DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016

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1 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2016 PREPARED BY: OFFICE OF FINANCIAL SERVICES

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3 Government-Wide Financial Statements Fund Financial Statements Notes to the Financial Statements

4 Combining and Individual Fund Financial Schedules Special Revenue Funds Education Improvement Act Other Schedules Food Service Fund

5 Educational Foundation Government Auditing Standards

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7 Management s Responsibility for the Financial Statements Auditor s Responsibility Government Auditing Standards, Greenville Mauldin Mount Pleasant (864) (864) (843)

8 Opinions Other Matters Required Supplementary Information Supplementary Information Code of Federal Regulations Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards 2

9 Government Auditing Standards Government Auditing Standards Government Auditing Standards 3

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11 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 INTRODUCTION The following management s discussion and analysis (MD&A) of Dorchester County School District Two (the District or School District ) offers a narrative overview and analysis of the District s financial position and results of operations for the fiscal year ended June 30, Its design and purpose is to (a) focus on significant financial issues, (b) provide an overview of the District s financial activity, (c) identify changes in the District s financial position, (d) identify any material deviations from the approved budget, and (e) identify individual fund issues or concerns. Readers should also review the District s financial statements and the notes to the financial statements to enhance their understanding of the District s financial performance as a whole. FINANCIAL HIGHLIGHTS Revenues. Total revenues for governmental activities increased $11.4 million to $234.9 million for fiscal year Major changes include a $6.6 million increase in operating grants and contributions, a $3.7 million increase in property taxes and a $1.4 million increase in capital grants and contributions. The increase in operating grants and contributions is primarily the result of a $5.7 million increase in state revenues as a result of an increase in base student costs as well as changes in allocations and funding methods from the State. The $3.7 million increase in property taxes is primarily due to an increase in operating millage from to 169.9, or 0.8%, as well as an increase in assessed values from $478.9 million to $492.6 million, or 2.9%. The $1.4 million increase in capital grants and contributions is a result of the District receiving insurance proceeds and FEMA assistance related to the rebuilding of the Givhans Alternative Program school as a result of damage sustained during the October 2015 floods. Expenses. Total expenses for governmental activities increased $9.7 million to $231.1 million for fiscal year The major changes include increases of $7.8 million and $1.5 million in instruction and support services expenses, respectively. The increases in instruction and support services expenses are due to an $8.8 million increase in salaries and a $4.3 million increase in related benefits due to a 2% cost of live adjustment and a step provided to all staff during fiscal year Net Position. Net position for governmental activities for June 30, 2016 was a deficit of $91.0 million, an improvement of $3.8 million from the beginning deficit of $94.8 million. The net position for the business-type activities for June 30, 2016 was $230 thousand, a decrease of $15 thousand from the beginning balance of $245 thousand. The District s governmental activities have a $62.5 million net investment in capital assets, $10.1 million restricted for debt service by debt covenants, $13.7 million restricted for capital projects based on the revenue source, $2.0 million restricted for Food Service operations, $156 thousand restricted for Special Revenue Programs, $36 thousand restricted for the Educational Foundation, and a deficit of $179.4 million in unrestricted net position. The District s business-type activity has $230 thousand in unrestricted net position. Capital Assets. The District s general capital assets for governmental activities showed a net increase of $76.2 million. Net governmental activities capital assets on June 30, 2016 were $326.2 million. The District s total additions of $85.2 million included $80.9 million in construction in progress and $4.3 million in furniture, equipment and vehicles. Construction in progress additions were related to referendum projects and the rebuilding of the Givhans Alternative Program school as a result of damage sustained during the October 2015 floods. The furniture, equipment and vehicles additions consisted primarily of the purchase of new school buses. These additions were offset by $8.1 million in depreciation expense and $0.9 million in net disposals. The District s business-type activity does not have any capital assets as of June 30,

