Comprehensive Annual Financial Report

Transcription

1 Comprehensive Annual Financial Report for Fiscal Year Ended

2 Comprehensive Annual Financial Report

3 Contents Introductory Section Letter of Transmittal GFOA Certificate of Achievement Organization Chart Financial Section Independent Auditor's Report 1-2 Management's Discussion and Analysis 3-17 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position 18 Statement of Activities Fund Financial Statements: Governmental Funds: Balance Sheet 21 Reconciliation of the Balance Sheet to the Statement of Net Position 22 Statement of Revenue, Expenditures, and Changes in Fund Balances 23 Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities 24 Proprietary Funds: Statement of Net Position 25 Statement of Revenue, Expenses, and Changes in Net Position 26 Statement of Cash Flows Fiduciary Funds - Statement of Fiduciary Assets and Liabilities - Agency Fund 29 Component Units: Statement of Net Position 30 Statement of Activities Notes to Financial Statements Required Supplemental Information 69 Budgetary Comparison Schedule - General Fund 70 Schedule of Changes in the Net Pension Liability and Related Ratios 71 Schedule of Pension Contributions 72 Schedule of Changes in the Net OPEB Liability and Related Ratios 73 Schedule of OPEB Contributions 74 Notes to Required Supplemental Information 75 i-vii viii ix

4 Contents (Continued) Other Supplemental Information 76 Nonmajor Governmental Funds: Fund Descriptions Combining Balance Sheet Combining Statement of Revenue, Expenditures, and Changes in Fund Balances Budgetary Comparison Schedule - Nonmajor Governmental Fund Internal Service Funds: Fund Descriptions 93 Combining Statement of Net Position 94 Combining Statement of Revenue, Expenses, and Changes in Net Position 95 Combining Statement of Cash Flows Fiduciary Funds - Agency Funds: Statement of Assets and Liabilities 98 Schedule of Changes in Assets and Liabilities 99 Component Units: Balance Sheet/Statement of Net Position - Downtown Development Authority 100 Statement of Revenue, Expenditures, and Changes in Fund Balance/Statement of Activities - Downtown Development Authority 101 Balance Sheet/Statement of Net Position - Downtown Management Board 102 Statement of Revenue, Expenditures, and Changes in Fund Balance/Statement of Activities - Downtown Management Board 103 Balance Sheet/Statement of Net Position - Brownfield Redevelopment Authority 104 Statement of Revenue, Expenditures, and Changes in Fund Balance/Statement of Activities - Brownfield Redevelopment Authority 105 Balance Sheet/Statement of Net Position - Economic Development Corporation 106 Statement of Revenue, Expenditures, and Changes in Fund Balance/Statement of Activities - Economic Development Corporation 107 Balance Sheet/Statement of Net Position - Local Development Financing Authority 108 Statement of Revenue, Expenditures, and Changes in Fund Balance/Statement of Activities - Local Development Financing Authority 109 Statistical Section 110 Financial Trend Information 111 Net Position by Component Changes in Governmental Net Position Changes in Business Type Net Position Fund Balances - Governmental Funds Changes in Fund Balances - Governmental Funds Revenue Capacity Information 122 Taxable Value and Estimated Actual Value of Taxable Property Direct and Overlapping Property Tax Rates Principal Property Taxpayers 127 Property Tax Levies and Collections 128 Debt Capacity Information 129 Ratios of Outstanding Debt Ratios of General Bonded Debt Outstanding Direct and Overlapping Governmental Activities Debt 134 Legal Debt Margin Pledged-revenue Coverage 137

5 Contents (Continued) Demographic and Economic Information 138 Demographic and Economic Statistics 139 Principal Employers 140 Operating Information 141 Full-time Equivalent Government Employees Operating Indicators Capital Asset Statistics

6 November 20, 2018 Mayor and Members of City Council City of East Lansing East Lansing, Michigan The Comprehensive Annual Financial Report of the City of East Lansing for the fiscal year ending is submitted herewith. This report was prepared by the City's Finance Department and responsibility for both the accuracy of the data presented and the completeness and fairness of the presentation, including all disclosures, rests with the City s administration. We believe this financial information is accurate in all material aspects; that it is presented in a manner designated to fairly state the financial position and results of operations of the City as measured by the financial activity of its various funds; and that all disclosures necessary to enable the reader to gain the maximum understanding of the City's financial activities are included. The statements for the fiscal year ending were prepared in accordance with Statement No. 34 of the Government Accounting Standards Board (GASB 34) entitled Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. Before GASB #34 implementation, the financial statements only provided information about individual funds of the City. These funds established by the City show restrictions on planned use of resources or to measure, in the short term, the revenues and expenditures arising from municipal activities. While some of the statements in the CAFR are still on an individual fund basis, GASB 34 requires government-wide financial statements which were prepared using accrual accounting for all government activities. These statements at the government-wide level will help readers assess the finances of the government in its entirety; determine if the City s overall financial position improved or deteriorated, and see how the City invested in capital assets like roads, bridges, sewers, parks, etc. The government-wide statements are aimed at looking at the City as a whole and how it looks in the long term. Also included is a section called Management Discussion and Analysis, which is intended to give an easily readable analysis of the City s financial performance for the year. CITY SERVICES The City provides the full range of municipal services reflected by statute and/or charter. These services include police, fire, rescue, ambulance, district court, sanitation, recycling, recreation, library, streets and roads, public improvements, downtown parking, water, sewer, planning, zoning, building and general administrative services. i

