Village of Eau Claire, Michigan. Financial Report with Supplemental Information February 29, 2016

Transcription

1 Financial Report with Supplemental Information February 29, 2016

2 Contents Report Letter 1-2 Management's Discussion and Analysis 3-7 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position 8 Statement of Activities 9-10 Fund Financial Statements: Governmental Funds: Balance Sheet 11 Reconciliation of the Balance Sheet to the Statement of Net Position 12 Statement of Revenue, Expenditures, and Changes in Fund Balances 13 Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 14 Proprietary Funds: Statement of Net Position 15 Statement of Revenue, Expenses, and Changes in Net Position 16 Statement of Cash Flows 17 Notes to Financial Statements Required Supplemental Information 36 Budgetary Comparison Schedule - General Fund 37 Budgetary Comparison Schedule - Major Special Revenue Funds Note to Required Supplemental Information 41 Schedule of Changes in the Village Net Pension Liability and Related Ratios 42 Schedule of Village Contributions 43 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 44-47

3 Independent Auditor's Report To the Village Council Village of Eau Claire, Michigan Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, and each major fund of the Village of Eau Claire, Michigan (the "Village") as of and for the year ended February 29, 2016 and the related notes to the financial statements, which collectively comprise the Village of Eau Claire, Michigan's 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 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 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 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 opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, and each major fund of the Village of Eau Claire, Michigan as of February 29, 2016 and the respective changes in its financial position and cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America. 1

4 To the Village Council Village of Eau Claire, Michigan Emphasis of Matter As discussed in Note 8 to the financial statements, the Village adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an Amendment of GASB Statement No. 68, as of March 1, As a result of implementing this pronouncement, the Village's net pension liability has been recognized on the government-wide and proprietary statements and the 2015 financial statements have been restated. Our opinion is not modified with respect to this matter. Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, pension system schedules, and the major fund budgetary comparison schedules 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, which 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 supplemental 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 23, 2016 on our consideration of the Village of Eau Claire, Michigan's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Village of Eau Claire, Michigan's internal control over financial reporting and compliance. June 23,

5 Management s Discussion and Analysis Our discussion and analysis of the Village of Eau Claire, Michigan s (the Village ) financial performance provides an overview of the Village s financial activities for the fiscal year ended February 28, Please read it in conjunction with the Village s financial statements. Financial Highlights As discussed in further detail in this discussion and analysis, the following represents the most significant financial highlights for the year ended February 29, 2016: The Village was required to adopt GASB Statement No. 68 in the current year. GASB Statement No. 68 requires municipalities to recognize the net pension liability and the pension expense on their full-accrual financial statements. The Village recorded a liability of $190,446 in the government-wide financial statements and a liability of $163,935 in their proprietary financial statements. The Village had approximately $86,000 in fixed-asset additions in the current year due to storm drain repairs. The Village received approximately $6,700 in additional intergovernmental revenue in the current year related to PA 84 and PA 252 funds. Using this Annual Report This annual report consists of a series of financial statements. The statement of net position and the statement of activities provide information about the activities of the Village as a whole and present a longer-term view of the Village s finances. This longer-term view uses the accrual basis of accounting so that it can measure the cost of providing services during the current year and whether the taxpayers have funded the full cost of providing government services. The fund financial statements present a short-term view; they tell us how the taxpayers resources were spent during the year, as well as how much is available for future spending. Fund financial statements also report the Village s operations in more detail than the government-wide financial statements by providing information about the Village s most significant funds. 3

6 Management s Discussion and Analysis (Continued) The Village as a Whole The following table shows, in a comparative, condensed format, the net position for the past three years: Governmental Activities Business-type Activities Total Assets Current assets $ 515,995 $ 510,961 $ 531,957 $ 314,895 $ 309,798 $ 322,513 $ 830,890 $ 820,759 $ 854,470 Noncurrent assets ,610 96,530 71, ,610 96,530 71,450 Capital assets: Assets not subject to depreciation 30,140 30,140 30, ,140 30,140 30,140 Assets subject to depreciation 383, , ,816 1,022,536 1,073,629 1,123,551 1,406,175 1,402,945 1,434,367 Total assets 929, , ,913 1,459,041 1,479,957 1,517,514 2,388,815 2,350,374 2,390,427 Deferred Outflows of Resources - Pension 9, , , Liabilities Current liabilities 19,759 13,367 14,950 22,063 17,290 32,285 41,822 30,657 47,235 Long-term liabilities 190, , , ,000 1,092, , ,000 Total liabilities 210,205 13,367 14, , , ,285 1,134, , ,235 Net Position Net investment in capital assets 413, , , , , , , , ,507 Restricted 118, , , ,610 96,530 71, , , ,211 Unrestricted 196, , , , , , , , ,474 Total net position $ 728,861 $ 857,050 $ 857,963 $ 543,042 $ 713,667 $ 725,229 $ 1,271,903 $ 1,570,717 $ 1,583,192 The Village s combined net position decreased percent from a year ago, decreasing from $1,570,717 to $1,271,903, due to the implementation of GASB Statement No. 68, which was implemented retroactively to March 1, As we look at the governmental activities separately from the business-type activities, we see that governmental activities net position decreased percent, from $857,050 to $728,861, while business-type activities decreased percent, from $713,667 to $543,042. 4

