ROCHESTER PUBLIC SCHOOLS INDEPENDENT SCHOOL DISTRICT NO. 535 FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014

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1 FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014

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3 TABLE OF CONTENTS YEAR ENDED JUNE 30, 2014 INTRODUCTORY SECTION BOARD OF EDUCATION AND ADMINISTRATION 1 FINANCIAL SECTION INDEPENDENT AUDITORS REPORT 2 REQUIRED SUPPLEMENTARY INFORMATION MANAGEMENT S DISCUSSION AND ANALYSIS 5 BASIC FINANCIAL STATEMENTS STATEMENT OF NET POSITION 17 STATEMENT OF ACTIVITIES 18 BALANCE SHEET GOVERNMENTAL FUNDS 20 RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET POSITION 22 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS 23 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES 25 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL GENERAL FUND 27 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL FOOD SERVICE FUND 28 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL COMMUNITY SERVICE FUND 29 STATEMENT OF NET POSITION PROPRIETARY FUND 30 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PROPRIETARY FUND 31 STATEMENT CASH FLOWS PROPRIETARY FUND 32 NOTES TO FINANCIAL STATEMENTS 33

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5 TABLE OF CONTENTS YEAR ENDED JUNE 30, 2014 REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF FUNDING PROGRESS FOR POSTEMPLOYMENT BENEFIT PLAN 60 SUPPLEMENTARY INFORMATION STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL CAPITAL PROJECTS FUND 61 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL DEBT SERVICE FUND 62 COMBINING BALANCE SHEET CAPITAL PROJECTS FUND 63 COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL CAPITAL PROJECTS FUND 64 COMBINING STATEMENT OF NET POSITION PROPRIETARY FUNDS 66 COMBINING STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PROPRIETARY FUNDS 67 COMBINING STATEMENT OF CASH FLOWS PROPRIETARY FUNDS 68 SINGLE AUDIT AND OTHER REQUIRED REPORTS SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 69 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 71 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 72 INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A INDEPENDENT AUDITORS REPORT ON MINNESOTA LEGAL COMPLIANCE 76 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 77 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS 80

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7 TABLE OF CONTENTS YEAR ENDED JUNE 30, 2014 UNIFORM FINANCIAL ACCOUNTING AND REPORTING STANDARDS COMPLIANCE TABLE 81 STUDENT ACTIVITY FUNDS INDEPENDENT AUDITORS REPORT 82 STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS STUDENT ACTIVITY ACCOUNTS 84 NOTE TO STUDENT ACTIVITY FUND FINANCIAL STATEMENTS 85 INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH THE MANUAL FOR ACTIVITY FUND ACCOUNTING 86

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9 INTRODUCTORY SECTION

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11 BOARD OF EDUCATION AND ADMINISTRATION YEAR ENDED JUNE 30, 2014 BOARD OF EDUCATION Anne Becker Deborah Seelinger Terry Throndson Richard Hinds Dan O Neil Garold Smith Julia Workman Chair Vice Chair Clerk Treasurer Director Director Director * * * * * * * * * * * * * * * * * * * * ADMINISTRATION Mr. Michael Muñoz Superintendent (1)

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13 FINANCIAL SECTION

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15 INDEPENDENT AUDITORS REPORT Board of Education Independent School District No. 535 Rochester, Minnesota Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Independent School District No. 535, as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the District s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District 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 District s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. An independent member of Nexia International (2)

16 Board of Education Independent School District No. 535 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of Independent School District No. 535 as of June 30, 2014, and the respective changes in financial position and, where applicable, cash flows, and budgetary comparison for General Fund, Food Service Fund, and Community Service Fund thereof, for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Summarized Comparative Information We have previously audited Independent School District No. 535 s 2013 financial statements of the governmental activities, each major fund, and the aggregate remaining fund information, and we expressed unmodified audit opinions on those audited financial statements in our report dated October 28, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2013 is consistent, in all material respects, with the audited financial statements from which it has been derived. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and the schedule of funding progress for postemployment benefit plan, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Independent School District No. 535 s basic financial statements. The supplementary information section and the Uniform Financial Accounting and Reporting Standards Compliance Table are presented for purposes of additional analysis and are not a required part of the basic financial statements. The schedule of expenditures of federal awards, as required by the U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, is also presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplementary information section, the Uniform Financial Accounting and Reporting Standards Compliance Table, and the schedule of expenditures of federal awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. (3)

