CITY OF KILGORE, TEXAS ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED SEPTEMBER 30, 2014 PREPARED BY THE FINANCE DEPARTMENT OF THE CITY OF KILGORE, TEXAS

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1 ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED SEPTEMBER 30, 2014 PREPARED BY THE FINANCE DEPARTMENT OF THE

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3 ANNUAL FINANCIAL REPORT YEAR ENDED SEPTEMBER 30, 2014 TABLE OF CONTENTS Page Number INTRODUCTARY SECTION Letter of Transmittal FINANCIAL SECTION Independent Auditors' Report MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED) BASIC FINANCIAL STATEMENTS Government-Wide Financial Statements Statement of Net Position 11 Statement of Activities 13 Fund Financial Statements Governmental Fund Financial Statements Balance Sheet 15 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position 16 Statement of Revenues, Expenditures, and Changes in Fund Balances 17 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 19 Statement of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund 20 Statement of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - Capital Projects Fund 21 Proprietary Fund Financial Statements Statement of Net Position 22 Statement of Revenues, Expenses, and Changes in Net Position 23 Statement of Cash Flows 24 Fiduciary Fund Financial Statements Statement of Fiduciary Net Position 26 Statement of Changes in Fiduciary Net Position 27 Notes to the Financial Statements 28

4 ANNUAL FINANCIAL REPORT YEAR ENDED SEPTEMBER 30, 2014 TABLE OF CONTENTS Page Number REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) Schedule of Funding Progress: TMRS 52 Schedule of Funding Progress: Other Post-Employment Benefits Plan 53 COMBINING FUND FINANCIAL STATEMENTS Nonmajor Governmental Funds Description of Nonmajor Governmental Funds 54 Combining Balance Sheet 55 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 56 Internal Service Funds Description of Internal Service Funds 57 Combining Statement of Net Position 58 Combining Statement of Revenues, Expenses, and Changes in Net Position 59 GOVERNMENTAL COMPLIANCE SECTION Independent Auditors' 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 60 Schedule of Findings and Responses 62

5 INTRODUCTORY SECTION

6 THE CITY OF STARS Honorable Mayor and Members of the City Council City of Kilgore, Texas The Annual Financial Report for the City of Kilgore, (the City) for the fiscal year ended September 30, 2014, including the independent auditor's report, is hereby submitted. This Annual Financial Report is published to provide the Mayor and City Council, City staff, our citizens, representatives of financial institutions, our bond holders and other interested parties with detailed information concerning the financial condition and activities of the city. The full responsibility for the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with City management. To the best of our knowledge and belief, the enclosed data are accurate in all material respects and reported in a manner designed to present fairly the financial position and results of operations of the various funds of the city. All disclosures necessary to enable the reader to gain an understanding of the City's financial activities have been included. The City established and maintains a system of internal accounting controls designated in part to provide reasonable assurance that assets are safeguarded against loss, left, or unauthorized use, and that financial records can be relied upon to produce financial statements in accordance with generally accepted accounting principles (GAAP). 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 control should not exceed the benefits likely derived; and 2) the evaluation of costs and benefits requires estimates and judgments by management. The City's financial statements have been audited by Henry & Peters, P.C., a firm of licensed certified public accountants. The independent auditors issued a qualified opinion on the City of Kilgore financial statements for the fiscal year ended September 30, The Independent Auditor's Report is presented in the first component of the financial section of this report. Management's Discussion and Analysis (MD&A) can be found immediately following the auditor's report. The MD&A is an easy to understand narrative introduction, overview and analysis which accompanies the basic financial statements. KILGORE COMMUNITY PROFILE The City of Kilgore is a political subdivision and municipal corporation of the State, located in Gregg and Rusk Counties of East Texas. Kilgore is 120 miles east of Dallas, Texas and 66 miles west of Shreveport, Louisiana on the 1-20 corridor. The City operates as a Home-Rule city under the laws of the State of Texas and a Charter approved by its voters in 1960 that was last amended in The City operates under a Council-Manager form of government where the governing body consists of the Mayor and four City Council Members elected for staggered two-year terms. The City Council formulates operating policy for the City while the City Manager is the chief administrative officer. The City currently covers approximately square miles. Kilgore's population estimate as of 2014 was 14,948, which reflects substantial growth over the preceding five years from a 2010 estimate of 12,975.

7 The City provides a full range of services, which include the following: police and fire protection; construction and maintenance of streets, drainage, water and wastewater infrastructure; parks and library; development services, and general administration. The City's Water Utility fund is operated as a business type activity which is funded through usage fees and is not supported through taxes. As a result, the Water Utility service area differs from the City limits. FACTORS AFFECTING FINANCIAL CONDITION Economically, Kilgore benefits from a strong and diverse local economy. Situated at the crossroads of Interstate 20 and several major state highways, Kilgore is a very desirable location for employers. Residents love Kilgore for its wonderful neighborhoods, many cultural and recreational amenities, and a plethora of shopping, dining and transportation options available within a 15 mile radius of the city center. The following section details some of the major factors which impact the City's financial condition. Industrial Development and Kijore Economic Development Corporation (KEDC) KEDC's mission is to enhance a business climate that is conducive to job creation and retention, improving the standard of living for Kilgore residents. Creating a diversified economy in Kilgore has been a key goal of KEDC, and their successful realization of that goal is evident in Kilgore nearly everywhere. Since KEDC's inception in 1990, the industrial tax value in Kilgore has grown faster than any other category of property. The top ten taxpayers in Kilgore have increased in value 504% since The per capita value of industrial property in Kilgore is $41,878 and is up to 22 times larger than other Gregg County areas. The organization is funded by a dedicated local sales tax approved by voters. It is directed by a five-person board and managed by a staff of four with certifications in business retention and expansion, economic and community development and economic development finance. KEDC has won international awards for excellence in economic development. Oil and Gas Industry While the efforts of the City of Kilgore and KEDC over the past three decades have resulted in substantial and beneficial diversification of industry within the city, the historic foundation of the oil and gas industry has been the city's largest source of revenue, providing approximately 70 percent of the city's annual property tax and sales tax receipts. As the oil and gas industry experiences its cyclical ups and downs, Kilgore is presented with unique financial planning challenges that other communities do not have. However, the City of Kilgore has positioned itself well in meeting those challenges and in overcoming the sometimes-volatile nature of its economic base by maintaining a healthy reserve fund, avoiding debt and cash funding major projects through conservative budgeting and fiscal planning. Residential Development Kilgore has seen considerable new residential development since Currently there are three active new subdivisions within the City limits which represent growth of over 100 new single family homes. Additionally, the Remington North subdivision is slated to include up to 30 senior living Tri-plex/Condo units. Creating opportunity for new diverse residential housing developments has been a goal of the City Council for several years, and these new subdivisions represent the realization of that goal.

8 Financial Planning The City has a long history of conservative budgeting and fiscal planning. Because of Kilgore's historic ties to the oil and gas industry, and despite KEDC's successes in diversifying the industries present here, the local economy still sees some degree of volatility associated with spikes or declines in the Oil and Gas markets. As a result, the City Council has a long-held philosophy of utilizing conservative budgeting, low debt burden and cash funding of capital projects in order to provide for sustainability and flexibility during oil and gas downturns. When these philosophies are employed, it is important to maintain long-term strategic plans in order to ensure that over time, infrastructure is maintained adequately. Between 2010 and 2015, the City has updated many of those plans including the Water Master Plan, Wastewater Master Plan, and Roadway Condition Plan in order to determine the condition of existing infrastructure and to prioritize upcoming projects. The outcomes of those plans have been structured into 10 and 20 year capital priority listings and financial plans are currently being developed in order to fund those projects. Education Education plays a substantial role in Kilgore's local economy. Kilgore Independent School District (KISD) serves most Kilgore residents. KISD has exceptional academic programs including dual credit opportunities with Kilgore College and the Career and Technical Education (CTE) program, which gives high school students the chance to get a head start on preparing for college and careers. Job shadowing and internships provide students the opportunity to get hands on real-world experience. Kilgore is also home to Kilgore College, a two-year community college founded in 1935 that offers an abundance of courses in a wealth of subjects. Offering classes from accounting to zoology and with a full-time enrollment of over 5,500, it offers an excellent foundation for all who are seeking higher education. In addition to their other academic programs, Kilgore College administrators have a long history of offering programs which benefit local industries by teaching students the specific skills necessary to succeed in highly technical industrial fields present in the local economy. gion 7 Education Service Center Based in Kilgore, Region 7 Education Service Center serves 17 counties in the East Texas area consisting of 106 school districts, which is the largest number of service recipients in the state's education system. As one of 20 service centers statewide, Region 7 is committed to district and charter student success by providing quality programs and services. Revenues are received from three primary sources: federal, state, and local funds. Region 7 contributes significantly to the Kilgore economy with approximately 250 full-time employees and thousands of visitors each year who come for the many training opportunities they offer. Transportation Kilgore is located on Interstate 20 approximately two hours east of Dallas and an hour west of Shreveport. Other major thoroughfares through the City of Kilgore include U.S. Highway 259, as well as Texas State Highways 31, 42, and 135. The East Texas Regional Airport is 8 miles from Kilgore and provides direct flights to the Dallas/Fort Worth Airport via their regional partner, American Eagle. Annual passenger traffic is 25,000 with both small package and large cargo services available through the airline. Other airports within easy driving distance are Pounds Field Regional Airport in Tyler, Texas (24 miles) and Shreveport Regional Airport in Shreveport, Louisiana (60 miles). The Union Pacific Railroad passes through the City of Kilgore 35 times per day, carrying primarily freight. Passenger rail service is available at the Amtrak station located in Longview, Texas. III

9 For interstate travel by bus, Kilgore has a Greyhound Bus station located downtown, and interlocal bus travel is provided by the East Texas Council of Governments (ETCOG) through its GoBus program. Water Resources Kilgore is recognized as a Superior Water System by the Texas Commission on Environmental Quality (TCEQ), with a capacity of 7 MGD supplied through seven wells and a water treatment plant which takes water from the nearby Sabine River. In the heart of the lush natural pine forest of East Texas, Kilgore has an average annual rainfall of inches, which is 8.38 inches more than the average nationwide, and 33 percent more than the average rainfall amount in Texas. Outdoor Recreation The mild East Texas climate, with its average annual temperature of 68 degrees, is an ideal environment for outdoor recreation, and the Kilgore area boasts an abundance of outdoor activities: fishing, hunting, watersports, hiking, sport shooting, and many others. Within the City of Kilgore, residents enjoy public parks for baseball, softball, soccer, and many other outdoor activities. ACKNOWLEDGEMENTS: The preparation of the Annual Financial Report would not have been possible without the efficient and dedicated services of the Finance Department, and I would like to express my appreciation for the services of Interim Finance Director, Bill Martin, as well as Accountant, Landon Ward, for all of their hard work preparing information for the Annual Financial Report. Additionally, I'd like to thank the Mayor and City Council for their support for maintaining the highest standards of professionalism in the management and oversight of the City's finances. Respectfully submitted, Joshua C. Selleck, CFP, CGFO City Manager, City of Kilgore iv

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11 FINANCIAL SECTION

12 HENRY&PETERS, PC CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITORS' REPORT To the Honorable Mayor and Members of the City Council City of Kilgore, Texas Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate discretely presented component units and remaining fund information of the City of Kilgore, Texas, as of and for the year ended September 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 an opinion on these financial statements based on our audit. We did not audit the financial statements of the Kilgore Economic Development Corporation, the Kilgore Redevelopment Authority, or the Roy H. Laird Memorial Hospital Foundation, discretely presented component units of the City, which represent 99 percent, 99 percent, and 100 percent, respectively, of the assets, net position, and revenues of the discretely presented component units. 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 such discretely presented component units, is based 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. We believe that the audit evidence we have obtained s sufficient and appropriate to provide a basis for our (I) unmodified opinion on the governmental activities, business-type activities, the Capital Improvements fund and the Hospital fund, aggregate discretely presented component units, and aggregate remaining fund information; and (2) qualified audit opinions on the General fund, Water and Sewer funds, and the Golf Course fund Judson Road, Suite 233 Longview, Texas Fax S. Broadway, Suite 100 Tyler, Texas Fax info@henrypeters.com

13 Summary of Opinions Basis for Qua/Wed Opinions Management did not count the physical inventory of the General Fund or the Water and Sewer Fund as of September 30, As such, we were unable to obtain sufficient, appropriate audit evidence of the inventory on hand at yearend. The amount by which this departure would affect the assets, fund balances, and revenues of these funds has not been determined. Qua!j/ied Opinion on Major Funds: General Fund and Water and Sewer Fund In our opinion, except for the effects, if any, of the matter described in the Basis for Qualified Opinion paragraph on the General Fund and the Water and Sewer Fund, the financial statements referred to above present fairly, in all material respects, the respective financial position of the General Fund and the Water and Sewer Fund of the City of Kilgore, Texas, as of September 30, 2014, and the respective changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. UnmodWed Opinion on the Governmental Activities, Business- Type Activities, Major Funds, Aggregate Discretely Presented Component Units and Aggregate Remaining Fund Information 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 Capital Improvements Fund, the Hospital Fund, the aggregate discretely presented component units, and the aggregate remaining fund information of the City of Kilgore, Texas, as of September 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. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and budgetary comparison information on pages 4-10 and 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. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Kilgore, Texas' basic financial statements. The introductory section and the combining fund financial statements are presented for purposes of additional analysis and are not a required part of the basic financial statements.

