COMPREHENSIVE ANNUAL FINANCIAL REPORT OFTHE CITY OF PILOT POINT, TEXAS

Transcription

1 COMPREHENSIVE ANNUAL FINANCIAL REPORT OFTHE CITY OF PILOT POINT, TEXAS FOR FISCAL YEAR ENDED SEPTEMBER 30, 2010 City Manager Tom Adams Chief Financial Clerk Jan Messman

2

3 COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED SEPTEMBER 30,2010 TABLE OF CONTENTS I. INTRODUCTORY SECTION Letter of TransmittaL Elected Officials and Administrative Officers Organizational Chart i v vi II. FINANCIAL SECTION Independent Auditor's Report on Financial Statements A. Management Discussion and Analysis B. Basic Financial Statements Government-wide Financial Statements: Statement of Net Assets Statement of Activities Fund Financial Statements: Governmental Fund Financial Statements Balance Sheet Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities Proprietary Fund Financial Statements Statement of Net Assets Statement of Revenues, Expenses, and Changes in Fund Net Assets Statement of Cash Flows Notes to the Financial Statements C. Required Supplementary Information Budgetary Comparison Schedule - General Fund Schedule of Pension Trust - TMRS Funding Progress and Contributions

4 COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED SEPTEMBER 30,2010 TABLE OF CONTENTS D. Supplementary Information Discretely Presented Component Unit Balance Sheet - Pilot Point Economic Development Corporation Statement of Revenues, Expenditures, and Changes in Fund Balances - Pilot Point Economic Development Corporation Budgetary Comparison Schedule - Pilot Point Economic Development Corporation.. 55 STATISTICAL SECTION (UNAUDITED) Table Net Assets by Component Changes in Net Assets Governmental Activities Tax Revenues by Source ' " Fund Balances, Governmental Funds Changes in Fund Balances of Governmental Funds Assessed Value and Estimated Actual Value of Taxable Property Direct and Overlapping Property Tax Rates Principal Taxpayers Property Tax Levies and Collections Ratio of Outstanding Debt by Type Ratios of Net General Bonded Debt Outstanding Direct and Overlapping Governmental Activities Debt Legal Debt Margin Information Pledged-Revenue Coverage Demographic and Economic Statistics Principal Employers Full-Time Equivalent City Government Employees by Function/Program Operating Indicators by Function Capital Asset Statistics by Function

5 INTRODUCTORY SECTION

6

7 e 4 ~ P ilot Point - TEXAS - l' Ol N l 1NO t' Ii E \lay.s; 1 ~C a: 1114(, City of Pilot Point, Texas 102 E. Main Street Pilot Point, TX (940) February 11, 2011 Honorable Mayor and City Council City of Pilot Point Pilot Point, Texas Dear Mayor and Council Members: The Comprehensive Annual Financial Report (CAFR) of the City of Pilot Point, Texas, for the year ending September 30, 2010, is submitted herewith. Management assumes full responsibility for the completeness and reliability of the information contained in this report. Information is based upon a comprehensive framework of internal control that is established for this purpose. The cost of internal control should not exceed anticipated benefits. The objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. Conway Company CPAs, P.C. have issued an unqualified ("clean") opinion on the City of Pilot Point's financial statements for the year ending September 30, The independent auditor's report is located in the beginning of the financial section of the CAFR. This letter of transmittal is designed to complement the Management's Discussion and Analysis (MD&A) and should be read in conjunction with it. The City's MD&A can be found immediately following the independent auditors' report and provides a narrative introduction, overview, and analysis of the basic financial statements. GENERAL INFORMATION - CITY OF PILOT POINT The City of Pilot Point is located 15 miles northeast of Denton, Texas which is the County seat, and located just north of the Dallas/Ft Worth (DFW) metro area of north Texas. Pilot Point is ideally located between several transportation hubs and is bounded on its western corporate limits by Lake Ray Roberts, which is one of the most popular recreation destination lakes in north Texas. The city was incorporated in 1854 and is one of the oldest and most historic communities in the DFW region. In a special election held in November 2009, the voters of Pilot Point approved a Home Rule Charter. 1

8 Under the City Charter, the City Council is comprised of a Mayor and six (6) City Council members and is responsible for enacting ordinances, resolutions, and regulations governing the City, as well as appointing the members of various statutory and advisory boards, the City Manager, City Attorney, City Secretary, and the Municipal Judge. The City Manager is the chief administrative officer of the government and is responsible for the enforcement of laws and ordinances, the appointment and supervision of the executive directors, department heads, and the performance of functions within the municipal organization. Pilot Point has an estimated population 5,047 according to a January 2009 estimate, representing an estimated increase in population of 43% since the 2000 U.S. Census. The city is located on U.S. Highway 377 with vehicular traffic counts in excess of 11,000 a day. We are located 5 minutes from the proposed 4B extension of the Dallas North Tollway, 10 minutes north of the extremely fast growing U.S. Highway 380 corridor, 15 minutes east of Interstate 35, 30 minutes west of the U.S. Highway 75 corridor, and a short 45 minute drive to the DFW Airport. Pilot Point is also located minutes from some of the most renowned medical/rehab/trauma centers in the nation. Major industry for the area includes all business related to the horse/equine industry, sod farming, livestock, lake and tourism related activities and historic tourism. Pilot Point is also home to more cabinet manufacturing facilities per capita than any other community in the State of Texas. ECONOMIC CONDITIONS AND OUTLOOK The City of Pilot Point is in a great position to take advantage of the local and national economic turnaround. While the economy has slowed in Texas and here in Pilot Point, the City and the local economy is stable, and there are tangible indicators that the next twelve (12) months will show some level of improvement, compared to the past fiscal year - some housing construction continues within the City's limits and surrounding areas and sales tax collections have shown an increase over the prior year for a number of months. Pilot Point is strategically located on the northern growth fringe of the DFW Region, geographically centered between Allen and McKinney to our east, Denton to our west, and Frisco and Plano to our south. We are attractive to business and to residential housing because the cost of living is reasonable, the potential for growth in coming years is high, and the country atmosphere provides an excellent place for people to live while working in adjacent metropolitan areas. With the City situated in the heart of Horse Country, located on the shores of beautiful Lake Ray Roberts, the area offers a unique quality of life and an opportunity for growth. The opening of the new toll bridge across Lake Lewisville by the North Texas Tollway Authority on August 1 51 has enabled new development along the Highway 377 Corridor because of the ease of access to and from Interstate 35. In July of 2010 the North Texas Toll Authority designated the location for the future extension of the Dallas North Tollway. While the actual extension is still in future years, developers are taking the opportunity to begin preparing for the economic opportunities the new transporation tollway will provide. The Tollway will border Pilot Point on the eastern side of its Extra Territorial Jurisdiction. The City has an Economic Development Corporation with funding from the 4B sales tax. With this resource, the City is setting goals and objectives for economic development including the redevelopment of its downtown area. The City participates in the Texas Main Street program and actively encourages economic and event based opportunities in the downtown area. MAJOR INITIATIVES Several major initiatives underway include: Construction is near completion for sidewalk replacement, landscaping and lighting replacement on the north and east side of our historic Square; 11

9 Construction is near completion on water storage and water line improvement projects including the replacement of a major water supply line through the downtown area. The City has finished construction for the implementation of an Energy Conservation grant as part of the federal Economic Stimulus package. The grant funded through the State Energy Conservation Office enabled the retrofitting of lighting in the Library, Senior Center and Fire Station as well as the replacement of air conditioning at the Library. The City is developing a plan for its future growth and annexation as a home rule city. The City's planning efforts will address annexation into the City as well as continued negotiations with developers for the orderly implementation and provision of basic services for new developments. The City has set a goal to rebuild the south side of the historic downtown square. Objectives to assist with this significant goal will be developed in order to begin building an opportunity with private and public funding to make the dream a reality. The City Council continues to approved a waiver on impacts and permit fees for the 2009/2010 fiscal period as a method of encouraging developers to look at Pilot Point. This program has peaked interest and is working as planned to increase residential, commercial, and retail construction. The City Continues to build its general and water fund balances each fiscal year as part of its efforts to reach a goal of having a 25% reserve level in the General and Utility Fund. Transfers in the current fiscal budget included allocating $96,500 into the General Fund Reserve Account. The City continues to implement a major change in its financial management and reporting after a major upgrade of our accounting system. Funds were approved by the Mayor and City Council for Debt Service and Capital Improvement Projects in both the General and Water Funds. In addition Special Revenue Funds for the Economic Development Corporation and other financial resources have been approved. The City initiated a capital improvement program to finance projects every three years, and to payoff the outstanding debt whenever possible within six years. This enables the City to have a reasonable period to complete major projects while lowering overall interest rates and leaving the City's finances flexible to address new and emerging challenges and opportunities. FINANCIAL INFORMATION Accounting Procedures and Budgetary Controls The City's accounting records for general government are maintained on a modified accrual basis, with revenues being recorded when available and measurable, and expenditures being recorded when the services or goods are received and the liabilities are incurred. Accounting records for the City's water and sewer utility and other proprietary activities are maintained on an accrual basis. The City Manager is responsible for presenting a quarterly detailed fiscal report to the City Council for their review and comment. The budgetary process begins each year with the preparation of both current and proposed year revenue estimates by the City's financial management staff and expenditure estimates by each City department. Proposed budgets are reviewed by the City Manager before being submitted to the City Council for consideration and approval. Under the Home Rule Charter, the City Manager is responsible for developing the final proposed budget and submitting a recommended budget and tax rate to the City Council for consideration. As part of each year's fiscal review process, departments are required to update mid-year expenditure estimates for the current fiscal period. These estimates are reviewed by the City Manager and City Secretary and incorporated into the proposed mid-year budget adjustment. If an adjustment is required, the City Manager will develop a proposed amendment to the current fiscal budget for presentation and consideration by the City Council. This re-estimated budget may require a supplemental appropriation 111

