The Authority of the Borough of Charleroi - Water System

Transcription

1 The Authority of the Borough of Charleroi - Water System For the Years Ended December 31, 2016 and 2015 Financial Statements And Required Supplementary Information And Supplementary Information

2 The Authority of the Borough of Charleroi - Water System For the Years Ended December 31, 2016 and 2015 Table of Contents Independent Auditor's Report 1 Management Discussion and Analysis 3 Basic Financial Statements Statements of Net Position 7 Statements of Revenues, Expenses and Changes in Net Position 8 Statements of Cash Flows 9 10 Required Supplementary Information Schedule of Changes in the Authority's Net Pension Liability and Related Ratios 30 Schedule of Changes in the Authority's Net Pension Liability and Related Ratios - Nine Year Analysis 31 Supplementary Information Independent Auditor's Report on Supplementary Information 32 Exhibit I - Statements of Operating Revenues 33 Exhibit II - Statements of Operating Expenses 34

3 Robert D. Hoag, CPA, CGMA, MST David A. Keefe, CPA, CGMA William M. Rader, CPA, CGMA Gregory J. Palmieri, CPA, CGMA John C. Fogle, CPA Ronald L. Parker, CPA R.D. HOAG & ASSOCIATES A PROFESSIONAL CORPORATION Certified Public Accountants 2607 NICHOLSON ROAD SEWICKLEY, PA (724) FAX (724) jfogle@rdhcpapc.com Web: Independent Auditor s Report To the Board of Directors of the Authority of the Borough of Charleroi - Water System: We have audited the accompanying financial statements of the Authority of the Borough of Charleroi - Water System as of and for the years ended December 31, 2016 and 2015, and the related notes to the financial statements, which collectively comprise the basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not 1

4 for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Authority of the Borough of Charleroi Water System as of December 31, 2016 and 2015, and the changes in its financial position, and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 3 through 6 and pension information on pages 30 through 31 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. June 30,

5 Management Discussion and Analysis Years ended December 31, 2016 and 2015 This section presents management's analysis of the Authority of the Borough of Charleroi Water System's (the Authority) financial conditions and activities for the year ended December 31, 2016 and Please read this information in conjunction with the financial statements, which follow this section. The Authority of the Borough of Charleroi Water System s comparative 2016 and 2015 financial statements have been conformed to meet the requirements of Governmental Accounting Standards Board (GASB) Statement No. 34, "Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments." The financial statements incorporate three basic statements: the Statement of Net Position, the Statement of Revenues, Expenses and Changes in Net Position, and the Statement of Cash Flows. This Management's Discussion and Analysis (MD&A) is based upon facts, decisions, and conditions known as of the date of the audit report. Please note that the historical information provided in the financial statements and MD&A reflects the results of past operations and is not necessarily indicative of results of future operations. Future operations will be affected by various factors, including, but not limited to, regulatory mandates, rate changes, weather, labor contracts, population changes, business environment and other matters, the nature and effect of which cannot now be determined. Using This Financial Report - Overview of Reporting Changes The Statement of Net Position presents information about the resources which are available to the Authority and claims against these resources. Both assets and liabilities are classified in a format which segregates current from long-term. In addition, assets available for special purposes - labeled "restricted assets" - are segregated from those assets available for operations. The Authority's restricted assets represent money on deposit with the bond trustee to meet indenture, debt service, and construction program requirements. Liabilities have a similar classification segregating claims on restricted assets from claims on assets available for operations. The net position section of the Statement of Net Position classifies the total net position as net investment in capital assets, restricted for capital activity and debt service, and unrestricted. The Statement of Revenues, Expenses and Changes in Net Position presents the results of the business activities over the course of the year and information as to how the net position changed during the year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. This Statement also provides information about whether the Authority has successfully recovered its costs through its user fees and other charges; its profitability and credit worthiness. 3

6 Management Discussion and Analysis Years ended December 31, 2016 and 2015 The Statement of Cash Flows has been prepared using the indirect method. The statement provides an analysis of the Authority's cash by operating, investing, and capital and related financing activities over the respective fiscal year. The Authority's rates are based on the cost to provide service, including the payment of interest and principal on the Authority's debt. The primary objectives are to improve equity among customer classes and to ensure that capital assets are allocated on the basis of long-term capacity needs. The notes to the financial statements provide disclosures and other information that are essential to a full understanding of material data provided in the statements. The notes present information about the Authority's accounting policies, significant account balances and activities, material risks, obligations, commitments, contingencies and other information. Supplementary information comparing actual expenses in each year is provided. Financial Highlights Management believes the Authority's financial condition is strong. The Authority is well within its debt covenants and the more stringent financial policies and guidelines set by the Board. The following are the financial highlights: The Authority delivered 1,156 million gallons of water in Total assets at December 31, 2016 and December 31, 2015 were $48,703,661 and $49,130,923, respectively. Operating revenues were $8,569,085 in 2016 compared to $8,513,937 in Operating expenses increased to $7,750,920 in 2016 from $7,083,216 in There was a net gain of $67,449 at December 31, 2016 versus a net gain of $406,341 at December 31, Net position increased in 2016 to $18,517,757 when compared to the balance of $18,450,308 in Financial Analysis of the Authority of the Borough of Charleroi Water Authority The statements of net position, and the statements of revenues, expenses, and changes in net position provide useful information in the analysis of the financial position of the Authority. The statements report the net position of the Authority and changes in the net position. 4

