Washtenaw County Road Commission. Financial Report with Supplemental Information December 31, 2016

Transcription

1 Financial Report with Supplemental Information

2 Contents Report Letter 1-2 Management's Discussion and Analysis 3-9 Basic Financial Statements Statement of Net Position/Governmental Funds Balance Sheet 10 Statement of Activities/Governmental Fund Revenue, Expenditures, and Changes in Fund Balances 11 Notes to Financial Statements Required Supplemental Information 33 Budgetary Comparison Schedule - Road Fund 34 Note to Required Supplemental Information 35 Other Postemployment Benefit Plan Schedule of Funding Progress 36 Pension System Schedules: Schedule of Changes in the Road Commission Net Pension Liability and Related Ratios 37 Schedule of Road Commission Contributions 38 Other Supplemental Information 39 Analysis of Changes in Road Fund Balances 40 Note to Other Supplemental Information 41

3 Independent Auditor's Report To the Board of County Road Commissioners Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities and each major fund of the (the "Road Commission"), a component unit of Washtenaw County, as of and for the year ended and the related notes to the financial statements, which collectively comprise the Washtenaw County Road Commission's basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 To the Board of County Road Commissioners Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the governmental activities and each major fund of the Washtenaw County Road Commission as of and the changes in its financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and other required supplemental information, as identified in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, which 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 supplemental information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the 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 's basic financial statements. The analysis of changes in Road Fund balances is presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements as a whole. March 2,

5 Management s Discussion and Analysis Our discussion and analysis of the financial performance of the Washtenaw County Road Commission (the Road Commission ) provides an overview of the Road Commission s financial activities for the fiscal year ended. Please read this in conjunction with the financial statements. Using this Annual Report This annual report consists of a series of financial statements. The statement of net position/governmental funds balance sheet presents all governmental activities of the Road Commission, presented first by fund on a modified accrual basis, and then in total on a full accrual basis. The modified accrual fund-based columns present a short-term view of the Road Commission; they tell us how much is available for future spending. The total full accrual column is intended to present a longer-term view, and tells us whether taxpayers have funded the full cost of providing services to date. The statement of activities/governmental fund revenue, expenditures, and changes in fund balances also presents all governmental activities of the Road Commission, presented first by fund on a modified accrual basis, and then in total on a full accrual basis. The modified accrual fund-based columns tell us how the Michigan Transportation Fund revenue was spent during the year, while the total full accrual column tells us the cost of providing services this year, as well as whether taxpayers paid the full cost of providing services this year. Supplemental information is also provided for additional information purposes. Financial Analysis The net position of the Road Commission is summarized for the purpose of determining the overall fiscal position. As shown on the net position chart below, the Road Commission s assets and deferred outflows exceeded liabilities and deferred inflows by $261,631,571 at the end of the fiscal year. When comparing this fiscal year to the previous year, net position has increased by $369,620. 3

6 Management s Discussion and Analysis (Continued) A comparative analysis of the Road Commission data is presented below: Condensed Statement of Net Position Governmental Activities December Assets Current and other assets $ 26,006,696 $ 25,861,321 Capital assets 278,420, ,989,879 Total assets 304,426, ,851,200 Deferred Outflows of Resources 7,414,700 2,068,774 Liabilities Other liabilities 9,313,798 7,466,623 Long-term liabilities outstanding 39,732,982 35,191,400 Total liabilities 49,046,780 42,658,023 Deferred Inflows of Resources 1,163,184 - Net Position Net investment in capital assets 270,772, ,223,191 Restricted - Special assessments 2,215,218 2,179,034 Restricted - Debt service 3,600,000 4,200,000 Unrestricted (14,956,311) (12,340,274) Total net position $ 261,631,571 $ 261,261,951 Condensed Statement of Activities Governmental Activities Year Ended December Revenue $ 40,799,029 $ 42,778,036 Expenses 40,429,409 37,890,813 Change in Net Position $ 369,620 $ 4,887,223 4

