$4,000,000 CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015

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1 Book-Entry Only New Issue Not Bank Qualified OFFICIAL STATEMENT DATED AUGUST 11, 2015 Rating: S&P s: "AA/Stable" (Insured) Moody s: "Baa1" (Underlying) See "Rating" herein In the opinion of Bond Counsel for the Bonds, based upon an analysis of laws, regulations, rulings and court decisions, (i) interest on the Bonds will be includable in gross income of the holders thereof for purposes of federal income taxation and (ii) interest on the Bonds is exempt from income taxation and the Bonds are exempt from ad valorem taxation by the Commonwealth of Kentucky, all subject to the qualifications described herein under the heading "LEGAL MATTERS Tax Treatment" herein. $4,000,000 CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 Dated: Date of Initial Delivery Due: May 1, as shown below Interest on the captioned bonds (herein the "Bonds") will be payable from the dated date, on May 1 and November 1, commencing May 1, 2016, and the Bonds mature on May 1, as shown below: Year Amount Interest Rate Price/ Yield Cusip Year Amount Interest Rate Price/ Yield Cusip $150, % 1.450% FF $175, % % FN , FG , FP , FH , FQ , FJ , FR , FK , FS , FL , FT , FM , FU9 $465,000; 4.125%; Term Bond due May 1, 2031; Yield: 4.300%; CUSIP: FW5 $510,000; 4.375%; Term Bond due May 1, 2033; Yield: 4.400%; CUSIP: FY1 $555,000; 4.500%; Term Bond due May 1, 2035; Yield: 4.600%; CUSIP: GA2 The Bonds will be issuable under a book entry system, registered in the name of The Depository Trust Company ("DTC") or its nominee. There will be no distribution of the Bonds to the ultimate purchasers. See "Book Entry" herein. Principal and interest on the Bonds is payable at the designated corporate trust office of U.S. Bank National Association, Cincinnati, Ohio, as Paying Agent and Bond Registrar. The Bonds are being issued as fully registered bonds in denominations of $5,000 and integral multiples thereof. Interest payments will be mailed by the Paying Agent to each holder of record as of the fifteenth day of the month preceding the date for such interest payment. The Bonds shall be subject to optional redemption prior to their maturity on any date on or after May 1, 2025, as described herein. The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under a Municipal Bond Insurance Policy to be issued concurrently with the delivery of the Bonds by Build America Mutual Assurance Company ("BAM"). The City deems this Official Statement to be final for purposes of Security and Exchange Commission Rule 15c2-12. The Bonds are offered when, as and if issued, subject to the approval of legality by Dinsmore & Shohl LLP, Bond Counsel, Covington, Kentucky. Certain legal matters have been passed upon for the City by Frank Warnock, Esq., City Solicitor. The Bonds are expected to be available for delivery on or about August 27, THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION. Dated: August 11, 2015

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3 CITY OF COVINGTON, KENTUCKY Mayor Sherry Carran Board of Commissioners Steve Frank Chuck Eilerman Jordan Huizenga Bill Wells City Manager Larry Klein Interim Finance Director Lisa Desmarais City Solicitor Frank Warnock, Esq. City Clerk Margaret Nyhan BOND COUNSEL Dinsmore & Shohl LLP Covington, Kentucky FINANCIAL ADVISOR Fifth Third Securities, Inc. Cincinnati, Ohio PAYING AGENT AND BOND REGISTRAR U.S. Bank National Association Cincinnati, Ohio

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5 TABLE OF CONTENTS INTRODUCTION... 1 The Issuer Authority for Issuance...1 Sources of Payment for the Bonds...1 Purpose of the Bonds...1 Description of the Bonds...1 Redemption Book Entry Payment of Bonds and Paying Agent and Bond Registrar...2 Interest Parties to the Issuance of the Bonds...2 Offering and Delivery of the Bonds...3 Disclosure Information...3 Additional Information...3 DESCRIPTION OF THE BONDS... 3 Redemption Provisions...3 Security and Source of Payment for Bonds...5 Book-Entry Only System...5 BOND INSURANCE... 6 Bond Insurance Policy...6 Build America Mutual Assurance Company...6 DESCRIPTION OF THE PROJECT AND PLAN OF FINANCE... 7 SOURCES AND USES OF FUNDS... 8 INVESTMENT CONSIDERATIONS... 8 PROFILE OF THE CITY AND SURROUNDING AREA... 8 CITY GOVERNMENT... 8 Elected and Appointed Officials...8 Financial Matters...9 Financial Management...9 Financial Reports and Examinations of Accounts...10 Budgeting and Appropriations Procedures...10 Investment Policies...10 Debt Limitation...12 Tax Limitation...12 Future Borrowings of the City...13 LEGAL MATTERS General Information...13 Transcript and Closing Certificates...13 Litigation Tax Treatment...14 RATING CONTINUING DISCLOSURE UNDERWRITING FINANCIAL ADVISOR MISCELLANEOUS APPENDICES: APPENDIX A - APPENDIX B - APPENDIX C - APPENDIX D - APPENDIX E - APPENDIX F - APPENDIX G - APPENDIX H - Debt Service Requirements for the Bonds and Aggregate Debt Service on General Obligation Indebtedness Demographic and Economic Data Historical General Fund Revenues and Expenses and Actual and Projected General Fund Balances; and Audited Financial Statements for the Fiscal Year ended June 30, 2014 Audited General Purpose Financial Statements of the City of Covington, Kentucky for the Fiscal Year Ending June 30, 2014 Statement of Indebtedness of Interim Finance Director Form of Legal Approving Opinion of Bond Counsel Book-Entry Only System Specimen Municipal Bond Insurance Policy i

6 REGARDING THIS OFFICIAL STATEMENT This Official Statement does not constitute an offering of any security other than the original offering of the Bonds of the City. No dealer, broker, salesman or other person has been authorized by the City to give any information or to make any representation, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information and expressions of opinion herein are subject to change without notice. Neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City since the date hereof. Upon issuance, the Bonds will not be registered by the City under any federal or state securities law, and will not be listed on any stock or other securities exchange. Neither the Securities and Exchange Commission nor any other federal, state, municipal or other governmental entity or agency except the City will have, at the request of the City, passed upon the accuracy or adequacy of this Official Statement or approved the Bonds for sale. All financial and other information presented in this Official Statement has been provided by the City from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future. Insofar as the statements contained in this Official Statement involve matters of opinion or estimates, even if not expressly stated as such, such statements are made as such and not as representations of fact or certainty, no representation is made that any of such statements have been or will be realized, and such statements should be regarded as suggesting independent investigation or consultation of other sources prior to the making of investment decisions. Certain information may not be current; however, attempts were made to date and document sources of information. Neither this Official Statement nor any oral or written representations by or on behalf of the City preliminary to sale of the Bonds should be regarded as part of the City's contract with the successful bidder or the holders from time to time of the Bonds. References herein to provisions of Kentucky law, whether codified in the Kentucky Revised Statutes ("KRS") or uncodified, or to the provisions of the Kentucky Constitution or the City's ordinances or resolutions, are references to such provisions as they presently exist. Any of these provisions may from time to time be amended, repealed or supplemented. Build America Mutual Assurance Company ( BAM ) makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, BAM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding BAM, supplied by BAM and presented under the heading Bond Insurance and Appendix H - Specimen Municipal Bond Insurance Policy. As used in this Official Statement, "debt service" means principal of, interest and any premium on, the obligations referred to; "City" means the City of Covington; and "State" or "Kentucky" means the Commonwealth of Kentucky. ii

7 INTRODUCTION The purpose of this Official Statement, which includes the cover page and appendices hereto, is to provide certain information with respect to the issuance of $4,000,000 aggregate principal amount of Taxable General Obligation Bonds, Series 2015 (the "Bonds") of the City of Covington, Kentucky as specified on the cover hereof. This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of Bonds to potential investors is made only by means of the entire Official Statement. The Issuer The Bonds are being issued by the City of Covington, Kentucky (the "City"), a municipal corporation of the 2 nd class and a political subdivision of the State of Kentucky. The City is located in Kenton County in Northern Kentucky. Authority for Issuance Authority for the issuance of the Bonds is provided by Sections through of the Kentucky Revised Statutes and an ordinance (the "Ordinance") adopted by the Board of Commissioners of the City on June 16, Sources of Payment for the Bonds The Bonds are general obligation debt of the City. The basic security for the Bonds is the City's ability to levy an annual tax to pay the interest on and principal of the Bonds as and when the same become due and payable. (See "Security and Source of Payment for the Bonds," herein). Purpose of the Bonds The Bonds are being issued for the purpose of: (i) financing a portion of the costs of the redevelopment of formerly owned municipal property into a hotel to be located in downtown Covington, including related appurtenances (the "Project"); and (ii) paying the costs of issuance of the Bonds. (See "DESCRIPTION OF THE PROJECT AND PLAN OF FINANCE" herein for a more detailed description of the Project.) Description of the Bonds The Bonds mature as indicated on the cover page hereof. The Bonds are being offered in the denominations of $5,000 or any integral multiple thereof. The Bonds are initially being issued in Book-Entry-Only form registered in the name of DTC or its nominee. There will be no distribution of Bonds to ultimate purchasers (see "Book-Entry", herein). Redemption The Bonds maturing May 1, 2026 and thereafter are subject to optional redemption prior to maturity, commencing May 1, 2025, see "DESCRIPTION OF THE BONDS Redemption Provisions Optional Redemption," herein).

8 The Bonds maturing on May 1, 2031 are subject to mandatory sinking fund redemption commencing May 1, 2030; the Bonds maturing on May 1, 2033 are subject to mandatory sinking fund redemption commencing May 1, 2032; and the Bonds maturing on May 1, 2035 are subject to mandatory sinking fund redemption commencing May 1, 2034 (see "DESCRIPTION OF THE BONDS - Redemption Provisions - Mandatory Sinking Fund Redemption", herein). In the event any Bonds are called for redemption, notice shall be given by mailing a copy of the redemption notice at least thirty (30) days prior to the date fixed for redemption to the registered owner of each Bond to be redeemed (see "DESCRIPTION OF THE BONDS - Redemption Provisions", herein). Book Entry The Bonds are issuable only as fully registered Bonds, without coupons. The Bonds, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York, which will act as securities depository for the Bonds. Purchasers will not receive certificates representing their ownership interest in the Bonds purchased. So long as DTC or its nominee is the registered owner of the Bonds, payments of the principal of and interest due on the Bonds will be made directly to DTC. Principal of, redemption premium, if any, and interest on the Bonds will be paid directly to DTC by U.S. Bank National Association, Cincinnati, Ohio, as Registrar and Paying Agent (the "Paying Agent and Bond Registrar"). See "DESCRIPTION OF THE BONDS Book-Entry Only System" and APPENDIX G herein. Payment of Bonds and Paying Agent and Bond Registrar Principal of the Bonds will be paid in lawful money of the United States of America at the designated corporate trust office of U.S. Bank National Association, Cincinnati, Ohio, and interest shall be mailed by the Paying Agent and Bond Registrar to the record date registered holders at the address of such holder maintained on the registration book of the Paying Agent and Bond Registrar. The record dates for May 1 and November 1 interest payment dates on the Bonds shall be the preceding April 15 and October 15, respectively. Interest The Bonds shall be dated their date of initial issuance and delivery and bear interest at the rates set forth on the cover hereof, payable semi-annually on May 1 and November 1, beginning May 1, Tax Treatment Under the laws, regulations, rulings and judicial decisions in effect as of the date hereof, interest, including original issue discount, if any, on the Bonds is includable in gross income for Federal income tax purposes, pursuant to the Internal Revenue Code of 1986, as amended (the "Code"). Bond Counsel expresses no other opinion as to the federal tax consequences of purchasing, holding or disposing of the Bonds. Interest on the Bonds is exempt from income taxation and the bonds are exempt from ad valorem taxation by the Commonwealth of Kentucky and any of its political subdivisions. See "LEGAL MATTERS Tax Treatment" herein and Appendix F for the form of the opinion Bond Counsel proposes to deliver in connection with the Bonds. Parties to the Issuance of the Bonds The Paying Agent and Bond Registrar is U.S. Bank National Association, Cincinnati, Ohio. Legal matters incident to the issuance of the Bonds and with regard to the tax-exempt status of the interest thereon are subject to the approving legal opinion of Dinsmore & Shohl LLP, Covington, Kentucky, Bond Counsel. The Financial Advisor to the City is Fifth Third Securities, Inc., Cincinnati, Ohio. 2

9 Offering and Delivery of the Bonds The Bonds are offered when, as and if issued by the City. The Bonds will be delivered on or about August 27, 2015 in New York, New York through the Depository Trust Company (DTC). Disclosure Information This Official Statement speaks only as of its date, and the information contained herein is subject to change. This Official Statement and continuing disclosure documents of the City are intended to be made available through one or more repositories. Copies of the basic documentation relating to the Bonds, including the authorizing ordinances and the note forms, are available from the City. The City deems this Official Statement to be final for the purposes of Securities and Exchange Commission Rule 15c2-12(b)(3). Additional Information Additional information concerning this Official Statement, as well as copies of the basic documentation relating to the Bonds, is available from Fifth Third Securities, Inc., Financial Advisor to the City, 38 Fountain Square Plaza, Cincinnati, Ohio 45202, Telephone (513) Attn: Mr. Andrew J. Brossart. DESCRIPTION OF THE BONDS The Bonds are dated their date of initial issuance and delivery and bear interest from such date at the rates set forth on the cover page of this Official Statement. The Bonds are being issued as fully registered bonds in the denomination of $5,000 or any integral multiple thereof. Interest on the Bonds is payable semi-annually on May 1 and November 1, commencing May 1, Interest on all Bonds is payable by check or draft mailed to the registered holder by U.S. Bank National Association, Cincinnati, Ohio, the Paying Agent and Bond Registrar. Principal is payable when due to the registered holder upon surrender of the Bonds at the corporate trust office of the Paying Agent and Bond Registrar in Cincinnati, Ohio. Redemption Provisions Optional Redemption The Bonds maturing on and after May 1, 2026 shall be subject to optional redemption prior to their maturity on any date on or after May 1, 2025, in whole or in part, in such order of maturity as may be selected by the City and by lot within a maturity at a redemption price equal to the principal amount of Bonds to be redeemed, plus accrued interest to the date of redemption. Mandatory Sinking Fund Redemption The Bonds maturing on the dates set forth below are subject to mandatory sinking fund redemption prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus accrued interest to the redemption date, on the dates, in the years and in the principal amounts as follows: 3

10 Maturing May 1, 2031 Date Amount May 1, 2030 $230,000 May 1, ,000* *Final Maturity Maturing May 1, 2033 Date Amount May 1, 2032 $250,000 May 1, ,000* *Final Maturity Maturing May 1, 2035 Date Amount May 1, 2034 $270,000 May 1, ,000* *Final Maturity Notice of Redemption If less than all Bonds which are payable by their terms on the same date are to be called, the particular Bonds or portions of Bonds payable on such same date and to be redeemed from such series shall be selected by lot by the Paying Agent and Bond Registrar, in such manner as the Paying Agent and Bond Registrar in its discretion may determine; provided, however, that the portion of any Bond to be redeemed shall be in the principal amount of $5,000 or some multiple thereof, and that, in selecting Bonds for redemption, the Paying Agent and Bond Registrar shall treat each bond as representing that number of Bonds which is obtained by dividing the principal amount of such Bond by $5,000. At least thirty (30) days before the redemption date of any Bonds the Paying Agent and Bond Registrar shall cause a notice of such redemption either in whole or in part, signed by the Paying Agent and Bond Registrar, to be mailed, postage prepaid, to all registered owners of Bonds to be redeemed in whole or in part at their addresses as they appear on the registration books kept by the Paying Agent and Bond Registrar, but failure so to mail any such notice shall not affect the validity of the proceedings for such redemption. Each such notice shall set forth the date fixed for redemption, the redemption price to be paid and, if less than all of the Bonds being payable by their terms on a single date then outstanding shall be called for redemption, the distinctive numbers or letters, if any, of such Bonds to be redeemed and, in the case of Bonds to be redeemed in part only, the portion of the principal amount thereof to be redeemed. In case any Bond is to be redeemed in part only, the notice of redemption which relates to such Bond shall state also that on or after the redemption date upon surrender of such Bonds, a new Bond in principal amount equal to the unredeemed portion of such Bonds will be issued. On the date so designated for redemption, notice having been sent in the manner and under the conditions hereinabove provided and moneys for payment of the redemption price being held in separate accounts by the Paying Agent and Bond Registrar for the holders of the Bonds or portions thereof to be redeemed, the Bonds or portions of Bonds so called for redemption shall become and be due and payable at the redemption price provided for redemption of such Bonds or portions of Bonds on such date, interest on the Bonds or portions of Bonds so called for redemption shall cease to accrue, and the holders or registered owners of such Bonds or portions of Bonds shall have no rights in respect thereof except to 4

11 receive payment of the redemption price thereof and to receive Bonds for any unredeemed portions of Bonds. In case part but not all of an outstanding Bond shall be selected for redemption, the registered owner thereof or his attorney or legal representative shall present and surrender such Bond to the Paying Agent and Bond Registrar for payment of the principal amount hereof so called for redemption, and the City shall execute and the Paying Agent and Bond Registrar shall authenticate and deliver to or upon the order of such registered owner or his legal representative, without charge therefor, for the unredeemed portion of the principal amount of the Bond so surrendered a Bond of the same series and maturity and bearing interest at the same rate. Security and Source of Payment for Bonds The Bonds are general obligations of the City and the full faith, credit and taxing power of the City is irrevocably pledged to the payment of principal of and interest on the Bonds when due. The basic security for the general obligation debt of the City, including the Bonds, is the City's ability to levy, and its pledge to levy, an annual tax to pay the interest on and principal of the Bonds as and when the same become due and payable. The tax must be levied in sufficient amount to pay, as the same become due, the principal of and interest on the Bonds as well as the principal of and interest on all outstanding general obligation bonds and bond anticipation notes of the City. The Constitution of the State mandates the collection of a tax sufficient to pay the interest on an authorized indebtedness and the creation of a sinking fund for the payment of the principal thereof. The Ordinance levies such annual tax which shall be collected to the extent other lawfully available monies of the City are not provided. The Ordinance also maintains a sinking fund into which the proceeds of such tax or other lawfully available monies of the City are to be deposited for payment of the interest on and principal of the Bonds and shall not be used for any other purpose. Chapter 9 of the Federal Bankruptcy Code contains provisions relating to the adjustment of debts of a State's political subdivisions, public agencies and instrumentalities ("eligible entity"), such as the City. Under the Bankruptcy Code and in certain circumstances described therein, an eligible entity may be authorized to initiate Chapter 9 proceedings without prior notice to or consent of its creditors, which proceedings may result in material and adverse modification or alteration of the rights of its secured and unsecured creditors, including holders of its bonds and notes. Section of the Kentucky Revised Statutes permits a political subdivision, such as the City, for the purpose of enabling such subdivision to take advantage of the provisions of the Bankruptcy Code, and for that purpose only, to file a petition stating that the subdivision is insolvent or unable to meet its debts as they mature, and that it desires to effect a plan for the composition or readjustment of its debts, and to take such further proceedings as are set forth in the Bankruptcy Code as they relate to such subdivision. No taxing subdivision is permitted, in availing itself of the provisions of the Bankruptcy Code, to scale down, cut down or reduce the principal sum of its securities except that interest thereon may be reduced in whole or in part. In addition, the scheduled payment of the principal of and interest on the Bonds, when due, will be guaranteed under a municipal bond insurance policy to be issued concurrently with the delivery of the Bonds by BAM (see "BOND INSURANCE" and APPENDIX H herein). Book-Entry Only System The Bonds initially will be issued solely in book entry form to be held in the book-entry only system maintained by DTC. So long as such book-entry system is used, only DTC will receive or have the right to receive physical delivery of Bonds and Beneficial Owners will not be or be considered to be, 5

12 and will not have any rights as, owners or holders of the Bonds under the Ordinance. For additional information about DTC and the book-entry-only system see "APPENDIX G Book-Entry Only System." THE INFORMATION IN THIS SECTION AND IN APPENDIX G CONCERNING DTC AND DTC'S BOOK-ENTRY SYSTEM HAS BEEN OBTAINED FROM SOURCES THAT THE CITY BELIEVES TO BE RELIABLE, BUT THE CITY TAKES NO RESPONSIBILITY FOR THE ACCURACY THEREOF Bond Insurance Policy BOND INSURANCE Concurrently with the issuance of the Bonds, Build America Mutual Assurance Company ( BAM ) will issue its Municipal Bond Insurance Policy for the Bonds (the Policy ). The Policy guarantees the scheduled payment of principal of and interest on the Bonds when due as set forth in the form of the Policy included as Appendix H to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Build America Mutual Assurance Company BAM is a New York domiciled mutual insurance corporation. BAM provides credit enhancement products solely to issuers in the U.S. public finance markets. BAM will only insure obligations of states, political subdivisions, integral parts of states or political subdivisions or entities otherwise eligible for the exclusion of income under section 115 of the U.S. Internal Revenue Code of 1986, as amended. No member of BAM is liable for the obligations of BAM. The address of the principal executive offices of BAM is: 1 World Financial Center, 27 th Floor, 200 Liberty Street, New York, New York 10281, its telephone number is: , and its website is located at: BAM is licensed and subject to regulation as a financial guaranty insurance corporation under the laws of the State of New York and in particular Articles 41 and 69 of the New York Insurance Law. BAM s financial strength is rated AA/Stable by Standard and Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ). An explanation of the significance of the rating and current reports may be obtained from S&P at The rating of BAM should be evaluated independently. The rating reflects the S&P s current assessment of the creditworthiness of BAM and its ability to pay claims on its policies of insurance. The above rating is not a recommendation to buy, sell or hold the Bonds, and such rating is subject to revision or withdrawal at any time by S&P, including withdrawal initiated at the request of BAM in its sole discretion. Any downward revision or withdrawal of the above rating may have an adverse effect on the market price of the Bonds. BAM only guarantees scheduled principal and scheduled interest payments payable by the issuer of the Bonds on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the Policy), and BAM does not guarantee the market price or liquidity of the Bonds, nor does it guarantee that the rating on the Bonds will not be revised or withdrawn. Capitalization of BAM BAM s total admitted assets, total liabilities, and total capital and surplus, as of June 30, 2015 and as prepared in accordance with statutory accounting practices prescribed or permitted by the New York 6

13 State Department of Financial Services were $472.1 million, $31.0 million and $441.1 million, respectively. BAM is party to a first loss reinsurance treaty that provides first loss protection up to a maximum of 15% of the par amount outstanding for each policy issued by BAM, subject to certain limitations and restrictions. BAM s most recent Statutory Annual Statement, which has been filed with the New York State Insurance Department and posted on BAM s website at is incorporated herein by reference and may be obtained, without charge, upon request to BAM at its address provided above (Attention: Finance Department). Future financial statements will similarly be made available when published. BAM makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, BAM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding BAM, supplied by BAM and presented under the heading BOND INSURANCE. Additional Information Available from BAM Credit Insights Videos. For certain BAM-insured issues, BAM produces and posts a brief Credit Insights video that provides a discussion of the obligor and some of the key factors BAM s analysts and credit committee considered when approving the credit for insurance. The Credit Insights videos are easily accessible on BAM's website at buildamerica.com/creditinsights/. Obligor Disclosure Briefs. Prior to the pricing of bonds that BAM has been selected to insure, BAM may prepare a pre-sale Obligor Disclosure Brief for those bonds. These pre-sale Obligor Disclosure Briefs provide information about the sector designation (e.g. general obligation, sales tax); a preliminary summary of financial information and key ratios; and demographic and economic data relevant to the obligor, if available. Subsequent to closing, for any offering that includes bonds insured by BAM, any pre-sale Obligor Disclosure Briefs will be updated and superseded by a final Obligor Disclosure Brief to include information about the gross par insured by CUSIP, maturity and coupon. BAM pre-sale and final Obligor Disclosure Briefs are easily accessible on BAM s website at buildamerica.com/obligor/. BAM will produce an Obligor Disclosure Brief for all bonds insured by BAM, whether or not a pre-sale Obligor Disclosure has been prepared for such bonds. Disclaimers. The Obligor Disclosure Briefs and the Credit Insights videos and the information contained therein are not recommendations to purchase, hold or sell securities or to make any investment decisions. Credit-related and other analyses and statements in the Obligor Disclosure Briefs and the Credit Insights videos are statements of opinion as of the date expressed, and BAM assumes no responsibility to update the content of such material. The Obligor Disclosure Briefs and Credit Insight videos are prepared by BAM; they have not been reviewed or approved by the issuer of or the underwriter for the Bonds, and the issuer and underwriter assume no responsibility for their content. BAM receives compensation (an insurance premium) for the insurance that it is providing with respect to the Bonds. Neither BAM nor any affiliate of BAM has purchased, or committed to purchase, any of the Bonds, whether at the initial offering or otherwise. DESCRIPTION OF THE PROJECT AND PLAN OF FINANCE The Bonds are being issued to (i) finance a portion of the costs of the redevelopment and conversion of real property formerly owned by the City into a hotel to be located in downtown 7

14 Covington, including related appurtenances (the "Project"); and (ii) pay the costs of issuing the Bonds. The Project is located in the City Center Covington Development Area. The remainder of the project is being financed with historic tax credits, tourism tax credits, and new market tax credits, along with equity investments. SOURCES AND USES OF FUNDS Sources: Bond Proceeds $4,000, Plus Original Issue Premium 2, Total Sources $4,002, Uses: Underwriter's Discount $105, Deposit to Construction Fund 3,839, Cost of Issuance 57, Total Uses $4,002, INVESTMENT CONSIDERATIONS The Bonds, like all obligations of state and local government, are subject to changes in value due to changes in the condition of the tax-exempt bond market and/or changes in the financial condition of the City. It is possible under certain market conditions, or if the financial condition of the City should change, that the market price of the Bonds could be adversely affected. With regard to the risk involved in a lowering of the City's bond rating, see "RATING" herein. With regard to creditors' rights, see "SECURITY AND SOURCE OF PAYMENT FOR BONDS" herein. PROFILE OF THE CITY AND SURROUNDING AREA Economic and financial information with respect to the City is set forth in Appendix B hereto. Elected and Appointed Officials CITY GOVERNMENT The City of Covington is governed by a Board of Commissioners, comprised of a Mayor, elected to a four year term, and four (4) commissioners who are elected to two year terms. The members of the Board of Commissioners and their terms of office are as follows: Member Original Term Began Current Term Ends Sherry Carran, Mayor January 1, 2013 December 31, 2016 Steve Frank January 1, 2011 December 31, 2016 Chuck Eilerman January 1, 2013 December 31, 2016 Jordan Huizenga January 1, 2015 December 31, 2016 Bill Wells January 1, 2015 December 31,

15 The current appointed City officials who serve at the pleasure of Board of Commissioners are: City Manager Interim Finance Director City Clerk City Solicitor Larry Klein Lisa Desmarais Margaret Nyhan Frank Warnock, Esq. Financial Matters The Finance Director is the fiscal officer of the City, and is appointed by and serves at the pleasure of the Board of Commissioners. The Finance Director is responsible for the accounting, collection, custody and disbursement of the funds of the City. The Finance Director serves the Board of Commissioners and the City Manager as financial advisor in connection with City affairs, and performs such other duties as the Board of Commissioners or City Manager request. The City's fiscal year commences July 1 and ends the following June 30. The administrative functions of the City are performed by or under the supervision of the following: 1. Establishment of overall financial policy, the Board of Commissioners. 2. Planning and development, City Manager. 3. Assessment of real and personal property, the Kenton County Property Valuation Administrator. 4. Financial control functions, the Finance Director. 5. Inspection and supervision of the accounts and reports of the City as required by law, by independent certified public accountants. Financial Management The Board of Commissioners is responsible for appropriating the funds used to support the various City activities. The Board of Commissioners exercises its legislative powers by budgeting, appropriating, levying taxes, issuing bonds and notes, and letting contracts for public works and services to provide this financial management. On August 23, 2013, the former Finance Director for the City was arrested and charged with theft, unlawful access to a computer, criminal possession of a forged instrument, and official misconduct. An examination was completed by the Kentucky Auditor of Public Accounts which identified a total of $793,127 in embezzled funds over a 12 year period. The checks were the result of a circumvention of controls and manipulation of accounting records perpetrated by the former finance director. The City has filed a civil lawsuit against the former finance director and a variety of other parties, including prior auditors. Recovery of funds is still pending legal proceedings. The City expects that it will be able to recover most of the money that was stolen, which will be added to the existing General Fund balance. The City took several actions to mediate this risk in the future, including hiring a new Finance Director, a Certified Public Accountant (CPA), an Assistant Finance Director, also a CPA, an Internal Auditor who is a Certified Fraud Examiner and an Information Technology Manager. Additionally, internal control procedures are being reviewed at every level of operation within the City, with control mechanisms having been put in place that will continually be monitored by internal and external auditors. These changes reflect the City Management s commitment to preventing future occurrences and ensuring that public funds are properly managed going forward. 9