10 and, if so, such supplemental appropriation request must be approved by ordinance and adopted by the City Council in order to amend the current fiscal budget. General Governmental Functions Tax Rates All eligible property within the City is subject to assessment, levy, and collection by the City of Pilot Point of a continuing direct ad valorem tax sufficient to provide for the payment of principal and interest on outstanding bonds within the limits prescribed by law, and the payment of operation and maintenance costs as approved by the City Council. The tax rates adopted by the City Council for the last ten (10) years are shown below: Fiscal Period Tax Rate/Per $100 of Value $ $ $ $ $ $ $ $ $ $ OTHER INFORMATION Independent Audit The City of Pilot Point has engaged the firm of Conway Company CPAs, P.C. to perform the annual audit; their opinion is included in this report. It should be noted that the auditors included all funds in their audit, performed their audit in accordance with generally accepted auditing standards, and stated that, in their opinion, the statements herein present fairly, in all material respects, the financial position of the City as of September 30, The changes in financial position and cash flows of its proprietary funds for the year ended in conformity with accounting principles generally accepted in the United States of America. Acknowledgements Many persons are responsible for the preparation of this report and for the maintenance of records upon which it is based. Appreciation is expressed to the City employees throughout the organization, especially those employees of the Accounting Department who are instrumental in the successful completion of this report. Our appreciation is also extended to the Mayor and members of the City Council for providing the resources necessary to maintain the integrity of the City's financial affairs. Respectfully submitted, Thomas L. Adams City Manager IV

11 City of Pilot Point, Texas City Council Janet Groff, Mayor Pete Hollar, Mayor Pro-Tem Robert Heuman, Council Member Mark Roth, Council Member David Doughty, Council Member MichaellChamp" Walker, Council Member Bobbie Jezek, Council Member Administrative Staff Tom Adams, City Manager Jan Messman, Chief Financial Clerk Karen Schoonover, Deputy City Secretary Andy Messer, City Attorney Robin Ramsey, Municipal Court Judge v

12 2010 FISCAL YEAR ORGANIZATIONAL CHART 0 4 Pilot Point - TEXA S - CITIZENS I CITY COUNCIL I BOARDS AND COMMITTEES CITY ATTORNEY (Andy Messer) CITY MANAGER (Tom Adams) CITY JUDGE (Robin Ramsay) DEPUTY CITY SECRETARY (Karen Schoonover) Board of Adjustments Economic Development Corporation Historic Review Library Parks Main Street Budget Officer Purchasing Agent EDC General Manager Elections Council/Board Agendas & Minutes Public Information Requests Keep Pilot Point Beautiful Newsletter Records Website Planning & Zoning I MAIN STREET (Bruce Thomas) I FIRE DEPARTMENT (Heath Hudson) I LIBRARY SERVICES (Phyllis Tillery) PLANNING & ZONING (Randy Hosea) I POLICE DEPARTMENT (Harold Martin) I I., PUBLIC WORKS (Randy Hosea) FINANCE (Jan Messman) ~ Downtown Development Historic Preservation Marketing/Promotion Festivals Emergency Medical Services (EMS) Fire Fighting Fire Prevention Rescue Services Library Services Reading Programs Computer & Internet Services Planning & Development Building Permits & Inspections Patrol Investigation (CID) Code Enforcement Animal Control Streets & Traffic Signs Drainage Solid Waste Parks Water Utilities Accounting HR & Payroll A/R and Permitting Municipal Court Office Section 8 & Health Inspections vi City Engineering Utility Billing Senior Center

13 FINANCIAL SECTION

14 2

15 Michael Conway, CPA Neil Conway, CPA Toll Free (800) Metro (903) CONWAY COMPANY CPAs PC ACCOUNTANTS & ADVISORS PO Box 8234 Greenville, Texas Member American Institute of CPAs Texas Society of CPAs March 4, 2011 Independent Auditor's Report on Financial Statements City Council City of Pilot Point 102 East Main Street Pilot Point, Texas Members of the City Council: We have audited the accompanying financial statements of the governmental activities, the business-type activities, and each major fund of the City of Pilot Point, Texas (the "City") as of and for the year ended September 30, 2010, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City of Pilot Point, Texas' 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 businesstype activities, and each major fund of the City of Pilot Point as of September 30, 2010, and the respective changes in financial position, and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America Park Street Commerce, Texas Office (903) Fax (903) Wesley Street Greenville, Texas Office (903) Fax (903) #1 Horizon Court Rockwall, Texas Office (972) Fax (903)

16 In accordance with GOVERNMENT AUDITING STANDARDS, we have also issued our report dated March 4, 2011, on our consideration of the City of Pilot Point, Texas' internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, 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. Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis, the Budgetary Comparison Schedule, and the Schedule of Pension Trust - TMRS Funding Progress and Contributions on pages 5 to 15, 48, and 49 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Pilot Point, Texas' financial statements as a whole. The introductory section and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Respectfully Submitted, CONWAY COMPANY CPAs, PC 1021 Park Street Commerce, Texas Office (903) Fax (903) Wesley Street Greenville, Texas Office (903) Fax (903) #1 Horizon Court Rockwall, Texas Office (972) Fax (903)

17 CITY OF PILOT POINT,TEXAS MANAGEMENT DISCUSSION AND ANALYSIS SEPTEMBER 30, 2010 As management of the City of Pilot Point, we offer the readers of the City of Pilot Point's financial statements this narrative overview and analysis of the financial activities of the City of Pilot Point for the fiscal year ended September 30, We encourage readers to read the information presented here in conjunction with additional information that we have furnished in the City's financial statements, which follow this narrative. Financial Highlights The assets of the City of Pilot Point exceeded its liabilities at the close of the fiscal year by $7,268,664 (net assets). Of this amount, $316,056 is restricted for public safety, debt service, and tourism. The amount of unrestricted net assets is $1,561,985 (see page 19) The government's total net assets increased by $660,807 (see page 21), due to increases in both the Governmental activities and Business-type activities. As of the close of the current fiscal year, the City of Pilot Point's governmental funds reported combined ending fund balances of $1,075,293, an increase of 22% in comparison with the prior year. $731,338, or 68%, is available for spending at the government's discretion (unreserved fund balance - see page 22). At the end of the current fiscal year, unreserved fund balance for the General fund of $731,338 (see page 22) was 27% of total general fund expenditures for the fiscal year. The City of Pilot Point's total bonded debt decreased by ($410,000) or 10% during the current fiscal year. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City of Pilot Point's basic financial statements. The City's basic financial statements consist of three components; 1) governmentwide financial statements, 2) fund financial statements, and 3) notes to the financial statements. The basic financial statements present two different views of the City through the use of government-wide statements and fund financial statements. In addition to the basic financial statements, this report contains other supplemental information that will enhance the reader's understanding of the financial condition of the City of Pilot Point. 5

18 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30, 2010 Required Components of Annual Financial Report Figure 1 Management's Discussion and Analysis Basic Financial Statements I Government-wide Financial Statements I Fund Financial Statements Notes to the Financial Statements Summary Detail Basic Financial Statements The first two statements (pages 19-21) in the basic financial statements are the Governmentwide Financial Statements. They provide both short and long-term information about the City's financial status. The next statements (pages 22-28) are Fund Financial Statements. These statements focus on the activities of the individual parts of the City's government. These statements provide more detail than the government-wide statements. There are two parts to the Fund Financial Statements: 1) the governmental funds statements; and 2) the proprietary fund statements. The next section of the basic financial statements is the notes. The notes to the financial statements explain in detail some of the data contained in those statements. After the notes, supplemental information is provided to show details about the City's individual funds. Budgetary information required by the General Statutes also can be found in this part of the statements. 6