12 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 FINANCIAL HIGHLIGHTS (CONTINUED) Governmental Funds Fund Balance. The District s combined fund balance for all governmental funds at the fund level report an ending balance of $143.7 million, a decrease of $33.7 million. The overall decrease is due to decreases of $32.6 million in the Capital Projects District Fund and $2.0 million in the Food Service Fund partially offset by a $1.5 million increase in the General Fund. General Fund Fund Balance. The District s principal operating fund, the General Fund, showed an increase in its fund balance of $1.5 million that provided a balance at year-end of $25.6 million. This balance includes $167 thousand in nonspendable fund balance related to prepaid items, $219 thousand in fund balance assigned for school carryovers, and $25.2 million in unassigned fund balance. Revenues and Expenditures. Expenditures and other financing uses exceeded revenues and other financing sources for all governmental funds by $33.7 million. Major changes in revenues and expenditures are discussed in detail in the Financial Analysis of the District s Funds section below. Debt. The District retired $2.2 million in long-term debt through principal payments on General Obligation Bonds, $570 thousand in principal payments on Special Obligation Bonds, $2.6 million through principal payments on GROWTH s Installment Purchase Revenue Bonds, and $1.2 million in principal payments on capitalized leases. The District borrowed $39.9 million in General Obligation Bonds, which were approved via a voter referendum, to complete the referendum approved construction projects. The District also borrowed $1.8 million in capital leases to finance the purchase of 20 school buses. In addition, the District borrowed $17.3 million in short-term General Obligation Bonds during the year that were fully repaid with the exception of $5.8 million related to the May 2016 short-term General Obligation Bonds, which will be repaid in March OVERVIEW OF THE FINANCIAL STATEMENTS This document consists of three parts: management s discussion and analysis (this section), the financial statements and supplementary information. The discussion and analysis serves as an introduction to the District s financial statements. The financial statements consist of three components: 1) government-wide financial statements, 2) fund financial statements and 3) notes to the financial statements. This report also contains other supplementary information in addition to the financial statements themselves. The first two statements are district-wide financial statements that provide both short-term and long-term 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 were financed in the short term as well as what remains for future spending. Proprietary funds statements offer short-term and long-term financial information about the activities that the District operates like businesses (extended day program). Fiduciary funds statements provide information about the financial relationships in which the District acts solely as a trustee or agent for the benefit of others. The financial statements also include notes that explain some of the information in the statements and provide more detailed data. The statements are followed by a section of required supplementary information that further explains and supports the financial statements with a comparison of the District s budget for the year. 6

13 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 OVERVIEW OF THE FINANCIAL STATEMENTS (CONTINUED) Figure A-1 summarizes the major features of the District s financial statements, including the portion of the District s activities they cover and the types of information they contain. The remainder of this overview section of management s discussion and analysis highlights the structure and contents of each of the statements. Figure A-1: Major Features of the District-Wide and Fund Financial Statements Scope Required financial statements Accounting basis and measurement focus Type of asset/liability information Type of inflow/outflow information District-Wide Statements Entire district (except fiduciary funds) Statement of net position Statement of activities Accrual accounting and economic resources focus All assets and liabilities, both financial and capital, short-term and long-term. All revenues and expenses during year, regardless of when cash is received or paid Fund Financial Statements Governmental Funds Proprietary Funds Fiduciary Funds The activities of the district that are not proprietary or fiduciary Balance sheet Statement of revenues, expenditures, and changes in fund balances Modified accrual accounting and current financial resources focus Only assets expected to be used and liabilities that come due during the year or soon thereafter; no capital assets or long-term liabilities included Revenues for which cash is received during or soon after the end of the year; expenditures when goods or services have been received and payment is due during the year or soon thereafter Activities the district operates similar to private businesses: extended day program Statement of net position Statement of revenues, expenses and changes in fund net position Statement of cash flows Accrual accounting and economic resources focus All assets and liabilities, both financial and capital, and short-term and longterm All revenues and expenses during the year, regardless of when cash is received or paid Instances in which the district is the trustee or agent for someone else s resources such as the Pupil Activity Fund Statement of assets and liabilities Accrual accounting and economic resources focus All assets and liabilities, both short-term and long-term; funds do not currently contain capital assets, although they can All additions and deductions during the year, regardless of when cash is received or paid 7

14 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 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, current and noncurrent. The statement of activities presents information showing how the District s net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused compensated absences). The two district-wide statements report the District s net position and how it has changed. Net position the difference between the District s assets and deferred outflows and liabilities and deferred inflows 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 diminishing, respectively. To assess the District s overall health, the reader also needs to consider additional non-financial factors such as changes in the District s property tax base, current property tax laws, the condition of school buildings and other facilities, and required educational programs and standards. In the district-wide financial statements, the District s activities are divided into two categories: Governmental activities: Most of the District s basic services are included here, such as instruction, including both regular and special education; support services, including administration, operation and maintenance of plant, and pupil transportation; community services and intergovernmental expenditures. These functions are principally supported by taxes and intergovernmental revenues. Business-type activities: These services are provided on a charge for goods and services basis to recover all of the expenses of the goods or services provided. The District s extended day program is included here. 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. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The District uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Some funds are required by state law and by bond covenants. The District establishes other funds to control and manage money for particular purposes (such as repaying its longterm debts) or to show that it is in compliance with certain programs or sources of revenues (such as federal grants). 8

