Berrien County Road Commission. Financial Report with Supplemental Information September 28, 2017

Transcription

1 Financial Report with Supplemental Information

2 Contents Report Letter 1-3 Management's Discussion and Analysis 4-7 Basic Financial Statements Statement of Net Position/Governmental Fund Balance Sheet 8 Statement of Activities/Governmental Fund Revenue, Expenditures, and Changes in Fund Balance/Net Position 9 Notes to Financial Statements Required Supplemental Information 31 Budgetary Comparison Schedule - Road Fund 32 Note to Required Supplemental Information 33 Schedule of Changes in the Net Pension Liability and Related Ratios 34 Schedule of Pension Contributions 35 Other Postemployment Benefit Plan Schedule of Funding Progress 36 Other Supplemental Information 37 Schedule of Changes in Road Fund Balance 38 Schedule of Road Fund Revenue 39 Schedule of Road Fund Expenditures 40 Note to Other Supplemental Information 41

3 Independent Auditor's Report To the Board of County Commissioners Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities and the Road Fund of (the "Road Commission"), a component unit of Berrien County, Michigan as of and for the period ended and the related notes to the financial statements, which collectively comprise Berrien 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 an opinion 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 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 the Road Fund of Berrien County Road Commission as of and the changes in its financial position for the period then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As described in Note 1 to the financial statements, on, the functions of the were absorbed into the Berrien County government operations by establishing the Berrien County Road Department. Our opinion is not modified with respect to this matter. Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, the Road Fund budgetary comparison schedule, and the 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 Supplemental Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise 's basic financial statements. The other supplemental information, as identified in the table of contents, is presented for the purpose of additional analysis and is not a required part of the basic financial statements. 2

5 To the Board of County Commissioners The other supplemental information, as identified in the table of contents, is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the 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 other supplemental information, as identified in the table of contents, is fairly stated in all material respects in relation to the basic financial statements as a whole. January 31,

6 Management s Discussion and Analysis This section of s (the Road Commission ) annual financial report presents our discussion and analysis of the Road Commission s financial performance during the fiscal period ended. Please read it in conjunction with the Road Commission s financial statements, which follow this section. Financial Highlights The Road Commission s total net position increased by approximately $3.1 million, due primarily to the amount of capital outlay expenditures exceeding the current period s depreciation expense. Total revenue of $22.8 million was in excess of total expenditures of $19.7 million for the year, resulting in the increase in net position noted above. Approximately $9.9 million was invested in capital assets during the year. The obligation for postemployment benefits has been reflected using the alternative measurement method permitted by GASB Statement No. 45 for employers with fewer than 100 plan members. Overview of the Financial Statements This annual report consists of a series of financial statements. The statement of net position/governmental fund 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 column presents a short-term view of the Road Commission; it tells 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 balance/net position 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 column tells us how the taxpayers money 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. The financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. The statements are followed by a section of required supplemental information that further explains and supports the information in the financial statements. In addition to these required elements, we have included a section with more detail regarding revenue, expenditures, and changes in fund balance. 4

7 Management s Discussion and Analysis (Continued) Financial Analysis of the Road Commission as a Whole Net Position - The Road Commission s net position increased during FY 2017 by $3.1 million, ending the year at $78.5 million. The table below shows the composition of the Road Commission s net position at and at September 30, 2016 and 2015: Governmental Activities Assets Current and other assets $ 9,792,873 $ 8,199,422 $ 9,189,918 Capital assets 79,420,385 75,822,285 75,183,341 Total assets 89,213,258 84,021,707 84,373,259 Deferred Outflows of Resources 3,799,273 5,368, ,327 Liabilities Long-term liabilities outstanding 10,641,670 11,413,633 6,018,016 Other liabilities 2,286,358 2,065,477 1,928,168 Total liabilities 12,928,028 13,479,110 7,946,184 Deferred Inflows of Resources 1,536, ,346 11,205 Net Position Net investment in capital assets 78,238,740 75,573,852 74,804,908 Restricted for road construction 472, , ,116 Unrestricted (163,173) (622,386) 1,763,173 Total net position $ 78,547,782 $ 75,423,615 $ 77,040,197 Changes in Net Position - The Road Commission s increase in net position was due primarily to the amount of capital outlay expenditures exceeding the current period s depreciation expense, as approximately $9.9 million was invested in capital assets during the year, and the depreciate expense calculated on all capital assets amounted to only $6.3 million. The Michigan Transportation Fund revenue is a statutory formula that is structured to share various fuel tax and license fees collected by the State of Michigan with cities, road commissions, and the Michigan Department of Transportation. This revenue item is a primary source of revenue for the Road Commission. For 2017, there was an approximately $2.7 million increase in Michigan Transportation Funds receipts, an approximately $1 million decrease in federal and other state aid, and approximately a $2.1 million increase in revenue from local governments. Other revenue increased by approximately $270,000. 5