19 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30,2010 Government-wide Financial Statements The government-wide financial statements are designed to provide the reader with a broad overview of the City's finances, similar in format to a financial statement of a private-sector business. The government-wide statements provide short and long-term information about the City's financial status as a whole. The two government-wide statements report the City's net assets and how they have changed. Net assets are the difference between the City's total assets and total liabilities. Measuring net assets is one way to gauge the City's financial condition. The government-wide statements are divided into two categories: 1) governmental activities and 2) business-type activities. The governmental activities include most of the City's basic services such as public safety, parks and recreation, and general administration. Property taxes, sales taxes, franchise fees, permit revenues and municipal court fines finance most of these activities. The business-type activities are those that the City charges customers to provide. These include the utility services offered by the City of Pilot Point. The government-wide financial statements are on pages 19 through 21 of this report. Fund Financial Statements The fund financial statements (pages 22-28) provide a more detailed look at the City's most significant activities. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City of Pilot Point, like all other governmental entities in Texas, uses fund accounting to ensure and reflect compliance (or non-compliance) with finance-related legal requirements, such as the General Statutes or the City's budget ordinance. All of the funds of the City of Pilot Point can be divided into two categories: governmental funds and proprietary funds. Governmental Funds - Governmental funds are used to account for those functions reported as governmental activities in the government-wide financial statements. Most of the City's basic services are accounted for in governmental funds. These funds focus on how assets can readily be converted into cash flow in and out, and what monies are left at year-end that will be available for spending in the next year. Governmental funds are reported using an accounting method called modified accrual accounting which provides a short-term spending focus. As a result, the governmental fund financial statements give the reader a detailed short-term view that helps him or her determine if there are more or less financial resources available to finance the City's programs. The relationship between government activities (reported in the Statement of Net Assets and the Statement of Activities) and governmental funds is described in a reconciliation that is a part of the fund financial statements. The City of Pilot Point adopts an annual budget for its General Fund, as required by the General Statutes. The budget is a legally adopted document that incorporates input from the citizens of the City, the management of the City, and the decisions of the council about which services to provide and how to pay for them. It also authorizes the City to obtain funds from identified sources to finance these current period activities. The budgetary statement provided for the General Fund demonstrates how well the City complied with the budget ordinance and whether or not the City succeeded in providing the services as planned when the budget was adopted. The budgetary comparison statement uses the budgetary basis of accounting and is presented using the same format, language, and classifications as the legal budget document. The statement shows four columns: 1) the original budget; 2) the final budget as amended by the council; 3) the actual resources, charges to appropriations, and ending balances in the General Fund; and 4) the difference or variance between the final budget and the actual resources and charges. 7

20 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30,2010 Proprietary Funds - Proprietary Funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City of Pilot Point uses proprietary funds to account for its water, sewer, and solid waste activity. These funds are the same as those functions shown in the business-type activities in the Statement of Net Assets and the Statement of Activities. Notes to the Financial Statements - The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements are on pages 29 to 45 of this report. Other Information - In addition to the basic financial statements and accompanying notes, this report includes certain required supplementary information concerning the City of Pilot Point's progress in funding its obligation to provide pension benefits to its employees. Required supplementary information can be found beginning on page 48 of this report. Government-Wide Financial Analysis The government-wide financial statements for the fiscal year ended September 30, 2010 continue the implementation of a new standard of financial reporting for the City of Pilot Point, and many other units of government across the United States. Prior to fiscal year 2004, the City of Pilot Point maintained their governmental and proprietary fund groups as two separate and very distinct types of accounting without any type of consolidated statement that accurately reflected the operations and net assets of the government as a whole. There was a total column that appeared on the financial statements, but it was a memorandum total only. No attempt was made to adjust the statements in such a way that the total column would represent the overall financial condition of the City of Pilot Point. These statements were basically the equivalent of the fund financial statements that appear in this report with fiduciary funds and two account groups, the long-term debt and the general fixed assets, added in. The changes in the financial statement reporting model are mandated by the Governmental Accounting Standards Board (GASB). GASB Statement 34 dictated the changes you see in the City of Pilot Point's financial reports as well as those of many other units of government. While the City of Pilot Point was required to implement these changes for the fiscal year ended September 30, 2004, other units were required to implement Statement 34 in 2002, and

21 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30, 2010 The City of Pilot Point's Net Assets Figure 2 Current and other assets Capital assets Total assets $ Governmental Activities * 1,411,199 $ 1,068,673 5,043,318 5,089,656 6,454,517 6,158,329 $ Business-Type Activities ,400 $ 907,663 4,477,108 4,536,019 5,361,508 5,443,682 $ Total Primary Government ,295,599 $ 1,976,336 9,520,426 9,625,675 11,816,025 11,602,011 Long-term liabilities Other liabilities Total liabilities 2,517,053 2,899, , ,105 2,795,634 3,032,419 1,705,145 1,890,518 46,582 71,216 1,751,727 1,961,734 4,222,198 4,789, , ,321 4,547,361 4,994,153 Net assets: Invested in capital assets, net of related debt Restricted Unrestricted Total net assets $ 2,584,656 2,443, , , , ,114 3,658,883 $ 3,125,909 $ 2,805,967 2,665,978 86,433 80, , ,499 3,609,781 $ 3,481,948 $ 5,390,623 5,109, , ,118 1,561,985 1,083,613 7,268,664 $ 6,607,857 As noted earlier, net assets may serve over time as one useful indicator of a government's financial condition. The net assets of the City of Pilot Point exceeded liabilities by $7,268,664 as of September 30, The City's net assets increased by $660,807, for fiscal year ended September 30, However, the largest portion (74%) reflects the City's investment in capital assets (e.g. land, buildings, machinery, and equipment) less any related debt still outstanding that was issued to acquire those items. The City of Pilot Point uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City of Pilot Point's investment in its capital assets is reported net of the outstanding related debt, the resources needed to repay that debt must be provided by other sources since the capital assets cannot be used to liquidate these liabilities. An additional portion of the City of Pilot Point's net assets, 4%, represents resources that are subject to external restrictions on how they may be used. The remaining balance of $1,561,985 is unrestricted. *As restated, see financial statement note R. 9

22 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30, 2010 The City of Pilot Point's Changes in Net Assets Figure 3 Governmental Activities Business Activities Revenues: Program Revenues: Charges for services $ 379,049 $ 502,949 $ 1,496,841 $ 1,684,306 Operating Grants and Contributions 1, Capital Grants and Contributions 86, ,017 16,500 General Revenues: Property Taxes 1,303,831 1,304,956 Sales and Beverage Taxes 503, ,242 Hotel/Motel Taxes 6,528 6,198 Franchise Taxes 302, ,017 Donations 4,455 Sale of Capital Assets (3,867) Investment Income 62,570 56,448 35,417 27,488 Intergovernmental 256, ,116 Miscellaneous 32,944 8,595 6,745 Total Revenues 2,930,736 3,117,349 1,557,353 1,718,539 Expenses: Program Expenses General Government 513, ,620 Public Safety 1,180,339 1,346,332 Streets 327, ,447 Culture and Recreation 240, ,412 Interest on Long-Term Debt 132, ,846 Utility 1,433,230 1,371,939 Total Expenses 2,394,052 2,854,657 1,433,230 1,371,939 Increase in Net Assets before Transfers 536, , , ,600 Totals $ 1,875,890 $ 2,187,255 1, , ,017 1,303,831 1,304, , ,242 6,528 6, , ,017 4,455 (3,867) 97,987 83, , ,116 41,539 6,745 4,488,089 4,835, , ,620 1,180,339 1,346, , , , , , ,846 1,433,230 1,371,939 3,827,282 4,226, , ,292 Transfers (3,710) 147,259 3,710 (147,259) Increase in Net Assets 532, , , ,341 Net assets - October 1 as restated 3,125,909 2,817,367 3,481,948 3,286,013 Prior Period Adjustments (101,409) (3,406) Net assets - September 30 $ 3,658,883 $ 3,125,909 $ 3,609,781 $ 3,481, , ,292 6,607,857 6,103,380 (104,815) $ 7,268,664 $ 6,607,857 10

23 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30,2010 Governmental-type activities - The Governmental Funds increased the City's net assets by $532,974. Key elements of this increase are as follows: General government expenditures decreased by $220,979 or 30%. Public safety expenditures decreased by $165,993 or 13%. Expenses and Program Revenues - Governmental Activities (amounts expressed in thousands) Iii Expenses u Program Revenues 1,400,<XXl 1,200,<XXl 1,<XXl,<XXl lnj,<xxl 6OO,<XXl 4OO,<XXl 200,<XXl r--~ r-- ~ I I" 'I ~ I L J r ] E3 Revenues By Source - Governmental Activities Intergovernmental Revenues 9% Interest Income 2% Capital Grants and Other Revenues Contributions 1% 3% Franchise Fees 10% 11

24 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30, 2010 Business-type Activities - Business-type activities increased the City of Pilot Point's net assets by $127,833. A key element ofthis increase is as follows: Capital grants and contributions increased by $16,500 or 100%. Expenses and Program Revenues - Business Activities (amounts expressed in thousands) 1iII Expenses u Program Revenues 1,520 1,500 1,480 1,460 1,440 1,420 1,400 ~. Revenues By Source - Business Activities Investment Income Other Income ~..-- 2% 12