7 Management s Discussion and Analysis (Continued) The following table shows, in a comparative, condensed format, the changes in net position for the past three years: Governmental Activities Business-type Activities Total Revenue Program revenue: Charges for services $ 40,396 $ 43,691 $ 58,323 $ 212,633 $ 199,122 $ 200,532 $ 253,029 $ 242,813 $ 258,855 Operating grants and contributions 67,526 59,692 52, ,526 59,692 52,982 Capital grants and contributions ,969 40,012-37,969 40,012 General revenue: Property taxes 177, , , , , ,070 State-shared revenue 65,600 66,289 63, ,600 66,289 63,265 Investment income 1,224 1,191 2,218 8,410 11,460 13,268 9,634 12,651 15,486 Other revenue 3,348 4,271 4, ,348 4,271 4,226 Gain on sale of fixed assets - - 1, ,500 Total revenue 355, , , , , , , , ,396 Program Expenses General government 94, ,587 93, , ,587 93,283 Public safety 66,593 68,933 75, ,593 68,933 75,069 Public works 132, , , , , ,944 Recreation and culture 23,207 20,096 20, ,207 20,096 20,625 Water, sewer, and sanitation , , , , , ,635 Total program expenses 317, , , , , , , , ,556 Change in Net Position $ 38,865 $ (913) $ 15,663 $ (69,560) $ (11,562) $ (11,823) $ (30,695) $ (12,475) $ 3,840 5

8 Management s Discussion and Analysis (Continued) Governmental Activities The Village s total governmental revenue increased by approximately $7,500. The increase was primarily due to the increase in property taxes received in the current year. Expenses decreased by approximately $32,000, or 9.2 percent, during the current year, primarily due to the Clerk s retirement in fall of The Village Secretary became the Clerk and the Secretary s position was not filled until after year end. Business-type Activities The Village s business-type activities consist of the Water, Sewer, and Sanitation Funds. During the year ended February 29, 2016, the Village s business-type activities experienced an operating loss of approximately $53,000. When factoring in nonoperating revenue and expense, the Village had a decrease in net position of approximately $69,000. The majority of this was due to the implementation of GASB Statement No. 68, which brought on an additional $26,000 of pension expense in order to bring on the net pension liability. Long-term Debt and Capital Assets During the year, the Village paid down the USDA Bond debt balance by $11,000. The Village purchased approximately $86,000 of governmental-type fixed assets for storm drain repairs. General Fund Budgetary Highlights The General Fund pays for most of the Village s governmental services. The primary services provided include police services, administrative services, public services, and parks and recreation. As shown in the required supplemental information, the Village had originally budgeted General Fund operational expenditures of $246,330. During the year, the Village amended the budget which included increasing expenditures by approximately $3,800. Actual expenditures ended up less than the amended budget by $32,059 and actual revenue was $12,326 less than the amended budget. There were insignificant budget overruns as follows: General Fund-Inspections - $715 Municipal Streets and Sidewalks Fund - $369 6

9 Management s Discussion and Analysis (Continued) Economic Factors and Next Year s Budgets and Rates The Village s fiscal year 2017 budget anticipates state-shared revenue consistent with fiscal year The Council has adopted a conservative budget that retains current fund balance, but also facilitates community priorities and quality services. Contacting the Village s Management This financial report is intended to provide our citizens, taxpayers, customers, and investors with a general overview of the Village s finances and to show the Village s accountability for the money it receives. If you have questions about this report or need additional information, we welcome you to contact the clerk s office. 7