7 Authority of the Borough of Charleroi Water System Management Discussion and Analysis Years Ended December 31, 2016 and 2015 The net position, the difference between total assets and total liabilities, is a significant measure of the health of the Authority. Over time, increases and decreases in the Authority s net position is one indicator of whether its financial health is improving or deteriorating. The comparative condensed statements of net position, statements of revenues, expenses, and changes in net assets, and other selected information is presented below: Condensed Statement of Net Position (Dollars expressed in Thousands) Increase (Decrease) Assets: Capital Assets Producing Assets $ 40,997 $ 22,596 $ 18,401 Construction in Progress 1,199 20,048 (18,849) Restricted Assets 2,200 2,450 (250) Current Assets 4,307 4, Total Assets 48,704 49,131 (427) Deferred Outflows of Resources Liabilities: Current Liabilities 1,251 1,711 (460) Long-term Liabilities 27,594 29,116 (1,522) Total Liabilities 28,844 30,827 (1,983) Deferred Inflows of Resources (7) Net Position: Net Investment in Capital Assets 14,429 18,156 (3,727) Restricted for Capital Activity and Debt Serv 1, ,512 Unrestricted 2, ,282 Total Net Position $ 18,518 $ 18,450 $ 68 5

8 Authority of the Borough of Charleroi Water System Management Discussion and Analysis Years Ended December 31, 2016 and 2015 Condensed Statement of Revenues, Expenses, and Net Position (Dollars expressed in Thousands) Increase (Decrease) Operating Revenues $ 8,569 $ 8,514 $ 55 Operating Expenses Water Treatment Plant 1,143 1, Distribution System 2,146 2, General Expenses 3,004 2, Depreciation 1,457 1, Total Operating Expenses 7,751 7, Operating Income 818 1,431 (613) Non-Operating Revenues (Expenses) - Investment Income (Loss) 84 (14) 98 Miscellaneous Income Interest Expense (876) (882) 6 Rental Expense (118) (141) 23 Total Non-Operating Revenues (Expense (751) (1,025) 274 Net Gain $ 67 $ 406 $ (339) The number of customers served by the Authority as of December 31, 2016 and 2015 are as follows: Residential 9,801 10,080 Commercial Industrial Public Total Customers 10,673 11,058 Municpal Fire Hydrants

9 Authority of the Borough of Charleroi Water System Statements of Net Position December 31, 2016 and Assets: Current Assets Cash and Cash Equivalents $ 2,930,846 $ 2,600,927 Accounts Receivable, net Billed 455, ,377 Unbilled 507, ,124 Material Supplies and Inventory 262, ,485 Prepaid Insurance 150, ,799 Total Current Assets 4,306,999 4,036,712 Restricted Assets: Cash and Cash Equivalents 629, ,328 Investments 1,570,906 1,516,969 Total Restricted Assets 2,200,449 2,450,297 Capital Assets: Net of Accumulated Depreciation 40,996,882 22,432,375 Not being Depreciated 1,199,331 20,211,539 Total Capital Assets 42,196,213 42,643,914 Total Assets 48,703,661 49,130,923 Deferred Outflows of Resources 570, ,250 Liabilities: Current Liabilities Water Revenue Bonds - Current $ 95,000 $ 30,000 Payable to Pennvest - Current 699, ,172 Accounts Payable 148, ,676 Accrued Liabilities 221, ,098 Consumer Deposits 86,122 90,265 Total Current Liabilities 1,250,830 1,711,211 Long Term Debt Water Revenue Bonds Series 2012 (less current portion) 640,000 9,310,000 Water Revenue Bonds Series 2014 (less current portion) 8,885,000 8,905,000 Water Revenue Bonds Series 2016 (less current portion) 9,830,000 - Payable to Pennvest (less current portion) 8,238,613 8,980,265 Total Long Term Debt 27,593,613 27,195,265 Net Pension Liability 1,851,068 1,901,686 Liability for Line Extensions 10,000 19,050 Total Liabilities 30,705,511 30,827,212 Deferred Inflows of Resources 50,950 57,653 Net Position: Net Position: Net Investment in Capital Assets 14,429,262 18,197,479 Restricted for Debt Service 1,579,231 67,076 Unrestricted 2,509, ,753 Total Net Position $ 18,517,757 $ 18,450,308 The accompanying notes are an integral part of the financial statements. 7