25 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30,2010 Financial Analysis of the City's Funds As noted earlier, the City of Pilot Point uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental Funds - The focus of the City of Pilot Point's governmental funds is to provide information on near-term inflows, outflows, and balances of usable resources. Such information is useful in assessing the City of Pilot Point's financing requirements. Specifically, unreserved fund balance can be a useful measure of a government's net resources available for spending at the end of the fiscal year. The general fund is the chief operating fund of the City of Pilot Point. At the end of the current fiscal year, unreserved fund balance of the General Fund was $731,338. As a measure of the general fund's liquidity, it may be useful to compare the unrestricted fund balance to total fund expenditures. Unreserved fund balance represents 27% of total General Fund expenditures. At September 30, 2010, the governmental funds of the City of Pilot Point reported a combined fund balance of $1,075,293, a 22% increase over last year. General Fund Budgetary Highlights: During the fiscal year, the City made no budget amendments. Generally, budget amendments fall into one of three categories: (1) amendments made to adjust the estimates that are used to prepare the original budget ordinance once exact information is available; (2) amendments made to recognize new funding amounts from external sources, such as Federal and State grants; and (3) increases in appropriations that become necessary to maintain services. Revenues were slightly less than the budgeted amounts mainly in the area of charges for services. Expenditures were also less than budgeted amounts, mainly in the area of public safety. Proprietary Funds - The City of Pilot Point's proprietary funds provide the same type of information found in the government-wide statements but in more detail. Unrestricted net assets of the proprietary funds at the end of the fiscal year amounted to $717,

26 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30, 2010 Capital Asset and Debt Administration Capital assets - The City of Pilot Point's investment in capital assets for its governmental and business-type activities as of September 30, 2010 totals $9,520,426 (net of accumulated depreciation). These assets include land, buildings, improvements, infrastructure, machinery & equipment, vehicles and construction in progress. The City of Pilot Point's capital assets for governmental activities decreased by 1%, while capital assets for business-type activities decreased by 2%. Major capital asset transactions during the year include the following additions (there were no Significant demolitions or disposals): Improvements to the water and sewer infrastructure Downtown street and sidewalk projects Figure 4 City of Pilot Point Capital Assets As of September 30,2010 (net of accumulated depreciation) Governmental Business-type Total Land 1,491,166 1,491, , ,421 1,637,587 Buildings and Improvements 1,542,071 1,601, , ,283 1,671,125 Infrastructure 1,031,100 1,121,027 4,001,267 4,171,226 5,032,367 Machinery & Equipment 926, ,683 59,100 83, ,567 Construction in Progress 52, , ,780 Total $ 5,043,318 $ 5,089,956 $ 4,477,108 $ 4,536,019 $ 9,520,426 $ ,637,587 1,736,363 5,292, ,772 9,625,975 More detailed information about the City's capital assets is presented in Note E to the financial statements. Long-Term Debt - As of September 30, 2010 the City of Pilot Point had $3,805,000 in general obligation bonds and certificates of obligation. This is a decrease of $410,000 or 10% in comparison with the prior year. City of Pilot Point Outstanding Debt As of September 30, 2009 General Obligation Bonds Certificates of Obligation Governmental Business-type Total ,557,680 1,733, , ,063 1,900,000 2,115, , ,000 1,285,000 1,395,000 1,905,000 2,100,000 $ 2,177,680 $ 2,438,937 $ 1,627,320 $ 1,776,063 =$=====3=,8=05=,0=0=0===$==4=,2=1=5=,0=00,= More detailed information about the City's long-term obligations is presented in Note I to the financial statements. Refer to Note S to the financial statements for subsequent events involving long-term debt transactions. 14

27 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) SEPTEMBER 30, 2010 Economic Factors and Next Year's Budgets and Rates The proposed budget for FY totals $6,295,930 and reflects an increase of 39% or $1,767,587 from the prior year's adopted budget. The proposed tax rate FY will increase to $0.68 per $100 valuation. Major capital projects the budget allows for are park improvements, City Hall improvements, Fire Station and related equipment, downtown sidewalk and street projects, and water system improvements Requests for Information This report is designed to provide an overview of the City's finances for those with an interest in the government's finances. Questions concerning the information found in this report or requests for additional financial information should be directed to the Chief Financial Clerk, 102 E. Main Street, City of Pilot Point, Texas

28 16

29 BASIC FINANCIAL STATEMENTS 17

30 18

31 STATEMENT OF NET ASSETS SEPTEMBER 30, 2010 Primary Government Governmental Business-type Activities Activities Total ASSETS Cash and Cash Equivalents $ 807,776 $ 524,123 $ 1,331,899 Receivables (net of allow for uncollectibles) 259, , ,855 Prepaid Expense 2,651 2,651 Restricted assets: Cash and Cash Equivalents 341, , ,467 Deferred Charges 25,727 25,727 Capital Assets not being depreciated Land 1,491, ,421 1,637,587 Construction in Progress 52, , ,780 Capital Assets net of accumulated depreciation: Buildings and Improvements 1,542, ,054 1,671,125 Infrastructure 1,031,100 4,001,267 5,032,367 Machinery and Equipment 926,467 59, ,567 Total Assets 6,454,517 5,361,508 11,816,025 Component Unit $ 86,000 27, ,767 LIABILITIES Accounts Payable 38,704 15,505 54,209 Accrued Expenses 57,433 8,525 65,958 Accrued Interest Payable 16,168 9,226 25,394 Short-term Note Payable 155, ,000 Customer Deposits 24,602 24,602 Internal Balances 11,276 (11,276) Noncurrent Liabilities: Due within one year: Compensated Absences 18,311 1,553 19,864 Notes Payable 43,821 43,821 Capital Leases 102, ,137 Bonds Payable 135,267 29, ,000 Certificates of Obligation 90, , ,000 Due in more than one year: Compensated Absences 83,399 32, ,850 Capital Leases 135, ,526 Bonds Payable 1,422, ,587 1,735,000 Certificates of Obligation 530,000 1,170,000 1,700,000 Total Liabilities 2,795,634 1,751,727 4,547,361 NET ASSETS Investment in Capital Assets, Net of Related Debt 2,584,656 2,805,967 5,390,623 Restricted for: Debt Service 152, ,984 Public Safety 66,226 86, ,659 Tourism 10,413 10,413 Unrestricted 844, ,381 1,561,985 Total Net Assets $ 3,658,883 $ 3,609,781 $ 7,268, ,767 $ 113,767 The notes to the financial statements are an integral part of these financial statements 19

32 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2010 Program Revenues Operating Capital Charges for Grants and Grants and Expenses Services Contributions Contributions Function/Program Activities Primary Government Governmental Activities: General Government $ 513,641 Public Safety 1,180,339 Streets 327,070 Culture and Recreation 240,343 I nterest on Long-Term Debt 132,659 Total governmental activities 2,394,052 Business-type Activities: Utility 1,433,230 Total business-type activities 1,433,230 Total primary government $ 3,827,282 $ 80,448 $ 298, ,049 1,496,841 1,496,841 $ 1,875,890 $ 1,153 1,153 1,153 $ $ 59,971 26,305 86,276 16,500 16, ,776 Component Unit Industrial Development Corporation 66,053 Total component unit $ 66,053 $ $ $ General revenues: Property Taxes Sales and Beverage Taxes Franchise Taxes Hotel/Motel Taxes Interest Income Intergovernmental Revenues Sale of Capital Assets Miscellaneous Transfers Total general revenues and transfers Change in net assets Net assets - beginning as restated Net assets - ending The notes to the financial statements are an integral part of these financial statements 20

33 Net (Expense) Revenue and Changes in Net A_s_se_t_s Primary Governme..:.,:n..:...t Governmental Activities Business Activities Total Component Unit $ $ (373,222) (855,818) (327,070) (238,805) p32,659~ P,927,574) {1,927,574) $ $ (373,222) $ (855,818) (327,070) (238,805) {132,659~ P,927,574) 80,111 80,111 80,111 80,111 $ 80,111 $ p,847,463) $ $ {66,053~ $ $ $ {66,053~ $ $ 1,303, , ,183 6,528 62, ,910 (3,867) 32,944 {3,710~ 2,460, ,974 3,125,909 3,658,883 $ $ 1,303,831 $ 503, , ,183 6,528 35,417 97,987 3, ,910 (148,717) (3,867) 8,595 41,539 3,710 47,722 2,508,270 19, , ,807 (46,283) 3,481,948 6,607, ,050 $ 3,609,781 $ 7,268,664 $ 113,767 The notes to the financial statements are an integral part of these financial statements 21

34 BALANCE SHEET-GOVERNMENTAL FUNDS SEPTEMBER 30, 2010 General Hotel Fund Fund Total ASSETS Cash and Cash Equivalents $ 807,776 $ $ 807,776 Receivables (net of allowance for uncollectibles) 259, ,467 Cash and Cash Equivalents - Restricted 330,892 10, ,305 Prepaid Expense 2,651 2,651 Total Assets 1,400,786 10,413 1,411,199 LIABILITIES AND FUND BALANCES Liabilities Accounts Payable 38,704 38,704 Accrued Expenses 57,433 57,433 Deferred Revenues 73,493 73,493 Short-term Note Payable 155, ,000 Due to Other Funds 11,276 11,276 Total Liabilities 335, ,906 Fund Balances Reserved for: Prepaid Expense 2,651 2,651 Capital Projects 111, ,681 Debt Service 152, ,984 Public Safety 66,226 66,226 Tourism 10,413 10,413 Unreserved-Designated for: Capital Projects 28,151 28,151 Other Special Projects 373, ,517 Unreserved-Undesignated 329, ,670 Total Fund Balances 1,064,880 10,413 1,075,293 Total Liabilities and Fund Balances $1,400,786 $ 10,413 $ 1,411,199 The notes to the financial statements are an integral part of these financial statements 22