8 Management s Discussion and Analysis (Continued) Expenditures were approximately $700,000 lower than those of The decrease in expenses is primarily attributed to the decrease in funds spent on maintenance activities as well as pension expense within administrative activities. Governmental Activities Revenues State aid - Act 51 $ 13,797,362 $ 11,069,508 $ 10,834,508 Federal/State sources 4,047,232 5,083,370 4,273,140 Revenue from local governments 4,505,577 2,432,825 2,938,785 Other 435, , ,700 Total revenue 22,785,339 18,750,305 18,176,133 Expenses Maintenance 12,850,553 13,350,605 10,773,770 Administrative 541,921 2,094,647 1,036,381 Depreciation 6,260,075 5,930,704 5,661,224 Equipment rental and interest charges 8,623 (1,009,069) (106,467) Total expenses 19,661,172 20,366,887 17,364,908 Change in Net Position $ 3,124,167 $ (1,616,582) $ 811,225 Financial Analysis of the Road Commission s Funds The Road Fund s fund balance ended the year at approximately $7.7 million, which is approximately $1.3 million more than the fund balance in the previous year. Portions of this balance are restricted for anticipated needs in the near future. The Road Commission has approximately $850,000 classified as nonspendable fund balance for inventory and prepaid expenses and $472,000 as restricted fund balance for future road construction. The remaining unassigned fund balance is $6.4 million. Road Fund Budgetary Highlights The Road Commission amended its 2017 budget during the year to reflect changes in budgeted projects and activities that were unknown at the time the original budget was adopted. The final budget for revenue was approximately $1.3 million less than the original budget, primarily due to less federal and other state revenue, besides those from Act 51 state aid funds. Actual revenue ended the year lower than expected by approximately $1.2 million, primarily due to the Road Commission receiving less local revenue than anticipated. The final budget for expenditures was approximately $2 million less than the original budget due to less than anticipated local road preservation and maintenance expenditures. Actual expenditures at the end of the year were approximately $1.75 million less than the final amended budget, primarily due to the Road Commission spending less on operations and road projects. 6

9 Management s Discussion and Analysis (Continued) Capital Assets The Road Commission had $79.4 million in net capital assets at the end of the year, which includes $61.1 million of infrastructure assets. Departmentalization Section 6 of Public Act 283 of 1909 (MCL (7)) authorizes a county board of commissioners of a county with an appointed board of county road commissioners to transfer the powers, duties, and functions that are otherwise provided by law of that appointed board of county road commissioners to the county board of commissioners if a resolution of such transfer is approved by a majority vote of the county board of commissioners, as so allowed under Section 11 of 1851 Public Act 156 (MCL 46.11). On, the Berrien County Board of Commissioners passed a resolution to transfer the powers, duties, and function provided by law for the Berrien County Board of Road Commissioners to the Berrien County Board of Commissioners, effective. The functions of the were absorbed into Berrien County government operations by establishing the Berrien County Road Department effective. Berrien County s financial statements will include the Road Department as a function of primary government on its financial statements in contrast to the Road Commission s inclusion as a discretely presented component unit. Contacting the Road Department s Financial Management This financial report is designed to provide a general overview of the Road Commission s finances and accountability of the public trust. Questions regarding any of the information provided in this report or requests for additional information should be addressed to our finance director, Berrien County Road Department, 2860 E. Napier Ave, Benton Harbor, MI or visit our webpage at 7