7 ECONOMIC CONDITION AND OUTLOOK East Lansing is located in central Lower Michigan adjacent to the City of Lansing, the state capital of Michigan. East Lansing is a residential, commercial-oriented community serving as a local business, marketing and cultural center and is the home of Michigan State University. The East Lansing economy is slowly reversing the impact of the prolonged economic recession in the State. The state equalized value (SEV) of all property in the City increased by $39.4 million in the last year with an inflationary increase of 2.1 percent. In November 1993, Michigan voters passed Proposal A which affects how K-12 education is funded. School operating property taxes were drastically reduced which cut many homeowners property taxes in half. In its place, a 2 cent sales tax increase was implemented which was earmarked for education, as well as a state wide 6 mill education property tax. While the ballot initiative had the greatest impact on school funding, there were several City budget impacts as well. Proposal A also limited the increase on assessment of individual properties to the lesser of 5% or the consumer price index (CPI). The only exception to this provision is the uncapping of taxable value upon the transfer of property ownership. The initiative also called for an assessment increase limit of 5% or consumer price index whichever is LESS by individual parcel, except when the ownership of a parcel is transferred. The unprecedented economic conditions of the last several years have led to real declines in the SEV s of homes across the nation. While Michigan was impacted greatly with the economic downturn, in the past year East Lansing has seen an encouraging number of sales and increasing home prices, indicating market stabilization. Statutory revenue sharing payments to local governments had been subject to participation in the Economic Vitality Incentive Program (EVIP) created by Public Act 63 of The State of Michigan s budget eliminated the EVIP for cities, villages, and townships and replaced it with City, Village, and Township Revenue Sharing (CVTRS). The new model eliminated two of the three EVIP requirements; but it retained the requirement to publish a citizen s guide and performance dashboard by December 1 st, and add some additional disclosures. The City completed the CVTRS certification, due December 1st, and the FY2018 Citizen s Guide and Performance Dashboard are available for viewing on the city s website, in the clerk s office and at the city library. MAJOR INITIATIVES In 1996, 1998, 2000, 2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016 and 2018 the City Council adopted a set of strategic priorities which guide initiatives and decisions regarding the allocation of resources. These priorities are set forth in 32 objectives with attendant action items. This document will be used to guide policy-setting over the next two years. A summary of these priorities include: ii

8 I. Strong Neighborhoods: Safe and stable neighborhoods provide the foundation for East Lansing as a community. Their continued appeal will be achieved by meeting the needs of a diverse population through the provision of quality public services, maintenance of infrastructure and housing stock, along with targeted outreach geared towards supporting neighborhood connectivity and competence. Build stronger relationships between permanent residents and students and expand the relationship between police with the community Complete the Action Plan for the AARP Network of Age-Friendly Communities Review and revise parking requirements for commercial areas, residential areas (including the residential parking permit program), home occupations and transitional areas Update the Zoning Code to provide more flexibility for remodels and additions of owner-occupied single-family homes II. Vibrant Economy: Industry diversity is a hallmark of a vibrant economy. Continued efforts to attract and retain diverse businesses through creative initiatives, key partnerships and innovation, will help to cultivate a model of economic development in East Lansing that is transformational and dynamic. Actively encourage redevelopment of the Park District area Continue to implement policies which help attract more diverse age groups to live in the downtown Continue to enhance programs of the DDA and DMB that will improve the character of downtown and diversify downtown businesses Continue to implement city programs to welcome students and new residents to East Lansing Lease, not sell, City-owned properties to maintain a revenue stream Identify a funding strategy for the extension of Coleman Road III. Enhanced Public Assets: East Lansing s public assets contribute to the high quality of life that helps to define the community. Maintaining and improving these assets, which include physical structures and facilities, as well as recreational, cultural and educational programs, is critical to the well-being of the community and its residents. Enhance sidewalks and non-motorized transportation facilities with grants and direct investment on major streets Develop a plan for balanced infrastructure renewal throughout East Lansing to renew and or extend the service life of critical infrastructure, to include: water, sewer, WRRF, streets, drains and sidewalks throughout East Lansing Evaluate current park facilities and develop relevant plans for the management and improvement of each component of the park system iii