16 Financial Reports and Examinations of Accounts Each city in the State is required to keep its accounting records and render financial reports in such a way as to: (a) determine compliance with statutory provisions; (b) determine fairly and with full disclosure the financial operations of consistent funds and account groups of the city in conformity with generally accepted governmental accounting principles; and (c) readily provide such financial data as may be required by the federal revenue sharing program. Municipal accounting systems are required to be organized and operated on a fund basis. The City maintains its accounts and other fiscal records on an appropriation and modified accrual basis in accordance with the procedures established and prescribed by the Kentucky Department for Local Government. As required by law, financial reports are prepared annually by the City and filed with the Kentucky Department for Local Government. Audits are required to be completed by the February 1st immediately following the fiscal year being audited. The accounting procedures prescribed by the Kentucky Department for Local Government are generally applicable to all cities in Kentucky and may be different from generally accepted government accounting principles as presented and recommended in the National Council on Governmental Accounting publication "Governmental Accounting Auditing and Financial Reporting," and the Industry Audit Guide of the American Institute of Certified Public Accountants, entitled "Audits of State and Local Governmental Units." Those publications, among other things, provide for a modified accrual basis of accounting for the general fund, all special revenue funds and the debt service fund, and for a full accrual basis of accounting for all other funds, and further provide for the preparation for each fund of balance sheets, statements of revenues and expenditures, and statements showing changes in fund balances. Budgeting and Appropriations Procedures Detailed provisions for City budgeting, tax levies and appropriations are made in the Kentucky Revised Statutes. Cities are required to operate under an annual budget ordinance and no City may expend any moneys from a governmental or proprietary fund except in accordance with such budget. A budget proposal must be submitted to the City's legislative body no later than 30 days prior to the beginning of the fiscal year covered by the budget. No budget ordinance may be adopted which provides for appropriations to exceed revenues and the available fund balance in a fiscal year. The full amount estimated to be required for debt service during the budget year must be appropriated. Investment Policies Section of the Kentucky Revised Statutes sets forth the requirements and limitations for investments of the state's political subdivisions, including the City. Under that Section, the City must adopt an investment policy and may invest its funds only in the classifications of obligations; which are eligible for investment, which are as follows: (a) (b) Obligations of the United States and of its agencies and instrumentalities, including obligations subject to repurchase agreements, if delivery of these obligations subject to repurchase agreements is taken either directly or through an authorized custodian. These investments may be accomplished through repurchase agreements reached with sources including, but not limited to, national or state banks chartered in Kentucky; Obligations and contracts for future delivery or purchase of obligations backed by the full faith and credit of the United States or a United States governmental agency, including but not limited to: 10

17 1. United States Treasury; 2. Export-Import Bank of the United States; 3. Farmers Home Administration; 4. Governmental National Mortgage corporation; and 5. Merchant Marine bonds; (c) Obligations of any corporation of the United States government, including but not limited to: 1. Federal Home Loan Mortgage Corporation; 2. Federal Farm Credit Banks; 3. Bank for Cooperatives; 4. Federal Intermediate Credit Banks; 5. Federal Land Banks; 6. Federal Home Loan Banks; 7. Federal National Mortgage Association; and 8. Tennessee Valley Authority; (d) (e) (f) (g) Certificates of deposit issued by or other interest-bearing accounts of any bank or savings and loan institution which are insured by the Federal Deposit Insurance Corporation or similar entity or which are collateralized, to the extent uninsured, by any obligations permitted by KRS (d); Uncollateralized certificates of deposit issued by any bank or savings and loan institutions rated in one (1) of the three (3) highest categories by a nationally recognized rating agency; Bankers' acceptances for banks rated in one (1) of the three (3) highest categories by a nationally recognized rating agency; Commercial paper rated in the highest category by a nationally recognized rating agency; (h) Bonds or certificates of indebtedness of this state and of its agencies and instrumentalities; (i) (j) Securities issued by a state or local government, or any instrumentality of agency thereof, in the United States, and rated in one (1) of the three highest categories by a nationally recognized rating agency; and Shares of mutual funds, each of which shall have the following characteristics; 1. The mutual fund shall be an open-end diversified investment company registered under the Federal Investment Company Act of 1940, as amended; 2. The management company of the investment company shall have been in operation for at least five (5) years; and 3. All of the securities in the mutual fund shall be eligible investments pursuant to this section. The City's current investment policy is more restrictive than is permitted by State law. The City values safety, liquidity and return, in that order. 11

18 Debt Limitation Kentucky Constitution Section 158 provides that cities shall not incur indebtedness to an amount exceeding the following maximum percentages on the value of the taxable property therein, to be estimated by the last assessment previous to the incurring of the indebtedness: (a) Cities having a population of fifteen thousand (15,000) or more, ten percent (10%); (b) Cities having a population of less than fifteen thousand (15,000) but not less than three thousand, five percent (5%); and (c) Cities having a population of less than three thousand (3,000), three percent (3%). Nothing shall prevent the issue of renewal bonds, or bonds to fund the floating indebtedness of any city, county, or taxing district. Subject to the limits and conditions set forth in that section and elsewhere in the Constitution, the General Assembly has the power to establish additional limits on indebtedness and conditions under which debt may be incurred by cities. KRS provides the same limitations as are set forth in the Constitution except that the limitations apply to "net indebtedness". In calculating "net indebtedness," KRS provides that certain obligations of a municipality are not to be considered in the calculation, including self-supporting obligations, revenue bonds, and special assessment debt. (For a complete list of exempt debt see the Statement of Indebtedness attached as Appendix E.) Other infrequently-issued types of obligations are also excluded from the calculation of net indebtedness. The City has no such obligations outstanding. Notes issued in anticipation of bonds excluded from the calculation of net indebtedness are also excluded from such calculation. Appendix E of this Official Statement is a Statement of Indebtedness for the City, certified by the Interim Finance Director, calculating the amount of the outstanding obligations of the City (including the Bonds) which are subject to the total direct debt limit (10% limit). The total principal amount of general obligation debt that could be issued by the City, subject to the 10% total direct debt limitation is $221,081,976 and the City's net debt subject to such limitation presently outstanding (including the Bonds) is $60,484,136 leaving a balance of approximately $160,597,840 borrowing capacity issuable within such limitation. However, as described below, the City's ability to incur debt in these amounts is restricted by tax limitations. In the case of general obligation debt, both the debt limitations and tax limitations must be met. Tax Limitation The Kentucky Constitution Section 157 also indirectly imposes a debt limitation on general obligation indebtedness of Cities by limiting the tax rates cities may impose upon the value of taxable property, as follows: (a) (b) (c) cities having a population of fifteen thousand or more, one dollar and fifty cents on each hundred dollars of assessed value; cities having a population of less than fifteen thousand and not less than ten thousand, one dollar on each hundred dollars of assessed value; and cities having a population of less than ten thousand, seventy-five cents on the hundred dollars. 12

19 Section 159 of the Kentucky Constitution requires the collection of an annual tax sufficient to pay the interest on contracted indebtedness and to retire indebtedness over a period not exceeding forty years. The two constitutional provisions operate as a limit on general obligation debt. Because the indirect debt limit results from tax limitations and the requirement to levy taxes to pay debt charges, it has application only to debts which are payable from taxes either initially or in the event other pledged non-tax revenues prove to be insufficient. It does not have any application where the type of debt being issued does not pledge the credit of the municipality or when the debt is payable solely out of the revenues of non-tax sources, such as utility income. Appendix E of this Official Statement contains a Statement of Indebtedness, certified by the City, setting forth the property tax rate currently levied by the City of $.3045 per $100 for real property and $.3045 per $100 for personal property, and certifying that the issuance of the Bonds will not cause such rates to increase to amounts which would exceed the maximum permissible rates. Future Borrowings of the City The City does not presently anticipate issuing any additional general obligation debt. General Information LEGAL MATTERS Legal matters incident to the issuance of the Bonds the Bonds are subject to the approving legal opinion of Dinsmore & Shohl LLP, Bond Counsel. Upon delivery of the Bonds of the City to the successful bidder therefor, the Bonds will be accompanied by an approving opinion dated the date of such delivery, rendered by Dinsmore & Shohl LLP. A draft of such legal opinion for the Bonds is attached as Appendix F. Said firm as Bond Counsel has performed certain functions to assist the City in the preparation by the City of its Official Statement. However, said firm assumes no responsibility for, and will express no opinion regarding the accuracy or completeness of this Official Statement or any other information relating to the City or the Bonds that may be made available by the City or others to the bidders or holders of the Bonds or others. The engagement of said firm as Bond Counsel is limited to the preparation of certain of the documents contained in the transcript of proceedings with regard to the Bonds, and an examination of such transcript proceedings incident to rendering its legal opinion. In its capacity as Bond Counsel, said firm has reviewed the information in this Official Statement under Sections entitled "General Information" as to legal matters, "Authority for Issuance", "Security and Source of Payment for Bonds", "Debt Limitation", Tax Limitation, and Tax Treatment, which review did not include any independent verification of financial statements and statistical data included therein, if any. Transcript and Closing Certificates A complete transcript of proceedings, a no-litigation certificate and other appropriate closing documents will be delivered by the City when the Bonds are delivered to the original purchaser. The City will also provide to the original purchaser, at the time of such delivery, a certificate from the City's Mayor and or Treasurer addressed to such purchaser relating to the accuracy and completeness of this Official Statement. Litigation To the knowledge of the City, no litigation or administrative action or proceeding is pending or threatened materially affecting the financial position of the City, directly affecting the Bonds, the security 13

20 for the Bonds or the improvements being financed from the proceeds of the Bonds. A No-Litigation Certificate to that effect will be delivered to the purchaser at the time of the delivery of the Bonds. Tax Treatment In the opinion of Bond Counsel for the Bonds, based upon an analysis of existing laws, regulations, rulings and court decisions, interest on the Bonds is includable in gross income for Federal income tax purposes under the Code. Furthermore, Bond Counsel for the Bonds is of the opinion that interest on the Bonds is exempt from taxation, including personal income taxation, by the Commonwealth of Kentucky and its political subdivisions. A copy of the opinion of Bond Counsel for the Bonds is set forth in Appendix F, attached hereto. RATING Standard & Poor's Ratings Services, a Division of The McGraw Hill Companies, Inc. ("S&P") is expected to assign to the Bonds the rating of rating of "AA" (stable outlook), with the understanding that upon delivery of the Bonds, the Bond Insurance Policy will be issued by BAM. Moody's Investors Service, Inc. ("Moody's") has assigned an underlying rating of "Baa1" to the Bonds. Such ratings reflect only the view of Moody's and S&P, respectively. An explanation of the significance of the rating given by Moody's may be obtained from Moody's Investors Service at 7 World Trade Center, 250 Greenwich Street, New York, New York 10007, (212) An explanation of the significance of the rating given by S&P may be obtained from Standard & Poor's Ratings Services at 55 Water Street, New York, New York 10041, (212) There is no assurance that the ratings will continue for any given period of time or that the ratings will not be revised downward or withdrawn entirely if, in the judgment of Moody's or S&P, respectively,, circumstances so warrant. Any such downward revision or withdrawal of the rating may have an adverse effect on the market price of the Bonds. The City presently expects to furnish Moody s with information and material that it may request on future general obligation bond issues. However, the City assumes no obligation to furnish requested information and materials, and may issue debt for which a rating is not requested. Failure to furnish requested information and materials, or the issuance of debt for which a rating is not requested, may result in the suspension or withdrawal of the rating agency's ratings on outstanding general obligation bonds. CONTINUING DISCLOSURE In accordance with the Securities and Exchange Commission Rule 15c2-12 (the "Rule") and so long as the Bonds are outstanding the City (the "Obligated Person") will agree pursuant to an Undertaking to be dated as of the date of issuance and delivery of the Bonds (the "Disclosure Undertaking"), to cause the following information to be provided: (i) to the Municipal Securities Rulemaking Board ("MSRB"), or any successor thereto for purposes of the Rule, through the continuing disclosure service portal provided by the MSRB's Electronic Municipal Market Access ("EMMA") system as described in 1934 Act Release No , or any similar system that is acceptable to the Securities and Exchange Commission, certain annual financial information and operating data, including audited financial statements, generally consistent with the information contained in "Appendix B," and "Appendix D" of the Official Statement (the "Annual Financial Information"). The Annual Financial Information shall be provided on or before March 1 following the fiscal year ending on the preceding June 30, commencing with the fiscal year ended June 30, 2015; provided that the audited financial statements may not be available by such date, but will be made available immediately upon delivery thereof by the auditors for the Obligated Person; and; 14

21 (ii) to the MSRB through EMMA, in a timely manner, not in excess of ten business days after the occurrence of the event, notice of the occurrence of the following events with respect to the Bonds: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) Principal and interest payment delinquencies; Non-payment related defaults, if material; Unscheduled draws on debt service reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers, or their failure to perform; Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax-exempt status of the security; Modifications to rights of security holders, if material; Bond calls, if material, and tender offers (except for mandatory scheduled redemptions not otherwise contingent upon the occurrence of an event); Defeasances; Release, substitution or sale of property securing repayment of the securities, if material; Rating changes; Bankruptcy, insolvency, receivership or similar event of the obligated person (Note: For the purposes of this event, the event is considered to occur when any of the following occur: The appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person); The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and Appointment of a successor or additional trustee or the change of name of a trustee, if material. (iii) in a timely manner, to the MSRB through EMMA, notice of a failure (of which the Obligated Persons have knowledge) of the Obligated Person to provide the required Annual Financial Information on or before the date specified in the Disclosure Agreement. The Disclosure Undertaking provides bondholders, including beneficial owners of the Bonds, with certain enforcement rights in the event of a failure by the Obligated Person to comply with the terms thereof; however, a default under the Disclosure Undertaking does not constitute an event of default under the Ordinance. The Disclosure Undertaking may also be amended or terminated under certain circumstances in accordance with the Rule as more fully described therein. 15

22 For purposes of this transaction with respect to events as set forth in the Rule: (a) (b) (c) (d) there are no debt service reserve funds applicable to the Bonds; there are no credit enhancements applicable to the Bonds; there are no liquidity providers applicable to the Bonds; and there is no property securing the repayment of the Bonds. The City has previously entered into continuing disclosure undertakings pursuant to the Rule (the Prior Disclosure Undertakings ). For the most recent five year period, the annual financial information, including the audited financial statement, for the fiscal years ended in June 30, 2010, June 30, 2011, June 30, 2012 and June 30, 2013, as well as an event notice regarding a rating change for the City s outstanding general obligation bonds, were filed after the dates specified by the City in the Prior Disclosure Undertakings. The annual Financial Information for the fiscal year ended June 30, 2014 was filed within the timeframes specified in the prior Disclosure Undertakings. In 2014, the City also adopted procedures and controls to ensure further Annual Financial Information and event notices are filed within the time requirements specified. Those procedures are as follows: (i) On or before the 60 th day following the conclusion of each fiscal year of the City, the City shall compile all financial data relating to the operations of the City that shall be required to enable the independent auditors of the City to prepare audited financial statements of the City for the fiscal year just ended and to enable the City to submit operating data required to be submitted to the EMMA system under the Prior Disclosure Undertakings and the Disclosure Undertaking; (ii) On or before the 90 th day following the conclusion of each fiscal year of the City, the Finance Director of the City shall submit the required financial data set forth in subsection (i). above for preparation of the City s audited financial statements to the independent auditors of the City; (iii) On or before the 150 th day following the conclusion of each fiscal year of the City, the Finance Director of the City shall seek confirmation in writing from the City s independent auditors that the audited financial statements of the City for such fiscal year shall be released and publicly available not less than 10 days prior to the date such audited financial statements are required to be submitted by the City under its Prior Disclosure Undertakings and the Disclosure Undertaking; (iv) On or before the 200 th day following the conclusion of each fiscal year of the City, the Finance Director of the City shall determine whether the audited financial statements of the City for such fiscal year have been received from the City s independent auditors, and, if so, shall cause such, together with the operating data referenced in subsection (i) above, to be transmitted in accordance with its Prior Disclosure Undertakings and the Disclosure Undertaking; (v) In the event the City shall not have received on or before the 210 th day following the conclusion of each fiscal year of the City, the audited financial statements of the City for such fiscal year from the City s independent auditors, then the Finance Director of the City shall compile unaudited financial statements for such fiscal year on before the 220 th day following the conclusion of such fiscal year and cause such unaudited financial statements to be immediately transmitted in accordance with its Prior Disclosure Undertakings and the Disclosure Undertaking utilizing the same procedures as would have been utilized for the submission of audited financial statements; and 16

23 (vi) In the event the City shall have transmitted unaudited financial statements in accordance with its Prior Disclosure Undertakings and the Disclosure Undertaking pursuant to the provisions of the foregoing subsection (v)., the Finance Director of the City shall cause the audited financial statements, when prepared and released by the City s independent auditors, to be transmitted in accordance with its Prior Disclosure Undertakings and the Disclosure Undertaking within ten days of acceptance by the Board of Commissioners of the independent audited financial statements prepared by the City s independent auditors. The City intends to file all future Annual Financial Information within the time requirements specified in the Prior Disclosure Undertakings and in the Disclosure Undertaking. In furtherance thereof, the City recently, in addition to adopting the written policies and procedures described above, retained Dinsmore & Shohl LLP, to serve as disclosure agent for the City in connection with the submission of the Annual Financial Information through the EMMA system. UNDERWRITING The Bonds are being purchased for reoffering by J.J.B. Hilliard, W.L. Lyons, LLC (the "Underwriter"). The Underwriter has agreed to purchase the Bonds at an aggregate purchase price of $3,897, (reflecting the par amount of the Bonds, plus Original Issue Premium of $2,947.95, and less underwriter's discount of $105,562.50). The initial public offering prices which produce the yields set forth on the cover page of this Official Statement may be changed by the Underwriter and the Underwriter may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts) and others at prices lower than the offering prices which produce the yields set forth on the cover page. FINANCIAL ADVISOR Fifth Third Securities, Inc. (the "Financial Advisor"), Cincinnati, Ohio has been employed as Financial Advisor in connection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery thereof. MISCELLANEOUS To the extent any statements made in this Official Statement involve matters of opinion or estimates, whether or not expressly stated to be such, such statements are made as such and not as representations of fact or certainty, and no representation is made that any of such statements will be realized. Information herein has been derived by the City from official and other sources and is believed by the City to be reliable, but such information other than that obtained from official records of the City has not been independently confirmed or verified by the City and its accuracy is not guaranteed. Neither this Official Statement nor any statement which may have been made orally or in writing is to be construed as a contract with the holders of the Bonds. This Official Statement has been duly executed and delivered for and on behalf of the City of Covington, Kentucky, by its Mayor. CITY OF COVINGTON, KENTUCKY Dated: August 11, 2015 By: /s/ Sherry Carran Mayor 17

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25 APPENDIX A CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 DEBT SERVICE REQUIREMENTS FOR THE BONDS AND AGGREGATE DEBT SERVICE ON GENERAL OBLIGATION INDEBTEDNESS

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27 DEBT SERVICE SCHEDULE Date Principal Coupon Interest Total Net New Debt Service 11/01/ /01/ , % 102, , , /01/ , , , /01/ , % 73, , , /01/ , , , /01/ , % 71, , , /01/ , , , /01/ , % 68, , , /01/ , , , /01/ , % 66, , , /01/ , , , /01/ , % 63, , , /01/ , , , /01/ , % 61, , , /01/ , , , /01/ , % 58, , , /01/ , , , /01/ , % 56, , , /01/ , , , /01/ , % 53, , , /01/ , , , /01/ , % 49, , , /01/ , , , /01/ , % 45, , , /01/ , , , /01/ , % 41, , , /01/ , , , /01/ , % 37, , , /01/ , , , /01/ , % 33, , , /01/ , , , /01/ , % 28, , , /01/ , , , /01/ , % 23, , , /01/ , , , /01/ , % 18, , , /01/ , , , /01/ , % 12, , , /01/ , , , /01/ , % 6, , , Total $4,000, $1,844, $5,844, $5,844, A-1

28 A-2 AGGREGATE DEBT SERVICE ON GENERAL OBLIGATION INDEBTEDNESS

29 APPENDIX B CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 DEMOGRAPHIC AND ECONOMIC DATA

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31 DEMOGRAPHIC AND ECONOMIC DATA CITY OF COVINGTON Regional Setting The City of Covington, Kentucky, which was incorporated in 1834, is located in the northern most part of the state. Covington covers a total land area of 10 square miles and is ideally situated along and adjacent to the south bank of the Ohio River, immediately south of Cincinnati, Ohio. Covington, located in Kenton County, is the largest city in Northern Kentucky and the fourth largest in the state. The City of Covington is part of the Greater Cincinnati Area and of the Cincinnati Metropolitan Statistical Area. The current population of the City is 40,713. Kenton County is part of the tri-county Northern Kentucky Area, which forms the northern apex of an industrial triangle anchored by Louisville on the southwest and Lexington on the southeast. Located within the triangle are more than one-third of the state's population and nearly one-half of its manufacturing jobs. The interstate highway system places these three metropolitan areas within less than two hours driving from each other. These factors, combined with available industrial sites, a good livability environment, high quality educational facilities, and wide variety of recreation, provide a strong base for additional industrial growth in the area. Historical Information The beginnings of Covington can be found at the junction of Second and Garrard Streets, in a small park commemorating the legendary George Rogers Clark. Now a part of the Cincinnati Bicentennial River Walk, this tract of land was once the site of a 150-acre farm owned by Thomas Kennedy, the founder of Covington. On this site he built a modest log home in 1791 and proceeded to run a ferry across the Ohio River from Northern Kentucky to Losantiville, now called Cincinnati. By 1814 the town was officially put on the map, bearing the name of General Leonard Covington, a famous hero from the War of With a constant influx of industry and inhabitants, Covington was a full-fledged city by the mid 1830's. "The Point," at the confluence of the Licking and Ohio Rivers, was both the commercial and residential focus of the city for several years, home to various shipping facilities and industry along the rivers, taking full advantage of Covington's superior river location. Advances in transportation changes the character of the city, as work was completed on both the Kentucky Central Railroad and Cincinnati- Covington Bridge (John Roebling Suspension Bridge) by the late 1860's. Financial and commercial interest shifted to locate near the new train terminals, forming a more advantageous hub in the area now called Downtown. The Ohio Riverside area, however, did not suffer for long. Once again capitalizing on its riverfront location, it became home to the elegant townhouses and villas, with park-like settings and commanding views still seen today. With a new direct link to Cincinnati via the Suspension Bridge, the area continued to prosper and the residential grandeur began to spread south along Garrard and Greenup Streets. Here, the more urban Licking Riverside area took shape, characterized by a dense settlement of large homes on fairly modest lots. By combining these two areas, the full spectrum of nineteenth century architecture, from typical Italianate townhouse to the mansions of the Second Empire, Queen Anne, Romanesque and Greek Revival styles can be experienced. B-1

32 The City of Covington has been very fortunate in that so many of its historic resources remain intact. Due to the efforts of many admirable individuals, the hands of time have left a collection of unique structures that form a unified tapestry of the city's rich heritage. Taxation City Assessment Rates (per $ assessed valuation) Year Real Estate Tangible Personal Real Estate Franchise Tangible Franchise Bank Shares Motor Vehicles Watercraft n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Source: City of Covington, Kentucky City Property Tax Levy and Collection Fiscal Year Total Tax Levy Percent Of Current Taxes Collected 2014 $6,577, % ,427, % ,724, % ,542, % ,385, % Source: City of Covington, Kentucky Largest City Principal Taxpayers. The following were the ten largest real property taxpayers for the tax year ending December 31, 2014: Name Real Property Taxes Paid Assessed Valuation Fidelity Properties, Inc. $507,845 $166,780,100 ARCP of Covington KY, LLC 251,593 82,625,000 CPX-RiverCenter Development Corporation 209,385 68,763,500 EHP Rivercenter Landmark Hotel 102,245 33,578,000 OH 16 FO 66,193 21,738,300 Atkins & Pearce 34,896 11,460,000 J & S Latonia Centre KY, LLC 31,918 10,482,000 FMR Kentucky I, LLC 29,080 9,550,000 Truss Latonia Plaza KY, LLC 20,781 6,824,500 CCO, LLC 20,744 6,812,500 Source: City of Covington, Kentucky B-2

33 Assessed Value of Property Fiscal Year Real Property Personal Property Bank Deposits Franchise Total Assessed Value 2014 $2,010,732,622 $200,087,137 $265,748,148 $182,199,672 $2,658,767, ,972,203, ,941, ,748, ,692,723 2,593,585, ,982,856, ,288, ,935, ,582,571 2,584,661, ,027,907, ,468, ,159, ,647,886 2,730,182, ,014,385, ,294, ,391, ,210,000 2,637,280, ,897,368, ,242, ,309, ,207,000 2,543,126,000 Source: City of Covington, Kentucky Building Permit Values Building activity is evidenced by the following data relating to the issuance of building permits by the City from 2008 to 2014: Residential Commercial Year Estimated Number of New Units Construction Costs Year Estimated Number of New Units Construction Costs $1,408, $12,020, ,361, ,583, ,097, ,124, ,699, ,545, ,746, , ,171, ,311, ,378, ,096,800 Source: City of Covington, Kentucky Recent Developments The City of Covington has the following construction projects currently planned, underway, or recently completed: Southern and Latonia Reconstruction: $950,000; 80% SNK: Complete reconstruction of Latonia Ave from Madison to Southern and Southern Avenue from Latonia to Grace. This is a heavily traveled roadway that had surpassed its useful life to the point where resurfacing was no longer a viable option. Latonia Reconstruction: $785,000; 80% SNK: Complete reconstruction of Latonia Ave from Southern to W 36 th. This is a heavily traveled roadway that had surpassed its useful life to the point where resurfacing was no longer a viable option. Johnson Reconstruction and sidewalk widening: $891,000; 80% SNK: Complete reconstruction of Johnson and sidewalk widening to meet ADA requirements. The roadway will be reconstructed so that it can handle the bus and heavy truck load it gets while widening the sidewalks to make them more usable and ADA accessible. Devou/Western Avenue Retaining Wall: $2.1 Million; reconstruction of failed retaining walls along Devou Drive and Western Avenue to stabilize the hillsides and roadways. B-3

34 City Center Parking Garage: $247,582: Repairs to the exterior stabilization of the garage will take place to bring the Garage up to current codes. Joints along the driving surface will also be replaced. 21 st Street Slide: $1 Million: There is a significant slide along the earthen levee that runs along the Licking River. The levee will need to be stabilized in order for the properties in this area to avoid having to get flood insurance and for the City s flood protection system to maintain certification with the USACE. Caroline Underpass Reconstruction: $620,000; 80% SNK: Complete reconstruction of Caroline Avenue from 34 th to 36 th Street. This is a heavily traveled roadway that had surpassed its useful life to the point where resurfacing was no longer a viable option. The grade on the roadway was changed and a new storm water system was constructed to alleviate flooding during heavy rain events. Madison Avenue Streetscape: $635,000; 80% grant: Utilities were placed underground and all sidewalks were replaced on Madison Avenue from 5 th to 8 th Street. This is one of the key business corridors in the City. 6 th Street and Scott Street Design and Construction: $1.7 million: A grant to cover 80% of the costs of both the design and construction was approved. Design will take place this year and construction will begin in the fall. The project will replace the sidewalks, place utilities underground, install mast arm traffic signals, and resurface the road on Scott between 4 th and 6 th and on 6 th Street from Scott to Russell. These are both key business corridors and connectors within the City. Demolitions: $345,000: 50 vacant and dilapidated buildings were demolished throughout the City to help improve the building stock and safety issues. 55 more properties are slated to be demolished this calendar year. Cost for next phase has not been determined. Riverfront Commons: Additional grant applications have been submitted for this $10 Million project; $230,000 in construction money has been awarded from SNK for this year. Project will develop riverfront property between the foot of Greenup (Riverside Terrace) to west of the floodwall and will be part of a complete multi use trail that will ultimately connect the 6 river Cities from Ludlow to Ft. Thomas. The Covington portion will include a large plaza area that will serve as a gathering space and a park/recreation area that will attract residents and visitors of all ages. Access to the river will also be provided for fishing, kayaking, and other recreational activities. Lake Park Drive reconstruction: $190,000. This is a heavily traveled industrial roadway that had surpassed its useful life to the point where resurfacing was no longer a viable option. Mainstrasse Parking Lot Improvement: $100,000. This is the main parking facility for visitors to the Mainstrasse area. The project included resurfacing the lot, TANK bus stop improvements, plaza reconstruction, a kiosk directing visitors to the amenities in Mainstrasse, and landscaping/green infrastructure to improve the drainage and aesthetics of the lot. Retained ABM Facilities Management Group to manage parking: Prior to ABM taking over parking, the management of parking was poorly organized and handled by several departments. ABM has brought organization, coordination, consistency, and efficiency to parking within the City. MLK Reconstruction/widening plus landscaping: 12 th Street/MLK was completely reconstructed and widened from the interstate to Greenup Street. This project included placing the utilities underground, decorative lighting throughout, and decorative pavers around the Cathedral. B-4

