Wastewater and Surface Water Management 2010 Financial Report

Transcription

1 Wastewater and Surface Water Management 2010 Financial Report City of Tacoma Public Works Environmental Services

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3 Table of Contents Independent Auditor s Report... 3 Management s Discussion and Analysis... 7 Financial Statements Notes to Financial Statements Unaudited Supplemental Information

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5 Independent Auditor s Report 3

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7 IlSSAIlA MS. til M REPORT OF INDEPENDENT AUDITORS Honorable Mayor and City COlmcil City of Tacoma, Washington, Public Works Department, Environmental Services, Wastewater and Surface Water Management Tacoma, Washington We have audited the accompanying balance sheets of City of Tacoma, Washington, Public Works Deparbnent, Environmental Services, Wastewater and Surface Water Management (the Division) as of December 31, 2010 and 2009 and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Division's management 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circlllllstances, but not for the purpose of expressing an opinion on the effectiveness of the Division's internal control over fmancial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amolmts and disclosures in the financial statements, assessing the accolmting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of City of Tacoma, Washington, Public WOIks Department, Environmental Services, Wastewater and Surface Water Management as of December 31, 2010 and 2009 and the results of its operations and its cash flows for theyears then ended in conformity with accolmting principles generally accepted in the United States of America. The management's discussion and analysis preceding the financial statements is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. The supplemental information following the financial statements and notes to the fmancial statements is also not a required part of the basic financial statements but is supplementary information provided for purposes of additional analysis. We did not audit or peiform any other procedures on this information and express no opinion on it. Portland, Oregon April 18, 2011 Prax;'ty., ",,~.' GlOUl.nl.~Cf Qf INgl'EN~!N1 firm$ 5

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9 Management s Discussion and Analysis 7

10 City of Tacoma, Washington Public Works Department Environmental Services Wastewater and Surface Water Management Management s Discussion and Analysis December 31, 2010 and 2009 Introduction The following is management s discussion and analysis (MD&A) of the financial activities of the City of Tacoma s Wastewater and Surface Water Management Division (the Division) for the years ended December 31, 2010 and The MD&A is designed to focus on significant financial transactions and activities and to identify changes in financial position. This information should be read in conjunction with the financial statements taken as a whole. The financial statements are prepared on a full accrual basis of accounting. Financial Highlights Total net assets are $355.7 million at December 31, 2010 compared to $340 million and $326.4 million at yearend 2009 and 2008, respectively. The change in net assets is $15.7 million in 2010, $13.6 million in 2009, and $22.7 million in Total assets are $595.9 million, an increase of $42.5 million in 2010 compared to an increase of $6.6 million in Liabilities are $240.2 million, an increase of $26.9 million in 2010 compared to a decrease of $7 million in Financial Analysis Condensed Balance Sheets December 31, Current, restricted, and other assets $ 161,206,839 $ 165,920,392 $ 167,199,099 Capital assets 434,653, ,407, ,521,391 Total assets $ 595,860,417 $ 553,327,678 $ 546,720,490 Current liabilities and liabilities payable from restricted assets $ 38,075,394 $ 34,359,292 $ 35,409,847 Noncurrent liabilities 202,129, ,969, ,914,438 Total liabilities 240,204, ,328, ,324,285 Invested in capital assets, net of related debt 313,888, ,075, ,332,048 Restricted for bond reserves 7,361,598 5,263,356 5,099,281 Unrestricted 34,404,910 40,660,240 39,964,876 Total net assets 355,655, ,999, ,396,205 Total liabilities and net assets $ 595,860,417 $ 553,327,678 $ 546,720,490 Current, restricted, and other assets Cash decreased $8.2 million in 2010 and $3.2 million in The significant decrease in 2010 was primarily due to increased spending on capital projects and increased payments to employees for labor and benefits and decreased investment income due to lower cash balances and interest rates. Accounts receivable, net of the allowance for uncollectible accounts, increased $404,000. The allowance for uncollectible accounts is $3.6 million in 2010 or 5% of revenues compared to $3.1 million in 2009 or 4% of revenues. Of the increase, $397,000 was the result of the accrued bad debt for a tenant who has been listed as non operational by the Department of 8