14 The combining fund financial statements 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 statements 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 are fairly stated in all material respects in relation to the basic financial statements as a whole. The introductory section has 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 April 11, 2016, on our consideration of City of Kilgore, Texas' 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 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 City of Kilgore, Texas' internal control over financial reporting and compliance. Longview, 1 xas April 11, 2016 iii

15 FINANCIAL SECTION

16 MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED) As management of the City of Kilgore, we offer readers of the City of Kilgore financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30, We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal which can be found at the beginning of this report. Financial Highlights The assets of the City exceeded its liabilities at the close of the most recent fiscal year by $76,177,812 (net position). Of this amount, $24,130,428 (unrestricted net position) may be used to meet the government's ongoing obligations to citizens and creditors. The government's total net position increased by $5,761,863. As of the close of the current fiscal year, the City's governmental funds reported combined ending fund balances of $17,334,648. Approximately 68 percent of this total amount, $11,783,437, is available for spending at the government's discretion (unassigned fund balance). The City's total debt decreased by $526,412 during the current fiscal year. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City's basic financial statements. The City's basic financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to 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 information on all of the City's assets and liabilities, with the difference between the two 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 government'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 in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and accumulated sick leave for employees retiring with 10 years of service). Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their cost through user fees and charges (business-type activities). For audit purposes, the governmental activities of the City include general government, public safety, contingency, court, health, building maintenance, library, parks, planning and zoning, streets, and the swimming pool. The businesstype activities of the City include a water and sewer fund and a hospital fund. The government-wide financial statements include, not only the City itself (known as the primary government), but four legally separate component units, Kilgore Economic Development Corporation (KEDC), Kilgore Redevelopment Authority (KRA), Kilgore Community Development corporation (KCDC), and the Roy H. Laird Memorial Hospital Foundation (Foundation). Financial information regarding KEDC, KRA, and the Foundation can be found in their separately issued audit reports. The government-wide financial statements can be found on pages of this report 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 state and 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 two categories: governmental funds and proprietary funds. Once divided into these two categories, each fund is classified as a major fund or a nonmajor fund. A fund is classified as a major fund when it meets each of the two following criteria:

17 Total assets, liabilities, revenues or expenditures of that individual governmental or proprietary fund are at least 10 percent of the corresponding element total (assets, liabilities, revenues or expenditures) for all funds of that category or type (that is total governmental or total proprietary funds). The same element that met the 10 percent criterion above is at least 5 percent of the corresponding element total for all governmental and proprietary funds combined. 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 evaluating 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 statements of revenues, expenditures, and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City maintains four individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenue, expenditures, and changes in fund balances for the general fund, which is considered to be a major fund. Data from the other two governmental funds (special revenue and debt service) are combined into a single, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements elsewhere in this report. The City adopts an annual appropriated budget for its general fund. A budgetary comparison statement has been provided for the general fund to demonstrate compliance with this budget. The basic governmental fund financial statements can be found on pages of this report. Proprietary funds. The City maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses enterprise funds to account for its water and sewer operations and for its hospital operation. Internal service funds are an accounting device used to accumulate and allocate cost internally among the various functions. Internal service funds are used by management to charge the cost of capital equipment purchases and health insurance to individual funds. Certain assets and liabilities of the internal service funds are included in business-type activities. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the water and sewer fund and for the hospital fund. Conversely, both internal service funds are combined in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report. The basic proprietary fund financial statements can be found on pages of this report. Notes to the financial statements. The notes provide additional information that is essential to acquire a full understanding of the data provided in the government-wide statements and in the fund financial statements. The notes to the financial statements can be found on pages of this report. Government-wide Overall Financial Analysis As noted earlier, net position may serve over time as a useful indicator of a government's financial position. By far the largest portion of the City's net position (67 percent) reflects its investment in capital assets (e.g. land, construction in progress, building and systems, and equipment and other) less any related debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide services to citizens; consequently, these are not available for future spending. Although the investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities.

18 CITY OF KILGORE Statement of Net Position Governmental Activties Business-type Activties Totals Current and other Assets $ 23,557,185 $ 20,561,805 $ 4,164,884 $ 5,819,894 $ 27,722,069 $ 26,381,699 Capital Assets 24,689,134 24,280,929 31,469,333 28,828,554 56,158,467 53,109,483 Total Assets 48,246,319 44,842,734 35,634,217 34,648,448 83,880,536 79,491,182 Current liabilities Noncurrent liabilities Total Liabilities Net position: Net investment in Capital Assets Restricted Unrestricted Total net position 2,652,143 4,339, ,524 2,291,254 2,980,667 6,630,531 4,069,694 1,894, , ,894 4,722,057 2,444,702 6,721,837 6,234, ,887 2,841,148 7,702,724 9,075,233 20,349,857 19,672,069 30,919,265 27,591,184 51,269,122 47,263, ,262 3,576, , ,262 4,001,094 20,396,363 15,360,070 3,734,065 3,791,532 24,130,428 19,151,602 $ 41,524,482 $ 38,608,649 $ 34,653,330 $ 31,807,300 $ 76,177,812 $ 70,415,949 An additional portion of the City's net position (approximately 1.02 percent) represents resources that are subject to external restrictions on how they maybe used. The remaining balance of unrestricted net position ($24,130,428) may be used to meet the government's ongoing obligations to citizens and creditors. At the end of the current fiscal year, the City is able to report positive balances in all three categories of net position, both for the government as a whole, as well as for its separate governmental and business-type activities.

19 CITY OF KILGORE Statement of Activities Governmental Activities Business-type Activities Total Re ye nues: Program revenues: Charges forservices Operating grants & contributions Capital grants & contributions General Revenues: Propertytaxes Sales taxes Other taxes Investment income Miscellaneous income Gain on sale of assets Total Revenues 3,079,166 2,828, , , , ,428 5,392,214 5,305,326 7,374,627 6,822,517 1,280,726 1,228,388 61,211 59, , ,562 7,065-18,405,667 18,100,162 6,124,780 6,300,014 9,203,946 9,128, , , ,685 3,595,829-3,781, , ,392,214 5,305, ,374,627 6,822, ,280,726 1,228,388 23,225 17,753 84,436 77, , , ,065-9,743,834 6,478,344 28,149,501 24,578,506 Expenses: General government Public safety Public Works Developmental services Sanitation Culture and recreation Public welfare lnterestand fiscal charges Golf Course Waterand sewer Hospital Total Expenses: Excess before transfers Transfers Increase in net position Net position, beginning Prior Period Adjustments Net position, ending 1,376,055 1,838, ,376,055 1,838,751 7,938,620 7,508, ,938,620 7,508,034 5,630,653 2,503, ,630,653 2,503, , , , ,921 1,715,046 1,638, ,715,046 1,638,366 1,694, , ,694, , , , , , , , , , , , , , ,064,122 4,962,240 4,064,122 4,962, , , , ,018 19,710,93115,624,065 5,211,006 6,211,389 24,921,937 21,835,454 (1,305,264) 2,476,097 4,532, ,955 3,227,564 2,743,052 2,163, ,307 (2,163,339) (389,307) ,075 2,865,404 2,369,489 (122,352) 3,227,564 2,743,052 38,608,649 35,743,245 31,807,300 31,929,652 70,415,949 67,672,897 2,057, ,541-2,534,299-41,524,482 38,608,649 34,653,330 31,807,300 76,177,812 70,415,949 Governmental activities. Governmental activities increased the City's net position by $858,075. Business-type activities. Business-type activities increased the City's net position by $2,369,489. 7

20 Financial Analysis of the Government's Funds As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of the City's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unassigned fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. At the end of the current fiscal year, the city's governmental funds reported combined ending fund balances of $17,334,648. Approximately 68% of this amount or $11,783,437 constitutes unassigned fund balance, which is available for spending at the government's discretion. Restricted fund balance represents amounts that are constrained by external parties, constitutional provisions, or enabling legislation. The City's fund balance is restricted by debt covenants for future debt service, by enabling legislation for municipal court fines collected, and for other special revenue type restrictions. Committed fund balance represents amounts that can only be used for specific purpose because of formal action by the city council. The city council has committed $2,459,699 for future capital projects. The remainder of fund balance is considered non dispensable to represent amounts that cannot be spent because they are either not in spendable fonn or are legally required to remain intact. In the case of the City, the nonspendable fund balance of $83,801 represents inventory on hand at year-end. 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 $11,783,437, while total fund balance reached $14,526,399. The fund balance of the City's General Fund increased by $1,028,860 (including the prior period adjustment) during the current fiscal year. Proprietary funds. The city's proprietary funds provide the same type of information found in the government wide financial statements, but in more detail. Net position of the water and sewer fund at the end of the year amounted to $28,334,189 and the total for the Hospital operating fund amounted to $6,004,432. Other factors concerning the finances of these two funds have already been addressed in the discussion of the City's business type activities General Fund Budgetary highlights As the City completed the year, its General Fund (as presented in balance sheet on page 15) reported a fund balance of $14,526,399, which is an increase of $364,725 over the final budgeted amount.

21 Capital Assets and Debt Administration Capital assets. The City's investment in capital assets for its governmental and business type activities as of September 30, 2014, amounts to $56,158,467 (net of accumulated depreciation). This investment in capital assets includes land, construction in progress, buildings and system, and equipment and other. Capital Assets, Net of Accumulated Depreciation September 30 Governmental Activties Lend $ 1,225,396 $ 1,118,380 Equipment (historical treasure) 40,000 - Construction in progress 3,863,361 5,698,346 Building and system 2,275,533 2,186,840 Equipment and other 17,284,844 16,141,255 Total Net Capital Assets $24,689,134 $25,144,821 Bus ines s-type Activties Totals $ 311,536 $ 311,536 $ 1,536,932 $ 1,429, , ,863,361 5,698,34 30,667,695 28,075,139 32,943,228 30,261,97 490, ,118 17,774,946 16,697,3 7; $31,469,333 $28,942,793 $56,158,467 $ 54,087,61 Business type capital assets increased by $2,526,540 due to the completion of various water and sewer line projects which included the completion of the Rabbit Creek Sewer Main. Additional information on the City's capital assets can be found in note 3 on pages of this report. Long-term debt. At the end of the current fiscal year, the City had total debt outstanding of $5,730,338. Of this amount, $5,057,728 was outstanding for the governmental funds and $672,610 was outstanding for the business-type funds. CITY OF KILGORE Outstanding Debt General obligation bonds Certificates of obligation Loans Capital Leases Compensated abences Claims payable Total Governmental Activities Bus ines s-type Activities $ - $ - $ 515,000 $ 830,000 4,250,000 4,475,000 89, ,860 35,068 43, , ,022 * 122, ,295 * 128,474 56,546 * $ 5,057,728 $ 5,270,428 $ 672,610 $ Totals $ 515,000 $ 830,000 4,250,000 4,475,000 89, ,860 35,068 43, , , ,474 56,546 $ 5,730,338 $ 6,256,750 * Includes prior period adjustments of $285,671 for compensated absences and $56,546 for claims payable in governmental activities and $51,374 for compensated absences ofthe business-type activities. Additional information on the City's long-term debt can be found in note 4 on page of this report. Economic Factors and Next Year's Budget and Rates Factors considered in preparing the City's 2015 fiscal year budget were: The total budget for FY 2015 is $35,975,577, an increase of 9.68% from FY Of this amount $15,349,719 is appropriated for the General Fund and $4,691,262 is appropriated in the Water Utilities Fund. General Fund revenues were projected at similar levels as prior year, and as a result, the General Fund Sales Tax and Ad Valorem Tax revenue numbers were adjusted upward. The FY 2015 General Fund budget has $762,606 appropriated to transfer to the Capital Projects Fund, from unassigned fund balance. Capital project spending priorities were developed using an Annual Citizen survey, the results of which are used in scoring individual projects. The FY 2015 budget includes projects totaling $5,540,257 with funding coming from a combination of cash funding and grant funding. 9

22 Employee compensation was studied in FY 2014 and the FY 2015 budget includes what is intended to be the first phase of a two year wage adjustment necessary in order to retain professional and front line employees. Requests for Information This financial report is designed to provide a general overview of the City's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the City Manager, City of Kilgore, Texas, 815 N. Kilgore Street, Kilgore, Texas

23 GOVERNMENT-WIDE FJNANCIAL STATEMENTS

24 STATEMENT OF NET POSITION SEPTEMBER 30, 2014 Primaiy Government ASSETS Cash and cash equivalents Investments Receivables (net of allowance for estimated uncollectible accounts): Taxes Accounts Notes and accrued interest Internal balances Inventoiy Deposits and prepaid expenses Investment in partnership Restricted: Cash and cash equivalents Investments Water rights (net of accumulated amortization) Net OPEB asset Capital assets (net of accumulated depreciation) Property held for resale Total Assets LIABILITIES Accounts payable Accrued expenses Unearned revenue Accrued interest payable Customer deposits Long-term debt Due within one year Due in more than one year Total Liabilities Governmental Business-Type Activities Activities Total $ 4,385,676 $ 12,951,940 1,633,245 2,957, , ,922 83,801 21, ,023 1,813,302 1,674, ,669 (958,922) 152, , , ,785 20,247 $ 6,198,978 14,626,849 1,633,245 3,936, , , , , , ,270 24,689,134 31,469,333 56,158,467 48,246,319 35,654,464 83,900,783 1,441, ,595 1,621, ,153 75, ,060-44,734 44,734-4,953 4,953-23,335 23, , ,358 1,339,392 4,069, ,252 4,390,946 6,721,837 1,001,134 7,722,971 NET POSITION Net investment in capital assets Restricted for debt service Restricted for capital projects Restricted for grant restrictions Restricted for municipal court Restricted for public safety Restricted for tourism and convention Unrestricted Total Net Position 20,349, ,376 72, ,201 57, ,239 20,396,363 $ 41,524,482 30,919,265 51,269, ,376 72, ,201 57, ,239 3,734,065 24,130,428 $ 34,653,330 $76,177,812 See accompanying notes to financial statements. - II -

25 Component Units Kilgore Economic Kilgore Nonmajor Development Redevelopment Component Corporation Authority Units $ 540,816 $ 50,858 $ 225,060 8,553,149-2,914,658 4,068 3, ,031 2, , ,654, ,385, ,218 22,897,797 54,836 3,945,967 18, , , ,080, ,000-2,213, ,043-10,844, , , ,869,134 (396,207) 3,945,967 $ 20,683,978 $ (396,207) $ 3,945,967 See accompanying notes to financial statements

26 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2014 Functions/Programs Primary Government: Governmental activities: General government Public safety Public works Developmental services Sanitation Culture and recreation Public welfare Interest and fiscal charges Total Governmental activities Program Revenues Operating Capital - Charges for Grants and Grants and Expenses Services Contributions Contributions $ 1,376,055 $ - $ - $ - 7,938, , ,876 40,000 5,630, , ,121 72,283 1,715,046 2,216,018 1,694,184 99,105 16, , , , ,436 19,710,931-3,079, , ,220 Business-Type activities: Water and sewer Hospital Golf course Total Business-Type activities Total Primary Government Component Units: Economic Development Corporation Redevelopment Authority Nonmajor Total Component Units 4,064,122 5,434, , , , ,457 5,211,006 6,124,780 $ 24,921,937 $ 9,203,946 $ 2,769,063 $ 113,798 15, ,720 - S 3,012,476 $ 113,798-3,595, ,595,829 $ 804,727 $ 3,781,049 $ $ General Revenues: Taxes: Property Sales Other Investment income Partnership income (loss) Miscellaneous Transfers Gain (loss) on sale of assets Total general revenues Change in net position Net position - beginning of year Prior period adjustments (Note 10) Net position - end of year See accompanying notes to financial statements

27 Net (Expense) Revenue and Changes in Net Position Primary Government Governmental Business-Type Component Activities Activities Total Units $ (1,376,055) $ (6,720,984) (5,505,653) (806,838) 500,972 (1,578,609) 60,785 (215,436) (15,641,818) - $ (1,376,055) $ - (6,720,984) - (5,505,653) - (806,838) 500,972 - (1,578,609) - 60,785 - (215,436) - (15,641,818) I I I - 4,965,919 4,965,919 - (181,371) (181,371) - (274,945) (274945) - - 4,509,603 4,509,603 - $ (15,641,818) $ 4,509,603 $ (11,132,215) $ $ (2,655,265) (15,693) (227,720) (2,898,678) 5,392,214-5,392,214-7,374,627-7,374,627 3,605,116 1,280,726-1,280,726 29,126 61,211 23,225 84,436 1,168, (43,804) 220, , ,382 2,163,339 (2,163,339) - - 7,065-7,065-16,499,893 (2,140,114) 14,359,779 4,946, ,075 2,369,489 3,227,564 2,047,965 38,608,649 31,807,300 70,415,949 19,178,072 2,057, ,541 2,534,299 3,007,701 $ 41,524,482 $ 34,653,330 $ 76,177,812 $ 24,233,738 See accompanying notes to financial statements