7 Management s Discussion and Analysis (Continued) Road Fund Budgetary Highlights The Road Commission is in its tenth year using a department-based budget and our management staff has steadily become more proficient with our budgeting process. Management s active participation has afforded each department the opportunity to provide feedback, as well as monitor their sectional budgets. The process continues to be refined as more financial history becomes available for comparisons and projection purposes. The Road Commission participated in a few online auctions in The theory behind online auctions is that we can reach a wider audience and ultimately a better return. This process will continue to be explored as the agency looks for maximizing its value in selling used equipment. Due to state and federal grants, in addition to developer-funded projects, the Road Commission was able to complete a high number of construction projects in The Road Commission amended its 2016 budget on three occasions during the year to reflect changes in the level of funding from the Michigan Transportation Fund (MTF) revenue and status changes in budgeted projects. The actual 2016 revenue was approximately $176,000 lower than the amended budget due to carryover for federal and state funded projects. Actual 2016 expenditures were approximately $3,150,000 lower than the amended budget due to: (1) project work and capital outlay purchases that will be carried over into 2017, (2) all departmental wages that were lower than budgeted, and (3) road project costs that were below estimates. The Road Commission continued to fund a postemployment trust that was established in 2006 to address the GASB 43 and 45 other postemployment benefits reporting conditions (OPEB). The funding ratio has increased from 0 percent in 2006 to 28.2 percent in Due partially to the fact that Blue Cross is now the prescription drug vendor, the OPEB amount decreased significantly. The Road Commission remains committed to funding the OPEB as much as dwindling resources will allow. Since the MTF continues to fail to provide adequate funding to meet minimal road condition needs, staff has looked toward the local community for assistance. A portion of Engineering and Operations staff services continued to be funded by other sources in A number of townships have formed road committees that are effectively communicating the needs of the citizens and educating residents on the Road Commission s financial challenges. The residents of Scio Township supported a township-wide special assessment. Each parcel will be assessed $85 per year for 10 years. The assessment is anticipated to bring in $500,000 per year and funds will be dedicated to local road improvements within the township. In addition to Scio Township, one new special assessment project was completed in As residents continue to become better educated as to why the Road Commission does not have the funds to improve subdivision roads, they are taking the initiative to tax themselves. 5

8 Management s Discussion and Analysis (Continued) Eleven years ago the Road Commission demolished its maintenance garage in Salem Township and relocated its District 6 crew and most of the crew s equipment to its maintenance facility in Pittsfield Township. In 2012, the Road Commission had an opportunity to acquire property in Northfield Township for a future facility for District 6. Then, in 2016, the Road Commission approved plans to construct a new District 6 yard. The new location will greatly enhance our service delivery to area residents. The new facility will eliminate commute time for the crew that services the northeast portion of the county. This project is ongoing and the Road Commission expects to complete construction and open the facility in late In late 2014, the Road Commission had to unexpectedly close and impose weight-restrictions on several structures. In 2015, Road Commission staff began a comprehensive two-year inspection program whereby all culverts greater than eight feet and less than 20 feet in span were examined. Structures 20 feet or greater in span are already inspected at least bi-annually as part of the National Bridge Inventory program. The culvert inspections quantified the number of deficient structures. This culvert inspection program resulted in the closing of 10 structures and posting of at least 27 additional structures. The Road Commission is working closely with townships to identify cost-effective options for repairs and/or the replacement of structures located on local roads. These projects will have an impact on the 2017 and 2018 budgets, at a minimum, as staff develops plans for structure replacements on primary roads and works with townships for work on the local road system. In 2015, the Washtenaw County Board of Commissioners used Public Act 283 (P.A. 283) to levy a one-year, 0.5-mill property tax to help address the county s failing road system at the local level. These funds allowed the Road Commission to plan an additional 28 road projects in 2016, improving an additional 56 miles of roads. WCRC used P.A. 283 funds to pulverize and repave some of the worst pavement conditions in the county, including sections of Pontiac Trail, Lohr Road, Moon Road, and Zeeb Road. In order to streamline service delivery to the citizens of Washtenaw County, the Road Commission implemented SeeClickFix in This online tool allows citizens to report road issues via a mobile app or on our website. The product creates a central system to collect data, route and assign requests, while continually communicating the progress with the requester. Another initiative the Road Commission began in 2016 was the development of a new website. The new website will be optimized to work on mobile devices and restructured to help citizens quickly find information about projects, permits, and make it easier to report road defects. Besides a new look and functionality, the new website will be simpler to maintain. The new website will go live in spring