9 Increase bicycle friendly infrastructure throughout the community Review and analyze the option for a regional cooperation with area partners including the establishment of service authorities Enhance safety of public spaces and public events IV. Environmental Stability: Environmental stewardship is a key function of city government. Protecting the health of East Lansing s natural resources through efficient, safe and effective water, sewer, street and transportation systems are all key elements in achieving a high quality, healthy environment that is sustainable. Continue to educate residents about private utility ownership Participate regionally and locally in addressing groundwater management, wellhead protection and storm water/watershed management programs Continue to reduce the City s environmental footprint, including moving the City toward the use of 100% clean energy Develop funding mechanism for tree replacement V. Sustainable High Performing Government: The primary role of local government in East Lansing is to provide residents with high quality services in the most efficient, cost-effective and transparent manner. This is achievable through collaborative initiatives, both internal and external, and by maintaining an organizational culture in which employees are empowered and outstanding service provision is paramount. Ensure East Lansing s fire protection services are of the best value and most effective while evaluating the possibility of a regional fire authority, and increasing fire supervision and succession planning and training Expand on cooperative relationships with local law enforcement partners Draft and adopt, where appropriate, form-based zoning for areas along the Michigan Avenue-Grand River corridor, as well as update the remaining Zoning Code Improve the efficiency and effectiveness of the City s finance system Increase number of residents enrolled in emergency notification systems by increasing Nixle subscribers to the goal of 15,000 Promote East Lansing as a highly desirable place to live and work through social media and other marketing efforts Increase regular communication to residents, so that they are more informed about City news and events Implement the six pillars of 21 st Century policing, which would expand East Lansing Police Department diversity training and be proactive on diversity relations Review 2018 International Property Maintenance Code and adopt relevant modifications to the City s current property maintenance code iv

10 Partner with the City of Lansing, Meridian Township, and other related entities to undertake the Red Cedar remapping project Continue efforts to ensure the City s financial viability and enhance the City s economic sustainability Significant Initiatives, Events or Projects The following is a partial list of significant initiatives, events or projects either underway or accomplished in FY2018: The five year financial forecast for the General Fund was updated for the twelfth consecutive year as part of the City s strategic fiscal planning practices. The forecast has become a framework for making financial decisions throughout fiscal year 2018 and an integral part of developing the fiscal year 2019 budget. The City Council held multiple community engagement sessions and commissioned a phone survey to guide them in making future financial decisions, including the decision to place an income tax on the August 2018 ballot, subsequently approved by the residents of East Lansing. As of the statement from MERS, the City had over $15.6 million in plan assets set aside to fund the OPEB (retiree healthcare) liability. These funds are maintained in the Retirement Health Funding Vehicle and invested and monitored by MERS. The City has an AA+ rating from Standard and Poor s and an AA rating from Fitch. The rating reflects the City s strong budgetary flexibility, strong financial management practices and strong overall budget performance, among other things. The rating summary also notes the City s effort to pre-fund its other post-employment health care benefits plan (OPEB), as well as the fact that the City is home to Michigan State University a stabilizing institution and the community s leading employer. The City has negotiated labor agreements in place with all seven unions. These agreements expire June 30, The City has continued to make progress in the development of service-sharing agreements with local partners. We continue to participate in inter-local agreements with Meridian Township to share an assessor and provide building inspection services for both jurisdictions. The City has continued its partnership with five local jurisdictions to review opportunities for collaborations and efficiencies among fire services. In FY2018, the City's Healthcare Task Force once again maintained cost competitive healthcare for all full time employees. The Task Force has enabled the City's healthcare plan to continuously meet the hard cap limits established by State of Michigan Public Act 152. The City s Neighborhood Partnerships Initiative saw continued success in The goals of the initiative are to support citizenship, foster two-way communication and build community in East Lansing s neighborhoods. The initiative includes a City sponsored, community maintained website, City staff liaisons assigned to work one-on-one with neighborhoods and the opportunity to obtain a neighborhood enhancement mini-grant to use towards community activities or events. The initiative has grown to ten staff liaisons working with seventeen neighborhoods and there has been an increased interest in the mini-grant program. v

