MEMPHIS HOUSING AUTHORITY. Memphis, Tennessee. Basic Financial Statements and Supplementary Information. Year ended June 30, 2015

Transcription

1 MEMPHIS HOUSING AUTHORITY Memphis, Tennessee Basic Financial Statements and Supplementary Information Year ended June 30, 2015

2 TABLE OF CONTENTS INDEPENDENT AUDITOR S REPORT 1 MANAGEMENT S DISCUSSION AND ANALYSIS (Required Supplementary Information) 4 BASIC FINANCIAL STATEMENTS Statement of Net Position 12 Statement of Revenues, Expenses and Changes in Net Position 13 Statement of Cash Flows 14 Notes to Basic Financial Statements 16 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Changes in Net Pension Liability (Asset) and Related Ratios 49 Based on Participation in the Public Employee Pension Plan of TCRS Schedule of Contributions Based on Participation in the Public Employee 50 Pension Plan of TCRS SUPPLEMENTARY INFORMATION Financial Data Schedule 52 Schedules of Actual Program Costs and Advances 70 SINGLE AUDIT SECTION Schedule of Expenditures of Federal Awards and Local Assistance 74 Note to Schedule of Expenditures of Federal Awards and Local Assistance 75 Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 76 Independent Auditor s Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by OMB Circular A Schedule of Findings and Questioned Costs 81 Corrective Action Plan 84 Page

3 8035 Spyglass Hill Road Melbourne, FL Phone: Fax: S. Orange Ave. Suite 1545 Orlando, FL Phone: Fax: INDEPENDENT AUDITOR S REPORT Board of Commissioners Memphis Housing Authority Memphis, Tennessee We have audited the accompanying financial statements of the business-type activities of the Memphis Housing Authority (the Authority ), as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the Authority 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 principless 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 off 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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States of America. Those standards require that we plan andd perform the audit to obtain reasonable assurance about whether the financial statements aree 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 dependd on the auditor s judgment, including the assessment of the risks off 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 effectivenesss 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 ourr audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Authority s business-type activities as of June 30, 2015, and the respective changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note B-12 to the financial statements, in 2015 the Authority adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions and GASB Statement No. 71 Pension Transition for Contributions Made Subsequent to the Measurement Date. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, schedule of changes in net pension liability (asset) and related ratios based on participation in the Public Employee Pension Plan of Tennessee Consolidated Retirement System (TCRS), and schedule of contributions based on participation in the Public Employee Pension Plan of TCRS, 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 this information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 2

5 Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Authority s financial statements as a whole. The accompanying financial data schedule and schedules of actual program costs and advances are presented for purposes of additional analysis as required by U.S. Department of Housing and Urban Development, and are not a required part of the financial statements of the Authority. The accompanying schedule of expenditures of federal awards and local assistance is presented for purposes of additional analysis as required by the U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the financial statements of the Authority. This supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. This information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, this information is fairly stated in all material respects in relation to the financial statements taken as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 29, 2016, on our consideration of the Authority s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority s internal control over financial reporting and compliance. March 29, 2016 Melbourne, Florida Berman Hopkins Wright & LaHam CPAs and Associates, LLP 3