9 Management s Discussion and Analysis (Continued) The Road Commission continues to focus on the safety and wellbeing of our workforce. The Safety Committee has taken an active role in developing programs and educating all employees on practicing safe working habits. The Safety Committee s activities have helped decrease the Road Commission s number of workforce injuries and reduced our MOD factor from in 2014 to in The MOD factor is a measurement to compare all road commissions that participate in a workers compensation pool. A MOD factor of 1.00 is considered average. Capital Assets The Road Commission had $278,420,139 in capital assets at the end of the fiscal year. The reason for the approximately $2.4 million increase from the previous year is twofold: (1) purchases of new equipment and various capital improvements and (2) an increase in infrastructure costs. Investment in infrastructure continues to be the largest asset class. Capital Assets at Year End (Net of Depreciation) - Governmental Activities December Land $ 27,978,969 $ 27,671,820 Buildings and storage bins 8,021,493 8,193,102 Road equipment 3,741,110 4,769,943 Other equipment 481, ,636 Infrastructure 238,197, ,935,378 Debt Administration Governmental Activities Total $ 278,420,139 $ 275,989,879 In 2016, the Road Commission issued one new special assessment district bond totaling $406,000, which was used for improvements within each respective district. At, the Road Commission had $7,647,475 in total outstanding notes and bonds payable, a decrease of $1,119,213 from the previous year. Economic Factors and the 2017 Budget Michigan experienced a slight uptick in general economic activity in 2016 which resulted in the Road Commission s Michigan Transportation Fund (MTF) revenue increasing by 2.95 percent when compared to 2015 receipts. 7

10 Management s Discussion and Analysis (Continued) After nearly 20 years without an increase to state road funding, the State Legislature approved a long-term road funding package in The new funding will not be received until, at a minimum, March 2017 and the package does not provide the full extent of funding outlined until Half of the $1.2 billion package is based on assumed economic growth which remains to be seen The Road Commission has received contradictory reports regarding the MTF funding available in 2017 and has chosen to use a 25 percent increase in MTF. While this increase will help, this is still far short of what is needed. The Road Commission will need to manage expectations from the public and communicate what can be done as well as how the new funding is still not enough. The actual 2017 revenue and expenditures will be monitored on a quarterly basis to obtain a balanced budget. The Washtenaw County Board of Commissioners was unwilling to approve a third year of P.A. 283 to fund 2017 projects. Instead, the County Board approved a ballot measure to allow the citizens to vote on a proposed 0.5-mill, four-year road and non-motorized path property tax. The measure passed with 71 percent of the vote. This millage operates similarly to the P.A. 283 millage that was levied in 2015 and The Road Commission is looking forward to using these funds toward desperately needed road repairs. Overall, the 2017 budget includes higher expenditures than 2016 primarily due to an increase in the expected level of reimbursable projects and additional capital improvements. Revenue is expected to be higher in 2017 primarily due to an increase in the Michigan Transportation Funding. The services of Brown and Brown of Central Michigan continue to provide a value-add to the Road Commission. The company serves as an agent and advocate for both the organization and employees with a mutually beneficial goal of cost containment for all benefits while minimizing the impact on benefit levels. Brown and Brown has assisted the Road Commission with information and implementation regarding the Patient Protection and Affordable Care Act (PPACA). This will be an ongoing process as other measures of healthcare reform are implemented. Per Brown and Brown s recommendation, the Road Commission began self-funding its health insurance in 2009 with stop-loss protections. Additionally, Brown and Brown conducted a solicitation for proposals for other current benefit plans to ensure that all benefit programs are the most cost-effective plans. All changes implemented have allowed the Road Commission to contain costs while minimizing the impact on employees. In 2009, the Road Commission implemented a cost share for health insurance for all employees based on illustrative rates exceeding bargaining unit contracts rates. This change also applies to AFSCME and nonunion employees that retired after December 31, The Road Commission continues to apply for federal reimbursement for Medicare Part D applicable costs. 8

11 Management s Discussion and Analysis (Continued) The governor signed SB 7 (Public Act 152 of 2011), sponsored by Sen. Jansen (R-Kent), which creates the "Publicly Funded Health Insurance Contribution Act" and imposes certain limits on the portion of employees' medical benefit plan coverage paid for by public employers. This created hard caps that the Road Commission cannot exceed for health insurance costs in The Road Commission has revised its base insurance plan to meet this requirement. The ultimate goal is cost containment although the law does not dictate what should be done with these healthcare savings. In summary, Lansing continues to challenge county road commissions to follow best practices and is poised to impose additional legislation that is sure to impact our agency. The hope is that any new laws are judicious and not knee jerk reactions to perceived problems. The greatest challenge for the Road Commission remains the lack of funding! Contacting the Road Commission s Management This financial report is designed to provide a general overview of the Road Commission s finances and to show accountability for the money it receives and expends. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the, 555 N. Zeeb Road, Ann Arbor, MI