11 For the 32 th year, the City was named a Tree City USA by the National Arbor Day Foundation in In celebration, the City hosted its annual school tree planting at Pinecrest Elementary during April s Arbor Day. The City of East Lansing and MSU hosted the 2018 One Book, One Community program, featuring "My Beloved World" by Associate Justice Sonia Sotomayor, Supreme Court of the United States. In My Beloved World, Sotomayor provides readers with a frank and loving account of her coming of age and her large extended family, many with roots still in Puerto Rico. Sotomayor also recounts the adversity she has faced in her life from growing up in poverty with an at-times challenging family life to her lifelong management of juvenile diabetes and her determination to adapt to a wider world that would eventually result in her becoming the first Latina and third woman appointed to the U.S. Supreme Court. The East Lansing Public Library hosted the 9th Annual East Lansing Welcomes the World event in 2018, which serves to welcome MSU international students and families to the Community. INTERNAL CONTROLS Management of the City is responsible for establishing and maintaining an internal control structure designed to ensure that the City assets are protected from loss, theft or misuse and to ensure that adequate accounting data are compiled to allow for the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America. The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) the cost of the control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. MUNICIPAL SECONDARY MARKET DISCLOSURE Certain financial information is required to be disclosed annually in compliance with Security and Exchange Commission Rule 15c, We maintain the information contained in this Comprehensive Annual Financial Report that meets the annual reporting guidelines. INDEPENDENT AUDIT The City Charter and State Law require an audit of the accounts of the City annually by qualified accountants experienced in municipal accounting. The City contracted with the auditing firm of Plante & Moran, PLLC, to conduct the audit and their report is included in the Comprehensive Annual Financial Report. The audit team consisted of Doug Bohrer, Partner, Alisha Watkins, Senior Associate, and other supporting staff. vi

12 CERTIFICATE OF ACHIEVEMENT The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of East Lansing for its Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2017, as well as the thirty three previous fiscal years. In order to be awarded a Certificate of Achievement, a governmental unit must publish an easily readable and efficiently organized Comprehensive Annual Financial Report whose contents conform to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe our current report continues to conform to Certificate of Achievement Program requirements, and we are submitting it to the GFOA to determine its eligibility for another certificate. ACKNOWLEDGMENT The attached report represents the final product in the accounting cycle of the City for the year ended. The issuance of this report is the culmination of many hours of effort in analyzing and reporting city-wide fiscal operations for the 2018 fiscal year. We would like to express our appreciation to Plante & Moran, PLLC, auditors for their efforts in making the audit run smoothly. We also wish to acknowledge the efforts of the accounting staff and other staff members in their efforts in closing the books and assisting the auditors in their examination. We would like to give special thanks to the finance department who provided valuable support during the audit and report writing process. We would also like to thank the Mayor and the City Council for their interest and support in the financial condition of the City. For further information regarding the City s financial condition, please see the Management Discussion and Analysis included in the report. Sincerely, George Lahanas City Manager Jill Feldpausch, CPA Director of Finance vii

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14 ORGANIZATIONAL CHART East Lansing Citizens Boards and Commissions 54-B District Court Chief Judge Andrea Larkin Judge Richard D. Ball City Attorney Tom Yeadon City Council Library Director Kristin Shelley Asst. Director Jason Shoup Administrator Nicole Evans City Manager George Lahanas Planning, Building & Development Director Tim Dempsey Parking Administrator Caleb Sharrow Planning & Zoning Administrator David Haywood Community & Economic Development Administrator Thomas Fehrenbach Police Department Chief Larry Sparkes Human Resources Director Shelli Neumann Compensation/ Benefi ts Manager Sally Schepis Administrative Services Information Technology Manager Thomas Crane City Clerk/ Elections City Clerk Jennifer Shuster Communications Coordinator Mikell Frey Parks, Recreation & Arts Director Tim McCaffrey Assistant Director Wendy Wilmers-Longpre Fire Department Chief Randall G. Talifarro Prevention Fire Marshal Don Carter Art Festival Director Michelle Carlson Public Works & Environmental Services Director Scott House Seniors Program Director Kelly Arndt Treasury Treasurer Andrea Smith Finance Services Director/CFO Jill Feldpausch Assessing Assessor David Lee Accounting Budget & Acctg. Admin. Audrey Kincade Housing & University Relations Administrator Annette Irwin Building & Code Administrator Scott Weaver Operations Deputy Chief Steve Gonzalez Lt. James Campbell Operations Deputy Chiefs Steve Alvarado Ken Lehto Dawn Carson ix Infrastructure Administrator Ron Lacasse Environmental Administrator Cathy DeShambo Engineering Administrator Nicole McPherson Water Resource Recovery Facility Superintendent Paul Stokes Communications Department Updated Nov. 2, 2017

