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5 INDEPENDENT SCHOOL DISTRICT NO. 834 Table of Contents Page SECTION I INTRODUCTORY SECTION Letter of Transmittal Organizational Chart School Board and Administration Certificate of Excellence Map of School District i iv v vi vii viii SECTION II FINANCIAL SECTION INDEPENDENT AUDITOR S REPORT 1 3 MANAGEMENT S DISCUSSION AND ANALYSIS 4 15 BASIC FINANCIAL STATEMENTS Government-Wide Financial Statements Statement of Net Position 16 Statement of Activities 17 Fund Financial Statements Governmental Funds Balance Sheet Reconciliation of the Balance Sheet to the Statement of Net Position 20 Statement of Revenue, Expenditures, and Changes in Fund Balances Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities 23 Statement of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual General Fund 24 Internal Service Funds Statement of Net Position 25 Statement of Revenue, Expenses, and Changes in Net Position 26 Statement of Cash Flows 27 Fiduciary Funds Statement of Fiduciary Net Position 28 Statement of Changes in Fiduciary Net Position 28 Notes to Basic Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Public Employees Retirement Benefits Plan Schedule of District s Proportionate Share of Net Pension Liability 60 Schedule of District Contributions 60 Teachers Retirement Association Pension Benefits Plan Schedule of District s and Non-Employer Proportionate Share of Net Pension Liability 61 Schedule of District Contributions 61 Other Post-Employment Benefits Plan Schedule of Funding Progress 62 Schedule of District Contributions 62

6 INDEPENDENT SCHOOL DISTRICT NO. 834 Table of Contents (continued) Page SUPPLEMENTAL INFORMATION Nonmajor Governmental Funds Combining Balance Sheet 63 Combining Statement of Revenue, Expenditures, and Changes in Fund Balances 64 General Fund Comparative Balance Sheet 65 Schedule of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual Food Service Special Revenue Fund Comparative Balance Sheet 69 Schedule of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual 70 Community Service Special Revenue Fund Comparative Balance Sheet 71 Schedule of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual 72 Capital Projects Building Construction Fund Comparative Balance Sheet 73 Schedule of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual 74 Debt Service Fund Balance Sheet by Account 75 Schedule of Revenue, Expenditures, and Changes in Fund Balances by Account Budget and Actual Internal Service Funds Combining Statement of Net Position 78 Combining Statement of Revenue, Expenses, and Changes in Net Position 79 Combining Statement of Cash Flows 80 SECTION III STATISTICAL SECTION (UNAUDITED) Net Position by Component Changes in Net Position Governmental Activities Tax Revenues by Source and Levy Type 85 Fund Balances of Governmental Funds Changes in Fund Balances of Governmental Funds General Governmental Tax Revenues by Source and Levy Type 90 Tax Capacities and Market Values Property Tax Rates Direct and Overlapping Governments Principal Property Taxpayers 95 Property Tax Levies, Collections, and Receivables Ratios of Outstanding Debt by Type 98 Ratio of Net General Obligation Bonded Debt to Market Value and Net General Obligation Bonded Debt per Capita 99

7 INDEPENDENT SCHOOL DISTRICT NO. 834 Table of Contents (continued) Page SECTION III STATISTICAL SECTION (UNAUDITED) (CONTINUED) Direct and Overlapping Debt 100 Legal Debt Margin Information Demographic and Economic Statistics 103 Principal Employers 104 Employees by Classification Teacher Data Student to Staff Ratios 109 Operating Indicators by Function Standardized Testing and Graduation Rates School Facilities 112 Food Service School Lunch Program Data Student Enrollment 115 Expenditures per Student 116

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9 Section I Introduction Stillwater AREA PUBLIC SCHOOLS

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11 September 23, 2016 To the School Board, citizens, and employees of Independent School District No. 834: State law requires that every public school district publish, within six months of the close of each fiscal year, a complete set of audited financial statements. This report is published to fulfill that requirement for the fiscal year ended June 30, Management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. Malloy, Montague, Karnowski, Radosevich & Co. P.A., Certified Public Accountants, have issued an unmodified ( clean ) opinion on Independent School District No. 834 s (the District) financial statements for the year ended June 30, The independent auditor s report is located at the front of the financial section of this report. The Management s Discussion and Analysis (MD&A) immediately follows the independent auditor s report and provides a narrative introduction, overview, and analysis of the basic financial statements. The MD&A complements this letter of transmittal and should be read in conjunction with it. PROFILE OF THE ENTITY AND ITS SERVICES The District provides a full range of public education services appropriate to grade levels ranging from pre-kindergarten through Grade 12. These include regular and enriched academic programs, special education programs, and career/vocational education. Food service and transportation are provided as supporting programs. The community education program in the District includes early childhood and family education programs, an adult basic education program, and a variety of classes for lifelong learning experiences for children and adults. Minnesota s first schoolhouse was built in Stillwater in 1848, a year before Minnesota became a territory. Located on Olive Street between Second and Third Streets, the schoolhouse was a one-room building with cracks in the walls. Stillwater became the state s first school district just two years later, a full four years before the City of Stillwater was incorporated. This District, now known as Independent School District No. 834, Stillwater Area Public Schools, has a long tradition of high expectations, high standards, and outstanding achievement. It is also a system dedicated to continuous improvement. -i-