6 Management s Discussion and Analysis As management of the Memphis Housing Authority (the Authority ), we offer the readers of the Authority s financial statements this narrative overview and analysis of the financial activities for the year ended June 30, We encourage readers to consider the information presented here in conjunction with the Authority s financial statements. Financial Highlights The assets of the Authority exceeded its liabilities as of June 30, 2015, by $233,112,440 (net position), an increase of $1,981,025 from the previous year. This includes a prior period adjustment of $3,157,999 to establish a net pension liability and accounting for deferred contributions as of June 30, The Authority earned revenue directly from the U.S. Department of Housing and Urban Development ( HUD ) of $64,265,357, which includes funds for capital asset activities. The Authority had cash and cash equivalents as of June 30, 2015, totaling $18,752,584, an increase of $734,023 from the previous year. Increases in deferred outflow and inflow of resources of $605,945 and $2,928,614 respectively, due to the implementation of GASB 68. Public housing has maintained occupancy of 97% for the fiscal year. The Authority s Programs Conventional Public Housing - Under the Conventional Public Housing Program, the Authority rents units that it owns to eligible low-income families, the elderly, and persons with disabilities. The Authority uses income limits developed by HUD which sets the limits at 50 to 80 percent of median income for the area. This program is operated under an Annual Contribution Contract (ACC) with HUD, whereby HUD provides the Authority operating subsidy funding to assist in funding the operating and maintenance expenses and offers rent based upon 30 percent of household income. The Conventional Public Housing Program also includes the Fund Program, which is the primary funding source for modernization of, and physical and management improvements to, the Authority s properties. Housing Choice Voucher Program - Under the Housing Choice Voucher Program, the Authority administers contracts with independent landlords to allow low-income families to reside in privately-owned rental housing. The Authority subsidizes the family s rent through a Housing Assistance Payment paid to the landlord. This program is administered under ACC with HUD, whereby HUD provides funding to enable the Authority to structure a lease that sets the participant s rent at 30 percent of household income. HOPE VI Program - Under the HOPE VI Program the Authority administers grants that provide assistance for the purpose of improving the living environment for public housing residents through demolition, substantial rehabilitation, reconfiguration, and/or replacement of severely distressed units. Community Development Block Grant - This program is funded by HUD to provide communities with resources to address a wide range of unique community development needs. The Authority receives pass-through funding for this program from the City of Memphis. Business Activities - This program consists of several programs that further the mission of the Authority. 4

7 The Authority s Programs (continued) Resident Opportunity and Supportive Services Program - This program provides public housing residents with supportive services, resident empowerment activities, and assistance in becoming economically self-sufficient. In addition, the Authority is provided funding to establish, expand and/or update community technology centers. Disaster Housing Assistance Program - This program provides rental assistance for families displaced by Hurricanes Katrina and Rita from the Federal Emergency Management Agency (FEMA). In addition, the Authority receives funding for case management to help families rebuild their lives and have the opportunity to return home. Disaster Housing Assistance Ike Program - This program is a HUD FEMA initiative to provide monthly rental assistance, service connections, security deposit and utility deposit assistance for certain families displaced from their homes by Hurricanes Ike or Gustav. Veterans Affairs Supportive Housing Program - This program combines HUD Housing Choice Voucher rental assistance for homeless veterans with case management and clinical services provided by the Veterans Affairs at its medical centers and in the community. Overview of Financial Statements The financial statements included in this annual report are those of a special-purpose government agency engaged in a single business-type activity prepared on an accrual basis. Over time, significant changes in the Authority s components of net position serve as a useful indicator of whether its financial health is improving or deteriorating. To fully assess the financial health of any authority, the reader must also consider other non-financial factors such as changes in family composition, fluctuations in the local economy, HUD mandated program administrative changes, and the physical condition of capital assets. The following statements are included: Statement of Net Position - this statement reports the Authority s assets and deferred outflows of resources less its liabilities and deferred inflows of resources at the end of the fiscal year. The Authority s net position is the difference between the Authority s rights (assets and deferred outflows of resources) and the Authority s obligations (liabilities and deferred inflows of resources). Statement of Revenues, Expenses, and Changes in Net Position - this statement presents information showing how the Authority s net position increased or decreased during the current fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of when cash is received or paid. Thus, revenues and expenses are reported in this statement for some items that will result in cash inflows and cash outflows in prior or future periods. Statement of Cash Flows - this statement presents information showing the total cash receipts and cash disbursements of the Authority during the current fiscal year. The statement reflects the net changes in cash resulting from operations plus any other cash requirements during the current year (i.e. capital additions, debt service, prior period obligations, etc.). In addition, the statement reflects the receipt of cash that was obligated to the Authority in prior periods and subsequently received during the current fiscal year (i.e. accounts receivable, notes receivable, payables, etc.). 5