10 Statement of Net Position/Governmental Fund Balance Sheet Modified Accrual Basis Road Fund Adjustments (Note 2) Statement of Net Position Assets Cash and cash equivalents (Note 3) $ 5,866,506 $ - $ 5,866,506 Restricted cash - Road construction (Note 3) 472, ,215 Due from other governmental units 2,610,813-2,610,813 Inventory 686, ,630 Prepaid expense 156, ,709 Capital assets (Note 4): Assets not subject to depreciation - 15,210,049 15,210,049 Assets subject to depreciation - 64,210,336 64,210,336 Total assets $ 9,792,873 79,420,385 89,213,258 Deferred Outflows of Resources - Pensions (Note 6) 3,799,273 3,799,273 Liabilities Accounts payable and accrued liabilities $ 1,841,848-1,841,848 Advances 70,654-70,654 Escrow 16,000-16,000 Noncurrent liabilities: Due within one year: Compensated absences (Note 5) - 76,186 76,186 Current portion of long-term debt (Note 5) - 281, ,670 Due in more than one year: Net pension liability (Note 6) - 9,243,324 9,243,324 Net OPEB obligation (Note 7) - 498, ,371 Long-term debt (Note 5) - 899, ,975 Total liabilities 1,928,502 10,999,526 12,928,028 Deferred Inflows of Resources Unavailable revenue 157,482 (157,482) - Deferred inflows related to pensions (Note 6) - 1,536,721 1,536,721 Total deferred inflows of resources 157,482 1,379,239 1,536,721 Equity Fund balance: Nonspendable: Inventory 686,630 (686,630) - Prepaids 156,709 (156,709) - Restricted - Road construction 472,215 (472,215) - Unassigned 6,391,335 (6,391,335) - Total fund balance 7,706,889 (7,706,889) - Total liabilities, deferred inflows of resources, and fund balance $ 9,792,873 Net position: Net investment in capital assets 78,238,740 78,238,740 Restricted - Road construction 472, ,215 Unrestricted (163,173) (163,173) Total net position $ 78,547,782 $ 78,547,782 The Notes to Financial Statements are an Integral Part of this Statement. 8

11 Statement of Activities/Governmental Fund Revenue, Expenditures, and Changes in Fund Balance/Net Position Period Ended Road Fund Adjustments (Note 2) Statement of Activities Revenue State aid - Act 51 $ 13,797,362 $ - $ 13,797,362 Federal/State sources 4,047,232-4,047,232 Revenue from local governments 4,348, ,482 4,505,577 Interest, fees, and other sources 342,845 92, ,168 Total revenue 22,535, ,805 22,785,339 Expenditures - Current Administrative 552,035 (10,114) 541,921 Operations 6,052,130 (1,180,181) 4,871,949 Signs and signals 283, ,736 Engineering 507,953 (27,783) 480,170 County drain assessment 196, ,857 Road projects 12,383,058 (8,660,656) 3,722,402 Nondepartmental 2,243,611 1,051,828 3,295,439 Depreciation expense - 6,260,075 6,260,075 Debt service: Principal retirement 143,133 (143,133) - Interest 8,623-8,623 Total expenditures 22,371,136 (2,709,964) 19,661,172 Other Financing Sources Sale of capital assets 102,768 (102,768) - Proceeds from debt issuance 1,076,345 (1,076,345) - Net Change in Fund Balance/Net Position 1,343,511 1,780,656 3,124,167 Fund Balance/Net Position - Beginning of period 6,363,378 69,060,237 75,423,615 Fund Balance/Net Position - End of period $ 7,706,889 $ 70,840,893 $ 78,547,782 The Notes to Financial Statements are an Integral Part of this Statement. 9