12 The District served more than 8,300 students for the school year and is projecting a similar enrollment for the school year. We have gone from a one-room schoolhouse to 10 elementary schools (K 6), two junior high schools (Grades 7 9), one high school (Grades 10 12), and an alternative learning center for secondary students. An early childhood family center (ECFC) serves families with young children, from birth to age five. The average age of the District s buildings is approximately years; with the original buildings being constructed first in 1919 to the latest construction of the ECFC in Building ages include 1920s (1), 1930s (1), 1950s (5), 1960s (2), 1970s (2), 1990s (2), and 2010s (1). The District stretches 30 miles along the scenic St. Croix River from Marine on St. Croix south to Afton, and covers approximately 150 square miles. The District encompasses 18 communities, including: Afton, Bayport, Baytown Township, Grant, a portion of Hugo, Lake Elmo, Lakeland, Lakeland Shores, Lake St. Croix Beach, Marine on St. Croix, May Township, Oak Park Heights, St. Mary s Point, Stillwater, Stillwater Township, West Lakeland Township, Withrow, and a portion of Woodbury. The total district population is estimated at 63,865. The District is well known for providing a solid and rigorous curriculum that focuses on the expanded basics of reading, writing, math, logic, and speaking. Student achievement on state and national tests ranks above the state average. The District strives to develop learners who are innovative, creative, and prepared for a rapidly changing world. Expectations are high and students of all abilities are challenged, supported, and motivated at every level from early childhood through high school. Students regularly earn top awards and recognitions in academics, and performing and visual arts programs. Student athletes also consistently appear in state competitions. LOCAL ECONOMY According to census information from the Washington County website, the county continued to experience growth, increasing 2.2 percent since The Washington County population in 2012 was 243,313, making it the fifth largest county in the state of Minnesota, housing approximately 4.4 percent of the state s population and approximately 8.0 percent of the Twin Cities metropolitan area s population. According to the Metropolitan Council, as reported on the county s website, Washington County s population is expected to continue to grow. By the year 2030, the county s population is projected to increase to 362,090. The District s population has grown from 41,958 in 1996 to 63,865 in This represents more than a 52.0 percent increase. Source data from the American Community Survey shows that the median household income in 2014 for Washington County was $83,200 as compared to $61,481 for the state of Minnesota. Source data from the American Community Survey shows that the per capita income in 2014 for Washington County was $37,800. The poverty rate of Washington County continues to be low. Source data from the 2014 American Community Survey, as reported on the county s website, shows that 5.7 percent of Washington County s population was below the federal poverty level and that 5.2 percent of the county s population was between percent and percent of poverty. Due to its strong and healthy local economy, the District has maintained a credit rating of Aa2 from Moody s Investor Service since ii-