35 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS SEPTEMBER 30, 2010 Total fund balances - governmental funds balance sheet $ 1,075,293 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. Accumulated depreciation has not been included in the governmental fund financial statements. Certificates of Obligation have not been included in the governmental fund financial statements. Bonds Payable have not been included in the governmental fund financial statements. Capital Leases have not been included in the governmental fund financial statements. Accrued liabilities for compensated absences have not been included in the fund financial statements. 8,688,632 (3,645,314) (620,000) (1,557,680) (237,663) (101,710) Revenue reported as deferred statements was recorded as statements. revenue in the governmental fund financial revenue in the government-wide financial 73,493 Interest is accrued on outstanding debt in the government-wide financial statements, whereas in the governmental fund financial statements, an interest expenditure is reported when due. (16,168) Net assets of governmental activities - statement of net assets $ 3,658,883 The notes to the financial statements are an integral part of these financial statements 23

36 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30,2010 Total General Hotel Governmental Fund Fund Funds REVENUES Property Taxes including P&I $ 1,299,743 $ $ 1,299,743 Beverage Taxes 6,826 6,826 Hotel Taxes 6,528 6,528 Franchise Fees 302, ,183 Fines and Forfeitures 129, ,631 Licenses and Permits 29,149 29,149 Sales Taxes 496, ,333 Charge for Services 220, ,268 Grant Revenue 31,237 31,237 Contributions 56,192 56,192 Intergovernmental Revenue 256, ,910 Investment Income 62, ,570 Miscellaneous Revenues 32,944 32,944 Total Revenues 2,923,578 6,936 2,930,514 EXPENDITURES Current: General Government 486,425 3, ,237 Public Safety 1,067,918 1,067,918 Streets 189, ,373 Culture and Recreation 206, ,585 Debt Service: Principal Retirement 358, ,120 Interest and Fiscal Agent Fees 134, ,963 Capital Outlays 292, ,380 Total Expenditures 2,735,764 3,812 2,739,576 Excess (deficiency) of revenues over (under) expenditures 187,814 3, ,938 Other Revenues and Financing Sources (uses) Transfers (3,710) (3,710) Sale of Capital Assets 3,432 3,432 Total Other Financing Sources (uses) (278) (278) Net Change in Fund Balances 187,536 3, ,660 Fund Balances, October 1 as restated 877,344 7, ,633 Fund Balances, September 30 $ 1,064,880 $ 10,413 $ 1,075,293 The notes to the financial statements are an integral part of these financial statements 24

37 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30,2010 Net change in fund balances - statement of revenues, expenditures and changes in fund balances - governmental funds $ 190,660 Amounts reported for governmental activities in the statement of activities are different because: Current year capital outlays are expenditures in the fund financial statements, but these are shown as an increase in capital assets in the government-wide financial statements. The effect of removing the 2010 capital outlays is to increase net assets. Depreciation is not recognized as an expense in governmental funds since it does not require the use of current financial resources. The effect of recording the current year's depreciation is to decrease net assets. Current year long-term debt principal payments on certificates of obligation are expenditures in the fund financial statements but are shown as a reduction in long-term debt in the government-wide financial statements. Changes to compensated absences liabilities are not shown in the fund financial statements. The net effect of the current year decrease is to increase net assets. Interest is accrued on outstanding debt in the government-wide financial statements, whereas in the fund financial statements an interest expenditure is reported when due. Revenues in the statement of activities that do not provide current financial resources are not reported as revenue in the fund financial statements. In governmental fund financial statements the proceeds from a sale of assets are shown as an increase in financial resources. In the government-wide financial statements, the gain or loss is calculated and reported. Change in net assets - statement of activities 292,380 (331,420) 358,120 24,140 2,304 4,088 (7,298) $ 532,974 The notes to the financial statements are an integral part of these financial statements 25

38 STATEMENT OF FUND NET ASSETS PROPRIETARY FUND SEPTEMBER 30, 2010 Utility Fund ASSETS Current Assets: Cash and Cash Equivalents $ 524,123 Receivables (net of allow for uncollectibles) 230,388 Due From Other Funds 11,276 Total Current Assets 765,787 Noncurrent Assets: Cash and Cash Equivalents - Restricted 104,162 Deferred Charges 25,727 Capital Assets: Land 146,421 Machinery & Equipment 375,434 Buildings 190,424 Infrastructure 6,969,420 Construction in Progress 141,266 Less: Accumulated Depreciation p,345,857} Total Capital Assets (net of accumulated depreciation) 4,477,108 Total Noncurrent Assets 4,606,997 Total Assets 5,372,784 LIABILITIES AND NET ASSETS LIABILITIES Current Liabilities: Accounts Payable 15,505 Customer Deposits 24,602 Accrued Interest 9,226 Accrued Expenses 8,525 Compensated Absences - current 1,553 Notes Payable - current 43,821 Bonds Payable - current 29,733 Certificates of Obligation - current 115,000 Total Current Liabilities 247,965 Noncurrent Liabilities: Compensated Absences 32,451 Bonds Payable 312,587 Certificates of Obligation 1,170,000 Total Noncurrent Liabilities 1,515,038 Total Liabilities 1,763,003 NET ASSETS Invested in capital assets (net of related debt) 2,805,967 Restricted for: Debt Service 86,433 Unrestricted 717,381 Total Net Assets $ 3,609,781 The notes to the financial statements are an integral part of these financial statements 26

39 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS - PROPRIETARY FUND FOR THE YEAR ENDED SEPTEMBER 30,2010 Utility Fund OPERATING REVENUES: Charges for Services Connect Fees Miscellaneous Total Operating Revenues OPERATING EXPENSES: Personnel Services Repairs and Maintenance Utilities Contractual Services Insurance Vehicle Expenses Other Supplies and Expenses Depreciation Total Operating Expenses Operating Income (Loss) NON-OPERATING REVENUES (EXPENSES): Interest Revenue Interest Expense Amortization Total Non-Operating Revenues (Expenses) Income Before Contributions and Transfers Capital Contributions Transfers Change in Net Assets Net Assets, October 1 Net Assets, September 30 $ 1,472,501 24,340 8,595 1,505, , , , ,742 7,980 23,258 74, ,138 1,347, ,169 35,417 (83,271 ) (2,692) (50,546) 107,623 16,500 3, ,833 3,481,948 $ 3,609,781 The notes to the financial statements are an integral part of these financial statements 27

40 STATEMENT OF CASH FLOWS PROPRIETARY FUND FOR THE YEAR ENDED SEPTEMBER 30,2010 Utility Fund CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers Cash Received from Other Sources Cash Paid to Employees Cash Paid to Suppliers Net Cash Provided by Operating Activities CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Advances to Other Funds Transfers from Other Funds Net Cash Used for Non-capital Financing Activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets Capital Contributions Principal paid on capital debt Interest paid on capital debt Net Cash Used for Capital & Related Financing Activities CASH FLOWS FROM INVESTING ACTIVITIES Interest Income Net Cash Provided by Investing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year Reconciliation of Operating Income to Net Cash Provided by Operation Activities: Operating Income (Loss) Adjustment to Reconcile Operating Income to Net Cash Provided by Operating Activities Depreciation (Increase) Decrease in Assets: Accounts Receivable Increase (Decrease) in Liabilities: Accounts Payable Accrued Expenses Customer Deposits Compensated Absences Total Adjustments Net Cash Provided (Used) by Operating Activities $ $ $ $ 1,521,838 8,595 (520,433) {592,019} 417,981 (7,450) 3,710 (3,740} (159,228) 16,500 (198,900) {84,784} (426,412) 35,417 35,417 23, , , , ,138 43,817 5,964 (2,814) (18,820) 13, , ,981 The notes to the financial statements are an integral part of these financial statements. 28

41 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 A. Summary of Significant Accounting Policies The City is a municipal corporation governed by an elected mayor and six-member council and has the authority to make decisions, appoint administrators and managers, and significantly influence operations. It also has the primary accountability for fiscal matters. Therefore, the City is a financial reporting entity as defined by Government Accounting Standards Board ("GASB") in its Statement No. 14, "The Financial Reporting Entity," as amended by GASB 39 "Determining Whether Certain Organizations are Component Units". The City reports in accordance with accounting principles generally accepted in the United States of America (GAAP) as established by the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB). The accounting and reporting framework and the more significant account principles and practices are discussed in subsequent sections of this Note. The remainder of the notes are organized to provide concise explanation, including required disclosures of budgetary matters, assets, liabilities, fund equity, revenues, expenditures/expenses, and other information considered important to gaining a clear picture of the City's financial activities for the fiscal year ended September 30, Reporting Entity The City is a municipal corporation governed by an elected mayor and six-member council and has the authority to make decisions, appoint administrators and managers, and significantly influence operations. It also has the primary accountability for fiscal matters. Therefore, the City is a financial reporting entity as defined by Government Accounting Standards Board ("GASB") in its Statement No. 14, "The Financial Reporting Entity," as amended by GASB 39 "Determining Whether Certain Organizations are Component Units". Under GASB 14, component units are organizations for which the City is financially accountable and all other organizations for which the nature and significance of their relationship with the City are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. Financial accountability exists if the City appoints a voting majority of an organization's governing board and is either able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the City. The City may be financially accountable for governmental organizations with a separately elected governing board, a governing board appointed by another government, or a jointly appointed board that is fiscally dependent on the City. The financial statements of the component units may be discretely presented in a separate column from the primary government or blended with the financial statements of the primary government. GASB 39 added clarification to GASB 14 by including entities which meet all three of the following requirements: 1. The economic resources received or held by the separate organization are entirely for the direct benefit of the primary government, its component units, or its constituents. 2. The primary government, or its component units, is entitled to, or has the ability to otherwise access, a majority of the economic resources received or held by the separate organization. 3. The economic resources received or held by an individual organization that the specific primary government, or its component units, is entitled to, or has the ability to other access, are significant to the primary government. Discretely Presented Component Unit - The Pilot Point Economic Development Corporation ("EDC") is a discretely presented component unit of the City. The EDC is governed by a board of seven directors, all of whom are appointed by the City Council of the City of Pilot Point and whom can be removed from office by the City Council at its will. The EDC was incorporated in the state of Texas in The nature and significance of the relationship between the primary government and the EDC is such exclusion would cause the City's financial statements to be misleading or incomplete. There are no separate financial statements issued for the EDC. 2. Financial Statement Presentation The basic financial statements are prepared in conformity with GASB Statement No. 34 which requires the governmentwide financial statements to be prepared using the accrual basis of accounting and the economic resources measurement focus. Government-wide financial statements do not provide information by fund, but distinguish between the City's governmental activities and business-type activities on the statement of net assets and statement of activities. Significantly, the City's statement of net assets includes both noncurrent assets and noncurrent liabilities. In addition, the government-wide statement of activities reflects depreciation expenses on the City's capital assets, including infrastructure. 29