17 Board of Education Independent School District No. 535 Other Information (Continued) In our opinion, the supplementary information section, the Uniform Financial Accounting and Reporting Standards Compliance Table, and the schedule of expenditures of federal awards are fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 29, 2014, on our consideration of Independent School District No. 535 s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the result of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Independent School District No. 535 s internal control over financial reporting and compliance. CliftonLarsonAllen LLP Austin, Minnesota October 29, 2014 (4)

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19 REQUIRED SUPPLEMENTARY INFORMATION

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21 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 This section of Independent School District No. 535's annual financial report presents our discussion and analysis of the District's financial performance during the fiscal year that ended on June 30, Please read it in conjunction with the District's financial statements, which immediately follows this section. FINANCIAL HIGHLIGHTS Key financial highlights for fiscal year include the following: Total General Fund revenues were $168,227,860 and total General Fund expenditures were $173,993,442 for the fiscal year ended June 30, Total revenues and expenditures for all governmental funds combined were $201,115,412 and $220,212,817 respectively. The total fund balance in the General Fund decreased by $5,129,942 to $35,581,307. The Unassigned fund balance in the General Fund decreased by $6,208,169 to $23,363,880. Total General Fund revenues were 1.20% less than the final budget, and total General Fund expenditures were 3.92% less than the final budget. The District spent less than budgeted in several areas, with the largest savings in the area of contracted services followed by capital expenditures and supplies. The total fund balance in the Food Services fund decreased by $495,090 to $3,480,212, with revenue of $7,900,782 and expenditures of $8,402,198. The Food Service budget projected that expenditures would exceed revenue by approximately $1,218,229. The District spent less than the amount budgeted for food, and some replacement equipment purchased did not arrive until after June 30, 2014, and will therefore be part of the expenditures.. Community Service programs offered by the District generated revenue of $9,868,546 and expenditures of $9,535,890 for the fiscal year. The total fund balance in the Community Services fund is $1,240,396. The Community Service fund budget projected that revenue would exceed expenditures by approximately $100,053. Revenue was greater than budgeted by $243,022, primarily in the area of fees and tuition for programs and services offered. Expenditures for programs offered were $10,419 greater than budgeted. The District spent $17,433,282 on facility construction and deferred maintenance projects during the fiscal year. Of that amount, $3,886,219 was spent to begin construction of building additions at six elementary schools to provide space necessary to implement all-day every-day kindergarten district wide beginning in and $12,200,948 was spent on major maintenance projects as several district facilities. The major cost of those projects was primarily HVAC system replacement at three elementary schools. The long-term liability for compensated absences amounts to $13,557,628 at June 30, This is an increase of $81,250. The long-term liability for other postemployment benefits is $4,941,809 at June 30, This is an increase of $944,303. The District has established a committed fund balance to begin to fund the postemployment obligation. The fund balance amount is equal to the liability. The District has general obligation bonded debt principal outstanding in the amount of $84,475,000 and certificates of participation payable principal outstanding in the amount of $28,790,000 as of June 30, This is a combined decrease of $1,955,000 from the previous fiscal year end, due to the issuance of certificates of participation offsetting most of repayment of principal for the year. Net position of governmental activities decreased by $1,924,501 or 1.52 percent to $124,530,163. The total expense of governmental activities was $202,933,457. Program revenues totaled $70,746,537 and general revenues totaled $130,262,419. (5)

22 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 OVERVIEW OF THE FINANCIAL STATEMENTS The financial section of the annual report consists of four parts - Independent Auditors Report, required supplementary information which includes the management's discussion and analysis (this section), the basic financial statements, and single audit and other required reports. The basic financial statements include two kinds of statements that present different views of the District: The first two statements are district-wide financial statements that provide both short-term and longterm information about the District's overall financial status. The remaining statements are fund financial statements that focus on individual parts of the District, reporting the District's operations in more detail than the district-wide statements. The governmental funds statements tell how basic services such as regular and special education were financed in the short term as well as what remains for future spending. The proprietary funds statements offer short-term and long-term financial information about the activities the School District operates in a manner similar to businesses. DISTRICT-WIDE STATEMENTS The District-wide statements report information about the District as a whole using accounting methods similar to those used by private-sector companies. The statement of net position includes all of the District's assets, deferred outflows of resources, liabilities, and deferred inflows of resources. All of the current year's revenues and expenses are accounted for in the statement of activities regardless of when cash is received or paid. The two district-wide statements report the District's net position and how they have changed. Net position, the difference between the District's assets and deferred outflows of resources and liabilities and deferred inflows of resources, is one way to measure the District's financial health or position. Over time, increases or decreases in the District's net position are an indicator of whether its financial position is improving or deteriorating, respectively. To assess the overall health of the District, you need to consider additional non-financial factors such as changes in the District's property tax base and the condition of school buildings and other facilities. In the district-wide financial statements the District's activities are shown as Governmental activities: Governmental activities - Most of the District's basic services are included here, such as regular and special education, transportation, administration, food services and community education. Property taxes and state aids finance most of these activities. FUND FINANCIAL STATEMENTS The fund financial statements provide more detailed information about the District's funds - focusing on its most significant or "major" funds - not the District as a whole. Funds are accounting devices the District uses to keep track of specific sources of funding and spending on particular programs: Some funds are required by State law and by bond covenants. The District establishes other funds to control and manage money for particular purposes. (6)