12 Statement of Net Position/Governmental Funds Balance Sheet Road Fund Subdivision Fund Total Adjustments Statement of Net Position Assets Cash and investments (Note 3) $ 13,350,937 $ 39,590 $ 13,390,527 $ - $ 13,390,527 Receivables: Special assessments receivable 49,896 2,175,628 2,225,524-2,225,524 Due from other governmental units 4,977,066-4,977,066-4,977,066 Inventory 1,350,152-1,350,152-1,350,152 Prepaid expenses and other assets 463, , ,427 Long-term receivables (Note 5) 3,600,000-3,600,000-3,600,000 Capital assets (Note 4): Assets not subject to depreciation ,978,969 27,978,969 Assets subject to depreciation ,441, ,441,170 Total assets 23,791,478 2,215,218 26,006, ,420, ,426,835 Deferred Outflows of Resources - Deferred outflows related to pensions ,414,700 7,414,700 Total assets and deferred outflows $ 23,791,478 $ 2,215,218 $ 26,006, ,834, ,841,535 Liabilities Accounts payable $ 880,708 $ - $ 880, ,708 Accrued liabilities and other 4,223,241-4,223,241 60,985 4,284,226 Advances and deposits 2,580,725-2,580,725-2,580,725 Noncurrent liabilities: Due within one year - Bonds and contracts payable (Note 7) ,568,139 1,568,139 Due in more than one year: Net pension liability (Note 10) ,831,168 30,831,168 Other noncurrent liabilities (Note 6) ,822,478 2,822,478 Bonds and contracts payable (Note 7) ,079,336 6,079,336 Total liabilities 7,684,674-7,684,674 41,362,106 49,046,780 Deferred Inflows of Resources Unavailable revenue 3,714,713 2,175,628 5,890,341 (5,890,341) - Deferred inflows related to pensions ,163,184 1,163,184 Total deferred inflows of resources 3,714,713 2,175,628 5,890,341 (4,727,157) 1,163,184 Equity Fund balance: Nonspendable: Inventory 1,350,152-1,350,152 (1,350,152) - Prepaids 463, ,427 (463,427) - Restricted - Special assessments - 39,590 39,590 (39,590) - Committed - Construction 81,706-81,706 (81,706) - Assigned: Employee retirement 2,150,000-2,150,000 (2,150,000) - Capital improvements 4,889,973-4,889,973 (4,889,973) - Insurance retention 327, ,833 (327,833) - Subsequent year's budget shortfall 3,129,000-3,129,000 (3,129,000) - Total fund balance 12,392,091 39,590 12,431,681 (12,431,681) - Total liabilities, deferred inflows, and fund balance $ 23,791,478 $ 2,215,218 $ 26,006,696 Net Position Net investment in capital assets 270,772, ,772,664 Restricted: Special assessments 2,215,218 2,215,218 Debt service 3,600,000 3,600,000 Unrestricted (14,956,311) (14,956,311) Total net position $ 261,631,571 $ 261,631,571 10

13 Statement of Activities/Governmental Fund Revenue, Expenditures, and Changes in Fund Balances Year Ended Road Fund Subdivision Fund Total Adjustments (Note 2) Statement of Activities Revenue State aid - Michigan Transportation Fund $ 18,812,017 $ - $ 18,812,017 $ - $ 18,812,017 State trunkline maintenance 2,996,546-2,996,546-2,996,546 Special assessments revenue - 363, ,861 (8,405) 355,456 Federal and state sources 9,203,870-9,203,870 (1,438,067) 7,765,803 Revenue from local governments 5,218,061-5,218,061 (690,000) 4,528,061 Contributions in-kind , ,066 Gain on sale of equipment ,138 39,138 Interest, fees, and other revenue 1,680,344 67,924 1,748,268-1,748,268 PA 283 millage 4,279,674-4,279,674-4,279,674 Total revenue 42,190, ,785 42,622,297 (1,823,268) 40,799,029 Expenditures Administration 944, ,652 23, ,033 Operations 8,624,892-8,624,892 (2,379,288) 6,245,604 Engineering 2,577,525-2,577,525 (798,198) 1,779,327 Nondepartmental 6,796,989-6,796,989 1,554,588 8,351,577 Reimbursable road projects, capital improvements, and state trunkline 21,864,827-21,864,827 (20,940,121) 924,706 Depreciation expense ,951,532 21,951,532 Debt service - Principal 1,144, ,000 1,513,897 (1,513,888) 9 Interest and other charges 133,110 68, ,849 6, ,621 Total expenditures 42,086, ,739 42,524,631 (2,095,222) 40,429,409 Excess (Deficiency) of Revenue Over Expenditures 103,620 (5,954) 97, , ,620 Other Financing Sources Proceeds from issuance of long-term debt 406, ,000 (406,000) - Proceeds from the sale of fixed assets 49,019-49,019 (49,019) - Total other financing sources 455, ,019 (455,019) - Net Change in Fund Balances/Net Position 558,639 (5,954) 552,685 (183,065) 369,620 Fund Balances/Net Position - Beginning of year 11,833,452 45,544 11,878, ,382, ,261,951 Fund Balances/Net Position - End of year $ 12,392,091 $ 39,590 $ 12,431,681 $ 249,199,890 $ 261,631,571 The Notes to Financial Statements are an Integral Part of this Statement. 11

