonds have a final maturity date of December 31, The principal and interest payments will be made annually from the District's cash flow in an amount equal to the lesser of all accrued and unpaid interest on the refunding bonds or the then outstanding balance in the District's Bond Retirement Fund. To the extent that the District's funds are insufficient to pay accrued interest due on the Refunding Bonds, the obligation of the District to pay such sums shall continue. In 2003, the District sold 139 acres of land to the City of Houston and obtained a Bondholder Consent Agreement (Agreement). The Agreement required the net proceeds from the land sale be used for payment of interest and partial redemption of bonds, thus resulting in a restructuring of the District's debt. In addition, interest on the bonds was reduced from 8.25 percent to 3.50 percent effective May 1, The principal and interest payments will continue to be made annually from the District's cash flow. The District will levy a combined debt service maintenance tax at a rate of 1.25 per 100 assessed valuation until the earlier of December 31, 2026, or the date on which all of the refunding bonds have been paid in full. The tax rate cannot be raised or lowered without consent of the holders of a majority of the refunding bonds. The District has conveyed, under the Plan, title to approximately 116 acres of land and has also conveyed the outstanding reimbursables assigned by the Resolution Trust Corporation (RTC). 18

21 Notes to Financial Statements Note 5: Longterm Liabilities Changes in longterm liabilities for the year ended, were as follows: Governmental Activities Balances, Beginning and End of Year Amounts Due in One Year Bonds payable: General obligation bonds 2,255,000 0 General Obligation Bonds Refunding Series 1998 Amount outstanding, Interest rate Maturity dates, serially beginning/ending Interest payment date Mandatory redemption* 2,255, % As funds are available August 1 December 31, 2026 *The District has the option to redeem all or a portion of the bonds on any date at par plus accrued and unpaid interest. Unpaid Interest Bonds voted 21,340,000 Bonds sold 4,650,000 Refunding bonds sold 3,995,000 The District's first interest payment was due August 1, 1999, in the amount of 329,587. Additional payments of 329,587 were due August 1, 2000, 2001 and At June 30, 2002, the District had not made any payments to the bondholders. These amounts were included in the partial redemption of bonds in At, interest accrued since the partial redemption of bonds totaled 472,800 and is recorded in accrued expenses in the governmentwide financial statements. 19

22 Notes to Financial Statements Estimated Maturities of Debt The District is not obligated to make interest and principal payments unless it has cash in excess of amounts necessary to operate the District. The District is unable to project annual bondholder payments to be made in the future. The bonds are payable from the proceeds of an ad valorem tax levied upon all property within the District subject to taxation and are further payable from, and secured by a lien on, and a pledge of, the net revenues to be received from the operation of the District's waterworks and sanitary sewer system. Partial Redemption of Bonds In 2003, pursuant to the Agreement and the Board of Directors' authorization for partial redemption of outstanding bonds, the District paid all past due accrued interest totaling 1,581,968 and redeemed 1,740,000 in bonds. The bonds were redeemed at per 100 for a total redemption price of 1,087,500. Note 6: Significant Bond Order and Commission Requirements The Bond Order requires that the District levy and collect an ad valorem debt service tax sufficient to pay interest and principal on bonds when due. During the year ended, the District levied an ad valorem debt service tax at the rate of per 100 of assessed valuation, which resulted in a tax levy of 151,406 on the taxable valuation of 15,140,562 for the 2008 tax year. Note 7: Regional Wastewater Treatment Plant Tax Rebate On October 20, 1986, the District and the City of Houston (the City) entered into a contract establishing the respective rights, duties and obligations of the District and the City to provide water, sewer and drainage services to serve the land within the District which is also located within the corporate boundaries of the City. Under its terms, the City agrees to make annual payments to the District in order to more equitably distribute the burden of the ad valorem taxes to be levied by the City and the District against the property owners of the District. The District has received a total of 66,839 from the City since the beginning of the contract through. The District is authorized to issue bonds to finance its facilities. Until the City acquires title to the facilities, the District is to own the facilities and is solely responsible for their operation and maintenance. 20

23 Notes to Financial Statements Regional Wastewater Treatment Plant On November 5, 1986, the District entered into a contract with the City for the construction of the City's intercontinental airport regional wastewater treatment plant. In exchange for 2,000,000 gallonsperday capacity, the District agreed to contribute to the City the plans and specification for the design of the plant, and design of the second expansion of the plant, as well as construction phase engineering services. Construction of the plant has been completed. The District's initial developers provided financing for approximately 1,300,000 of construction. Pursuant to an assignment and release dated September 6, 1994, the RTC, as successor to the District's initial developers, assigned to the District any rights to reimbursement for this amount and any other amounts. In March 1994, the District assigned 1,000,000 gallonsperday capacity to North Belt Utility District for 1,117,362. The District currently receives no service from the City and will be subject to monthly operating charges when service is actually utilized. Note 8: Maintenance Taxes At an election held September 14, 1985, voters authorized a maintenance tax not to exceed 0.25 per 100 valuation on all property within the District subject to taxation. During the year ended June 30, 2009, the District levied an ad valorem maintenance tax at the rate of per 100 of assessed valuation, which resulted in a tax levy of 37,851 on the taxable valuation of 15,140,562 for 2008 tax year. The maintenance tax is used by the general fund to pay expenditures of operating the District. Note 9: Reimbursement Due Developers Developers of the District constructed certain water, sewer and drainage facilities within the District's boundaries. The District has agreed to reimburse the developers for these construction costs from the proceeds of future bond sales to the extent approved by the Commission. The engineer stated that the total cost of the construction, which is reimbursable by the District to the developers, was approximately 1,200,000, exclusive of interest. The RTC assigned the rights to be reimbursed to the District. The District subsequently assigned the rights to Northwood Venture II, L.P. (Northwood), pursuant to the purchase of land in the District by Northwood. Note 10: Relatedparty Transactions Legal counsel for the District owns an interest in Northwood and also owns a portion of the District's Series 1998 bonds. This financial relationship has been disclosed to the District. Due to the financial condition of the District, legal counsel has deferred billing approximately 83,635 of legal fees. These amounts have been recorded as accrued expenses in the statement of net assets. 21