23 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 FUND FINANCIAL STATEMENTS (CONTINUED) The District has two kinds of funds: Governmental funds - Most of the District's basic services are included in governmental funds, which generally focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out and (2) the balances left at year-end that are available for spending. Consequently, the governmental funds statements provide a detailed short-term view that helps to determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs. Because this information does not encompass the additional long-term focus of the district-wide statements, we provide additional information at the bottom of the governmental funds statements that explain the relationship (or differences) between them. Proprietary funds Services for which the District charges a fee are generally reported in proprietary funds. Proprietary funds are reported in the same way as the district-wide statements. The District s sole Proprietary fund is an internal service fund. o The District uses internal service funds to report activities that provide supplies and services for the District s other programs and activities. The District currently uses internal service funds for the Health and Dental Care self-insurance program and the Workers Compensation selfinsurance program. FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE Net position. The District's combined net position from Governmental activities was $124,530,163 on June 30, (See Table A-1) This represents a decrease of 1.5% in net position. Total assets increased by approximately $9.2 million or 2.9%. Current and other assets increased by approximately $1.0 million or 0.7%. Capital and non-current assets increased by $8.2 million or 4.5% due to the completion and capitalization of facility major maintenance and renovation projects. Total liabilities decreased by approximately $0.3 million or 0.2% with current liabilities increasing by $17.4 million and long-term liabilities decreasing by $17.7 million primarily due to refunding and planned retirement of bonds issued in 2004, on February 1, Table A-1 The District's Net Position Governmental Activities Percentage Change Current and Other Assets $ 141,421,410 $ 140,415, % Capital and Non-Current Assets 188,782, ,587, % Total Assets 330,204, ,002, % Deferred Outflows of Resources 1,214,574 1,326, % Current Liabilities 59,725,896 42,319, % Long Term Liabilities 112,209, ,899, % Total Liabilities 171,935, ,219, % Deferred Inflows of Resources 34,953,180 23,655, % Net Position Net Investment in Capital Assets 91,608,827 88,269, % Restricted 16,316,996 14,485, % Unrestricted 16,604,340 23,699, % Total Net Position $ 124,530,163 $ 126,454, % (7)

24 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE (CONTINUED) Changes in net position. The District's total revenues were $201,008,956 for the year ended June 30, Property taxes and state formula aid accounted for 64.6% of total revenue for the year (See Figure A-1). Another 35.2% came from program revenues. Less than 0.2% comes from investment earnings and other general revenues. The total cost of all programs and services was $202,933,457. The District's expenses are predominantly related to educating and caring for students, approximately 76% (See Figure A-2). The purely administrative activities of the District accounted for just 4% of total costs. Total expenses surpassed revenues, decreasing net position by $1,924,501 from the previous year. Table A-2 Change in Net Position Revenues Program Revenues Charges for Services 10,660,264 Governmental Activities for the fiscal year ended June 30, Total % Change $ $ 9,941, % Operating Grants and Contributions 58,524,281 54,545, % Capital Grants and Contributions 1,561,992 1,434, % General Revenues Property Taxes 26,081,180 37,291, % Unrestricted State Aid 103,870,561 92,259, % Investment Earnings 230, , % Other 80,298 9, % Total Revenues 201,008, ,592,408 Expenses Administration 7,889,479 8,561, % District Support Services 4,492,281 5,624, % Regular Instruction 88,780,739 85,787, % Vocational Education Instruction 2,203,224 2,187, % Special Education Instruction 31,349,878 27,941, % Instructional Support Services 10,954,224 8,481, % Pupil Support Services 16,758,849 15,385, % Sites and Buildings 17,264,367 18,929, % Fiscal and Other Fixed Cost Programs 382, , % Food Service 7,744,624 6,936, % Community Service 10,044,575 9,941, % Interest and Fiscal Charges on Long-Term Liabilities 5,068,597 3,398, % Total Expenses 202,933, ,570, % Increase (Decrease) in Net Position (1,924,501) 2,021,565 Beginning Net Position 126,454, ,433,099 Ending Net Position $ 124,530,163 $ 126,454,664 (8)