10 Statement of Net Position February 29, 2016 Governmental Activities Primary Government Business-type Activities Total Assets Cash (Note 3) $ 461,895 $ 277,816 $ 739,711 Receivables: Property taxes receivable 13,723-13,723 Receivables from sales to customers on account - 25,170 25,170 Due from other governmental units 35,577 8,709 44,286 Prepaid expenses 4,800 3,200 8,000 Restricted cash (Note 1) - 121, ,610 Capital assets (Note 4): Assets not subject to depreciation 30,140-30,140 Assets subject to depreciation 383,639 1,022,536 1,406,175 Total assets 929,774 1,459,041 2,388,815 Deferred Outflows of Resources - Pension 9,292 7,999 17,291 Liabilities Accounts payable 10,326 4,807 15,133 Accrued liabilities and other 4,810 6,256 11,066 Noncurrent liabilities: Due within one year: Compensated absences (Note 5) 4,623-4,623 Current portion of long-term debt (Note 5) - 11,000 11,000 Due in more than one year: Net pension liability (Note 6) 190, , ,381 Long-term debt (Note 5) - 738, ,000 Total liabilities 210, ,998 1,134,203 Net Position Net investment in capital assets 413, , ,315 Restricted for: Streets and highways 118, ,191 Debt service - 121, ,610 Unrestricted 196, , ,787 Total net position $ 728,861 $ 543,042 $ 1,271,903 The Notes to Financial Statements are an Integral Part of this Statement. 8

11 Expenses Charges for Services Program Revenues Operating Grants and Contributions Capital Grants and Contributions Functions/Programs Primary government: Governmental activities: General government $ 94,610 $ 5,700 $ - $ - Public safety 66,593 6, Public works 132,606 28,271 67,526 - Recreation and culture 23, Total governmental activities 317,016 40,396 67,526 - Business-type activities: Water Fund 124,586 95, Waste Water Fund 133,881 84, Sanitation Fund 32,136 31, Total business-type activities 290, , Total primary government $ 607,619 $ 253,029 $ 67,526 $ - General revenues: Property taxes State-shared revenue Investment income Other miscellaneous income Change in Net Position Total general revenues Net Position - Beginning of year (as restated) Net Position - End of year The Notes to Financial Statements are an Integral Part of this Statement. 9

12 Statement of Activities Year Ended February 29, 2016 Net (Expense) Revenue and Changes in Net Position Primary Government Governmental Activities Business-type Activities Total $ (88,910) $ - $ (88,910) (60,168) - (60,168) (36,809) - (36,809) (23,207) - (23,207) (209,094) - (209,094) - (28,723) (28,723) - (49,078) (49,078) - (169) (169) - (77,970) (77,970) (209,094) (77,970) (287,064) 177, ,787 65,600-65,600 1,224 8,410 9,634 3,348-3, ,959 8, ,369 38,865 (69,560) (30,695) 689, ,602 1,302,598 $ 728,861 $ 543,042 $ 1,271,903 10

13 Major Streets Fund Local Streets Fund Governmental Funds Balance Sheet February 29, 2016 Municipal Streets and Sidewalks Fund General Fund Total Assets Cash (Note 3) $ 357,799 $ 96,387 $ 3,711 $ 3,998 $ 461,895 Receivables: Property taxes receivable 10, ,015 13,723 Due from other governmental units 21,165 7,329 7,083-35,577 Prepaid expenses 2, ,800 Total assets $ 392,472 $ 104,516 $ 11,594 $ 7,413 $ 515,995 Liabilities Accounts payable $ 4,994 $ 516 $ 516 $ 4,300 $ 10,326 Accrued liabilities and other 4, ,810 Total liabilities 9, ,300 15,136 Deferred Inflows of Resources - State-shared revenue - Unavailable revenue 10,182-4,317-14,499 Fund Balances Nonspendable - Prepaids 2, ,800 Restricted - Roads - 103,200 5,961 2, ,874 Committed - Parks 125, ,000 Assigned: Police car 10, ,000 Public works equipment 10, ,000 Unassigned 224, ,686 Total fund balances 372, ,000 6,761 3, ,360 Total liabilities, deferred inflows of resources, and fund balances $ 392,472 $ 104,516 $ 11,594 $ 7,413 $ 515,995 The Notes to Financial Statements are an Integral Part of this Statement. 11

14 Governmental Funds Reconciliation of the Balance Sheet to the Statement of Net Position February 29, 2016 Fund Balance Reported in Governmental Funds $ 486,360 Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and are not reported in the funds 413,779 Grants and other receivables that are collected after year end, such that they are not available to pay bills outstanding as of year end, are not recognized in the funds 14,499 Employee compensated absences are payable over a long period of years and do not represent a claim on current financial resources; therefore, they are not reported as fund liabilities (4,623) Net pension liabilities, pension-related deferred outflows and inflows are not current financial resources and are not reported in the funds (181,154) Net Position of Governmental Activities $ 728,861 The Notes to Financial Statements are an Integral Part of this Statement. 12