13 LONG-TERM FINANCIAL PLANNING AND MAJOR INITIATIVES With the exception of the voter-approved operating referendum, the District is dependent on the state of Minnesota for its revenue authority. Recent experience demonstrates that legislated revenue increases are unpredictable and have not been sufficient to meet instructional program needs and increased costs due to inflation. The District will continue to monitor its operations to ensure that revenues are sufficient to meet expenditures and to maintain a reasonable amount in reserve to cover any unforeseen expenditures. A long-term facilities committee was established during the school year to address the many facets of facility planning. School age population changes are projected to result in greater facility needs on the south end of the District and reduced need on the northern end of the District. A shared elementary school, under a joint powers agreement, has retired existing debt, eliminating long-term financial ties. During the school year, it was decided that the joint powers agreement for the shared elementary school be terminated. The elementary school was sold and the District s portion of the proceeds was returned during the school year. A referendum was passed in May 2015 that will change the instructional delivery model. The District will become a pre-k 5, 6 8, and 9 12 grade configuration. Remodeling for this configuration is occurring in our existing buildings. A new elementary school is being built in the south end of the District. Along with a transportation terminal, science rooms, gym space, field improvements, playgrounds, and HVAC systems are being addressed with the bond proceeds. With the involvement of students, staff, and community members, the District developed a strategic plan known as the Bridge to Excellence. This plan was designed for action and transparency, while addressing the objectives of uncompromising commitment to achieve specific, measurable, observable, or demonstrable results that exceed our present capability. This plan will be the focus of work for the District in the next five years. Year one of the Bridge to Excellence plan was the school year. The complete five-year implementation plan can be viewed at RELEVANT FINANCIAL POLICIES The District has adopted several financial policies, which were not significantly changed in the current year. The District is required to adopt an annual budget prior to the start of the fiscal year. For the fiscal year, the District adopted a General Fund original budget estimating revenues and other financing sources to be slightly more than expenditures ($93,939,488 versus $93,747,274), achieving the School Board goal of a balanced budget. School Board policy states the school district will maintain a minimum unassigned General Fund balance of 5 percent of the annual projected expenditures. The District s unassigned fund balance was greater than 5 percent which allowed for the School Board to commit $4 million for various purposes. AWARDS AND ACKNOWLEDGEMENTS The Association of School Business Officials (ASBO) International awarded the Certificate of Excellence in Financial Reporting to the District for its comprehensive annual financial report (CAFR) for the fiscal year ended June 30, This was the 12th consecutive year that the District has achieved this prestigious award. A Certificate of Excellence in Financial Reporting is valid for a period of one year only. However, we believe that our current CAFR continues to meet the Certificate of Excellence in Financial Reporting program s requirements, and we are submitting it to the ASBO International to determine its eligibility for another certificate. -iii-

14 The preparation of this report would not have been possible without the skill, effort, and dedication of the entire staff of the Business and Administrative Services Division. We wish to thank all departments for their assistance in providing the data necessary to prepare this report. Credit is also due to the Superintendent and the School Board for their unfailing support in maintaining the highest standards of professionalism in the management of the District s finances. Respectfully submitted, Kristen Hoheisel, SFO, CPA (inactive) Executive Director of Finance and Operations -iv-

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16 INDEPENDENT SCHOOL DISTRICT NO. 834 School Board and Administration Year Ended June 30, 2016 SCHOOL BOARD Board Position Mr. George Hoeppner Dr. Michael Ptacek Ms. Amy Burback Ms. Paula O Loughlin Ms. Kathleen Buchholz Mr. Tom Lehmann Ms. Shelley Pearson Chairperson Vice Chairperson Treasurer Clerk Director Director Director ADMINISTRATION Ms. Denise Pontrelli Dr. Bob McDowell Ms. Kristen Hoheisel Ms. Cathy Moen Ms. Angela Freese Ms. Rachel Larson Mr. John Perry Mr. Paul Lee Ms. Annette Sallman Superintendent Executive Director of Learning and Innovation Executive Director of Finance and Operations Executive Director of Administrative Services Director of Learning Analytics and Systems Improvement Director of Personalized Learning Systems Director of Learning, Technology and Design Systems Director of Student Support Services Director of Community Education and Community Relations -vi-

17 The Certificate of Excellence in Financial Reporting Award is presented to Stillwater Area Public Schools Independent School District #834 for its Comprehensive Annual Financial Report (CAFR) for the Fiscal Year Ended June 30, 2015 The CAFR has been reviewed and met or exceeded ASBO International s Certificate of Excellence standards Brenda R. Burkett, CPA, CSBA, SFO President John D. Musso, CAE, RSBA Executive Director -vii-

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19 Section II Financial Stillwater AREA PUBLIC SCHOOLS

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21 INDEPENDENT AUDITOR S REPORT To the School Board and Management of Independent School District No. 834 Stillwater, Minnesota REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Independent School District No. 834 (the District) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the District 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 District 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 District 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. -1- (continued)

22 OPINIONS In our opinion, the financial statements referred to on the previous page present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the District as of June 30, 2016, and the respective changes in financial position and, where applicable, cash flows thereof, and the budgetary comparison for the General Fund for the year then ended, in accordance with accounting principles generally accepted in the United States of America. OTHER MATTERS Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis and the required supplementary information (RSI), as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the RSI 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 Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the District s basic financial statements. The introductory section, supplemental information, and statistical section, as listed in the table of contents, are presented for purposes of additional analysis and are not required parts of the basic financial statements. The supplemental information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. -2- (continued)

23 Prior Year Comparative Information We have previously audited the District s 2015 financial statements, and we expressed unmodified audit opinions on the respective financial statements of the governmental activities, each major fund, and the aggregate remaining fund information in our report dated September 28, In our opinion, the partial comparative information presented herein as of and for the year ended June 30, 2015 is consistent, in all material respects, with the audited financial statements from which it has been derived. OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated September 23, 2016 on our consideration of the District 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 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 the District s internal control over financial reporting and compliance. Minneapolis, Minnesota September 23,