42 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 A. Summary of Significant Accounting Policies 2. Financial Statement Presentation (continued) In addition to the government-wide financial statements, the City has prepared fund financial statements, which use the modified accrual basis of accounting and the current financial resources measurement focus for the governmental funds. The accrual basis of accounting is utilitized by proprietary funds. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. The City also presents Management's Discussion and Analysis which includes an analytical overview of the City's financial activities. In addition, a budgetary comparison statement is presented in the required supplementary section that compares the original adopted and final amended General Fund budget with actual results. 3. Basis of Presentation, Basis of Accounting a. Basis of Presentation Government-wide Statements: The basic financial statements include both government-wide (based on the City as a whole) and fund financial statements. The government-wide financial statements (Le., the statement of net assets and the statement of activities) report information on all of the activities of the primary government and its component units. As a general rule the effect of interfund activity has been eliminated. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely on fees and charges for support. The government-wide statement of activities demonstrates the degree to which the direct expenses of a functional category (Police, Fire, Public Works, etc.) or program are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or program. Program revenues include: a) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or program, b) grants and contributions that are restricted to meeting the operational requirements of a particular function or program, c) grants and contributions that are restricted to meeting the capital requirements of a particular function or program. Taxes and other items not properly included among program revenues are reported instead as general revenues. Fund Financial Statements: The fund financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the funds financial statements. The major governmental funds are the general fund, debt service, and capital improvements funds. GASB Statement No. 34 sets forth minimum criteria (percentage of assets, liabilities, revenues or expenditures/expenses of either fund category for the governmental and enterprise combined) for the determination of major funds. The non-major funds are combined in a column in the fund financial statements. The non-major funds are detailed in the combining section of the statements. Proprietary fund distinguish operating revenues and expenses from non-operating 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 principal operating revenues of the water and wastewater funds are charges to customers for sales and services. The water and wastewater fund also recognizes as operating revenue the portion of tap fees intended to recover the cost of connecting new customers to the system. Operating expenses for enterprise funds include the cost of sales and service, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting the definition are reported as non-operating revenues and expenses. b. Measurement Focus, Basis of Accounting Government-wide and Proprietary Fund Financial Statements: These financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the City gives (or receives) value without directly receiving (or giving) equal value in exchange, include property taxes, grants, entitlements and donations. On an accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants, entitlements and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. 30

43 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 A. Summary of Significant Accounting Policies 3. Basis of Presentation, Basis of Accounting b. Measurement Focus, Basis of Accounting (continued) Governmental Fund Financial Statements: Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The City considers all revenues reported in the governmental funds to be available if the revenues are collected within sixty days after year-end. Revenues from local sources consist primarily of property taxes. Property tax revenues and revenues received from the State are recognized under the susceptibleto-accrual concept. Miscellaneous revenues are recorded as revenue when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long-term debt, claims and compensated absences, which are recognized as expenditures to the extent they have matured. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of general long-term debt and acquisitions under capital leases are reported as other financing sources. The City reports the following major governmental funds: The General Fund is the general operating fund of the City. It is used to account for all financial resources except those required to be accounted for in another fund. The Hotel Fund accounts for hotel/motel tax revenues received by the City. Proprietary funds are accounted for on a flow of economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operation of these funds are included on the balance sheet. Proprietary fund-type operating statements present increases (e.g., revenues) and decreases (e.g., expenses) in net total assets. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the City's water, sewer and environmental waste services are charges to customers for sales and services. Operating expenses for Proprietary fund include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Under GASB Statement No. 20, "Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting," all proprietary funds will continue to follow Financial Accounting Standards Board ("FASB") standards issued on or before November 30, However, from that date forward, proprietary funds will have the option of either 1) choosing not to apply future FASB standards (including amendments of earlier pronouncements), or 2) continuing to follow new FASB pronouncements unless they conflict with GASB guidance. The City has chosen not to apply future FASB standards. The City reports the following major enterprise fund: The Utility Fund accounts for the operations of the water, sanitary sewer utilities and solid waste collection which are self-supporting activities rendering services on a user-charge basis. The City does not have any fiduciary funds. 4. Financial Statement Amounts a. Cash and Cash Equivalents For purposes of the statement of cash flows, highly liquid investments are considered to be cash equivalents if they have a maturity of three months or less when purchased. The City pools cash from all fund types to increase the amount of funds available for investment. Investments held by the City that have a remaining maturity of greater than one year from purchase are carried at fair value. Interest earnings are allocated to the respective funds based upon each fund's relative balance in the pool. Each fund may liquidate its equity in the pool on demand. 31

44 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 A. Summary of Significant Accounting Policies 4. Financial Statement Amounts (continued) b. Receivable and Payable Balances Trade and property tax receivables are shown net of an allowance for uncollectibles. c. Property Taxes Property taxes attach as an enforceable lien on property located in the City as of January 1. Taxes are levied on October 1 and are due and payable on or before January 31 of the following year. The Denton County Tax Assessor/Collector's office bills and collects the City's property taxes. The statutes of the State of Texas do not prescribe a legal debt limit. However, Article XI, Section 5 of the Texas Constitution applicable to cities of more than 5,000 population limits the ad valorem tax rate to $2.50 per $100 assessed valuation. For the fiscal year September 30, 2010, the City had a tax rate of $0.64 per $100 assessed valuation based upon the maximum rates described above. d. Prepaid Items Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. e. Restricted Assets Assets are reported as restricted when limitations on their use change the nature of normal understanding of the availability of the asset. Such constraints are either externally imposed by creditors, contributors, grantors, or laws of the other governments, or are imposed by law through constitutional provisions or enabling legislation. Restricted assets in the funds represent cash and cash equivalents and investments set aside for repayment of debt service, customer's water/sewer deposits, certain special projects, and specific capital outlays. 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. f. Capital Assets Capital assets, which include land, buildings, equipment, and improvements, purchased or acquired, are reported in the applicable governmental or business-like activities columns in the government-wide financial statements and proprietary fund types. The City defines capital assets as assets with an initial individual cost of more than $1,000 and an estimated useful life in excess of two years. Such assets are recorded at historical cost or estimated historical if historical cost is not available. Contributed assets are recorded at fair market value as of the date donated. Additions, improvements, and other capital outlays that Significantly extend the useful life of an asset are capitalized. Other costs incurred for repairs and maintenance are expensed. Major outlays for capital assets and improvements are capitalized as projects are constructed. Net interest incurred during the construction phase of capital assets of business-like activities is included as part of the capitalized value of the assets constructed. Management elected not to retroactively report infrastructure assets within the scope of GASB 34. Capital assets are being depreciated using the straight-line method over the following estimated useful lives: Estimated Asset Class Useful Lives Buildings Equipment Water & Sewer System Infrastructure g. Compensated absences It is the government's policy to permit employees to accumulate earned but unused vacation, overtime not paid (comp time), and sick pay benefits. A liability for unpaid accumulated sick leave is recorded in relation to these amounts. All vacation and comp time is accrued at close of fiscal year end in the government-wide and proprietary fund financial statements. 32