8 Overview of Financial Statements (continued) Notes to the Basic Financial Statements - notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided. These notes give greater understanding on the overall activity of the Authority and how values are assigned to certain assets and liabilities and the longevity of these values. In addition, the notes reflect the impact (if any) of any uncertainties the Authority may face. In addition to the basic financial statements listed above, our report includes supplemental information. This information is to provide more detail on the Authority s various programs and the required information mandated by regulatory bodies that fund the Authority s various programs. Financial Analysis Statement of Net Position Net Change Current assets $ 18,273,670 $ 23,238,162 $ (4,964,492) assets, net 53,618,067 57,399,678 (3,781,611) Other noncurrent assets 168,031, ,192,137 10,839,141 Total assets 239,923, ,829,977 2,093,038 Deferred outflows of resources 605, ,945 Current liabilities 3,481,617 5,656,762 (2,175,145) Other noncurrent liabilities 1,006,289 1,041,800 (35,511) Total liabilities 4,487,906 6,698,562 (2,210,656) Deferred inflows of resources 2,928,614-2,928,614 Net investment in capital assets 53,618,067 57,399,678 (3,781,611) Restricted 170,882, ,152,592 8,730,122 Unrestricted 8,611,659 11,579,145 (2,967,486) Total net position $ 233,112,440 $ 231,131,415 $ 1,981,025 Current Assets decreased by $4,964,492 primarily due to a reduction in accounts receivable due from HUD and the City and subsequent capital activity and operation expenses. Net Assets decreased by $3,781,611 primarily due to depreciation expense offset by capital asset renovations (see Note B-4). Other Noncurrent Assets increased by $10,839,141 primarily due to current year additions to the Authority s notes receivable (see Note B-3) and the recording of the net plan assets in accordance with GASB 68 (see Note B-12). Deferred Outflows of Resources increased by $605,945 due to the implementation of GASB Statement No. 68, Accounting and Financial Reporting for Pension, ( GASB No. 68 ) and GASB Statement No. 71 Pension Transition for Contributions Made Subsequent to the Measurement Date ( GASB No. 71 ) and the recording of changes in net pension liability and contributions subsequent to the measurement date (see Note B-6). Total Liabilities decreased by $2,210,656 primarily due to a decrease in accrued payables due to timing of payments at fiscal year-end. 6

9 Financial Analysis (continued) Deferred Inflows of Resources increased by $2,928,614 due to the implementation of GASB No. 68 and 71, and changes in net pension liability (see Note B-6). Net Position - The difference between an organization s assets and deferred outflows of resources and its liabilities and deferred inflows of resources is its net position. Total net position is categorized into three components. 1. Net investment in capital assets - the Authority s investment in capital assets, net of accumulated depreciation, is due to the capital asset activity. The Authority had a current year decrease in this component of net position of $3,781,611 as a direct result of the changes in the Authority s capital assets previously discussed. 2. Restricted - the component of net position which is subject to constraints imposed by law or agreement consisting primarily of restricted notes receivable, debt service reserves, and, to a lesser extent, restricted funds for housing assistance payments. As of June 30, 2015, the Authority s restricted component of net position was $170,882,714 which represents an increase of $8,730,122 over the prior year. This increase is primarily due to the following: An increase of $8,576,657 due to activity in notes receivable. An increase of $2,145,896 of other restricted escrows and reserves in the Public Housing program; and A decrease of the Section 8 Housing Choice Voucher ( HCV ) Program Housing Assistance Payments (HAP payments) reserves of $1,992,431 primarily due to the Authority utilizing HAP reserves in accordance with HUD rules and regulations. 3. Unrestricted - the component of the Authority s net position that is neither invested in capital assets nor restricted. These resources are available to meet the Authority s ongoing obligations to its residents and creditors. The Authority s unrestricted component of net position is $8,611,659 as of June 30,

10 Financial Analysis (continued) Statement of Revenues, Expenses, and Changes in Net Position Net Change revenues HUD revenues $ 59,895,438 $ 71,493,210 $ (11,597,772) Other revenue 12,408,590 13,386,528 (977,938) Total operating revenues 72,304,028 84,879,738 (12,575,710) expenses Administrative 9,121,703 9,434,840 (313,137) Tenant services 609, ,044 (208,353) Utilities 2,715,344 2,720,967 (5,623) Maintenance 4,882,797 4,394, ,804 Protective services 432, ,114 64,947 General 8,313,791 14,132,549 (5,818,758) Depreciation 7,285,762 8,239,759 (953,997) Housing assistance payments 44,316,424 45,567,557 (1,251,133) Total operating expenses 77,677,573 85,675,823 (7,998,250) income (loss) (5,373,545) (796,085) (4,577,460) Nonoperating revenues (expenses) 11,983 17,871 (5,888) contributions 10,500,586 10,880,726 (380,140) Change in net position 5,139,024 10,102,512 (4,963,488) Total net position - beginning 231,131, ,028,903 10,102,512 Prior period adjustment (3,157,999) - (3,157,999) Total net position - ending $ 233,112,440 $ 231,131,415 $ 1,981,025 Total Revenue decreased by $12,575,710 primarily due to a decrease in HUD subsidy of $6,721,032 related to the Fund Program and $3,876,609 related to the Housing Choice Vouchers Program. 8