15 Independent Auditor's Report To the City Council Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the as of and for the year ended and the related notes to the financial statements, which collectively comprise the 's financial statements, as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of East Lansing, Michigan as of and the respective changes in its financial position and, where applicable, cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 17 to the financial statements during the year ended, the City adopted the new accounting guidance of Governmental Accounting Standards Board Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions, which establishes accounting and financial reporting standards for postemployment benefits other than pensions provided to the employees of state and local governments. Our opinion is not modified with respect to this matter. 1

16 To the City Council Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and the required supplemental information, as identified in the table of contents, be presented to supplement the financial statements. Such information, although not a part of the financial statements, is required by the Governmental Accounting Standards Board, which considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplemental information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the 's financial statements. The other supplemental information, introductory section, and statistical section, as identified in the table of contents, are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The other supplemental information, as identified in the table of contents, is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the other supplemental information, as identified in the table of contents, is fairly stated in all material respects in relation to the financial statements as a whole. The introductory section and statistical section schedules 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 November 20, 2018 on our consideration of the 's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the 's internal control over financial reporting and compliance. November 20,

17 Management s Discussion and Analysis Overview of the Financial Statements The s (the City ) 2018 Comprehensive Annual Financial Report (CAFR) consists of five parts - management s discussion and analysis, the basic financial statements, required supplemental information, other supplemental information, which presents combining statements for non-major governmental funds and fiduciary funds, and a statistical section. The basic financial statements include two kinds of statements that present different views of the City. The first two statements are government-wide financial statements that provide both long-term and short-term information about the City s overall financial status. The remaining statements are fund financial statements that focus on individual parts of the City s government, reporting the City s operations in more detail than the government-wide statements. Government-wide Statements The government-wide statements report information about the City as a whole using accounting methods similar to those used by private sector companies. The statement of net position includes all of the government s assets and liabilities. All of the current year s revenue and expenses are accounted for in the statement of activities regardless of when cash is received or paid. The two government-wide financial statements report the City s net position and how it has changed. Net position, the difference between the City s assets and liabilities, is one way to measure the City s financial health or position. The government-wide financial statements of the City are divided into three categories: Governmental activities - Most of the City s basic services are included here, such as police, fire, public works, court, streets, recreation and culture (includes parks departments, library, and culture), solid waste disposal, and general administration. Property taxes, state-shared revenue, charges for services, and court revenue provide most of the funding. Business-type activities - The City charges fees to customers to help it cover the costs of certain services it provides. The City s water and sewer systems and automobile parking system are treated as business-type activities. Component units - The City includes five other entities in its report: the Downtown Development Authority, the Downtown Management Board, the Brownfield Redevelopment Authority, the Economic Development Corporation, and the Local Development Financing Authority. Although legally separate, these component units are important because the City is financially accountable for them, including debt, which was issued on behalf of the authorities by the City. Fund Financial Statements The fund financial statements provide more detailed information about the City s most significant funds - not the City as a whole. Funds are accounting devices that the City uses to keep track of specific sources of funding and spending for particular purposes. Some funds are required by state law and bond covenants. The City Council establishes other funds to control and manage money for particular purposes. The City has three kinds of funds: Governmental funds - Most of the City s basic services are included in governmental funds, which focus on how cash and other financial assets can readily be converted to cash flow in and out and the balances left at year end that are available for spending. The governmental fund statements provide a detailed short-term view that helps you determine whether there are more or fewer financial resources that can be spent in the near future to finance the City s programs. 3

18 Management s Discussion and Analysis Proprietary funds - Services for which the City charges customers a fee are generally reported in proprietary funds. Proprietary funds, like government-wide statements, provide both long-term and short-term financial information. Fiduciary fund - The City is responsible for ensuring that the assets reported in this fund are used for their intended purpose. All of the City s fiduciary activities are reported in a separate statement of fiduciary assets and liabilities. We exclude these activities from the City s government-wide financial statements because the City cannot use these assets to finance its operations. Financial Overview In a condensed format, the table below shows a comparison of the net position as of the current date to the prior year: *Note: GASB Statement No. 75 was implemented by the City in fiscal year Fiscal year 2017 amounts shown have not been modified to reflect the retrospective application of the change within the management s discussion and analysis section; however, the changes are reflected in the audited financial statements that follow as outlined in Note 17. Governmental Activities 2017* 2018 Change Percent Change Assets Other Assets $ 20,121,000 $ 25,433,544 $ 5,312, % Capital assets 65,828,124 67,300,835 1,472, % Total assets 85,949,124 92,734,379 6,785, % Deferred Outflows of Resources 11,917,586 7,989,315 (3,928,271) -33.0% Liabilities Current liabilities 2,430,813 3,735,003 1,304, % Long-term liabilities 102,887, ,500,311 19,613, % Total liabilities 105,317, ,235,314 20,917, % Deferred Inflows of Resources 510,028 2,728,132 2,218, % Net Position Net investment in capital assets 52,461,026 58,436,354 5,975, % Restricted 2,922,588 4,880,849 1,958, % Unrestricted (63,344,860) (91,556,955) (28,212,095) 44.5% Total net position $ (7,961,246) $ (28,239,752) $ (20,278,506) 254.7% 4