12 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies The following is a summary of the significant accounting policies used by Berrien County Road Commission: Reporting Entity (the "Road Commission") is governed by a fivemember Board of County Road Commissioners appointed by the Berrien County Board of Commissioners. The Road Commission's financial statements will be included in the basic financial statements of Berrien County, Michigan as a discretely presented component unit. Concurrently, with the period ended, the Berrien County Board of Commissioners (i) transferred the powers, duties, and functions of the Berrien County Board of Road Commissioners to the Berrien County Board of Commissioners, (ii) dissolved the Berrien County Board of Road Commissioners, and (iii) absorbed the functions of the Road Commission into Berrien County government operations by establishing the Berrien County Road Department. 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 Governmental 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 Road Fund column presents the activity on the modified accrual basis of accounting, as discussed below, which demonstrates accountability for how the current resources have been spent. The government-wide column is 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. 10

13 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) Fund Accounting The Road Commission accounts for its activities in one major governmental fund, the Road Fund. The Road Fund is used to account for all activities of the Road Commission. Basis of Accounting The Road Fund uses 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 Road Commission 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. For revenue sources collected after the period of availability, receivables are recorded along with a "deferred inflow." Specific Balances and Transactions Cash and Cash Equivalents - Cash includes cash on hand, demand deposits, money market accounts, and certificates of deposit. Restricted cash consists of cash held by the Road Commission for use on road construction. Due from Other Governments - Due from other governments consists of amounts due from the Michigan Transportation Fund for state-shared revenue as well as receivables from local townships for their share of construction projects. Inventories and Prepaid Items - Inventories consist principally of road material, salt, signs, and equipment maintenance materials and is valued at average cost. 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 the government-wide and fund financial statements. 11

14 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) Capital Assets - Capital assets, which include property, buildings, equipment, and infrastructure assets (e.g., roads, bridges, sidewalks, culverts, 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 $5,000 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 acquisition value at the date of donation. The related revenue is recorded as other contributions. The Road Commission did not capitalize any interest expense in the current year. Land is not subject to depreciation, road equipment is depreciated using the sum of the years' digits method, and all other capital asset classes are depreciated using the straightline method over the following useful lives: Capital Asset Class Lives in Years Infrastructure 8-50 Buildings and storage bins Other equipment Road equipment 5-8 Land improvements 10 Advance Payables - Advances result when payments are made to the Road Commission by local townships for work to be performed in the future. Long-term Obligations - In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the governmental activities statement of net position. Bond premiums and discounts are deferred and amortized over the life of the bonds using the effective interest method; bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are expensed at the time they are incurred. In the Road Fund financial statements, bond issuances are reported as an other financing source, as well as bond premiums and discounts. The Road Fund is used to liquidate governmental long-term debt. 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, the changes in assumptions related to economic and demographic factors, and for contributions made to the pension plan subsequent to the plan's period end. 12

15 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 Road Commission has two types of items that qualify for reporting in this category. One item, unavailable revenue, is reported only in the governmental fund's balance sheet. The governmental fund reports unavailable revenue from intergovernmental revenue related to road construction projects. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. Additionally, the government-wide statements report deferred inflows related to the pension plan. These inflows are from the difference between projected and actual experience of the pension plan and from changes in assumptions related to economic and demographic factors. 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. Furthermore, 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. 13

16 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) Fund Balance Policies Fund balance of the Road Fund is reported in various categories based on the nature of any limitations requiring the use of resources for specific purposes. The government itself can establish limitations on the use of resources through either a commitment (committed fund balance) or an assignment (assigned fund balance). 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's Board of County Road Commissioners is the highest level of decision-making authority for the Road Commission that can, by adoption of a resolution prior to the end of the fiscal year, commit fund balance. Once adopted, the limitation imposed by the resolution remains in place until a similar action is taken (the adoption of another resolution) 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's Board of County Road Commissioners has by resolution authorized the Engineering Manager 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 through the Berrien County Employees Retirement System. The Road Commission records a net pension liability for the difference between the Road Commission's portion of the total pension liability calculated by the actuary and the Road Commission's portion of the pension plan's fiduciary net position. For the purpose 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 Road Commission's portion of the Berrien County Employees Retirement System 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. 14