11 Financial Analysis (continued) Total Revenue (continued) Nonoperating revenues <1% Revenues contributions 14% Other revenue 15% HUD operating revenues 70% Total Expenses are categorized by the Authority as administrative, tenant services, utilities, maintenance, protective services, general, depreciation and housing assistance payments. The Authority s total operating expenses decreased by $7,998,250 over prior year primarily as a result of decreased expenses for general expenses of $5,818,758 and decreased expenses for Housing Assistance Payments of $1,251,133. Depreciation decreased during 2015 due to several capital assets being fully depreciated in the prior year. Housing assistance payments 57% expenses Administrative 12% Tenant Utilities services 3% 1% Maintenance 6% Protective services 1% General 11% Depreciation 9% A Prior Period Adjustment was made in 2015 to establish a net pension liability and to account for contributions made after the prior year s measurement date as part of the GASB No. 68 and GASB No. 71 implementation (see Note B-12). 9

12 Assets As of June 30, 2015, the Authority decreased its net capital assets by $3,781,611. At the end of fiscal year 2015, the Authority had invested in capital assets of $53,618,067, net of depreciation. All increases to capital assets are normal planned additions to the federal modernization program as outlined in the agency plan and depreciation expense was responsible for the overall decrease in total capital assets. The following illustrates the capital asset values for 2015 and Assets Net Change Land $ 13,167,777 $ 13,167,777 $ - Buildings and improvements 232,590, ,101, ,981 Furniture and equipment 2,767,951 2,767,951 - Construction in progress 4,300,770 1,285,600 3,015,170 Accumulated depreciation (199,208,529) (191,922,767) (7,285,762) Total $ 53,618,067 $ 57,399,678 $ (3,781,611) Debt Administration The Authority had no debt activity during the fiscal year ended June 30, Economic Factors Significant economic factors affecting the Authority are as follows: Federal funding levels provided by Congress to the Department of Housing and Urban Development; Local labor supply and demand, which can affect salary and wage rates; Local inflationary, recessionary and employment trends, which can affect resident incomes and therefore the amount of rental income; Inflationary pressure on utility rates, housing costs, supplies and other costs; Current trends in the housing market; Decreased income by tenants in the Public Housing program and participants in the Section 8 program; and The decrease in available housing units in the Public Housing program due to the demolition and disposition of sites has created a demand for additional Housing Choice Vouchers to house displaced Public Housing tenants. Factors Affecting Next Year s Budget The Authority is primarily dependent upon HUD for the funding of its Low Rent Public Housing, Housing Choice Voucher and Fund programs; therefore, the Authority is affected more by the federal budget than by local economic conditions. The Authority continues to face decreases in federal funding provided by HUD as a result of congressional budget cuts, including the federal budget sequestration which took effect on March 1, 2013, under the Budget Control Act of These budget cuts will greatly affect the services which housing authorities across the nation can provide to their clients. The Authority is continually assessing the direct impact of these budget cuts to its programs and services. 10

13 Request for Information This financial report is designed to provide a general overview of the Authority s finances for all those with an interest in the Authority s finances. Should additional information be required or questions arise regarding this financial report, contact our office in writing at the following address: Memphis Housing Authority Attention: Executive Director 700 Adams Avenue Memphis, Tennessee

14 STATEMENT OF NET POSITION June 30, 2015 ASSETS CURRENT ASSETS Cash and cash equivalents - unrestricted $ 11,479,113 Cash and cash equivalents - restricted 3,189,897 Investments - unrestricted 763,284 Receivables, net 2,235,538 Prepaid expenses 425,315 Net pension asset 180,523 Total current assets 18,273,670 NONCURRENT ASSETS Cash and cash equivalents - restricted 4,083,574 Notes, loans and mortgages receivable - restricted 163,947,704 assets, net 53,618,067 Total assets 239,923,015 DEFERRED OUTFLOWS OF RESOURCES Defined benefit pension plan 605,945 LIABILITIES CURRENT LIABILITIES Accounts payable 2,682,840 Due to HUD 55,425 Accrued salaries and benefits 291,895 Tenant security deposits 156,485 Unearned revenue 127,801 Other current liabilities 167,171 Total current liabilities 3,481,617 NONCURRENT LIABILITIES Accrued compensated absences 949,372 Family self sufficiency escrow 56,917 Total liabilities 4,487,906 DEFERRED INFLOWS OF RESOURCES Defined benefit pension plan 2,928,614 NET POSITION Net investment in capital assets 53,618,067 Restricted 170,882,714 Unrestricted 8,611,659 Total net position $ 233,112,440 The accompanying notes are an integral part of these financial statements. 12