11 Revenue since March The estimate of the allowance for uncollectible accounts is based on increasing percentages of aged accounts receivable balances up to 100% of balances over six months. The current ratio, excluding restricted assets and liabilities, is 2.9 in 2010 compared to 3.4 in Capital assets Capital assets increased $47.2 million in 2010; this compares to an increase of $7.9 million in The significant increase in 2010 included $30.3 million in buildings for the Urban Waters capital lease building; $9.3 million in donated assets: $2.3 million for lines and $7 million for historical easements recorded at estimated fair market value. Detail activity may be found under the Capital Assets section. Current liabilities and liabilities payable from restricted assets Total current liabilities including those payable from restricted assets increased $3.7 million in This compares to a decrease of $1.1 million in The increase in 2010 is attributable to an increase of $3.1 million in accounts payable due to increased spending on capital projects. The decrease in 2009 is attributable to a decrease of $1.4 million in account payable due to decreased spending on the CTP Upgrade project which was completed in Noncurrent liabilities Noncurrent liabilities increased $23.2 million in 2010 and $5.9 million in The increase in 2010 is primarily due to recording the long term portion of capital lease obligations for $29.2 million offset by the principal payments of $5.8 million on State Revolving Fund (SRF) loans and revenue bonds. Financial Analysis Condensed Statements of Revenues, Expenses and Changes in Net Assets Year Ended December 31, Operating revenues $ 76,555,368 $ 73,594,834 $ 67,812,356 Operating expenses: Administration and general 5,007,152 5,296,685 4,699,287 Operations 12,737,789 12,140,527 10,730,851 Science and engineering 7,638,799 7,126,196 8,831,735 Environmental remediation Foss (3,465,568) Maintenance 15,325,997 12,825,263 12,423,376 Other 20,594,206 16,604,498 15,157,601 Total operating expenses 61,303,943 53,993,169 48,377,282 Net operating income 15,251,425 19,601,665 19,435,074 Nonoperating revenues (4,119,876) (2,293,547) 415,071 Income before contributions and transfers 11,131,549 17,308,118 19,850,145 Contributions 10,897,345 2,559,249 8,637,251 Transfers (18,918) (225,426) (24,523) Gross earnings taxes (6,353,795) (6,038,890) (5,799,819) Change in net assets 15,656,181 13,603,051 22,663,054 Total net assets beginning 339,999, ,396, ,733,151 Total net assets ending $ 355,655,437 $ 339,999,256 $ 326,396,205 Operating revenues Operating revenues increased $3 million (4%) in 2010 and $5.8 million (9%) in The Sewer annual rate increases effective January 1 st of each year were reflected in revenue increases. However, the economic downturn caused the decrease in revenue for Wastewater commercial and reduced the rate of increase on other revenues. 9

12 The following graph provides a comparison of operating revenues for the three years. $ʹs in Millions 40.0 Operating Revenues WW Residential WW Commercial & PA Surface Water Tagro Other Operating expenses Operating expenses were $61.3 million in 2010 and $54 million in 2009, an increase of $7.3 million or 13.5% over Administration and general expenses decreased $290,000 over This decrease is a result of a $337,000 decrease in bad debt expenses and an increase of $353,000 in capitalized A&G due to more spending on capital projects. Offsetting this decrease was a $422,000 increase in lease costs associated with the Urban Waters capital lease building after construction was completed in March In Operations, the majority of the $597,000 change from 2009 is a result of increased costs to Pierce County for wastewater treatment charges and an increase in material costs associated with internal and external laboratory services. Maintenance costs increased $2.5 million as a result of increased labor costs in represented positions, including retro pay for 2009, resulting from the class and compensation initiative and the increase in detention pond expenditures that were required to be spent by the end of the year per agreements with property owners. Other operating expenses include costs for insurance, taxes, IT services, and customer services totaled $7.8 million, a $741,000 increase from the $7.1 million in The allocated charges for IT services and customer services slightly increased due to increased labor costs. Taxes increased due to an increase in the tax rate as of March 2010 and increased revenues. Operating expenses were $54 million in 2009, an increase of $5.6 million (12%) over Across the Division, salaries and wages increased approximately 6%; however, costs for health care benefits decreased slightly. In Operations, $1.4 million of the increase was the result of increased costs in Customer Service related to source control, expense projects for laboratory work, and a high volume of overtime in January to assist and protect against flood damage due to record high rain. Other operating expenses include costs for insurance, taxes, IT services, and customer service which were $7.1 million, a $1.1 million increase from $5.9 million in The allocated charges for IT services and customer services significantly increased primarily due to higher labor costs and changes in the cost allocation. 10

13 The graph below shows operating expenses for each of the operating groups: $ʹs in Millions Operating Expenses Excluding Environmental Costs and Reimbursements Related to the Foss Waterway and Depreciation Expense Admin & General Operations Science & Engin Maintenance Other Nonoperating revenues (expenses) Nonoperating revenues and expenses consist of investment income, operating grant revenues, and interest expense. Net expenses of $4.1 million were reported in 2010, an increase of $1.8 million from the net expenses of $2.3 million in The most significant decrease was in investment income on the cash and equity in the City s pooled investments. This included a market value adjustment loss of $822,000. Contribution The Division recorded $10.9 million in contributions in 2010 which is $8.3 million more than in $9.3 million of this increase was donated assets as previously discussed. An additional $1.6 million was due to capital grants related to Surface Water projects. Capital Assets Capital assets increased $47.2 million compared to $7.9 million in (See Note 3.) 2010 activity Assets in service, net of accumulated depreciation, increased $42.8 million over the prior year. Of this increase, land and easements increased $4.3 million due to the first time recording of donated easements of $7 million net of land related to the Urban Waters capital lease reclassified to other noncurrent assets of $2.7 million. Capital lease buildings increased $30.3 million due to the capital lease treatment for the Urban Waters building. Transmission lines increased $14.4 million: 8,730 feet of the donated lines at $2.2 million, 105,642 feet of replaced sewer lines at $11.3 million and 3,918 feet of line extensions at $894,000. Accumulated depreciation increased $12.3 million to $169.1 million due to the Central Treatment Plant (CTP) upgrade activity Assets in service, net of accumulated depreciation, increased $103.1 million over the prior year. This includes $99.5 million in buildings and machinery and equipment including $97.3 million for capitalization of the CTP upgrade project. Transmission lines increased $12.4 million and computer software increased $334,000. Increases to transmission lines 11