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25 INDEPENDENT SCHOOL DISTRICT NO. 834 Management s Discussion and Analysis Year Ended June 30, 2016 This section of Independent School District No. 834 s (the District) comprehensive annual financial report (CAFR) presents management s narrative overview and analysis of the District s financial performance during the fiscal year ended June 30, Please read it in conjunction with the other components of the District s CAFR. FINANCIAL HIGHLIGHTS The District s assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources at June 30, 2016 by $34,749,966 (net position). The District s total net position increased by $17,886,801 during the fiscal year ended June 30, 2016, excluding the change in accounting principle reported in the current year as discussed below. The District recorded a change in accounting principle in the current year for the change in the capitalization threshold approved for capital assets. The change reflects the increase in the capitalization threshold to $5,000 for financial statement reporting purposes, which reduced beginning net position in the government-wide statements by $374,509. Government-wide revenues totaled $120,535,406 and were $8,968,030 more than expenses of $111,567,376. The District also reported a special item, which increased net position by $8,918,771. The special item represents the District s share of the sale of a joint school operated through a joint powers agreement, the proceeds from which will be used for capital purposes of the District. The General Fund s total fund balance (under the governmental fund presentation) increased $2,158,409 from the prior year, compared to a $685,511 increase planned in the budget. OVERVIEW OF THE FINANCIAL STATEMENTS The financial section of the CAFR consists of the following parts: Independent Auditor s Report; Management s Discussion and Analysis; Basic financial statements, including the government-wide financial statements, fund financial statements, and the notes to basic financial statements; Required supplementary information; and Supplemental information consisting of combining and individual fund statements and schedules. The following explains the two types of statements included in the basic financial statements: GOVERNMENT-WIDE FINANCIAL STATEMENTS The government-wide financial statements (Statement of Net Position and Statement of Activities) report information about the District as a whole using accounting methods similar to those used by private sector companies. The Statement of Net Position includes all of the District s assets, deferred outflows of resources, liabilities, and deferred inflows of resources, except for the fiduciary funds. All of the current year s revenues and expenses are accounted for in the Statement of Activities regardless of when cash is received or paid. -4-

26 The two government-wide financial statements report the District s net position and how it has changed. Net position the difference between the District s assets, deferred outflows of resources, liabilities, and deferred inflows of resources is one way to measure the District s financial health or position. Over time, increases or decreases in the District s net position are indicators of whether its financial position is improving or deteriorating, respectively. To assess the overall health of the District requires consideration of additional nonfinancial factors such as changes in the District s property tax base and the condition of school buildings and other facilities. In the government-wide financial statements the District s activities are all shown in one category titled governmental activities. These activities, including regular and special education instruction, transportation, administration, food services, and community education, are primarily financed with state aids and property taxes. FUND FINANCIAL STATEMENTS The fund financial statements provide more detailed information about the District s funds, focusing on its most significant or major funds, rather than the District as a whole. Funds (Food Service Special Revenue and Community Service Special Revenue) that do not meet the threshold to be classified as major funds are called nonmajor funds. Detailed financial information for nonmajor funds can be found in the supplemental information section. Funds are accounting devices the District uses to keep track of specific sources of funding and spending on particular programs. For Minnesota schools, funds are established in accordance with Uniform Financial Accounting and Reporting Standards in accordance with statutory requirements and accounting principles generally accepted in the United States of America. The District maintains the following kinds of funds: Governmental Funds The District s basic services are included in governmental funds which generally focus on: 1) how cash and other financial assets that can readily be converted to cash flow in and out, and 2) the balances left at year-end that are available for spending. Consequently, the governmental fund statements provide a detailed short-term view that helps to determine whether there are more or less financial resources that can be spent in the near future to finance the District s programs. Because this information does not encompass the additional long-term focus of the government-wide financial statements, we provide additional information (reconciliation schedules) immediately following the governmental fund statements that explain the relationship (or differences) between these two types of financial statement presentations. Proprietary Funds The District maintains one type of proprietary fund. The internal service funds are used as an accounting device to accumulate and allocate costs internally among the District s various functions. The District uses its internal service funds to account for the self-insurance activities of the district employees medical and dental claims. These services have been included within governmental activities in the government-wide financial statements. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. Fiduciary Funds The District is the trustee, or fiduciary, for assets that belong to other organizations. The District is responsible for ensuring that the assets reported in these funds are used only for their intended purposes and by those to whom the assets belong. All of the District s fiduciary activities are reported in a separate Statement of Fiduciary Net Position and a Statement of Changes in Fiduciary Net Position. We exclude these activities from the government-wide financial statements because the District cannot use these assets to finance its operations. -5-