24 Notes to Financial Statements Note 11: Uncertainties The City has, in two separate transactions, acquired approximately 115 acres and 90 acres of land in the District. Both acquisitions were for airport expansions and, as a result, approximately one third of the District's land area was removed from its tax rolls. The reduced tax base has had a negative impact on the District's ability to develop a tax base and fund its operations. In addition, the District is having issues with the timely collection of taxes owed by its largest single taxpayer. This taxpayer has been in litigation with the Harris County Appraisal District over the taxable value of their property and as a result, taxes for 2007 and 2008 have not been paid by the taxpayer pending final resolution of this litigation. The District's ability to meet its obligations is dependent on the taxpayer's ability to pay all property taxes levied. This lack of tax revenue has impacted the District and its ability to operate its facilities. Note 12: Management's Consideration of Going Concern Matters The District has incurred a decrease in net assets for several years and currently has a deficiency of working capital due to recurring negative cash flows. The financial statements have been prepared assuming the District will continue as a going concern, realizing assets and liquidating liabilities in the ordinary course of business. The District's management is considering several alternatives for mitigating these conditions during the next year. These include entering into payment plans with select vendors, as well as the deferral of fees and charges by certain District consultants until the District has available funds. In addition, the District continues to pursue the collection of delinquent taxes by its primary taxpayer (see Note 11) through litigation and other means including consideration of termination of water and sewer services due to nonpayment of taxes. As a result of such efforts, in June 2011, the District collected all outstanding taxes and related penalty and interest due for the 2010 tax year totaling approximately 82,800. Although not currently planned, realization of assets in other than the ordinary course of business in order to meet liquidity needs could incur losses not reflected in these financial statements. Note 13: Risk Management The District is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; and natural disasters for which the District carries commercial insurance. The District has not significantly reduced insurance coverage or had settlements which exceeded coverage amounts in the past three fiscal years. 22

25 Required Supplementary Information

26 Budgetary Comparison Schedule General Fund Year Ended Original Budget Final Amended Budget Actual Variance Favorable (Unfavorable) Revenues Property taxes 7,600 34,000 12,823 (21,177) City of Houston tax rebate 7,681 7,681 Water service 26,250 26,250 32,749 6,499 Sewer service 17,250 17,250 58,850 41,600 Penalty and interest 1,048 1,048 Investment income (177) Other 9,560 9,560 Total revenues 51,280 77, ,714 45,034 Expenditures Service operations: Professional fees 47,500 49,500 46,235 3,265 Contracted services 24,150 24,150 20,040 4,110 Utilities 28,200 28,200 30,575 (2,375) Repairs and maintenance 47,340 47, ,177 (220,837) Other expenditures 15,320 17,933 21,442 (3,509) Capital outlay 30,616 (30,616) Total expenditures 162, , ,085 (249,962) Excess expenditures (111,230) (89,443) (294,371) (204,928) Other Financing Sources Interfund transfers 50,000 50,000 (50,000) Excess uses (61,230) (39,443) (294,371) (254,928) Fund Balance, Beginning of Year 5,795 5,795 5,795 Fund Balance (Deficit), End of Year (55,435) (33,648) (288,576) (254,928) 23

27 Notes to Required Supplementary Information Budgets and Budgetary Accounting An annual operating budget is prepared for the general fund by the District's consultants. The budget reflects resources expected to be received during the year and expenditures expected to be incurred. The Board of Directors is required to adopt the budget prior to the start of its fiscal year. The budget is not a spending limitation (a legally restricted appropriation). The original budget of the general fund was amended during The District prepares its annual operating budget on a basis consistent with accounting principles generally accepted in the United States of America. The Budgetary Comparison Schedule General Fund presents the original and revised budget amounts, if revised, compared to the actual amounts of revenues and expenditures for the current year. 24

28 Supplementary Information

29 Supplementary Schedules Included Within This Report (Schedules included are checked or explanatory notes provided for omitted schedules.) [X] [X] [X] Notes Required by the Water District Accounting Manual See "Notes to Financial Statements," Pages 1122 Schedule of Services and Rates Schedule of General Fund Expenditures [ ] Schedule of Temporary Investments Not Applicable [X] [X] [X] Analysis of Taxes Levied and Receivable Schedule of Longterm Debt Service Requirements by Years Changes in Longterm Bonded Debt [X] Comparative Schedule of Revenues and Expenditures General Fund and Debt Service Fund Five Years [X] Board Members, Key Personnel and Consultants 25