14 include the capitalization of $2.5 million in donated lines. Accumulated depreciation increased $9.1 million to $156.8 million principally due to the $9.5 million in depreciation expense. Construction work in progress decreased $95.2 million. Transfers to assets in service include $3.1 million for the St. Helens Neighborhood Low Impact Development (LID), $927,000 for the Salishan Redevelopment project, and other completed projects including the CTP upgrade project. Debt Administration At December 31, 2010, the Division had $106 million outstanding in revenue bonds. The rating agencies maintained the Division s underlying credit ratings in 2010 of Aa2, AA+, and AA+ from Moody s, Standard & Poor s, and Fitch, respectively. The principal payments on the revenue bonds were $2.3 million in 2010 and $2.6 million in Additionally, the Division had $69.2 million in State Revolving Fund (SRF) loans after payments of $3.3 million during the year. (See Note 4.) Debt Service Coverage The bond coverage ratio is calculated by dividing net revenue by debt service. The debt service on the SRF loans were excluded in the ratio calculations and the interest expense on the SRF loans were treated as a reduction in the net revenue calculation. The bond coverage ratio is 3.72 at the end of This compares to 3.94 at the end of 2009 and 4.27 reported in A bond coverage ratio of 1.3 is required by bond covenants for the Division. Summary This Management Discussion and Analysis should be read in conjunction with the accompanying financial statements and notes. This report is prepared by our Financial Services Team. Moss Adams LLP independently audited the financial statements and notes. Public Works Management and Finance Management are jointly responsible for the information contained in this report, including the financial statements and notes. 12

15 Financial Statements 13

16 City of Tacoma, Washington Public Works Department Environmental Services Wastewater and Surface Water Management Balance Sheets December 31, ASSETS Current assets: Operating cash and equity in pooled investments: Operating Fund $ 72,071,139 $ 78,706,881 Rate Stabilization Fund 22,500,000 22,500,000 Total operating cash and equity in pooled investments 94,571, ,206,881 Accounts receivable 9,229,319 8,266,215 Allowance for uncollectible accounts (3,640,364) (3,081,030) Unbilled revenue 5,800,000 5,400,000 Due from other funds 117, ,583 Due from other governmental units 498, ,171 Inventory 928, ,310 Prepaid expenses 85,094 83,758 Notes and contracts receivable 121, ,830 Total current assets 107,711, ,613,718 Restricted cash and equity in pooled investments: Bond reserve and debt service accounts 8,007,221 5,909,540 Customer deposits detention ponds 140, ,128 Construction accounts 41,028,115 44,299,604 Total restricted cash and equity in pooled investments 49,176,201 50,768,272 Capital assets: Land and easements 9,589,094 5,322,964 Buildings 145,373, ,025,709 Buildings capital lease 30,272,000 Machinery and equipment 125,530, ,824,048 Transmission lines 273,573, ,178,075 Computer software 6,817,157 6,708,950 Less: accumulated depreciation (169,104,085) (156,812,287) Assets in service, net of accumulated depreciation 422,051, ,247,459 Construction in progress 12,601,731 8,159,827 Total capital assets 434,653, ,407,286 Other noncurrent assets 4,319,348 1,538,402 TOTAL ASSETS $ 595,860,417 $ 553,327,678 The accompanying notes are an integral part of the financial statements. 14

17 City of Tacoma, Washington Public Works Department Environmental Services Wastewater and Surface Water Management Balance Sheets December 31, LIABILITIES Current liabilities: Accounts payable $ 4,403,512 $ 1,296,979 Accrued wages payable 780, ,960 Compensated absences 200, ,201 Accrued taxes payable 768, ,633 Due other funds 895,751 1,102,551 Due other governmental units 426, ,218 Deferred revenue 168, ,816 Deferred credit rate stabilization 22,500,000 22,500,000 Environmental liabilities 660, ,247 Capital lease obligation 534,000 Current portion of long term debt revenue bonds 2,245,833 2,135,833 Current portion of long term debt State Revolving Loans 3,388,886 3,328,549 State Revolving Loan interest payable 316, ,046 Total current liabilities 37,288,906 33,330,033 Current liabilities payable from restricted assets: Deposit payable detention ponds 140, ,128 Bond interest payable 441, ,165 Current portion of long term debt revenue bonds 204, ,167 Total current liabilities payable from restricted assets 786,488 1,204,460 Noncurrent liabilities: Long term debt revenue bonds 103,525, ,901,569 Long term debt State Revolving Loans 65,766,043 69,154,929 Capital lease obligation 29,181,667 Compensated absences 1,800,199 1,576,807 Net OPEB obligation 1,006, ,960 Environmental liabilities 850,000 1,422,664 Total noncurrent liabilities 202,129, ,793,929 Total liabilities 240,204, ,328,422 NET ASSETS Invested in capital assets, net of related debt 313,888, ,075,660 Restricted for bond reserves and debt service 7,361,598 5,263,356 Unrestricted 34,404,910 40,660,240 Total net assets 355,655, ,999,256 TOTAL LIABILITIES AND NET ASSETS $ 595,860,417 $ 553,327,678 The accompanying notes are an integral part of the financial statements. 15