15 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION Year ended June 30, 2015 OPERATING REVENUES HUD operating revenue $ 59,895,438 Other government operating grants 3,336,209 Tenant revenue, net 4,043,815 Other operating revenue 5,028,566 Total operating revenues 72,304,028 OPERATING EXPENSES Administrative 9,121,703 Tenant services 609,691 Utilities 2,715,344 Maintenance 4,882,797 Protective services 432,061 General 8,313,791 Depreciation 7,285,762 Housing assistance payments 44,316,424 Total operating expenses 77,677,573 OPERATING LOSS (5,373,545) NONOPERATING REVENUES Interest income - restricted 242 Interest income - unrestricted 11,741 Total nonoperating revenues 11,983 Change in net position before capital contributions (5,361,562) CAPITAL CONTRIBUTIONS Other government capital grants 6,130,667 HUD capital grants 4,369,919 Total capital contributions 10,500,586 Change in net position 5,139,024 Total net position - beginning 231,131,415 Prior period adjustment (3,157,999) Total net position - ending $ 233,112,440 The accompanying notes are an integral part of these financial statements. 13

16 STATEMENT OF CASH FLOWS Year ended June 30, 2015 CASH FLOWS FROM OPERATING ACTIVITIES HUD operating grants received $ 61,444,414 Collections from tenants 4,104,647 Collections from other sources 10,523,726 Payments to employees (6,443,387) Payments to suppliers (22,908,756) Housing assistance payments (44,348,035) Net cash provided by operating activities 2,372,609 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Other government grants received 6,130,667 HUD capital grants received 4,369,919 Purchase of property and equipment (3,504,152) Net cash provided by capital and related financing activities 6,996,434 CASH FLOWS FROM INVESTING ACTIVITIES Interest received 11,983 Purchase of investments 22,282 Advances in note receivable (10,293,418) Payments received in note receivable 1,624,133 Net cash used in investing activities (8,635,020) NET INCREASE IN CASH AND CASH EQUIVALENTS 734,023 Cash and cash equivalents at beginning of year 18,018,561 Cash and cash equivalents at end of year $ 18,752,584 AS PRESENTED IN THE ACCOMPANYING STATEMENT OF NET POSITION: Cash and cash equivalents - unrestricted $ 11,479,113 Cash and cash equivalents - restricted 3,189,897 Cash and cash equivalents - restricted noncurrent $ 4,083,574 18,752,584 The accompanying notes are an integral part of these financial statements. 14

17 STATEMENT OF CASH FLOWS (continued) Year ended June 30, 2015 RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES loss $ (5,373,545) Adjustments to reconcile operating loss to net cash provided by operating activities Depreciation 7,285,762 Provision for bad debt, net of recoveries 34,784 (Increase) decrease in assets and deferred outflows: Receivables, net 2,115,994 Due from other governments 1,612,182 Prepaid expenses (76,060) Net pension asset (3,894,980) Defined benefit pension plan (49,487) Increase (decrease) in liabilities and deferred inflows: Accounts payable (2,011,502) Due to HUD 12,434 Accrued salaries and benefits (74,754) Tenant security deposits (6,635) Unearned revenue 31,009 Other current liabilities (84,563) Accrued compensated absences (57,047) Family self sufficiency escrow (19,597) Defined benefit pension plan 2,928,614 Net cash provided by operating activities $ 2,372,609 The accompanying notes are an integral part of these financial statements. 15