25 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE (CONTINUED) Figure A-1 Rochester Public Schools Revenues by Category Figure A-1 Sources of District's Revenues for Fiscal 2014 Charges for Services 5% All other 0% Operating and Capital Grants 30% Unrestricted State Aid 52% Property Taxes 13% Figure A-2 Rochester Public Schools Expenses by Category Figure A-2 District Expenses for Fiscal 2014 Food & Comm Serv 9% Maintenance 8% Other 3% Administration 4% Student Support Services 16% Instruction-Related 60% (9)

26 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE (CONTINUED) The cost of all governmental activities was $202,933,457 which is an increase of $9,362,614 or 4.8% over the previous year. Some of the cost was paid by the users of the District's programs ($10,660,264). The federal and state governments subsidized certain programs with grants and contributions ($60,086,273). Most of the District's costs ($132,186,920), however, were paid for by District taxpayers and the taxpayers of the State of Minnesota. The net expense of governmental activities in excess of program revenue was paid for with $26,081,180 in property taxes, $103,870,561 of state aid based on the statewide education aid formula, and $310,678 in investment earnings and other general revenues. Table A-3 Change in Net Position Total Cost of Services Percentage Net Cost of Services Percentage Change Change Administration $ 7,889,479 $ 8,561, % $ 7,809,297 $ 8,452, % District Support Services 4,492,281 5,624, % 4,298,284 5,106, % Regular Instruction 88,780,739 85,787, % 64,101,668 61,806, % Vocational Education Instruction 2,203,224 2,187, % 1,986,821 1,995, % Special Education Instruction 31,349,878 27,941, % 7,583,596 5,656, % Instructional Support Services 10,954,224 8,481, % 7,862,120 7,760, % Pupil Support Services 16,758,849 15,385, % 15,586,534 14,337, % Sites and Buildings 17,264,367 18,929, % 15,630,840 17,395, % Fiscal and Other Fixed Cost Programs 382, , % 382, , % Food Service 7,744,624 6,936, % (145,535) (793,207) -81.7% Community Service 10,044,575 9,941, % 2,022,078 2,192, % Interest and Fiscal Charges on Long-Term Liabilities 5,068,597 3,398, % 5,068,597 3,342, % Total $ 202,933,457 $ 193,570, % $ 132,186,920 $ 127,649, % FINANCIAL ANALYSIS OF THE DISTRICT'S FUNDS The financial performance of the District as a whole is reflected in its governmental funds as well. As the District completed the year its governmental funds reported a combined fund balance of $66,249,528, which is a decrease of $11,585,020 from the prior year ending fund balance. Revenues for the District's governmental funds were $201,115,412, total expenditures were $220,212,817, and other sources and uses provided $7,512,385. The District issued Certificates of Participation, Series 2014A to finance the construction of additional kindergarten classroom space and remodeling of the alternative learning center. The District used proceeds of the newly issued debt in addition to previously issued debt to fund projects at ten school facilities. The Capital Projects fund balance decrease totaled $5,901,068. The fund balance of the General fund decreased by $5,129,942, which was also a planned and approved utilization of fund balance by the School Board. The operations of the other governmental funds: Food Service, Community Service, and Debt Service resulted in a decrease in fund balance of $554,010. (10)