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19 City of Tacoma, Washington Public Works Department Environmental Services Wastewater and Surface Water Management Statements of Revenues, Expenses, and Changes in Net Assets Year Ended December 31, OPERATING REVENUES Wastewater residential $ 33,792,005 $ 31,887,934 Wastewater commercial and public authorities 18,207,496 18,367,043 Surface Water 23,403,506 22,044,118 Tagro revenue 317, ,630 Other revenue 835, ,109 Total operating revenues 76,555,368 73,594,834 OPERATING EXPENSES Administration and general 5,007,152 5,296,685 Operations 12,737,789 12,140,527 Science & engineering 7,638,799 7,126,196 Maintenance 15,325,997 12,825,263 Other 7,801,772 7,061,222 Depreciation 12,792,434 9,543,276 Total operating expenses 61,303,943 53,993,169 Net operating income 15,251,425 19,601,665 NONOPERATING REVENUES (EXPENSES) Investment income 2,534,564 4,139,647 Bond interest expense, net of capitalized interest (5,014,701) (5,482,017) Interest on long term debt State Revolving Loans (1,294,233) (1,324,463) Interest on capital lease (617,410) Amortization of premium, discount, issuance, and refunding costs (136,281) (123,752) Other, net 408, ,038 Total nonoperating revenues (expenses) (4,119,876) (2,293,547) CHANGE IN NET ASSETS Net income before capital contributions and transfers 11,131,549 17,308,118 Contributions: Capital related grants 1,575, ,953 Donated fixed assets 9,321,908 2,458,296 Transfers to other fund (18,918) (225,426) Transfers gross earnings tax (6,353,795) (6,038,890) CHANGE IN NET ASSETS 15,656,181 13,603,051 TOTAL NET ASSETS BEGINNING 339,999, ,396,205 TOTAL NET ASSETS ENDING $ 355,655,437 $ 339,999,256 The accompanying notes are an integral part of the financial statements. 17

20 City of Tacoma, Washington Public Works Department Environmental Services Wastewater and Surface Water Management Statements of Cash Flows Year Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 74,753,663 $ 70,290,747 Payments to suppliers (18,280,215) (20,539,533) Payments to employees (24,838,059) (21,982,200) Payments for taxes (1,317,801) (1,200,250) Net cash from operating activities 30,317,588 26,568,764 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Gross earning taxes paid (6,232,626) (6,018,111) Debt service related to environmental cleanup (2,246,876) (2,246,876) Operating grants received 497, ,841 Net cash from noncapital financing activities (7,982,064) (7,753,146) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets (52,602,122) (15,560,533) Transfers out of capital assets (18,918) (225,426) Principal payments on revenue bonds (2,330,000) (2,570,000) Principal payments on State Revolving loans (3,328,549) (2,694,790) Capital lease obligation 29,715,667 Interest expense, net of capitalized interest (4,704,909) (5,191,220) Net cash from capital and related financing activities (33,268,831) (26,241,969) CASH FLOWS FROM INVESTING ACTIVITIES Investment income 2,534,564 4,139,647 Rental income 220, ,092 Contributions for low income assistance (61,440) (57,880) Other nonoperating income 11,479 6,772 Net cash from investing activities 2,705,494 4,190,631 Net change in cash and equity in pooled investments (8,227,813) (3,235,720) Cash and equity in pooled investments beginning 151,975, ,210,873 Cash and equity in pooled investments ending $ 143,747,340 $ 151,975,153 The accompanying notes are an integral part of the financial statements. 18

21 City of Tacoma, Washington Public Works Department Environmental Services Wastewater and Surface Water Management Statements of Cash Flows Year Ended December 31, Reconciliation of cash and equity in pooled investments to balance sheets: Operating funds $ 94,571,139 $ 101,206,881 Restricted funds 49,176,201 50,768,272 $ 143,747,340 $ 151,975,153 Reconciliation of operating income to net cash from operating activities: Operating income $ 15,251,425 $ 19,601,665 Adjustments to reconcile operating income to net cash from operating activities: Depreciation expense 12,792,434 9,543,276 Change in assets and liabilities: Accounts receivable, net of allowance (403,770) (409,973) Unbilled revenue (400,000) (600,000) Notes and contract receviable (110,662) (78,436) Due from other funds 353,703 (424,607) Due from other governmental units 338,171 (365,034) Inventory (151,278) (80,197) Prepaid expenses (1,336) (63,801) Accounts payable 3,106,533 (761,426) Accrued wages and compensated absences 389, ,545 Accrued taxes payable 64,549 6,584 Deposits payable (418,263) 52,117 Due other funds (206,801) 92,836 Due other governmental units 42,158 20,630 Deferred revenue (136,038) 46,065 Environmental liability (460,950) (528,781) Accrued OPEB obligation, net 268, ,301 Total adjustments 15,066,163 6,967,099 $ 30,317,588 $ 26,568,764 Significant non cash transactions: Captal and Related Financing Activities Donated fixed assets $ 9,321,908 $ 2,458,296 Land transfer to other noncurrent assets 2,748,225 Record capital lease buidling 30,272,000 The accompanying notes are an integral part of the financial statements. 19

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23 Notes to Financial Statements 21