45 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 A. Summary of Significant Accounting Policies 4. Financial Statement Amounts (continued) h. Long-term Obligations In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, businesstype activities, or proprietary fund type statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. 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 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. i. Fund Equity 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. Designation of fund balances represent management plans that are subject to change. j. Comparative Data/Reclassification Comparative total data for the current year to budget have been presented in the supplementary section of the financial statement in order to provide an understanding of budget to actual. Also, certain amounts presented in the prior year data have been reclassified in order to be consistent with the current year's presentation. k. Interfund Activity Interfund activity results from loans, services provided, reimbursements or transfers between funds. Loans are reported as interfund receivables and payables as appropriate and are subject to elimination upon consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures or expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate benefiting fund and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers In and and Transfers Out are netted and presented as a single "Transfers" line on the government-wide statement of activities. Similarly, interfund receivables and payables are netted and presented as a single "Internal Balances" line of the government-wide statement of net assets. I. Use of Estimates The preparation of financial statements in conformity with GAAP requires the use of management's estimates. m. Program Revenues Certain revenues such as charges for services and impact fees are included in program revenues. n. Program Expenses Certain indirect costs such as administrative costs are included in the program expense reported for individual functional activities. B. Compliance and Accountabilitv 1. Finance-Related Legal and Contractual Provisions In accordance with GASB Statement No. 38, "Certain Financial Statement Note Disclosures," violations of finance-related legal and contractual provisions, if any, are reported below, along with actions taken to address such violations: Violation None reported Action Taken Not applicable 33

46 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 B. Compliance and Accountability (continued) 2. Deficit Fund Balance or Fund Net Assets of Individual Funds Following are funds having deficit fund balances or fund net assets at year end, if any, along with remarks which address such deficits: Fund Name None reported Deficit Amount Not applicable 3. Budgets and Budgetary Accounting The City adopts an "appropriated budget" of governmental fund types on the modified accrual basis of accounting by department. The City is required to present the adopted and final amended budgeted revenues and expenditures. The City compares the final amended budget to actual revenues and expenditures. The General Fund budget appears on page 48. The following procedures are followed in establishing the budgetary data: No later than August 15 of the fiscal year, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing October 1. The operating budget includes proposed expenditures and the means of financing them. Public hearings are conducted to obtain taxpayer comments. Prior to September 30, the budget is legally enacted through passage of an ordinance. If the Council takes no action on or prior to such day, the prior year fiscal budget shall be in force on a month to month basis until a new budget is adopted. The level of control (the level at which expenditures may not exceed budget) is the fund level. The City Manager and/or Director of Finance are authorized to approve a transfer of budgeted amounts within departments; however, any revisions that alter the total of any fund must be approved by the City Council. Budgets for the General Fund are legally adopted on a basis consistent with modified accrual accounting. The majority of the City's Capital Projects are budgeted on an annual basis. For budgeted capital projects not expended during the fiscal year the City will roll those balances into the following year's budget. Encumbrances for goods or purchased services are documented by purchase orders or contracts. At year end, encumbrances are canceled or reappropriated as part of the following year's budget. C. Deposits and Investments The City's funds are required to be deposited and invested under the terms of a depository contract. The depository bank deposits for safekeeping and trust with the City's agent bank approved pledged securities in an amount sufficient to protect City funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository banks dollar amount of Federal Deposit Insurance Corporation ("FDIC") insurance. Cash Deposits At September 30, 2010, the carrying amount of the City's deposits (cash, certificates of deposit, and interest-bearing savings accounts included in temporary investments) was $1,777,366 and the bank balance was $1,924,458. The City's cash deposits at September 30, 2010 and during the year ended September 30, 2010, were entirely covered by FDIC insurance or by pledged collateral held by the City's agent bank in the City's name. The amount of deposits covered by collateralized securities was $1,527,366. Cash and investments as of September 30, 2010 consist of and are classified in the accompanying financial statements as follows: 34

47 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 C. Deposits and Investments (continued) Statement of net assets: Primary Government Cash and Cash Equivalents Restricted Cash and Cash Equivalents Total cash and cash equivalents $ 1,331, ,467 $ 1,777,366 Cash on hand Savings and checking accounts Investments Total cash and cash equivalents $ 2,148 1,643, ,322 $ 1,777,366 Investments The Public Funds Investment Act ("Act") requires an annual audit of investment practices. Audit procedures in this area conducted as a part of the audit of the general purpose financial statements disclosed that in the areas of investment practices, management reports and establishment of appropriate policies, the City adhered to the requirements of the Act. Additionally, investment practices of the City were in accordance with local policies. Currently all of the City's investments are with LOGIC Investments. LOGIC is administered by First Southwest Asset Management, Inc. and JPMorgan Chase. Together, these organizations bring to the LOGIC program the powerful partnership of two leaders in financial services with a proven track record in local government investment pool management. LOGIC is a local government investment cooperative created under the Interlocal Cooperation Act, Chapter 791 of the Texas Government Code, and operates under the Public Funds Investment Act, Chapter 2256 of the Texas Government Code. The fund is rated AAAm by Standard & Poor's. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the City manages its exposure to interest rate risk is by investing mainly in investment pools which purchase a combination of shorter term investments with an average maturity of less than 60 days thus reducing the interest rate risk. The City monitors the interest rate risk inherent in its portfolio by measuring the weighted average maturity of its portfolio. The City has no specific limitations with respect to this metric. As of September 30, 2010, the City had the following investments: Investment Type LOGIC Amount 131,322 $ 131,322 Weighted Average Maturity 47 As of September 30, 2010 the City did not invest in any securities which are highly sensitive to interest rate fluctuations. Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the Public Funds Investment Act, the City's investment policy, or debt agreements, and the actual rating as of year end for each investment type: Investment Type LOGIC Minimum Amount Legal Rating 131,322 AAAorAAA-m $ 131,322 Rating as of YearEnd AAA-m Concentration of Credit Risk With the exception of U.S. Treasury securities and authorized pools, no more than 50% of the City's total investment portfolio will be invested in a single security type. 35

48 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30,2010 C. Deposits and Investments (continued) Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. Consistent with the requirements of the Public Funds Collateral Act, it is the policy of the City to require full collateralization of all City investments and funds on deposit with a depository bank, other than investments which are obligations of the U.S. government and its agencies and instrumentalities. As of September 30, 2010, the City deposits with financial institutions in excess of federal depository insurance limits were fully collateralized. D. Receivables Receivables as of year end for the government's individual major funds and nonmajor funds, including the applicable allowances for uncollectible accounts, are as follows: E. Capital Assets General Utility Total Receivables: Taxes $ 249,812 $ 993 $ 250,805 Fees and Charges 223, , ,507 Gross Receivables 473, , ,312 Less: allowance for uncollectibles 213,800 11, ,457 Net Total Receivables $ 259,467 $ 230,388 $ 489,855 Capital asset activity for the period ended September 30, 2010 was as follows: Beginning Ending Balances Additions Decreases Balances Governmental Activities Capital assets, not being depreciated: Land $ 1,491,166 $ $ $ 1,491,166 Construction in Progress 52,514 52,514 Total capital assets, not being depreciated: 1,491,166 52,514 1,543,680 Capital assets, being depreciated: Buildings & Improvements 2,361,763 9,190 2,370,953 Infrastructure 2,779,445 38,780 2,818,225 Equipment 1,846, ,896 (82,236} 1,955,774 Total capital assets being depreciated 6,987, ,866 (82,236} 7,144,952 Less accumulated depreciation for: Buildings & Improvements (760,683) (68,199) (828,882) Infrastructure (1,658,417) (128,708) (1,787,125) Equipment (969,731} (134,513} 74,937 (1,029,307} Total accumulated depreciation (3,388,831) (331,420} 74,937 (3,645,314) Total capital assets, being depreciated, net 3,598,491 (91,554) (7,299) 3,499,638 Governmental activities capital assets, net $ 5,089,657 $ (39,040) $ (7,299) $ 5,043,318 36

49 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 E. Cagital Assets (continued) Beginning Ending Balances Additions Decreases Balances Business-type Activities Capital assets, not being depreciated: Land $ 146,421 $ $ $ 146,421 Construction in Progress 141, ,266 Total capital assets, not being depreciated 146, , ,687 Capital assets, being depreciated: Buildings & Improvements 190, ,424 Infrastructure 6,956,072 13,348 6,969,420 Equipment 370,820 4, ,434 Total capital assets being depreciated 7,517,316 17,962 7,535,278 Less accumulated depreciation for: Buildings & Improvements (55,141) (6,229) (61,370) Infrastructure (2,784,846) (183,307) (2,968,153) Equipment (287,732) (28,602) (316,334) Total accumulated depreciation (3,127,719) (218,138) (3,345,857) Total capital assets, being depreciated, net 4,389,597 (200,176) 4,189,421 Business-type activities capital assets, net $ 4,536,018 $ (58,910) $ $ 4,477,108 Depreciation expense was charged to functions/programs of the primary government as follows: Governmental activities: Administration Ambulance Fire Department Library Parks & Recreation Police Department Streets Total depreciation expense - governmental activities Business-type activities: Water Sewer Total depreciation expense - business-type activities $ $ $ $ 29,483 11,844 86,865 17,646 19,146 29, , ,420 78, , ,138 Cagital Imgrovement Program Commitments The City has active construction projects as of September 30, The projects include the rehabilitation of a water tank and waterline improvements. Commitments for construction in progress are composed of the following: WaterlineslTank Rehab Building Energy Improvements Main Street Sidewalk Improvements Project Budget Appropriation $ 885,000 33, ,500 $ 1,164,530 Spent to Date $ 141,266 3,250 49,264 $ 193,780 Remaining Commitment $ 743,734 29, ,236 $ 970,750 37