27 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 GENERAL FUND The General Fund includes the primary operations of the District in providing educational services to students from early childhood through grade 12 including pupil transportation activities and operating capital expenditures. The following table shows that the number of students has increased slightly over the last four years, increasing by 476 students since Membership decreased slightly in 2012, 3 students less than in 2011, but increased by 224 students or 1.4% in 2013, and 215 students or 1.3% in Table A-4 Five-Year Enrollment Trend Average Daily Membership (ADM) Grade ECSE Kdgt. 1,273 1,263 1,218 1,294 1, ,774 3,867 3,944 3,888 3, ,497 3,486 3,540 3,663 3, ,241 7,188 7,074 7,144 7,121 Total K-12 ADM 15,911 15,951 15,948 16,172 16,387 ADM Change N/A 40 (3) Percent Change N/A 0.3% 0.0% 1.4% 1.3% District enrollment peaked in 2003 at 16,222 students in average daily membership, declined to 15,689 in 2006, and has been generally increasing since then to 16,387 in The enrollment growth is occurring at the elementary grade levels, with enrollment holding fairly steady at the secondary grade levels. District projections indicate that enrollments will be steady with slight growth for the next five years. The District did realize higher than projected enrollment for The previous decline in enrollment was largely due to new charter schools opening within the District boundaries. The overall population of the School District continues to increase. The following schedule presents a summary of General Fund Revenues. Fund Table A-5 General Fund Revenues Year Ended Change June 30, June 30, Increase (Decrease) Percent Local Sources Property Taxes $ 11,020,964 $ 19,247,115 $ (8,226,151) -42.7% Earnings on Investments 81,317 21,066 60, % Other 5,676,350 5,431, , % State Sources 144,472, ,577,320 14,895, % Federal Sources 6,976,486 7,138,858 (162,372) -2.3% Total General Fund Revenue $ 168,227,860 $ 161,416,003 $ 6,811, % Total General Fund revenue of $168,227,860 increased by $6,811,857 or 4.2% compared to the previous year. Basic general education revenue is determined by the state per student funding formula and consists of state aid revenue. Other state-authorized revenue including excess levy referendum and operating capital involve an equalized mix of property tax and state aid revenue. The mix of property tax and state aid can change significantly from year to year without any net change of revenue. (11)

28 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 GENERAL FUND (CONTINUED) State sources increased by $14,895,423 or 11.5% due to legislative increases in per pupil funding formulas and state repayment of a shift in recognition of property tax and state aid which initially impacted the fiscal year ended June 30, Local sources decreased by $7,921,194 primarily as a result of the offsetting recognition of the shift with state aid. Federal sources decreased by $162,372 or 2.3%. The following schedule presents a summary of General Fund expenditures. Table A-6 General Fund Expenditures Year Ended Amount of Percent June 30, June 30, Increase Increase (Decrease) (Decrease) Salaries $ 101,652,339 $ 95,433,361 $ 6,218, % Employee Benefits 37,551,921 34,024,593 3,527, % Purchased Services 20,268,903 20,045, , % Supplies and Materials 7,102,415 6,219, , % Capital Expenditures 4,569,970 8,480,313 (3,910,343) -46.1% Debt Service Expenditures 2,607,913 1,834, , % Other Expenditures 239, ,179 (680,198) -73.9% Total Expenditures $ 173,993,442 $ 166,957,579 $ 7,035, % The total General Fund expenditure of $173,993,442 was an increase of $7,035,863 or 4.2% over the prior year. Salaries and benefits increased by $9,746,306 combined. Salaries increased 6.5% and employee benefits increased by 10.4%. The District continues to look at cost containment measures to minimize the effect of rising health insurance premiums on the costs of the district s employee compensation packages. Bargaining unit contracts now contain language that caps the District contribution toward health insurance premiums. Capital expenditure costs decreased by $3,910,343 or 46.1%, from the prior year. The capital expenditures for fiscal year ended June 30, 2013 were higher than normal primarily due to the purchase of student-use technology and the acquisition of a facility for maintenance and other operations. The remaining categories of purchased services, supplies and materials, debt service, and other expenditures net to an overall cost increase of $1,199,900 or 4.1% from 2013 to In , General Fund expenditures exceeded revenue by $5,765,582 which was $5,066,688 better than budget. Revenue received was $2,036,717 less than budgeted and expenditures were $7,103,405 less than budgeted. State special education revenue was the largest line-item lower than budget by $1,410,076. The unassigned fund balance decreased from $29,572,049 at June 30, 2013 to $23,363,880 at June 30, 2014, a decrease of $6,208,169. This was a planned utilization of fund balance to maintain opportunities for students. Expenditures were less than budgeted in several areas, including salaries, contracted services, supplies, and capital expenditures. Additional discussion of budget variances is provided in the next section General Fund Budgetary Highlights. (12)