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29 FUND FINANCIAL STATEMENTS

30 BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2014 ASSETS Cash and cash equivalents Investments Receivables (net of allowance for estimated uncollectible accounts): Taxes Accounts Due from other funds Advance receivable Inventory, at lower of cost or market Total assets LIABILITIES Trade payables Accrued payroll and related expenses Due to other funds Advance payable Total liabilities DEFERRED INFLOWS OF RESOURCES Unavailable revenue - property taxes Unavailable revenue - fines Unavailable revenue - customer deposits Unavailable revenue - assessments Unavailable revenue - interest on long-term receivable Total deferred inflows of resources FUND BALANCES Nonspendable: Inventory Restricted for: Debt service Grant restrictions Municipal court Public safety Tourism and convention Tax increment district Other purposes Committed to: Capital projects Assigned to: Cemeteries Unassigned Total fund balances Total liabilities, deferred inflows of resources, and fund balances See accompanying notes to financial statements. Nonmajor Total Capital Governmental Governmental General Projects Funds Funds $ 1,161,644 $ 1,806,050 $ 712,341 $ 3,680,035 11,683, ,879 37,883 12,701,941 1,594,811-38,434 1,633,245 2,909,454-99,546 3,009,000 1,000,000-1,000, , ,712 83, ,801 $ 18,862,601 $ 2,786,929 $ 888,204 $ 22,537,734 $ 822,074 $ 327,230 $ 19,695 $ 1,168, , , , , , ,712 1,489, , ,177 2,266, ,284-38, ,718 1,388,448-1,388,448 62, ,823 1,109, ,109, ,043 51,043 2,846,780-89,477 2,936,257 83, , , , ,301 72, , , ,145 57, , ,239 (429,712) (429,712) 21,578 21,578-2,459,699-2,459,699 2,637, ,637,583 11,783, ,783,437 14,526,399 2,459, ,550 17,334,648 $ 18,862,601 $ 2,786,929 $ 888,204 $ 22,537,

31 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION SEPTEMBER 30, 2014 Amounts reported for governmental activities in the statement of net position are different because: Total fund balance per balance sheet Capital assets used in governmental activities are not current financial resources and, therefore, are not reported in the governmental funds balance sheet. Some of the City's revenues will be collected after year end, but are not available soon enough to pay current year's expenditures and therefore are not reported in the governmental funds balance sheet. 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 $ 17,334,648 23,347,991 3,273,434 (718,451) Governmental funds report all other post employment benefit payments as expenditures. However, in the government-wide statement of activities the OPEB asset or liability is actuarially determined. This amount is the total net OPEB asset. Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported in the governmental funds balance sheet. Interest payable on long-term debt in the City's governmental activities is not payable from current resources and, therefore, is not reported in the governmental funds balance sheet. Internal service funds are used by management to charge the costs of equipment management, information technology, and health insurance to individual funds. Certain assets and liabilities of the internal service funds are included in governmental activities. Net position of governmental activities 113,023 (4,339,277) (22,788) 2,535,902 $ 41,524,482 See accompanying notes to financial statements

32 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 Nonmajor Total Capital Governmental Governmental General Projects Funds - Funds REVENUES Taxes: Property $ 4,701,637 $ - $ 635,156 $ 5,336,793 Sales 7,374,627-7,374,627 Other 776, ,401 1,280,726 Charges for services: Garbage collection 2,216,019-2,216,019 Police court fines and fees 617,325-24, ,823 Permits 72, ,283 Cemetery 60, ,625 Swirnmingpool 31, ,728 Library 6, ,752 County support 217, ,034 Drug seizure revenue , ,290 Donations Grants 219, , , ,154 Interest on investments 26,595 5,799 4,803 37,197 Miscellaneous 219,166-13, ,168 Total revenues 16,539, ,019 1,549,745 18,240,689 EXPENDITURES Current: General government: Administration 524, , ,183 Finance 307, ,327 Cemetery 238, ,021 City council 116, ,127 Information technology 1, ,015 Contingency 22, ,310 Public safety: Police 4,149, ,198 4,431,701 Fire 3,075, ,075,409 Rescue unit 120, ,894 Municipal court 211, ,776 Public works: Streets 1,645, ,827-2,417,196 Water - 2,718,808-2,718,808 Grants , ,703 Developmental services: Building maintenance and inspection 357, ,123 Equipment Services 240, ,073 Planning and zoning 287, ,234 Sanitation: garbage collection 1,715, ,715,046 Culture and recreation: Parks 797,462 55,775 33, ,891 Library 406, ,730 Swimming pool 145, ,093 Grants , ,250 Public welfare: health department 244, ,724 Debt service: Principal 44, , ,583 Interest and fiscal charges 1, , ,225 Total Expenditures 14,651,571 3,648,415 1,236,456 19,536,442 See accompanying notes to financial statements. -17-

33 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 Nonmajor Total Capital Governmental Governmental General Projects Funds Funds Excess (deficiency) of revenues over (under) expenditures OTHER FINANCING SOURCES (USES) Proceeds from loans Transfers in Transfers out Total other financing sources (uses) Net change in fund balances Fund balance - beginning of year Prior period adjustment (Note 10) Fund balance - end of year I 888,354 (3,497,396) 313,289 (1,295,753) 104, , ,734 3,692,912 10,000 3,967,646 (1,050,245) (498,263) (2.55,800) (1,804,308) (681,275) 3,194,649 (245,800) 2,267,574 1,207,079 (302,747) 67, ,821 13,497,539 2,680, ,535 16,922,503 (178,219) 82,017 (463,474) (559,676) $ 14,526,399 $ 2,459,699 $ 348,550 $ 17,334,648 See accompanying notes to financial statements

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35 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AJD CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES SEPTEMBER 30, 2014 Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balance - total governmental funds Governmental funds report capital outlay as expenditures. However, in the statement of activities the cost of these assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which depreciation expense in the current period exceeded capital outlay. 971,821 (572,128) The net effect of various transactions involving capital assets (i.e., sales, trade-ins, and donations) is to increase net position. Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. Governmental funds report all payments to the OPEB trust as expenditures. However, in the government-wide statement of activities the actuarial annually required contribution is considered an expense. Any surplus amount is considered an asset. Change in net other post employment benefits asset. Some expenses reported in the statement of activities do not require the use of current financial resources; therefore, they are not reported as expenditures in governmental funds. This amount reflects the change in the accrued liability for compensated absences and claims payable. The issuance of long-term debt (e.g., bonds) provides current financial resources to governmental funds, while repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net position. This amount reflects the principal payments made on long-term debt during the year. Interest payable on long-term debt is recorded in the government-wide statements. This is the amount that current year interest payable exceeded prior year interest payable. Internal service funds are used by management to charge the costs of equipment management, information technology, and health insurance to individual funds. The net expenses of certain activities of internal service funds is reported within governmental activities. Change in net position of governmental activities 13,815 53,085 (56,883) 269,583 (22,786) 201,568 $ 858,075 See accompanying notes to financial statements

36 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2014 REVENUES Taxes: Property $ 4,599,580 Sales 6,250,000 Other 804,122 Charges for services: Garbage collection 2,185,760 Police court fines and fees 565,000 Permits 73,900 Cemetery 70,000 Swimming pool 32,380 Library 7,600 Country support 134,000 Donations - Grants 173,352 Interest on investments 35,710 Miscellaneous 609,130 Total revenues 15,540,534 Budget Original Final Actual $ 4,599,580 $ 4,701,637 6,250,000 7,374, , ,325 2,185, ,000 73,900 70,000 32,380 7, , ,352 35, ,130 15,540,534 2,216, ,325 72,283 60,625 31,728 6, , ,339 26, ,166 16,539,925 Variance with Final Budget - Positive (Neg vej $ 102,057 1,124,627 (27,797) 30,259 52,325 (1,617) (9,375) (652) (848) 83, ,987 (9,115) (389,964) 999,391 EXPENDITURES Current: General government: Administration 427,545 Finance 300,117 Cemetery 166,797 City council 146,433 Information technology - Contingency 218,030 Public safety: Police 4,030,194 Fire 3,029,998 Rescue unit 106,398 Municipal court 191,679 Public works: streets 1,787,725 Developmental services: Building maintenance and inspection 388,257 Equipment Services 240,710 Planning and zoning 338,700 Sanitation: garbage collection 1,673,796 Culture and recreation: Parks 731,655 Library 449,351 Swimming pool 121,049 Public welfare: health department 282,460 Debt service: Principal 44,583 Interest and fiscal charges 1,574 Total xpenditure See accompanying notes to tinancial statements. 14,677, , , , , ,030 4,030,194 3,029, , ,679 1,787, , , ,700 1,673, , , , ,460 44,583 1,574 14,677, , , , ,127 1,015 22,310 4,149,503 3,075, , ,776 1,645, , , ,234 1,715, , , , ,724 44,583 1,574 14,651,571 96,633 7,210 71,224 (30,306) 1,015 (195,720) 119,309 45,411 14,496 20,097 (142,356) (31,134) (637) (51,466) 41,250 65,807 (42,621) 24,044 (37,736) (25,480)

37 Excess (deficiency) of revenues over (under) expenditures OTHER FINANCiNG SOURCES (USES) Proceeds from loans Transfers in Transfers out Total other financing sources (uses) Net change in fund balances 863, ,483 1,888,354 1,024, , , , , ,734 48,582 (415,500J (415,500) (1,050,245) (634,745) (199,348) (199,348) (681,275) (481,927) 664, ,135 1,207, ,944 Fund balance - beginning of year 13,497,539 13,497,539 13,497,539 Prior period adjustment (Note 10) - - (178,219) (178,219) Fund balance - end of year $ 14,161,674 $ 14,161,674 $ 14,526,399 $ 364,725 See accompanying notes to financial statements

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39 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION BUDGET AND ACTUAL CAPITAL PROJECTS FUND FOR THE YEAR ENDED SEPTEMBER 30, 2014 REVENUES Grants Interest on investments Total revenues 13 LIdgel Original - $ - $ Final Actual - $ 145,220-5, ,019 Variance with Final Budget - Positive _JNegative) $ 145,220 5, ,019 EXPENDITURES Current: General government: Administration Public works: Streets Water Culture and recreation: Parks Total expenditures Excess (deficiency) of revenues over (under) expenditures OTHER FINANCING SOURCES (USES) Transfers in Transfers out Total other financing sources (uses) Net change in fund balances Fund balance - beginning of year Prior period adjustment (Note 10) Fund balance - end of year 100, , ,005 2, , , , ,827 3,283,260 3,283,260 2,718,808 (564,452) ,678,260 3,678,260 3,648,415 (29,845) (3,678,260) (3,678,260) (3,497,396) 180,864 3,678,260 3,678,260 3,692,912 14, (498,263) (498,263) 3,678,260 3,678,260 3,194,649 (483,611) - - (302,747) (302,747) 2,680,429 2,680,429 2,680, ,017 82,017 $ 2,680,429 $ 2, $ 2,459,699 $ (220,730) See accompanying notes to financial statements

40 STATEMENT OF NET POSITION PROPRIETARY FUNDS SEPTEMBER 30, 2014 ASSETS Current assets: Cash and cash equivalents Investments Accounts receivable (net) Due from other funds lnventoiy, at lower of cost or market Prepaid expenses Restricted assets: Cash Investments Total current assets Noncurrent assets: Water rights (net) Net OPEB asset Capital assets (net) Total noncurrent assets Total assets Enterprise Funds Water Nonmajor - Internal and Sewer Hospital Golf Course Total Service Funds $ 1,639,524 $ 100,431 $ 50,261 $ 1,790,216 $ 727,220 1,370, ,546-1,674, , ,651 10,000 27, ,669-14, , , , ,534-13, , , , , ,479-4,394, ,977 91,610 5,011,098 1,256, , ,785-20, ,247-25,624,134 5,507, ,438 31,469,334 1,341,143 25,881,166 5,507, ,438 31,726,366 1,341,143 $ 30,275,677 $ 6,032,739 $ 429,048 $36,737,464 $ 2,597,950 LIABILITIES Current liabilities: Unrestricted current liabilities Trade payables Accrued payroll and related expenses Accrued expenses Due to other funds Unearned revenue Compensated absences Capital lease payable - current Bonds and notes payable - current Total unrestricted current liabilities $ 148,476 $ 58,333 4,953 1,073, , ,000 1,623,403 14,078 14,078 $ 31,119 17,574 32,036 30,505 4,088 8, ,138 $ 179,595 $ 75,907 4,953 1,119,301 30, ,542 8, ,000 1,761,619 25,748 25,748 Restricted deposits Total restricted current liabilities Total current liabilities Noncurrent liabilities: Bonds and notes payable - long term Capital lease payable - long term Other post-employment benefits Total noncurrent liabilities Total liabilities DEFERRED INFLOWS OF RESOURCES Advance from Hospital Foundation Total deferred inflows of resources NET POSITION Net investment in capital assets Restricted Unrestricted Total net position 23, ,335-23, ,335-1,646,488 14, ,388 1,784,954 25, , , ,252 26, ,000-26, ,252-1,941,488 14, ,640 2,106,206 25,748 14,229-14,229-14,229-14,229-25,109,134 5,507, ,370 30,919,266 1,341, , ,276-2,957, ,670 (23,962) 3,430,487 1,231,059 $ 28,334,189 $6,004,432 $ 278,408 $34,617,029 S 2,572,202 See accompanying notes to financial statements.