35 KY Route 16 reconstruction/widening: KY Route 16 was completely reconstructed and widened in South Covington. Can get cost from state tomorrow Purchased and demolished mobile home park at Patton: A mobile home park in Austinburg was creating a variety of issues for the neighborhood. The mobile home park was purchased, the tenants were relocated, and the site was demolished and graded. Sidewalk replacement: $2.5 million in South Covington and Latonia $1.0-$3.5 million planned for this year in north Covington. All of the sidewalk blocks in South Covington that were 10% deteriorated or worse were replaced. All of the sidewalk blocks in Latonia that were 25% deteriorated or worse were replaced. The details for the North Covington section are being worked out for construction this year. The improvements make the City a much more walkable place for residents and visitors. Additionally, the City has several development projects underway or in the start-up stage, including the following: Scott Street The City has a development agreement with Allan Haehnle for the redevelopment of the building for the City s Bike Patrol on the first floor and new development on the upper floors. Construction will be complete in th Street Properties The City entered into a Development Agreement with The Milburn Group and Ecce Properties, LLC for the development of the city owned property at 11 E. 5 th Street, 18 E. 5 th Street, and 20 E. 5 th Street, for the redevelopment of upper floor residential and first floor retail and office. 3. Martin Luther King, Jr. Street state owned properties (remnants from 12 th Street/MLK Widening) The State auctioned off the buildings along MLK to various bidders. A 14,000 sq foot historic lumber mill is being renovated into an artist/maker space and community center. The City is in discussion with the state on the additional remaining right of way property Main Street The City is evaluating the options for this prime location property. Several interested parties have been through the building but no offers for outright purchase or lease have come to fruition. City is considering issuing another RFP for redevelopment of the entire city owned property, but some challenges remain Pike Street - Tanino s The City has transferred the property to a developer who will be renovating the building into residential and office uses Pike Street - Pike Star / UpTech The City, along with several partners, assisted in the redevelopment of the Pike Star building at 112 Pike street. The City is subsidizing the non-profit corporation, Up-Tech, which is an affiliate of NKU s Department of Informatics and the Northern Kentucky e-zone. B-5

36 7. Lincoln Grant Scholar House The Lincoln Grant School building, at 824 Greenup Street, is being planned as the future location of a Family Scholar House ( LIHTC have been awarded and the project is in its final planning stages. Closing on the transfer of the property will occur in Upper Floor Residential Rehab Projects utilizing City loan/grant sources W Pike Street with 7 units was completed March 3, Madison Avenue with 2 units is 80% complete as of June 30, E 5 th Street with 2 units is 80% complete as of June 30, W Pike Street with 2 units is 80% complete as of June 30, E 5 th Street with 2 units was completed July 8, W Pike Street with 1 or 2 units City has received initial inquiries for program funding Madison The Mutual Building is nearing completion. Fourteen Residential units and first floor commercial space B-6

37 Scott - Doctors Building Redevelopment of eight residential units, first floor commercial and fourth floor office space. Construction is underway and tenants should be moving in this Fall. 11. Boone Block Redevelopment of 9 single family townhomes with 2-3 bedrooms, ranging in price from $299,000 $450,000. Project construction will be underway in Duveneck Initial project financing structure and design is underway for a Mixed Use development, subject to market and financial feasibility, consisting of office space, research, education and healthcare space, retail, commercial and multi-family residential in the vicinity of 730 Washington Street. 13. Kenton County Administrative Building The County is actively working to redevelop the Roebling Point Project which converts an underutilized building in a key location to a high impact economic development project that: Substantially enhances entrepreneurship and other business support services for the emerging knowledge-based economy enterprises, small businesses, and start-ups that are locating in Northern Kentucky s river cities. Incents as many as 600 students, most ages 21 and older, to live, study and play in Northern Kentucky s river cities, principally Covington and Newport. Provides a beneficial urban location for multiple NKU academic programs, including the Chase Law School, allowing students to connect with potential clients and employers due to the project site s proximity to two federal courthouses, three county courthouses and the Greater Cincinnati/Northern Kentucky region s central business district. B-7

38 14. RiverCenter The RiverCenter Towers have recently been refinanced. Aggressive marketing and potential renovations are being planned for the office spaces and first floor retail. 15. Jackson Square Jackson Square is a 20-acre, 15 block area in Covington, Kentucky having high potential for a residential redevelopment project consisting of rehab of existing structures as well as infill construction of new units. The area is bounded by Martin Luther King Boulevard on the south, Pike Street on the north, Main Street on the west, and the properties on the west side of Banklick Street on the east. The City of Covington has primed the area for private investment by acquiring over 38 properties and demolishing those that were in blighted condition and causing crime and nuisance issues. Also, the Center for Great Neighborhoods, a non-profit Community Development Corporation, has successfully rehabbed and sold several properties in the area, establishing comparables and proving demand for market rate single-family units. A Master Planning process is currently underway support the City of Covington and Catalytic Fund in their collaborative efforts to accelerate rehabilitation, re-investment and infill development efforts in the area. Regional Economy Northern Kentucky is generally defined as the three counties of Boone, Campbell and Kenton Counties. From a regional perspective, Northern Kentucky is part of the greater Cincinnati CMSA, which is composed of 13 counties in Kentucky, Ohio, and Indiana. The Greater Cincinnati region is known as a major center for transportation, medical services, wholesaling, manufacturing, retailing, insurance/financial service, government installations and service industries. A recent study conducted by Michael Gallis & Associates describes the Greater Cincinnati region as "diversified, and a stable economy with the best airport in America." Northern Kentucky is the location of the Cincinnati/Northern Kentucky International Airport (CVG), voted Best Regional Airport for 2011, 2012 and 2013 by Skytrax. [Remainder of Page Intentionally Left Blank] B-8

39 The Greater Cincinnati economy has prospered over the past decade. The following table shows the region's labor market. Greater Cincinnati Labor Market Overview Greater Cincinnati Area As of 2015 Civilian Labor Force 1,092.1 Total Employed 1,044.8 Total Unemployed 47.3 Unemployment Rate 4.3 Manufacturing Durable Goods and Non-Durable Goods Non-Manufacturing Trade, Transportation & Utilities Information 13.6 Financial Activities 66.8 Professional & Business Services Educational & Health Services Leisure, Hospitality and Other Service Government Natural Resources, Mining & Construction 43.1 Total Non-Agricultural 1,076.9 Source: United States Bureau of Labor Statistics [Remainder of Page Intentionally Left Blank] B-9

40 The Greater Cincinnati region has a diversified employment base, with numerous business entities employing significant numbers of employees. Largest Employers in Greater Cincinnati/Northern Kentucky Company Employees Locations in Tri-State The Kroger Company 20, University of Cincinnati 15,326 3 Cincinnati Children's Hospital 12, The Procter & Gamble Co. 12, TriHealth, Inc 10, Catholic Health Partners/Mercy Health Partners 8, UC Health 8, GE Aviation 7,500 6 St. Elizabeth Healthcare 7, Fifth Third Bancorp 7, Source: Business Courier 2013 Enrollment at Major Colleges & Universities Enrollment Institution Location Fall 2014 University of Cincinnati Cincinnati, OH 43,691 Brown Mackie College Cincinnati, OH 17,000 Miami University Oxford, OH 18,456 Northern Kentucky University Highland Heights 15,738 Jefferson Community & Technical College Carrollton 1,115 Xavier University Cincinnati, OH 6,325 Maysville Community & Technical College Cynthiana 4,634 Gateway Community & Technical College Covington 4,850 College of Mount St Joseph Cincinnati, OH 1,795 Thomas More College Crestview Hills 1,502 Wilmington College Wilmington, OH 1,435 Antonelli College Cincinnati, OH 872 Cincinnati Christian University Cincinnati, OH 1,025 Beckfield College Florence 1,579 Unemployment Rate/Percentages Greater Cincinnati United States Source: United States Bureau of Labor Statistics Data B-10

41 Total Civilian Labor Force Year Kenton County 2015(May) ,217 Employment by Place of Residence & Unemployment Rate Year Kenton County Total Employment Kenton County Unemployment Rate , , , , , , (May) 79, Total Median Family Income Year Kenton County Family Income 2000 Census $52, , , , , ,270 Source: U.S. Census Bureau, American Community Survey Per Capita Income Per capita income for Kenton County has exceeded the national average in 2004, 2005, 2006, 2012 and Kenton County $34,990 $36,526 $38,405 $38,783 $39,161 $37,703 $38,613 $41,281 $43,509 $41,766 United States $33,909 $35,452 $37,725 $39,506 $40,947 $38,637 $39,791 $41,560 $42,693 $41,706 Source: US Department of Commerce, Bureau of Economic Analysis B-11

42 Average Increase in Population The annual average population growth rate in Northern Kentucky for the indicated periods in the following table has exceeded the growth rates of the greater Cincinnati CMSA, the Commonwealth of Kentucky and the United States Northern Kentucky 29.9% 15.2% 17.3% 8.9% Cincinnati CMSA 5.1% 13.7% 20.1% 8.4% Commonwealth of Kentucky 0.7% 9.7% 6.0% 8.2% United States 9.5% 13.2% 6.5% 10.0% Source: Tri-County Economic Dev. Corporation Population Historical population growth data from Northern Kentucky presented in the following table shows over a 3.50% increase in population since 2009, and an 11.00% increase since Year Boone Campbell Kenton Northern County County County Kentucky Thousands Source: Kentucky Cabinet for Economic Development Transportation The Greater Cincinnati International Airport, located in adjoining Boone County, Kentucky, provides commercial airline service. The major highways serving Boone, Kenton, and Campbell County include Interstates 71 and 75, U.S. Highways 42/127, 27, and 25. Interstate 275, a three-state beltline, traverses the three counties. Interstate 471 extends from I-275 to the Ohio River in Campbell County. The Norfolk Southern and CSX Transportation provides main line rail service to the area. Several barge and towing companies provide barge transportation on the Ohio River. The Port of Cincinnati extends 30 miles along both banks of the Ohio River. Power and Fuel Electric power is provided to Boone, Kenton, and Campbell Counties by Union Light, Heat and Power (a subsidiary of the Duke Energy) and the Owens County Rural Electric Cooperative Corporation. Natural Gas service is provided to portions of the three-county area by Union Light, Heat and Power Company. B-12

43 Education Primary and secondary education is provided by the Boone, Kenton, and Campbell County Public School Systems; eleven independent school systems; and 44 nonpublic schools within the three-county area. Three universities and six senior colleges are located in the Northern Kentucky-Cincinnati Area. Northern Kentucky University and Thomas Moore College are located in Northern Kentucky. Vocational training is available at both the state vocational-technical schools and the area vocational education centers. The state vocational-technical schools are post-secondary institutions. The area vocational education centers are designed to supplement the curriculum of high school students. Both the state vocational-technical schools and the area vocational education centers offer evening courses to enable working adults to upgrade current job skills. Arrangements can be made to provide training in the specific production skills required by an industrial plant. Instruction may be conducted either in the vocational school or in the industrial plant, depending upon the desired arrangement and the availability of special equipment. The Bluegrass State Skills Corporation, an independent public corporation created and funded by the Kentucky General Assembly, provides programs of skills training to meet the needs of business and industry from entry level to advanced training, and from upgrading present employees to retraining experienced workers. The Bluegrass State Skills Corporation is the primary source for skills training assistance for a new or existing company. The Corporation works in partnership with other employment and job training resources and programs, as well as Kentucky's economic development activities, to package a program customized to meet the specific needs of a company. OUTSTANDING INDEBTEDNESS OF THE CITY OF COVINGTON, KENTUCKY AS OF JUNE 30, 2015 Name of Issue Principal Amount Outstanding Final Maturity 2003 Series A $1,285, KIA Fidelity Rainwater project 463, KLCFT Fort Mitchell Pool 6,367, KLCFT Fort Mitchell Pool #2 295, KLCFT Richmond Pool 402, Lease with Bank of Kentucky 1,155, Recovery Zone Bonds 2,410, KBC 2012E 14,910, Series 2014B 10,960, Series ,235, TAN 3,500, Total $59,984,136 B-13

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45 APPENDIX C CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 HISTORICAL GENERAL FUND REVENUES AND EXPENSES FOR FISCAL YEARS ENDING JUNE 30, 2010 THROUGH JUNE 30, 2014 AND ACTUAL AND PROJECTED GENERAL FUND BALANCES FOR FISCAL YEARS ENDING JUNE 30, 2009 THROUGH JUNE 30, 2016

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47 City of Covington Kentucky Historical General Fund Revenues and Expenses - GAAP Basis Historical Revenues: Taxes $14,194,342 $13,806,160 $13,657,232 $13,725,616 $14,291,815 Licenses and Permits 25,429,776 25,362,255 26,175,310 25,979,427 25,353,330 Intergovernmental 612,863 1,652,616 1,862, ,800 1,179,402 Charges for Services 4,937,078 5,394,348 6,063,323 6,063,670 5,936,837 Fines and Forfeitures 746, , , , ,625 Investment Earnings 1,353 45,885 21,948 95,694 3,181 Miscellaneous 422, , , , ,563 Total Revenues $46,344,472 $47,435,590 $48,914,815 $47,454,649 $47,743,753 Expenditures: Current: General Government 2,955,869 3,119,887 3,207,768 3,526,196 3,629,368 Police 15,010,788 15,288,716 14,902,625 13,465,973 13,168,105 Fire 13,326,126 13,156,714 13,241,215 12,731,634 12,267,843 Public improvements 6,514,905 6,268,883 5,891,702 5,994,547 8,791,581 Recreation 504, , , ,483 - Community Development 3,544,888 3,749,450 3,947,945 4,146,502 2,454,467 Parking Garage 732, , , , ,835 Debt Principal 503,716 1,584,379 2,147,521 1,312,011 2,326,777 Debt Interest 209, , , ,919 1,219,509 Capital Outlay - 2,791,727 3,743, Total Expenditures $43,302,421 $48,054,193 $48,865,845 $42,957,023 $44,589,485 Operating Income (Loss) $3,042,051 $(618,603) $48,970 $4,497,626 $3,154,268 Other Financing Sources (Uses) Transfers In 1,231,004 1,172,469 1,595, , ,099 Transfers Out (4,712,226) (2,692,926) - (5,334,951) (2,238,043) Sale of Assets/Proceeds of Debt 9,700 2,772,157 5,517 31,092 33,684 Inception of Leases - - (3,937,681) - - Total Other Financing Sources (Uses) $(3,471,522) $1,251,700 $(2,337,151) $(4,571,917) $(2,081,260) Special Item $ - $ - $ - $(102,445) $(17,000) Net Change In Fund Balance $(429,471) $633,097 $(2,288,181) $(176,736) $1,056,008 Fund Balance at beginning of year, restated 771,969 2,987,558 3,620, ,604 1,148,435 Fund Balance at End of Year $342,498 $3,620,655 $1,332,474 $779,868 $2,204,443 C-1

48 City of Covington, Kentucky Year End General Fund Balance Fiscal Year End Cash Balance 2009 $529, (1,712,680) , , , , (Est.) 1,553,462 C-2

49 APPENDIX D CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 AUDITED GENERAL PURPOSE FINANCIAL STATEMENTS OF CITY OF COVINGTON, KENTUCKY FOR FISCAL YEAR ENDING JUNE 30, 2014

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51 COVINGTON, KENTUCKY COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 THE SPIRIT OF PROGRESS

52 CITY OF COVINGTON, KENTUCKY COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Issued by: Finance Department Lisa Goetz, CPA Finance Director

53 CITY OF COVINGTON, KENTUCKY COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2014 Table of Contents INTRODUCTORY SECTION Letter of Transmittal... 1 List of Elected and Appointed Officials... 9 Organizational Chart FINANCIAL SECTION Independent Auditors Report Management s Discussion and Analysis Basic Financial Statements: Government-wide Financial Statements: Statement of Net Position Statement of Activities Fund Financial Statements: Balance Sheet Governmental Funds Reconciliation of Total Governmental Fund Balances to Net Position of Governmental Activities Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds Reconciliation of the Statement of Revenues, Expenditures and Changes In Fund Balances of Governmental Funds to the Statement of Activities 28 Statement of Net Position Proprietary Funds Statement of Revenues, Expenses and Changes in Net Position Proprietary Funds Statement of Cash Flows Proprietary Funds Statement of Fiduciary Net Position Fiduciary Funds Statement of Changes in Fiduciary Net Position Fiduciary Funds i

54 Table of Contents (con t.) Notes to the Basic Financial Statements Required Supplementary Information: Schedule of Revenues, Expenditures, and Change in Fund Balance Budget and Actual General Fund Schedule of Revenues, Expenditures, and Change in Fund Balance Budget and Actual Neighborhood Stabilization Program Fund RSI Employees Retirement Plan RSI Police and Firemen s Retirement Plan Notes to Required Supplementary Information Combining Statements and Individual Fund Schedules: Description of Funds Combining Balance Sheet Nonmajor Governmental Funds Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Nonmajor Governmental Funds Schedules of Revenues, Expenditures and Changes in Fund Balance Budget and Actual Federal & State Grants Fund Community Development Fund HOME Program Fund Renaissance Grant Fund One Stop Shop Fund Police Forfeiture Justice Fund HOME Consortium Fund Housing Voucher Program Fund Police & Fire Supplemental Pay Fund Devou Park Maintenance Fund Devou Park Master Plan Fund Pension Obligation 2004 Fund Capital Improvement Fund Combining Statement Net Position Internal Service Funds Combining Statement of Revenues, Expenses and Changes in Net Position Internal Service Funds Combining Statement of Cash Flows Internal Service Funds ii

55 Table of Contents (con t.) STATISTICAL SECTION Schedule 1 - Net Position by Component Schedule 2 - Changes in Net Position Schedule 3 - Fund Balances, Governmental Funds Schedule 4 - Changes in Fund Balances Governmental Funds Schedule 5 - Occupational License Fees Payroll Withholding Schedule 6 - Principal Occupational Payroll Tax Payers Schedule 7 - Assessed Value and Estimated Actual Value of Taxable Property Schedule 8 - Direct and Overlapping Property Tax Rates Schedule 9 - Principal Real Property Tax Payers Schedule 10 - Property Tax Levies and Collections Schedule 11 - Ratios of Outstanding Debt by Type Schedule 12 - Ratio of General Bonded Debt Outstanding Schedule 13 - Direct and Overlapping Governmental Activities Debt Schedule 14 - Legal Debt Margin Information Schedule 15 - Demographic and Economic Statistics Schedule 16 - Principal Employers Schedule 17 - Full-Time Equivalent City Government Employees by Function/Program Schedule 18 - Operating Indicators by Function/Program Schedule 19 - Capital Assets Statistics by Function/Program SINGLE AUDIT SECTION Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by OMB Circular A Schedule of Findings and Questioned Costs iii

56 INTRODUCTORY SECTION

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65 City of Covington, Kentucky Elected and Appointed Officials June 30, 2014 Elected Officials Mayor... Sherry Carran Commissioner/Mayor Pro Tem... Steve Frank Commissioner... Charles Eilerman Commissioner... Mildred Rains Commissioner... Michelle Williams Appointed Officials City Manager... Larry Klein Assistant City Manager for Development... Larisa Sims Assistant City Manager/City Solicitor... Frank Warnock Finance Director... Lisa Goetz City Operations Director... Lisa Desmarais Internal Auditor... Greg Crump City Clerk... Margaret Nyhan Interim City Solicitor... Christian Dennery Chief of Police... Spike Jones Fire Chief... Dan Mathew DPI Director/Assistant City Engineer... Rick Davis Community Service Manager/City Engineer... Mike Yeager Human Resources Director... Jo Ann Simpson 9

66 Citizens of Covington, Kentucky Mayor Sherry Carran Commissioner/Mayor Pro Tem Steve Frank Commissioner Charles Eilerman Commisioner Michelle Williams Commissioner Mildred Rains City Manager Larry Klein Assistant City Manager for Development Larisa Sims Community Services Manager/City Engineer Mike Yeager Programs and Strategic Projects Manager Natalie Gardner Business Development Manager Naashom Marx Marketing & Communications Director Natalie Bowers Assistant City Manager/City Solicitor Frank Warnock Human Resources Director Jo Ann Simpson Assistant City Solicitor Bryce Rhoades Assistant City Solicitor Christian Dennery City Clerk Margaret Nyhan Police Chief Spike Jones Assistant Police Chief Bryan Carter Fire Chief Dan Mathew Assistant Fire Chief Chris Black Assistant Fire Chief Glenn Johnson DPI Director/Assistant City Engineer Rick Davis Finance Director Lisa Goetz Assistant Finance Director Vickie Cox Internal Auditor Greg Crump Information Technology & Data Manager Lisa Desmarais City of Covington City Wide Organizational Chart June, 2014

67 FINANCIAL SECTION

68 INDEPENDENT AUDITORS REPORT To the Mayor and City Commissioners City of Covington, Kentucky: Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City of Covington, Kentucky (the City ) as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the City 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. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of Devou Properties, Inc.. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Devou Properties, Inc., is based on solely on the report of the other auditors. 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 auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. one east fourth street, ste cincinnati, oh cincinnati cleveland columbus miami valley northern kentucky springfield toledo p f

69 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City of Covington, Kentucky, as of June 30, 2014, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Effect of Adopting New Accounting Standards As discussed in Note 13, the City adopted the provisions of Governmental Accounting Standards Board Statement No. 65, Items Previously Reported as Assets and Liabilities, Statement No. 67, Financial Reporting for Pension Plans an amendment of GASB Statement No. 25 and Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27. Our opinions were not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and other required supplementary information, as identified 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 required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 12

70 Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City s basic financial statements. The introductory section, combining and individual nonmajor fund financial statements and schedules, the statistical section, and the schedule of expenditures of federal awards, as required by Office of Management Budget Circular A-133, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and schedules and schedule of expenditures of federal awards are the responsibility of management and were derived from and relate 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 statement themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements and schedules and schedule of expenditures of federal awards are fairly stated, in all material respects, in relation to the basic financial statements taken 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 29, 2014 on our consideration of the City of Covington s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and 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 City of Covington s internal control over financial reporting and compliance. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio December 29,

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72 City of Covington, Kentucky Management s Discussion and Analysis For the Fiscal Year Ended June 30, 2014 (unaudited) The management discussion and analysis (MD&A) of the City of Covington, Kentucky s (the City s) financial statements provides readers a narrative overview and analysis of the City s financial position and activities for the fiscal year ended June 30, The information presented here should be read in conjunction with the City s basic financial statements which immediately follow this overview and analysis. Financial Highlights Some of the City s financial highlights for the fiscal year ended June 30, 2014 include: The assets and deferred outflows of resources exceeded its liabilities at the close of the most recent fiscal year by $24,473,322 (net position). The City s total net position decreased during the fiscal year by $368,542, or 1%. The City s total expenses were $60,473,108, a decrease of $1,224,668. Program revenues of $20,187,141 reduced the net cost of the City s functions to be financed from the City s general revenue to $40,285,967. At the close of the current fiscal year, the City s governmental funds reported combined fund balances of $8,912,925, a decrease of $9,524,940 in comparison with the prior year. Approximately 24% of this amount ($2,103,342) is available for spending at the City s discretion (unassigned fund balance). At the end of the fiscal year end, unrestricted fund balance for the general fund was $2,178,928, or approximately 5% of total general fund expenditures. The City s total outstanding long-term debt decreased by $2,771,777 during the fiscal year because of the payment of bond and lease payments. Overview of the Financial Statements The discussion and analysis provided here is intended to serve as an introduction to the City s basic financial statements. The City s basic financial statements consist of three components: 1) governmentwide financial statements, 2) fund financial statements, and 3) notes to financial statements. This report also includes supplementary information intended to furnish additional detail to support the basic financial statements themselves. Government-wide Financial Statements. The government-wide financial statements are designed to provide readers with a broad overview of the City s finances, in a manner similar to a private-sector business. The statement of net position presents financial information on all of the City s assets/deferred outflows of resources and liabilities, with the difference reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The statement of activities presents information showing how the City s net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported for some items that will only result in cash flows in future fiscal periods. The government-wide financial statements include functions of the City, including police, fire, street maintenance, parks and recreation, and general administration services, that are principally supported by licenses, fees, taxes and intergovernmental revenues (governmental activities). 15

73 The government-wide financial statements include not only the City itself (known as the primary government), but also Devou Properties, Inc., a legally separate non-profit organization. Financial information for this component unit is reported separately from the financial information presented for the primary government itself. The Municipal Properties Corporation, although also legally separate, functions for all practical purposes as a department of the City, and therefore has been included as an integral part of the primary government. Fund Financial Statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental Funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in assessing a government s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City maintains several individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund, Neighborhood Stabilization Program Fund, and the Capital Improvement Fund, which are considered to be major funds. Data from the other governmental funds are combined into a single aggregated presentation. The City adopts an annual appropriation budget for its governmental funds. Budgetary comparison schedules have been provided for its general and special revenue major funds in required supplementary information to demonstrate compliance with its budgets. Proprietary Funds. Proprietary funds can be classified into two subcategories; enterprise funds and internal service funds. The City does not have any enterprise funds. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City s various functions. The City uses internal service funds to account for the management of its retained risks and for selfinsured for medical and dental coverage for its employees. Internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Because both of these services benefit governmental functions, they have been included within governmental activities in the government-wide financial statements. Fiduciary Funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the City. Fiduciary funds are not reported in the government-wide financial statements because the resources of those funds are not available to support the City s own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The City is trustee, or fiduciary, for two retirement funds. The Police and Firemen s Retirement Fund and Employee s Retirement Fund are closed pension funds held solely for trust beneficiaries. 16

74 Notes to the Financial Statements. The notes provide additional information that is necessary to acquire a full understanding of the data provided in the government-wide and fund financial statements. Government-wide Overall Financial Analysis As noted earlier, net position over time, may serve as a useful indicator of a government s financial position. In the case of the City, assets and deferred outflows of resources exceeded liabilities by $24,473,322, at the close of the most recent fiscal year. City s Net Position Governmental Activities Restated Change Current and other assets $ 21,568,048 $ 28,368,609 $ (6,800,561) Capital assets 59,932,539 54,489,483 5,443,056 Total assets 81,500,587 82,858,092 (1,357,505) Deferred outflows of resources 243, ,805 (468,711) Long-term liabilities 49,437,125 52,918,302 (3,481,177) Other liabilities 7,833,234 5,809,731 2,023,503 57,270,359 58,728,033 (1,457,674) Net position: Net investment in capital assets 29,360,778 33,666,204 (4,305,426) Restricted 6,653,643 4,561,466 2,092,177 Unrestricted (deficit) (11,541,099) (13,385,806) 1,844,707 Total net position $ 24,473,322 $ 24,841,864 $ (368,542) By far, the largest portion of the City s net position ($29,360,778) reflects its investment in capital assets (e.g., land and improvements, construction in progress, buildings and improvements, machinery and equipment, vehicles, and infrastructure), less any related outstanding debt that was used to acquire those assets. The City uses these capital assets to provide a variety of services to its citizens. Accordingly, these assets are not available for future spending. Although the City s investment in capital assets is reported net of related debt, it should be noted that the resources used to repay this debt must be provided from other sources, since capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the City s net position ($6,653,643) represents resources that are subject to external restrictions on how they may be used. Any remaining balance is unrestricted and may be used to meet the City s ongoing obligations to its citizens and creditors. At the end of the current fiscal year, the City s overall net position decreased from the prior fiscal year. The reasons for this overall decrease are discussed in the following section. 17