24 City of Tacoma, Washington Public Works Department Environmental Services Wastewater & Surface Water Management Notes to Financial Statements Years Ended December 31, 2010 and 2009 NOTE 1 OPERATIONS OPERATIONS OF THE WASTEWATER AND SURFACE WATER MANAGEMENT DIVISION The Wastewater and Surface Water Management Division (the Division) is presented as an enterprise fund within the Department of Public Works under the provisions of the City of Tacoma Charter and is included in the City s Comprehensive Annual Financial Report. The Division has approximately 250 employees and is responsible for the planning, design, construction, operation, and maintenance of the wastewater and surface water facilities owned by the City. In addition to providing wastewater service within the City, the Division provides sewage treatment and disposal services by contract to the towns of Fife, Ruston, and Fircrest, and portions of Pierce County and the Federal Way Water and Sewer District in neighboring King County. The Division receives certain services from other departments and agencies of the City including those normally considered to be general and administrative. The Division is charged for services received from other City departments and agencies and, additionally, must pay gross earnings tax to the City. These transactions are required to be arms length transactions by law. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING AND PRESENTATION The financial statements of the Division are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP) issued by the Governmental Accounting Standards Board (GASB) applicable to governmental entities that use proprietary fund accounting. Revenues are recognized when earned, and costs and expenses are recognized when incurred. The Division follows the provisions set forth in regulatory accounting guidance. In general, regulatory accounting permits an entity with cost based rates to defer certain costs or income that would otherwise be recognized when incurred to the extent that the rate regulated entity is recovering or expects to recover such amounts in rates charged to its customers. CASH AND EQUITY IN POOLED INVESTMENTS The Division s fund cash balances are a deposit with the City Treasurer s Tacoma Investment Pool (TIP) for the purpose of maximizing interest earnings through pooled investment activities. Cash and equity in pooled investments in the TIP are reported at fair value and changes in unrealized gains and losses are recorded in the Statements of Revenues, Expenses and Changes in Net Assets. Interest earned on such pooled investments is allocated daily to the participating funds based on each fundʹs daily equity in the TIP. The TIP operates like a demand deposit account in that all City departments, including the Division, have fund balances which are their equity in the TIP. Accordingly, balances are considered to be cash equivalents. 22

25 Wastewater & Surface Water Management Notes to Financial Statements Continued The City of Tacoma Investment Policy permits legal investments as authorized by state law including Certificates of Deposit with qualified public depositories (as defined in Chapter RCW), obligations of the U.S. Treasury, Government Sponsored Agencies and Instrumentalities, bonds issued by Washington State and its Local Governments with an A or better rating, general obligation bonds issue by any State or Local Government with an A or better rating, Bankersʹ Acceptances, Commercial Paper, Repurchase and Reverse Repurchase agreements, and the Washington State Local Government Investment Pool (LGIP). Daily liquidity requirement to meet the City s daily obligations is maintained by investing a portion of the City s Investment Pool in the WA State LGIP and/or a Municipal Investor interest bearing demand deposit account maintained with U.S. Bank. The Division s equity in that portion of the City of Tacoma Investment Pool held in qualified public depositories at December 31, 2010 and 2009 is entirely covered by the Federal Deposit Insurance Corporation (FDIC) and the Washington State Public Deposit Protection Commission (PDPC). Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, longer term investments have greater exposure to changes in market interest rates. The City of Tacoma investment policy allows for authorized investments up to 60 months to maturity. One way the City manages its exposure to interest rate risk is by timing cash flows from maturities so that portions of the portfolio are maturing over time to provide cash flow and liquidity needed for operations. RECEIVABLES AND UNBILLED REVENUES Accounts receivable consist of amounts owed by private individuals and organizations for goods delivered or services rendered in the regular course of business operations Receivables are shown net of allowances for doubtful accounts. The Division accrues an estimated amount for services that have been provided but not billed. ALLOWANCE FOR DOUBTFUL ACCOUNTS A reserve has been established for uncollectible accounts receivable based on historical write off trends and knowledge of specific circumstances that indicate collection of an account may be unlikely. Generally accounts receivable are considered past due after 30 days. INTERDIVISION TRANSACTIONS Unsettled transactions between funds at year end are recorded as due to or due from other funds. MATERIAL AND SUPPLIES INVENTORY Materials and supplies consist primarily of items for maintenance of Division assets and are valued at the lower of average cost or fair market value. SPECIAL FUNDS AND RESTRICTED ASSETS In accordance with bond resolutions, agreements and laws, separate restricted funds have been established. These funds consist of cash and investments in pooled investments with restrictions externally imposed and legally enforceable, established by the City Council. Generally, restricted assets include bond construction, reserve and debt service funds, extraordinary operations and customer deposits. BOND PREMIUM, ISSUANCE COSTS AND LOSS ON REFUNDING Bond premium, discount and issuance costs are amortized over the life of the bonds using the weighted average of the bonds outstanding. Losses on refunding are amortized on a straight line basis over the applicable bond period. RATE STABILIZATION FUND The Division has established a rate stabilization account to reduce significant yearto year variations in rates. Amounts deposited into the account are excluded from the statement of revenues, expenses and changes in net assets in accordance with regulated operations. Revenue will be recognized in subsequent periods when it is withdrawn in accordance with rate decisions and debt service covenants. 23