41 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 Enterprise Funds Water Nomnajor - Internal and Sewer Hospital Golf Course Total Service Funds OPERATING REVENUES Charges forservices $ 5,358,745 $ - $ 460,464 $ 5,819,209 $ 2,465,264 Other operating revenue 75, ,101 42, ,571 - Total operating revenues 5,434, , ,457 6,124,780 2,465,264 OPERATING EXPENSES Operating expenses 3,116,772 97, ,506 3,972,379 1,984,324 Depreciation and amortization 957, ,371 24,008 1,252, ,457 Total operating expenses 4,074, , ,514 5,225,025 2,285,781 OPERATING INCOME (LOSS) 1.360,183 (181,371) (279,057) 899, ,483 NONOPERATING REVENUES: Investment earnings 21,186 1, ,225 11,320 Interest expense and fiscal charges (20,505) - (1,777) (22,282) Gain (loss) on sale of assets ,065 Total nonoperating revenues 681 1,309 (1,047) ,385 INCOME BEFORE CONTRIBUTIONS AND TRANSFERS 1,360,864 (180,062) (280,104) 900, ,868 Capital contribution from governmental activities 3,595, ,595,829 40,000 Transfers in 215, , ,836 - Transfers out (2,701,035) - (11,140) (2,712,175) - Change in net position 2,471,448 (180,062) 41,802 2,333, ,868 Total net position, beginning 25,361,788 6,208, ,606 31,807,300 3,288,833 Prior period adjustment (Note 10) 500,953 (24,412) - 476,541 (954,499) Totalnetposition,ending $ 28,334,189 $ 6,004,432 $ 278,408 $ 34,617,029 $ 2,572,202 See accompanying notes to financial statements

42 STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash payments to suppliers for goods and services Cash payments to employees for services Net cash provided by (used in) operating activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Operating transfers out to other funds Operating transfers in from other funds Net cash (used in) provided by noncapital financing activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets Principal paid on long term debt Principal paid on general obligation bonds Interest and fiscal charges on debt Net cash (used in) provided by capital and related financing activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments Interest on investments Net cash provided by investing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning Cash and cash equivalents, ending Water and Sewer Hospital Golf Course Operating Fund Fund Funds Total $ 5,566,201 $ 56,918 $ 519,727 $ 6,142,846 (2,580,314) (83,023) (606,133) (3,269,470) (996,488) - (193,174) (1,19,662) 1,989,399 (26,105) (279,580) 1,683,714 (2,701,035) - (11,140) (2,712,175) 215, , ,836 (2,485,235) - 321,896 _J2,1 63,339) (95,572) - (35,167) (130,739) - - (7,961) (7,961) (315,000) - (315,000) (20,505) - (1,777) (22,282) (431,017) - (44,905) (475,982) 1,748,980 (106) 1,748,874 21,186 1, ,225 1,770,166 1, ,772, ,253 (24,902) (1,859) 816, , ,333 52,120 1,001,606 $ 1,667,406 $ 100,431 $ 50,261 $ 1,818,098 See accompanying notes to financial statements

43 STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 CONTINUED RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income (loss) Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization Change in Assets and Liabilities: Decrease (increase) in assets: Receivables Inventories Due from other funds Prepaid expense Increase (decrease) in liabilities: Accounts payable Due to other funds Unearned revenue Accrued liabilities Customer deposits Compensated absences Other post employment benefits Total adjustments Net Cash Provided by (Used in) Operating Activities Water and Nonmajor - Sewer Hospital Golf Course Operating Fund Fund Funds Total $ 1,360,183 $ (181,371) $ (279,057) $ 899, , ,371 24,008 1,252, ,591 (10,000) 5, , (2,158) (2,158) (13,612) (110,000) (123,612) - - (698) (698) (54,711) - (84,361) (139,072) (426,813) 14,078 32,036 (380,699) - (10,183) 10, (31,829) - 10,042 (21,787) (3,660) (3,410) 67,080-4,088 71,168 (10,097) - - (10,097) 629, ,266 (523) 783,959 $ 1,989,399 $ (26,105) $ (279,580) $ 1,683,714 NONCASH CAPITAL AND RELATED FINANCNG ACTIVITIES Contribution of capital assets 3,595, ,595,829 RECONCILIATION OF TOTAL CASH AND CASH EQUIVALENTS Current assets: Cash and cash equivalents $ 1,639,524 $ 100,431 $ 50,261 $ 1,790,216 Restricted assets - cash and cash equivalents 27, ,882 Total cash and cash equivalents $ 1,667,406 $ 100,431 S 50, ,818,098 See accompanying notes to financial statements

44 CITY OF K1LGORE, TEXAS STATEMENT OF FIDUCIARY NET POSITION FIDUCIARY FUNDS SEPTEMBER 30, 2014 ASSETS Cash and cash equivalents Investments, at fair value Mutual fund Total assets OPEB Trust Agency $ - $ 19,616 1,007,878 - $ 1,007,878 $ 19,616 LIABILITIES Intergovernmental payable Total liabilities - 19,616 - $ 19,616 - NET POSITION Held in trust for trust for OPEB benefits $ 1,007,878 See accompanying notes to financial statements

45 CITY OF K1LGORE, TEXAS STATEMENT OF CHANGES IN FIDUCIARY NET POSITION FIDUCIARY FUNDS SEPTEMBER 30, 2014 ADDITIONS Net increase in fair value of investments Total assets OPEB Trust $ 54,092 54,092 Net Position - beginning of year Prior period adjustment Net Position - end of year 953,786 $ 1,007,878 See accompanying notes to financial statements

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47 NOTES TO FINANCIAL STATEMENTS

48 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the City of Kilgore, Texas have been prepared in conformity with generally accepted accounting principles ("GAAP") as applied to governmental units. The Governmental Accounting Standards Board ("GASB") is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The more significant of the government's accounting policies are described below. The significant accounting policies of the City are as follows: Reporting Entity The City of Kilgore, Texas (the "City") is a municipal corporation governed by an elected mayor and a fourmember council. The City was incorporated February 1, 1931 and operated under the provision of a general rule concept until September 13, 1960, when the City's first charter was adopted. The City operates under a Council- Manager form of government and provides the following authorized services: police and fire protection, streets, sanitation, health services, water utilities, library, recreation, planning and zoning, and general administrative services. The accompanying financial statements present the City and its discretely presented component units, Kilgore Economic Development Corporation, Kilgore Redevelopment Authority, Kilgore Community Development Corporation, and the Roy H. Laird Memorial Hospital Foundation. The discretely presented component units are reported in separate columns in the government-wide financial statements to emphasize they are legally separate from the government. For financial reporting purposes, the City's basic financial statements include all financial activities that are controlled by, or are dependent upon, actions taken by City Council. All of the component units have a September 30 year end, with the exception of the Roy H. Laird Memorial Hospital Foundation which has a December 31 year end. The financial statements of the individual component units may be obtained by writing the City of Kilgore, Finance Department, 805 N. Kilgore Street, Kilgore, Texas Discretely presented component units The financial statements of the following component units have been discretely presented in the accompanying report because the City is considered to be financially accountable. Kilgore Economic Development Corporation The Kilgore Economic Development Corporation ("KEDC") is a nonprofit corporation. The governing body of KEDC is appointed by the City Council and KEDC's operating budget is subject to approval of the City Council. The purpose of KEDC, which is financed with a voter-approved half-cent city sales tax, is to aid, promote, and further economic development within the City. KEDC is presented as a major component unit in the governmentwide financial statements. Under a contract with KEDC, the City performs financial services for KEDC. Kilgore Redevelopment Authority The Kilgore Redevelopment Authority ("KRA") is a public nonprofit corporation organized for the purpose of aiding, assisting, and acting on behalf of the City to promote the common good and welfare included in the Reinvestment Zone Number One and neighboring areas; to promote, develop, encourage and maintain housing, educational facilities, employment, commerce and economic development in the City. The KRA is managed by a board of directors consisting of nine members, of which a majority is appointed by City Council. The City performs financial services for KCDC. Kilgore Community Development Corporation The Kilgore Community Development Corporation ("KCDC") is a 501(c)(3) nonprofit corporation organized for the purpose of assisting in the development of adequate housing for the residents of Kilgore, Texas. The governing body of KCDC is comprised of a City Commissioner, a board member from KEDC, and a board member from the Kilgore Housing Financing Corporation, all of whom are appointed by the City Council and can be removed at will by the City. The City performs financial services for KCDC. 28

49 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) Roy H. Laird Memorial Hospital Foundation The Roy H. Laird Memorial Hospital Foundation ("Foundation") is a 501 (c)(3) nonprofit corporation funded primarily by the Roy H. Laird Memorial Hospital Endowment Trust. The Foundation is dedicated to promoting, fostering, facilitating, and supporting indigent and general health care services in the City of Kilgore and its surrounding areas. The governing body of the Foundation is appointed by City Council. In addition, the Foundation has agreed by contract, to the extent it receives proceeds from the Endowment Trust, to satisfy the City's obligation to the Texas Municipal Retirement System for the former City employees of Roy H. Laird Memorial Hospital (a financial benefit to the City). The agreement also stated that the Foundation would reimburse the City for costs associated with defeasance of bonds of the Roy H. Laird Memorial Hospital, to which that obligation has now been paid in full. The Foundation's fiscal year-end is December 31. As a result, the financial statements of the Foundation presented herein are for the year ended December 31, Payments Between the City and Component Units Resource flows between a primary government and its discretely presented component units are reported as external transactions - that is, as revenue and expenses. Government-wide and Fund 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 and its component units. For the most part, the effects of the interfund activity have been removed from these statements. Governmental activities, which normally are 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. Likewise, the primary government is reported separately from certain legally-separate component units for which the primary government is financially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include 1) charges to customers or applicants 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 requirement of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. Nonmajor governmental funds (special revenue and debt service) are reported in a single colunm in the basic fund financial statements. A combining statement is presented after the notes with detail information for each fund. 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 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 City considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and legal claims and judgments, are recorded only when payment is due.

50 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) Measurement Focus, Basis of Accounting, and Financial Statement Presentation (Cont'd) Property taxes, franchise and sales tax revenues, licenses, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of special assessments receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the government. All proprietary funds and the OPEB trust fund are accounted for on a flow of economic resources measurement focus. Proprietary fund-type operating statements present increases (e.g., revenues) and decreases (e.g., expenses) in net position. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the City's Water and Sewer fund and Golf Course fund are charges to customers for sales and services. The principal operative revenue of the City's Hospital fund is lease income. Operating expenses for the enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. The City reports the following major governmental funds: The General Fund is the operating fund of the City. This fund is used to account for all financial resources not accounted for in other funds. All general tax revenues and other receipts that are not restricted by law or contractual agreement or some other fund are accounted for in this fund. General operating expenditures, fixed charges, and capital improvement costs that are not paid through other funds are paid from the General Fund. The Capital Projects Fund is used to account for capital improvement projects while under way. Once completed the project is transferred to the appropriate fund. The City reports the following major enterprise funds: The Water and Sewer Fund accounts for the operation of the City's water and sewer utilities. Activities of the fund include administration, operation and maintenance of the water and sewer system and billing and collection activities. The Fund also accounts for the accumulation of resources for, and the payment of, long-term debt principal and interest for revenue bonds when due throughout the year. All costs are financed through charges made to utility customers with rates reviewed regularly and adjusted if necessary to ensure integrity of the Fund. The Hospital Fund accounts for the activities associated with leasing the hospital assets. Additionally, the City reports the following fund types: The Internal Service Funds are used to account for self-funded group health insurance, capital equipment management services, and information technology services. These services are provided to other departments of the City, generally on a cost reimbursement basis. The Fiduciary Funds are used to account for assets held in a trustee capacity to fund other postemployment benefits to employees of the City and in an agency capacity for seized assets awaiting a judgement to either be released back to the defendant or to be distributed to the police department. These funds are not available to support the City's activities; therefore, they are not included in the government-wide statements. f*1

51 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance Cash, Cash Equivalents and Investments The City's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. The City pools cash from all fund types (excluding certain restricted assets that are considered cash and cash equivalents) to increase the amount of funds available for investment. Interest earnings are allocated to the respective funds based upon each fund's relative balance in the pool. Each fund may liquidate its equity in the pooi on demand. In accordance with GASB Statement No. 31, investments are recorded at fair value. Restricted Assets Restricted assets are assets whose use is subject to constraints that are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments or (b) imposed by law through constitutional provisions or enabling legislation. The balances of the restricted asset accounts at September 30, 2014 are as follows: Governmental Activities Business-type Activities Customer deposits - $ 23,335 Debt service/bond reserves - 267,276 Donations 21,578 - Total restricted assets $ 21, ,611 When both restricted and unrestricted resources are available for use, it is the government's policy to use restricted resources first, then unrestricted resources as they are needed. Inventories and Prep aid Items Inventories of supplies are maintained at City warehouses and are accounted for by the consumption method. Inventories are capitalized under the consumption method, whereby expenditures are capitalized as inventory until used. They are valued at the lower of moving average cost or market. Unit prices are adjusted as new inventory is added, thus the moving average cost closely represents the cost of goods sold. Reported inventories in governmental funds are equally offset by nonspendable fund balance, which indicates that they do not constitute "available expendable resources" even though they are a component of net current assets. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both government-wide and fund financial statements. Capital Assets Property, plant and equipment purchased or acquired is carried at historical cost or estimated historical cost. Contributed capital assets are recorded at estimated fair market value at the time received. Public domain (infrastructure) capital assets consisting of roads, bridges, curbs and gutters, streets and sidewalks, drainage systems and lighting systems have been recorded at estimated historical cost. Capital assets are defined by the government as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed. Net revenue bond interest cost incurred during construction periods is capitalized when material. 31

52 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) Capital Assets (Cont'd) Property, plant, and equipment of the primary government, as well as the component units, is depreciated using the straight line method over the following estimated useful lives: Assets Years Buildings & system Vehicles 3-5 Office equipment 5-10 Computer equipment 5 Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, 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 has no deferred outflows of resources to report at year-end. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents 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. The City has two types of deferred inflows. Unavailable revenue, which only arises on a modified accrual basis of accounting, is comprised of property taxes, municipal court revenue, customer deposits, special assessments, and interest on a long-term note receivable and is reported only in the governmental funds balance sheet. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. Advance from Hospital Foundation, in the Proprietary Statement of Net Position, represents funds on hand in which the eligibility requirements have been met, however the funds have not yet been expended. These amounts are deferred and recognized as an inflow of resources in the period in which the expenditure is incurred. Compensated Absences The City encourages its employees to take annual leave (vacation) in the year it accrues; however, employees are allowed to accumulate vacation time for a maximum of two years credit. Effective May 22, 2001, the City enacted a policy that states if an employee retires with 10 years of service, they would be paid for one-half of their accumulated sick leave up to 45 days. At September 30, 2014, the liability for unpaid leave was $589,977, which is reported in the governmental activities. Fund Balances Governmental funds utilize a fund balance presentation for equity. Fund balance is categorized as nonspendable, restricted, committed, assigned, or unassigned. Nonspendable fund balance - represents amounts that cannot be spent because they are either not in spendable form (such as inventory or prepaids) or legally required to remain intact. Restricted fund balance - represents amounts with external constraints placed on the use of these resources (such as debt covenants, grantors, other governments, etc.) or imposed by enabling legislation (such as municipal court fines). Committed fund balance - represents amounts than can only be used for specific purposes imposed by a formal action of the City's highest level of decision-making authority, the City Council. Committed resources cannot be used for any other purpose unless the City Council removes or changes the specified use by the same action previously used to commit those amounts, an ordinance. Commitments are typically done through adoption and amendment of the budget. Assigned fund balance - represents amounts the City intends to use for specific purposes as expressed by the City Council or an official delegated the authority to assign amounts. This is the residual classification for all governmental funds other than the general fund. Unassigned fund balance - represents the residual classification for the general fund or deficit fund balances in other funds. When an expenditure is incurred for a purpose for which more than one fund balance classification could be used, the City considers the expenditure to be made from the most restrictive classification first. 32