10 Authority of the Borough of Charleroi Water System Statements of Revenue, Expenses and Changes in Net Position Years Ended December 31, 2016 and Operating Revenues: Water Billings $ 8,355,170 $ 8,291,031 Other 213, ,906 Total Operating Revenues 8,569,085 8,513,937 Operating Expenses: Operating Expenses - Exhibit II 6,294,035 5,823,037 Depreciation 1,456,885 1,260,179 Total Operating Expenses 7,750,920 7,083,216 Operating Income 818,165 1,430,721 Nonoperating Revenues and (Expenses): Investment Income (Loss) 83,643 (13,630) Miscellaneous Income 159,654 12,039 Interest Expense (876,084) (882,269) Rental Expense (117,929) (140,520) Total Nonoperating Revenues (Expenses), Net (750,716) (1,024,380) Increase in Net Position 67, ,341 Net Position at Beginning of Year 18,450,308 18,043,967 Net Position at End of Year $ 18,517,757 $ 18,450,308 The accompanying notes are an integral part of the financial statements. 8

11 Authority of the Borough of Charleroi Water System Statements of Cash Flows Years Ended December 31, 2016 and Cash Flows From Operating Activities: Increase in Net Position $ 67,449 $ 406,341 Adjustments to reconcile net income to net cash flow provided by operating activities: Realized and Unrealized Gain on Investments - 4,701 Depreciation and Amortization 1,456,885 1,260,179 Changes in assets and liabilities: Accounts Receivable 45, ,860 Inventories 26,561 (10,700) Other Assets (12,578) 13,499 Accounts Payable (623,502) 87,071 Deferred Outflows (Inflows) (373,010) 155,537 Other Liabilities 35,687 (176,440) Net Cash Flow Provided by Operating Activities 623,141 1,984,048 Cash Flows From Investing Activities: Additions to Property, Plant & Equipment (1,009,184) (7,837,293) Proceeds from Sale of Equipment - 8,600 Purchases of Investments 249,848 (1,521,671) Net Cash (Used in) Investing Activities (759,336) (9,350,364) Cash Flows From Financing Activities: Repayment of Debt (688,268) (231,040) Line of Credit - Net - (475,711) Proceeds from Long Term Debt Borrowing 1,205,000 - Increase in Net Investment in Capital Assets (354,403) 30,650 Net Cash (Used in) Financing Activities 162,329 (676,101) Net Increase (Decrease) in Cash 26,134 (8,042,417) Cash at Beginning of Year 3,534,255 11,576,672 Cash at End of Year $ 3,560,389 $ 3,534,255 Consists of: Restricted Cash and Cash Equivalents $ 629,543 $ 933,328 Unrestricte Water Revenue Bonds Series 2014 (less current po 2,930,846 2,600,927 Payable to Pennvest (less current portion) $ 3,560,389 $ 3,534,255 Supplemental Disclosures of Cash Flow Information: Cash Paid For Interest Expense $ 876,084 $ 882,269 The accompanying footnotes are an integral part of the financial statements. 9

12 NOTE 1 Organization: The Authority of the Borough of Charleroi Water System (the Authority), of Washington County, Pennsylvania, was organized under the Municipal Authorities Act of 1945, P.L. 382, as amended. The Authority is authorized by law to acquire, hold, construct, improve, maintain, and operate a water system to serve individual residents and businesses in the Borough of Charleroi and certain surrounding communities, to borrow money, to make and issue negotiable bonds and to secure the payments of such bonds or any part thereof by pledge or deed of trust of all or any of its receipts and revenues. NOTE 2 Summary of Significant Accounting Policies: Significant accounting policies applied in the preparation of the accompanying financial statements of the Authority are as follows: The Financial Reporting Entity. The Authority is not a component unit of any government, therefore, the financial statements include only the financial position, results of operations, and cash flows of the Water System. Basis of Accounting and Measurement Focus. The Authority prepares its financial statements on the economic resources measurement focus and the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). The Authority functions as a Business-Type Activity, as defined by the Governmental Accounting Standards Board (GASB). Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Clarification of Revenues. Operating revenues and expenses are distinguished from nonoperating items in the statement of revenues, expenses, and changes in net position. Operating revenues generally result from providing services in connection with the Authority s principal ongoing operations. The principal operating revenues of the Authority are charges to customers for the sale of water. Operating expenses include the cost of providing services, administrative expenses, depreciation on capital assets and amortization on bond premiums. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. 10