18 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Reporting entity The Memphis Housing Authority (the Authority ), a quasi-governmental agency, was created in 1935 under Section 615, the Private Act of the General Assembly of the State of Tennessee and was established as a tax-exempt, quasi-governmental entity under the United States Housing Act of The Authority promotes the development and professional management of a variety of affordable housing opportunities, facilities and supportive services to nurture neighborhoods and provide economic development and selfsufficiency activities for residents while also assuring equal access to safe, quality housing for low and moderate income families throughout the community. The Authority's governing board consists of a seven member Board of Commissioners (the Board ), which is appointed by the Mayor of the City of Memphis (the City ). The Authority is not a component unit of the City, as defined in Governmental Accounting Standards Board ( GASB ) Statement No. 61, The Financial Reporting Entity:Omnibus, as the Board independently oversees the Authority s operations. The definition of the reporting entity as defined by GASB Statement No. 61 is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization s governing body and either it is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. The Authority s reporting entity is comprised of an enterprise fund which includes the activities of several housing programs and component units. Blended component units Some component units, despite being legally separate from the primary government, are so integrated with the primary government that they are in substance part of the primary government and are therefore blended with the primary government. The Authority s operations include one blended component unit, MHA Fowler Multifamily, Inc. ( Fowler ), which is included in the basic financial statements and consists of a legally separate entity for which the Authority is financially accountable and has the same governing board as the Authority. Fowler is a Tennessee corporation formed on December 16, 2004 at the direction of the Board to operate and manage real estate in the Memphis, Tennessee area as the general partner of Fowler Multifamily Development, LP. 16

19 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1. Reporting entity (continued) Related parties The Authority has relationships with the for-profit limited partnerships listed below which were formed to develop and operate mixed finance housing properties. The Authority has no direct ownership interest in these entities but holds notes receivable as detailed in Note B-3 and provides program support on behalf of these entities. Fairway Manor, LP; Ford Sr. Villas, LP; Horn Lake Apartments, LP; Lakeview Road, LP; Latham Terrace, LP; Legends Park East, LP; Legends Park West, LP; Legends Park North, LP; Lemoyne Gardens Family I MCU, LP; Lemoyne Gardens Senior MCU, LP; Levi Landing, LP; Lyons Ridge Apartments, LP; Memphis Land Bank, Inc.; Memphis Triangle Infrastructure, Inc.; Memphis Triangle Family, LLC; Memphis Triangle Phase IV, LLC; Memphis Triangle Senior, LLC; MLB University Place Two, LLC; Renaissance Village Apartments, LP; Thomas W. Jones and Dianne C. Jones; Uptown Square Apartments, LP; Uptown Senior Housing Development, LP; Uptown Village Apartments, LP; University Place Southeast, LP; University Place II, LP; University Place III, LP; and Village Parkway Apartments, LP. These limited partnerships are not considered to be component units of the Authority and, therefore, are not a part of the reporting entity. As disclosed in Note A-4, the Authority has already entered into, or plans to enter into, Mixed-Finance Annual Contributions Contracts ( ACC ) with these entities. 17

20 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2. Government-wide and fund financial statements The government-wide financial statements report information about the reporting government as a whole excluding fiduciary activities. The statements distinguish between governmental and business-type activities. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange revenues. Businesstype activities rely to a significant extent on fees and charges for support. Governments use fund accounting, whereby funds are generally organized into three major categories: governmental, proprietary and fiduciary. Each fund is accounted for by providing a separate set of self-balancing accounts that constitute its assets, deferred outflows, liabilities, deferred inflows, fund equity, revenues and expenditures/expenses. For financial reporting purposes, the Authority reports all of its operations as a single business activity in a single enterprise fund. Therefore, the government-wide and the fund financial statements are the same. Enterprise funds are proprietary funds. Proprietary funds distinguish operating revenues and expenses from non-operating items. activities generally arise from providing services in connection with a proprietary fund s principal activity. The operating revenues of the Authority consist primarily of rental charges to tenants and operating grants from the Department of Housing and Urban Development ( HUD ) and include, to a lesser extent, certain operating amounts of capital grants that offset operating expenses. expenses for the Authority include the cost of administrative, maintenance, tenant services, general operations, utilities, protective services, depreciation and housing assistance payments. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses, except for capital contributions and transfers, which are presented separately. When restricted resources meet the criteria to be available for use and unrestricted resources are also available for use, it is the Authority s policy to use restricted resources first, and then unrestricted resources, as needed. 3. Measurement focus and basis of accounting Measurement focus is a term used to describe which transactions are recorded within the various financial statements. The proprietary fund utilizes an economic resources measurement focus. The accounting objectives of this measurement focus are the determination of operating income, changes in net position (or cost recovery), financial position and cash flows. All assets, deferred outflows, liabilities, and deferred inflows (whether current or noncurrent) associated with their activities are reported. Proprietary fund equity is classified as net position. 18