53 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) Net position Net position represents the difference between assets and liabilities. Net investment in capital assets consists of net capital assets reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets, and adding back unspent proceeds. Net position is reported as restricted when there are limitations imposed on its use either through the enabling legislations adopted by the City or through external restrictions imposed by creditors, grantors or laws and regulations of other governments. Interfund Transactions During the course of operations, numerous transactions occur between individual funds for goods provided and services rendered. These receivables and payables are classified as "due from other funds" or "due to other funds" on the fund-level statements when they are expected to be liquidated within one year. If receivables and payables are expected to be liquidated after one year, they are classified as "advances to other funds" or "advances from other funds." In the government-wide statement of activities, the effect of interfund activity has generally been removed from the statements. Exceptions include the chargeback of services for which the elimination would distort the direct costs and program revenues of the various functions reported. Internal service fund activity is eliminated in order to remove duplicate activity in making the transition from the fund financial statements to the government-wide financial statements. The elimination of the internal service fund activity requires the City to "look back" and adjust the internal service funds' internal charges. A positive change in net position derived from internal service fund activity results in a pro rata reduction in the charges made to the participatory funds. A deficit change in net position of internal service funds requires a pro rata increase in the amounts charged to the participatory funds. Use of Estimates Preparing the City's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements In March 2012, the GASB issued Statement No. 65, Items Previously Reported as Assets and Liabilities. This statement will improve financial reporting by reclassifying certain items that were previously reported as assets and liabilities as deferred outflows of resources or deferred inflows of resources, or as outflows or inflows of resources. The requirements of this statement are effective for financial statements for periods beginning after December 15, The City has implemented GASB No. 65 in this annnual report. In March 2012, the GASB issued Statement No. 66, Technical Corrections This statement will improve financial reporting by resolving conflicting guidance that resulted from the issuance of two pronouncements, Statements No. 54 Fund Balance Reporting and Governmetnal Fund Type Definitions, and No. 62, Codofication of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronoucements. The requirements of this statement are effective for financial statements for periods beginning after December 15, The City has implemented GASB No. 66 in this annual report. In June 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions. This statement will improve financial reporting of public employee pensions by state and local governments. Th reqjireinents, of. this statement are effective for financial statements for periods beginning after June 15, The City is evaluating the impact upon its financial position and is expecting an increase to pension liabilities, and a corresponding decrease to unrestricted net position, of approximately $6 million. 33

54 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) New Accounting Pronouncements (Cont' d) In November 2013, the GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date. This statement will eliminate the source of a potential significant understatement of restated beginning net position and expense in the first year of implementation of Statement 68 in the accrual-basis financial statements of employers and nonemployer contributing entities. The requirements of this statement are effective for financial statemetns for periods beginning after June 15, The City is evaluating the impact, if any, upon its financial position, results of operations or cash flows upon adoption. Restatement Certain accounts in the prior year financial statements have been reclassified for comparative pursposes (in the MD&A) to conform with the presentation in the current year financial statements. In addition, certain funds have been reclassified into different fund types during the current year. See Note 10 for details on which funds and the financial effects. II. STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY Budgetary Information The City Council adopts an annual operating budget, which can be amended by the Council throughout the year. Legal budgets are adopted for the City's major funds and certain non-major funds. The following non-major funds did not have budgets adopted for fiscal year 2014: the Hospital Fund, TIRZ Fund, Drug Seizure Funds, KilGogh Art Festival Fund, and Main Street Funds. The level of budgetary control (the level at which expenditures may not exceed budget) is the fund level. The City Manager is authorized to approve a transfer of budgeted amounts within departments; however, any revisions that alter the total expenditures of any fund must be approved by the City Council. Unencumbered appropriations for annual budgets lapse at fiscal year-end. Encumbrances outstanding at year-end are reported as assigned fund balances and do not constitute expenditures or liabilities because the commitments will be honored during the subsequent year. Deficit Fund Equity The Tax Increment Reinvestment Zone Fund had a deficit fund balance of $429,712 as of September 30, The deficit fund balance is a result of a loan the City made to the Kilgore Redevelopment Authority in the amount of $400,000 plus interest to accrue at 3% per year. The City plans to cover the deficit fund equity of the Tax Increment Reinvestment Zone Fund as future property tax revenue is received from the Zone which KRA will use to repay the loan and accrued interest. III. DETAILED NOTES ON ALL FUNDS NOTE 1: DEPOSITS AND INVESTMENTS Cash and investments as of September 30, 2014 consist of and are classified in the accompanying financial statements as follows: Statement of net position: Primary Government Cash and equivalents $ 6,198,978 Restricted cash and equivalents 26,375 Investments 14,626,849 Restricted investments 262,479 $ 21,114,681 Compnent Unit s * Cash and equivalents 816,734 Investments 11,467,807 Total cash and investments $ 33,399,222 *C om po n e nt units include the discretely presented component units KEDC, KRA, KCDC, and the Hospital Foundation. 34

55 NOTE 1: DEPOSITS AND INVESTMENTS (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 Custodial Credit Risk In the case of deposits, this is the risk that in the event of a bank failure, the City's deposits may not be returned to it. State statues require that deposits in financial institutions be fully collateralized by U.S. Government obligations or its agencies and instrumentalities or direct obligations of Texas or its agencies and instrumentalities that have a fair value of not less than the principal amount of deposits. As of September 30, 2014, the City and its component units' deposits were covered by Federal Depository Insurance or by collateral held by a third party custodian. In the case of investments, this is the risk that, in the event of the failure of the counterparty, the government will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The City's investments are with the Texas Local Government Investment Pool ("TexPool"), the Texas Short-Term Asset Reserve Investment Pool ("TexSTAR"), and in certificates of deposit. Under the TexPool Participation Agreement, administrative and investment services to TexPool are provided by Federated Investors, Inc. through an agreement with the State of Texas Comptroller of Public Accounts. The State Comptroller is the sole officer, director, and shareholder of the Texas Treasury Safekeeping Trust Company authorized to operate TexPool. The reported value of the pooi is the same as the fair value of the pooi shares. TexPool is subject to annual review by an independent auditor consistent with the Public Funds Investment Act. Audited financial statements of the Pool are available at First Public, Research Blvd., Austin, Texas In addition, TexPool is subject to review by the State Auditor's Office and by the Internal Auditor of the Comptroller's Office. TexSTAR is a local government investment pooi organized under the authority of the Interlocal Cooperation Act, chapter 791, of the Texas Government Code, and the Public Funds Investment Act, chapter 2256, of the Texas Government Code. J.P. Morgan Investment Management Inc. serves as investment advisor and co-administrator with First Southwest Asset Management, Inc. TexSTAR invests in treasury and agency securities and repurchase agreements fully collateralized by government securities. The pooi maintains a weighted average maturity of 60 days or less. The pool seeks to maintain a constant dollar objective. The reported value of the pool is the same as the fair value of the pool shares. Credit Risk This is the risk that an issuer of an investment will be unable to fulfill its obligations. The rating of securities by nationally recognized rating agencies is designed to give an indication of credit risk. It is the government's policy to limit its investments to those investments rated at least AAAm. The credit quality rating for both TexPool and TexSTAR at year end was AAAm by Standard & Poor's. Interest Rate Risk This is the risk that changes in interest rates will adversely affect the fair value of an investment. In accordance with its investment policy, the government manages its exposure to declines in fair values by limiting the weighted average maturity of its investment portfolio to less than one year from the time of purchase. The maximum allowable maturity for operating funds is five years. The weighted average maturity for the government's investment in external investment pools is less than 60 days. Foreign Currency Risk This is the risk that exchange rates will adversely affect the fair value of an investment. The government is not exposed to foreign currency risk. Concentration of Credit Risk This is the risk of loss attributed to the magnitude of the government's investment in a single issuer (i.e., lack of diversification). Concentration risk is defined as positions of 5 percent (5%) or more in the securities of a single issuer. It is the government's policy to not allow for a concentration of credit risk. Investments issued by the U. S. Government and investments in investment pools are excluded from the 5 percent (5%) disclosure requirement. The government is not exposed to concentration of credit risk. 35

56 NOTE 1: DEPOSITS AND INVESTMENTS (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 At year end, the government's investment balances were as follows: Primary government TexPool TexSTAR Certificates of deposit Total primary government Component units: TexPool TesSTAR Fixed income Equities Alternative assets Total component units Total Reporting Entity Fair Value $ 9,529,474 4,359,854 1,000,000 14,889,328 7,450,263 1,195, ,581 1,572, ,728 11,467,807 $ 26,357,135 Weighted Average Maturity (Years Under provisions of state and local statutes, the City's investment policies and provisions of the City's depository contracts with an area financial institution, the City is authorized to place available deposits and investments in the following: 1. Obligations of the U.S., its agencies and instrumentalities; 2. Direct obligations of the State of Texas; its agencies and instrumentalities rated not less than A or its equivalent 3. Depository banks and credit unions in Texas which are insured by FDIC or NCUA 4. Local Government Investment Pools authorized under Section of the Texas Government code which invest in instruments and follow practices allowed by current law. A pool must be continuously rated no lower than AAA or AAA-m or at an equivalent rating by at least one nationally recognized rating service. 5. Certificates of Deposit and Share Certificates authorized under Section of the Texas Government Code; and 6. SEC registered no-load money market mutual funds The City Council has adopted a written investment policy regarding the investments of its funds as defined by the Public Investment Act of 1995 (Chapter 2256, Texas Government Code). In addition, the component units have adopted written investment policies as well. Additional disclosures related to the investment policies of the component units are disclosed in their separately issued financial reports. The investments of the City are in compliance with the Council's investment policies. The City did not have any derivative investment products during the current year. All significant legal and contractual provisions for investments were complied with during the year. Investments at year-end are representative of the types of investments maintained by the City during the year. NOTE 2: DELINQUENT TAXES RECEIVABLE Delinquent taxes are prorated between maintenance and debt service based on rates adopted for the year of the levy. Allowances for uncollectible tax receivables within the General and Interest and Sinking Funds are based on historical experience in collecting property taxes. Uncollectible personal property taxes are periodically reviewed and written off, but the City is prohibited from writing off real property taxes without specific statutory authority from the Texas Legislature.

57 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 NOTE 2: DELINQUENT TAXES RECEIVABLE (Cont'd) At September 30, 2014, the components of delinquent taxes receivables are as follows: General Interest & Fund Sinking Total Delinquenttaxes $ 417,811 $ 57,482 $ 475,293 Allowance (131,527) (19,049) (150,576) Totals $ 286,284 $ 38,433 $ 324,717 NOTE 3: CAPITAL ASSETS Capital assets activity for the year ended September 30, 2014, was as follows: Governmental activities: Capital assets, not being depreciated: Land Equipment (historical treasure) Construction in progress Total capital assets, not being depreciated Beginning Balance Increases $ 1,118,380 $ 107,016 40,000 5,698,346 3,763,165 6,816,726 3,910,181 $ Decreases 5,598,150 5,598,150 Ending Balance $ 1,225,396 40,000 3,863,361 5,128,757 Capital assets, being depreciated: Buildings & system Equipment & other Total capital assets being depreciated 4,219, ,549 31,236,320 2,423,801 35,455,884 2,531, , ,682 4,327,113 33,547,439 37,874,552 Less accumulated depreciation for: Buildings & system Equipment & other Total accumulated depreciation (2,032,724) (18,856) (15,095,065) (1,268,756) (17,127,789) (1,287,612) (101,226) (101,226) (2,051,580) (16,262,595) (18,314,175) Total capital assets, being depreciated, net Governmental activities capital assets, net 18,328,095 1,243,738 $ 25,144,821 $ 5,153,919 11,456 $ 5,609,606 19,560,377 $ 24,689,134 37

58 NOTE 3: CAPITAL ASSETS (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 Beginning Balance Increases Decreases Business-type activities: Capital assets, not being depreciated: Land $ 311,536 $ - $ Construction in progress Total capital assets, not being depreciated 311,536 - Capital assets, being depreciated: Buildings & system 54,559,398 3,726,567 Equipment & other 9,391, Total capital assets being depreciated 63,950,978 3,726,567 Ending Balance -. $ 311, ,536-58,285,965-9,391,580 67,677,545 Less accumulated depreciation for: Buildings & system (26,484,259) (1,134,011) - (27,618,270) Equipment & other (8,835,462) (66,016) - (8,901,478) Total accumulated depreciation (35,319,7 ) (1,200,027) - (36,519,748) Total capital assets, being depreciated, net 28,631,257 2,526,540-31,157,797 Business-type activities capital assets, net $ 28,942,793 $ 2,526,540 $ - $ 31,469,333 Depreciation expense was charged to functions/programs of the primary government as follows: Governmental activities: General Government $ 75,814 Building maintenance 10,858 Public safety 418,060 Court 10,522 Streets and planning 603,706 Sanitation and health 8,129 Library 2,624 Parks and recreation 89,213 Water 68,686 Total depreciation expense - governmental activities $ 1,287,612 Business-type activities: Water and sewer $ 904,648 Golf course 24,008 Hospital 271,371 Total depreciation expense - business-type activities $ 1,200,027

59 NOTE 3: CAPITAL ASSETS (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 Beginning Ending Balance Increases Decreases Balance Kilgore Economic Development Corporation: Capital assets, not being depreciated: Land $ 94,711 $ 66,360 $ - $ 161,071 Property held for resale/transfer 2,931, ,796 3,389,570 depreciated 3,026, ,156-3,550,641 Capital assets, being depreciated: Buildings & improvements 10,720,460 2,588,017-13,308,477 Furniture, fixtures, & equipment 227, ,714 Total capital assets being depreciated 10,948,174 2,588,017-13,536,191 Less accumulated depreciation for: Buildings & improvements (3,259,390) (631,781) - (3,891,171) Furniture, fixtures, & equipment (128,432) (23,500) - (151,932) Property held for resale/transfer (4,419) - (4,419) Total accumulated depreciation (3,392,241) (655,281) (4,047,522) Total capital assets, being depreciated, net 7,555,933 1,932,736-9,488,669 Kilgore Economic Development Corporation capital assets, net $ 10,582,418 $ 2,456,892 $ - $ 13,039,310 Depreciation expense was charged to functions/programs of the primary government as follows: Economic Development $ 655,281 NOTE 4: LONG TERM DEBT General Obligation Bonds The City issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. General obligation bonds have been issued for both general government and proprietary activities. These bonds are reported in the Proprietary Funds if they are expected to be repaid from Proprietary Fund revenues. General obligation bonds are direct obligations and pledge the full faith and credit of the government. General obligation bonds currently outstanding are as follows: 2009 general obligation refunding bonds due in various annual principal installments through February, 2017, interest from 2% to 3% Enterprise Fund $ Annual debt service requirements to maturity for general obligation bonds are as follows: Year Ending September Total Business-Type Activities Principal Interest $ 220,000 $ 12, ,000 5,325 60, $ 515,000 $ 18,375