27 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE Table 1 is a summarized view of the District s Statement of Net Position: Table 1 Summary Statement of Net Position as of June 30, 2016 and Assets Current and other assets $ 178,596,423 $ 80,153,556 Capital assets, net of depreciation 102,349,805 82,239,477 Total assets $ 280,946,228 $ 162,393,033 Deferred outflows of resources Pension plan deferments PERA and TRA $ 10,839,462 $ 8,294,510 Liabilities Current and other liabilities $ 23,014,906 $ 12,049,441 Long-term liabilities, including due within one year 190,522,206 91,290,424 Total liabilities $ 213,537,112 $ 103,339,865 Deferred inflows of resources Property taxes levied for subsequent year $ 34,525,586 $ 34,357,434 Pension plan deferments PERA and TRA 8,973,026 15,752,570 Total deferred inflows of resources $ 43,498,612 $ 50,110,004 Net position Net investment in capital assets $ 65,414,063 $ 56,387,161 Restricted 9,743,503 5,665,080 Unrestricted (40,407,600) (44,814,567) Total net position $ 34,749,966 $ 17,237,674 The District s financial position is the product of many factors. For example, the determination of the District s net investment in capital assets involves many assumptions and estimates, such as current and accumulated depreciation amounts. A conservative versus liberal approach to depreciation estimates, as well as capitalization policies, will produce a significant difference in the calculated amounts. The other major factor in determining net position as compared to fund balances is the liability for long-term severance, pension, and other post-employment benefits (OPEB), which impacts the unrestricted portion of net position. Total net position increased by $17,512,292, which reflects an increase of $17,886,801 from current year operating results, while the change in accounting principle mentioned earlier reduced net position by $374,509. The District issued $90,565,000 of building bonds in the current year to be used for improvements at several District facilities. -6-

28 The District s increase in net investment in capital assets is due mostly to the District repaying debt at a faster rate than the assets being depreciated. The District s use of the alternative facility levy to finance capital improvements also contributes to the overall increase in the net investment in capital assets, without an offsetting decrease for related debt. An increase in net position restricted for capital asset acquisition and debt service increased the restricted portion of net position. The increase in unrestricted net position was primarily due to favorable operating results in the General Fund and internal service funds, discussed later in this report. Table 2 presents a summarized version of the District s Statement of Activities: Table 2 Summary Statement of Activities for the Years Ended June 30, 2016 and Revenues Program revenues Charges for services $ 8,706,584 $ 7,558,128 Operating grants and contributions 15,073,801 13,909,704 General revenues Property taxes 36,659,210 35,014,752 General grants and aids 58,466,733 57,947,379 Other 1,629,078 1,134,319 Total revenues 120,535, ,564,282 Expenses Administration 3,835,257 3,469,001 District support services 4,930,575 2,879,688 Elementary and secondary regular instruction 45,403,156 45,526,927 Vocational education instruction 1,293,897 1,142,699 Special education instruction 17,032,647 16,441,733 Instructional support services 5,748,010 6,112,684 Pupil support services 10,113,009 9,807,046 Sites and buildings 9,363,699 11,582,408 Fiscal and other fixed cost programs 263, ,265 Food service 3,983,097 3,883,245 Community service 4,807,513 4,586,087 Interest and fiscal charges on debt 4,793,187 1,362,338 Total expenses 111,567, ,982,121 Change in net position before special item 8,968,030 8,582,161 Special item joint school proceeds 8,918,771 Change in net position 17,886,801 8,582,161 Net position beginning, as previously reported 17,237,674 8,655,513 Change in accounting principle (374,509) Net position beginning, restated 16,863,165 8,655,513 Net position ending $ 34,749,966 $ 17,237,674 This table is presented on an accrual basis of accounting, and it includes all of the governmental activities of the District. This statement includes depreciation expense, but excludes capital asset purchase costs, debt proceeds, and the repayment of debt principal. -7-

29 Figure A shows further analysis of these revenue sources. Figure A Sources of Revenues for Fiscal Years 2016 and 2015 The largest share of the District s revenue is received from the state, including the general education aid formula and most of the operating grants. This significant reliance on the state for funding has placed pressure on local school districts as a result of limited funding increases in recent years. Property taxes are generally the next largest source of funding. The level of revenue property tax sources provide is not only dependent on district taxpayers by way of operating and building referenda, but also by decisions made by the Legislature in the mix of state aid and local effort in a variety of funding formulas. -8-

30 Figure B shows further analysis of these expense functions. Figure B Expenses for Fiscal Years 2016 and 2015 The District s expenses are predominately related to educating students. Programs (or functions) such as elementary and secondary regular instruction, vocational education instruction, special education instruction, and instructional support services are directly related to classroom instruction, while the rest of the programs support instruction and other necessary costs to operate the District. -9-