26 Wastewater & Surface Water Management Notes to Financial Statements Continued DEFERRED CONSERVATION COSTS The Division has deferred conservation costs to be charged to future periods matching the time when the revenues and expenses are included in rates. Conservation assets represent installation of savings measures at the properties of its customers. The deferred balance is reduced as costs are recovered, which for the most part represent debt service payments included in rates for related borrowing. Conservation assets are amortized as other operating expense on the statements of revenues, expenses and changes in net assets. CAPITAL ASSETS AND DEPRECIATION Capital assets consist of utility plant and are stated at original cost, which includes both direct costs of construction or acquisition and indirect costs. The cost of capital assets contributed is recorded at donated fair value. The cost of maintenance and repairs is charged to expense as incurred while the costs of improvements, additions and major renewals that extend the life of an asset are capitalized. Assets are capitalized when costs exceed $5,000 and the useful life exceeds one year. Depreciation is recorded using the straight line method based upon estimated useful lives of the assets. The original cost of property together with removal cost, less salvage, is charged to accumulated depreciation at such time as property is retired and removed from service. The estimated useful lives range as follows: Years Collection and Transmission Mains 75 Structures and Improvements 50 Land Improvements 25 Intangible Plant 7 20 Equipment 3 20 CONSTRUCTION IN PROGRESS Capitalizable costs incurred on projects which are not in service or ready for use are held in construction in progress. When the asset is ready for service, related costs are transferred to capital assets. Upon determining that a project will be abandoned, the related costs are charged to expense. ASSET VALUATION The Division periodically reviews the carrying amount of its long lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is generally determined based on discounted future cash flows. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) AFUDC represents the cost of borrowed funds used for the construction of utility plant, net of interest earned on unspent construction funds. Capitalized AFUDC is shown as part of the cost of utility plant and as a reduction of interest income and expense. INTANGIBLE ASSETS In accordance with GASB No. 51, Accounting and Financial Reporting for Intangible Assets, land use rights such as easements and right of ways are recorded as intangible assets. Land use intangible assets are recorded at fair market value. CONTRIBUTED CAPITAL In accordance with GASB No. 33, ʺAccounting and Financial Reporting for Nonexchange Transactionsʺ, capital grants and capital contributions are recorded as capital contribution revenue. 24

27 Wastewater & Surface Water Management Notes to Financial Statements Continued COMPENSATED ABSENCES The City has two different policies for compensated absences. The Cityʹs original policy allows employees to accrue vacation based on the number of years worked with a maximum accrual equal to the amount earned in a two year period. These employees also accrue one day of sick leave per month without any ceiling on the maximum accrued. The City implemented a new policy in 1998 allowing employees to earn PTO (personal time off) without distinction between vacation and sick leave. Employees who worked for the City prior to the change could choose to stay with the original policy or opt to convert to the new policy. The amount of PTO earned is based on years of service. The maximum accrual for PTO is 960 hours, and upon termination, employees are entitled to compensation for unused PTO at 100%. Vacation pay and PTO are recorded as a liability and expense in the year earned. Employees in the original policy accumulate sick leave at the rate of one day per month with no maximum accumulation specified. Employees receive 25% of the value at retirement or 10% upon termination for any other reason. In the event of death, beneficiaries receive 25% of the value. The accrued liability is computed at 10%, which is considered the amount vested. Sick leave pay is recorded as an expense in the year earned. OPERATING REVENUE Revenues are derived from providing wastewater and surface water services. Wastewater services include the collection and treatment of wastewater to produce clean water and biosolids that are then used to produce TAGRO, planting fertilizer and material. Wastewater rates are based on volume of flow and strength. Total suspended solids (TSS) and biological oxygen demand (BOD) are strength determinants. Surface water services include flooding and erosion control, pollution prevention and control, environmental cleanup and restoration, and street drainage. Surface water rates are based on the area of the parcels and level of development with reductions for direct discharge and approved detention systems. The rate structure is designed to meet the Division s needs and obligations on a cost of service basis while adhering to legal requirements. These legal requirements include computing rates on a reasonable basis, charging rates uniformly within classes, and using the revenues for utility and regulatory purposes. In addition, there may be laws imposed by the State, City Charter or to meet grant or bond requirements. The City has a parity bond ordinance that it will establish, maintain and collect rates or charges in connection with the ownership and operation of the utility that will be fair and nondiscriminatory and adequate to provide gross revenues sufficient for 1) the payment of the principal and interest on all parity bonds and all amounts that the City is obligated to set aside in the bond fund, 2) the proper operation and maintenance of the utility, 3) the payment of any and all amounts that the City may now or hereafter become obligated to pay from gross revenues. Customers are billed on bi monthly or monthly billing cycles. At year end, unbilled revenues are estimated and accrued based on these billing cycles. TAXES The City charges the Division a Gross Earnings Tax at the rate of 8.0%. In addition, the Division pays a 3.852% public utility tax to the State on a certain portion of revenues identified as utility revenues. The Division also pays business and occupation tax to the State at the rate of 1.8% on certain other non utility revenues. The Division is exempt from payment of federal income tax. NET ASSETS The statement of Net Assets reports all financial and capital resources. The difference between assets and liabilities is net assets. There are three components of net assets: invested in capital assets net of related debt, restricted or unrestricted. 25