60 NOTE 4: LONG TERM DEBT (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 Certificates of Obligation The City issues certificates of obligation to provide funds for the acquisition and construction of major capital facilities. Certificate of obligation bonds may be issued for both general government and proprietary activities. These bonds are reported in the Proprietary Funds if they are expected to be repaid from Proprietary Fund revenues. The City has outstanding certificate of obligation bonds as follows: 2008 Tax and Waterworks and Sewer System (Limited Pledge) Revenue Certificate of Obligations due in various annual principal installments through August 2028, interest from 4.0% to 4.5%. Debt Service $ Annual debt service requirements to maturity for certificate of obligations are as follows: Year Ending September Total Governmental Activities Principal Interest $ 225,000 $ 181, , , , , , , , ,525 1,525, ,500 1,500, ,068 $ 4,250,000 $ 1,489,443 Notes Payable The City has one outstanding note payable to Austin Bank, due in annual installments through December 2016 at a rate of interest of 2.275%. At September 30, 2014, the outstanding balance was $89,277. Capital Leases The City is obligated under two capital leases, one for golf carts and the other for a mower. The equipment acquired through capital lease has a net book value of $24,994. The lease payments relating to the equipment have been capitalized and included in equipment in the golf course enterprise fund. The outstanding leases at September 30, 2014 are as follows: Ten (10) YDRA Golf Cars payable in 48 monthly installments of $542.68, including interest at 3.8 8%, with a balloon payment of$16,000 on February 1, Golf Course Enterprise Fund $ Turfco 1530 tow-behind mower payable in 60 monthly installments of $304.20, including interest at 6.98%, with final payment due June 1,2016. Golf Course Enterprise Fund $ 5.993

61 NOTE 4: LONG TERM DEBT (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 Annual debt service requirements to maturity for capital leases are as follows: Year Ending September Total amount of minimum lease payments Less: amount representing interest Present value of minimum lease payments Governmental Activities $ 10,160 9, ,579 (2,511) $ 35,068 Changes in Long-Term Liabilities Long-term liability activity for the year ended September 30, 2014, was as follows: Governmental activities: General obligation and certificates of obligation Loans Compensated absences Claims payable Total governmental activities Balance 10/1/2013 Additions $ 4,475, , ,022 56,546 $ 5,270,428 $ * 36,379 * 156,785 $ 193,164 Retirements $ (225,000) (44,583) (51,424) (84,857) $ (405,864) Balance 9/30/2014 $ 4,250,000 89, , ,474 $ 5,057,728 Due Within One Year $ 225,000 44, , ,474 $ 988,034 Business-type Activities: Generalobligationbonds $ 830,000 $ - $ (315,000) $ 515,000 $ 220,000 Capital lease obligation 43,027 - (7,959) 35,068 8,816 Compensated absences 113,295 * , ,542 Total business-type activities $ 986,322 $ 9,247 $ (322,959) $ 672,610 $ 351,358 * Includes prior period adjustments of $285,671 for compensated absences and $56,546 for claims payable in the govnernmental activities and $51,374 for compensated absences of the business-type activities. See Note 10. The General Fund generally liquidates the liability for compensated absences payable as well as the claims liability. Component Unit - Kilgore Economic Development Corporation KEDC issued $2,775,000 of sales tax revenue refunding and improvement bonds, Series 2010, to provide sufficient funds to discharge and pay for KEDC's obligation for the 1999 Sales Tax Revenue Bonds and the 1999 Taxable Sales Tax Revenue Bonds. The refunded obligations were refunded to achieve debt service savings of approximately $192,747. KEDC issues bonds whereby the government pledges income from sales tax to pay the related debt service. Revenue bonds outstanding at year-end are as follows: 2010 Sales Tax Revenue Refunding & Improvement Bonds, due in various principal installments through September 15, 2029, interest from 2.0% to 4.25% $

62 NOTE 4: LONG TERM DEBT (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 The principal and interest requirements at September 30, 2014, for the component unit debt for the next five years and, thereafter, are as follows: Year Ending Governmental Activities September 30 Principal Interest 2015 $ 115,000 $ 83, ,000 80, ,000 76, ,000 72, ,000 69, , , , ,494 Total $ 2,195,000 $ 765,519 Kilgore Redevelopment Authority The note payable owed to the City of Kilgore (Note 9) in the amount of $400,000 currently does not have a payment timeline established. The note continues to accrue interest at a rate of 3% annually. NOTE 5: PENSION AND EMPLOYEE BENEFIT PLANS Texas Municipal Retirement System Plan Description The City provides benefits for all of its eligible employees (with the exception of firefighters) through a nontraditional, joint contributory, hybrid defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS), an agent multiple-employer public employee retirement system. The plan provisions that have been adopted by the City are within the options available in the governing state statutes of TMRS. TMRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information (RSI) for TMRS; the report also provides detailed explanations of the contributions, benefits and actuarial methods and assumptions used by the System. This report may be obtained from TMRS' website at The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS. Plan provisions for the City were as follows: Employee deposit rate Matching ratio (city to employee) Years required for vesting Service Updated Service Credit Annuity Increase (to retirees) Plan Year % 2 to /5, 0/20 100% Repeating, Transfers 70% of CPI Plan Year % 2 to /5, 0/20 100% Repeating, Transfers 70% of CPI Contributions Under the state law governing TMRS, the contribution rate for each city is determined annually by the actuary, using the Entry Age Normal (BAN) cost method (BAN was first used in the December 31, 2013 valuation; previously the Projected Unit Credit actuarial cost method had been used). This rate consists of the normal cost contribution rate and the prior service cost contribution rate, which is calculated to be a level percent of payroll from year to year. The normal cost contribution rate for an employee is the contribution rate which, if applied to a member's compensation throughout their period of anticipated covered service with the municipality, would be sufficient to meet all benefits payable on their behalf. The salary-weighted average of the individual rates is the total normal cost rate. The prior service contribution rate amortizes the unfunded (overfunded) actuarial liability (asset) over the applicable period for that city. Both the normal cost and prior service 42

63 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 NOTE 5: PENSION AND EMPLOYEE BENEFIT PLANS (Cont'd) Contributions (Cont'd) contribution rates include recognition of the projected impact of annually repeating benefits, such as Updated Service Credits and Annuity Increases. The City contributes to the TMRS Plan at an actuarially determined rate. Both the employees and the City make contributions monthly. In addition, the City receives a contribution from the Hospital Foundation for the TMRS obligation for the former City employees of Roy H. Laird Memorial Hospital. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect. Annual Pension Cost For the calendar year ended December 31, 2013 (reported in fiscal year 9/30/2014), the City's annual pension cost of $1,121,808 for TMRS was equal to the City's required and actual contributions. Fiscal year Ending 9/3 0/ /3 0/ /30/2014 Annual Pension Cost (APC) $ 1,139,281 1,086,337 1,121,808 Percentage of APC Contributed 100% 100% 100% $ Net Pension Obligation The required contribution rates for fiscal year 2014 were determined as part of the December 31, 2011 and 2012 actuarial valuations. Additional information as of the latest actuarial valuation, December 31, 2013, also follows: Actuarial Valuation Date Actuarial Cost Method Amortization Method GASB 25 Equivalent Single Amortization Period Amortization Period for new Gains/Losses Asset Valuation Method Actuarial Assumptions: Investment Rate of Return * Projected Salary Increases * *I nc l u d es Inflation At Cost-of-Living Adjustments 12/31/ /31/ /31/2013 Projected Unit Projected Unit Projected Unit Credit Credit Credit Level Percent of Level Percent of Level Percent of Payroll Payroll Payroll 25.9 years; 24.8 years; 27.0 years; closed period closed period closed period 30 years 30 years 30 years 10-year Smoothed 10-year Smoothed 10-year Market Market Smoothed Market 7% 7% 7% Varies by age and Varies by age and Varies by age and service service service 3% 3% 3% 2% 2% 2% 43

64 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 NOTE 5: PENSION AND EMPLOYEE BENEFIT PLANS (Continued) Funded Status The funded status as of December 31, 2013, is presented as follows: Actuarial Valuation Date 12/31/2013 Actuarial Actuarial UAALas a Value of Accrued Funded Unfunded Covered Percentage of Assets Liability (AAL) Ratio AAL(UAAL) Payroll Covered Payroll (a) (b) (a/b) (c)=(b-a) (d) (e)=(c/d) $ 30,859,146 $ 38,914, % $ 8,055,168 $ 6,801, % Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. Actuarial calculations are based on the benefits provided under the terms of the substantive plan in effect at the time of each valuation, and reflect a long-term perspective. Consistent with that perspective, actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. The schedule of funding progress, presented as Required Supplementary Information following the notes to the financial statements, presents multi-year trend information about the actuarial value of plan assets. The City also participates in the cost sharing multiple-employer defined benefit group-term life insurance plan operated by TMRS known as the Supplemental Death Benefits Fund (SDBF). The City elected, by ordinance, to provide group-term life insurance coverage to both current and retired employees. The City may terminate coverage under and discontinue participation in the SDBF by adopting an ordinance before November 1 of any year to be effective the following January 1. The death benefit for active employees provides a lump-sum payment approximately equal to the employee's annual salary (calculated based on the employee's actual earnings, for the 12-month period preceding the month of death); retired employees are insured for $7,500; this coverage is an "other postemployment benefit," or OPEB. Contributions The City contributes to the SDBF at a contractually required rate as determined by an annual actuarial valuation. The rate is equal to the cost of providing one-year term life insurance. The funding policy for the SDBF program is to assure that adequate resources are available to meet all death benefit payments for the upcoming year; the intent is not to prefund retiree term life-insurance during employees' entire careers. The City's contributions to the TMRS SDBF for the years ended 2014, 2013, and 2012 were $14,590, $13,726, and $15,165, respectively, which equaled the required contributions each year. Schedule of Contribution Rates (RETIREE-only portion of the rate) Plan! Annual Required Actual Percentage Calendar Contribution Contribution of ARC Year Rate Made Rate Contributed % 0.07% 100% % 0.07% 100% % 0.06% 100% % 0.06% 100% % 0.06% 100% 44

65 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 NOTE 5: PENSION AND EMPLOYEE BENEFIT PLANS (Cont'd) IRC 457 Deferred Compensation Plans The City offers its executive employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457, which is administered by Nationwide Retirement Solutions, Inc. Due to the fact that the City does not administer this plan, the plan is not included in the City's financial statements. Other Post-Employment Benefits (OPEB) Plan Description Prior to January 1, 2014, the City provided medical, dental and vision benefits to eligible retirees. Retirees are eligible at age 55 with 20 years of service. The City paid 100% of the monthly contribution rate for individual coverage under the standard co-pay plan option for retirees. The retiree was required to contribute $75 for individual coverage and for any premium related to dependent coverage under the core plan option. Coverage terminated for both the retiree and dependents when the retiree became eligible for Medicare or if the retiree accepted another job that offered medical insurance. Effective January 1, 2014, the City amended the plan to remove the retirees from the City's OPEB plan and instead provide a flat subsidy per month, based on the premium of the standard PPO plan of the current fiscal year, for eligible retirees to purchase health insurance coverage elsewhere. Funding Policy The City set up an irrevocable trust for OPEB, which is reported as a Fiduciary Fund in the financial statements. The annual employer contribution is equal to the ARC (annual required contribution). Under this funding policy, a discounted rate consistent with the investment return earned on the plan's assets is used. Dependent on the asset allocation of the investment pool, this rate is based on longer term investments. In this valuation, the discount rate is 7.5%. The present value of all benefits expected to be paid to current plan members as of October 1,2013 is $1,107,105. The actuarial accrued liability is the liability or obligation for benefits earned through the valuation date, based on certain actuarial methods and assumptions. The Plan's Actuarial Accrued Liability at October 1, 2013 is $715,675. The actuarial accrued liability represents 64.64% of the present value of all projected benefits. The assets available to offset the liability as of October 1, 2013 are $953,786 resulting in net OPEB asset of $238,111. Service cost is the value of benefits expected to be earned during the year, based on certain actuarial methods and assumptions. The 2014 fiscal year service cost is $ 32,153. Annual Required Contribution (AR GASB Statement No. 45 sets the method for determining the City's postemployment benefits accrual, the Annual Required Contribution (ARC), to include both the value of the benefits earned during the year (Service Cost) and an amortization of the unfunded actuarial accrued liability. Accordingly, the following table shows the City's 2014 Fiscal Year Annual Required Contribution (ARC) based on a 30-year amortization of the unfunded actuarial accrued liability as a level dollar amount. Fiscal Year Ending September 30, 2014 Service cost $ 32,153 Unfunded Actuarial Accrued Liability Amortization (18,262) Annual Required Contribution (ARC) $ 13,891 Annual OPEB Cost Summary -, If there is a prior year net OPEB obligation (asset), the Annual OPEB Cost should reflect an adjustment for the obligation including both an interest adjustment and amortization of the prior year OPEB obligation (asset). Annual Required Contribution (ARC) $13,891 Interest on Prior Year Net OPEB Asset (5,724) Amortization of Prior Year Net OPEB Asset 5,724 Total Annual OPEB Cost (AOC) $14,358 45

66 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 NOTE 5: PENSION AND EMPLOYEE BENEFIT PLANS (Cont'd) Other Post-Employment Benefits (Cont'd) Annual Fiscal Year OPEB Ended Costs September 30, 2012 $ 183,779 September 30, ,212 September 30, ,358 Employer Amount Contributed $ 183, ,300 77,541 Percentage of Net OPEB Annual OPEB Obligation Cost Contributed (Asset) 100.0% $ % (70,088) 540.1% (133,271) Actuarial Methods and Assumptions The Projected Unit Credit actuarial cost method is used to calculate the GASB ARC for the City's retiree health care plan. Using the plan benefits, the present health premiums and a set of actuarial assumptions, the anticipated future payments are projected. The projected unit credit method then provides for a systematic recognition of the cost of these anticipated payments. The yearly ARC is computed to cover the cost of benefits being earned by covered members as well as to amortize a portion of the unfunded accrued liability (asset). Projections of health benefits are based on the plan as understood by the City and include the types of benefits in force at the valuation date and the pattern of sharing benefit costs between the City and its employees to that point. Actuarial calculations reflect a long-term perspective and employ methods and assumptions that are designed to reduce short-term volatility in actuarial liabilities and the actuarial value of assets. Significant methods and assumptions are as follows: Inflation rate Investment rate of return Actuarial cost method Amortization method Amortization period Payroll growth Healthcare cost trend rate 3.00% per annum 4.50%, net of expenses Projected Unit Cost Method Level Dollar 30-year, open amortization 3.00% per annum 3.50% level assumed Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events in the future. Amounts determined regarding the funded status and the annual required contributions of the City's retiree health care plan are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. The required schedule of funding progress presented as required supplementary information provides multiyear trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. NOTE 6: INTERFUND TRANSACTIONS Transfers between funds during the year were as follows: Transfers Out: General Fund Capital Improvement Fund Non-Major Governmental Funds Water and Sewer Fund Non-Major Enterprise Funds Total General Fund $ 40,582 30, ,152 Governmental Capital Improvement Fund $ 707, ,263 2,506,883 $ 264,734 $ 3,692,913 $ 10,000 Transfers In Enterprise Non-Major Non-Major Governmental Water and Enterprise Funds Sewer Fund Funds $ - $ - $ 301, ,000 10, , ,140 $ 215,800 $ 333,036 Total $ 1,050, , ,800 2,701,035 11,140 $ 4,516,483