13 Classification of Net Position. In accordance with the provision in GASB Statement No. 34, Basic Financial Statements- and Management s Discussion and Analysis for State and Local Governments, net position is classified into three components net investment in capital assets; restricted; and unrestricted. These classifications are defined as follows: Net Investment in Capital Assets. This component of net position consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Deferred outflows of resources and deferred inflows of resources that are attributable to the acquisition, construction, or improvement of those assets or related debt are also included in this component of net position. If there are significant unspent related debt proceeds or deferred inflows of resources at the end of the reporting period, the portion of the debt or deferred inflows of resources attributable to the unspent amount is not included in the calculation of net investment in capital assets. Instead, that portion of the debt or deferred inflow of resource is included in the same net position component (restricted or unrestricted) as the unspent amount. Restricted. This component of net position consists of restricted assets reduces by liabilities and deferred inflows of resources related to those assets. Generally, a liability relates to restricted assets if the asset results from a resource flow that also results in the recognition of a liability or if the liability will be liquidated with the restricted assets reported. Unrestricted. This component of net position is the net amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted components of net position. When an expense is incurred that can be paid using either restricted or unrestricted resources, the Authority s policy is to first apply the expense towards restricted resources and then towards unrestricted resources. Premiums and Discounts. Original issue bond premiums and discounts are amortized over the life of the related bonds using the effective interest method of amortization. The unamortized balance of premiums and discounts is presented net on the statements of net position as a decrease to bonds payable. 11

14 Project Accounts. The Authority has the following special purpose funds, segregated for specific use and for the security of holders of bonds: Debt Service Fund, Debt Service Reserve Fund, Surplus Fund, Capital Additions Fund, and WTP Project Fund, which are maintained by an independent trustee on a cash basis, which method is in accord with the Trust Indenture. Monies in trust funds, including deposits of interest, must be insured or secured and may be invested as provided for the bylaw and the Trust Indenture. See Note 10. The Revenue Fund includes operating revenues and expenses for operations of the Water System. Under provisions of the Indentures, the monies on deposit at any time in the Revenue Fund are subject to a lien in favor of the trustees and the holders of the Bonds until disbursed by the Authority in accordance with the Indentures. Cash and Cash Equivalents. For purposes of the statement of cash flows, the Authority considers all cash accounts, and all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Authority maintains its operating cash balances in local financial institutions. Demand deposits in each financial institution are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Also, the FDIC insures any time deposits in each financial institution up to an additional $250,000. Further protection of public fund deposits in excess of FDIC limits is provided under Pennsylvania state law. Accounts Receivable. Accounts receivable primarily consist of customers current unpaid billings and are shown net of an allowance of $50,000 for uncollectible accounts. Accounts receivable are evaluated for collectability and the allowance is established as deemed necessary, based on the best information available and in an amount that management believes to be adequate. Unbilled Water Usage. Water usage that is not billed by year-end is recorded in accounts receivable using subsequent billings for water used through December 31. Materials and Supplies. Materials and supplies are stated at cost, with cost being determined by the first-in, first-out method. Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates when made. 12

15 Capital Assets. Capital assets are recorded at cost and are depreciated using the straightline method over their estimated useful life as follows: Land Improvements Water System Equipment & Small Tools Furniture & Fixtures Vehicles 40 years years 5 20 years 5 10 years 5 years Repairs and maintenance that do not extend the lives of the applicable assets are charged to expense as incurred. Gain or loss resulting from the retirement or disposition of assets is included in income in the year of disposition or retirement. Compensated Absences. The Authority records its obligation to compensate employees for earned, but unused sick time as the liability is incurred. The liability has been determined according to personnel policies of the Authority. Deferred Outflows and Inflows of Resources. The Authority implemented GASB Statement No. 63, "Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position." This new GASB Statement replaces the term Net Assets with Net Position. Net Position is the residual of (a) assets and deferred outflows, less (b) liabilities and deferred inflows. The new deferred classifications take into consideration the fact that governments enter into transactions that are applicable to future periods. Deferred outflows of resources represents consumption of net position that applies to future period(s) and will not be recognized as an expenditure/expense until that time. Deferred inflows of resources represents and acquisition of net position that applies to future periods and will not be recognized as revenue until that time. On the full accrual basis of accounting, the Authority has one item that qualify for reporting in this classification. Deferred pension transactions are recognized as an expense or revenue in a future period. Deferred outflows of resources at December 31, 2016 are: Deferred Pension Expense $ 213,945 Deferred Loss on 2012 Bond refund $ 356,612 Total Deferred Outflows $ 570,557 Deferred inflows of resources at December 31, 2016 are: Deferred Pension Revenue $ 50,950 13