19 Management s Discussion and Analysis Business-type Activities 2017* 2018 Change Percent Change Assets Other Assets $ 16,361,697 $ 18,942,698 $ 2,581, % Capital assets 88,360,508 99,444,602 11,084, % Total assets 104,722, ,387,300 13,665, % Deferred Outflows of Resources 1,452,592 1,015,860 (436,732) -30.1% Liabilities Current liabilities 3,878,229 3,860,702 (17,527) -0.5% Long-term liabilities 51,596,304 61,854,110 10,257, % Total liabilities 55,474,533 65,714,812 10,240, % Deferred Inflows of Resources 276, , , % Net Position Net investment in capital assets 47,498,930 50,316,577 2,817, % Restricted 16,156 - (16,156) % Unrestricted 2,908,739 2,867,510 (41,229) -1.4% Total net position $ 50,423,825 $ 53,184,087 $ 2,760, % 5

20 Management s Discussion and Analysis Total 2017* 2018 Change Percent Change Assets Other Assets $ 36,482,697 $ 44,376,242 $ 7,893, % Capital assets 154,188, ,745,437 12,556, % Total assets 190,671, ,121,679 20,450, % Deferred Outflows of Resources 13,370,178 9,005,175 (4,365,003) -32.6% Liabilities Current liabilities 6,309,042 7,595,705 1,286, % Long-term liabilities 154,483, ,354,421 29,871, % Total liabilities 160,792, ,950,126 31,157, % Deferred Inflows of Resources 786,467 3,232,393 2,445, % Net Position Net investment in capital assets 99,959, ,752,931 8,792, % Restricted 2,938,744 4,880,849 1,942, % Unrestricted (60,436,121) (88,689,445) (28,253,324) 46.7% Total net position $ 42,462,579 $ 24,944,335 $ (17,518,244) -41.3% The City has a combined net position of approximately $24.9 million. The combined net position decreased in total $17.5 million or 41.3 percent over fiscal year This overall change is better explained below when looking at the two activities separately. The governmental activities overall net position is in a deficit due to the long-term unfunded pension and OPEB liabilities. The current year activity resulted in an additional decrease in net position of $20.3 million overall. During the current year, the City adopted GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions, which required recognition of the $30.3 million liability for the estimated unfunded OPEB costs. This was offset by a $4.5 million reduction in the estimated pension liability and an accumulation of cash and receivables in various funds. Specifically, Major and Local Streets plan to cash fund some larger street projects in the coming year. Net investment in capital assets increased almost $6.0 million primarily due to long-term debt being paid down and the 300 Bailey building renovation which was completed by Capital Area Housing Partnership (CAHP). The 300 Bailey building is owned by the City and being leased to CAHP and includes 30 apartment units for area seniors, a daycare center, commercial and office space, and a community space open to the public. Restricted net position is seeing an increase due to the additional cash on hand in the Major and Local Streets funds. Unrestricted net position includes the aforementioned OPEB liability and pension liability netting to a decrease in unrestricted net position of $28.2 million. The City contributed $2.56 million of supplemental pension payments in the current year and will continue to work on reducing the pension and OPEB liabilities. 6