17 Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) Other Postemployment Benefit Costs - The Road Commission offers retiree healthcare benefits to retirees. The Road Commission has elected to calculate the ARC necessary to fund the retiree healthcare obligation using an alternative measurement method permitted by GASB Statement No. 45. 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. Compensated Absences (Vacation and Sick Leave) - It is the Road Commission's policy to allow employees to accumulate earned but unused vacation pay benefits. Vacation pay is earned by employees based on the length of service with the Road Commission. All vacation pay is accrued when incurred in the government-wide financial statements. A liability for these amounts is reported in the Road Fund only for employee terminations as of year end. The Road Commission does not accrue for unused sick pay benefits. 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. 15

18 Notes to Financial Statements 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 Road Fund 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 $ 7,706,889 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 79,420,385 Pension-related deferred outflows and inflows are not current financial resources and are not reported in the funds 2,262,552 Net pension liability does not present a claim on current financial resources and is not reported as a fund liability (9,243,324) Receivables that are collected after year end, such that they are not available to pay bills outstanding as of year end, are not recognized in the funds 157,482 Long-term liabilities are not due and payable in the current period and are not reported in the funds (1,181,645) 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 (76,186) Net OPEB obligation does not present a claim on current financial resources and is not reported as a fund liability (498,371) Net Position of Governmental Activities $ 78,547,782 16

19 Notes to Financial Statements Note 2 - Reconciliation of Individual Fund Columns of the Statement of Net Position/Statement of Activities (Continued) The change in net position reported in the statement of activities column is different than the change in fund balance reported in the Road Fund because of the different measurement focus and basis of accounting, as discussed in Note 1. Below is a reconciliation of the differences: Net Change in Fund Balance - Total Governmental Fund $ 1,343,511 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 9,868,620 Depreciation expense (6,260,075) Net book value of assets disposed of (10,445) 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 157,482 Repayment of long-term liabilities is an expenditure in the governmental funds, but not in the statement of activities (where it reduces long-term debt) 143,133 Debt proceeds provide financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net assets (1,076,345) Change in accumulated employee sick and vacation pay and other similar expenses reported in the statement of activities do not require the use of current resources and, therefore, are not reported in the fund statements until they come due for payment 10,114 Change in the net OPEB obligation is reported as an expense, but not in the governmental fund 360 Change in the net pension liability and related deferrals is reported as an expense, but is not reported in the governmental funds since they do not require the use of current financial resources (1,052,188) Change in Net Position of Governmental Activities $ 3,124,167 17

20 Notes to Financial Statements Note 3 - Deposits 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 seven financial institutions for the deposit of its funds, in addition to funds held by Berrien County. The Road Commission follows the investment policy approved by the Board of County Road Commissioners. In accordance with Public Act 196 of 1997, the policy has authorized investment in bonds and securities and other obligations of the United States government, bank accounts and certificates of deposit, limited commercial paper, repurchase agreements limited to United States government investments, and obligations of Michigan or its political subdivisions. 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 approximately $5,700,000 of bank deposits (certificates of deposit, money market, and checking and savings accounts) that were uninsured and uncollateralized. The federal depository insurance coverage pertains to all the deposits of the County of Berrien, Michigan; hence, the specific coverage pertaining to the Road Commission's deposits, if any, is not determinable. The Road Commission believes that due to the dollar amounts of cash deposits and the limits of the FDIC and NCUA 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. 18

21 Notes to Financial Statements Note 4 - Capital Assets Capital asset activity for the period was as follows: Governmental Activities Balance October 1, 2016 Additions Retirements/ Disposals Balance September 28, 2017 Capital assets not being depreciated - Land $ 14,913,267 $ 296,782 $ - $ 15,210,049 Capital assets being depreciated: Infrastructure 121,235,609 8,363,874 (5,578,304) 124,021,179 Buildings and storage bins 2,815,208 17,287-2,832,495 Other equipment 841,346 20,677 (20,220) 841,803 Road equipment 12,400,521 1,170,000 (513,949) 13,056,572 Land improvements 28, ,540 Subtotal 137,321,224 9,571,838 (6,112,473) 140,780,589 Accumulated depreciation: Infrastructure 63,055,395 5,434,381 (5,578,304) 62,911,472 Buildings and storage bins 2,151,066 67,313-2,218,379 Other equipment 688,643 36,401 (20,220) 704,824 Road equipment 10,499, ,126 (503,504) 10,714,649 Land improvements 18,075 2,854-20,929 Subtotal 76,412,206 6,260,075 (6,102,028) 76,570,253 Net capital assets being depreciated 60,909,018 3,311,763 (10,445) 64,210,336 Net capital assets $ 75,822,285 $ 3,608,545 $ (10,445) $ 79,420,385 Construction Commitments - At, the Road Commission had commitments for construction contracts totaling approximately $637,