16 Pensions. For purposes of measuring the net position liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Authority of the Borough of Charleroi Pension Plan and additions to/deductions from the Authority's Pension Plan's fiduciary net position have been determined on the same basis as they are reported by the Authority of the Borough of Charleroi Pension Plan. For this purpose, benefit payments are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. New Accounting Standards. In 2015 the Authority implemented GASB Statement No. 68, "Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27," an accounting pronouncement that revised existing standards for measuring and reporting pension liabilities for pension plans. One of the objectives of this accounting standard is to require governmental agencies to recognize the difference between its actuarial total pension liability and the pension plan's fiduciary net position as the net pension liability on the statement of net position. In addition to the benefits earned each year, the annual pension expense will also include interest on the total pension liability and the impacts of changes in benefit terms, projected investment earnings and other plan net position liability and the impacts of changes in benefit terms, projected investment earnings and other plan net position changes. The adoption of this accounting standard had a material impact on recorded pension liabilities compared to the application of prior standards. As a result of this change in accounting principle, a net pension liability was established which required the beginning net position as of January 1, 2014 to be adjusted downward by $1,746,149 to reflect the change. Effective concurrently with GASB Statement No. 68, GASB Statement No. 71, "Pension Transition for Contributions Made Subsequent to the Measurement Date - an amendment of GASB Statement No. 68, clarified that, even if it is not practical to determine the amount of all deferred outflows of resources and deferred inflows of resources related to pensions at GASB 68 transition, a government should recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability but before the start of the government fiscal year. The Authority has determined that this standard has no impact on its current year financial statements because the measurement date of the Authority's beginning net pension liability was December 31,2014. Reclassifications: Certain items reported in the prior year financial statements have been reclassified to conform with current year presentation. 14

17 NOTE 3 Capital Assets: Capital assets as of December 31, 2016 and 2015 consisted of the following: Capital Assets Not Being Depreciated: Construction in Progress $1,199,331 $20,048,017 Land and Right-of-Ways 163, ,522 Capital Assets Being Depreciated: Land Improvements 25,210 25,210 Water System Assets 63,238,807 43,511,660 Equipment & Small Tools 2,081,820 2,050,469 Vehicles 547, ,933 Furniture & Fixtures 279, ,775 Total Capital Assets 67,535,770 66,526,586 Accumulated Depreciation (25,339,557) (23,882,672) Capital Assets - Net $42,196,213 $42,643,914 NOTE 4 Line of Credit: At December 31, 2016 and 2015, a line of credit of $2,500,000 was available at 4.0% interest. At both December 31, 2016 and December 31, 2015, there was a balance of $0 outstanding. NOTE 5 Water Revenue Bonds: On September 21, 2016, the Authority issued $9,905,000 of Water Revenue Bonds, series The proceeds of the 2016 Water Revenue Bonds were to be used for (1) various improvements and acquisitions related to the Water System including, but not limited to, membrane expansion, water plant pumping system improvements and water plan electrical and architectural upgrades, new waterline construction and existing waterline replacements, and water tank and pumping station improvements; (2) fund a capitalized interest account; (3) fund a deposit to a debt service reserve fund; (4) reimburse certain costs incurred by the Authority in connection with the foregoing; (5) pay the cost and 15

18 expenses of issuing and insuring the 2016 Bonds; and (6) to pay down the 2012 series bonds. At December 31, 2016 and 2015, the Water Revenue Bonds, Series 2016 consisted of the following: Serial maturities, due each December 1 through 2036, with interest from % $9,905,000 $ - Current portion (75,000) - $9,830,000 $ - At December 31, 2016, the following are the scheduled maturities of the Series of 2016 Water Revenue Bonds: December 1 Principal Amount Interest Rate 2017 $ 75, % , % , % , % , % Thereafter 9,515, % - 3.0% 9,905,000 Current portion (75,000) $9,830,000 On June 24, 2014, the Authority issued $8,945,000 of Water Revenue Bonds, series The proceeds of the 2014 Water Revenue Bonds were to be used for (1) various improvements and acquisitions related to the Water System including, but not limited to, membrane expansion, water plant pumping system improvements and water plan electrical and architectural upgrades, new waterline construction and existing waterline replacements, and water tank and pumping station improvements; (2) fund a capitalized interest account; (3) fund a deposit to a debt service reserve fund; (4) reimburse certain costs incurred by the Authority in connection with the foregoing; and (5) pay the cost and expenses of issuing and insuring the 2014 Bonds. 16