31 FINANCIAL ANALYSIS OF THE DISTRICT S FUNDS The financial performance of the District as a whole is also reflected in its governmental funds. Table 3 shows the change in total fund balances of each of the District s governmental funds: Table 3 Governmental Fund Balances as of June 30, 2016 and 2015 Increase (Decrease) Major funds General $ 16,160,123 $ 14,001,714 $ 2,158,409 Capital Projects Building Construction 82,458, ,204 81,977,396 Debt Service 7,341,354 1,772,888 5,568,466 Nonmajor funds Food Service Special Revenue 166, ,578 42,950 Community Service Special Revenue 884, , ,756 Total governmental funds $ 107,011,308 $ 17,045,331 $ 89,965,977 The focus of the District s governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the District s financing requirements. In particular, unassigned fund balance may serve as a useful measure of a government s net resources available for discretionary use as they represent the portion of fund balance which has not yet been limited to use for a particular purpose by either an external party, the District itself, or a group or individual that has been delegated authority to assign resources for use for particular purposes by the District s School Board. At June 30, 2016, the District s governmental funds reported combined fund balances of $107,011,308, an increase of $89,965,977 in comparison with the prior year. Approximately 7.2 percent of this amount ($7,753,286) constitutes unassigned fund balance, which is available for spending at the District s discretion. The remainder of the fund balance is either nonspendable, restricted, committed, or assigned to indicate that it is 1) not in spendable form ($250,272), 2) restricted for particular purposes ($93,372,094), 3) committed for particular purposes ($3,783,815), or 4) assigned for particular purposes ($1,851,841). -10-

32 ANALYSIS OF THE GENERAL FUND Table 4 summarizes the amendments to the General Fund budget: Table 4 General Fund Budget Increase Original Budget Final Budget (Decrease) Percent Change Revenues and other financing sources $ 93,939,488 $ 95,317,534 $ 1,378, % Expenditures $ 93,747,274 $ 94,632,023 $ 884, % The District is required to adopt an operating budget prior to the beginning of its fiscal year, referred to above as the original budget. During the year, the District amended the budget for known significant changes in circumstances such as: updated enrollment estimates, legislative changes, additional funding received from grants or other local sources, staffing changes, employee contract settlements, insurance premium changes, special education tuition changes, or for new debt issued. Table 5 summarizes the operating results of the General Fund: Table 5 General Fund Operating Results Over (Under) Final Budget Over (Under) Prior Year 2016 Actual Amount Percent Amount Percent Revenue $ 97,533,586 $ 2,222, % $ 3,405, % Expenditures 104,299,281 9,667, % 11,642, % Excess (deficiency) of revenue over expenditures (6,765,695) (7,445,206) (8,236,375) Net other financing sources (uses) 5,333 (667) 451,868 Special item - joint school proceeds 8,918,771 8,918,771 8,918,771 Net change in fund balances $ 2,158,409 $ 1,472,898 $ 1,134,264 The fund balance of the General Fund increased $2,158,409, compared to a planned increase of $685,511 approved in the final budget. -11-

33 General Fund revenues for 2016 increased $3,405,857, or 3.6 percent, compared to the prior year. This was within $2,222,052, or 2.3 percent, of budget. The largest revenue variances occurred in state sources and other local sources, which were $1,969,686 and $528,122 more than projected in the budget, respectively. The increase from the prior year was mainly due to additional special education revenue, improvements in the general education funding formula, and pass-through of state funding for pensions. Total General Fund expenditures for 2016 increased $11,642,232, or 12.6 percent, over the prior year. Current year expenditures of $104,299,281 were $9,667,258, or 10.2 percent, over budget. The expenditure variance was spread across several programs and object categories of the General Fund. District support services, along with sites and buildings, experienced the largest program variances, with expenditures exceeding budget by $1,511,201 and $8,126,385, respectively. This was due mostly to an unanticipated communication system upgrade and the capital spending of sources received from the special item previously discussed. COMMENTS ON SIGNIFICANT ACTIVITIES IN OTHER FUNDS Capital Projects Building Construction Fund The District s issuance of the 2015A General Obligation School Building Bonds, which will be used to finance construction and improvements at several district facilities, contributed to the overall increase in fund balance. Debt Service Fund The Debt Service Fund revenues and other financing sources exceeded expenditures and other financing uses by $5,568,466 in the current year. The funding of debt service is controlled in accordance with each outstanding debt issue s financing plan. The remaining fund balance of $7,341,354 at June 30, 2016 is available for meeting future debt service obligations. Other Governmental Funds The Food Service Special Revenue Fund ended the year with revenues exceeding expenditures, increasing equity by $42,950, compared to a planned fund balance increase of $6,861. The Community Service Special Revenue Fund ended the year with revenues exceeding expenditures, increasing equity by $218,756, compared to a planned fund balance increase of $120,635. Internal Service Funds Internal service funds are used to account for the financing of goods and services provided by one department or agency of a government to other departments or agencies on a cost reimbursement basis. The District currently maintains two internal service funds. These funds are used to account for the District s self-insured health and dental insurance functions. Operating revenues for the internal service funds for fiscal 2016 totaled $15,173,620. This is a decrease from the fiscal year 2015 operating revenue level of $15,747,052. Nonoperating revenues totaled $6,126, which is an increase from the fiscal year 2015 nonoperating revenue of $4,684. Operating expenses totaled $13,585,839, which represents a decrease from fiscal year 2015 operating expenditures of $14,991,681, due to a significant decrease in health benefit claims. The net position balance for all internal service funds as of June 30, 2016 was $3,940,420, which represents a $1,593,907 increase from the prior year. -12-