75 City s Changes in Net Position Governmental Activities Restated Change Program revenues: Charges for services $ 7,027,222 $ 6,538,387 $ 488,835 Operating grants and contributions 10,842,196 11,932,368 (1,090,172) Capital grants and contributions 2,317,723 1,290,469 1,027,254 Total program revenues 20,187,141 19,761, ,917 General revenues: Taxes 39,770,408 40,049,286 (278,878) Investment earnings 4,287 96,889 (92,602) Miscellaneous 159, ,261 (417,531) Total general revenues 39,934,425 40,723,436 (789,011) Total revenues 60,121,566 60,484,660 (363,094) Expenses: General government 5,916,248 4,028,857 1,887,391 Police 14,177,725 15,464,519 (1,286,794) Fire 13,060,943 13,727,885 (666,942) Public improvements 13,769,904 10,916,212 2,853,692 Recreation - 683,742 (683,742) Community development 11,159,338 13,912,337 (2,752,999) Parking garage 734, ,059 (48,461) Interest on long-term debt 1,654,352 2,181,165 (526,813) Total expenses 60,473,108 61,697,776 (1,224,668) Special item (17,000) (102,445) 85,445 Change in net position (368,542) (1,315,561) 947,019 Net position beginning of year 24,841,864 26,157,425 (1,315,561) Net position end of year $ 24,473,322 $ 24,841,864 $ (368,542) During the current fiscal year, net position for governmental activities decreased $368,542 from the prior fiscal year for an ending balance of $24,473,322. Total revenues decreased by $363,094, or less than 1%. Operating grants and contributions decreased as the City was granted less housing voucher funding in Capital grants and contributions increased due to project-specific state funding and new grant awards. However, the City was able to reduce its expenses by $1,224,668, or 2%. In response to declining tax revenue, an on-going review of expenses have resulted in cost savings. Please note that expenses by category are altered from the previous year due to department restructuring. The special item amounts of $17,000 and $102,445 in 2014 and 2013, respectively, represent amounts identified as alleged embezzlement transactions incurred in prior years by the former finance director. The City has filed lawsuits to recover these funds and is currently involved in litigation. 18

76 Financial Analysis of Governmental Funds At June 30, 2014, the City s governmental funds reported combined fund balances of $8,912,925, a decrease of $9,524,940 in comparison with the prior year. The majority of this decrease occurred in the Capital Improvement Fund, discussed below. Approximately 24% of this amount ($2,103,342) constitutes unassigned fund balance, which is available for spending at the City s discretion. The remainder of the fund balance is either nonspendable, restricted, or committed to indicate that it is 1) not in spendable form ($25,515), 2) restricted for particular purposes ($6,356,203), or 3) committed for particular purposes ($427,865). The General Fund is the chief operating fund of the City. At the end of the current fiscal year, unassigned fund balance of the General Fund was $2,178,928, or 5% of total General Fund expenditures. The following schedules present a summary of the General Fund revenues and expenditures for the current fiscal year. General Fund Revenues for the Fiscal Year Ended June 30, Percent Percent 2014 of Total 2013 Change Taxes $ 14,291, % $ 13,725, % Licenses and permits 25,353, % 25,979, % Intergovernmental 1,179, % 839, % Fines and forfeitures 414, % 367, % Charges for services 5,936, % 6,063, % Investment earnings 3, % 95, % Miscellaneous 564, % 382, % Total Revenue $ 47,743, % $ 47,454, % Revenue remained fairly consistent during the fiscal year, with total General Fund revenue only increasing by $289,104, or less than 1% General Fund Revenues Intergovernmental, 2.47% Licenses and permits, 53.10% Fines and forfeitures, 0.87% Charges for services, 12.43% Investment earnings, 0.01% Taxes, 29.93% Miscellaneous, 1.19% 19

77 Taxes, which include real estate taxes, personal property taxes, and insurance premium taxes increased by $566,199, or 4% from the prior fiscal year. Total taxable assessed value increased by $114 million, or 6%, to remain at approximately $2 billion. License and permit revenue includes both a payroll occupational license fee and a net profit occupational license fee on businesses. License and permit revenue decreased by $626,097, or 2.4%, from the prior fiscal year and are expected to remain flat into the next fiscal year. With health care costs and pension costs continuing to escalate, there will be increasing pressure to further reduce operating expenditures. General Fund Expenditures for the Fiscal Year Ended June 30, Percent Percent 2014 of Total 2013 Change General government $ 3,629, % $ 3,526, % Public safety 25,435, % 26,197, % Public improvements 8,791, % 5,994, % Recreation % 437, % Community development 2,454, % 4,146, % Parking garage 731, % 776, % Debt service 3,546, % 1,877, % Total Expenditures $ 44,589, % $ 42,957, % Total General Fund expenditures increased by $1,632,462, or 3.80%, primarily due to funding more debt service expenditures that had been paid by other funds in previous years General Fund Expenditures Public safety 57.04% Public improvements 19.72% Debt service 7.96% Community development 5.50% Parking garage 1.64% General government 8.14% The Neighborhood Stabilization Program is a cost reimbursement HUD-funded program. There is no fund balance, and therefore, no change in fund balance to report. 20

78 The Capital Improvement Fund, the City s remaining major governmental fund, is used to account for the City s acquisition and construction of public improvements and equipment. The fund balance decreased $10,169,859 to $4,705,268. The City entered into a lease agreement in December 2012 in the amount of $16.04 million to finance various public improvements. At the end of the fiscal year, the City had $2,138,059 remaining from this lease to fund its planned capital improvements. General Fund Budgetary Highlights Over the course of the fiscal year, the City Commission approved revisions to the General Fund budget. The final amended budget resulted in a $658,610 increase in appropriations and transfers, while the final budgeted revenue and transfers was increased by $1,019,837. The budget amendments were made to more closely reflect the anticipated actual results for the fiscal year and to formally adopt as part of the budget changes in staff and activities that were approved by the City Commission during the fiscal year. Capital Assets and Debt Administration Capital assets. The City s investment in capital assets for its governmental activities as of June 30, 2014 amounts to $59,932,539 (net of accumulated depreciation), an increase of $5,443,056 from the prior year. This investment in capital assets includes land and improvements, buildings and improvements, machinery and equipment, vehicles, infrastructure and construction in progress. The total increase in capital assets for the current fiscal year was approximately 10%, as the City continued work on its capital plans financed by the $16.04 million in capital lease financing issued in Capital Assets at June 30, (Net of Depreciation) Governmental Activities Land $ 14,424,312 $ 14,339,320 Land improvements 1,755,297 1,717,703 Buildings 15,620,738 14,299,467 Building improvements 5,513,113 2,924,807 Machinery and equipment 1,358,532 1,521,925 Vehicles 1,750,262 2,033,469 Infrastructure 18,842,076 17,617,964 Construction in progress 668,209 34,828 Totals $ 59,932,539 $ 54,489,483 Additional information on the City s capital assets can be found in Note 4. Long-term debt. At the end of the current fiscal year, the City had outstanding notes, bonds and capital leases of $43,799,820, which is backed by the full faith and credit of the City. Outstanding Long-term Debt Obligations at June 30, Governmental Activities Mortgage bonds and notes $ 15,825,835 $ 16,863,621 Capital Leases 27,973,985 29,707,976 Total $ 43,799,820 $ 46,571,597 21

79 The City issues and incurs debt in order to fund capital improvement projects, purchase capital equipment and facilities, and respond to other economic development needs. The City s outstanding debt decreased by $2,771,777 (6%) from the prior year, as the City met its scheduled debt service requirements. The Kentucky Constitution states the total principal amount of indebtedness, which excludes selfsupporting obligations, revenue bonds, special assessment debt, and non-tax supported debt, cannot exceed 10% of the value of taxable property in the City. The debt limit for the City is $214 million. Additional information on the City s long-term debt can be found in Note 7. Economic Factors and Next Year s Budget The budget for the 2015 fiscal year was developed to structurally balance its operating budget while maintaining current levels of City services as much as possible. Positions went unfilled and two positions were removed from the budget. Capital investment in public safety infrastructure and fleet will be funded by a $15 million bond. The City is committed to a structurally balanced budget and will not permit further erosion of the General Fund balance. Unless significant concessions can be realized from the three collective bargaining units, more layoffs may be necessary. An action plan is currently being developed to ensure financial stability and growth in fiscal year 2015 and beyond. The economic outlook is grim for the coming year. Revenue estimates have been unchanged. Requests for Information This financial report is designed to provide our citizens, taxpayers, customers, and creditors with a general overview of the City s finances and to show the City s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Finance Department, 20 West Pike Street, Covington, KY

80 CITY OF COVINGTON, KENTUCKY Statement of Net Position June 30, 2014 Primary Component Government Unit Governmental Devou Activities Properties, Inc. Assets Cash and cash equivalents $ 7,726,609 $ 1,903,105 Cash with fiscal agent 2,138,059 - Cash held in escrow 642,746 Receivables (net of allowance for doubtful accounts) Taxes 4,961,391 - Intergovernmental 791,298 - Notes 2,951,019 - Accounts 977,209 72,061 Due from fiduciary activities 1,354,202 - Prepaid items 25,515 11,775 Nondepreciable capital assets 16,847,818 - Depreciable capital assets, net 43,084,721 67,960 Total assets 81,500,587 2,054,901 Deferred Outflows of Resources Deferred outflows - hedges 243,094 - Liabilities Accounts payable 3,968,303 31,779 Accrued liabilities 651, ,102 Claims payable 1,659,614 - Accrued interest payable 59,661 - Unearned revenue 1,250,864 - Derivative instruments - interest rate swap 243,094 Noncurrent liabilities: - Due within one year 4,226,937 - Due in more than one year: - Net pension liability 4,256,504 - Other 40,953,684 - Total liabilities 57,270, ,881 Net Position Net investment in capital assets 29,360,778 67,960 Restricted for: Capital improvements 2,614,198 - Debt service 401,000 HUD programs 3,622,306 - Other purposes 16,139 - Unrestricted (deficit) (11,541,099) 1,698,060 Total net position $ 24,473,322 $ 1,766,020 See accompanying notes to the basic financial statements. 23

81 CITY OF COVINGTON, KENTUCKY Statement of Activities Fiscal Year Ended June 30, 2014 Program Revenues Net (Expense) Revenue and Changes in Net Position Primary Component Government Unit Operating Capital Charges for Grants and Grants and Governmental Devou Expenses Services Contributions Contributions Activities Properties, Inc. Functions/Programs Primary Government Governmental activities: General government $ 5,916,248 $ 940,479 $ 171,075 $ 2,154,649 $ (2,650,045) $ - Police 14,177,725 58, , ,074 (13,471,863) - Fire 13,060,943 1,391, ,569 - (11,191,460) - Public improvements 13,769,904 2,343,079 1,008,327 - (10,418,498) - Community development 11,159, ,833 8,700,439 - (1,720,066) - Parking garage 734,598 1,554, ,317 - Interest on long-term debt 1,654, (1,654,352) - Total governmental activities 60,473,108 7,027,222 10,842,196 2,317,723 (40,285,967) - Component Unit Devou Properties, Inc. 977, , (84,970) Total $ 61,450,330 $ 7,919,474 $ 10,842,196 $ 2,317,723 (40,285,967) (84,970) General Revenues: Taxes: Real property taxes 6,085,654 - Personal property taxes 764,100 - Public service taxes 2,131,042 - Taxes, levied for bank deposits 65,134 - Insurance premium taxes 5,672,059 - Payroll taxes 22,222,546 - Net profit taxes 2,829,873 - Investment earnings 4,287 1,046 Miscellaneous 159,730 - Special item (17,000) - Total general revenues and special item 39,917,425 1,046 - Change in net position (368,542) (83,924) Net position beginning of year, restated 24,841,864 1,849,944 Net position end of year $ 24,473,322 $ 1,766,020 See accompanying notes to the basic financial statements. 24

82 CITY OF COVINGTON, KENTUCKY Balance Sheet Governmental Funds June 30, 2014 Neighborhood Nonmajor Total Stabilization Capital Governmental Governmental General Program Improvement Funds Funds Assets Cash and cash equivalents $ 183,186 $ - $ 4,587,985 $ 1,944,293 $ 6,715,464 Cash with fiscal agent - - 2,138,059-2,138,059 Cash held in escrow 1, , ,746 Receivables (net of allowance for doubtful accounts): Taxes 4,961, ,961,391 Intergovernmental 77, , ,298 Notes 515,520 2,435, ,951,019 Accounts 849, , ,209 Due from other funds 926, ,517 59, ,363 1,642,853 Due from fiduciary funds 1,354, ,354,202 Prepaid items 25, ,515 Total assets $ 8,895,063 $ 2,662,016 $ 6,785,668 $ 3,857,009 $ 22,199,756 Liabilities: Accounts payable $ 1,435,193 $ 226,517 $ 2,033,650 $ 150,427 $ 3,845,787 Accrued liabilities 651, ,698 Due to other funds 1,224,684-46,750 1,208,673 2,480,107 Unearned revenue 756, ,695 1,250,864 Total liabilities 4,067, ,517 2,080,400 1,853,795 8,228,456 Deferred Inflow of Resources: Unavailable revenue 2,622,876 2,435, ,058,375 Fund balances: Nonspendable 25, ,515 Restricted - - 4,705,268 1,650,935 6,356,203 Committed , ,865 Unassigned 2,178, (75,586) 2,103,342 Total fund balances 2,204,443-4,705,268 2,003,214 8,912,925 Total liabilities, deferred inflows of resources and fund balances $ 8,895,063 $ 2,662,016 $ 6,785,668 $ 3,857,009 $ 22,199,756 See accompanying notes to the basic financial statements. 25

83 CITY OF COVINGTON, KENTUCKY Reconciliation of Total Governmental Fund Balances to Net Position of Governmental Activities June 30, 2014 Total fund balances - governmental funds $ 8,912,925 Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 59,932,539 Other long-term assets are not available to pay for current period expenditures and, therefore, are deferred in the funds. 5,058,375 Internal service funds are used by management to charge the cost of certain activities, such as liability and medical insurance, to individual funds. The assets and liabilities of the internal service funds are included in the governmental activities in the statement of net position. 66,269 Long-term liabilities are not due and payable in the current period and, therefore, are not reported in the funds: Bonds payable 15,825,835 Capital lease payable 27,973,985 Accrued interest payable 59,661 Net pension liability 4,256,504 Compensated absences 1,380,801 Total (49,496,786) Net position of governmental activities $ 24,473,322 26

84 CITY OF COVINGTON, KENTUCKY Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds Fiscal Year Ended June 30, 2014 Neighborhood Nonmajor Total Stabilization Capital Governmental Governmental General Program Improvement Funds Funds Revenues: Taxes $ 14,291,815 $ - $ - $ - $ 14,291,815 Licenses and permits 25,353, ,353,330 Intergovernmental 1,179, ,123-11,767,098 13,142,623 Charges for services 5,936, ,936,837 Fines and forfeitures 414, ,625 Investment earnings 3, ,106 4,287 Miscellaneous 564,563 7, ,017 1,045,589 Total revenues 47,743, ,132-12,242,221 60,189,106 Expenditures: Current: General government 3,629,368-4,963, ,271 8,990,541 Police 13,168, ,560 13,945,665 Fire 12,267, ,569 12,745,412 Public improvements 8,791, ,998 8,816,579 Community development 2,454,467 20,398 9,776 8,380,327 10,864,968 Parking garage 731, ,835 Debt service: Principal 2,326, ,000 2,771,777 Interest 1,219, ,460 1,754,969 Capital outlay - 182,734 5,196,181 2,756,656 8,135,571 Total expenditures 44,589, ,132 10,169,859 13,794,841 68,757,317 Excess (deficiency) of revenues over (under) expenditures 3,154,268 - (10,169,859) (1,552,620) (8,568,211) Other financing sources (uses): Transfers in 123, ,264,630 1,387,729 Transfers out (2,238,043) - - (123,099) (2,361,142) Sale of assets 33, ,684 Total other financing sources (uses) (2,081,260) - - 1,141,531 (939,729) Special item (17,000) (17,000) Net change in fund balances 1,056,008 - (10,169,859) (411,089) (9,524,940) Fund balance, beginning of year, restated 1,148,435-14,875,127 2,414,303 18,437,865 Fund balance, end of year $ 2,204,443 $ - $ 4,705,268 $ 2,003,214 $ 8,912,925 See accompanying notes to the basic financial statements. 27

85 CITY OF COVINGTON, KENTUCKY Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities Fiscal Year Ended June 30, 2014 Net change in fund balances - total governmental funds $ (9,524,940) Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities, the costs of those assets are allocated over their estimated useful lives as depreciation expense: Capital additions 12,404,238 Depreciation expense (6,732,532) In the statement of activities, loss on disposal of capital assets is reported, whereas only proceeds from sales are reported in the governmental funds. (228,650) Revenue in the statement of activities that do not provide current financial resources are reported as deferred inflows in the governmental funds. 131,548 Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds: Compensated absences (136,307) Interest on long-term debt 100,617 Change in net pension liability 845,707 Repayment of bonds, notes and lease principal is an expenditure in the governmental funds, whereas the payments reduce long-term liabilities in the statement of net position 2,771,777 Change in net position of governmental activities $ (368,542) 28

86 CITY OF COVINGTON, KENTUCKY Statement of Net Position Proprietary Funds June 30, 2014 Governmental Activities Internal Service Funds Assets Cash and cash equivalents $ 1,011,145 Due from other funds 837,254 Total assets 1,848,399 Liabilities Accounts payable 122,516 Claims payable 1,659,614 Total liabilities 1,782,130 Net Position Unrestricted 66,269 Total net position $ 66,269 See accompanying notes to the basic financial statements. 29

87 CITY OF COVINGTON, KENTUCKY Statement of Revenues, Expenses and Changes in Net Position Proprietary Funds Fiscal Year Ended June 30, 2014 Governmental Activities Internal Service Funds Operating revenues: Insurance premiums $ 4,755,895 Other 20,090 Total operating revenues 4,775,985 Operating expenses: Contractual services 1,278,071 Claims and judgments 4,471,458 Total operating expenses 5,749,529 Operating loss (973,544) Non-operating revenues (expenses): Investment income 131 Loss before transfers (973,413) Transfers in 973,413 Change in net position - Net position, beginning of year, restated 66,269 Net position, end of year $ 66,269 See accompanying notes to the basic financial statements. 30

88 CITY OF COVINGTON, KENTUCKY Statement of Cash Flows Proprietary Funds Fiscal Year Ended June 30, 2014 Governmental Activities Internal Service Funds Cash flows from operating activities: Cash received from other funds $ 5,520,772 Cash received from other income 20,090 Cash payments to other activities (94,898) Cash payments for claims (5,733,182) Net cash used by operating activities (287,218) Cash flows from noncapital financing activities: Transfers 973,413 Cash flows from investing activities: Interest income 131 Net change 686,326 Cash and cash equivalents, beginning of year 324,819 Cash and cash equivalents, end of year $ 1,011,145 Reconciliation of operating loss to net cash used by operating activities: Operating loss $ (973,544) Adjustments to reconcile operating loss to net cash used by operating activities: Changes in assets and liabilities: Prepaid items 48,497 Due from/to other funds 669,979 Accounts payable 110,960 Claims payable (143,110) Net cash used by operating activities $ (287,218) See accompanying notes to the basic financial statements. 31

89 CITY OF COVINGTON, KENTUCKY Statement of Fiduciary Net Position Fiduciary Funds June 30, 2014 Police and Employees' Firemen's Retirement Retirement Assets Cash and cash equivalents $ 275,028 $ 240,708 Investments 3,368,996 8,282,031 Total assets 3,644,024 8,522,739 Liabilities Due to the primary government 577, ,919 Net Position Net position restricted for pensions $ 3,066,741 $ 7,745,820 See accompanying notes to the basic financial statements. 32

90 CITY OF COVINGTON, KENTUCKY Statement of Changes in Fiduciary Net Position Fiduciary Funds Fiscal Year Ended June 30, 2014 Employees' Retirement Police and Firemen's Retirement Additions Contributions: Employer contributions $ 138,459 $ 359,506 Impounding lot - 30,383 Miscellaneous 67 - Total revenue 138, ,889 Investment return: Interest and dividends 139, ,258 Net appreciation in fair value of investments 335, ,845 Total net investment return 474,728 1,133,103 Total additions 613,254 1,522,992 Deductions Benefit payments 623,756 1,446,162 Administration 12,221 28,113 Total deductions 635,977 1,474,275 Change in net position (22,723) 48,717 Net position, beginning of year 3,089,464 7,697,103 Net position, end of year $ 3,066,741 $ 7,745,820 See accompanying notes to the basic financial statements. 33

91 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 1 - Summary of Significant Accounting Policies Basis of Presentation The basic financial statements of the City of Covington, Kentucky, have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) as applied to government units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The significant accounting policies of the City are described below. Financial Reporting Entity The City of Covington is a municipality that operates under a City Manager form of government. Legislative authority is vested in the elected Mayor and four City Commissioners. As required by U.S. generally accepted accounting principles, these financial statements present the government and its component units, entities for which the government is considered to be financially accountable. Blended component units, although legally separate entities are, in substance, part of the government's operations and so data from these units are combined with data of the primary government. Each blended component unit of the City has a June 30 year end. The component units discussed below is included in the City's reporting entity as part of the primary government because of the significance of its operational and/or financial relationship with the City. Blended Component Unit Included Within the Reporting Entity. The City of Covington Municipal Properties Corporation was formed to act as an agent and to be instrumental in the financing of public improvements and projects of a capital nature for the City and for the particular purpose of acquiring real estate located within the City and constructing, acquiring and equipping thereon capital improvements, facilities, buildings, structures and related appurtenances. The Corporation finances these projects by the issuance of debt. These debt issues are secured by (l) first mortgage liens on the projects, (2) lease and option agreements between the Corporation and the City, the construction agreements and pledged receipts. The lease and option agreements require the City to pay rental, on a yearly basis with the option to renew each year, equal to the amount of bonds and interest coupons coming due in that year. If the City renews the leases from year-to-year, and pays the rentals for each year as stipulated, and when the Corporation has fully paid and retired all of the bonds, the Corporation agrees it will convey the properties to the City free and clear. Discretely Presented Component Units Included Within the Reporting Entity. Devou Properties, Inc. (a nonprofit organization) is included in the City's financial statements as a discretely presented component unit. Although a legally separate entity, Devon Properties, Inc. is included in these financial statements because of its financial accountability to the City. Devou Properties, Inc. was formed to maintain and operate the Drees Pavilion at Devou Memorial Overlook for the City of Covington, for the benefit of Devou Park. Devou Properties, Inc. is responsible for renting out the facilities for events, including weddings, receptions and corporate events. Directors of Devou Properties, Inc. are appointed by the City's Board of Commissioners, upon the recommendation of the Mayor. Any excess funds from operations of the facility are to be set aside to be used on Devou Park projects. As a discretely presented component unit, the financial statements of Devou Properties, Inc. are only included on the City's government-wide financial statements in a column that makes it clearly separate from the primary government. Devou Properties, Inc. operates on a calendar yearend basis; therefore, the financial statements for the year ended December 31, 2013, are included in the City's current financial statements. Audited financial statements of Devou Properties Inc. are available and may be obtained by contacting the City Manager. 34

92 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 1 - Summary of Significant Accounting Policies - continued Basis of Presentation Government-Wide Financial Statements The government-wide financial statements (i.e., the statement of net position and the statement of activities) report information on all of the non-fiduciary activities of the primary government. For the most part, the effect of interfund activity has been removed from these statements; however, interfund services provided and used are not eliminated. Governmental activities, which are normally supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The statement of activities demonstrates the degree to which direct expenses of a given function or segments are offset by program revenues. Direct expenses are those clearly identifiable with a specific function or segment. Program revenues include 1) charges to customers or applicants who purchase, use or directly benefit from goods, services or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Amounts paid to acquire capital assets are capitalized as assets in the government-wide financial statements, rather than reported as an expenditure. Proceeds of long-term debt are recorded as a liability in the government-wide financial statements, rather than as other financing source. Amounts paid to reduce long-term indebtedness of the reporting government are reported as a reduction of the related liability, rather than as an expenditure. Measurement Focus, Basis of Accounting and Financial Statement Presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting as are the proprietary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within sixty days of the end of the current fiscal period. Significant revenues susceptible to accrual are payroll license fees, insurance fees and grant revenues. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. 35

93 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 1 - Summary of Significant Accounting Policies - continued The City reports the following major governmental funds: The General Fund is the government's primary operating fund. It accounts for all financial resources of the general government that are not accounted for in the other funds. The Neighborhood Stabilization Program Fund accounts for U.S. Department of Housing and Urban Development funds, passed through from the State, to develop low income rental units and owner occupied homes purchased out of foreclosure. The Capital Improvement Fund accounts for funds provided to the City by the Federal and State governments and public financing for the acquisition and/or construction of capital improvements and equipment. The City reports the following proprietary funds: The City has two internal service funds. One fund is for self-insurance for the City's health and dental insurance program for City employees. The second fund is for the self-insurance of the City's liability claims. Proprietary funds distinguish operating revenues and expenses from non-operating revenues and expenses. Operating revenues and expenses generally result from providing services in connection with a proprietary fund's principal ongoing operations. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Additionally, the City reports two fiduciary funds. The two pension trust funds account for the activities of the Employees' Retirement Fund and the Police and Firemen's Retirement Fund. These funds are for the accumulation of resources for pension benefit payments to qualified retired employees (see Note 9). Assets, Deferred Inflows, Deferred Outflows, Liabilities and Net Position/Fund Balance Cash and Cash Equivalents Cash and cash equivalents include amounts in demand deposits as well as short-term investments with an initial maturity date within three months of the date acquired by the City. The City is authorized by state statute to invest in: Obligations of the United States and of its Agencies and Instrumentalities Certificates of Deposits Bankers Acceptances Commercial Paper Bonds of Other State or Local Governments Mutual Funds Cash with fiscal agent represents the balance available to be drawn from the inception of a capital lease for public improvements. Cash held in escrow represents the portion of the capital lease proceeds used to fund a debt service reserve account to satisfy debt service requirements in the final year of maturity and amounts for Devou Park maintenance. Property Tax Receivable Property taxes are levied as of January 1 on property values assessed as of the same date. The taxes are billed on approximately August 15 and are due and payable on September 30. On October 1, the bill becomes delinquent and penalties and interest may be assessed by the City. A lien may be placed on the property on October 1. 36

94 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 1 - Summary of Significant Accounting Policies - continued Notes Receivable Notes receivable are comprised of housing development and small business loans financed by a combination of resourced appropriated by the City and allocations from the U.S. Department of Housing and Urban Development (HUD). As of June 30, 2014, the City had housing development and small business loans outstanding of $16,296,455 and $1,122,401, respectively. The City has recorded an allowance of $13,860,956 on housing development and $606,881 on small business loans. Although some loans are repaid, repayment may be limited to net proceeds after payment of the first mortgage and seller closing costs and; therefore most repayments are minimal. Additionally, many loans have favorable repayments terms to encourage home ownership that include deferral and/or forgiveness if homeowners remain in the home for a specified period of time. Short-Term Interfund Receivables/Payables During the course of operations, numerous transactions occur between individual funds for goods provided or services rendered. These receivables and payables are classified as "due from/to other funds" on the balance sheet. Short-term interfund loans are classified as "interfund receivables/payables." Prepaid Items Payments made to vendors for services that will benefit periods beyond June 30, 2014, are recorded as prepaid items in both the government-wide and fund statements. The consumption method is used in the fund statements. Capital Assets General capital assets are those assets not specifically related to activities reported in a propriety fund. These assets are reported in the governmental activities column of the government-wide statement of net position. The accounting and reporting treatment applied to capital assets associated with a fund are determined by its measurement focus. General capital assets are long-lived assets of the City as a whole. When purchased, such assets are recorded as expenditures in the governmental funds and capitalized. Infrastructure, such as streets, traffic signals and signs are capitalized. The valuation basis for general capital assets are historical costs, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are recorded at their fair value on the date donated. Repairs and maintenance are recorded as expenses. Renewals and betterments are capitalized. The City maintains a capitalization threshold of one thousand dollars with the exception of infrastructure for which the threshold is twenty-five thousand dollars. Capital assets used in operations are depreciated over their estimated useful lives using the straight-line method in the government-wide financial statements. Depreciation is charged as an expense against operations and accumulated depreciation is reported on the statement of net position. The range of lives used for depreciation purposes for each capital asset class is as follows: Description Buildings Buildings and improvements Public domain infrastructure Vehicles Office equipment Governmental Activities Estimated Lives 30 years years years 5 10 years 3 10 years 37