22 Notes to Financial Statements Note 5 - Long-term Debt Long-term debt activity can be summarized as follows: Governmental Activities Interest Rate Ranges Maturity Year Beginning Balance Additions Reductions Ending Balance Due Within One Year General obligations: Berrien Township - Notes payable 3% - 6% 2018 $ 69,800 $ - $ 50,000 $ 19,800 $ 19,800 Coloma Township - Notes payable 0% ,133-18, Watervliet Township - Notes payable 0% ,500-75,000 85,500 55,000 Chemical Bank - Notes payable 1.99% ,076,345-1,076, ,870 Total 248,433 1,076, ,133 1,181, ,670 Other long-term obligations: Accumulated compensated absences 86,300-10,114 76,186 76,186 Obligation for retiree healthcare benefits 498, ,371 - Total governmental activities $ 833,464 $1,076,345 $ 153,607 $ 1,756,202 $ 357,856 The annual principal and interest requirements to service all debt outstanding as of (excluding liabilities for compensated absences and obligation for retiree healthcare benefits) are as follows. Note that while the balances are reported as of, the future payment schedule is based on the fiscal years ending September 30. Fiscal Year Ending September 30 Principal Interest Amount 2018 $ 281,670 $ 49,561 $ 331, ,987 28, , ,685 10, , ,468 6, , ,835 2, ,062 Total $ 1,181,645 $ 98,380 $ 1,280,025 Note 6 - Agent Defined Benefit Pension Plan Description Plan Description - The Road Commission participates in the Berrien County Employees Retirement Plan (the "Plan"), an agent multiple-employer defined benefit pension plan administered by the County of Berrien, Michigan that covers all full-time employees of the Road Commission. The Plan issues a publicly available financial report that includes financial statements and required supplemental information for the Plan. That report may be obtained in writing to the County of Berrien, Michigan at the Berrien County Courthouse, 811 Port Street, St. Joseph, Michigan

23 Notes to Financial Statements Note 6 - Agent Defined Benefit Pension Plan Description (Continued) Benefits Provided - The Plan provides certain retirement, disability, and death benefits to plan members and beneficiaries. The Berrien County Board of Commissioners establishes and amends the benefit provisions of the participants in the Plan. Retirement benefits for employees are calculated as 2.0 percent of the employee's final average earnings (highest five consecutive years) times the employee's years of service. Normal retirement age is 60 with eight years of service or age plus years of service greater than or equal to 80. Early retirement is at age 55 with eight years of service, or 25 years of service regardless of age. Vesting period is eight years. Employees are eligible for nonduty disability benefits after 10 years of service and for duty-related disability benefits upon hire. Disability retirement benefits are determined in the same manner as retirement benefits, but actuarially reduced for commencement before regular retirement age. Death benefits equal the same monthly retirement income that would have been payable if the member had retired the day preceding his or her death and elected the joint and 50 percent survivor option. An employee who leaves service may withdraw his or her contributions, plus any accumulated interest. Benefit terms do not provide for annual cost-of-living adjustments to each employee's retirement allowance subsequent to the employee's retirement date. Employees Covered by Benefit Terms - At the December 31, 2016 measurement date, the following employees were covered by the benefit terms: Inactive plan members or beneficiaries currently receiving benefits 75 Inactive plan members entitled to, but not yet receiving benefits 6 Active plan members 67 Total employees covered by the Plan 148 Contributions - Article 9, Section 24 of the State of Michigan constitution requires that financial benefits arising on account of employee service rendered in each year be funded during that year. Accordingly, the Plan retains an independent actuary to determine the annual contribution. The employer is required to contribute amounts at least equal to the actuarially determined rate, as established by the plan retirement board. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by plan members during the year, with an additional amount to finance any unfunded accrued liability. The employer may establish contribution rates to be paid by its covered employees. 21