21 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3. Measurement focus and basis of accounting (continued) Basis of accounting refers to when transactions are recorded regardless of the measurement focus applied. The basis of accounting used is similar to businesses in the private sector; thus, these funds are maintained on the accrual basis of accounting. Revenues are recognized when earned and expenses are recorded when the liability is incurred or economic asset used. For financial reporting purposes, the Authority considers its HUD grants associated with operations as operating revenue because these funds more closely represent revenues generated from operating activities rather than non-operating activities. HUD and City grants associated with capital acquisition and improvements are considered capital contributions and are presented after non-operating activity on the accompanying statement of revenues, expenses and changes in net position. 4. Summary of programs The accompanying financial statements include the activities of several housing programs subsidized by HUD and other federal entities at the Authority. A summary of each significant program is provided below. Low Rent Housing Programs The Low Rent Public Housing Programs consist of asset management projects ( AMPs ) which collect both operating and capital fund subsidy and various other related HUD grants both directly and indirectly. The purpose of the public housing program is to provide decent and affordable housing to low-income families at reduced rents. The developments are owned, maintained and managed by the Authority. The developments/units are acquired, developed and modernized under HUD s Development, Fund Program ( CFP ) grants and various other related HUD grants. Funding of the program s operations and development is provided by annual federal contributions or appropriations, operating subsidies and tenant rentals (determined as a percentage of family income, adjusted for family composition and other allowances). Central Office Cost Center The Central Office Cost Center ( COCC ) is a business unit within the Authority that generates revenue through fees for service from the Authority s AMPs, programs and activities. 19

22 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4. Summary of programs (continued) Housing Assistance Payments ( HAP ) Programs HAP Programs utilize existing privately owned family rental housing units to provide decent and affordable housing to low-income families. The Section 8 Housing Choice Voucher program is funded through federal housing assistance contributions from HUD for the difference between the approved landlord contract rent and the rent paid by the tenants. Administrative fees earned by the Authority from HUD for administering this program are intended to cover the cost of program operations. Mixed Financing The Authority has entered into, or plans to enter into, Mixed-Finance Annual Contributions Contracts approved by HUD to provide public housing funding for the ACC units at the developments owned by the limited partnerships listed as related parties in Note A-1. HUD, through the Authority, has provided funds through various grants for a number of the developments. As disclosed in Note B-3, a portion of the funds received by the Authority from HUD and the City have been loaned to the respective related parties and are presented as mortgage notes receivable. Revitalization of Severely Distressed Public Housing Program ( HOPE VI ) Revitalization grants enable the Authority to improve the living environment for public housing residents of severely distressed public housing projects through the demolition, substantial rehabilitation, reconfiguration, and/or replacement of severely distressed units. This helps to build sustainable mixed-income communities and provide wellcoordinated, results-based supportive services that directly complement housing redevelopment and that help residents to achieve self-sufficiency. Funding for this program is provided by grants from HUD and the City as well as other sources. Resident Opportunities and Supportive Services Program/EDSS The Authority administers the economic development and support services program to provide reliable transportation for all elderly and disabled residents of the Authority and to contract for housekeeping and personal assistance for residents who meet certain criteria. Funding for these programs is provided by grants from HUD. 20

23 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4. Summary of programs (continued) CDBG and HOME The activities of these programs include redevelopment activities of the affected areas of the City undergoing revitalization of distressed public housing communities under the control of the Authority. These programs are designed to acquire, construct and manage property within the City, as well as to perform contractual service in the field of housing management, and to assist in providing housing for low and moderate-income individuals. Funding is received through the City s Housing and Community Development Department ( HCD ). 5. Assets, deferred outflows, liabilities, deferred inflows and net position a. Deposits and investments For purposes of the statement of cash flows, the Authority considers all unrestricted highly liquid investments with an initial maturity of three months or less to be cash equivalents. b. Receivables Receivables consist of revenues earned during the fiscal year and not yet received. Amounts due from HUD and other governments represent reimbursable expenses or grant subsidies earned that have not been collected as of June 30, 2015, and are considered fully collectible. As of June 30, 2015, there are allowances for uncollectible amounts for doubtful accounts of $386,872. Allowances are determined by management based on the specific accounts and prior experience. c. Notes, loans, and mortgages receivable A significant portion of the mortgage notes receivable represent loans to related parties (see Note A-1). The Authority subordinated mortgage loans to the related parties in conjunction with financing arrangements related to the development of mixed-income, multifamily rental communities, in most cases, on land owned by the Authority. Such loans are generally interest-bearing and are payable from cash flow from the property owned by each respective related party. Such loans are typically funded from CDBG Development, HOPE VI, and fund grants, representing a significant portion of the construction costs associated with the Authority-assisted component of the mixedincome rental property. Because interest and principal on these loans are subordinated and are contingent on cash flow from the property, interest income recognition does not occur until payments are received or are reasonably expected to be received. 21