95 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 1 - Summary of Significant Accounting Policies - continued Deferred Outflows of Resources In addition to assets, the statement of net position reports a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. The City s interest rate swap was deemed to be an effective hedge and was offset by a deferred outflow of resources in accordance with GASB No. 53. Compensated Absences The City s policy permits employees to accumulate earned but unused vacation benefits, which are eligible for payment upon separation. Vested or accumulated vacation leave that has matured and is expected to be liquidated with expendable available financial resources is reported as an expenditure and a fund liability of the governmental fund that will pay it. Accumulated sick leave lapses when employees leave employment of the City and, upon separation from service, no monetary obligation exists. Long-Term Obligations The accounting treatment of long-term debt depends on whether the assets are used in governmental fund operations or proprietary fund operations and whether they are reported in the government-wide or fund financial statements. In the government-wide financial statements, and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the governmental activities, statement of net position. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds. Long-term debt for governmental funds is not reported as a liability in the fund financial statements. The debt proceeds are reported as an other financing source and payment of principal and interest reported as expenditures. The accounting for the proprietary fund is the same in the fund statements as it is in the government-wide statements. Unearned Revenue In the statements of financial position, unearned revenue represents the amount for which revenue recognition criteria have not been met. In subsequent periods, when the incurrence of qualifying expenditures has been made, the liability for the unearned revenue is removed and the revenue is recognized. Deferred Inflows of Resources In addition to liabilities, the governmental fund financial statements report a separate section for deferred inflows of resources. Deferred inflows of resources represent an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. For the City, deferred inflows of resources include unavailable revenue, which represent receivables that will not be collected within the available period (sixty days after fiscal year-end). 38

96 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 1 - Summary of Significant Accounting Policies - continued Fund Equity Net position is the difference between assets and deferred outflows of resources less liabilities and deferred inflows of resources. Net investment in capital assets is capital assets less accumulated depreciation and any outstanding debt related to the acquisition, construction or improvement of those assets. In the governmental fund financial statements, fund balances are classified as follows: Nonspendable- Amounts that cannot be spent either because they are in a non-spendable form or because they are legally or contractually required to be maintained intact. Restricted - Amounts that can be spent only for specific purposes because of the City Charter, the City Code, state or federal laws, or externally imposed conditions by grantors or creditors. Committed - Amounts that can be used only for specific purposes determined by a formal action by City Commission ordinance or resolution. Assigned - Amounts that are designated by the Mayor for a particular purpose but are not spendable until a budget ordinance is passed or there is a majority vote approval (for capital projects or debt service) by City Commission. Unassigned- All amounts not included in other spendable classifications. When an expense is incurred that can be paid using either restricted or unrestricted resources (net position), the City's policy is to first apply the expense toward restricted resources and then toward unrestricted resources. In governmental funds, when both restricted and unrestricted resources are available for use, it is the City's police to use externally restricted resources first, then unrestricted resources - committed, assigned and unassigned - in order as needed. Revenues, Expenditures and Expenses Operating Revenues and Expenses Operating revenues and expenses generally result from providing services and producing and delivering services in connection with a proprietary fund s principal ongoing operations. Operating revenues and expenses for the proprietary funds are those that result from internal insurance premiums. Interfund Transactions Interfund services provided/used are accounted for as revenues, expenditures or expenses. Transactions that constitute reimbursements to a fund for expenditures/expenses initially made from it that are properly applicable to another fund, are recorded as expenditures/expenses in the reimbursing fund and as reductions of expenditures/expenses in the fund that is reimbursed. Use of Estimates The process of preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and fund balances, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates. Budgetary Information Annual budgets are adopted on a basis consistent with U.S. generally accepted accounting principles for all governmental funds and for proprietary funds. Special Item During the fiscal year, the City uncovered embezzlement that had been perpetrated by the former Finance Director. The City reported the amount embezzled during the fiscal year as a special item. See Note 11 for additional information. 39

97 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 2 - Stewardship, Compliance and Accountability The City follows these procedures in establishing the budgetary data reflected in the financial statements: In accordance with City ordinance, prior to June 1, the City Manager submits to the Board of Commissioners, a proposed operating budget for the fiscal year commencing the following July 1. The operating budget includes proposed expenditures and the means of financing them for the upcoming year. A public meeting is conducted to obtain taxpayer comment. Prior to June 30, the budget is legally enacted through passage of an ordinance. The City Manager is required by Kentucky revised statutes to present a quarterly report to the Mayor and Board of Commissioners explaining any variance from the approved budget. Appropriations continue in effect until a new budget is adopted. The Board of Commissioners may authorize supplemental appropriations during the year. Expenditures may not legally exceed budgeted appropriations at the fund level. Any amendments to the budget that would change fund level totals must be approved by the Board of Commissioners. Encumbrance accounting is not employed by the City. During the year, the Board of Commissioners adopted one supplementary appropriation ordinance. Appropriations lapse at year end unless a new budget has not been adopted. Excess of Expenditures over Appropriations The following funds had expenditures in excess of legally adopted appropriations for the year ended June 30, 2014: Budget Actual Federal & State Grants Fund $1,811,620 $1,917,047 Renaissance Grant Fund 502, ,592 Police Forfeiture Justice Fund 239, ,817 Police & Fire Supplemental Pay Fund 901, ,763 Devou Park Master Plan Fund 245, ,656 40

98 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 3 - Deposits Cash and Cash Equivalents Custodial Credit Risk. For deposits, this is the risk that in the event of a bank failure, the City s deposits will not be returned. The City maintains deposits with financial institutions insured by the Federal Deposit Insurance Corporation (FDIC). As allowed by law, the depository bank should pledge securities along with FDIC insurance at least equal to the amount on deposit at all times. As of June 30, 2014, $472,798 of the City's deposits are insured by the FDIC, and $11,018,019 of the City's deposits are collateralized with securities held by the pledging institution's trust department but not in the City's name. As of June 30, 2014, the City did not have any deposits in excess of insured and/or collateralized amounts. During fiscal year 2013, the City entered into a capital lease agreement for $16.04 million to fund specific public improvements. As of June 30, 2014, the City had $2,138,059 available to be drawn. Additionally, the City had $642,746 in escrow balances for debt reserves and park maintenance. As of December 31, 2013, Devou Properties, Inc. (a component unit of the City) had $1,653,105 in cash in excess of insured limits. Investments Custodial Credit Risk. For investments, this is the risk, that in the event of the failure of the counterparty, the City will not be able to recover the value of its investments that are in the possession of an outside party. Investments are made by the City as an agent for the City Employee's Retirement Fund and the Police and Firemen's Retirement Fund. The City maintains investment accounts with brokerage institutions which hold the investments registered in the City's name. As of June 30, 2014, all of the City's investments were covered by SIPC coverage or excess SIPC coverage provided by the institution, and are therefore not subject to custodial credit risk. See Note 9 for additional information. 41

99 Note 4 - Capital Assets and Depreciation City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Capital asset activity for the fiscal year ended June 30, 2014, was as follows: Governmental Activities Balance Beginning Balance of Year Additions Retirements End of Year Capital assets not being depreciated Land $ 14,339,320 $ 223,778 $ 138,786 $ 14,424,312 Land improvements 1,717,703 37,594-1,755,297 Construction in progress 34, ,209 34, ,209 Total capital assets not being depreciated 16,091, , ,614 16,847,818 Depreciable capital assets Buildings 24,903,661 2,014, ,692 26,083,465 Building improvements 12,052,787 3,043,921-15,096,708 Infrastructure 113,460,486 5,706, ,167,126 Machinery and equipment 4,700, , ,420 4,420,207 Vehicles 12,405, , ,830 12,080,551 Total depreciable capital assets 167,523,514 11,509,485 2,184, ,848,057 Less accumulated depreciation Buildings 10,604, , ,828 10,462,727 Building improvements 9,127, ,615-9,583,595 Infrastructure 95,842,522 4,482, ,325,050 Machinery and equipment 3,179, , ,420 3,061,675 Vehicles 10,372, , ,830 10,330,289 Total accumulated depreciation 129,125,882 6,732,532 2,095, ,763,336 Total depreciable capital assets, net 38,397,632 4,776,953 89,864 43,084,721 Governmental Activities capital assets, net $ 54,489,483 $ 5,706,534 $ 263,478 $ 59,932,539 Component Unit Devou Properties, Inc. Depreciable capital assets Property and equipment $ 90,124 $ 61,277 $ - $ 151,401 Less accumulated depreciation 48,224 35,217-83,441 Component Unit property and equipment, net $ 41,900 $ 26,060 $ - $ 67,960 42

100 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 4 - Capital Assets and Depreciation - continued Depreciation expense was charged to functions as follows: Governmental Activities General government $ 501,666 Police 555,431 Fire 281,164 Public improvements 5,157,133 Community development 237,138 Total Governmental Activities depreciation expense $ 6,732,532 Note 5 - Interfund Activity Interfund transactions at June 30, 2014 consisted of the following due to/from other funds and transfers in/out: Interfund Transfers Receivable Payable In Out General Fund $ 926,349 $ 1,224,684 $ 123,099 $ 2,238,043 Neighborhood Stabilization Program 226, Capital Improvement Fund 59,624 46, Nonmajor Governmental Funds 430,363 1,208,673 1,264, ,099 Internal Service Funds 837, ,413 - Due To/From Other Funds $ 2,480,107 $ 2,480,107 $ 2,361,142 $ 2,361,142 Interfund receivables/payables represent short-term loans from one fund to another to cover cash overdrafts. Much of the City's revenue is received in the general fund, and then transferred to various other funds in order to fund immediate expenditures. Due From Fiduciary Activities/Due To Primary Government As of June 30, 2014, the General Fund provided short-term loans of $577,283 to the Employees Retirement Fund and $776,919 to the Police & Firemen s Retirement Fund. Interfund Transfers Transfers are typically used to move unrestricted revenues collected in one fund to finance various programs accounted for in another fund in accordance with budgetary authorizations and to fund debt service payment when they become due. Much of the City s revenue is received in the General Fund and transferred to various other funds in order to fund immediate expenditures. Note 6 - Short-Term Debt On July 1, 2013, the City issued a Tax and Revenue Anticipation Note (TRAN) in the amount of $3,500,000 for the purpose of providing working capital in advance of tax and revenue cash flows. This note carried a fixed rate of 1.75% and matured on June 30, 2014, at which time it was repaid out of the General Fund. 43

101 Note 7 - General Long-Term Debt Capital Lease Obligations City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Capital lease obligations in the government-wide financial statements are reported as liabilities at lease inception. The related assets along with depreciation are reported at that time. Lease payments are reported as a reduction of the liability. For capital lease obligations in governmental funds, "Other Financing Sources Inception of capital lease" was recorded at lease inception. Lease payments are recorded as expenditures. The following capital lease obligations payable are payable from governmental fund revenues. The City has entered into various lease agreements as lessee for financing the acquisition of capital assets. These lease agreements qualify as capital leases for accounting purposes and therefore, have been recorded at the present value of the future minimum lease payments as of the date of their inception. The following is an analysis of the capital assets acquired through capital leases as of June 30, 2014: Capital Assets Buildings $ 9,409,484 Building improvements 4,824,846 Equipment 894,145 Land 7,215,848 Infrastructure 6,029,482 Vehicles 2,555,052 Total cost 30,928,857 Accumulated depreciation (5,430,095) Net Book Value $ 25,498,762 44

102 Note 7 - General Long-Term Debt continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 The following is a schedule of the future minimum lease payments under these capital leases, and the present value of the net minimum lease payments at June 30, 2014: Notes and Bonds Fiscal Year Ending June 30, 2015 $ 2,606, ,507, ,524, ,263, ,214, ,114, ,513, ,526, ,646,522 Total minimum lease payments 35,917,727 Less amounts representing interest 7,943,742 Present value of minimum lease payments $ 27,973,985 The following schedule summarizes outstanding long-term mortgage bonds and notes payable at June 30, 2014: Interest Mature Date Purpose Rate June 30, Issued Outstanding Mortgage Bonds 2003 Series Refunding % 2018 $ 4,996,000 $ 1,679, Series Pension funding Variable ,410,000 11,090,000 KY Infrastructure Auth. Rainwater project 2.00% ,197, ,918 KY Bond Corp Series A Refinancing 2.00% ,000 37,917 Recovery Zone Economic Dev River Center % ,650,000 2,530,000 Interest on the variable rate 2004 Series Pension Obligation Bonds is paid at the rate of interest determined by the Remarketing Agent, determined on a weekly basis. The rate was 0.30% at June 30, The bonds may be called prior to maturity at rates and redemption premiums specified in each issue. 45

103 Note 7 - General Long-Term Debt continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Assuming no issues are called prior to maturity, the minimum obligations of the City at June 30, 2014 are as follows: Interest Rate Swap Fiscal Year Ending June 30, Principal Interest Total 2015 $ 1,048,254 $ 720,763 $ 1,769, ,051, ,059 1,726, ,096, ,581 1,723, ,143, ,641 1,721, , ,585 1,264, ,166,517 2,138,675 6,305, ,217,438 1,033,625 6,251, ,372,853 61,155 1,434,008 $ 15,825,835 $ 6,370,084 $ 22,195,919 Objective of the Interest Rate Swap. As a means to lower its borrowing costs, when compared against fixedrate bonds at the time of issuance in May 2005, the City entered into an interest rate swap in connection with its $14.4 million 2004 Series variable-rate general obligation bonds. The intention of the swap was to effectively change the City's variable interest rate on the bonds to a synthetic fixed rate of 4.56 percent. The interest rate swap is considered a hedging derivative instrument. Terms. The bonds mature on December 1, 2029, and the related swap agreement matures on December 1, The swap's initial notional amount of $14.4 million matched the $14.4 million variable-rate bonds on an amortizing schedule. The swap was entered at the same time the bonds were issued (December 2004). Starting in fiscal year 2006, the notional value of the swap and the principal amount of the associated debt decline. Under the swap, the City pays the counterparty a fixed payment of 4.56 percent and receives a variable payment based on the London Interbank Offered Rate (LIBOR). Conversely, the bond's variablerate coupons are based on a rate determined by the remarketing agent in accordance with the indenture. Fair Value. The swap had a fair value of $243,094 as of June 30, 2014, representing a decrease in fair value of $468,711 from June 30, The fair value of the swap was offset by a deferred outflow of resources. The swap's fair value may be countered by a reduction in total interest payments required under the variablerate bonds, creating a lower synthetic interest rate. Because the coupons on the City's variable-rate bonds adjust to changing interest rates, the bonds do not have a corresponding fair value increase or decrease. Credit Risk. As of June 30, 2014, the City was exposed to credit risk in the amount of the swap's fair value. The swap counterparty was rated AA by Standard & Poor's and Aa2 by Moody's Investors Service as of June 30, Swap Payments and Associated Debt. For the year ended June 30, 2014, the City did not receive any payments from the agreement. Using rates as of June 30, 2014, debt service requirements of the variablerate debt and net swap payments, assuming current interest rates remain the same for their term, were as follows. As rates vary, variable-rate bond interest payments and net swap payments will vary. 46

104 Note 7 - General Long-Term Debt continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Fiscal Year Ending June 30, Principal Interest Swap, Net Total Conduit Debt Obligations 2015 $ 470,000 $ 9,877 $ 245,946 $ 725, , , , , , , , , , , , , ,305,000 1,562,677-4,867, ,225, ,533-4,941, ,000 22, ,035 $ 11,090,000 $ 4,046,011 $ 245,946 $ 15,381,957 The City has issued Industrial Revenue Bonds to provide financial assistance to private-sector entities for the acquisition and construction of industrial and commercial facilities deemed to be in the public interest. The bonds are secured by the property financed and are payable solely from payments received on the underlying mortgage loans. Upon repayment of the bonds, ownership of the acquired facilities transfers to the private-sector entity served by the bond issuance. Neither the City, state, nor any political subdivision thereof, is obligated in any manner for repayment of the bonds. Accordingly, the bonds are not reported as liabilities in the accompanying financial statements. As of June 30, 2014, there was $62.7 million outstanding in Industrial Revenue Bonds. During the year ended June 30, 2014, the following changes occurred in long-term liabilities: Debt Issue Restated Amounts Beginning Ending Due Within Balance Issued Redeemed Balance One Year Mortgage bonds and notes: 2003 Refunding $ 2,062,000 $ - $ (383,000) $ 1,679,000 $ 394, Series 11,535,000 - (445,000) 11,090, ,000 KIA Rainwater Harvest 513,704 - (24,786) 488,918 26,337 KY Bond Corp 2010 Series A 102,917 - (65,000) 37,917 37,917 Recovery Zone Bonds 2,650,000 - (120,000) 2,530, ,000 Total mortgage bonds and notes 16,863,621 - (1,037,786) 15,825,835 1,048,254 Capital lease obligations: Infrastructure/equipment 29,707,976 - (1,733,991) 27,973,985 1,797,882 Net pension liability: Employees' Retirement 1,772,079 1,068,709 (1,221,779) 1,619,009 - Police & Firemen's Retirement 3,330,132 1,927,437 (2,620,074) 2,637,495 - Total net pension liability 5,102,211 2,996,146 (3,841,853) 4,256,504 Compensated absences 1,244,494 1,380,801 (1,244,494) 1,380,801 1,380,801 Total Long-Term Liabilities $ 52,918,302 $ 4,376,947 $ (7,858,124) $ 49,437,125 $ 4,226,937 47

105 Note 7 - General Long-Term Debt continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Compensated absences will be liquidated by the City's general fund. Compensated absences are required to be used within one year, therefore the balance is classified as due within one year. Note 8 - Risk Management The City is exposed to various risks to loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters. The City has established a Liability Self Insurance Fund (an internal service fund) to account for and finance its uninsured risks of loss. Under this program, the Liability Self Insurance Fund provides coverage for all losses. The City purchases commercial insurance for fire and extended coverage losses. All funds of the City participate in the program and make payments to the Liability Self Insurance Fund; however, the payments are not based on actuarial estimates of the amounts needed to pay prior and current-year claims but are intended to establish a reserve for catastrophic losses. That reserve was $714,000 at June 30, Changes in the Liability Self Insurance Fund s claims liability amount during the fiscal year ended June 30, 2014 were as follows: Claims liability at July 1 $ 714,000 $ 792,500 Change in claims and estimates 652, ,364 Claims payments (652,118) (592,864) Claims liability at June 30 $ 714,000 $ 714,000 Additionally, the City accrued a liability of approximately $193,000 during fiscal year 2013 in the General Fund for a settlement of pension payments that was paid off during The City has also established a Medical Self Insurance Fund. Employees may elect to participate in this program or certain other medical insurance programs offered by the City. Under this program the first $125,000 of a participants ' medical claims are payable by the Medical Self Insurance Fund. The City purchases insurance for claims in excess of coverage provided by the fund. All funds of the City participate in the program and make payments to the Medical Self Insurance Fund based on historical estimates of the amounts needed to pay prior and current year claims. The claims liability reported at June 30, 2014 is $945,614. Changes in the Medical Self Insurance Fund s claims liability amount during the fiscal year ended June 30, 2014 were as follows: Claims liability at July 1 $ 1,088,724 $ 993,291 Change in claims and estimates 4,937,955 3,963,730 Claims payments (5,081,065) (3,868,297) Claims liability at June 30 $ 945,614 $ 1,088,724 There have been no significant reductions in insurance coverage from the prior year. There have been no settlements in excess of insurance coverage in the past three years. 48

106 Note 9 - Employee Retirement Plans City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 The City of Covington maintains two single employer, defined benefit pension plans: Employees' Retirement Plan and Police and Firemen's Retirement Plan. A separate, audited post-employment benefit plan report prepared in accordance with U.S. generally accepted accounting principles is not available for these plans. Summary of Significant Accounting Policies Basis of Accounting. The plans financial statements are prepared using the accrual basis of accounting. Plan member contributions are recognized in the period in which the contributions are due. Employer contributions to each plan are recognized when due and the employer has made a formal commitment to provide the contributions. Benefits and refunds are recognized when due and payable in accordance with the terms of each plan. Method Used to Value Investments. Investments are reported at fair value. Short-term investments are reported at cost, which approximates fair value. Securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates. Mortgages are valued on the basis of future principal and interest payments, and are discounted at prevailing interest rates for similar instruments. The fair value of real estate investments is based on independent appraisals. Investments that do not have all established market are reported at estimated fair value. A. Employees Retirement Plan Plan Description. The Employees' Retirement Plan is a single-employer defined benefit pension plan that covers substantially all non-public safety employees hired prior to April 1, The plan is administered by the Board of Trustees, which consists of five members: the Mayor, the City Manager, the Finance Director, the Human Resources Director, and a former employee who is a member of the Fund appointed by the Mayor. Benefits Provided. The plan provides retirement, disability and death benefits to plan members and their beneficiaries. Plan members who retire with 10 years of service at age 50 are eligible to receive a monthly benefit of 2.5% of their average salary for each of the first 20 years of service, 2.0% for the next 5 years of service, and 1.0% for each additional year, with a maximum benefit of 65% of average salary. Plan members who were terminated before age 50, but had 10 years of service are eligible for an accrued benefit as of termination of employment payable upon attainment of age 50. Plan members terminating with less than 10 years of service are entitled to a refund of their contributions without interest. Plan members eligible for an occupational disability retirement shall receive an annuity equal to 60% of an average of their three highest salary years. Plan members eligible for a non-occupational disability retirement are entitled to an annuity equal to 2.5% of their average salary, subject to a minimum payment of 25% of such average salary, and a maximum payment of 65% of their average salary, if they have at least 10 years of service. Non-occupational death benefits are equal to the total contributions made to the Plan, if the employee had less than 10 years of service, or an annuity equal to 1.5% of their average salary for each year of service, adjusted by 0.50 for the first minor child and by 0.25 for each additional child, with a maximum family benefit of 50% of the average salary if the employee had at least 10 years of service. Occupational death benefits are equity to 50% of average salary, increasing by 10% for each minor child, with a maximum equal to 70% of average salary. Cost-of-living adjustments (COLA) are provided at the discretion of the Board of Trustees. Benefits are provided and may be amended by City ordinance. The Board of Trustees approved a 1.5% COLA as of January 1,

107 Note 9 - Employee Retirement Plans continued A. Employees Retirement Plan - continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Contributions. As of June 30, 2014, there are 43 retirees and beneficiaries currently receiving benefits. The City is required to contribute at an actuarially determined rate. Contribution requirements of the City are established and may be amended by City ordinance. Administrative costs are financed through investment earnings. The plan is closed to new entrants and doesn t have any active plan members. Investment Policy. The plan s policy in regard to the allocation of invested assets is established and may be amended by the Board of Trustees by a majority vote of its members. It is the policy of the Board to pursue an investment strategy that reduces risk through the prudent diversification of the portfolio across a broad selection of distinct asset classes. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. Best estimates of arithmetic real rates of return for each major asset class included in the pension plan s target asset allocation as of June 30, 2014: Asset Class Target Allocation Long-Term Expected Real Rate of Return Fixed income 20% Equity funds 60% Real assets 10% Low volatility 10% Total 100% 4.0% 8.0% 6.5% 5.0% Concentrations. The Employees Retirement Plan investments concentration as of June 30, 2014: Investment Concentration Cash and money markets 14% Bond mutual funds 19% Equity mutual funds 56% Other assets 11% 100% Rate of Return. For the year ended June 30, 2014, the annual money-weighted rate of return on the plan investments, net of pension plan investment expense was 16.20%. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested. 50

108 Note 9 - Employee Retirement Plans continued A. Employees Retirement Plan - continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Net Pension Liability. The Employees Retirement net pension liability was measured as of June 30, 2014, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The components of the net pension liability of the City at June 30, 2014, were as follows: Total pension liability $ 4,685,750 Employee's Retirement Plan fiduciary net position (3,066,741) City's net pension liability $ 1,619,009 Employees' Retirement Plan net position as a percentage of total pension liability 65.45% Actuarial Assumptions. The total pension liability was determined by an actuarial valuation as of June 30, 2014, using the following actuarial assumptions, applied to all periods included in the measurement: Investment rate of return 7.5%, net of pension plan investment expense, including inflation Mortality rates were based on the RP-2000 Mortality Table projected to 2021 based on Scale AA. The actuarial assumptions used in the June 30, 2014 valuation were based on the results of an actuarial experience study for the period July 1, 2013 June 30, Discount rate. The discount rate used to measure the total pension liability was 7.5 percent. The projection of cash flows used to determine the discount rate assumed the City contributions will be made at rates equal to the difference between actuarially determined contribution rates and the member rate. Based on those assumptions, the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. 51

109 Note 9 - Employee Retirement Plans continued A. Employees Retirement Plan - continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Changes in Employees Net Pension Liability. Changes in the Employees Retirement net pension liability for the year ended June 30, 2014 were as follows: Total Plan Pension Fiduciary Net Pension Liability Net Position Liability (a) (b) (a) - (b) Balance, June 30, 2013 $ 4,861,543 $ 3,089,464 $ 1,772,079 Changes for the year: Interest 342, ,966 Benefit changes 64,980-64,980 Difference between expected and actual experience (20,562) - (20,562) Changes of assumptions 24,786-24,786 Benefit payments (587,963) - (587,963) Contributions - employer - 138,459 (138,459) Net investment income - 474,728 (474,728) Benefit payments - (623,756) 623,756 Administrative expense - (12,221) 12,221 Other - 67 (67) Net changes (175,793) (22,723) (153,070) Balance, June 30, 2014 $ 4,685,750 $ 3,066,741 $ 1,619,009 Sensitivity of the net pension liability to changes in the discount rate. The following presents the net pension liability of the City, calculated using the discount rate of 7.5 %, as well as what the City s net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (6.5%) or 1-percentagepoint higher (8.5%) than the current rate: Discount Rate Net Pension Liability 1% decrease 6.5% $ 1,932,982 Current discount rate 7.5% $ 1,619,009 1% increase 8.5% $ 1,340,552 Pension Revenue/Expense. For the year ended June 30, 2014, the City recognized pension revenue of $153,070. B. Police and Firemen s Retirement Plan Plan Description. The Police and Firemen's Retirement Plan is a single-employer defined benefit pension plan that covers all retired police and firemen who were receiving benefits prior to August 1, The plan is administered by the Board of Trustees, which consists of five members: the Mayor, the City Manager, the Finance Director, and two retired members of the police and fire department. 52

110 Note 9 - Employee Retirement Plans continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 B. Police and Firemen s Retirement Plan - continued Benefits Provided. The plan provides retirement, disability and death benefits to plan members and their beneficiaries as provided under Kentucky Revised Statutes (KRS) to Plan members who retire with 20 years of service at age 50 are eligible to receive a monthly benefit of 2.5% of their average salary for each of the first 30 years of service, with a maximum benefit of 75% of average salary and a minimum monthly benefit of $ Plan members who were terminated before age 50, but had 20 years of service are eligible for an accrued benefit as of termination of employment payable upon attainment of age 50. Plan members terminating with less than 20 years of service are entitled to a refund of their contributions without interest. Plan members eligible for an occupational disability retirement shall receive an annuity equal to 70% of the last salary, with a maximum benefit, including basic Workers Compensation, is 100% of the last salary, and a minimum of the greater of $ monthly benefit or 2.5% of average salary of each year of service. Plan members eligible for a non-occupational disability retirement are entitled to an annuity equal to 2.5% of their average salary, subject to a minimum monthly benefit of $512.50, and a maximum payment of 50% of their average salary, if they have at least 10 years of service. Beneficiaries are entitled to non-occupational death benefits for employees who had 3 years of service and died from causes other than in the performance of duty. Benefits include 1.5% of average salary for each year of service plus total cost-of-living (COL) increases retired members may have received in their annuity for beneficiaries who are at least age 45. If the beneficiary becomes totally disabled before age 45 or has a minor child or children, payments will begin immediately. If there are minor children under the age of 18, the annuity percentage credit shall be increased by a factor of 0.50 on account of the first child and by a factor of 0.25 on account of each additional child, subject to a maximum combined payment of 75% of average salary. If the pensioner is not survived by a widow and there are minor children a benefit of 50% of average salary plus total COL increases for the first minor child, plus 15% additional for the second minor child, plus 10% additional if there are 3 or more minor children, to a maximum payment of 75% of average salary (excluding COL). These benefits will be payable until age 18 or, in the case of a full-time student, until age 23. In the situation of an occupational death, monthly benefits are equal to 50% of the last rate of salary plus total COL increases, payable to the survivor until they die or remarry. If there are minor children under age 18, an additional 25% shall be paid until the last child reaches age 18, to a combined maximum benefit of 75% of the final rate of salary (excluding COL). If the pensioner is not survived by a widow and there are minor children a benefit of 50% of average salary plus total COL increases for the first minor child, plus 15% additional for the second minor child, plus 10% additional if there are 3 or more minor children, to a maximum payment of 75% of average salary (excluding COL). These benefits will be payable until age 18 or, in the case of a full-time student, until age 23. If neither a widow nor minor children survive the member, each dependent parent shall be entitled to an annuity equal to 25% of the member s last rate of salary. Cost-of-living adjustments (COLA) are provided at the discretion of the Board of Trustees. Benefits are provided and may be amended by City ordinance. The Board of Trustees approved a 2.0% COLA as of July 1, Contributions. As of June 30, 2014, there are 72 retirees and beneficiaries currently receiving benefits. The City is required to contribute at an actuarially determined rate. Contribution requirements of the City are established under KRS Administrative costs are financed through investment earnings. The plan is closed to new entrants and doesn t have any active plan members. Investment Policy. The plan s policy in regard to the allocation of invested assets is established and may be amended by the Board of Trustees by a majority vote of its members. It is the policy of the Board to pursue an investment strategy that reduces risk through the prudent diversification of the portfolio across a broad selection of distinct asset classes. 53