50 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30,2010 F. Bond Issuance Costs The City incurred various bond issuance fees upon issuance of bonds. These fees are amortized over the life of the bonds. The following are schedules of these fees: Prior Years Current Year Amortization Amortization Utility Fund Fees Ex~ense Ex~ense Balance 1999 C.O.'s $ 35,400 $ (18,733) $ (1,770) $ 14, G.O. Bonds 18,434 {6,682) {922) 10,830 Totals $ 53,834 $ {25,415) $ {2,692) $ 25,727 G. Deferred Revenue Governmental funds report deferred revenue in connection with receivables for revenue that is not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned. Tax revenues which are reported as deferred revenue in the governmental funds are recorded as revenue in the government-wide financial statements. At the end of the current fiscal year, the various components of deferred revenue reported in the governmental funds were as follows: H. Short-term Debt General Fund Tax Revenue $ 73,493 On September 17, 2010, the City issued a note payable in the amount of $155,000. The note was repaid in November 2010 with interest of $833. I. Long-Term Obligations A summary of long-term debt transactions, including the current portion, for the year ended September 30, 2010, is as follows: Beginning Ending Due Within Balance Increase Decrease Balance One Year Governmental Activities General Obligation Bonds & Certificates of Obligation $ 2,438,937 $ $ (261,257) $ 2,177,680 $ 225,267 Total Bonds Payable 2,438,937 (261,257) 2,177, ,267 Capital Leases 334,526 (96,863) 237, ,137 Compensated absences 125,851 6,193 {30,334) 101,710 18,311 Governmental activity Long-term liabilities $ 2,899,314 $ 6,193 $ {388,454) $ 2,517,053 $ 345,715 Business-type Activities Beginning Ending Due Within Balance Increase Decrease Balance One Year General Obligation Bonds & Certificates of Obligation $ 1,776,063 $ $ {148,743) $ 1,627,320 $ 144,733 Total Bonds Payable 1,776,063 (148,743) 1,627, ,733 Notes Payable 93,978 (50,157) 43,821 43,821 Compensated absences 20,477 15,393 (1,866) 34,004 1,553 Business-type activity Long-term liabilities $ 1,890,518 $ 15,393 $ {200,766) $ 1,705,145 $ 190,107 38

51 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 I. Long-Term Obligations (continued) Changes in Governmental Long-term Debt b!l Series Amounts Amounts Interest Outstanding Outstanding Rate Amounts September 30 September 30 Descri~tion Payable Issue 2009 Issued Retired GO Bonds % $ 2,830,000 $ 1,733,937 $ $ (176,257) $ 1,557, CO's % 1,400, ,000 (85,000) 620,000 Total Bonds Payable 4,230,000 2,438,937 (261,257) 2,177,680 Lease - Refinance 5.337% 540, ,526 (96,863) 237,663 Compensated absences 125,851 6,193 (30,334) 101,710 Totals $ 4,770,443 $ 2,899,314 $ 6,193 $ (388,454) $ 2,517,053 Due Within One Year $ 135,267 90, , ,137 18,311 $ 345,715 Debt service requirements are as follows: Total Year Ending September 30: Princi~al Interest Reguirements 2011 $ 225,267 $ 106,162 $ 331, ,465 95, , ,762 84, , ,475 72, , ,574 61, , , , , ,188 22, ,528 Totals $ 2,177,680 $ 615,924 $ 2,793,604 $1,400,000 Certificates of Obligation issued for street reconstruction, park improvements and to pay the costs associated with the issuance of the Certificates. Per the repayment terms of the certificates, the interest rate starts at 5.25%, rising thereafter to a maximum of 7.25%. This series was refinanced subsequent to year-end and is more fully discussed in Note S. $2,830,000 General Obligation Refunding and Improvement Bonds issued for the construction of a new municipal complex, park improvements, improvements to and furnishing the fire station, and refunding outstanding obligations. Per the repayment terms of the bonds, the interest rate starts at 3%, rising thereafter to a maximum of 5%. Changes in BusinesS-1!l!2e Long-term Debt b!l Series Amounts Amounts Interest Amounts Outstanding Outstanding Rate Original September 30 September 30 Descri~tion Payable Issue 2009 Issued Retired GO Bonds % $ 500,000 $ 381,063 $ $ (38,743) $ 342, CO's % 2,200,000 1,395,000 (110,000) 1,285,000 Total Bonds Payable 2,700,000 1,776,063 (148,743) 1,627,320 NIP - Water Well 5.20% 230,228 93,978 (50,157) 43,821 Compensated absences 20,477 15,393 (1,866) 34,004 Totals $ 2,930,228 $ 1,890,518 $ 15,393 $ (200,766) $ 1,705,145 Due Within One Year $ 29, , ,733 43,821 1,553 $ 190,107 Debt service requirements are as follows: Total Year Ending September 30: Princi~al Interest Reguirements 2011 $ 144,733 $ 73,807 $ 218, ,535 67, , ,238 61, , ,525 54, , ,426 47, , , , , ,812 4,910 69,722 Totals $ 1,627,320 $ 421,823 $ 2,049,143 39

52 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30,2010 I. Long-Term Obligations (continued) $2,200,000 Combination Tax and Revenue Certificates of Obligation issued for the expansion and rehabilitation of the City's sanitary sewer plant and to pay the costs associated with the issuance of the Certificates. Per the repayment terms of the certificates, the interest rate starts at 4.20%, rising thereafter to a maximum of 5.20%. This series was refinanced subsequent to year-end and is more fully dicussed in Note S. $500,000 General Obligation Refunding and Improvement Bonds issued for waterworks system improvements and refunding outstanding obligations. Per the repayment terms of the bonds, the interest starts at 3%, rising thereafter to a maximum of 5%. Capital Leases The City entered into a finance contract for the refinance of three existing leases in September of The existing leases were used to purchase two fire trucks, and an ambulance. The lease is being repaid over a five year period at an interest rate of 5.337%. The lease is secured by an annual levy of property taxes by the City. Capital Lease requirements are as follows: Year Ending September 30: Totals Less Interest Present Value of Minimum Lease Payments General Fund $ 112, ,799 28, ,798 16,135 $ 237,663 Notes Payable The City entered incurred a note payable to Point Bank in the amount of $230,228 to refinance a capital lease for a water well in October of The note calls for fifty eight monthly payments of $4,493 with an interest rate of 5.20%. The note is secured by the water well. Debt service requirements are as follows: Year Ending September 30: Principal Interest $ 43,821 $ 1,064 $ 43,821 $ 1,064 Total Requirements $ 44,885 $ 44,885 J. Restricted Assets The balances of restricted asset accounts in the governmental funds are as follows: Purpose Debt Service Hotel/Motel - Tourism Unspent Debt Proceeds - Capital Projects Public Safety Cash & Cash EqUivalents $ 152,984 10, ,681 66,226 $ 341,305 The balances of restricted asset accounts in the proprietary funds are as follows: Purpose Utility Customer DepOSits Capital Projects Debt Service Cash & Cash EqUivalents $ 17, ,433 $ 104,162 40

53 NOTES TO THE BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2010 K. Pension Plan 1. Plan Description The City provides pension benefits for all of its full-time employees through a non-traditional, joint contributory, hybrid defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS), one of 837 administered by TMRS, an agent multiple-employer public employee retirement system. Benefits depend upon the sum of the employees contributions to the plan, with interest, and the City-financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount at least equal to two times what would have been contributed by the employee, with interest, prior to establishment of the plan. Monetary credits for service since the plan began are a percent (100%, 150%, or 200%) of the employees accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit which is a theoretical amount which, when added to the employees accumulated contributions and the monetary credits for service since the plan began, would be the total monetary credits and employee contributions accumulated with interest if the current employee contribution rate and city matching percent had always been in existence and if the employees salary had always been the average of his salary in the last three years that are one year before the effective date. At retirement, the benefit is calculated as if the sum of the employee's accumulated contributions with interest and the employer-financed monetary credits with interest were used to purchase an annuity. Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. A member is vested after 5 years. The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statues. The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. Plan provisions for the City were as follows: Deposit Rate: 5% Matching Ratio (City to Employee): 2-1 A member is vested after 5 yrs Members can retire at certain ages, based on the years of service with the City. The Service Retirement Eligibilities for the City are: 5 yrs/age 60, 20 yrs/any age. TMRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information (RSI) for TMRS; the report also provides detailed explanations of the contributions, benefits and actuarial methods and assumptions used by the System. This report may be obtained by writing to TMRS, POBox , Austin TX or by calling ; in addition, the report is available on TMRS' website at 2. Contributions Under the state law governing TMRS, the actuary annually determines the City contribution rate. This rate consists of normal cost contribution rate and the prior service contribution rate, both of which are calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the currently accruing monetary credits due to the City matching percent, which are the obligation of the City as of an employee's retirement date, not at the time the employee's contributions are made. The normal cost contribution rate is the actuarially determined percent of payroll necessary to satisfy the obligation of the City to each employee at the time his/her retirement becomes effective. The prior service contribution rate amortizes the unfunded (overfunded) actuarially liability (asset) over the remainder of the plan's 28-year amortization period. The unit credit actuarial cost method is used for determining the City contribution rate. Both the employees and the City make contributions. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect (Le. December 31, 2009 valuations effective for rates beginning January 2011). 41