34 CAPITAL ASSETS AND LONG-TERM LIABILITIES Capital Assets Table 6 shows the District s capital assets, together with changes from the previous year. The table also shows the total depreciation expense for fiscal years ending June 30, 2016 and 2015: Table 6 Capital Assets Change Land $ 3,994,902 $ 3,994,902 $ Construction in progress 23,316,973 1,107,632 22,209,341 Land improvements 11,574,550 10,828, ,946 Buildings 123,146, ,016,768 1,129,816 Furniture and equipment 9,002,774 10,232,924 (1,230,150) Less accumulated depreciation (68,685,978) (65,941,353) (2,744,625) Total $ 102,349,805 $ 82,239,477 $ 20,110,328 Depreciation expense $ 4,188,030 $ 4,102,076 $ 85,954 By the end of 2016, the District had invested in a broad range of capital assets, including school buildings, athletic facilities, and other equipment for various instructional programs (see Table 6). The changes presented in the table above reflect the ongoing activity and completion of projects at district sites during fiscal year 2016, consistent with the activity of the Capital Projects Building Construction Fund discussed on the previous page. The District defines capital assets as those with an initial, individual cost of $5,000 or more, which benefit more than one fiscal year. Additional details about capital assets can be found in the notes to basic financial statements. -13-

35 Long-Term Liabilities Table 7 illustrates the components of the District s long-term liabilities with changes from the prior year: Table 7 Outstanding Long-Term Liabilities Change General obligation bonds payable $ 113,990,000 $ 31,605,000 $ 82,385,000 Certificates of participation payable 8,075,000 8,570,000 (495,000) Unamortized premium/discount 9,637, ,879 8,789,376 Net pension liability PERA 11,308,257 10,513, ,254 Net pension liability TRA 46,196,966 38,231,979 7,964,987 Severance benefits payable 1,093,763 1,259,750 (165,987) Compensated absences payable 220, ,813 (41,848) Total $ 190,522,206 $ 91,290,424 $ 99,231,782 The issuance of building and refunding bonds with premiums, offset by scheduled and refunding principal payments account for their changes above. The decrease in certificates of participation payable is due to the planned repayment schedules during fiscal year The differences in the PERA and TRA net pension liabilities reflects the change in the District s proportionate share of these state-wide pension obligations. The state limits the amount of general obligation debt the District can issue to 15 percent of the market value of all taxable property within the District s corporate limits (see Table 8): Table 8 Limitations on Debt District s market value $ 8,263,498,200 Limit rate 15.0% Legal debt limit $ 1,239,524,730 Additional details of the District s long-term debt activity can be found in the notes to basic financial statements. -14-

36 FACTORS BEARING ON THE DISTRICT S FUTURE With the exception of the voter-approved operating referendum, the District is dependent on the state of Minnesota for a majority of its revenue authority. Recent experience demonstrates that legislated revenue increases have not been sufficient to meet instructional program needs and increased costs due to inflation. The general education program is the method by which school districts receive the majority of their financial support. This source of funding is primarily state aid and, as such, school districts rely heavily on the state of Minnesota for educational resources. For the 2016 fiscal year, the legislature added $117, or 2.0 percent, per pupil to the basic general education funding formula and an additional $119, or 2.0 percent, per pupil to the formula for fiscal year The ongoing demands on limited resources continue to present challenges in funding education for Minnesota schools. CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT This CAFR is designed to provide our citizens, taxpayers, customers, investors, and creditors with a general overview of the District s finances and to demonstrate the District s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Finance Department, Independent School District No. 834, 1875 South Greeley Street, Stillwater, Minnesota