15 Governmental Funds Statement of Revenue, Expenditures, and Changes in Fund Balances Year Ended February 29, 2016 Major Streets Fund Local Streets Fund Municipal Streets and Sidewalks Fund General Fund Total Revenue Property taxes $ 138,704 $ - $ - $ 39,083 $ 177,787 Licenses and permits 5, ,925 State-shared revenue 65,474 41,891 21, ,683 Charges for services Investment income ,224 Rental income 33, ,971 Other revenue 3, ,348 Total revenue 248,892 42,089 21,319 39, ,438 Expenditures General government 89, ,058 Public safety 63, ,912 Public works 44,499 22,104 24,220 97, ,291 Recreation and culture 20, ,593 Total expenditures 218,062 22,104 24,220 97, ,854 Net Change in Fund Balances 30,830 19,985 (2,901) (58,330) (10,416) Fund Balances - Beginning of year 341,656 84,015 9,662 61, ,776 Fund Balances - End of year $ 372,486 $ 104,000 $ 6,761 $ 3,113 $ 486,360 The Notes to Financial Statements are an Integral Part of this Statement. 13

16 Governmental Funds Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities Year Ended February 29, 2016 Net Change in Fund Balances - Total Governmental Funds $ (10,416) Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures; however, in the statement of activities, these costs are allocated over their estimated useful lives as depreciation: Capital outlay 85,906 Depreciation expense (31,583) Revenues are recorded in the statement of activities when earned; they are not reported in the funds until collected or collectible within 60 days of year end 4,443 Change in accumulated employee sick and vacation pay and other similar expenses reported in the statement of activities do not require the use of current resources, and therefore are not reported in the fund statements until they come due for payment 4,615 Governmental funds report expenditures for pension benefits as they make contributions; in the statement of activities, the change in net pension liability does not require the use of current financial resources (14,100) Change in Net Position of Governmental Activities $ 38,865 The Notes to Financial Statements are an Integral Part of this Statement. 14

17 Proprietary Funds Statement of Net Position February 29, 2016 Waste Water Fund Water Fund Sanitation Fund Total Assets Current assets: Cash (Note 3) $ 90,644 $ 184,873 $ 2,299 $ 277,816 Receivables: Receivables from sales to customers on account 11,133 10,281 3,756 25,170 Due from other governmental units 4,210 4,499-8,709 Prepaid expenses 1,600 1,600-3,200 Total current assets 107, ,253 6, ,895 Noncurrent assets: Restricted cash (Note 1) 41,740 79, ,610 Capital assets - Assets subject to depreciation (Note 4) 403, ,959-1,022,536 Total noncurrent assets 445, ,829-1,144,146 Total assets 552, ,082 6,055 1,459,041 Deferred Outflows of Resources - Pension 3,799 3, ,999 Liabilities Current liabilities: Accounts payable 535 4,272-4,807 Accrued liabilities and other 3,022 3,234-6,256 Current portion of long-term debt (Note 5) 5,000 6,000-11,000 Total current liabilities 8,557 13,506-22,063 Noncurrent liabilities: Net pension liability (Note 6) 77,856 81,927 4, ,935 Long-term debt (Note 5) 357, , ,000 Total noncurrent liabilities 434, ,927 4, ,935 Total liabilities 443, ,433 4, ,998 Net Position Net investment in capital assets 41, , ,536 Restricted - Debt service 41,740 79, ,610 Unrestricted 29, ,817 2, ,896 Total net position $ 113,290 $ 427,646 $ 2,106 $ 543,042 The Notes to Financial Statements are an Integral Part of this Statement. 15

18 Proprietary Funds Statement of Revenue, Expenses, and Changes in Net Position Year Ended February 29, 2016 Waste Water Fund Water Fund Sanitation Fund Total Operating Revenue Sale of water $ - $ 95,863 $ - $ 95,863 Sewage disposal charges 84, ,803 Sanitation charges ,967 31,967 Total operating revenue 84,803 95,863 31, ,633 Operating Expenses Cost of water - 94,112-94,112 Cost of sewage treatment 88, ,740 Cost of sanitation services ,136 32,136 Depreciation 33,294 17,799-51,093 Total operating expenses 122, ,911 32, ,081 Operating Loss (37,231) (16,048) (169) (53,448) Nonoperating Revenue (Expenses) Investment income 4,037 4, ,410 Interest expense (11,847) (12,675) - (24,522) Total nonoperating (expenses) revenue (7,810) (8,304) 2 (16,112) Change in Net Position (45,041) (24,352) (167) (69,560) Net Position - Beginning of year (as restated) 158, ,998 2, ,602 Net Position - End of year $ 113,290 $ 427,646 $ 2,106 $ 543,042 The Notes to Financial Statements are an Integral Part of this Statement. 16