67 NOTE 6: INTERFUND TRANSACTIONS (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 Significant transfers are related to capital projects that were completed during the year and transferred to their respective funds. In addition, $301,896 was transferred from the General Fund to the Golf Course Fund for operational expenses of the fund and $194,152 was transferred out of the Water and Sewer Fund to the General Fund for administrative support. The composition of interfund balances as of September 30, 2014, is as follows: General Due to: Water and Sewer Fund Hospital Fund Non-Major Enterprise Funds Governmental General $ 1,000,000 $ 1,000,000 Due from Enterprise Water and Hospital Internal Sewer Fund Fund Service Funds Total $ - $ 110,000 $ 174,364 $ 284, ,187 1,073,187 14, , ,036 32,036 $ 14,078 $ 110,000 $ 279,587 $1,403,665 The significant interfund balance between the Water Fund and the General Fund is related to funds advanced to the Water and Sewer Fund to build infrastructure. The amount is scheduled to be repaid over two years. NOTE 7: COMMITMENTS AND CONTINGENCIES Grant Audits The City received federal and state grants for special purposes that are subjected to review and audit by the grantor agencies. Such audits could lead to requests for reimbursement to the grantor agency for expenditures disallowed under terms of the grant. City management believes such disallowances, if any, would be insignificant. Construction Commitments The City has active construction projects as of September 30, The projects include street construction, drainage construction, and the construction of water and sewer facilities. At year-end, the City's commitments with contractors are as follows: Project Spent-to-Date Knowles Street Reconstruct $ 187,290 Downtown Storm Sewer 353,350 AMI Neter Program 1,791,749 Hwy 42 Sewer Extension 96,539 $ 2,428,928 Estimated Remaining Commitment $ 614, , , ,487 $ 2,172,341 47

68 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 NOTE 7: COMMITMENTS AND CONTINGENCIES (Cont'd) Water Rights The City of Kilgore contracted with the Sabine River Authority to build and maintain a water collection facility on the Sabine River for the purpose of collecting and transferring water from the river to the City's water treatment plant. The City of Kilgore is directly liable for bonds issued to pay for construction of the River Authority collection plant; however, no ownership of the facility is vested with the City of Kilgore. As a result of this obligation to pay debt, the City has the right to receive water, as needed, from the River Authority for the operational life of the facility. The water rights are being amortized ratably over the life of the bond. Amortization for the year ending September 30, 2014 was $ 52,619. Business -Type Activities Water Rights Less: Accumulated amortization $ 1,289,164 (1,052,379) Water Rights, Net $ 236,785 NOTE 8: RISK MANAGEMENT Group Health The City provides medical benefits to City employees under a fully pooled program through the TML Intergovernmental Employee Benefits Pool (TML IEBP). The TML IEBP provides these benefits pursuant to Chapter 172 of the Local Government Code and the Interlocal Cooperation Act. General Liability The government is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; and natural disasters for which the government carries commercial insurance. Liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Worker's Compensation All City employees are covered by a risk pool workmen's compensation insurance program. The City pays certain administrative fees to an independent insurance intermediary who administers the program and processes all claims. Any valid claims are paid by the City and charged as current operating expenditures. Any potential future claims cannot be determined and, as of September 30, 2014, the administrator had not reported any such claims to the City. NOTE 9: RELATED PARTY TRANSACTIONS The city entered into a long-term lease agreement with Allegiance Specialty Hospital of Kilgore ("Allegiance") for space in the hospital building that the City owns. The current agreement in place began January 1, 2010 and expires December 31, 2015 and is accounted for in the Hospital Fund (a proprietary fund). The Chief Executive Officer of Allegiance was a member of City Council from During 2014, lease income to the City was $120,000 ($10,000 per month). At year-end, there is a receivable balance of $10,000. Rental income through this non-cancellable lease through December 2015 will be $150,000 ($10,000 per month for the following 15 months). The following schedule presents significant transactions between the primary government and its component units for the year ended September 30, 2014: Comnonent Unit Kilgore Redevelopment Authority Roy H. Laird Memorial Hospital Foundation Sigiilficant Transactions Note receivable in the amount of $400,000, with an interest rate of 3% annually. Accrued interest receivable of $51,043 at September 30, $67,101 contribution for the Texas Municipal Retirement System obligation for former City employees of the Roy H. Laird Memorial Hospital.

69 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 NOTE 10: NEW GASB STANDARD AND PRIOR PERIOD ADJUSTMENTS As a result of implementing GASB 65, Items Previously Reported as Assets and Liabilities, net position was restated at October 1, With the adoption of GASB 65, bond issuance costs (excluding the portion related to bond insurance) are expensed and no longer amortized annually as other assets. As a result, the Water and Sewer Fund and the Business-Type Activities beginning net position has been reduced by $28,303 to reflect the adoption of this standard. Following is a summary of prior period adjustments made on the government-wide financial statements: Discretely Governmental Business-Type Presented Activities Activities Component Unit To reclass the OPEB Trust (Note 5) from Internal Service Fund type to a Fiduciary Fund. $ (953,787) $ - $ To record KCDC as a discretely presented component unit of the City of Kilgore ,264 To record the Hospital Foundation as a discretely presented component unil of the City of Kilgore ,770,437 To record a receivable for municipal court fines and fees at 9/30/13. 1,338, To record public works inventory at 9/30/13. 62, ,534 - To add Remington Phase 3 project to capital assets, which was originally expensed in prior year. 863, ,946 - To remove bond issuance cost in accordance with GASB 65. (28,303) - To report expenditures in the correct period. (137,414) - - To correctly report the compensated absences liability at 9/30/13, including adding the accrual for taxes and retirement (salary-related payments). (285,671) (51,374) - To record net OPEB asset at 9/30/13. 59,938 10,150 - To record claims liability at 9/30/13. (56,546) - - To correctly report payments received in fiscal year 2013 from the Laird Memorial Hospital Foundation for TMRS payments related to fiscal year (24,412) - To correctly report sales tax revenue in the correct period. 1,166,456 - Total $ 2,057,758 $ 476,541 S 3,007,701 Following is a summary of prior period adjustments made on the fund financial statements: To report the Civic Center Fund as a Capital Projects Fund since it was created with donations restricted for a capital project. This fund was reported as a Special Revenue Fund in the prior year. Capital Nonmajor General Projects Governmenta' Fund Fund Funds - $ $ (82.017) Water & Sewer Hospital Fund Fund Internal OPEB Service Trust Funds Fund

70 NOTE 10: PRIOR PERIOD ADJUSTMENT - (Cont'd) NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 Capital Nonmajor Water & Internal OPEB General Projects Governmental Sewer Hospital Service Trust Fund Fund Funds Fund Fund Funds Fund To report the 911 Emergency Fund as a Special Revenue fund since these revenues are restricted. This fund was reported as part of the General Fund in the prior year. 10 report tlie Intormation I eclinology Fund (56,892) - 56, as an Internal Service Fund since this fund is used to pay for IT contracts and each department of the City pays this fund for their share of the costs. This fund was reported as part of the General Fund in the prioryear (713) - To reclass the OPEB Trust (Note 5) from Internal Service Fund type to a Fiduciary Fund (953,786) 953,786 To report the TIRZ Fund on the modified accrual basis of accounting, by removing long-term receivables. The long term loan should have been an other financing use in the year the loan was made. - - (438,349) To report unavailable revenue from special assessments as a deferred inflow on the modified accrual basis of accounting. ######## To reco public works inventory , To add Remington Phase 3 project to capital assets, which was originally expensed in prior year , To remove bond issuance cost in accordance with GASB (28,303) To report expenditures in the correct period. (137,414) To correctly report the compensated absences liability at 9/30/13, including adding the accrual for taxes and retirement (salary-related payments) (51,374) To record net OPEB asset at 9/30/ , To correctly report payments received in fiscal year 2013 from the Laird Memorial Hospital Foundation for TMRS payments related to fiscal year ( ) - - To correctly report sales tax revenue in the correct period. 1,166, Total $ (178,219) $ $ (463,474) $ 500,953 $(24,412) /#IIThII!ft# $ 953,786 50

71 NOTE 11: SUBSEQUENT EVENTS NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2014 In January 2016, the City extended their long-term lease agreement with Allegiance Specialty Hospital of Kilgore through December 31, The monthly lease amount increased from $10,000 to $25,000. In 2016, the City received additional property taxes in the amount of $742,844 for the years 2012, 2013, and 2014 as a result of a correction, by the appraisal district, in the allocation of property taxes among neighboring jurisdictions. In October 2015, Kilgore Economic Development Corporation, a component unit of the city, issued sales tax revenue bonds in the amount of$1,800,000. Subsequent events have been evaluated through April 11, 2016, the date the fmancial statements were available to be issued. 51

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73 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

74 REQUIRED SUPPLEMENTARY INFORMATION TEXAS MUNICIPAL RETiREMENT SYSTEM SCHEDULE OF FUNDII4G PROGRESS FOR THE YEAR ENDED SEPTEMBER 30, 2014 UAAL as a Actuarial Actuarial Unfunded Annual Percentage Actuarial Value of Accrued AAL Funded Covered of Covered Valuation Assets Liability (AAL) (UAAL) Ratio Payroll (1) Payroll Date (a) (b) (b-a) (a/b) (c) ((b-a)/c) 12/31/2011 $26,880,042 $ 33,442,115 $6,562, % $6,527, % 12/31/ ,792,571 34,982,434 6,189, % 6,632, % 12/31/ ,859,146 38,914,314 8,055, % 6,801, % (1) The annual covered payroll is based on the employee deposits received by TMRS for the year ending with the valuation date

75 REQUIRED SUPPLEMENTARY IIFORMATION OTHER POST-EMPLOYMENT BENEFITS PLAN SCHEDULE OF FUNDING PROGRESS FOR THE YEAR ENDED SEPTEMBER 30, 2014 UAAL as a Actuarial Actuarial Unfunded Annual Percentage Actuarial Value of Accrued AAL Funded Covered of Covered Valuation Assets Liability (AAL) (UAAL) Ratio Payroll (1) Payroll Date (a) (b) (b-a) (a/b) (c) ((b-a)/c) 10/1/2011 $ 468,065 $ 1,721,791 $1,253, % $6,916, % 10/1/ ,736 1,349, , % 6,268, % 10/1/ , ,675 (238,113) 133.3% 7,013, % (1) The annual covered payroll is the payroll related to those grandfathered employees who will be able to retire and continue health coverage at a subsidized premium

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77 COMBINING FUND FINANCIAL STATEMENTS

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79 NONMAJOR GOVERNMENTAL FUNDS Special Revenue Funds Special revenue funds are used to account for specific revenues that are legally restricted to expenditure for particular puxposes. The special revenue funds account for hotel occupancy taxes, grants, tax increment reinvestment zone, police seizures, municipal court fees restricted for technology and security, and funds related to the Main Street programs. Debt Service Fund The debt service fund accounts for resources accumulated and payments made for principal and interest on long-term general obligation debt of governmental funds. 54

80 COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS SEPTEMBER 30, 2014 ASSETS Cash and cash equivalents Investments Receivables (net of allowance for estimated uncollectible accounts): Taxes Accounts Total assets LIABILITIES Trade payables Accrued payroll and related expenses Advance payable Total liabilities DEFERRED INFLOWS OF RESOURCES Unavailable revenue - property taxes Unavailable revenue - interest on long-term receivable Total deferred inflows of resources FUND BALANCES Restricted for: Debt service Grant restrictions Municipal court Public safety Tourism and convention facilities Tax increment district Total fund balances Total liabilities, deferred inflows of resources, and fund balances Total Noninajor Special Debt Governmental Revenue - Service Funds - $ 550,228 $ 162,113 $ 712,341 37, ,883-38,434 38,434 99,546-99, , , ,204 19, , , , , ,177-38,434 38,434 51,043-51,043 51,043 38,434 89, , ,376 72,301-72, , ,201 57,145-57, , ,239 (429,712) - (429,712) 186, , ,550 $ 687,195 $ 201,009 $ 888,204 See accompanying notes to financial statements

81 COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 REVENUES Taxes: Property Other Drug seizure revenue Grants Interest on investments Miscellaneous Police court fines and fees Total revenues EXPENDITURES Cunent: Public safety: Police Grants Parks Debt service: Principal Interest and fiscal charges Total expenditures Excess (deficiency) of revenues over (under) expenditures Total Nonmajor Special Debt Governmental Revenue Service Funds $ - $ 635,156 $ 635, , , , , , ,595 3,571 1,232 4,803 13,002-13,002 24,498-24, , ,388 1,549, , , , ,953 33,654-33, , , , , , ,651 1,236, , ,289 OTHER FINANCING SOURCES (USES) Transfers in 10,000-10,000 Transfers out (40,000) (215,800) (255,800) Total other financing sources (uses) (30,000) (215,800) (245,800) Net change in fund balances 64,552 2,937 67,489 Fund balance beginning of year 585, , ,535 Prior period adjustment (Note 10) (463,474) - (463,474) Fund balance - end of year $ 186,174 $ 162,376 $ 348,550 See accompanying notes to financial statements

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83 INTERNAL SERVICE FUNDS Employee Benefit Fund - To account for the City's hospitalization plan for employee medical premiums. All activities related to such plan are accounted for in this fund, including, but not limited t, administration, claims reimbursement and collection of premiums. Capital Equipment Purchase Fund - To account for personal equipment purchased by the fund for lease to various departments of the City. All activities to provide such service are accounted for in the fund, including, but not limited to, purchases, sales and collection. Information Technology Fund - To account for IT costs paid by the City and allocated among departments benefiting from the services. 57

84 COMBINING STATEMENT OF NET POSITION INTERNAL SERVICE FUNDS SEPTEMBER 30, 2014 ASSETS Current assets Cash and cash equivalents Investments Due from other funds Total current assets Capital assets (net of accumulated depreciation) Total assets LIABILITIES Current liabilities Trade payables Total current liabilities NET POSITION Net investment in capital assets Unrestricted Total net position Capital Employee Equipment Infonnation Benefit Purchase Technology Fund Fund Fund Total $ 429,894 $ 287,865 $ 9,461 $ 727, , , , , , ,865 9,461 1,256,807-1,300,227 40,916 1,341, ,481 1,588,092 50,377 2,597, ,353 25, ,353 25,748-1,300,227 40,916 1,341, , ,470 (15,892) 1,231,059 $ 959,481 $ 1,587,697 $ 25,024 $ 2,572,202 See accompanying notes to financial statements