29 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 GENERAL FUND (CONTINUED) General Fund Budgetary Highlights Over the course of the year, the District revised the annual operating budget. The budget amendments fall into two categories: Implementing budgets for specially funded projects, which include both federal and state grants, reinstating prior year designated carryover reserves, and changes in enrollment estimates. Increases in appropriations for significant unbudgeted costs or revenues. The District's final budget for the general fund anticipated a net reduction in fund balance of $10,241,788 while the actual results for the year show a reduction of $5,129,942. In our analysis of significant variances between original and final budget amounts and between final budget amounts and actual results in the General Fund, there are no variances in revenues that will have a significant effect on future services or liquidity. The main reasons for the difference between the original budget and the final budget are for additional grants awarded to the District after the original budget was adopted and revised enrollment estimates. The District historically has used the October 1 student enrollment as the basis for the final budget. The largest variance between the final budget and actual revenue is in State Sources where revenue was less than the budget amount by $1,442,999. The District earned less revenue from the Special Education funding formulas than was budgeted. On the expenditure side of the budget, the major reasons for the variance between original and final budget amounts (approximately $8.1 million) were the addition of funding for capital projects (approximately $3.1 million); certain restricted, committed or assigned fund balances from the previous fiscal year (approximately $4.4 million); and additional grants awarded to the District after the original budget was approved. Taking a look at the $7.1 million difference between the final expenditure budget and actual expenditures, the unspent supply budgets were approximately $1.8 million. Of this amount, approximately $1.4 million was set aside in a committed fund balance to be carried over and added to the site supply budgets in the following year. Several contracted services budgets were not fully utilized (approximately $2.7 million) because the services were not utilized this year. Of the $2.7 million, approximately $515,000 was in the area of Staff development and will get carried over and added to the budget in , approximately $328,000 was for student transportation, approximately $360,000 was for utilities, and $331,000 was for special education services. The remaining savings was in a variety of budgets for consulting and contracted services. Finally, there were unspent capital expenditure allocations of approximately $2.2 million. These budgets were allocated for specific projects and the unspent dollars were set aside in restricted and committed fund balances and will be included in the budget for completion of these projects. Some of these variances will have a positive effect on future budgets by allowing for ongoing budget reductions in certain areas. FOOD SERVICE FUND The Food Service Fund accounts for the activities related to providing nutrition services to the K-12 academic program. The fund operates on the principle of revenues exceeding expenditures on day-today operations so that the excess can be used to systematically replace and upgrade kitchen equipment around the district. By operating in this manner, the Student Nutrition Services program is self-contained and does not pull resources away from direct K-12 instruction. The District served 1,563,207 lunches and 476,224 breakfasts to students and staff, in addition to a la carte sales during the school year. (13)

30 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 FOOD SERVICE FUND (CONTINUED) The fund balance decreased by $495,090 in This is $723,139 better than budget. Food Service Fund revenue for totaled $7,900,782 which is an increase of $167,324 or 2.2% from Food Service Fund Expenditures for totaled $8,402,198, an increase of $1,081,121 or 14.8% from Salaries and benefits increased by $153,008; the cost of supplies, food and milk increased by $196,181; and expenditures for equipment increased by $708,109 in Food and milk costs were impacted by the continued implementation of the requirements of the Healthy Hunger Free Kids Act. The increase in equipment expenditures was due to planned replacement of aging equipment and equipment needs for a new alternative learning center facility. COMMUNITY SERVICE FUND The Community Service Fund accounts for the activities related to providing education services for Pre- Kindergarten and Post-Grade 12 students. The fund operates on a principle of breaking even on a year-to-year basis so that it does not pull resources away from K-12 instruction. The fund balance increased by $332,656 in Community Service Fund Revenues for totaled $9,868,546. This was an increase of $376,234 or 4.0% from Community Service Fund Expenditures for totaled $9,535,890. This was an increase of $53,798 or 0.6% from The entire fund balance is restricted to be used for specific purposes based on state requirements. The minimal change fund balance from the previous year reflects the stability of the programs provided in this fund. CAPITAL PROJECTS FUND The Capital Projects Fund accounts for the costs of school construction, addition and renovation projects. Bond proceeds are deposited in the Capital Projects Fund and are then drawn down as the payments are made for work completed on the various building projects. The proceeds of bonds can only be used for the purpose for which the bonds were issued. In the District received property tax revenue in the amount of $4,060,014, state aid in the amount of $574,805, and had interest earnings on investments and other sources of $33,026 to fund deferred maintenance projects. In addition, the District had other financing sources from the issuance of certificates of participation, bond premiums, and utility rebates totaling 6,864,369 to fund the construction of building additions and capital improvements. The District expended $17,433,282 on deferred maintenance projects and building additions at several sites as planned. The fund balance decreased by $5,901,068 in to $8,443,903 at June 30, Several projects are in process at the end of the fiscal year. At such time that the district has completed all construction projects in process, the fund balance of this fund should end up at $0 as long as no further construction or facility renovation is approved. DEBT SERVICE FUND The Debt Service Fund exists to service the principal and interest payments on long-term debt issued by the district to construct school facilities or acquire school equipment. Annual levies will provide revenue at a rate of 105% of pending debt service payments for a fiscal year. This rate is specified in statute to ensure that principal and interest payments can be made as scheduled even if there are late property tax payments or delinquencies that may arise. (14)