21 Management s Discussion and Analysis Business-type activities net position increased $2.8 million or 5.5 percent when compared to the prior fiscal year. This was primarily driven by the increase in the net investment in capital assets as it relates to the Sewer Fund recognizing the significant amount of capital improvements at the Water Resource Recovery Facility (WRRF). Work was completed on the $32.0 million headworks, screening, grit removal, and interceptor project improvements. The change in the net OPEB liability for business-type activities due to GASB Statement No. 75 is approximately $4.0 million, reducing the unrestricted net position to $2.9 million. Despite the reduction resulting from the recording of the OPEB liability per GASB 75, the unrestricted net position remained consistent overall with increases in other assets, namely cash on hand, as well as various changes in other liabilities. The following tables show the changes in net position: Governmental Activities 2017* 2018 Change Revenue Program revenue: Charges for services $ 11,380,023 $ 12,687,435 1,307,412 Percent Change $ 11.5% Operating grants 7,071,659 7,651, , % Capital grants 2,165,889 6,005,880 3,839, % General revenue: Property taxes 20,744,477 21,136, , % Unrestricted state-shared revenue 5,446,391 5,595, , % Unrestricted interest earnings 137, ,386 35, % Unrestricted franchise fees 412,862 1,488,856 1,075, % Miscellaneous 103,706 99,519 (4,187) -4.0% Sale of assets 86,900 29,000 (57,900) -66.6% Total revenue 47,549,556 54,867,251 7,317, % Program Expenses General government 4,829,145 5,456, , % Public safety 25,661,644 23,972,456 (1,689,188) -6.6% Public works 8,788,852 10,054,825 1,265, % Health and welfare and community development 1,647,652 1,466,857 (180,795) -11.0% Recreation and culture 8,539,364 8,340,704 (198,660) -2.3% Interest on long-term debt 335, ,678 (50,260) -15.0% Total program expenses 49,802,595 49,576,878 (225,717) -0.5% Change in Net Position (2,253,039) 5,290,373 7,543, % Net Position, Beginning of year* (5,708,207) (33,530,125) (27,821,918) 487.4% Net Position, End of year $ (7,961,246) $ (28,239,752) $ (20,278,506) 254.7% 7

22 Management s Discussion and Analysis Business-type Activities 2017* 2018 Change Percent Change Revenue Program revenue: Charges for services: Water $ 4,788,434 $ 5,528,979 $ 740, % Sewer 11,126,972 12,334,760 1,207, % Parking 4,269,253 4,180,374 (88,879) -2.1% Capital grants and contributions 2,081,994 1,434,881 (647,113) -31.1% General revenue: Unrestricted interest earnings 64,717 91,643 26, % Unrestricted franchise fees 25,708 - (25,708) % Miscellaneous 21,575 22, % Income from joint venture 216, ,111 25, % Total revenue 22,594,990 23,835,113 1,240, % Program Expenses Water 3,239,213 4,003, , % Sewer 9,510,435 8,957,317 (553,118) -5.8% Parking 3,751,484 3,924, , % Total program expenses 16,501,132 16,885, , % Change in Net Position 6,093,858 6,949, , % Net Position, Beginning of year* 44,329,967 46,234,636 1,904, % Net Position, End of year $ 50,423,825 $ 53,184,087 $ 2,760, % 8

23 Management s Discussion and Analysis Total 2017* 2018 Change Revenue Program revenue: Charges for services $ 31,564,682 $ 34,731,548 3,166,866 Percent Change $ 10.0% Operating grants 7,071,659 7,651, , % Capital grants 4,247,883 7,440,761 3,192, % General revenue: Property taxes 20,744,477 21,136, , % Unrestricted state-shared revenue 5,446,391 5,595, , % Unrestricted interest earnings 202, ,029 62, % Unrestricted franchise fees 438,570 1,488,856 1,050, % Miscellaneous 125, ,884 (3,397) -2.7% Sale of assets 86,900 29,000 (57,900) -66.6% Income from joint venture 216, ,111 25, % Total revenue 70,144,546 78,702,364 8,557, % Program Expenses Governmental activities: General government 4,829,145 5,456, , % Public safety 25,661,644 23,972,456 (1,689,188) -6.6% Public works 8,788,852 10,054,825 1,265, % Health and welfare and community development 1,647,652 1,466,857 (180,795) -11.0% Recreation and culture 8,539,364 8,340,704 (198,660) -2.3% Interest on long-term debt 335, ,678 (50,260) -15.0% Business-type activities: Water 3,239,213 4,003, , % Sewer 9,510,435 8,957,317 (553,118) -5.8% Parking 3,751,484 3,924, , % Total program expenses 66,303,727 66,462, , % Change in Net Position 3,840,819 12,239,824 8,399, % Net Position, Beginning of year* 38,621,760 12,704,511 (25,917,249) -67.1% Net Position, End of year $ 42,462,579 $ 24,944,335 $ (17,518,244) -41.3% 9