19 Proprietary Funds Statement of Cash Flows Year Ended February 29, 2016 Waste Water Fund Water Fund Sanitation Fund Cash Flows from Operating Activities Receipts from customers $ 84,565 $ 95,673 $ 32,607 $ 212,845 Payments to suppliers (30,745) (23,498) (31,761) (86,004) Payments to employees (32,255) (34,460) (2,625) (69,340) Total Net cash provided by (used in) operating activities 21,565 37,715 (1,779) 57,501 Cash Flows from Capital and Related Financing Activities - Principal and interest paid on capital debt (16,847) (18,675) - (35,522) Cash Flows from Investing Activities - Interest received 4,037 4, ,410 Net Increase (Decrease) in Cash 8,755 23,411 (1,777) 30,389 Cash - Beginning of year 123, ,332 4, ,037 Cash - End of year $ 132,384 $ 264,743 $ 2,299 $ 399,426 Balance Sheet Classification of Cash Cash $ 90,644 $ 184,873 $ 2,299 $ 277,816 Restricted cash 41,740 79, ,610 Total cash $ 132,384 $ 264,743 $ 2,299 $ 399,426 Reconciliation of Operating Loss to Net Cash from Operating Activities Operating loss $ (37,231) $ (16,048) $ (169) $ (53,448) Adjustments to reconcile operating loss to net cash from operating activities: Depreciation 33,294 17,799-51,093 Pension expense 25,222 31,899 (2,250) 54,871 Changes in assets and liabilities: Receivables (238) (190) Accounts payable 518 4,255-4,773 Net cash provided by (used in) operating activities $ 21,565 $ 37,715 $ (1,779) $ 57,501 Noncash Investing, Capital, and Financing Activities - During the year ended February 29, 2016, the Village had noncash activity related to the implementation of GASB 68 to bring on the net pension liability. The Notes to Financial Statements are an Integral Part of this Statement. 17

20 Notes to Financial Statements February 29, 2016 Note 1 - Nature of Business and Significant Accounting Policies The following is a summary of the significant accounting policies used by the Village of Eau Claire, Michigan (the "Village"): Reporting Entity The Village of Eau Claire, Michigan is governed by an elected five-member council. In accordance with accounting principles generally accepted in the United States of America, there are no component units to be included in these financial statements. Accounting and Reporting Principles The Village follows accounting principles generally accepted in the United States of America (GAAP) as applicable to governmental units. Accounting and financial reporting pronouncements are promulgated by the Governmental Accounting Standards Board. Report Presentation Governmental accounting principles require that financial reports include two different perspectives - the government-wide perspective and the fund-based perspective. The government-wide financial statements (i.e., the statement of net position and the statement of activities) report information on all of the nonfiduciary activities of the primary government. The government-wide financial statements are presented on the economic resources measurement focus and the full accrual basis of accounting. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. The statements also present a schedule reconciling these amounts to the modified accrual-based presentation found in the fundbased statements. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include: (1) charges to customers or applicants for goods, services, or privileges provided; (2) operating grants and contributions; and (3) capital grants and contributions, including special assessments. Taxes and other items not properly included among program revenues are reported instead as general revenue. For the most part, the effect of interfund activity has been removed from these statements. Exceptions to this general rule are charges between the Village's water and sewer function and various other functions of the Village. Eliminations of these charges would distort the direct costs and program revenues reported for the various functions concerned. Separate financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual proprietary funds are reported as separate columns in the fund financial statements. 18

21 Notes to Financial Statements February 29, 2016 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Fund Accounting The Village accounts for its various activities in several different funds, in order to demonstrate accountability for how we have spent certain resources - separate funds allow us to show the particular expenditures for which specific revenues were used. The various funds are aggregated into two broad fund types: Governmental funds include all activities that provide general governmental services that are not business-type activities. This includes the General Fund, special revenue funds, debt service funds, capital project funds, and permanent funds. The Village reports the following funds as major governmental funds: The General Fund - The General Fund is the Village's primary operating fund. It accounts for all financial resources used to provide general government services, other than those specifically assigned to another fund. Major Streets Fund - The Major Streets Fund accounts for the resources of state gas and weight tax revenues that are restricted for use on major streets. Local Streets Fund - The Local Streets Fund accounts for the resources of state gas and weight tax revenues that are restricted for use on local streets. Municipal Streets and Sidewalks Fund - The Municipal Streets and Sidewalks Fund accounts for the resources provided by a tax millage to be used for road and sidewalk construction and repair. The millage is restricted to be used solely for municipal streets and sidewalks. Proprietary funds include enterprise funds, which provide goods or services to users in exchange for charges or fees. The Village reports the following funds as major proprietary funds: Waste Water Fund - The Waste Water Fund accounts for the activities of the sewage collection system. Water Fund - The Water Fund accounts for the activities of the water distribution system. Sanitation Fund - The Sanitation Fund accounts for the activities of the refuse collection service. 19