14 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies The following is a summary of the significant accounting policies used by the Washtenaw County Road Commission (the "Road Commission"): Reporting Entity The is a governmental agency responsible for the maintenance and construction of the road system in the County of Washtenaw, Michigan. The Road Commission s financial statements will be included in the basic financial statements of the County of Washtenaw, Michigan as a discretely presented component unit. Accounting and Reporting Principles The Road Commission follows accounting principles generally accepted in the United States of America (GAAP) as applicable to governmental units. Accounting and financial reporting pronouncements are promulgated by the Government Accounting Standards Board. Report Presentation Governmental accounting principles require that financial reports include two different perspectives - the government-wide perspective and the fund-based perspective. The individual fund columns present their activities on the modified accrual basis of accounting, as discussed above, which demonstrates accountability for how the current resources have been spent. The government-wide columns are presented on the economic resources measurement focus and the full accrual basis of accounting in order to measure the cost of providing government services, and the extent to which constituents have paid the full cost of government services. On the full accrual basis of accounting, revenue is recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Fund Accounting The Road Commission accounts for its various activities in two different funds in order to demonstrate accountability for how we have spent certain resources - separate funds allow us to show the particular expenditures for which specific revenue was used. All activity of the Road Commission is accounted for under governmental fund types. 12

15 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) Governmental funds include all activities that provide general governmental services that are not business-type activities. The Road Commission reports the following major governmental funds: The Road Fund is a special revenue fund that is used to account for the proceeds of earmarked revenue or financing activities requiring separate accounting because of legal or regulatory provisions. The Subdivision Improvement Fund is a governmental fund that is used to account for the construction and financing of public improvements provided in benefiting districts that are to be paid, at least in part, from an assessment against the benefited property. Basis of Accounting The governmental funds use the current financial resources measurement focus and the modified accrual basis of accounting. This basis of accounting is intended to better demonstrate accountability for how the government has spent its resources. Expenditures are reported when the goods are received or the services are rendered. Capital outlays are reported as expenditures (rather than as capital assets) because they reduce the ability to spend resources in the future; conversely, employee benefit costs that will be funded in the future (such as pension and retiree healthcare-related costs, or sick and vacation pay) are not counted until they come due for payment. In addition, debt service expenditures, claims, and judgments are recorded only when payment is due. Revenue is not recognized until it is collected, or collected soon enough after the end of the year, that it is available to pay for obligations outstanding at the end of the year. For this purpose, the Road Commission considers amounts collected within 60 days of year end to be available for recognition. The following major revenue sources meet the availability criterion: state gas and weight tax revenue, and revenue related to construction projects and inspection work orders. Conversely, special assessments and a portion of amounts due from other entities will be collected after the period of availability; receivables have been recorded for these, along with deferred inflows of resources. Special assessment revenue collected within 60 days of year end is not considered available to pay the debt service liabilities of the current period and is therefore recognized when received. Specific Balances and Transactions Cash and Investments - Cash includes cash on hand and demand deposits. Investments are stated at fair value, based on quoted market prices. 13