37 BASIC FINANCIAL STATEMENTS

38 INDEPENDENT SCHOOL DISTRICT NO. 834 Statement of Net Position as of June 30, 2016 (With Partial Comparative Information as of June 30, 2015) Governmental Activities Assets Cash and temporary investments $ 135,603,137 $ 35,965,527 Receivables Current taxes 18,794,038 18,957,340 Delinquent taxes 633, ,720 Accounts and interest 385, ,101 Due from other governmental units 8,237,929 8,414,619 Due from post-employment benefit trust 1,200,000 1,200,000 Inventory 48,086 55,935 Prepaid items 202, ,457 Negative net other post-employment benefit obligations 13,492,636 14,512,857 Capital assets Not depreciated 27,311,875 5,102,534 Depreciated, net of accumulated depreciation 75,037,930 77,136,943 Total capital assets, net of accumulated depreciation 102,349,805 82,239,477 Total assets 280,946, ,393,033 Deferred outflows of resources Pension plan deferments PERA and TRA 10,839,462 8,294,510 Total assets and deferred outflows of resources $ 291,785,690 $ 170,687,543 Liabilities Salaries payable $ 4,768,707 $ 4,628,230 Accounts and contracts payable 11,044,522 2,971,185 Accrued interest payable 3,743, ,858 Due to other governmental units 147, ,066 Unearned revenue 2,635,934 2,629,787 Claims incurred but not reported 674, ,315 Long-term liabilities Due within one year 10,115,973 9,446,489 Due in more than one year 180,406,233 81,843,935 Total long-term liabilities 190,522,206 91,290,424 Total liabilities 213,537, ,339,865 Deferred inflows of resources Property taxes levied for subsequent year 34,525,586 34,357,434 Pension plan deferments PERA and TRA 8,973,026 15,752,570 Total deferred inflows of resources 43,498,612 50,110,004 Net position Net investment in capital assets 65,414,063 56,387,161 Restricted for Capital asset acquisition 4,927,551 3,535,475 Debt service 3,705,186 1,328,536 Food service 166, ,578 Community service 894, ,491 Other purposes (state funding restrictions) 50,000 Unrestricted (40,407,600) (44,814,567) Total net position 34,749,966 17,237,674 Total liabilities, deferred inflows of resources, and net position $ 291,785,690 $ 170,687,543 See notes to basic financial statements -16-

39 INDEPENDENT SCHOOL DISTRICT NO. 834 Statement of Activities Year Ended June 30, 2016 (With Partial Comparative Information for the Year Ended June 30, 2015) Net (Expense) Net (Expense) Revenue and Revenue and Changes in Changes in Program Revenues Net Position Net Position Operating Charges for Grants and Governmental Governmental Functions/Programs Expenses Services Contributions Activities Activities Governmental activities Administration $ 3,835,257 $ $ 32,325 $ (3,802,932) $ (3,464,574) District support services 4,930, ,277 (4,928,663) (2,877,928) Elementary and secondary regular instruction 45,403,156 1,733,392 2,044,671 (41,625,093) (42,627,625) Vocational education instruction 1,293, ,274 (1,261,195) (1,124,268) Special education instruction 17,032, ,816 10,116,793 (6,199,038) (6,736,020) Instructional support services 5,748,010 3, ,719 (5,080,678) (5,368,693) Pupil support services 10,113,009 9, ,136 (9,843,176) (9,586,161) Sites and buildings 9,363, , (9,054,236) (11,220,117) Fiscal and other fixed cost programs 263,329 (263,329) (188,265) Food service 3,983,097 2,591,822 1,261,567 (129,708) (84,720) Community service 4,807,513 3,340, ,941 (805,756) (873,580) Interest and fiscal charges 4,793,187 (4,793,187) (1,362,338) Total governmental activities $ 111,567,376 $ 8,706,584 $ 15,073,801 (87,786,991) (85,514,289) General revenues Taxes Property taxes, levied for general purposes 21,857,533 21,050,994 Property taxes, levied for community service 879, ,576 Property taxes, levied for building construction 3,504,044 3,556,087 Property taxes, levied for debt service 10,418,158 9,524,095 General grants and aids 58,466,733 57,947,379 Other general revenues 1,222,650 1,100,896 Investment earnings 406,428 33,423 Special item joint school proceeds 8,918,771 Total general revenues and special item 105,673,792 94,096,450 Change in net position 17,886,801 8,582,161 Net position beginning, as previously reported 17,237,674 8,655,513 Change in accounting principle (374,509) Net position beginning, restated 16,863,165 8,655,513 Net position ending $ 34,749,966 $ 17,237,674 See notes to basic financial statements -17-