111 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 9 - Employee Retirement Plans continued B. Police and Firemen s Retirement Plan - continued The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. Best estimates of arithmetic real rates of return for each major asset class included in the pension plan s target asset allocation as of June 30, 2014: Asset Class Target Allocation Long-Term Expected Real Rate of Return Fixed income 20% Equity funds 60% Real assets 10% Low volatility 10% Total 100% 4.0% 8.0% 6.5% 5.0% Concentrations. The Police and Firemen s Retirement Plan investments concentration as of June 30, 2014: Investment Concentration Cash and money markets 16% Bond mutual funds 19% Equity mutual funds 55% Other assets 10% 100% Rate of Return. For the year ended June 30, 2014, the annual money-weighted rate of return on the plan investments, net of pension plan investment expense was 16.48%. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested. 54

112 Note 9 - Employee Retirement Plans continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 B. Police and Firemen s Retirement Plan - continued Net Pension Liability. The Police and Firemen s Retirement net pension liability was measured as of June 30, 2014, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The components of the net pension liability of the City at June 30, 2014, were as follows: Total pension liability $ 10,383,315 Police and Firemen's Retirement Plan fiduciary net position (7,745,820) City's net pension liability $ 2,637,495 Police and Firemen's Retirement Plan net position as a percentage of total pension liability 74.60% Actuarial Assumptions. The total pension liability was determined by an actuarial valuation as of June 30, 2014, using the following actuarial assumptions, applied to all periods included in the measurement: Investment rate of return 7.5%, net of pension plan investment expense, including inflation Mortality rates were based on the RP-2000 Combined Table with Blue Collar and Multi-Employer adjustment projected to 2020 for health retirees, the RP-2000 Mortality for Disabled Annuitants projected to 2020 for disabled retirees and surviving spouses. The actuarial assumptions used in the June 30, 2014 valuation were based on the results of an actuarial experience study for the period July 1, 2013 June 30, Discount rate. The discount rate used to measure the total pension liability was 7.5%. The projection of cash flows used to determine the discount rate assumed the City contributions will be made at rates equal to the difference between actuarially determined contribution rates and the member rate. Based on those assumptions, the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. 55

113 Note 9 - Employee Retirement Plans continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 B. Police and Firemen s Retirement Plan - continued Changes in Police and Firemen s Net Pension Liability. Changes in the Police and Firemen s net pension liability for the year ended June 30, 2014 were as follows: Total Plan Pension Fiduciary Net Pension Liability Net Position Liability (a) (b) (a) - (b) Balance, June 30, 2013 $ 11,027,235 $ 7,697,103 $ 3,330,132 Changes for the year: Interest 774, ,059 Benefit changes 38,609-38,609 Difference between expected and actual experience (17,688) - (17,688) Benefit payments (1,438,900) - (1,438,900) Contributions - employer - 359,506 (359,506) Net investment income - 1,133,103 (1,133,103) Benefit payments - (1,446,162) 1,446,162 Administrative expense - (28,113) 28,113 Other - 30,383 (30,383) Net changes (643,920) 48,717 (692,637) Balance, June 30, 2014 $ 10,383,315 $ 7,745,820 $ 2,637,495 Sensitivity of the net pension liability to changes in the discount rate. The following presents the net pension liability of the City, calculated using the discount rate of 7.5 %, as well as what the City s net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (6.5%) or 1-percentagepoint higher (8.5%) than the current rate: Discount Rate Net Pension Liability 1% decrease 6.5% $ 3,276,884 Current discount rate 7.5% $ 2,637,495 1% increase 8.5% $ 2,066,909 Pension Revenue/Expense. For the year ended June 30, 2014, the City recognized pension revenue of $692,637. C. County Employees Retirement System (CERS) City employees hired subsequent to April 1, 1977, who work at least 100 hours per month, participate in the County Employees Retirement System (CERS). Under the provisions of Kentucky Revised Statute , the Board of Trustees of Kentucky Retirement Systems administers the CERS. The plan issues separate financial statements which may be obtained by request from Kentucky Retirement Systems, 1260 Louisville Road, Frankfort, Kentucky

114 Note 9 - Employee Retirement Plans - continued City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 C. County Employees Retirement System (CERS) - continued Plan Description - CERS is a cost-sharing multiple-employer defined benefit pension plan that covers substantially all regular full-time members employed in positions of each county and school board, and any additional eligible local agencies electing to participate in the System. The plan provides for retirement, disability, and death benefits to plan members. Retirement benefits may he extended to beneficiaries of plan members under certain circumstances. Cost-of-living adjustments are provided at the discretion of the state legislature. Non-Hazardous Contributions - For the year ended June 30, 2014, all plan members were required to contribute 5% of their annual creditable compensation. Any plan members that entered the retirement plan on or after September 1, 2008 are required to contribute an additional 1% of their annual creditable compensation for health insurance. Participating employers were required to contribute at an actuarially determined rate. Per Kentucky Revised Statute Section (3), normal contribution and past service contribution rates shall be determined by the Board on the basis of an annual valuation last preceding July 1 of a new biennium. The Board may amend contribution rates as of the first day of July of the second year of a biennium, if it is determined on the basis of a subsequent actuarial valuation that amended contribution rates are necessary to satisfy requirements determined in accordance with actuarial bases adopted by the Board. For the year ended June 30, 2014, participating employers contributed 18.89% of creditable compensation. Administrative costs of CERS are financed through employer contributions and investment earnings. Hazardous Contributions - For the year ended June 30, 2014, plan members were required to contribute 8% of their annual creditable compensation. Any plan members that entered the retirement plan on or after September 1, 2008 are required to contribute an additional 1% of their annual creditable compensation for health insurance. The City was required to contribute at an actuarially determined rate. Per Kentucky Revised Statute Section (3), normal contribution and past service contribution rates shall be determined by the Board on the basis of an annual valuation last preceding July l of the second year of a biennium, if it is determined on the basis of a subsequent actuarial valuation that amended contribution rates are necessary to satisfy requirements determined in accordance with actuarial bases adopted by the Board. For the year ended June 30, 2014, participating employers contributed 35.70% of each employee's creditable compensation. Administrative costs of CERS are financed through employer contributions and investment earnings. The City s contributions to CERS for the fiscal years ended June 30, 2014, 2013, and 2012 were $6,292,374, $6,561,961, and $6,423,348, respectively, which equaled the required contributions each fiscal year. Medical Insurance Plan - The CERS provides post-retirement healthcare benefits to eligible members and dependents, under a cost-sharing multiple employer defined benefit plan. Medical benefits are offed to members who have retired from service or disability. The post-retirement healthcare is financed through member contributions and state appropriations. 57

115 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 10 - Fund Balances Fund balance is classified as nonspendable, restricted, committed, and/or unassigned based primarily on the extent to which the City is bound to observe constraints imposed upon the use of the resources in the governmental funds. The constraints placed on fund balance for the major funds and all other governmental funds are presented below: Nonmajor Total Capital Governmental Governmental Fund Balances General Improvement Funds Funds Nonspendable Prepaid expenses $ 25,515 $ - $ - $ 25,515 Restricted for Capital projects - 4,705,268-4,705,268 Debt service , ,000 HUD programs - - 1,186,807 1,186,807 Devou Park maintenance ,989 46,989 Other grant programs ,139 16,139 Total Restricted - 4,705,268 1,650,935 6,356,203 Committed to Police , ,695 Debt service , ,170 Total Committed , ,865 Unassigned 2,178,928 - (75,586) 2,103,342 Total Fund Balance $ 2,204,443 $ 4,705,268 $ 2,003,214 $ 8,912,925 At June 30, 2014, the following funds had a deficit fund balance: One Stop Shop Fund $ 10,238 Devou Park Maintenance Fund $ 65,348 The General Fund provides transfers to cover deficit balances; however, this is done when cash is needed rather than when accrual occur. 58

116 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 11 Contingencies The City is a defendant in a number of lawsuits pertaining to matters that are incidental to performing routine governmental and other funds. Management anticipates that any potential claims against the City would be covered by the self-insurance reserve and would not materially affect the City s financial position. Amounts grantor agencies pay to the City are subject to audit and adjustments by the grantor, principally the federal government. The grantor may require refunding by the City for any disallowed costs. Management cannot determine amounts grantors may disallow in future periods. However, based on prior experience, management believes any refunds would be immaterial to its financial statement as of June 30, Note 12 - Subsequent Events On July 1, 2014, the City issued $3,500,000 in tax and revenue anticipation notes, bearing interest at 2.75% and maturing on June 30, On August 6, 2014, the City issued $18,635,000 in Series 2014 general obligation bonds to finance the acquisition, construction, installation and equipping of multiple public projects and to currently refund a 2008 capital lease obligation with the Kentucky League of Cities Funding Trust. On October 21, 2014, the City issued $10,960,000 in Series 2014B taxable general obligation refunding bonds to refund the Series 2004 taxable variable rate general obligation funding bonds. Note 13 - Change in Accounting Principles and Restatement The City adopted Governmental Accounting Standards Board (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities. This Statement reclassifies certain items that were previously reported as assets and liabilities as deferred outflows of resources or deferred inflows of resources or recognizes certain items that were previously reported as assets or liabilities as outflows of resources (expenses/expenditures) or inflows of resources (revenues). This financial report has been updated in accordance with GASB Statement No. 65. The City adopted GASB Statement No. 66, Technical Corrections-2012-an amendment of GASB Statements No. 10 and 62. This Statement resolves conflicting accounting and financial reporting guidance that could diminish the consistency of financial reporting and thereby enhance the usefulness of the financial reports. GASB Statement No. 66 did not have an effect on the financial statements of the City. The City adopted GASB Statement No. 67, Financial Reporting for Pension Plans an amendment of GASB Statement No. 25. This Statement establishes standards of financial reporting and specifies the required approach to measuring pension liability of employers for benefits provided through the pension plan. The Statement also requires enhanced note disclosures and schedules of required supplementary information that will be presented by the pension plans that are within its scope. This financial report has been updated in accordance with GASB Statement No. 67. Related to its implementation of GASB Statement No. 67, the City elected to early implement the requirements of GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27, for the Employees and Police and Firemen s Pension Plans. The information was not available for early implementation on the CERS. This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, deferred inflows of resources, and expenses/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. The Statement also requires enhanced note disclosures and schedules of required supplementary information that will be presented by the pension plans that are within its scope. 59

117 City of Covington, Kentucky Notes to the Basic Financial Statements For the Fiscal Year Ended June 30, 2014 Note 13 - Change in Accounting Principles and Restatement - continued The City adopted GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. This Statement provides consistent reporting and disclosure requirements by those governments that extend nonexchange financial guarantees and by those governments that receive nonexchange financial guarantees. Statement No. 70 did not have an effect on the financial statements of the City. The implementation of GASB Statement Nos. 65 and 68 had the following effect: Governmental Activities Net position, June 30, 2013 $ 31,350,567 Recognition of unamortized bond issue costs as outflows (226,377) Recognition of net pension liabilities (6,282,326) Restated net position, June 30, 2013 $ 24,841,864 Additionally, the City s governmental fund balances and medical self-insurance fund net position as of June 30, 2013 have been adjusted to correct prior years interfund transactions. These adjustments had the following effect: General Fund Nonmajor Governmental Funds Fund balance, June 30, 2013 $ 779,868 $ 2,013,303 Interfund transaction corrections 368, ,000 Restated fund balance, June 30, 2013 $ 1,148,435 $ 2,414,303 Internal Service Funds Net position, June 30, 2013 $ 835,836 Interfund transaction corrections (769,567) Restated net position, June 30, 2013 $ 66,269 60

118 Required Supplementary Information

119 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund Fiscal Year Ended June 30, 2014 Revenues: Taxes: Budgeted Amounts Actual Variance with Original Final Amounts Final Budget Real property $ 6,489,664 $ 6,716,664 $ 6,488,714 $ (227,950) Franchise 1,983,543 2,028,888 2,131, ,154 Insurance premium 4,910,692 5,759,752 5,672,059 (87,693) Licenses and permits: Payroll license fees 22,532,651 22,287,904 22,222,546 (65,358) Net profits license fees 2,881,505 2,709,557 2,829, ,316 Liquor and beer licenses 120, , ,668 27,393 Other licenses and permits 118, , ,243 4,802 Intergovernmental 780,369 1,057,729 1,179, ,673 Fines and forfeitures 418, , ,625 46,542 Charges for services: Waste fees 2,457,984 2,484,044 2,375,586 (108,458) Parking 1,465,100 1,554,553 1,554, Squad runs 1,332,835 1,332,835 1,391,914 59,079 Rental property 350, , ,388 27,019 Other 21,080 59, ,034 78,921 Interest 5,000 5,000 3,181 (1,819) Miscellaneous 308, , , ,535 Total revenues 46,176,002 47,519,235 47,743, ,518 Expenditures: Current: General government: Administration department: Payroll 711, , ,299 (126,331) Contractual services 407, , ,841 (17,624) Materials and supplies 19,500 41,439 37,373 4,066 Miscellaneous 24,000 15,103 17,821 (2,718) Total administrative $ 1,163,072 $ 1,530,727 $ 1,673,334 $ (142,607) 61

120 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund - continued Fiscal Year Ended June 30, 2014 Expenditures - continued Current - continued : General government - continued : Legal department: Payroll 485,646 Budgeted Amounts Actual Variance with Original Final Amounts Final Budget $ $ 467,220 $ 436,714 $ 30,506 Contractual services 38,150 52,371 42,908 9,463 Materials and supplies 2,000 4,000 3, Miscellaneous 8,600 8,789 6,203 2,586 Total legal 534, , ,206 43,174 Finance department: Payroll 943,253 1,001, ,181 56,146 Contractual services 348, , ,401 (20,096) Materials and supplies 8,850 17,600 16,061 1,539 Miscellaneous 4,900 5,400 5, Total finance 1,305,628 1,504,632 1,466,828 37,804 Total general government 3,003,096 3,567,739 3,629,368 (61,629) Police: Payroll 11,507,374 11,902,749 12,344,586 (441,837) Contractual services 417, , ,015 96,094 Materials and supplies 386, , ,530 (64,969) Miscellaneous 15,000 13,000 11,974 1,026 Total police 12,326,599 12,758,419 13,168,105 (409,686) Fire: Payroll 11,941,163 11,828,813 11,653, ,270 Contractual services 269, , ,256 13,142 Materials and supplies 292, , ,283 48,570 Miscellaneous - 3,600 3,761 (161) Total fire $ 12,503,503 $ 12,504,664 $ 12,267,843 $ 236,821 62

121 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund - continued Fiscal Year Ended June 30, 2014 Expenditures - continued Current - continued : Public improvement: Payroll 4,115,675 Budgeted Amounts Actual Variance with Original Final Amounts Final Budget $ $ 4,267,513 $ 4,182,613 $ 84,900 Contractual services 3,382,272 3,611,717 3,586,200 25,517 Materials and supplies 723,467 1,119,759 1,021,638 98,121 Miscellaneous 12,810 19,633 1,130 18,503 Total public improvement 8,234,224 9,018,622 8,791, ,041 Community development: Economic development: Payroll 1,233,796 1,568,649 1,466, ,012 Contractual services 234, , ,896 (15,372) Materials and supplies 10,600 47,766 55,072 (7,306) Miscellaneous 501, , , Total economic development 1,980,151 2,533,975 2,454,467 79,508 Total community development 1,980,151 2,533,975 2,454,467 79,508 Parking garages: Contractual services 799, , ,835 43,876 Total parking garages 799, , ,835 43,876 Debt service: Principal 3,043,851 1,751,359 2,326,777 (575,418) Interest 2,158,384 1,808,087 1,219, ,578 Total debt service 5,202,235 3,559,446 3,546,286 13,160 Total expenditures $ 44,049,398 $ 44,718,576 $ 44,589,485 $ 129,091 63

122 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund - concluded Fiscal Year Ended June 30, 2014 Expenditures - concluded Budgeted Amounts Actual Variance with Original Final Amounts Final Budget Excess (deficiency) of revenues over (under) expenditures $ 2,126,604 $ 2,800,659 $ 3,154,268 $ 95,427 Other Financing Sources (Uses) Transfers in 323, , ,099 Proceeds on sale of assets ,684 33,684 Transfers out (2,700,000) (2,689,432) (2,238,043) (451,389) Total other financing sources (uses) (2,376,604) (2,689,432) (2,081,260) (294,606) Special item - (17,000) (17,000) - Net change in fund balance (250,000) 94,227 1,056,008 $ (199,179) Fund balance, beginning of year, restated 1,148,435 1,148,435 1,148,435 Fund balance, end of year $ 898,435 $ 1,242,662 $ 2,204,443 64

123 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - Neighborhood Stabilization Program Fund Fiscal Year Ended June 30, 2014 Budgeted Amounts Actual Variance with Original Final Amounts Final Budget Revenues: Intergovernmental $ 300,000 $ 300,000 $ 196,123 $ (103,877) Miscellaneous - 5,576 7,009 1,433 Total revenues 300, , ,132 (102,444) Expenditures: Current: Community development - 20,424 20, Capital outlay 300, , , ,418 Total expenditures 300, , , ,444 Net change in fund balance $ - Fund balance, beginning of year Fund balance, end of year $ - $ - $ - 65

124 CITY OF COVINGTON, KENTUCKY Required Supplementary Information - Employees' Retirement Plan Fiscal Year 2014 (1) 2014 Schedule of City Contributions Actuarially determined contribution $ 138,459 Contributions in relation to the actuarially determined contribution $ 138,459 Contribution deficiency (excess) $ - Covered-employee payroll N/A (2) Actual contributions as a percentage of covered-employee payroll N/A (2) Schedule of Changes in the Net Position Liability and Related Ratios Total pension liabilty Interest $ 342,966 Benefit changes 64,980 Difference between expected and actual experience (20,562) Changes of assumptions 24,786 Benefit payments (587,963) Net change in total pension liabilty (175,793) Total pension liability - beginning 4,861,543 Total pension liability - ending $ 4,685,750 Plan fiduciary net position Contributions-employer $ 138,459 Other 67 Net investment income 474,728 Benefit payments (623,756) Administrative expense (12,221) Net change in plan fiduciary net position (22,723) Plan fiduciary net position - beginning 3,089,464 Plan fiduciary net position - ending $ 3,066,741 Net pension liability $ 1,619,009 Plan fiduciary net position as percentage of the total pension liability 65.45% Covered-employee payroll N/A (2) Net pension liability as a percentage of covered-employee payroll N/A (2) Schedule of Investment Returns Annual money-weighted rate of return, net of investment expense 16.20% (1) - Only fiscal year 2014 was available. The City will continue to present information for years available until a full 10-year trend is compiled. (2) - No active employees participating in the plan. 66

125 CITY OF COVINGTON, KENTUCKY Required Supplementary Information - Police and Firemen's Retirement Plan Fiscal Year 2014 (1) 2014 Schedule of City Contributions Actuarially determined contribution $ 283,601 Contributions in relation to the actuarially determined contribution $ 384,806 Contribution deficiency (excess) $ (101,205) Covered-employee payroll N/A (2) Actual contributions as a percentage of covered-employee payroll N/A (2) Schedule of Changes in the Net Position Liability and Related Ratios Total pension liabilty Interest $ 774,059 Benefit changes 38,609 Difference between expected and actual experience (17,688) Benefit payments (1,438,900) Net change in total pension liabilty (643,920) Total pension liability - beginning 11,027,235 Total pension liability - ending $ 10,383,315 Plan fiduciary net position Contributions-employer $ 359,506 Impounding lot 30,383 Net investment income 1,133,103 Benefit payments (1,446,162) Administrative expense (28,113) Net change in plan fiduciary net position 48,717 Plan fiduciary net position - beginning 7,697,103 Plan fiduciary net position - ending $ 7,745,820 Net pension liability $ 2,637,495 Plan fiduciary net position as percentage of the total pension liability 74.60% Covered-employee payroll N/A (2) Net pension liability as a percentage of covered-employee payroll N/A (2) Schedule of Investment Returns Annual money-weighted rate of return, net of investment expense 16.48% (1) - Only fiscal year 2014 was available. The City will continue to present information for years available until a full 10-year trend is compiled. (2) - No active employees participating in the plan. 67

126 CITY OF COVINGTON, KENTUCKY Notes to Required Supplementary Information Year Ended June 30, 2014 Note 1. Valuation Date: Actuarially determined contribution rates are calculated as of July1st preceding the fiscal year end in which contributions are reported. Note 2. Benefit Changes: The City granted an ad hoc COLA increase of 1.5%, effective as of January 1, 2014, for participants of the Employees' Retirement Plan. The City also granted an ad hoc COLA increases of 2.0%, effective July 1, 2013, and 1.5%, effective July 1, 2014, for participants of the Police and Firemen's Retirement Plan. Note 3. Change in Assumptions: In 2014, amounts reported as change in assumptions under the Employees' Retirement Plan resulted primarily from updating the mortality table to the current table. Note 4. Methods and Assumptions Used to Determine Contribution Rates: Employees' Retirement Plan Police and Firemen's Retirement Plan Actuarial cost method Entry age Entry age Amortization method 20-year closed amortization 20-year closed amortization Asset valuation method Market Value Market Value Investment rate of return 7.5%, compounded annually net of investment expenses, including inflation 7.5%, compounded annually net of investment expenses, including inflation Retirement age Immediate Immediate Mortality RP-2000 Mortality Table projected to 2021 using Scale AA RP-2000 Combined Table with Blue Collar and Multi-Employer adjustment projected to 2020 for health retirees and RP-2000 Mortality for Disabled Annuitants projected to 2020 for disabled retirees and surviving spouses. 68

127 Supplement Section Combining Statements And Individual Fund Schedules

128 CITY OF COVINGTON, KENTUCKY SPECIAL REVENUE FUNDS The Special Revenue Funds are used to account for the proceeds of specific revenue sources (other than expendable trusts or major capital projects) that are legally restricted to expenditure for specified purposes. The following are descriptions of each Special Revenue Fund: Nonmajor Special Revenue Funds: The Federal & State Grants Fund accounts for the revenues and expenditures related to grants awarded by Federal and state agencies. The Community Development Block Grant Fund accounts for entitlements to the City under the provisions of Title I of the Housing and Development Act of Resources include a combination of block and other entitlement grants. Resources may only be used for activities which are directed toward developing urban communities and economic opportunities for persons for low and moderate income. The HOME Program Fund accounts for resources provided by the U.S. Department of Housing and Urban Development under the HOME Program. Proceeds are used for deferred loans which are used to acquire, construct or rehabilitate housing for low income families. The Renaissance Grant Fund accounts for revenues and expenditures related to renaissance grants received by the City. The One Stop Shop Fund accounts for revenue and expenditures generated at the Kentucky Career Center, with rent collected committed to debt service for economic development. The Police Forfeiture Justice Fund accounts for the resources provided for by police forfeitures. The HOME Consortium Fund was established to administer a HOME Program for a consortium of non-entitlement cities in Northern Kentucky, including Newport, Bellevue, Dayton, Ludlow, and Bromley. HOME funds are used to provide assistance to persons to purchase a home, owner-occupied rehab programs, and housing development activities with Community Housing Development organizations. The Housing Voucher Program Fund accounts for funds provided to the City by the U.S. Department of Housing and Urban Development Section 8 rent subsidy program. Resources are used for the payment of rent subsidies to landlords on behalf of qualified tenants. 69

129 CITY OF COVINGTON, KENTUCKY Nonmajor Special Revenue Funds: The Police & Fire Supplemental Pay Fund accounts for entitlements received under the State of Kentucky s Policemen and Firemen s Supplemental Pay Programs. The Devou Park Maintenance Fund accounts for all transactions related to the maintenance of roadways and streets within Devou Park. The Devou Park Master Plan Fund accounts for revenues and expenditures of funds allocated for use in Devou Park, from proceeds of the operation of the Drees Pavilion. DEBT SERVICE FUND The Debt Service Funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Nonmajor Debt Service Fund: The Pension Obligation 2004 Fund accounts for the retirement of the Series 2004 Pension Obligation bonds to fund the Employees Retirement Fund and the Police and Firemen s Retirement Fund. INTERNAL SERVICE FUNDS Internal Service Funds are an accounting device used to accumulate and allocate costs internally among the City s various functions. Internal Service Funds: The Liability Self Insurance Fund accounts for the City s self-insurance of liability claims. The Medical Self Insurance Fund accounts for the City s health and dental insurance programs for City employees. 70

130 CITY OF COVINGTON, KENTUCKY Combining Balance Sheet Nonmajor Governmental Funds June 30, 2014 Nonmajor Special Revenue Funds Nonmajor Debt Service Total Federal Community One Police Housing Police & Fire Devou Pension Nonmajor & State Development HOME Renaissance Stop Forfeiture HOME Voucher Supplemental Park Devou Park Obligation Governmental Grants Block Grant Program Grant Shop Justice Consortium Program Pay Maintenance Master Plan 2004 Funds Assets Cash and cash equivalents $ - $ 135,404 $ 316,547 $ - $ - $ 157,495 $ - $ 1,001,924 $ - $ 58,753 $ - $ 274,170 $ 1,944,293 Cash held in escrow , , ,746 Receivables (net of allowance for doubtful accounts): Intergovernmental 11,380 96,001 10, , ,000-36, ,343 Accounts 96, , ,264 Due from other funds - 65,308 46, , , ,363 Total assets $ 107,714 $ 296,713 $ 373,297 $ 554,592 $ - $ 157,495 $ 267,190 $ 1,032,854 $ 36,370 $ 299,499 $ 56,115 $ 675,170 $ 3,857,009 Liabilities: Accounts payable $ 25,663 $ 86,863 $ 247 $ - $ 7,953 $ 3,800 $ - $ 14,459 $ - $ 2,316 $ 9,126 $ - $ 150,427 Due to other funds 81, , ,457 2, ,190-36, ,208,673 Unearned revenue , , ,695 Total liabilities 106,710 86, , ,457 10,238 3, , ,623 36, ,847 9,126-1,853,795 Fund balances: Restricted 1, ,850 90,726 15, , , ,000 1,650,935 Committed , , ,865 Unassigned (10,238) (65,348) - - (75,586) Total fund balances 1, ,850 90,726 15,135 (10,238) 153, ,231 - (65,348) 46, ,170 2,003,214 Total liabilities and fund balances $ 107,714 $ 296,713 $ 373,297 $ 554,592 $ - $ 157,495 $ 267,190 $ 1,032,854 $ 36,370 $ 299,499 $ 56,115 $ 675,170 $ 3,857,009 71