24 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Assets, deferred outflows, liabilities, deferred inflows and net position (continued) c. Notes, loans, and mortgages receivable (continued) The Authority also earns developer and other fees associated with the development project. Developer fees are recorded at the time of the financial closing for the public and private funds for a particular phase of the development. Any portion of these fees that are contingent on cash flow where the owner is not otherwise required to pay by a certain date is not recorded until such fees are received or is reasonably expected to be received. The Authority reviews its notes receivable for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the future net undiscounted cash flow expected to be generated and any estimated proceeds from the eventual disposition. If the note receivable is considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount exceeds the fair value as determined from an appraisal, discounted cash flows analysis, or other valuation technique. d. assets The Authority s policy is to capitalize assets with a value in excess of $5,000 and a useful life in excess of one year. The Authority capitalizes the costs of site acquisition and improvement, structures, equipment and direct development costs meeting the capitalization policy. Assets are valued at historical cost, or estimated historical cost if actual historical cost is not available, and contributed assets are valued at fair value on the date contributed. Donated capital assets are stated at their fair value on the date donated. Depreciation has been provided using the straight-line method over the estimated useful lives, which range as follows: Buildings improvements Furniture, fixtures and equipment 40 years 15 years 5-15 years 22

25 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Assets, deferred outflows, liabilities, deferred inflows and net position (continued) e. Impairment of long-lived assets Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Management has determined that long-lived assets were not impaired at June 30, f. Accrued compensated absences Compensated absences are absences for which employees will be paid, such as sick leave, vacation, and other approved leave amounts. In accordance with GASB Statement No. 16, Accounting for Compensated Absences, the Authority accrues the liability for those absences that the employee has earned the rights to the benefits. Accrued amounts are based on the current salary rates. Full-time permanent employees are granted leave benefits to specified maximums depending on tenure with the Authority. Employees also earn annual sick leave at established rates. Vacation and sick pay are recorded as an expense and related liability in the year earned by the employees. g. Deferred outflows of resources In addition to assets, the statement of net position reports a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to future periods and thus, will not be recognized as an outflow of resources until then. The Authority s balance of deferred outflows of resources relates to funding of the net pension asset (see Note B-6). h. Unearned revenues Unearned revenues include amounts collected before revenue recognition criteria are met. The unearned revenues consist of $2,742 of prepaid tenant rents and $125,059 of Housing Choice Voucher administrative fees. 23

26 NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2015 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Assets, deferred outflows, liabilities, deferred inflows and net position (continued) i. Deferred inflows of resources In addition to liabilities, the statement of net position reports a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to future periods and thus, will not be recognized as an inflow of resources until then. The Authority s balance of deferred inflows of resources relates to funding of the net pension asset (see Note B-6). j. Pensions For purposes of measuring the net pension liability or asset, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Authority s participation in the Public Employee Retirement Plan of the Tennessee Consolidated Retirement System ( TCRS ), and additions to and deductions from the Authority s fiduciary net position have been determined on the same basis as they are reported by the TCRS for the Public Employee Retirement Plan. For this purpose, benefits (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms of the Public Employee Retirement Plan of TCRS. Investments are reported at fair value. k. Eliminations of interprogram activity For financial reporting purposes, certain amounts are internal and are therefore eliminated in the accompanying financial statements. The following have been eliminated from the financial statements: i.) Interprogram due to/from In the normal course of operations, certain programs may pay for common costs or advance funds for operations that create interprogram receivables or payables. As of June 30, 2015, the interprogram receivables and payables of $2,777 net to zero and are eliminated for the presentation of the Authority as a whole. ii.) Fee for service The Authority s COCC internally charges fees to the AMPs and programs of the Authority. These charges may include management fees, bookkeeping fees, and asset management fees. For financial reporting purposes $2,809,225 of fee for service charges have been eliminated for the year ended June 30,