19 At December 31, 2016 and 2015, the Water Revenue Bonds, Series 2014 consisted of the following: Serial maturities, due each December 1 through 2036, with interest from % $8,905,000 $8,925,000 Current portion (20,000) (20,000) $8,885,000 $8,905,000 At December 31, 2016, the following are the scheduled maturities of the Series of 2014 Water Revenue Bonds: December 1 Principal Amount Interest Rate 2017 $ 20, % , % , % , % , % Thereafter 8,800, % - 4.0% 8,905,000 Current portion (20,000) $8,885,000 On May 10, 2012, the Authority issued $9,350,000 of Water Revenue Bonds, series The proceeds of the 2012 Water Revenue Bonds were to be used to (1) finance waterline repairs, tele-meter replacements/repair, expansion and rehabilitation of two water storage tanks, and repair and rehabilitation of two water storage tanks, and repair and rehabilitation of three additional tanks and miscellaneous other capital improvements at the treatment facility; (2) fund a capitalized interest account; (3) fund a deposit to a debt service reserve fund; (4) pay off a portion of the outstanding principal of Pennvest notes; and (5) pay the cost and expenses of issuing and insuring the 2012 bonds. At December 31, 2016 and 2015, the Water Revenue Bonds, Series 2012 consisted of the following: Serial maturities, due each December 1 through 2036, with interest from % $ 640,000 $9,320,000 Current portion - (10,000) $ 640,000 $9,310,000 17

20 At December 31, 2015, the following are the scheduled maturities of the Series of 2012 Water Revenue Bonds: December 1 Principal Amount Interest Rate 2017 $ - 1.5% , % , % % % Thereafter 620, % - 4.0% 640,000 Current portion - $ 640,000 NOTE 6 Payable to Pennvest Loans payable to Pennvest consists of the following at December 31, 2016 and 2015: Pennvest III $ 76,194 $ 85,709 Pennvest VI 5,467,799 5,935,333 Pennvest VII 3,394,176 3,605,395 8,938,169 9,626,437 Current portion (699,556) (646,172) $8,238,613 $8,980,265 Pennvest III. In 1999, the Authority entered into a loan agreement with Pennvest in the total amount of $251,495 to finance the construction of the water supply system in the Borough of Twilight. Principal and interest are payable in consecutive monthly installments of $861 through August 1, The note bears interest at 1.0% per year. Pennvest VI. In June 2004, the Authority entered into a loan agreement to upgrade the water treatment plant in the amount of $10,582,415. Principal and interest are payable in consecutive monthly installments of $55,776 through January 1, The note bears interest at 1.0% per year. Pennvest VII. In May 2010, the Authority entered into a loan agreement to upgrade the water distribution and storage facilities for a total of $4,480,795. Principal and interest 18

21 are payable in consecutive monthly installments of $20,526 through October 1, The note bears interest at 1.0% per year. Debt service principal payments of the Pennvest loans at December 31, 2015 are as follows: , , , , ,512 Thereafter 5,280,046 $8,938,169 At December 31, 2016 and 2015, the Authority was in compliance with all debt covenants. NOTE 7 Pension Plan: Effective with fiscal year 2015, the Authority implemented GASB Statement No. 68, "Accounting and Financial Reporting for Pensions - an amendment of GASB No. 27". This statement revises existing standards for measuring and reporting pension liabilities for pension plans. The Authority of the Borough of Charleroi qualifies as a single employer plan under the definition provided by GASB No. 68. The following notes provide disclosures for the Plan in total as well as Water and Sewer component systems. Plan Description. The Authority participates in a plan that provides pension benefits for all of its full-time employees of both the Water and Sewer Systems. The Plan conforms to the Act of Assembly 205 and is in compliance with all requirements of applicable statutes of the Commonwealth of Pennsylvania. Benefits provided. The plan is a retirement annuity and provides a monthly benefit equal to 2.3% of Average Compensation multiplied by years of service for normal retirement at age 65, or early retirement after 5 years of service or the attainment of age 62 plus 20 years of service. Contributions are 100% vested after the completion of 5 years of service. The plan also provides for death and disability benefits. Employees Covered by Benefit Terms. The plan provides pensions for full-time employees of the Authority. Effective with the union contracts signed May 1, 2013 (plan 19