22 Notes to Financial Statements February 29, 2016 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Interfund Activity - During the course of operations, the government has activity between funds for various purposes. Any residual balances outstanding at year end are reported as due from/to other funds and advances to/from other funds. While these balances are reported in fund financial statements, certain eliminations are made in the preparation of the government-wide financial statements. Balances between the funds included in governmental activities (i.e., the governmental funds) are eliminated so that only the net amount is included as internal balances in the governmental activities column. Similarly, balances between the funds included in business-type activities (i.e., the enterprise funds) are eliminated so that only the net amount is included as internal balances in the business-type activities column. Further, certain activity occurs during the year involving transfers of resources between funds. In fund financial statements, these amounts are reported at gross amounts as transfers in/out. While reported in fund financial statements, certain eliminations are made in the preparation of the government-wide financial statements. Transfers between the funds included in governmental activities are eliminated so that only the net amount is included as transfers in the governmental activities column. Similarly, balances between the funds included in business-type activities are eliminated so that only the net amount is included as transfers in the business-type activities column. Basis of Accounting The governmental funds use the current financial resources measurement focus and the modified accrual basis of accounting. This basis of accounting is intended to better demonstrate accountability for how the government has spent its resources. Expenditures are reported when the goods are received or the services are rendered. Capital outlays are reported as expenditures (rather than as capital assets) because they reduce the ability to spend resources in the future; conversely, employee benefit costs that will be funded in the future (such as pension and retiree healthcare-related costs, or sick and vacation pay) are not counted until they come due for payment. In addition, debt service expenditures, claims, and judgments are recorded only when payment is due. Revenues are not recognized until they are collected, or collected soon enough after the end of the year that they are available to pay for obligations outstanding at the end of the year. For this purpose, the Village considers amounts collected within 60 days of year end to be available for recognition. The following major revenue sources meet the availability criterion: state-shared revenue, state gas and weight tax revenue, district court fines, and interest associated with the current fiscal period. Conversely, special assessments and federal grant reimbursements will be collected after the period of availability; receivables have been recorded for these, along with a deferred inflow. 20

23 Notes to Financial Statements February 29, 2016 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Proprietary funds use the economic resources measurement focus and the full accrual basis of accounting. Revenue is recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Specific Balances and Transactions Cash - Cash includes cash on hand, demand deposits, and short-term investments with a maturity of three months or less when acquired. Receivables and Payables - In general, outstanding balances between funds are reported as "due to/from other funds." Any residual balances outstanding between governmental activities and the business-type activities are reported in the governmentwide financial statements as "internal balances." All trade and property tax receivables are shown as net of allowance for uncollectible amounts. Restricted Assets - The revenue bonds of the proprietary funds require amounts to be set aside for a reserve amount for 10 years; at the end of the 10 years, the Village will have a full annual debt payment reserved in case it were to default on a payment one year. At the end of the 10 years, the reserve amount will then be added to the repair and maintenance reserve, which is also required. The repair and maintenance reserve requires the Village to reserve a set amount each year per the USDA agreement. Capital Assets - Capital assets, which include property, buildings, equipment, and infrastructure assets (e.g., roads, bridges, sidewalks, and similar items), are reported in the applicable governmental or business-type activities column in the government-wide financial statements. Capital assets are defined by the Village as assets with an initial individual cost of more than $500 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. Infrastructure, buildings, equipment, and vehicles are depreciated using the straight-line method over the following useful lives: Capital Asset Class Roads and sidewalks Water and sewer systems Buildings and building improvements Vehicles Equipment Lives 25 years years 50 years 5 to 10 years 3 to 25 years 21