24 Notes to Financial Statements Note 6 - Agent Defined Benefit Pension Plan Description (Continued) For the period ended, the average active employee contribution rate was 6.0 percent of annual pay, and the Road Commission's average contribution rate was percent of annual payroll from October 1, 2016 through December 31, 2016 and percent of annual payroll from January 1, 2017 through September 28, Net Pension Liability The net pension liability reported at was determined using a measure of the total pension liability and the pension net position as of December 31, The December 31, 2016 total pension liability was determined by an actuarial valuation performed as of that date. Changes in the net pension liability during the measurement year were as follows: Changes in Net Pension Liability Total Pension Liability Increase (Decrease) Plan Net Position Net Pension Liability Balance at December 31, 2015 $ 22,111,112 $ 11,301,510 $ 10,809,602 Service cost 428, ,457 Interest 1,328,481-1,328,481 Changes in benefits 8,640-8,640 Differences between expected and actual experience (91,488) - (91,488) Changes in assumptions (1,490,731) - (1,490,731) Contributions - Employer - 650,827 (650,827) Contributions - Employee - 204,861 (204,861) Net investment income - 898,509 (898,509) Benefit payments, including refunds (1,307,128) (1,307,128) - Administrative expenses - (4,560) 4,560 Net changes (1,123,769) 442,509 (1,566,278) Balance at December 31, 2016 $ 20,987,343 $ 11,744,019 $ 9,243,324 22

25 Notes to Financial Statements Note 6 - Agent Defined Benefit Pension Plan Description (Continued) Assumption Changes - Since the December 31, 2015 measurement date, the following actuarial assumptions have changed: Long-term municipal bond rate from 3.57 percent to 3.78 percent Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions For the period ended, the Road Commission recognized pension expense of $1,621,231. At, the Road Commission reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Difference between expected and actual experience $ - $ (410,882) Changes in assumptions 2,740,143 (1,125,839) Net difference between projected and actual earnings on pension plan investments 647,224 - Employer contributions to the plan subsequent to the measurement date 411,906 - Total $ 3,799,273 $ (1,536,721) Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows. These amounts are exclusive of the employer contributions to the Plan made subsequent to the measurement date of $411,906, which will impact the net pension liability in fiscal year 2018, rather than pension expense. Note that while the net pension liability is reported as of, the future deferral schedule is based on fiscal years ending September 30. Fiscal Years Ending September 30 Amount 2018 $ 886, , , (47,892) 2022 (1,219) Thereafter (2,674) 23

26 Notes to Financial Statements Note 6 - Agent Defined Benefit Pension Plan Description (Continued) Actuarial Assumptions - The total pension liability in the December 31, 2016 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 3.25 % Salary increases % Including inflation Investment rate of return 7.50 % Net of pension plan investment expense, including inflation Mortality rates were based on the fully generational RP-2014 Healthy Annuitant Tables after adjustment to the base year 2006 for males and females with MP-2015 mortality improvement scales. The margin for future mortality improvement included the MP mortality improvement scales. Discount Rate - The discount rate used to measure the total pension liability is 6.78 percent. The projection of cash flows used to determine the discount rate assumes that employee contributions will be made at the current contribution rate and that employer contributions will be made at rates equal to the difference between actuarially determined contribution rates and the employee rate. Projected Cash Flows Based on those assumptions, the pension plan's fiduciary net position was not projected to be available to make all projected future benefit payments of current active and inactive employees; therefore, the discount rate incorporates a municipal bond rate, which was 3.78 percent. The source of that bond rate was the 20-year AA municipal bond index rate. The long-term expected rate of return was applied to projected benefit payments until 2054 and the municipal bond rate was applied to the remaining periods. 24