22 and distribution contract) and October 1, 2014 (clerical) new fulltime employees are not eligible for the defined benefit pension plan. These employees shall be eligible for the Section 457 Plan only (see Note 8). As of December 31, 2016, pension membership consists of the following: Active Employees 36 Retirees and Beneficiaries Currently Receiving Benefits 14 Terminated Employees Entitled to Benefits but not yet Receiving Them 2 Total 52 Contributions. The Authority follows the funding policy prescribed by Act 205 of 1984 (as amended), which requires that annual contributions be based upon the Minimum Municipal Obligation (MMO) using the Plan's most recent biennial actuarial valuation. The MMO includes the normal cost, estimated administrative expenses and an amortization contribution of the unfunded actuarial accrued liability, less estimated member contributions, and a credit equal to 10% of the excess (if any) of the actuarial value of assets over the actuarial accrued liability. Any financial requirement established by the MMO must be funded by the employer. Employees are not required to contribute to the plan. Investments. The Plan is authorized to invest in legal investments permitted under the Pennsylvania Fiduciaries Investment Act. According to an investment policy statement dated November 24, 2009, the Plan's target asset allocation is as follows: Asset Class Range Equities 30%-70% Fixed Income 30%-70% Cash 0%-15% Net Pension Liability. The Authority's net pension liability was measured as of December 31, 2016, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The components of the net position liability as of December 31, 2016 are as follows: Total Pension Liability of the Plan 7,941,029 Plan Fiduciary Net Position (5,731,687) Net Pension Liability of the Plan 2,209,342 20

23 Plan fiduciary net position as a percentage of the total pension liability 72.2% The total pension liability was determined by an actuarial valuation as of January 1, 2015 and rolled forward to the reporting date using the following significant actuarial assumptions applied to all periods included in the measurement: Actuarial Assumptions: Inflation 3% Salary Increases 4.5%, including inflation Expected Long-Term Rate of Return 7.0%, applied to all periods Mortality rates were based on the RP-2000 Combined Healthy Mortality Table with Blue Collar Adjustment, with rates set forward 5 years for disabled lives. Rates are projected to improve with 75% of scale AA. The long-term expected rate of return on pension plan investments was determined using a building-block method in which the best-estimate ranges of expected future real rates of return (expected returns, net of inflation and investment expenses not funded through the MMO) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. Best estimates of arithmetic rates of return for each major asset class included in the target asset allocation as of December 31, 2016 are summarized as follows: Asset Class Long-Term Expected Real ROR Equities 6.3% Fixed Income 1.9% Cash 0.0% The discount rate used to measure the total pension liability was 7.0%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that employer contributions will be made equal to the Minimum Municipal Obligation. Based on those assumptions, the pension plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension 21

24 plan investments was applied to all periods of projected benefit payment to determine the total pension liability. Sensitivity of the Net Pension Liability to Changes in the Discount Rate. The following shows the effect of a 1% change in the discount rate on the net pension liability: 1% Decrease 6.0% Current Discount Rate 7.0% 1% Increase 8.0% Net Pension Liability $ 3,121,245 $ 2,209,342 $ 1,428,686 Changes in Net Pension Liability. The following table shows the changes in total pension liability, the plan fiduciary net position (i.e., fair value of the Plan's assets), and the net pension liability during the measurement period ending December 31, Total Pension Liability (a) Plan Fiduciary Net Position (b) Net Pension Liability (a) (b) Balance at December 31, 2015 $ 7,419,948 $ 5,150,143 $ 2,269,805 Changes for the Year 2016: Service Cost 167, ,456 Interest 525, ,214 Changes in Benefit Terms Difference Between Expected and Actual Changes in Assumptions Contributions - Employer 499,901 (499,901) Contributions - Employee Net Investment Income - 281,737 Benefit Payments and Refunds of Employee Contributions (171,589) (171,589) - Administrative Expense - (28,505) 28,505 Other Changes Net Changes 521, ,544 (60,463) Balance at December 31, 2016 $ 7,941,029 $ 5,731,687 $ 2,209,342 Component's Proportionate Shares. GASB No. 68 requires that the proportionate share for each component be determined upon the "employer projected long-term contribution effort to the pension... as compared to the total long-term contribution effort to all 22

25 employers". The Authority of the Borough of Charleroi has two components participate in the pension plan: the Water System and the Sewer System. The method of allocation is based upon the ratio of each component's contributions in proportion to total contributions of the plan. Total employer contributions to the Plan were $499,901 in Water Sewer Total Net Pension Liability $ 1,851,068 $ 358,274 $ 2,209,342 Deferred Outflows 213,945 41, ,354 Deferred Inflows 50,950 9,861 60,811 Employer Contributions 418,836 81, ,901 Employer Pension Expense 351,778 68, ,865 Deferred Outflows and Inflows of Resources Related to Pensions. At December 31, 2016, the Authority reported deferred inflows of resources for each employer from the following sources: Water Sewer Total Difference Between Expected and Actual Experience $50,950 $9,861 $60,811 At December 31, 2016, the Authority reported deferred outflows of resources for each employer from the following sources: Water Sewer Total Net Difference Between Projected and Actual Earnings on Pension Plan Investments $213,945 $41,409 $255,354 Amounts reported as deferred outflows of resources ( +) and deferred inflows (-) of resources related to pension will be recognized in pension expense as follows: Year Ended December 31: Water Sewer Total 2017 $ 59,548 $ 11,525 $ 71, ,548 11,525 71, ,547 11,525 71, ,487 1,643 10, (6,704) (1,297) (8,001) Thereafter (17,432) (3,374) (20,806) 23