16 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) Inventories and Prepaid Items - Inventory consists principally of road material, salt, signs, and equipment maintenance materials and is valued at the lower of average cost or market. Inventories of governmental funds are recorded as expenditures when consumed rather than when purchased. Certain payments to vendors reflect costs applicable to future fiscal years and are recorded as prepaid items in both governmentwide and fund financial statements. Capital Assets - Capital assets, which include property, plant, equipment, and infrastructure assets (e.g., roads, bridges, sidewalks, and similar items), are reported in the government-wide financial statements. Capital assets are defined by the Road Commission as assets with an initial individual cost of more than $500 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The related revenue is recorded as contributions in-kind. Capital assets are depreciated using the straight-line method over the following useful lives: Capital Asset Class Buildings Machinery and equipment Roads Other infrastructure Lives 40 to 60 years 5 to 20 years 5 to 30 years 12 to 50 years Long-term Obligations - In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the statement of net position. Bond premiums and discounts are deferred and amortized over the life of the bonds using the straight-line method. Bond issuance costs are expensed when incurred. Bonds payable are reported net of the applicable premium or discount. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position and/or balance sheet will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, represents a consumption of net position that applies to a future period and so will not be recognized as an outflow of resources (expense/expenditure) until then. The government-wide statements report deferred outflows from the difference between projected and actual investment earnings of the pension plan as well as Road Commission contributions made after the measurement date of the net pension liability. 14

17 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) In addition to liabilities, the statement of financial position and/or balance sheet will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (revenue) until that time. The deferred inflows of resources related to unavailable revenue are reported only in the governmental funds. The governmental funds report unavailable revenue from two sources: special assessments and amounts due from other governmental units. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. In addition to unavailable revenue, the Road Commission recognizes deferred inflows related to pensions for differences between expected and actual experience and changes in assumptions. Net Position Flow Assumption Sometimes the Road Commission will fund outlays for a particular purpose from both restricted (e.g., restricted bond or grant proceeds) and unrestricted resources. In order to calculate the amounts to report as restricted net position and unrestricted net position in the government-wide financial statements, a flow assumption must be made about the order in which the resources are considered to be applied. It is the Road Commission s policy to consider restricted net position to have been depleted before unrestricted net position is applied. Fund Balance Flow Assumption Sometimes, the Road Commission will fund outlays for a particular purpose from both restricted and unrestricted resources (the total of committed, assigned, and unassigned fund balance). In order to calculate the amounts to report as restricted, committed, assigned, and unassigned fund balance in the governmental fund financial statements, a flow assumption must be made about the order in which the resources are considered to be applied. It is the Road Commission s policy to consider restricted fund balance to have been depleted before using any of the components of unrestricted fund balance. Further, when the components of unrestricted fund balance can be used for the same purpose, committed fund balance is depleted first, followed by assigned fund balance. Unassigned fund balance is applied last. Fund Balance Policies Fund balance of governmental funds is reported in various categories based on the nature of any limitations requiring the use of resources for specific purposes. The Road Commission itself can establish limitations on the use of resources through either a commitment (committed fund balance) or an assignment (assigned fund balance). 15

18 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) The committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the Road Commission s highest level of decision-making authority. The Road Commission Board of Commissioners is the highest level of decision-making authority for the Road Commission that can, by adoption of an ordinance prior to the end of the fiscal year, commit fund balance. Once adopted, the limitation imposed by the ordinance remains in place until a similar action is taken (the adoption of another ordinance) to remove or revise the limitation. Amounts in the assigned fund balance classification are intended to be used by the Road Commission for specific purposes but do not meet the criteria to be classified as committed. The Road Commission Board of Commissioners has by resolution authorized the managing director or finance director to assign fund balance. The board may also assign fund balance as it does when appropriating fund balance to cover a gap between estimated revenue and appropriations in the subsequent year s appropriated budget. Unlike commitments, assignments generally only exist temporarily. In other words, an additional action does not normally have to be taken for the removal of an assignment. Conversely, as discussed above, an additional action is essential to either remove or revise a commitment. Pension - The Road Commission offers a defined benefit pension plan to its employees. The Road Commission records a net pension liability for the difference between the total pension liability calculated by the actuary and the pension plan s fiduciary net position. For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions and pension expense, information about the fiduciary net position of the pension plan and additions to/deductions from the pension plan s fiduciary net position have been determined on the same basis as they are reported by the pension plan. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. Other Postemployment Benefit Costs - The Road Commission offers retiree healthcare benefits to retirees. The Road Commission receives an actuarial valuation to compute the annual required contribution (ARC) necessary to fund the obligation over the remaining amortization period. In the governmental funds, OPEB costs are recognized as contributions are made. For the government-wide statements, the Road Commission reports the full accrual cost equal to the current year required contribution, adjusted for interest and adjustment to the ARC on the beginning of year underpaid amount, if any. 16