24 Notes to Financial Statements February 29, 2016 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Pension - The Village offers a defined benefit pension plan to its employees. The Village records a net pension liability for the difference between the total pension liability calculated by the actuary and the pension plan s fiduciary net position. For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the pension plan and additions to/deductions from the pension plan s fiduciary net position have been determined on the same basis as they are reported by the pension plan. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. Compensated Absences (Vacation and Sick Leave) - It is the Village's policy to permit employees to accumulate earned but unused sick and vacation pay benefits. There is no liability for unpaid accumulated sick leave since the Village does not have a policy to pay any amounts when employees separate from service with the Village. All vacation pay is accrued when incurred in the government-wide and proprietary fund financial statements. A liability for these amounts is reported in the governmental funds only for employee terminations as of year end. Compensated absences attributable to the governmental activities will be liquidated primarily by the General Fund and the Major and Local Streets Funds. Long-term Obligations - In the government-wide financial statements and the proprietary fund types in the fund financial statements, long-term debt and other longterm obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund-type statement of net position. In the fund financial statements, governmental fund types recognize the face amount of debt issued as other financing resources. There is currently no long-term debt in the governmental funds. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position and/or balance sheet will sometimes report a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period and so will not be recognized as an outflow of resources (expense/expenditure) until then. The Village does not have deferred outflows of resources in the current year. 22

25 Notes to Financial Statements February 29, 2016 Note 1 - Nature of Business and Significant Accounting Policies (Continued) In addition to liabilities, the statement of net position and/or balance sheet will sometimes report a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (revenue) until that time. The Village has two items that qualify for reporting in this category. One item, unavailable revenue, is reported only in the governmental funds balance sheet. The governmental funds report unavailable revenue from state-shared revenue. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. Second, the government-wide statements report deferred inflows related to the pension plan. These deferred inflows result from the difference between projected and actual investment earnings and employer contributions to the plan subsequent to the measurement date. Net Position Flow Assumption Sometimes the government will fund outlays for a particular purpose from both restricted (e.g., restricted bond or grant proceeds) and unrestricted resources. In order to calculate the amounts to report as restricted net position and unrestricted net position in the government-wide and proprietary fund financial statements, a flow assumption must be made about the order in which the resources are considered to be applied. It is the government's policy to consider restricted net position to have been depleted before unrestricted net position is applied. Fund Balance Flow Assumption Sometimes the government will fund outlays for a particular purpose from both restricted and unrestricted resources (the total of committed, assigned, and unassigned fund balance). In order to calculate the amounts to report as restricted, committed, assigned, and unassigned fund balance in the governmental fund financial statements, a flow assumption must be made about the order in which the resources are considered to be applied. It is the government's policy to consider restricted fund balance to have been depleted before using any of the components of unrestricted fund balance. Further, when the components of unrestricted fund balance can be used for the same purpose, committed fund balance is depleted first, followed by assigned fund balance. Unassigned fund balance is applied last. Fund Balance Policies Fund balance of governmental funds is reported in various categories based on the nature of any limitations requiring the use of resources for specific purposes. The government itself can establish limitations on the use of resources through either a commitment (committed fund balance) or an assignment (assigned fund balance). 23

26 Notes to Financial Statements February 29, 2016 Note 1 - Nature of Business and Significant Accounting Policies (Continued) The committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision-making authority. The Village Council is the highest level of decision-making authority for the government that can, by adoption of an ordinance prior to the end of the fiscal year, commit fund balance. Once adopted, the limitation imposed by the ordinance remains in place until a similar action is taken (the adoption of another ordinance) to remove or revise the limitation. Amounts in the assigned fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as committed. The Village Council has by resolution authorized the council to assign fund balance as it does when appropriating fund balance to cover a gap between estimated revenue and appropriations in the subsequent year's appropriated budget. Unlike commitments, assignments generally only exist temporarily. In other words, an additional action does not normally have to be taken for the removal of an assignment. Conversely, as discussed above, an additional action is essential to either remove or revise a commitment. Property Tax Revenue Properties are assessed as of December 31. The related property taxes are billed on July 1 and become a lien on December 1 of the following year. The taxes are due on September 30 with a final collection date of February 28 before they are added to the county tax rolls. The Village's 2015 tax is levied and collectible on July 1, 2015 and is recognized as revenue in the year ended February 29, 2016, when the proceeds of the levy are budgeted and available for the financing of operations. The 2015 taxable valuation of the Village totaled approximately $11.6 million, on which taxes levied consisted of mills for operating purposes and 3.25 mills for street repair and maintenance. This resulted in $139,000 for operating purposes and $39,000 for street repair and maintenance. These amounts are recognized in the respective General Fund and special revenue funds financial statements as tax revenue. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. 24