131 CITY OF COVINGTON, KENTUCKY Combining Statement of Revenues, Expenditures and Changes in Fund Balances Nonmajor Governmental Funds Fiscal Year Ended June 30, 2014 Nonmajor Special Revenue Funds Nonmajor Debt Service Total Federal Community One Police Housing Police & Fire Devou Pension Nonmajor & State Development HOME Renaissance Stop Forfeiture HOME Voucher Supplemental Park Devou Park Obligation Governmental Grants Block Grant Program Grant Shop Justice Consortium Program Pay Maintenance Master Plan 2004 Funds Revenues: Intergovernmental $ 1,751,982 $ 2,136,293 $ 314,435 $ 557,340 $ - $ 163,074 $ 173,998 $ 5,764,213 $ 905,763 $ - $ - $ - $ 11,767,098 Investment earnings ,106 Miscellaneous 163, ,417 61, ,208 1, ,017 Total revenues 1,915,551 2,379, , , , ,206 5,766, , ,242,221 Expenditures: Current: General government 75, , , ,271 Police 40, , , ,560 Fire , ,569 Public improvements 24, ,998 Community development 640,637 1,088, ,269 98,081 10, ,206 5,939, ,380,327 Debt service: Principal , ,000 Interest , ,460 Capital outlay 1,135,863 1,129, , ,716-25, ,756,656 Total expenditures 1,917,047 2,218, , ,592 10, , ,206 5,947, ,763 75, , ,460 13,794,841 Excess (deficiency) of revenues over (under) expenditures (1,496) 161,160 (49,289) 2,748 (10,238) (145,544) - (181,497) - (75,348) (272,656) (980,460) (1,552,620) Other financing sources (uses): Transfers in ,000-1,254,630 1,264,630 Transfers out - (123,099) (123,099) Total other financing sources (uses) - (123,099) ,000-1,254,630 1,141,531 Net change in fund balances (1,496) 38,061 (49,289) 2,748 (10,238) (145,544) - (181,497) - (65,348) (272,656) 274,170 (411,089) Fund balance, beginning of year 2, , ,015 12, ,239-1,067, , ,000 2,414,303 Fund balance, end of year $ 1,004 $ 209,850 $ 90,726 $ 15,135 $ (10,238) $ 153,695 $ - $ 886,231 $ - $ (65,348) $ 46,989 $ 675,170 $ 2,003,214 72

132 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Federal & State Grants Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Intergovernmental $ 1,787,647 $ 1,751,982 $ (35,665) Miscellaneous 23, , ,596 Total revenues 1,811,620 1,915, ,931 Expenditures: Current: General government 67,460 75,000 (7,540) Police 3,122 40,549 (37,427) Public improvements - 24,998 (24,998) Community development 570, ,637 (70,078) Capital outlay 1,170,479 1,135,863 34,616 Total expenditures 1,811,620 1,917,047 (105,427) Net change in fund balances - (1,496) $ (1,496) Fund balance, beginning of year 2,500 2,500 Fund balance, end of year $ 2,500 $ 1,004 73

133 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Community Development Block Grant Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Intergovernmental $ 2,583,168 $ 2,136,293 $ (446,875) Miscellaneous 225, ,417 18,417 Total revenues 2,808,168 2,379,710 (428,458) Expenditures: Current: Community development 1,554,726 1,088, ,842 Capital outlay 1,062,639 1,129,666 (67,027) Total expenditures 2,617,365 2,218, ,815 Excess (deficiency) of revenues over (under) expenditures 190, ,160 (29,643) Other financing sources (uses): Transfers out (226,750) (123,099) 103,651 Net change in fund balances (35,947) 38,061 $ 74,008 Fund balance, beginning of year 171, ,789 Fund balance, end of year $ 135,842 $ 209,850 74

134 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - HOME Program Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Intergovernmental $ 232,235 $ 314,435 $ 82,200 Investment earnings Miscellaneous 294,193 61,438 (232,755) Total revenues 526, ,980 (150,489) Expenditures: Current: Community development 526, , ,200 Total expenditures 526, , ,200 Net change in fund balances - (49,289) $ (49,289) Fund balance, beginning of year 140, ,015 Fund balance, end of year $ 140,015 $ 90,726 75

135 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Renaissance Grant Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Intergovernmental $ 502,748 $ 557,340 $ 54,592 Total revenues 502, ,340 54,592 Expenditures: Current: Community development - 98,081 (98,081) Capital outlay 502, ,511 46,237 Total expenditures 502, ,592 (51,844) Net change in fund balances - 2,748 $ 2,748 Fund balance, beginning of year 12,387 12,387 Fund balance, end of year $ 12,387 $ 15,135 76

136 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - One Stop Shop Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Miscellaneous $ 20,720 $ - $ (20,720) Total revenues 20,720 - (20,720) Expenditures: Current: Community development 20,720 10,238 10,482 Total expenditures 20,720 10,238 10,482 Net change in fund balances - (10,238) $ (10,238) Fund balance, beginning of year - - Fund balance, end of year $ - $ (10,238) 77

137 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Police Forfeiture Justice Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Intergovernmental $ 239,779 $ 163,074 $ (76,705) Investment earnings Total revenues 239, ,273 (76,628) Expenditures: Current: Police 239, ,817 (68,916) Total expenditures 239, ,817 (68,916) Net change in fund balances - (145,544) $ (145,544) Fund balance, beginning of year 299, ,239 Fund balance, end of year $ 299,239 $ 153,695 78

138 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - HOME Consortium Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Intergovernmental $ 174,341 $ 173,998 $ (343) Miscellaneous 91,701 4,208 (87,493) Total revenues 266, ,206 (87,836) Expenditures: Current: Community development 266, ,206 87,836 Total expenditures 266, ,206 87,836 Net change in fund balances - - $ - Fund balance, beginning of year - - Fund balance, end of year $ - $ - 79

139 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Housing Voucher Program Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Intergovernmental $ 5,987,394 $ 5,764,213 $ (223,181) Investment earnings Miscellaneous - 1,385 1,385 Total revenues 5,987,757 5,766,231 (221,526) Expenditures: Current: Community development 5,973,994 5,939,012 34,982 Capital outlay 8,800 8, Total expenditures 5,982,794 5,947,728 35,066 Net change in fund balances 4,963 (181,497) $ (186,460) Fund balance, beginning of year 1,067,728 1,067,728 Fund balance, end of year $ 1,072,691 $ 886,231 80

140 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Police & Fire Supplemental Pay Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Intergovernmental $ 901,339 $ 905,763 $ 4,424 Total revenues 901, ,763 4,424 Expenditures: Current: Police 423, ,194 (5,165) Fire 478, , Total expenditures 901, ,763 (4,424) Net change in fund balances - - $ - Fund balance, beginning of year - - Fund balance, end of year $ - $ - 81

141 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Devou Park Maintenance Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Investment earnings $ 167 $ 167 $ - Total revenues Expenditures: Current: General government 34,075 49,615 (15,540) Capital outlay 51,696 25,900 25,796 Total expenditures 85,771 75,515 10,256 Excess (deficiency) of revenues over (under) expenditures (85,604) (75,348) 10,256 Other financing sources (uses): Transfers in 85,516 10,000 (75,516) Net change in fund balances (88) (65,348) $ (65,260) Fund balance, beginning of year - - Fund balance, end of year $ (88) $ (65,348) 82

142 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Devou Park Master Plan Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Expenditures: Current: General government $ 245,201 $ 272,656 $ (27,455) Total expenditures 245, ,656 (27,455) Net change in fund balances (245,201) (272,656) $ (27,455) Fund balance, beginning of year 319, ,645 Fund balance, end of year $ 74,444 $ 46,989 83

143 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Pension Obligation 2004 Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Expenditures: Debt service: Principal $ 492,706 $ 445,000 $ 47,706 Interest 545, ,460 9,945 Total expenditures 1,038, ,460 57,651 Excess (deficiency) of revenues over (under) expenditures (1,038,111) (980,460) 57,651 Other financing sources (uses): Transfers in 1,038,111 1,254, ,519 Net change in fund balances - 274,170 $ 274,170 Fund balance, beginning of year 401, ,000 Fund balance, end of year $ 401,000 $ 675,170 84

144 CITY OF COVINGTON, KENTUCKY Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - Capital Improvement Fund Fiscal Year Ended June 30, 2014 Final Variance with Budget Actual Final Budget Revenues: Miscellaneous $ 114,273 $ - $ (114,273) Total revenues 114,273 - (114,273) Expenditures: Current: General government 5,359,630 4,963, ,728 Community development 10,000 9, Capital outlay 8,957,890 5,196,181 3,761,709 Total expenditures 14,327,520 10,169,859 4,157,661 Net change in fund balances (14,213,247) (10,169,859) $ 4,043,388 Fund balance, beginning of year 14,875,127 14,875,127 Fund balance, end of year $ 661,880 $ 4,705,268 85

145 CITY OF COVINGTON, KENTUCKY Combining Statement of Net Position Internal Service Funds June 30, 2014 Total Liability Medical Internal Service Self Insurance Self Insurance Funds Assets Cash and cash equivalents $ 65,531 $ 945,614 $ 1,011,145 Due from other funds 818,348 18, ,254 Total assets 883, ,520 1,848,399 Liabilities Accounts payable 103,610 18, ,516 Claims payable 714, ,614 1,659,614 Total liabilities 817, ,520 1,782,130 Net Position Unrestricted 66,269-66,269 Total net position $ 66,269 $ - $ 66,269 86

146 CITY OF COVINGTON, KENTUCKY Combining Statement of Revenues, Expenses and Changes in Net Position Internal Service Funds Fiscal Year Ended June 30, 2014 Total Liability Medical Internal Service Self Insurance Self Insurance Funds Operating revenues: Insurance premiums $ - $ 4,755,895 $ 4,755,895 Other - 20,090 20,090 Total operating revenues - 4,775,985 4,775,985 Operating expenses: Contractual services 647, ,181 1,278,071 Claims and judgments 99,159 4,372,299 4,471,458 Total operating expenses 747,049 5,002,480 5,749,529 Operating loss (747,049) (226,495) (973,544) Non-operating revenues (expenses): Investment income Loss before transfers (747,017) (226,396) (973,413) Transfers in 747, , ,413 Change in net position Net position, beginning of year, restated 66,269-66,269 Net position, end of year $ 66,269 $ - $ 66,269 87

147 CITY OF COVINGTON, KENTUCKY Combining Statement of Cash Flows Internal Service Funds Fiscal Year Ended June 30, 2014 Total Liability Medical Internal Service Self Insurance Self Insurance Funds Cash flows from operating activities: Cash received from other funds $ - $ 5,520,772 $ 5,520,772 Cash received from other income - 20,090 20,090 Cash payments to other funds (94,898) - (94,898) Cash payments for claims (652,118) (5,081,064) (5,733,182) Net cash flows from operating activities (747,016) 459,798 (287,218) Cash flows from noncapital financing activities: Transfers 747, , ,413 Cash flows from investing activities: Interest income Net change , ,326 Cash and cash equivalents, beginning of year 65, , ,819 Cash and cash equivalents, end of year $ 65,531 $ 945,614 $ 1,011,145 Reconciliation of operating loss to net cash flows from operating activities Operating loss $ (747,049) $ (226,495) $ (973,544) Adjustments to reconcile operating loss to net cash flows from operating activities: Changes in assets and liabilities: Prepaid items - 48,497 48,497 Due from/to other funds (94,898) 764, ,979 Accounts payable 94,931 16, ,960 Claims payable - (143,110) (143,110) Net cash flows from operating activities $ (747,016) $ 459,798 $ (287,218) 88

148 STATISTICAL SECTION

149 Schedule 1 City of Covington, Kentucky Net Position by Component, Current and Past Nine Fiscal Years (accrual basis of accounting) Fiscal Year (as restated) Governmental Activities / Primary Government Net Investment in Capital Assets $ 29,360,778 $ 33,666,204 $ 34,173,497 $ 36,088,303 $ 34,539,885 $ 36,577,167 $ 41,334,965 $ 39,709,313 $ 40,851,867 $ 41,483,876 Restricted for Capital Improvements 2,614, , ,681 1,577, Restricted for Debt Service 401, , Restricted for HUD Programs 3,622,306 3,565,125 16,648,464 1,318, Restricted for other purposes 16,139 14,887-27,361 91, , , ,123 1,307,719 1,593,846 Unrestricted (deficit) (11,541,099) (13,385,806) (4,806,437) 8,933,230 13,587,660 16,638,487 16,603,105 17,286,863 15,104,828 1,947,609 Total Governmental Activities Net Position $ 24,473,322 $ 24,841,864 $ 46,206,205 $ 47,944,685 $ 48,218,683 $ 53,409,347 $ 58,488,752 $ 57,884,299 $ 57,264,414 $ 45,025,331 Note: The City implemented GASB Statement Nos. 67 and 68 in fiscal year 2014, restating fiscal year

150 Schedule 2 City of Covington, Kentucky Changes in Net Position Current and Past Nine Fiscal Years (accrual basis of accounting) Fiscal Year Governmental Activities Expenses General Government $ 5,916,248 $ 4,028,857 $ 4,250,735 $ 3,814,055 $ 6,089,518 $ 12,149,528 $ 7,807,872 $ 6,975,709 $ 7,781,587 $ 9,381,965 Police 14,177,725 15,464,519 16,455,964 16,536,402 16,498,516 15,593,684 15,501,195 14,873,868 14,482,761 13,660,495 Fire 13,060,943 13,727,885 15,180,999 15,318,421 15,048,966 14,224,985 14,753,208 13,595,531 12,512,512 11,930,245 Public Improvements 13,769,904 10,916,212 11,349,786 11,780,808 11,847,116 7,185,210 5,995,347 6,001,968 5,324,831 5,561,622 Recreation - 683, , , ,215 2,740,960 2,426,639 2,350,546 2,325,250 2,575,568 Community Development 11,159,338 13,912,337 15,379,018 13,771,124 12,484,045 10,217,357 9,777,154 9,345,867 9,817,626 9,086,241 Parking Garage 734, , , , , , , , , ,715 Interest on Long-term Debt 1,654,352 2,181,165 1,324,845 1,676,776 1,716,153 2,052,549 1,935,242 1,872,816 1,919,888 1,437,434 Total Governmental Activities Expenses 60,473,108 61,697,776 65,421,592 64,498,205 65,212,891 64,866,259 58,944,334 55,750,706 54,891,874 54,437,285 Program Revenues General Government 940,479 1,214, , ,682 1,136, ,267 1,145,333 1,096,558 1,215, ,041 Police 58, , , , , , , , ,192 - Fire 1,391,914 1,238,042 1,333,724 1,175,621 1,282,105 1,077,448 1,084,825 1,073, , ,802 Public Improvements 2,343,079 2,506,617 2,342,050 2,082,635 1,918,838 1,859,171 1,464,056 1,170,789 1,226,952 1,092,970 Recreation - 11,739 22, Community Development 738,833 79, ,209 98,196 79,317 37,833 41, ,177 56,017 - Parking Garage 1,554,915 1,353,754 1,674,834 1,458,784 1,179,276 1,143,276 1,120,916 1,041,332 1,059,369 1,252,755 Operating Grants and Contributions 10,842,196 11,932,368 12,518,909 13,533,951 10,727,972 9,664,170 10,823,567 8,840,224 9,652,316 8,754,883 Capital Grants and Contributions 2,317,723 1,290,469 1,647,156 2,558,805 1,624,312 1,650,920 2,050,654 1,279, ,322 3,106,704 Total Governmental Activities Revenues 20,187,141 19,761,224 20,835,302 22,184,213 18,360,791 16,832,642 18,113,529 14,948,091 15,210,805 15,956,155 Program Revenues Over (Under) Expenses (40,285,967) (41,936,552) (44,586,290) (42,313,992) (46,852,100) (48,033,617) (40,830,805) (40,802,615) (39,681,069) (38,481,130) General Revenues and Changes in Net Assets Taxes Real Property-Levied for General Purposes 6,085,654 6,043,907 6,141,332 6,481,511 6,114,035 6,024,885 4,680,355 5,590,772 5,913,401 4,399,593 Personal Property-Levied for General Purposes 764, , , , , , , , , ,286 Public Services 2,131,042 2,018,535 1,944,431 2,107,927 2,085,706 2,140,821 2,178,804 1,978,504 2,092,335 1,909,267 Taxes-Levied for Bank Deposits 65,134 62,729 87,014 71,391 60,603 53,161 67,789 59,042 62,232 62,323 Insurance Premium 5,672,059 5,279,824 4,988,428 5,155,801 5,588,067 5,430,628 4,860,194 5,242,337 5,324,223 5,240,743 Payroll 22,222,546 22,974,835 22,764,392 22,595,598 22,850,229 23,697,247 23,287,559 21,656,929 21,263,831 19,543,654 Net Profit 2,829,873 2,710,237 3,011,825 2,404,497 2,285,504 2,555,089 2,779,489 2,959,729 2,554,150 2,303,123 Other - 303, , , , , , , , ,751 Investment Earnings 4,287 96,889 23,084 47,503 25, , , , , ,382 Fines and Forfeitures ,832 Licenses and Permits ,376 Gain (Loss) on Disposal of Capital Assets , ,242 - Miscellaneous 159, ,261 2,286,030 1,817,908 1,298,108 1,495,817 2,015,326 2,225,594 1,710,802 1,878,640 Special Item (17,000) (102,445) Transfers In (Out) (14,275,000) Total General Revenues and Transfers 39,917,425 40,620,991 42,847,810 42,039,994 41,661,436 42,954,212 41,435,258 41,422,500 40,887,745 22,957,970 Change in Net Position $ (368,542) $ (1,315,561) $ (1,738,480) $ (273,998) $ (5,190,664) $ (5,079,405) $ 604,453 $ 619,885 $ 1,206,676 $ (15,523,160) 90

151 Schedule 3 City of Covington, Kentucky Fund Balances, Governmental Funds, Current and Past Nine Fiscal Years (modified accrual basis of accounting) Fiscal Year (as restated) General Fund Reserved $ - $ - $ - $ - $ - $ 41,414 $ 4,483 $ 1,611 $ 122,892 $ 5,388 Unreserved , , , , , ,739 Nonspendable 25,515 41,593 98,617 - Restricted ,681 1,577,223 Assigned ,345,041 Unassigned 2,178, ,275 1,043, , Total General Fund 2,204, ,868 1,332,474 3,620, , , , , , ,127 All Other Governmental Funds Reserved Unreserved Special Revenue Funds ,007,906 4,821,080 4,296,812 3,713, ,353 1,207,276 Capital Projects Funds (12,984) 158,251 91, ,730 - Debt Service Funds , , , ,123 1,307,719 1,593,846 Nonspendable - 250, Restricted 6,356,203 16,339,191 1,574,894 1,345, Committed 427, , , ,605 Unassigned (deficit) (75,586) - - (27,062) Total All Other Governmental Funds 6,708,482 16,888,430 1,960,390 1,574,472 4,086,060 5,173,024 4,939,441 5,071,425 2,118,072 2,801,122 Total Governmental Funds $ 8,912,925 $ 17,668,298 $ 3,292,864 $ 5,195,127 $ 4,428,558 $ 5,944,993 $ 5,679,763 $ 5,748,356 $ 2,791,477 $ 3,036,249 Note: The City implemented GASB Statement 54 in fiscal year

152 Schedule 4 City of Covington, Kentucky Changes in Fund Balances - Governmental Funds Current and Past Nine Fiscal Years (modified accrual basis of accounting) Fiscal Year Revenues Taxes $ 14,291,815 $ 14,029,560 $ 14,462,247 $ 14,643,134 $ 14,987,054 $ 14,707,297 $ 13,682,151 $ 13,554,260 $ 13,466,713 $ 12,762,470 Licenses and Permits 25,353,330 25,979,427 26,175,310 25,362,255 25,429,776 26,550,329 26,357,476 24,897,197 24,123,130 22,214,153 Intergovernmental 13,142,623 12,897,498 14,510,735 13,684,242 12,166,647 11,691,463 12,063,637 11,204,089 10,345,557 9,636,936 Charges for Services 5,936,837 6,063,670 6,063,323 5,394,348 5,227,073 4,744,058 4,527,680 4,104,170 4,128,721 4,094,568 Fines and Forfeitures 414, , , , , , , , , ,832 Investment Earnings 4,287 96,889 23,084 47,244 24,439 99, , , , ,704 Miscellaneous 1,045,589 1,845,656 2,449,022 2,004,920 1,351,353 1,557,868 2,382,312 2,342,372 1,734,234 4,109,294 Total Revenues 60,189,106 61,280,291 64,122,910 61,694,608 59,932,664 60,062,706 59,953,035 57,144,410 54,680,172 53,485,957 Expenditures General Government 8,990,541 3,982,552 3,618,888 4,315,649 3,785,714 3,783,523 3,554,133 3,092,518 3,537,750 3,365,074 Police 13,945,665 14,207,005 15,588,778 15,913,878 15,593,494 14,886,861 15,013,636 14,359,432 14,109,828 13,239,562 Fire 12,745,412 13,203,841 13,842,762 13,630,059 13,812,934 13,306,319 13,959,222 12,989,464 12,168,065 11,429,099 General Service 8,816,579 5,994,547 5,891,702 6,268,883 6,514,905 6,690,503 5,644,983 5,292,360 5,180,111 5,358,833 Recreation - 437, , , ,309 2,533,103 2,347,048 2,309,959 2,289,413 2,372,300 Community Development (includes recreation in 2014) 10,864,968 13,051,903 14,104,562 13,075,265 12,175,797 10,138,570 9,771,182 9,098,909 9,832,881 9,096,233 Parking Garage 731, , , , , , , , , ,715 Debt Service Principal 2,771,777 3,510,165 3,682,521 3,131,379 2,980,841 3,516,517 2,918,585 2,727,985 2,763,879 5,553,494 Interest and Other Charges 1,754,969 2,273,447 1,223,546 1,503,485 1,679,854 2,054,516 1,829,031 1,701,223 1,965,386 1,509,839 Bond Issuance Costs , Capital Outlay 8,135,571 5,485,409 5,847,540 4,300,102 4,982,528 6,715,050 4,159,916 3,257,621 2,701,215 6,722,898 Total Expenditures 68,757,317 62,926,368 65,019,406 63,519,482 62,762,738 64,326,948 59,945,413 55,563,872 55,275,947 59,451,047 Excess (Deficit) of Revenues Over Expenditures (8,568,211) (1,646,077) (896,496) (1,824,874) (2,830,074) (4,264,242) 7,622 1,580,538 (595,775) (5,965,090) Other Financing Sources (Uses) Proceeds From Issuance of Debt ,806,827-4,509,181-1,630,000-12,806,241 Proceeds From Bond Refinancing , Payment to Refunded Lease Escrow Agent (303,694) Inception of Capital Leases - 16,040, Transfers In 1,387,729 6,009,757 4,090,194 3,565,394 6,028,123 6,063,518 5,377,180 6,169,710 6,006,833 11,506,504 Transfer Out (2,361,142) (6,066,893) (5,101,478) (3,865,395) (6,228,123) (6,747,200) (5,881,142) (6,663,029) (6,252,032) (25,926,704) Proceeds From Short-term Debt ,040,563 75, , ,202 - Proceeds from Sale of Assets 33, ,092 5,517 13,647 Miscellaneous (1,003) Total Other Financing Sources (Uses) (939,729) 16,123,956 (1,005,767) 2,531, ,563 3,900,918 (76,215) 1,136, ,003 (1,614,962) Special Item (17,000) (102,445) Increase (Decrease) in Fund Balance $ (9,524,940) $ 14,375,434 $ (1,902,263) $ 706,905 $ (1,989,511) $ (363,324) $ (68,593) $ 2,717,219 $ (244,772) $ (7,580,052) Debt Service as a Percentage of Non-Capital Expenditures 8.03% 10.02% 8.11% 7.81% 8.07% 9.67% 8.51% 8.47% 9.00% 13.40% 92

153 Schedule 5 City of Covington, Kentucky Occupational License Fees - Payroll Withholding Current and Past Nine Fiscal Years Total Total Fiscal Gross Withholding Total Direct Year Taxable Wages Fees Rate 2014 $ 940,233,510 $ 23,035, % 2013 $ 949,297,388 $ 23,257, % 2012 $ 910,575,680 $ 22,764, % 2011 $ 903,823,920 $ 22,595, % 2010 $ 914,009,160 $ 22,850, % 2009 $ 947,889,880 $ 23,697, % 2008 $ 931,502,360 $ 23,287, % 2007 $ 866,277,160 $ 21,656, % 2006 $ 850,553,240 $ 21,263, % 2005 $ 781,746,160 $ 19,543, % Source: City of Covington Finance Department 93

154 Schedule 6 City of Covington, Kentucky Principal Occupational Payroll Tax Payers Current and Nine Fiscal Years Ago Taxpayer Ashland Inc. A. C. Nielsen Atkins & Pearce Manufacturing Atkins & Pearce Manufacturing Club Chef Commonwealth of Kentucky Commonwealth of Kentucky Covington Board of Education Covington Board of Education Duro Bag Fidelity Investments Fidelity Investments Internal Revenue Service Internal Revenue Service No. Ky. Mental Health and Retardation Board No. Ky. Mental Health and Retardation Board Rosedale Manor Rosedale Manor St. Elizabeth Hospital St. Elizabeth Hospital Notes: Taxpayer information is listed alphabetically. Source: City of Covington Finance Department 94

155 Schedule 7 City of Covington, Kentucky Assessed Value and Estimated Actual Value of Taxable Property Curent and Past Nine Fiscal Years Total Total Taxable Direct Fiscal Real Personal Tax-Exempt Assessed Tax Year Property Property Property Value Rate 2014 $ 1,962,172 $ 139,733 $ 74,707 $ 2,098, $ 1,906,233 $ 150,542 $ 72,839 $ 1,983, $ 2,019,671 $ 156,875 $ 65,087 $ 2,111, $ 2,027,907 $ 168,468 $ 61,769 $ 2,134, $ 2,014,385 $ 159,294 $ 62,311 $ 2,111, $ 1,897,368 $ 217,242 $ 59,898 $ 2,054, $ 1,861,435 $ 187,585 $ 61,243 $ 1,987, $ 1,828,664 $ 195,876 $ 58,296 $ 1,966, $ 1,687,690 $ 203,668 $ 57,570 $ 1,833, $ 1,617,670 $ 160,191 $ 57,720 $ 1,720, Notes: Property in Covington is reassessed once every four years. City property was reassessed in The next reassessment will occur in The reassessment is conducted by the Kenton County Property Value Administrator. The property is assessed at 100% of value. Values are stated in thousands of dollars Tax rates are per $100 of assessed value. 95

156 Schedule 8 City of Covington, Kentucky Direct and Overlapping Property Tax Rates Current and Past Nine Fiscal Years (rate per $100 of assessed value) School Districts Totals City Covington Kenton Fiscal Direct Covington Kenton Schools County Year Rate Independent County County State Other Area Schools Area Notes: Portions of the City of Covington are located in the Kenton County Common School District and taxes are paid to that entity instead of Covington Independent School District. Consequently both rates are shown. The City's basic property tax may be increased up to the compensating rate plus 4% without being subject to a voter referendum. The compensating rate is defined as that rate which when applied to the current years assessment of property subject to taxation excluding new property and personal property produces an amount of revenue equal to that produced in the preceding year. 96

157 Schedule 9 City of Covington, Kentucky Principal Real Property Tax Payers Current and Eight Fiscal Years Ago Percentage Percentage of Total City of Total City Taxable Taxable Taxable Taxable Assessed Assessed Assessed Assessed Taxpayer Value Rank Value Value Rank Value Fidelity Properties Inc $ 184,387, % $ 85,932, % CPX-Rivercenter Development Corp 82,844, % 147,046, % EHP Rivercenter Landmark 33,578, % CIP II Buckeye Hotel 15,174, % Scott Street Land Co. Inc 14,960, % 14,960, % J & S Latonia Centre Ky LLC 12,314, % 10,482, % Atkins & Pearce Manufacturing 11,460, % 10,000, % FMR Kentucky I LLC 11,184, % Trustees Latonia Plaza KY LLC 7,916, % Truss Latonia Plaza KY LLC 6,824, % OZRE Lodging I LLC 9,000, % Scottenstein Trust 6,349, % Attria Highland Crossing 6,165, % Pioneer Park Association #2 LLC 6,812, % Latonia Realty Inc. 7,000, % Total $ 380,643, % $ 303,748, % Source: City of Covington Finance Department 97