19 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) Compensated Absences (Vacation and Sick Leave) - It is the Road Commission's policy to permit employees to accumulate earned but unused sick and vacation pay benefits. All vacation and sick pay is accrued when incurred in the government-wide financial statements. A liability for these amounts is reported in governmental funds only for employee terminations as of year end. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the 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 revenue and expenses during the period. Actual results could differ from those estimates. Note 2 - Reconciliation of Individual Fund Columns of the Statement of Net Position/Statement of Activities Net position reported in the statement of net position column is different than the fund balance reported in the individual fund columns because of the different measurement focus and basis of accounting, as discussed in Note 1. Below is a reconciliation of the differences: Fund Balance Reported in Governmental Funds $ 12,431,681 Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and are not reported in the funds 278,420,139 Special assessment and long-term receivables are expected to be collected over several years and are not available to pay for current year expenditures 5,890,341 Bonds payable and installment purchase obligations are not due and payable in the current period and are not reported in the funds (7,647,475) Accrued interest is not due and payable in the current period and is not reported in the funds (60,985) Employee compensated absences are payable over a long period of years and do not represent a claim on current financial resources; therefore, they are not reported as fund liabilities (668,695) Net other postemployment obligations are not reported in the funds (2,153,783) Net pension liability and related deferred outflows and deferred inflows are not current financial resources and are not reported in the funds (24,579,652) Net Position of Governmental Activities $ 261,631,571 The change in net position reported in the statement of activities column is different than the change in fund balance reported in the individual fund columns because of the different measurement focus and basis of accounting, as discussed in Note 1. Below is a reconciliation of the differences: 17

20 Notes to Financial Statements Note 2 - Reconciliation of Individual Fund Columns of the Statement of Net Position/Statement of Activities (Continued) Net Change in Fund Balances - Total Governmental Funds $ 552,685 Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures; however, in the statement of activities, these costs are allocated over their estimated useful lives as depreciation: Capital outlay 24,117,607 Depreciation expense (21,951,532) Net book value of assets disposed of (9,881) In-kind contributions of capital assets are recorded as revenue in the statement of activities, but are not reported in the funds 274,066 Revenue is recorded in the statement of activities when earned; it is not reported in the funds until collected or collectible within 60 days of year end (2,136,472) Proceeds from special assessment bonds provide financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net position (406,000) Repayment of principal on long-term debt is an expenditure in the governmental funds, but not in the statement of activities (where it reduces long-term debt) 1,513,888 Increase in accumulated employee sick and vacation pay is reported in the statement of activities and does not require the use of current resources, and therefore is not reported in the fund statements until it comes due for payment (23,381) Changes in the net pension liability and related deferred outflows and deferred inflows of resources reported in the statement of activities do not require the use of current financial resources and therefore are not reported in the governmental funds (1,384,067) In the statement of activities, other postemployment benefits are reported when incurred, whereas in the governmental funds, benefits are reported when paid (170,521) In the statement of activities, premiums on long-term debt are amortized over the life of the debt long-term debt: and related premium balances are not recorded in the funds 11,325 Interest expense is recorded in the statement of activities when a liability is incurred; it is reported in the funds only when payment is due (18,097) Change in Net Position of Governmental Activities $ 369,620 18

21 Notes to Financial Statements Note 3 - Deposits and Investments Michigan Compiled Laws Section (Public Act 20 of 1943, as amended) authorizes local governmental units to make deposits and invest in the accounts of federally insured banks, credit unions, and savings and loan associations that have offices in Michigan. The law also allows investments outside the state of Michigan when fully insured. The local unit is allowed to invest in bonds, securities, and other direct obligations of the United States or any agency or instrumentality of the United States; repurchase agreements; bankers acceptances of United States banks; commercial paper rated within the two highest classifications, which matures not more than 270 days after the date of purchase; obligations of the State of Michigan or its political subdivisions, which are rated as investment grade; and mutual funds composed of investment vehicles that are legal for direct investment by local units of government in Michigan. The Road Commission has designated two banks for the deposit of its funds. The investment policy adopted by the board in accordance with Public Act 196 of 1997 has authorized investment in bonds and securities of the United States government and bank accounts and CDs, but not the remainder of state statutory authority as listed above. The Road Commission's deposits and investment policies are in accordance with statutory authority. The Road Commission's cash and investments are subject to several types of risk, which are examined in more detail below: Custodial Credit Risk of Bank Deposits - Custodial credit risk is the risk that in the event of a bank failure, the Road Commission's deposits may not be returned to it. The Road Commission does not have a deposit policy for custodial credit risk. At year end, the Road Commission had $340,469 of bank deposits (certificates of deposit and checking and savings accounts) that were uninsured and uncollateralized. The Road Commission believes that due to the dollar amounts of cash deposits and the limits of FDIC insurance, it is impractical to insure all deposits. As a result, the Road Commission evaluates each financial institution with which it deposits funds and assesses the level of risk of each institution; only those institutions with an acceptable estimated risk level are used as depositories. Credit Risk - State law limits investments in commercial paper to the top two ratings issued by nationally recognized statistical rating organizations. The Road Commission has no investment policy that would further limit its investment choices. At year end, the Road Commission s investments of $13,123,137 were held by Washtenaw County. The Road Commission s funds are commingled with the County s funds for investment purposes. The County s pool of investments is not rated. 19