24 Management s Discussion and Analysis Governmental Activities Total revenue for governmental activities totaled approximately $54.9 million in fiscal year 2018, which is a 15.4 percent increase when compared to fiscal year This increase of approximately $7.3 million is primarily attributed to the Michigan State University (MSU) Wilson Road project, the 300 Bailey building renovation capital contribution, and the new Board of Water and Light (BWL) franchise fee. Charges for services increased $1.3 million, or 11.5 percent. General government charges for services actually decreased approximately $439,000 due to lower parking and ordinance fines collected in the current year. This was offset by a significant increase of $1.8 million in charges for services in the public works function due to the Wilson Road project being completed in conjunction with MSU. The City and MSU partnered to complete the Wilson Road project as the City was eligible for State grant dollars to subsidize the campus street reconstruction. The City is responsible for the project and receipted $1.9 million of funds from MSU to cover the costs not reimbursed by the State grant. The City will also receive up to $50,000 of administrative costs for their participation in the project that will be completed in fiscal year Operating grants saw an increase of $580,080 primarily due to a rise in gas and weight tax and supplemental street funds from the State under Public Act 82 of 2018, a one-time appropriation benefiting the City with an additional $295,449. A significant increase in capital grants of $3.8 million is primarily due to the MSU Wilson Road project and the contributed capital recognized in conjunction with the 300 Bailey building. As explained previously, a State grant of $1.3 million was received for the Wilson Road project, and contributed capital of $3.6 million for the 300 Bailey building renovation was completed by CAHP. Unrestricted franchise fees also increased significantly as a new franchise agreement with BWL was negotiated and put in place in July The new franchise fee resulted in revenue of $1.1 million in fiscal year On the expense side, there were a few significant line item changes from the prior year, but overall expenses decreased $225,717, or 0.5 percent. General government expenses increased $627,213, or 13.0 percent, due to higher legal fees related to a few significant cases and capital improvements that were made to various facilities, and losses on book value of assets recognized upon disposal. Public safety expenses decreased by approximately $1.7 million, or 6.6 percent, over the prior fiscal year. In fiscal year 2017, a supplemental pension payment of $1.0 million was made. In fiscal year 2018, a supplemental pension payment of $2.5 million was made. This $1.5 million increase is offset by a significant change in the pension expense and OPEB expense recorded in each year as the liability amounts increase or decrease. As mentioned previously, the Wilson Road project is the key factor in the $1.3 million increase experienced in the public works function. Approximately $1.9 million of public works expenses were recorded for the Wilson Road project, and this was offset by a reduction in pension and OPEB expense, as well as, less street and sidewalk construction activity in the current year. 10

25 Management s Discussion and Analysis Business-type Activities The City of East Lansing has three business-type activities. These include water, sewer, and automobile parking operations. Total revenue for business-type activities was $23.8 million. This is up approximately $1.2 million from fiscal year 2017 predominantly due to sizeable increases in the metered utility rates charged to customers and a few significant connection charges for large developments in the City. The water and sewer charges for services increased $740,545 and $1.2 million, respectively, primarily due to utility rate increases and large connection charges occurring in the current year. A utility rate model is used to calculate the appropriate rates based on the estimated cost to provide water and sewage service while maintaining adequate fund balances. Fiscal year 2018 included an overall increase of 8.4 percent in water rates and a 3.6 percent increase in sewage rates to customers. Connection charges for various developments, of which several were substantial, accounts for $266,000 in the Water Fund and $432,000 in the Sewer Fund. In addition, per the sewer agreement with Michigan State University and Meridian Township, they pay a percentage of all capital improvements to the WRRF as well as operation costs based on flow. MSU and Meridian Township s required contributions to the Sewer Fund increased approximately $477,000 due to significant sewer system improvements. Capital grants and contributions decreased significantly in fiscal year This amount includes loan forgiveness related to the SRF loan (discussed in further detail later in the debt management section) with $834,793 in fiscal year 2017 and $665,207 in fiscal year 2018, a reduction of $169,586. With the extensive work being completed at the WRRF, the City was able to secure a grant from the State to assist in the costs related to the improvements. Fiscal year 2018 includes $431,167 less in these grant dollars, when compared to fiscal year 2017, strictly due to timing and the awarded amount being fully received. Furthermore, the Parking Fund received approximately $100,000 of capital contributions from the University Place hotel and office suites to assist in the reconstruction of the MAC garage during the prior year without a similar situation in the current year. Water expenses appear to have increased by 23.6 percent, but the primary reason for this variance is the change in the net pension liability and related expense. Due to the allocation of employees across funds, the Water Fund actually saw a significant decrease in the net pension liability during fiscal year In the current year, there was actually an increase recognized due to the allocation and overall liability. The purchase of water from the East Lansing Meridian Water Sewer Authority (ELMWSA) increased $128,780, or 8.6 percent, as major capital improvements are being cash funded by the two communities. Other expenditures did not fluctuate greatly from the previous year. Expenses in the Sewer fund decreased 5.8 percent, or $553,118, due to the allocation of employees across funds for the pension liability. True cash expenditures did not fluctuate outside of the capital improvements that were capitalized as assets during the year. Parking expenses increased 4.6 percent primarily due to the recognition on the disposal of Albert Street Lot 1 land improvements and building. This was offset by reductions in required debt service. Two bonds were paid in full during the prior year and two others were refunded resulting in annual savings over the life of the bonds. 11