158 Schedule 10 City of Covington, Kentucky Property Tax Levies and Collections Current and Past Nine Fiscal Years Fiscal Year Taxes Levied Collected Within the Fiscal Year of the Levy Collections Total Collections to Date Ended for the Percentage in Subsequent Percentage June 30 Fiscal Year Amount of Levy Years Amount of Levy 2014 $ 6,490,788 $ 5,843, % N/A $ 5,843, % 2013 $ 6,376,341 $ 6,076, % $ 19,728 $ 6,096, % 2012 $ 6,287,872 $ 6,042, % $ 102,489 $ 6,145, % 2011 $ 6,328,051 $ 6,145, % $ 77,469 $ 6,223, % 2010 $ 6,411,125 $ 6,146, % $ 167,691 $ 6,314, % 2009 $ 6,330,592 $ 6,099, % $ 154,313 $ 6,253, % 2008 $ 6,159,153 $ 5,989, % $ 113,581 $ 6,103, % 2007 $ 5,849,979 $ 5,695, % $ 119,658 $ 5,815, % 2006 $ 5,590,484 $ 5,438, % $ 122,611 $ 5,561, % 2005 $ 5,478,874 $ 5,315, % $ 132,173 $ 5,447, % Source: City of Covington Finance Department 98

159 Schedule 11 City of Covington, Kentucky Ratios of Outstanding Debt by Type Current and Past Nine Fiscal Years (dollars in thousands, except per capita) General Total Percentage Fiscal Obligation Capital Primary of Personal Per Year Bonds Leases Government Income (a) Capita (a) ,826 27,974 43, % $ 1, ,864 29,708 46, % $ 1, ,961 15,081 34, % $ ,289 16,248 37, % $ ,811 17,663 38, % $ ,622 18,782 40, % $ ,790 15,271 39, % $ ,888 16,153 42, % $ ,907 15,231 43, % $ ,487 19,415 45, % $ 1,058 Note: Details of city's outstanding debt can be found in the notes to the financial statements. (a) See Schedule 15 for personal income and population data. 99

160 Schedule 12 City of Covington, Kentucky Ratios of General Bonded Debt Outstanding Current and Past Nine Fiscal Years (dollars in thousands, except per capita) Percentage of General Actual Taxable Fiscal Obligation Value of Per Year Bonds Property Capita 2014 $ 15, % $ $ 16, % $ $ 18, % $ $ 21, % $ $ 20, % $ $ 21, % $ $ 23, % $ $ 25, % $ $ 27, % $ $ 26, % $ Source: City of Covington Finance Department 100

161 Schedule 13 City of Covington, Kentucky Direct and Overlapping Governmental Activities Debt June 30, 2014 (amounts in thousands) Estimated Amount Applicable Debt Percentage to the City of Governmental Unit Outstanding Applicable (3) Covington Kenton County $ 50,010 (1) 25.10% $ 12,553 Covington Indpendent School District 14,671 (2) % 14,671 Subtotal, overlapping debt 27,224 City of Covington direct debt 15,826 Total direct and overlapping debt $ 43,050 Note: Overlapping governments are those that coincide, at least in part, with geographic boundaries of the City. This schedule estimates the portion of the outstanding debt of those overlapping governments that is borne by the property taxpayers of the City of Covington. This process recognizes that, when considering the government's ability to issue and repay long-term debt, the entire debt burden borne by the property taxpayers should be taken into account. However, this does not imply that every taxpayer is a resident, and therefore responsible for repaying the debt, of each overlapping government. Sources: (1) - Kenton County Treasurer's Office (2) - Covington Independent School District, Finance Department (3) - The percentage of overlapping debt applicable to the City of Covington is estimated using the percentage of Covington residents in each of the overlapping districts as estimated by the U.S. Census Bureau as of July 1,

162 Schedule 14 City of Covington, Kentucky Legal Debt Margin Information Current and Past Nine Fiscal Years (dollars in thousands) Legal Debt Margin Calculation for Fiscal Year 2014 Assessed value $ 2,098,172 Debt limit (10% of assessed value) $ 209,817 Debt applicable to limit: General Obligation $ 15,826 Total debt applicable to limit $ 15,826 Legal debt margin $ 193,991 Fiscal Year Debt limit $ 209,817 $ 198,394 $ 211,146 $ 213,461 $ 207,746 $ 205,471 $ 198,778 $ 196,624 $ 183,379 $ 172,014 Total net debt applicable to limit 15,826 16,865 18,961 21,289 20,811 21,622 23,790 25,888 27,907 26,487 Legal debt margin $ 193,991 $ 181,529 $ 192,185 $ 192,172 $ 186,935 $ 183,849 $ 174,988 $ 170,736 $ 155,472 $ 145,527 Total net debt applicable to the limit as a percentage of debt limit 7.54% 8.50% 8.98% 9.97% 10.02% 10.52% 11.97% 13.17% 15.22% 15.40% Source: City of Covington Finance Department 102

163 Schedule 15 City of Covington, Kentucky Demographic and Economic Statistics Current and Past Nine Fiscal Years Personal Per Income (a) Capita Fiscal (thousands Personal Median School Unemployment Year Population (a) of dollars) Income (a) Age (a) Enrollment (b) Rate (c) , ,667 20, , % , ,270 20, , % , ,667 20, , % , ,003 20, , % , ,927 21, , % , ,212 21, , % ,370 1,077,787 24, , % ,370 1,077,787 24, , % ,370 1,077,787 24, , % ,370 1,077,787 24, , % Sources: (a) City Data Moving Information & Guides - movingideas.org U. S. Department of the Census (2010 Census) & (1996 Census) 2009 Data U. S. Census Bureau American Community Survey 3-Year Estimate 2013 U.S. Census (b) Kentucky Department of Education (c) Kentucky Cabinet for Workforce Development 103

164 Schedule 16 City of Covington, Kentucky Principal Employers Current and Eight Fiscal Years Ago (1) 2014 Percentage Percentage of Total City of Total City Employer Employees Rank Employment Employees Rank Employment 2006 Internal Revenue Service 4, % 4, % Fidelity Investments 4, % 3, % Covington Board of Education % % St. Elizabeth Hospital % % State of Kentucky % % Ommicare % Club Chef % Rosedale Manor % % No. KY MH-MR Board % % Atkins & Pearce Mftg % % BBI Marketing % Ashland Inc % Total 12, % 12, % (1): Data is unavailable fiscal 2005 Source: City of Covington Finance Department 104

165 Schedule 17 City of Covington, Kentucky Full-Time-Equivalent City Government Employees by Function/Program Current and Past Nine Fiscal Years Full-time-Equivalent Employees as of June 30 Function/Program General Government Management Services Finance Economic Development Code Enforcement Housing Police Officers Civilians Fire Firefighters and Officers Civilians Other Public Improvements Engineering Parks and Recreation Total Source: City of Covington Finance Department 105

166 Schedule 18 City of Covington, Kentucky Operating Indicators by Function/Program Currrent and Past Nine Fiscal Years Fiscal Year Function/Program Police Physical arrests 4,678 4,909 5,420 5,763 5,899 5,248 5,321 5,762 5,819 5,342 Parking violations 10,952 11,133 15,891 14,520 13,926 15,873 14,230 14,863 15,622 14,721 Traffic violation 5,117 4,990 4,991 5,149 5,796 5,116 5,856 5,778 5,721 5,894 Fire Fire responses 3,126 2,798 2,716 2,731 2,657 2,818 3,658 3,752 3,985 4,167 Ambulance runs 9,304 9,106 9,523 9,112 8,595 10,542 11,549 10,246 9,742 8,602 Inspections 1,963 1,839 1,853 2,058 1,966 2,212 2,440 2,540 2,576 2,521 Sources: City of Covington Police and Fire Record Management System 106

167 Schedule 19 City of Covington, Kentucky Capital Assets Statistics by Function/Program Current and Past Nine Fiscal Years Fiscal Year Function/Program Police Stations Patrol units Fire stations Other public works Streets (miles) Streetlights 3,785 3,785 3,246 3,246 3,246 3,246 3,246 3,246 3,246 3,246 Miles of Sidewalks 1,545 Parks and recreation Parks 22 Acreage Playgrounds Baseball/softball diamonds Soccer/football fields Swimming pools Water Park 1 Golf courses 1 Source: City of Covington Police Department City of Covington Fire Department City of Covington Department of Public Improvement 107

168 SINGLE AUDIT SECTION

169 CITY OF COVINGTON, KENTUCKY Schedule of Expenditures of Federal Awards Fiscal Year Ended June 30, 2014 Federal Grantor / Pass- Through Grantor / Program Title Federal CFDA Pass-Through Number Grantor's Number Revenues Expenditures U.S. Department of Housing and Urban Development Section 8 Housing Choice Vouchers KY-133-VO F04 $ 5,778,944 $ 5,960,441 Community Development Block Grants/ Entitlement Grants B-11-MC ,136,293 2,136,293 HOME Investment Partnership Programs M-10-MC , ,433 Community Challenge Planning Grants CC-PKY , ,383 Economic Development Initiative - Special Project, Neighborhood Initiative and Miscellaneous Grants N/A 194, ,193 Pass Through From Kentucky Department of Local Government Community Development Block Grants/ State's Program (NSP1) N , ,123 Total U.S. Department of Housing and Urban Development 8,943,369 9,124,866 U.S. Department of Agriculture Forest Service Pass Through From Kentucky Division of Forestry Urban and Community Forestry Program PON ,998 9,998 Total U.S. Department of Agriculture Forest Service 9,998 9,998 U.S. Department of Transportation Pass Through From Kentucky Transportation Cabinet State and Community Highway Safety AL ,317 28,317 Total U.S. Department of Transportation 28,317 28,317 U.S. Department of Justice Pass Through From Kenton County Edward Byne Memorial Justice Assistance Grant Program N/A 56,592 56,592 Total U.S. Department of Justice 56,592 56,592 U.S. Environmental Protection Agency Brownfield Assessments and Cleanup - Stewart Ironworks Cleanup BF , ,703 Total U.S. Environmental Protection Agency 164, ,703 Total Federal Financial Assistance $ 9,202,979 $ 9,384,

170 CITY OF COVINGTON, KENTUCKY Schedule of Expenditures of Federal Awards Fiscal Year Ended June 30, 2014 Note 1 - Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards includes Federal grant activity of the City and is presented on the modified accrual basis of accounting. The information in this Schedule is presented in accordance with the requirements of OMB Circular A-133, therefore, some amounts presented in this Schedule may differ from amounts presented in or used in the preparation of the basic financial statements. Note 2 - Outstanding Notes The community development loans outstanding at June 30, 2014 totaled $5,439,492 under CFDA , $2,435,499 under CFDA , and $7,294,962 under CFDA Note 3 - Subrecipients Of the Federal expenditures presented in the Schedule, the City provided Federal awards to subrecipients as follows: Subrecipients Amount CFDA Community Development Block Grants/Entitlement Grants: Center for Great Neighborhoods $ 132,447 CFDA Community Development Block Grants/State's Program (NSP1): Center for Great Neighborhoods 5,784 Housing Opportunities of Northern Kentucky 1,920 CFDA HOME Investment Partnerships Program: Entryway, Inc. 63,795 Center for Great Neighborhoods 30,

171 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITORS REPORT To the Mayor and City Commissioners City of Covington, Kentucky: We have audited, in accordance with the 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, the financial statements of the governmental activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City of Covington, Kentucky ("City") as of and for the year ended June 30, 2014 and the related notes to the financial statements, which collectively comprise the City's basic financial statements, and have issued our report thereon dated December 29, 2014, wherein we noted the City implemented Governmental Accounting Standards Board Statements No. 65, 67, and 68 and the financial statements of Devou Properties, Inc. were audited by other auditors. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the City s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City s internal control. Accordingly, we do not express an opinion on the effectiveness of the City s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. We consider finding described in the schedule of findings and questioned costs to be a material weakness. 110

172 A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiencies in findings and described in the accompanying schedule of findings and questioned costs to be significant deficiencies. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. City s Responses to Findings The City s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The City s responses were not subjected to the auditing procedures applied in the audit of the financial statements and accordingly, we express no opinion on them. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the City s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio December 29,

173 REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY OMB CIRCULAR A-133 INDEPENDENT AUDITORS REPORT To the Mayor and City Commissioners City of Covington, Kentucky: Report on Compliance for Each Major Federal Program We have audited the City of Covington, Kentucky s (the City ) compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of the City s major federal programs for the year ended June 30, The City s major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of the City s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the City s compliance. Opinion on Each Major Federal Program In our opinion, the City complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30,

174 Other Matters The results of our auditing procedures disclosed an instance of noncompliance, which is required to be reported in accordance with OMB Circular A-133 and which is described in the accompanying schedule of findings and questioned costs as finding Our opinion on each major federal program is not modified with respect to this matter. The City s response to the noncompliance finding identified in our audit is describe in the accompanying schedule of findings and questioned costs. The City s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control over Compliance Management of the City is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the City s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, we identified a deficiency in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as finding that we consider to be a significant deficiency. The City s response to the internal control over compliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. The City s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A Accordingly, this report is not suitable for any other purpose. Clark, Schaefer, Hackett & Co. Cincinnati, Ohio December 29,

175 CITY OF COVINGTON, KENTUCKY Schedule of Findings and Questioned Costs Year Ended June 30, 2014 Section I Summary of Auditors Results Financial Statements Type of auditors report issued: Unmodified Internal control over financial reporting: Material weakness(es) identified? Yes Significant deficiency(ies) identified not considered to be material weaknesses? Yes Noncompliance material to the financial statements noted? None Federal Awards Internal control over major programs: Material weakness(es) identified? None Significant deficiency(ies) identified not considered to be material weaknesses? Yes Type of auditors report issued on compliance for major programs: Any audit findings that are required to be reported in accordance with 510(a) of Circular A-133? Unmodified Yes Identification of major programs: CFDA Section 8 Housing Choice Vouchers Dollar threshold to distinguish between Type A and Type B Programs: $300,000 Auditee qualified as low-risk auditee? No Section II Financial Statement Findings Finding Material Weakness Prior Period Adjustment The City restated its beginning fund balance in the General Fund and beginning net position in the Medical Self Insurance Fund to correct errors made in prior years in the due to/due from accounts between these fund. Our professional standards consider the restatement of previously issued financial statements to reflect the correction of a material misstatement due to error a material weakness in internal control over financial reporting. Management s Response: We concur. 114

176 Finding Significant Deficiency Accounting Procedures During our review of the City accounting and financial reporting processes, we noted the City does not have a comprehensive accounting procedures manual. A manual of written procedures, instructions, and assignments of duties will prevent or reduce misunderstandings, errors, inefficient or wasted effort, duplicated or omitted procedures, and other situations that can result in inaccurate or untimely accounting records. A well-devised accounting manual can also help to ensure that all similar transactions are treated consistently, that accounting principles used are proper, and that records are produced in the form designed by management. A good accounting manual would aid in the training of new employees. Management s Response: We agree with the auditor s comments. However, the City does have an accounting manual but it is in need of a complete overhaul. The City will be implementing new computer software in The manual will be updated to include all new information and procedures as it relates to the new software as well all of the changes that have occurred in the City over the last year that are currently documented in memo format. The City staff we are advised of all revisions and trained on the new software. Finding Significant Deficiency Tax Collection Processes During our review of property and other taxes and license fees, we observed the following: The tax auditors have the access and ability to initiate and authorize transactions, record and process transactions, reconcile and report on the transactions, and authorize refunds which represents a lack of segregation of duties. Without proper segregation of duties, the risk increases that errors or fraud could occur and not be detected within a timely basis. We recommend the City find ways to segregate these duties or develop additional monitoring controls to mitigate risk. Due to a recent reorganization, staff has been assigned new responsibilities. However, we noted a lack of formal training resources and manuals, such as a formalized manual of written procedures, instructions, and assignments of duties and checklists for processes and auditing that could assist with the training and reduce misunderstandings, errors, duplicated or wasted efforts and other situations that can result in inaccurate or untimely accounting records. We recommend additional training for staff and the development of formalized procedures and policies. Management s Response: We agree with the auditors comments, and the following actions have been taken or will be taken to improve the situation. We will find ways to segregate the duties relating to the tax collection process. The City is currently seeking new staff to help improve this process and implement the needed segregation. The City is also currently seeking a replacement for the individual currently responsible for revenue management. Once in place, staff will be trained and procedures formalized to improve the billing and collection process. Succession plans are underway and the development of a backup employee with knowledge of the billing and collection process has been planned for. The staff will be advised of all revisions. Also, the City will be implementing new software beginning July

177 Section III Federal Award Findings and Questioned Costs U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Finding CFDA Section 8 Housing Choice Vouchers Condition: The City did not submit its unaudited financial information, for the fiscal year ended June 30, 2013, until July 2014, which was rejected by HUD, and then resubmitted in December The City still hasn t submitted the audited financial information. Criteria: 24 CFR 5.801, Uniform Financial Reporting Standards, require unaudited financial statements to be submitted 60 days after the fiscal year end, and audited financial statements to be submitted no later than 9 months after the fiscal year end. Cause: The City experienced turnover in key positions during the fiscal year, which caused the oversight in financial reporting. Effect: The City was not in compliance with reporting requirements. Recommendation: We recommend the City implement procedures to ensure personnel are knowledgeable with reporting requirements of federal awards. View of Responsible Officials: The City believes this year had extenuating circumstances that had occurred during this time frame that did not allow for compliance. Staff turnover, correction of errors and difficulty of the process resulted in the late filing. Steps have been taken and issues have been resolved to allow for compliance in the future. Section IV Schedule of Prior Year Findings and Questioned Costs Finding Material Weakness Audit Adjustments During the course of the FY13 audit, misstatements in the financial statements were identified that were not detected by the City s internal control over financial reporting. Status: Corrected. Finding Material Weakness Purchasing and Accounts Payable Processes The Accounts Payable Clerk is responsible for processing payments and maintaining the vendor master database which represents a lack of segregation of duties. Checks printed with electronic signatures are not subjected to independent review before being mailed. Passwords within the system were not required to be changed periodically and the systems administrator (former finance director) had access to user names and their passwords. The City lacked effective cut-off procedures to properly capture expenditures and corresponding liabilities in the appropriate accounting period. Status: Corrected with the exception of the lack of segregation issue related to the vendor master database which still exists due to software limitations. Management has implemented mitigating controls over the purchasing and accounts payable process. This item was addressed in a separate communication to management and those charged with governance. Finding Significant Deficiency Accounting Procedures The City lacked a comprehensive accounting procedures manual. Status: Repeated as Finding

178 Finding Significant Deficiency Notes Receivable The City lacked processes to assess the collectability of its outstanding notes, and thus accurately report receivables in the financial statements. There was a lack of segregation of duties over maintaining loan database, reconciling with the general ledger and release of the mortgages. Status: Corrected. Finding Significant Deficiency Tax Collection Processes The City lacked segregation of duties within its tax software, lacked formal training resources and manuals, and succession planning for retire-eligible personnel. Status: Repeated as Finding Finding Significant Deficiency Cash Receipts Processes and Reconciliation The City lacked segregation of duties over general ledger maintenance and preparation of monthly bank reconciliations. The City also lacked supporting documentation for many of its reconciling items within the bank reconciliations. Status: Corrected. 117

179 APPENDIX E CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 STATEMENT OF INDEBTEDNESS OF INTERIM FINANCE DIRECTOR

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181 STATEMENT OF INDEBTEDNESS KY CONST. 157 and 158 KRS COMMONWEALTH OF KENTUCKY ) ) SS COUNTY OF COVINGTON ) The undersigned Interim Finance Director of the City of Covington, Kentucky, Commonwealth of Kentucky (the "Issuer"), does hereby certify that the following statements concerning the financial condition of said Issuer are true and correct as they appear from records of the Issuer: 1. The assessed valuation of all the taxable property in the Issuer as estimated on the last certified assessment is... $2,210,819, The current population of the Issuer is... 40, The total of all bonds, notes and other obligations currently issued and outstanding, including the present Bonds of $4,000, $63,984, Bonds, notes and other obligations excluded from the calculation of net indebtedness are as follows: (a) (b) (c) (d) (e) Obligations issued in anticipation of the levy or collection of special assessments which are payable solely from those assessments or are otherwise self-supporting obligations..... $0 Obligations issued in anticipation of the collection of current taxes or revenues for the fiscal year which are payable within that fiscal year... $3,500,000 Obligations, which are not self-supporting obligations, issued after July 15, 1996 by any instrumentality of the Issuer created for the purpose of financing public projects for which there has been no pledge to the payment of debt charges of any tax of the Issuer or for which there is no covenant by the Issuer to collect or levy a tax to pay debt charges... $0 Self-supporting obligations and other obligations for which there has been no pledge to the payment of debt charges of any tax of the Issuer or for which there is no covenant by the Issuer to collect or levy a tax to pay debt charges... $0 Obligations issued to pay costs of public projects to the extent they are issued in anticipation of the receipt of, and are payable as to principal from, federal or state grants within that fiscal year... $0 E-1

182 (f) (g) Leases entered into under KRS to after July 15, 1996 which are not tax-supported leases... $0 Bonds issued in the case of an emergency, when the public health or safety should so require... $0 (h) Bonds issued to fund a floating indebtedness... $0 TOTAL EXEMPT OBLIGATIONS... $3,500, The total of bonds, notes and other obligations subject to the debt limitation set forth in KRS (3 minus 4) is... $60,484, The total of bonds, notes and other obligations subject to the debt limitation set forth in KRS as computed in 5 above, does not exceed 10%* of the assessed valuation of all the taxable property in the Issuer. 7. The current tax rate of the Issuer, for other than school purposes, upon the value of its taxable property is $.3045 per $100 of assessed valuation for real property and $.3045, per $100 of assessed valuation for tangible property, which does not exceed the maximum permissible tax rates for the Issuer as set forth in Section 157 of the Kentucky Constitution. 8. The issuance of the bonds, notes or other obligations set forth in 3 hereof will not cause the tax rate set forth in 7 hereof to increase in an amount which would exceed the maximum permissible tax rate for the Issuer as set forth in Section 157 of the Kentucky Constitution. IN WITNESS WHEREOF, I have hereunto set my hand this day of August, By: Interim Finance Director * 10% for cities having a population of fifteen thousand or more; 5% for cities having a population of less than fifteen thousand but not less than three thousand; and 3% for cities having a population of less than three thousand. E-2

183 APPENDIX F CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 FORM OF LEGAL APPROVING OPINION OF BOND COUNSEL

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185 The form of the legal approving opinion of Dinsmore & Shohl LLP, bond counsel, is set forth below. The actual opinion will be delivered on the date of delivery of the bonds referred to therein and may vary from the form set forth to reflect circumstances both factual and legal at the time of such delivery. Recirculation of the Final Official Statement shall create no implication that Dinsmore & Shohl LLP has reviewed any of the matters set forth in such opinion subsequent to the date of such opinion. Gentlemen: We have examined the transcript submitted relating to the issue of $4,000,000 Taxable General Obligation Bonds, Series 2015 (the "Bonds") of the City of Covington, Kentucky (the "Issuer"), dated August 11, 2015, numbered R-1 upward and of the denomination of $5,000 and any integral multiple thereof. The Bonds mature, bear interest, and are subject to mandatory and optional redemption upon the terms set forth therein. We have also examined a specimen Bond. Based on this examination, we are of the opinion, based upon laws, regulations, rulings and decisions in effect on the date hereof, that: 1. The Bonds constitute valid obligations of the Issuer in accordance with their terms, which unless paid from other sources, are payable from taxes to be levied by the Issuer without limitation as to rate. 2. Under laws, regulations, rulings and judicial decisions in effect as of the date hereof, interest on the on the Bonds is not excludible from gross income for Federal income tax purposes. We express no other opinion as to the federal tax consequences of purchasing, holding or disposing of the Bonds. 3. The interest on the Bonds is not subject to taxation by the Commonwealth of Kentucky, and the Bonds are not subject to ad valorem taxation by the Commonwealth of Kentucky or by any political subdivision thereof. We express no other opinion as to the state tax consequences of purchasing, holding or disposing of the Bonds In giving this opinion, we have relied upon covenants and certifications of facts, estimates and expectations made by officials of the Issuer and others contained in the transcript; which we have not independently verified. It is to be understood that the enforceability of the Bonds may be subject to bankruptcy, insolvency, reorganization, moratorium and other laws in effect from time to time affecting creditors' rights, and to the exercise of judicial discretion. Very truly yours, F-1

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187 APPENDIX G CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 BOOK-ENTRY ONLY SYSTEM

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189 BOOK-ENTRY ONLY SYSTEM The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity date of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world's largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has a Standard & Poor's rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain G-1

190 steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Bonds will be made to Cede &. Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof. G-2

191 APPENDIX H CITY OF COVINGTON, KENTUCKY TAXABLE GENERAL OBLIGATION BONDS, SERIES 2015 SPECIMEN MUNICIPAL BOND INSURANCE POLICY

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193 ! MUNICIPAL BOND INSURANCE POLICY ISSUER: [NAME OF ISSUER] Policy No: MEMBER: [NAME OF MEMBER] BONDS: $ in aggregate principal amount of [NAME OF TRANSACTION] [and maturing on] Effective Date: Risk Premium: $ Member Surplus Contribution: $ Total Insurance Payment: $ BUILD AMERICA MUTUAL ASSURANCE COMPANY ( BAM ), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the Trustee ) or paying agent (the Paying Agent ) for the Bonds named above (as set forth in the documentation providing for the issuance and securing of the Bonds), for the benefit of the Owners or, at the election of BAM, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. On the later of the day on which such principal and interest becomes Due for Payment or the first Business Day following the Business Day on which BAM shall have received Notice of Nonpayment, BAM will disburse (but without duplication in the case of duplicate claims for the same Nonpayment) to or for the benefit of each Owner of the Bonds, the face amount of principal of and interest on the Bonds that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by BAM, in a form reasonably satisfactory to it, of (a) evidence of the Owner s right to receive payment of such principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner s rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in BAM. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by BAM is incomplete, it shall be deemed not to have been received by BAM for purposes of the preceding sentence, and BAM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, any of whom may submit an amended Notice of Nonpayment. Upon disbursement under this Policy in respect of a Bond and to the extent of such payment, BAM shall become the owner of such Bond, any appurtenant coupon to such Bond and right to receipt of payment of principal of or interest on such Bond and shall be fully subrogated to the rights of the Owner, including the Owner s right to receive payments under such Bond. Payment by BAM either to the Trustee or Paying Agent for the benefit of the Owners, or directly to the Owners, on account of any Nonpayment shall discharge the obligation of BAM under this Policy with respect to said Nonpayment. Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. Business Day means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer s Fiscal Agent (as defined herein) are authorized or required by law or executive order to remain closed. Due for Payment means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless BAM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration) and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. Nonpayment means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. Nonpayment shall also include, in respect of a Bond, any payment made to an Owner by or on behalf of the Issuer of principal or interest that is Due for Payment, which payment has been recovered from such Owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction. Notice means delivery to BAM of a notice of claim and certificate, by certified mail, or telecopy as set forth on the attached Schedule or other acceptable electronic delivery, in a form satisfactory to BAM, from and signed by an Owner, the Trustee or the Paying Agent, which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount, (d) payment instructions and (e) the date such claimed amount becomes or became Due for Payment. Owner means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that Owner shall not include the Issuer, the Member or any other person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds.! H-1

194 ! BAM may appoint a fiscal agent (the Insurer s Fiscal Agent ) for purposes of this Policy by giving written notice to the Trustee, the Paying Agent, the Member and the Issuer specifying the name and notice address of the Insurer s Fiscal Agent. From and after the date of receipt of such notice by the Trustee, the Paying Agent, the Member or the Issuer (a) copies of all notices required to be delivered to BAM pursuant to this Policy shall be simultaneously delivered to the Insurer s Fiscal Agent and to BAM and shall not be deemed received until received by both and (b) all payments required to be made by BAM under this Policy may be made directly by BAM or by the Insurer s Fiscal Agent on behalf of BAM. The Insurer s Fiscal Agent is the agent of BAM only, and the Insurer s Fiscal Agent shall in no event be liable to the Trustee, Paying Agent or any Owner for any act of the Insurer s Fiscal Agent or any failure of BAM to deposit or cause to be deposited sufficient funds to make payments due under this Policy. To the fullest extent permitted by applicable law, BAM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to BAM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy may not be canceled or revoked. This Policy sets forth in full the undertaking of BAM and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. THIS POLICY IS ISSUED WITHOUT CONTINGENT MUTUAL LIABILITY FOR ASSESSMENT. In witness whereof, BUILD AMERICA MUTUAL ASSURANCE COMPANY has caused this Policy to be executed on its behalf by its Authorized Officer. BUILD AMERICA MUTUAL ASSURANCE COMPANY By: Authorized Officer! H-2

195 ! Notices (Unless Otherwise Specified by BAM) Address: 1 World Financial Center, 27th floor 200 Liberty Street New York, New York Telecopy: (attention: Claims)! H-3

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