28 Wastewater & Surface Water Management Notes to Financial Statements Continued Net Assets invested in capital assets, net of related debt, consists of capital assets, less accumulated depreciation, reduced by the outstanding balances of any bonds, loans or other borrowings that are attributable to the acquisition, construction, or improvements of those assets. Net assets are restricted when constraints placed on net asset use are either (1) externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or (2) imposed by law through constitutional provisions or enabling legislation. Unrestricted net assets are those that are not invested in capital assets, net of related debt or restricted. ARBITRAGE REBATE REQUIREMENT The Division is subject to the Internal Revenue Code ( IRC ), Section 148(f), related to its tax exempt revenue bonds. The IRC requires that earnings on gross proceeds of any revenue bonds that are in excess of the amount prescribed will be surrendered to the Internal Revenue Service. As such, the Division would record such a rebate as a liability. The Division had no liability in the current or prior year. ENVIRONMENTAL REMEDIATION COSTS The Division recognizes environmental obligations according to GASB Statement No. 49 Accounting and Financial Reporting for Pollution Remediation Obligations. Accruals for expected pollution remediation outlays are recorded when one of five obligating events occurs and adjusted as further information develops or circumstances change. The five obligating events are applied when the Division is: 1) compelled to take action because of an imminent endangerment, 2) the Division is in violation of a pollution prevention related permit or license, 3) the Division is named or evidence indicates that it will be named by a regulator as a responsible party or potentially responsible party, 4) named in a lawsuit to compel participation in pollution remediation or 5) the Division commences or legally obligates itself to commence pollution remediation. Costs related to environmental remediation are charged to expense when the liability is recognized; outlays are capitalized when goods and services are acquired under specific circumstances as described in Statement No. 49. Measurement is based on the current value of the outlays for the individual remediation components using the expected cash flow technique, adjusted for recoveries from other parties and insurance. SHARED SERVICES The Division receives certain services from other departments and agencies of the City, including those normally considered to be general and administrative. The Division is charged for services received from other City departments and agencies and, additionally, must pay a gross earnings tax to the City. USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. The Division used estimates in determining reported unbilled revenues, allowance for doubtful accounts, accrued compensated absences, depreciation, OPEB, self insurance liabilities and other contingencies. Actual results may differ from these estimates. SIGNIFICANT RISKS AND UNCERTAINTIES The Division is subject to certain business risks that could have a material impact on future operations and financial performance. These risks include, but are not limited to, water conditions, weather and natural disaster related disruptions, collective bargaining labor disputes, fish and other endangered species act issues, Environmental Protection Agency regulations, federal government regulations or orders concerning the operation, maintenance and/or licensing of facilities. 26

29 Wastewater & Surface Water Management Notes to Financial Statements Continued RECLASSIFICATIONS Changes have been made to prior year account classifications as needed to conform to the current year presentation format. NOTE 3 CAPITAL ASSETS 2009 Additions Retirements Transfers 2010 Land and easements $ 5,322,964 $ 6,978,888 $ $ (2,712,758) $ 9,589,094 Buildings 143,025,709 30,272,000 (309,688) 2,657, ,645,595 Machinery and equipment 121,824,048 (41,337) 3,747, ,530,161 Transmission lines 259,178,075 2,358,135 (409,678) 12,447, ,573,925 Computer software 6,708, ,207 6,817,157 Assets in service 536,059,746 39,609,023 (760,703) 16,247, ,155,932 Accumulated depreciation (156,812,287) (12,792,434) 500,636 (169,104,085) Assets in service, net 379,247,459 26,816,589 (260,067) 16,247, ,051,847 Construction work in progress 8,159,827 23,437,995 (18,996,091) 12,601,731 Total capital assets $ 387,407,286 $ 50,254,584 $ (260,067) $ (2,748,225) $ 434,653, Additions Retirements Transfers 2009 Land and easements $ 5,322,964 $ $ $ $ 5,322,964 Buildings 127,987,675 15,038, ,025,709 Machinery and equipment 37,399,656 (109,953) 84,534, ,824,048 Transmission lines 246,777,546 2,458,294 (110,139) 10,052, ,178,075 Computer software 6,374, ,402 6,708,950 Assets in service 423,862,389 2,458,294 (220,092) 109,959, ,059,746 Accumulated depreciation (147,730,200) (9,543,276) 156, ,809 (156,812,287) Assets in service, net 276,132,189 (7,084,982) (63,712) 110,263, ,247,459 Construction work in progress 103,389,202 15,034,589 (110,263,964) 8,159,827 Total capital assets $ 379,521,391 $ 7,949,607 $ (63,712) $ $ 387,407,286 NOTE 4 LONG TERM DEBT Long term debt activity for the year ended December 31, 2010 is as follows: Beginning Ending Due within Balance Additions Payments Balance One Year Revenue bonds $ 108,730,000 $ $ (2,330,000) $ 106,400,000 $ 2,450,000 Plus: Unamortized premium 1,314,582 (136,122) 1,178,460 Less: Unamortized discount (165,791) 9,305 (156,486) Less: Loss on refunding (1,647,222) 200,908 (1,446,314) State Revolving Fund loans 72,483,478 (3,328,549) 69,154,929 3,388,886 Long term debt $ 180,715,047 $ $ (5,584,458) $ 175,130,589 $ 5,838,886 27