26 Payable to the Pension Plan. At December 31, 2016, the Authority did not owe anything to the Plan. NOTE 8 Retirement Benefits As a supplement to the pension plan, the Authority has elected to provide a singlepremium annuity as an additional benefit to its supervisory personnel. The Authority of the Borough of Charleroi Deferred Compensation Plan, effective October 26, 1990, is a defined contribution plan. Contributions to the plan, allocated to the Water System, for each years ended December 31, 2016 and 2015 were $45,080 and $88,045 respectively. Effective with the union contracts signed May 1, 2008 (plant and distribution contract) and October 1, 2009 (clerical) a Section 457 plan was added as an employee benefit providing for a $1,000 annual contribution by the Authority to each employee's account and a match of the employee's contribution by the Authority to a maximum of an additional $1,000. Management employees were included for the employee/employer match. NOTE 9 Restricted Assets: The Authority has special purpose funds whose use is restricted as provided in the trust indentures. At December 31, 2016 and 2015, the funds had investments in the following interest bearing cash accounts or investments. All investments are recorded at year end cost value Debt Service Reserve Fund Cash $ 129,945 $ 29,271 Investments 867, ,377 Debt Service Reserve Fund Cash 32,426 5,394 Investments 684, ,592 Debt Service Reserve Fund Cash 465,475 - Investments 44,365 - Construction Fund - Cash - 825,617 Capital Additions Fund Interest bearing Cash Account 1,695 72,596 WTP Project Fund Interest Bearing Cash Account Total $ 2,225,920 $ 2,450,297 24

27 NOTE 10 Investments and Deposits with Financial Institutions: GASB Statement No. 40, Deposit and Investment Risk Disclosures, requires disclosures related to the following deposit and investment risks: credit risk (including custodial credit risk and concentration of credit risk), interest rate risk, and foreign currency risk. The following is a description of the Authority s deposit and investment risks: Custodial Credit Risk. Custodial credit risk is the risk that in the event of a bank failure, the Authority s deposits may not be returned to it. As of December 31, 2016 and 2015, $2,680,847 and $2,350,927, respectively, of the Authority s bank balance of $2,930,847 and $2,600,927, respectively, was exposed to custodial credit risk. In addition to the deposits noted above, included in cash and cash equivalents as noncurrent restricted assets on the statement of net position are money market funds of $627,760 and $1,787,890 at December 31, 2016 and 2015, respectively. Interest Rate Risk. Interest rate risk is the risk that changes in interest rates will adversely affect the fair market value of the Authority s investments. The Authority is not subject to interest rate risk as all of its investments are in funds with a guaranteed return. Credit Risk. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. As of December 31, 2016, the Authority s investments were rated AA+ by Standard & Poor s. The counterparties to the Authority s investments are Freddie Mac and Fannie Mae. The Authority s investments in money markets were rated AAAm by Standard & Poor s. Concentration Credit Risk. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investments in a single issuer. The Authority places no limit on the amount it may invest with any one issuer. NOTE 11 Fair Value The Fair Value Measurements and Disclosures Topic of the Codification defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. This topic requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels, depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value, whereas Level 3 25

28 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. This topic s hierarchy of fair value is defined as follows: Level 1 - Valuations are based on unadjusted quoted prices in an active market for identical assets or liabilities in active markets that the Company has the ability to access. Level 2 - Valuations are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 - Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. The asset s or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Mortgage Backed Securities. Agency, nonagency and multifamily mortgage backed securities (MBS) are generally valued-based on third-party pricing services or dealer quotes. The third-party pricing services typically use pricing models that incorporate inputs and assumptions related to coupons; prepayment speeds; default rates; spread to the Treasury Department s curves and interest rate swap curves; duration; periodic and life caps; and credit enhancements, depending on the nature of the MBS. The Authority recorded the following investments at fair value at December 31, 2016: Level 1 Level 2 Level 3 Total Government Backed Mortgages $ - $1,570,906 $ - $1,570,906 Total Investments $ - $1,570,906 $ - $1,570,906 26