31 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 DEBT SERVICE FUND (CONTINUED) Debt service revenue was $10,450,379 for , 99.2% of which came from property tax revenue. Debt service expenditures were $10,848,005. The District made principal payments in the amount of $7,140,000 and interest payments of $3,694,681. The Debt Service Fund has a fund balance of $17,503,710 as of June 30, 2014, which is restricted to be used for future debt payments. Of this amount, $15,528,547 is held in an escrow account, to be used on February 1, 2015, to retire in advance of maturity the 2016 through 2029 maturities of the Series 2004A G.O. Bonds. The Minnesota Department of Education monitors fund balances in the Debt Service Fund and limits the amount of funds that can be carried forward. If the fund balance gets too high, future levy authority will be reduced in order to reduce the debt service fund balance to a reasonable level. Fund balance and collection of tax levies will provide adequate cash flow for timely payment of principal and interest. The District currently has an underlying bond rating of Aa1 from Moody s and AA+ from Standard & Poor s. INTERNAL SERVICE FUND This fund accounts for the District s self-funded employee s health and dental benefits and the workers compensation program. The costs of these programs are charged back to the other funds of the District based on established premium rates. The programs have total net position of $8,082,392 as of June 30, 2014 as compared to $6,859,757 on June 30, This is an increase of $1,222,635 or 17.8%. Operating revenues exceeded operating expenses by $1,690,553. There was a $500,000 transfer of funds out to the General Fund of excess funds accumulated for workers compensation self-insurance. Including this transfer the net position of the workers compensation program decreased by $514,438. The operating income of the health and dental care trust was $1,711,834. This is primarily due to the level of health insurance claims for the fiscal year. Claims expense decreased by $196,455 from the prior year to $21,839,501. Net position related to the health and dental care trust in the amount of $6,531,257 can only be used to provide benefits and are not available to the District for other purposes. The Insurance Trust Committee, comprised of community experts and District employees, monitors the funding requirements on an ongoing basis. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets: By the end of 2014, the District had invested $188,782,971 in a broad range of capital assets including: school buildings, land, computer and audio-visual equipment, and other equipment for various instructional programs (see Table A-7). Accumulated depreciation as of June 30, 2014 was $142,516,237, with current year depreciation expense for Governmental Activities totaling $9,576,315. More detailed information about capital assets can be found in Note 4 to the financial statements. Table A-7 The District's Capital Assets Percentage Change Land $ 9,145,689 $ 7,849, % Construction in Progress 13,620,274 18,603, % Land Improvements 8,232,307 8,232, % Buildings and Improvements 285,678, ,873, % Equipment 14,622,556 13,357, % Less: Accumulated Depreciation (142,516,237) (133,329,470) 6.9% Total $ 188,782,971 $ 180,587, % (15)

32 MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2014 CAPITAL ASSETS AND DEBT ADMINISTRATION (CONTINUED) Long-Term Liabilities: For the fiscal year ended June 30, 2014, the District had $138,223,032 in long-term liabilities outstanding, including $84,475,000 in General Obligation Bonds, $28,790,000 in Certificates of Participation, and $13,557,628 for compensated absences. This is a decrease in total long-term liabilities of $1,639,708 or 1.2% from last year (see Table A-8). In addition to the normal principal payments reducing the outstanding amount of general obligation bonds, the District issued $6,560,000 in Certificates of Participation, Series 2014A to finance building additions at Folwell, Franklin, Gibbs, Lincoln K-8, Pinewood, and Washington schools and interior build-out at Rochester Alternative Learning Center during , and More detailed information about the District s longterm liabilities is presented in Note 5 of the financial statements. Table A-8 The District's Long-Term Liabilities Percentage Change General Obligation Bonds $ 84,475,000 $ 90,380, % Bond Premium 4,361,392 4,556, % Certificates of Participation Payable 28,790,000 24,840, % Lease Purchase Agreement Payable 2,097,203 2,600, % Capital Leases Payable - 11, % Other Postemployment Benefits Payable 4,941,809 3,997, % Compensated Absences Payable 13,557,628 13,476, % Total $ 138,223,032 $ 139,862, % Long-Term Liabilities: Due Within One Year $ 26,013,316 $ 9,962,916 Due in More Than One Year 112,209, ,899,824 $ 138,223,032 $ 139,862,740 CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, customers and investors and creditors with a general overview of the District's finances and to demonstrate the District's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Business Office, Independent School District No. 535, th Street SW, Rochester, Minnesota (16)