30 Wastewater & Surface Water Management Notes to Financial Statements Continued The Divisionʹs long term debt at December 31, 2010 consists of the following payable from revenues of the Division Series A Revenue Bonds, with an interest rate of 5.0%, due in yearly installments of $3,025,000 to $4,690,000 from 2022 through $ 38,035,000 $ 38,035, Revenue Refunding Bonds, with interest rates ranging from 4.125% to 5.5%, due in yearly installments of $2,330,000 to $2,955,000 through ,415,000 15,745, Revenue & Refunding Bonds, with interest rates 54,950,000 54,950,000 ranging from 4.5% to 5.125%, due in yearly installments of $470,000 to $6,890,000 between 2016 and Total revenue bonds outstanding 106,400, ,730,000 State Revolving Fund loans A & B, with an interest rate of 1.5% and 2.6%, respectively, due in semi annual installments of $2,300,000 to $4,500,000 through 2028; this debt is junior lien and is secured by net operating revenue. 69,154,929 72,483,478 Total outstanding debt 175,554, ,213,478 Less: Current portion (5,634,719) (5,464,382) Current portion payable from restricted assets (204,167) (194,167) Unamortized bond discount (156,486) (165,791) Unamortized bond refunding loss (1,446,314) (1,647,222) Plus: Unamortized premium 1,178,460 1,314,582 Total long term debt $ 169,291,703 $ 175,056,498 28

31 Wastewater & Surface Water Management Notes to Financial Statements Continued Annual debt service requirement to maturity are as follows: Principal Interest on Debt Total Debt Service 2011 $ 5,838,886 $ 6,546,385 $ 12,385, ,000,399 6,383,810 12,384, ,168,113 6,212,721 12,380, ,382,053 6,002,756 12,384, ,597,244 5,783,289 12,380, ,694,803 25,716,876 59,411, ,453,324 19,964,076 59,417, ,690,107 13,131,158 47,821, ,840,000 6,385,288 36,225, ,890, ,112 7,243,112 $ 175,554,929 $ 96,479,471 $ 272,034,400 The fair value of the Division s revenue bonds is based on quoted market prices. At December 31, 2010 the fair market value of revenue bonds was $107,734,572 and at December 31, 2009, $112,770,773. The carrying amounts of the State Revolving Fund loans approximate the fair value since such loans are exclusive and have no market. The Division s current underlying credit ratings are Aa2, AA+, and AA+ from Moody s, Standard and Poor s, and Fitch, respectively. As of December 31, 2010, the following outstanding bonds are considered defeased: 2001 Series A Refunding Bonds $ 15,165,000 These defeased bonds constitute a contingent liability of the Division only to the extent that cash and investments presently in the control of the refunding trustees are not sufficient to meet debt service requirements and therefore are excluded from the financial statements because the likelihood of additional funding requirements is considered remote. The Division s revenue bonds are secured by net operating revenue and cash and equity in pooled investment balances in the bond construction, reserve, and debt service funds. The bonds are also subject to certain financial and non financial covenants. NOTE 5 CAPITAL LEASE By Ordinance No passed on January 20, 2009, the City approved a property agreement and project lease with TES Properties and issuance by TES Properties of $37,840,000 aggregate principal amount of its Lease Revenue Bonds, 2009 ( Bonds ). TES Properties is a single purpose Washington nonprofit corporation and subordinate organization of NDC Housing and Economic Development Corporation. The Environmental Services Department determined the appropriate pro rata share for the Public Works utilities to share in all revenue, costs and cash requirements based on usage of the Urban Waters building to be: Wastewater (43%), Surface Water (37%) and Solid Waste (20%). The three 29

32 Wastewater & Surface Water Management Notes to Financial Statements Continued utilities have included their pro rata share of the capital lease and lease obligation for the building in their respective financial statements. The building has a useful life of 50 years and the lease agreement is for 29 years which exactly matches the debt service schedule of the Bonds. The land on which the building was constructed has been transferred to TES Properties and reclassified on the utilities balance sheets to a deferred asset. All assets revert to the City at the end of the lease. The future payments of the lease obligation as of 12/31/2010 total $73,079,962. The Division s portion of the lease obligation is presented in the following table: Year Division 2011 $ 2,086, ,088, ,086, ,087, ,087, ,441, ,438, ,443, ,439, $ 6,263,583 58,463,970 The sub lease agreements for the space in the Urban Waters building include agreements with two tenants: the University of Washington Tacoma (UWT) and the Puget Sound Partnership (PSP). Both are for ten year periods with possibility of five year extensions. The UWT agreement provides revenue of $293,640 per year, adjusted annually for inflation, to be shared across the three utilities. The PSP agreement provides a total of $1,615,000 in revenue spread over the ten year lease period. NOTE 6 INSURANCE The major risks to the Division are flooding, recontamination, wind damage, chemical spills, and earthquakes. Mitigating controls and emergency and business resumption plans are in place. To the extent damage or claims exceed insured values, rates may be impacted. The City of Tacoma has established a Self Insurance Fund to insure the Division and other divisions within the City for certain losses arising from personal and property damage claims by third parties. The Division is required to make payments to the Self Insurance Fund to cover claims incurred by the Division and administrative expenses of the Fund. The Division s premium payments totaled $221,000 each of the years 2010, 2009, and As risk of loss transfers to the Self Insurance Fund, the Division only recognizes expense for premium payments. Additionally, the City maintains an excess general liability policy with limits of $15 million, subject to a self insured retention of $3 million. The City has an excess policy to cover extraordinary workers compensation claims with a limit of $25 million ($1 million self insured retention), and a property insurance policy with a limit of $500 million replacement cost ($100,000 deductible per occurrence). Earthquake coverage has a three percent per building self insured retention. 30