85 COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION INTERNAL SERVICE FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 Operating revenues: Charges for services Total operating revenues Operating expenses: Operating expenses Depreciation Total operating expenses Operating income (loss) Nonoperating revenues: Investment earnings Gain (loss) on sale of assets Total nonoperating revenues Income (loss) before contributions and transfers Capital Employee Equipment Information Benefit Purchase Technology Fund Fund Fund Total $ 1,775,927 $ 288,912 $ 400,425 $ 2,465,264 1,775, , ,425 2,465,264 1,612, ,469 1,984, ,758 4, ,457 1,612, , ,285, ,072 (7,846) 24, ,483 7,000 2,840 1,480 11,320-7,065-7,065 7,000-9,905 1,480 18, ,072 2,059 25, ,868 Capital contributions -. 40,000 40,000 Change in net position 170,072 42,059 25, ,868 Net Position - beginning of year 1,743,195 1,545,638-3,288,833 Prior period adjustment (Note 10) (953,786) - (713) (954,499) Net Position-end ofyear $ 959,481 $ 1,587,697 $ 25,024 $ 2,572,202 See accompanying notes to financial statements

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87 GOVERIMENTAL COMPLIANCE SECTION

88 HEN RY ETERS, PC CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENTAUDITING STANDARDS The Honorable Mayor and City Council City of Kilgore, Texas 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 business-type activities, the discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Kilgore, Texas, as of and for the year ended September 30, 2014, and the related notes to the financial statements, which collectively comprise the City of Kilgore, Texas' basic financial statements, and have issued our report thereon dated April 11, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City of Kilgore, Texas' 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 of Kilgore, Texas' internal control. Accordingly, we do not express an opinion on the effectiveness of the City of Kilgore, Texas' internal control. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control 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 Responses 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 the following deficiencies described in the accompanying Schedule of Findings and Responses to be material weaknesses: , , and A sign/icant 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 following deficiency described in the accompanying Schedule of Findings and Responses to be a significant deficiency: Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Kilgore, Texas' financial statements are free from 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 Judson Road, Suite 233 Longview, Texas Fax S. Broadway, Suite 100 Tyler, Texas Fax info@henrypetera.com

89 City of KiIore, Texas' Response to Findin2s City of Kilgore, Texas' response to the findings identified in our audit is described in the accompanying schedule of findings. City of Kilgore, Texas' response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. 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 results of that testing, and not to provide an opinion on the effectiveness of the entity'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 entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. p_ P i Longview, Texas April 11, 2016

90 SCHEDULE OF FINDINGS AND RESPONSES FOR THE YEAR ENDED SEPTEMBER 30, 2014 Section I - Summary of Auditor's Results Financial Statements Type of auditor's report issued: Internal control over financial reporting: Material weakness(es) identified? Yes Significant deficiency(s) identified that are not considered to be material weaknesses? Yes Noncompliance material to financial statements noted? No Section II- Financial Statement Findings Criteria: Basic internal control provides for a proper segregation of various accounting functions and reconciliation of financial transactions to the general ledger. Condition: During the audit, we noted the following conditions: 1. A lack of segregation of duties in the cash disbursement process. The same individual is processing payables and reconciling the bank accounts. 2. Multiple employees in the Finance Department have full access to record journal entries to the general ledger; whereas, access should be limited to key Finance personnel. 3. Cash reconciliations were not being performed routinely, or at all in some cases, for the consolidated cash account, credit card cash account, and country club cash accounts. As a result there were also bank accounts and certificates of deposit that were not recorded in the general ledger. 4. No one at the City had access to the certificates of deposit because the account signer was listed as a former City employee. 5. Investment reconciliations were not being performed routinely or at all in some cases. The OPEB trust statement balance did not agree to the general ledger and the TexStar investment for the Kilgore Community Development Corporation (a component unit in which the City maintains the recordkeeping) was not recorded on the general ledger. 6. City Council did not review investment reports at least quarterly throughout the year, which is required by the Public Funds Investment Act. 7. Records of capital asset additions were not maintained throughout the year. 8. Documentation for advertisements related to competitive bids was missing. 62

91 SCHEDULE OF FINDINGS AND RESPONSES FOR THE YEAR ENDED SEPTEMBER 30, 2014 Section II - Financial Statement Findings - continued (Continued) Cause, Turnover in key, long-time City personnel including the Finance Director, the Accounts Payable Clerk, and the City Manager. Effect or Potential Effect: The effects were material misstatements of the City's financial reports, inadequate recordkeeping, and noncompliance with the Public Funds Investment Act. The potential effects from these conditions, if not corrected, include the risk of error or fraud going undetected. Recommendation.' We recommend that the City implement internal controls to ensure that accounting duties are properly segregated and establish a month-end close process that ensures proper and complete reconciliations are performed each month. We recommend that access to the general ledger be limited to the Finance Director and the accountant and that journal entries are prepared by accounting personnel (i.e. payroll, cashier), but reviewed and posted by the Finance Director or accountant. We recommend the City develop a process to transfer account signers upon termination of employees. Finally, we recommend the Finance Director present quarterly investment reports to City Council to comply with the Public Funds Investment Act. Management 's Response: Internal Controls, segregation of duties, and internal review processes are being evaluated by the Interim Finance Director and City Manager on an ongoing basis. Due to the number of employees within the Accounting/Finance Department 100% segregation of duties which is normally seen in a much larger organization is not feasible at this time, however, the following improvements are being implemented: a. Review processes have been established which require the staff member processing payables to have all have phases of the AP process reviewed by the City's Accountant. b. While, the reconciliations of the City's consolidated cash account for the period of March of 2014 through October of 2015 had initially been completed by the Accounts Payable staff member, the Interim Finance Director re-reconciled this account for the stated time period once the conflict was identified. The Interim Finance Director will continue to perform this task until proper segregation of duties can be determined. 2. General ledger access for employees is currently being restructured by the City's Accountant and Interim Finance Director. Access to the general ledger will be removed for all staff members where it is not necessary. Other staff members will have access limited to view-only capabilities and will no longer have maintenance capabilities. Efforts are under way to centralize the posting of all transactions through the City's Accountant or Interim Finance Director. In addition, review processes are being implemented among the individuals who do have maintenance/posting capabilities to ensure the integrity of the information being input into the general ledger. 3. Due to turnover in the Finance Department staff and the complexity of the consolidated cash accounts, golf course accounting, and credit card processing, reconciliations were not being performed on a regular basis, however cash reconciliations on most of the City's smaller bank accounts were being perfotmed on a regular basis by the City's Accountant. Great efforts are being made to ensure these accounts are reconciled on a regular basis going forward. Review processes are also being established to ensure that all cash reconciliations are reviewed by someone within the accounting department once the reconciliation is prepared. Investment account reconciliations are also scheduled to be reconciled on a monthly basis to ensure all balances in investment accounts are accurate and recorded on the City's general ledger. 4. As of July 2015, the City retained Allegiance Advisors, Inc. to assist with the management of the City's investment portfolio and investment process. Allegiance staff will assist the City by ensuring that signature cards are updated as necessary and appropriate. 63

92 SCHEDULE OF FINDINGS AND RESPONSES FOR THE YEAR ENDED SEPTEMBER 30, 2014 Section II - Financial Statement Findings - continued (Continued) Management's Response (cont'd) 5. As of July 2015, the City converted from a decentralized investment program with pooled cash, to a pooled cash and investments program. This program requires a monthly consolidated investment earnings distribution process which incorporates the process of updating the GL for each investment as well as distributing earnings to each participating fund. The process also includes a formal reconciliation process following completion of the distribution process. The OPEB Trust and the KCDC postings have been corrected on the GL. 6. Quarterly reports are being compiled by the Allegiance Advisors and will be presented to the City Council quarterly. 7. Capital Assets procedures are currently under review by the Interim Finance Director. Efforts are being made to train staff to recognize when capital assets are purchased and to record them into the City's general ledger. 8. Department Heads responsible for tracking data associated with competitive bidding have been trained to keep a complete bid packet including advertisements in the project file Criteria: A good system of internal control over financial reporting includes a person with the skills, knowledge, and expertise in governmental accounting to ensure proper reporting in compliance with Governmental Accounting Standards and adherence to relevant local government code. Condition: During the audit, we noted the following conditions: 1. Misclassifications of fund types for financial reporting 2. Two additional component units of the City that were not being reported 3. No formal financial reporting process where financial information is reviewed by City management and City Council 4. Municipal Court accounts receivable was not recorded in the general ledger 5. Receivables for special assessments were reported incorrectly under the modified accrual basis of accounting. 6. The City did not have a process of conducting physical inventory counts and recording inventory on the general ledger. 7. Instances where revenue and expenses were reported in the incorrect period. 8. The accrual for compensated absences included a KEDC employee that the City was not liable for. Further, the accrual for compensated absences was not calculated in accordance with the City's personnel policy and salary-related payments such as payroll taxes and TMRS contributions were not included. 9. The OPEB actuarial valuation report was incorrect; therefore, the OPEB obligation was reported incorrectly. 10. Several instances where expenditures exceeded appropriations indicating the budget is not considered before approval of expenditures. 64

93 SCHEDULE OF FINDINGS AND RESPONSES FOR THE YEAR ENDED SEPTEMBER 30, 2014 Section II - Financial Statement Findings - continued Continued Cause: Turnover of the Finance Director and the Accounts Payable clerk coupled with inexperienced replacements. Effect or Potential Effect. The effect of these conditions was that the financial statements were materially misstated and the City did not comply with the Texas Local Government Code, Title 4, Subtitle A, Chapter 102: Municipal Budget. Local Government Code requires a municipality to strictly adhere to the adopted budget, including any amendments. Recommendation We recommend the City fill the Finance Director's position with a well-qualified accountant with governmental experience who will be responsible for, and capable of, reviewing the City's financial operations for compliance with the Texas Local Government Code and the City Charter (including adherence to the legally adopted budget), as well as ensuring proper financial reporting in compliance with Governmental Accounting Standards. Management 's Response. 1. The fund types have been corrected. 2. The Finance and Accounting staff have corrected the issue and will work to ensure all component units are reported in the future. 3. A formal process will be established for reporting financial information to the Kilgore City Council on a regular basis. 4. Municipal Court receivables will be properly booked into the general ledger by the City's Finance and Accounting department going forward. 5. Any future special assessments that are established will be booked under the modified accrual basis of accounting. 6. All Departments which maintain an inventory to perform ongoing services to the citizens of Kilgore have been instructed by Management to perform an inventory count on September 30th of each year. This will ensure that inventory amounts are accurate to coincide with the end of the City's fiscal year. 7. The City Manager and Interim Finance Director have been training staff to ensure all expenses and revenues are properly classified in their designated funds/accounts and are done so in the correct reporting period. Due to recent turnover, most of the Finance/Accounting staff of the City are new and just needed to be properly trained in this area. A review process has also been recently implemented by the City's Accountant in which all account coding is reviewed by him during the AP process. In addition, the City' Accountant also implemented a procedure where all incoming revenues outside of utility billing and municipal court (CD interest, franchise fees, County reimbursements, etc.) are reviewed and coded by him to ensure proper classification of the revenue. 8. The compensated absences error calculation was discovered and discussed at length with the Audit Manager while on site. The compensated absences schedule was updated to include payroll taxes and TMRS in the calculation and was forwarded to the Audit Manager upon completion. The updated schedule has been saved with the audit schedules and will be used in future calculations. It was also noted in the audit findings that KEDC staff was inadvertently included in the compensated absences schedule. The KEDC staff has been removed from this schedule. 9. OPEB actuarial valuation reports are prepared by independent third parties due to their complexity. Management is aware of the importance and accuracy of these studies and will strive to ensure proper review of these reports going forward. 10. The City Manager reviews monthly financial reports and has instructed department heads to be accountable to review and manage their budgets. However, budget amendments may be necessary from time to time, and will be completed when necessary to adjust for unforeseen situations. 65

94 SCHEDULE OF FINDINGS AND RESPONSES FOR THE YEAR ENDED SEPTEMBER 30, 2014 Section II - Financial Statement Findings - continued Criteria, A municipality with a population of 65,000 or less may lease a hospital owned by the municipality to be operated by the lessee as a public hospital. The lease must be authorized by ordinance or resolution and is subject to the terms agreed to by the governing body and the lessee. (Texas Local Government Code, Title 8, Subtitle A, Chapter 253: Sale or Lease of Property by Municipalities) Condition.' During the audit, we noted the following condition: 1. The City entered into an agreement to lease hospital space without being authorized by an ordinance or resolution. Further, the lease agreement was amended with no documentation of Council's approval through ordinance or resolution. Cause.' Turnover in key, long-time City personnel including the Finance Director, the Accounts Payable Clerk, and the City Manager. Effect or Potential Effect.' The City has violated the Texas Local Government Code. Recommendation We recommend the City fill the Finance Director's position with a well-qualified accountant with governmental experience who will be responsible for, and capable of, reviewing the City's financial operations for compliance with the Texas Local Government Code and the City Charter. Management 's Response: Management will present a resolution to the City Council at an upcoming City Council meeting necessary to authorize the current and past lease agreements Criteria: Procedures for processing cases that come within the criminal jurisdiction of the municipal court are governed by the Texas Code of Criminal Procedure Title 1, Chapter 45: Justice and Municipal Courts. Further, adequate internal controls should be established and adhered to in order to ensure proper substantiation of court records. Condition: During the audit, we noted the following conditions: 1. Instances where the jail form that is signed by the Municipal Judge for time served in jail was not maintained by the City's Municipal Court. 2. Instances where time served credit was granted for time served at another facility but documentation was not maintained by the City's Municipal Court. 3. An instance where the Community Service Record did not substantiate the full number of hours required by the judge. 4. An instance where the number of community service hours required exceeded the maximum number of credit hours as dictated by the Texas Statutes - Article : Community Service in Satisfaction of a Fine or Costs.

95 SCHEDULE OF FINDINGS AND RESPONSES FOR THE YEAR ENDED SEPTEMBER 30, 2014 Section II - Financial Statement Findings - continued (Continued) Con dition: 5. An instance where community service performed at an individual's mother's residence was accepted in lieu of fines, which does not comply with the Texas Statutes - Article : Community Service in Satisfaction of a Fine or Costs. Cause. Inadequate internal control over municipal court recordkeeping and review of acceptable means of discharge of a fine. Effect or Potential Effect: The City is in violation of the Texas Code of Criminal Procedure and does not have sufficient court records for all discharges of fines. Recommendation We recommend the City review their internal controls related to municipal court, implement controls over recordkeeping, and establish a process of monitoring compliance with established internal controls and relevant state statutes. Management 's Response: Management will meet with Court Clerks and Judges to discuss limits and record keeping requirements related to the Municipal Court function. 67