27 Notes to Financial Statements February 29, 2016 Note 2 - Stewardship, Compliance, and Accountability Construction Code Fees - The Village oversees building construction, in accordance with the State's Construction Code Act, including inspection of building construction and renovation to ensure compliance with the building codes. The Village charges fees for these services. The law requires that collection of these fees be used only for construction code costs, including an allocation of estimated overhead costs. A summary of the current year activity and the cumulative surplus or shortfall generated since January 1, 2000 is as follows: Shortfall at March 1, 2015 $ (8,619) Current year permit revenue 4,768 Related expenses: Direct costs $ 4,315 Estimated indirect costs 1,404 5,719 Current year shortfall (951) Cumulative shortfall at February 29, 2016 $ (9,570) Note 3 - Deposits and Investments Michigan Compiled Laws Section (Public Act 20 of 1943, as amended) authorizes local governmental units to make deposits and invest in the accounts of federally insured banks, credit unions, and savings and loan associations that have offices in Michigan. The law also allows investments outside the state of Michigan when fully insured. The local unit is allowed to invest in bonds, securities, and other direct obligations of the United States or any agency or instrumentality of the United States; repurchase agreements; bankers' acceptances of United States banks; commercial paper rated within the two highest classifications, which matures not more than 270 days after the date of purchase; obligations of the State of Michigan or its political subdivisions, which are rated as investment grade; and mutual funds composed of investment vehicles that are legal for direct investment by local units of government in Michigan. The Village has designated four financial institutions for the deposit of its funds. The investment policy adopted by the Council in accordance with Public Act 196 of 1997 has authorized investment in bank accounts and CDs, but not the remainder of state statutory authority as listed above. The Village's deposits and investment policies are in accordance with statutory authority. 25

28 Notes to Financial Statements February 29, 2016 Note 3 - Deposits and Investments (Continued) Custodial Credit Risk of Bank Deposits - Custodial credit risk is the risk that in the event of a bank failure, the Village's deposits may not be returned to it. The Village does not have a deposit policy for custodial credit risk. At year end, the Village had approximately $3,000 of bank deposits (certificates of deposit, checking, and savings accounts) that were uninsured and uncollateralized. The Village believes that due to the dollar amounts of cash deposits and the limits of FDIC/NCUA insurance, it is impractical to insure all deposits. As a result, the Village evaluates each financial institution with which it deposits funds and assesses the level of risk of each institution; only those institutions with an acceptable estimated risk level are used as depositories. Note 4 - Capital Assets Capital asset activity of the Village's governmental and business-type activities was as follows: Governmental Activities Balance March 1, 2015 Additions Disposals Balance February 29, 2016 Capital assets not being depreciated - Land $ 30,140 $ - $ - $ 30,140 Capital assets being depreciated: Roads and sidewalks 183,706 85, ,612 Buildings and improvements 139, ,686 Vehicles 86, ,965 Office furnishings and equipment 224, ,576 Subtotal 634,933 85, ,839 Accumulated depreciation: Roads and sidewalks 43,805 8,494-52,299 Buildings and improvements 82,405 3,965-86,370 Vehicles 49,029 7,760-56,789 Office furnishings and equipment 130,378 11, ,742 Subtotal 305,617 31, ,200 Net capital assets being depreciated 329,316 54, ,639 Net capital assets $ 359,456 $ 54,323 $ - $ 413,779 26

29 Notes to Financial Statements February 29, 2016 Note 4 - Capital Assets (Continued) Business-type Activities Balance March 1, 2015 Additions Disposals Balance February 29, 2016 Capital assets being depreciated: Water and sewer distribution systems $ 1,992,732 $ - $ - $ 1,992,732 Machinery and equipment 125, ,797 Subtotal 2,118, ,118,529 Accumulated depreciation: Water and sewer distribution systems 1,005,887 47,034-1,052,921 Machinery and equipment 39,013 4,059-43,072 Subtotal 1,044,900 51,093-1,095,993 Net capital assets being depreciated 1,073,629 (51,093) - 1,022,536 Net capital assets $ 1,073,629 $ (51,093) $ - $ 1,022,536 The roads and sidewalks balance disclosed above excludes roads and sidewalks acquired prior to March 1, 2003, as the Village opted to not retroactively capitalize infrastructure costs. Depreciation expense was charged to programs of the Village as follows: Governmental activities: General government $ 4,780 Public safety 2,519 Public works 22,259 Recreation and culture 2,025 Total governmental activities $ 31,583 Business-type activities: Water $ 17,799 Waste water 33,294 Total business-type activities $ 51,093 Note 5 - Long-term Debt and Compensated Absences The Village grants paid time off to employees for sick and vacation absences. Time is earned and accrued based on the employee's service to the Village. The liability activity can be summarized as follows: Beginning Balance Additions Reductions Ending Balance Due Within One Year Governmental activities - Compensated absences $ 9,238 $ 4,623 $ (9,238) $ 4,623 $ 4,623 27