22 Notes to Financial Statements Note 4 - Capital Assets Capital asset activity for the current year was as follows: Governmental Activities Balance January 1, 2016 Additions Disposals Balance December 31, 2016 Capital assets not being depreciated - Land and land improvements $ 27,671,820 $ 307,149 $ - $ 27,978,969 Capital assets being depreciated: Buildings and storage bins 14,902, ,439-15,110,473 Road equipment 17,556, ,859 (418,577) 17,672,458 Other equipment 2,601, ,528-2,741,531 Brine wells and gravel pits 136, ,386 Infrastructure 459,809,297 23,200,698 (66,122,282) 416,887,713 Subtotal 495,004,896 24,084,524 (66,540,859) 452,548,561 Accumulated depreciation: Buildings and storage bins 6,708, ,048-7,088,980 Road equipment 12,786,233 1,553,811 (408,696) 13,931,348 Other equipment 2,181,367 78,890-2,260,257 Brine wells and gravel pits 136, ,386 Infrastructure 224,873,919 19,938,783 (66,122,282) 178,690,420 Subtotal 246,686,837 21,951,532 (66,530,978) 202,107,391 Net capital assets being depreciated 248,318,059 2,132,992 (9,881) 250,441,170 Net capital assets $ 275,989,879 $ 2,440,141 $ (9,881) $ 278,420,139 Note 5 - Long-term Receivable At, the Road Commission has a long-term receivable due from Ypsilanti Township of $3.6 million. The receivable relates to road construction projects in Ypsilanti Township which the Road Commission initially funded by issuing Michigan Transportation Fund notes. Ypsilanti Township has pledged to make annual payments to the Road Commission equal to the debt service due on the notes. Commencing in 2013, the Road Commission will receive $600,000 annually for 10 years, plus 6 percent interest due semiannually. The revenue associated with the long-term receivable is being recognized in the Road Fund as it becomes available. The revenue is being recognized in the government-wide statements as related project expenses are incurred. For the year ended December 31, 2016, revenue of $600,000 was recognized in the fund-based statements. As of December 31, 2014, the entire $6 million receivable from Ypsilanti Township had been earned and recognized as revenue in the government-wide statements. 20

23 Notes to Financial Statements Note 6 - Risk Management and Other Long-term Liabilities Insurance Programs The Road Commission is exposed to various risks of loss related to property loss, torts, errors and omissions, and employee injuries (workers compensation), as well as medical benefits provided to employees. The Road Commission is partially self-insured for healthcare claims and participates in the Michigan County Road Commission Selfinsurance Pool for claims relating to property loss, torts, and errors and omissions. Settled claims relating to the commercial insurance have not exceeded the amount of insurance coverage in any of the past three fiscal years. The Michigan County Road Commission Self-insurance Pool program operates as a common risk-sharing management program for local units of government in Michigan; member premiums are used to purchase commercial excess insurance coverage and to pay member claims in excess of deductible amounts. The Road Commission is a member of the County Road Association Self-insurance Fund for workers compensation claims. Member premiums are used to purchase workers compensation insurance. As a member of the fund, the Road Commission is fully insured for workers compensation claims incurred. As of, no liability has been reported for healthcare claims since the asserted and unasserted claims estimated by management were deemed to be immaterial. Compensated Absences The compensated absences liability represents the estimated liability to be paid employees under the Road Commission s leave policies. Under the Road Commission s policy, union employees earn sick and vacation time, while nonunion employees earn annual leave based on time of service with the Road Commission. The estimated compensated absence liability as of is $668,695, an increase of $23,381 from December 31, This liability is expected to be paid out of the Road Fund. Postemployment Benefits Obligation Other long-term liabilities include the postemployment benefits obligation of $2,153,783 as disclosed in Note 9. 21