33 BASIC FINANCIAL STATEMENTS

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35 STATEMENT OF NET POSITION JUNE 30, 2014 (WITH SUMMARIZED FINANCIAL INFORMATION AS OF JUNE 30, 2013) Governmental Activities ASSETS Cash and Investments $ 79,075,759 $ 72,440,765 Cash and Investments Held by Trustee 22,145,973 21,753,482 Receivables Property Taxes 18,507,744 19,175,579 Other Governments 20,561,163 24,915,286 Other 786, ,914 Prepaid Items 262, ,999 Inventories 81, ,364 Bond Issuance Costs, Net - 1,011,790 Capital Assets Land and Construction in Progress 22,765,963 26,453,126 Other Capital Assets, Net of Depreciation 166,017, ,134,428 Total Assets 330,204, ,002,733 DEFERRED OUTFLOWS OF RESOURCES Loss on Bond Refunding 1,214,574 1,326,871 Total Deferred Outflows of Resources 1,214,574 1,326,871 LIABILITIES Salaries Payable 17,255,946 16,292,057 Accounts and Contracts Payable 11,165,012 10,138,952 Accrued Interest 1,765,870 1,817,738 Due to Other Governmental Units 94,787 74,314 Claims Payable 2,465,945 2,887,493 Unearned Revenue 965,020 1,146,004 Long-Term Liabilities Portion Due Within One Year 26,013,316 9,962,916 Portion Due in More Than One Year 112,209, ,899,824 Total Liabilities 171,935, ,219,298 DEFERRED INFLOWS OF RESOURCES Property Taxes 34,953,180 23,655,642 Total Deferred Inflows of Resources 34,953,180 23,655,642 NET POSITION Net Investment in Capital Assets 91,608,827 88,269,979 Restricted for: Operating Capital Purposes 660, ,695 State-Mandated Restrictions 779, ,764 Food Service 3,480,212 3,975,302 Community Service 1,249, ,558 Debt Service 601, ,379 Capital Projects - Facilities 2,995,149 2,563,910 Capital Projects - Building Construction 19,334 4,654 Health and Dental Insurance Trust 6,531,257 4,794,184 Unrestricted 16,604,340 23,699,239 Total Net Position $ 124,530,163 $ 126,454,664 See accompanying Notes to Financial Statements. (17)

36 STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2014 (WITH SUMMARIZED FINANCIAL INFORMATION FOR THE YEAR ENDED JUNE 30, 2013) 2014 Program Operating Charges for Grants and Functions Expenses Services Contributions Governmental Activities Administration $ 7,889,479 $ - $ 80,182 District Support Services 4,492,281 6,773 73,950 Regular Instruction 88,780, ,395 23,334,325 Vocational Education Instruction 2,203, ,002 Special Education Instruction 31,349,878 1,929,349 21,836,609 Instructional Support Services 10,954,224 11,050 2,315,880 Pupil Support Services 16,758, , ,174 Sites and Buildings 17,264, ,692 1,227,619 Fiscal and Other Fixed Cost Programs 382, Food Service 7,744,624 3,460,907 4,429,252 Community Service 10,044,575 3,963,209 4,059,288 Interest and Fiscal Charges on Long-Term Liabilities 5,068, Total School District $ 202,933,457 $ 10,660,264 $ 58,524,281 General Revenues Property Taxes Levied for: General Purposes Community Service Debt Service Capital Projects State Aid Not Restricted to Specific Purposes Earnings on Investments Gain on Sale of Fixed Assets Miscellaneous Total General Revenues Change in Net Position Net Position - Beginning Net Position - Ending See accompanying Notes to Financial Statements. (18)

37 Net (Expense) Net (Expense) Revenue and Revenue and Changes in Changes in Revenues Net Position Net Position Capital Total Total Grants and Governmental Governmental Contributions Activities Activities $ - $ (7,809,297) $ (8,452,058) 113,274 (4,298,284) (5,106,816) 383,351 (64,101,668) (61,806,237) 1,401 (1,986,821) (1,995,026) 324 (7,583,596) (5,656,415) 765,174 (7,862,120) (7,760,593) 3,252 (15,586,534) (14,337,615) 295,216 (15,630,840) (17,395,624) - (382,620) (397,020) - 145, ,207 - (2,022,078) (2,192,706) - (5,068,597) (3,342,442) $ 1,561,992 (132,186,920) (127,649,345) 10,789,046 19,192, ,569 1,787,759 10,289,551 9,613,154 4,060,014 6,698, ,870,561 92,259, , ,538 9,098-71,200 9, ,262, ,670,910 (1,924,501) 2,021, ,454, ,433,099 $ 124,530,163 $ 126,454,664 (19)