15 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 DISTRICT-WIDE STATEMENTS (CONTINUED) Fund Financial Statements (Continued) The District has three 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. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. Consequently, the governmental funds statements provide a detailed short-term view that helps you determine whether there are more or fewer financial resources that can be spent in the near future to finance the District s education programs. Because this information does not encompass the additional long-term focus of the district-wide statements, both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures and changes in fund balances provide a reconciliation to explain the relationship (or differences) between governmental funds and governmental activities. The District maintains its accounting records in conformity with the South Carolina Department of Education s Financial Accounting Handbook. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures and changes in fund balances for the General, Special Revenue, EIA, Food Service, Educational Foundation, Debt Service (District and GROWTH) and Capital Projects Funds (District and GROWTH), all of which are considered to be major funds. 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 enterprise fund (extended day program) is the same as its business-type activities but provides more detail and additional information, such as cash flows. Fiduciary funds: The District is the trustee, or fiduciary, for assets that belong to others, such as scholarship funds or student activities funds. The District is responsible for ensuring that the assets reported in these funds are used only for their intended purposes and by those to whom the assets belong. The District excludes these activities from the district-wide financial statements because it cannot use these assets to finance its operations. The District s pupil activity fund is the only fiduciary fund. Notes to the Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. Supplementary Information In addition to the financial statements and accompanying notes, this report also presents certain required supplementary information that further supports the financial statements with a comparison of the District s General Fund budget for the fiscal year. Supplementary information schedules required by the South Carolina Department of Education are also included. 9

16 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE Figure A-2 provides a summary of the District s net position for fiscal year 2016 compared to Figure A-2: Condensed Statement of Net Position (rounded thousands) Governmental Activities Business-Type Activities Total School District Current and other assets $ 209, ,092 1,428 1, ,406 $ 182,574 Capital assets 249, , , ,196 Total assets 459, ,288 1,428 1, , ,770 Deferred pension charges 17,202 17, ,303 18,043 Advance refunding charges 8,329 7, ,329 7,720 Total deferred outflows 25,531 25, ,632 25,763 Long-term obligations 331, , , ,025 Net pension liability 198, ,929 1,063 1, , ,137 Other liabilities 34,164 39, ,296 39,334 Total liabilities 563, ,135 1,195 1, , ,496 Deferred pension credits 16,713 2, ,802 2,791 Total deferred inflows 16,713 2, ,802 2,791 Net position: Net investment in capital assets 56,453 62, ,453 62,469 Restricted 26,495 25, ,495 25,920 Unrestricted (177,779) (179,373) (177,534) (179,143) Net Position, end of year $ (94,831) (90,984) (94,586) $ (90,754) Net Position The District s combined net position totaled a deficit of $90.8 million on June 30, 2016, an improvement of $3.8 million from the beginning deficit of $94.6 million. The governmental activities ended the year with an improvement of $3.8 million. The business-type activity ended the year showing a decrease of $15 thousand. An increase in the base student cost, changes in the State s funding formula, the increased assessed values, and the operating millage increase discussed above resulting in increased state revenues and property tax revenues had the most significant impact on the District during fiscal year Total assets increased $47.4 million primarily due to a $76.2 million increase in net capital assets due to the additions discussed above partially offset by a $29.4 million decrease in cash and cash equivalents, investments, and cash and investments held by the County Treasurer as cash was used to fund capital projects. Net capital assets increased approximately $76.2 million This is mainly due to current year additions of $85.2 million exceeding current year depreciation expense of $8.1 million and net disposals of $0.9 million as discussed above. Total deferred outflows of resources increased $107 thousand due to changes in the deferred pension charges related to the School District s participation in the State s pension plans. 10

17 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE (CONTINUED) Net Position (Continued) Total liabilities increased $57.6 million primarily due to a $35.7 million increase in long-term obligations and a $16.9 million increase in the net pension liability. The increase in long-term obligations is primarily due to the District issuing $39.9 million in General Obligation Bonds and $1.8 million in capital leases during the year partially offset by principal payments on long-term obligations as discussed above. The increase in the net pension liability is due to changes in the overall net pension liability of the State. Total deferred inflows of resources decreased $13.9 million due to changes in the actuarial valuation results related to the School District s participation in the State s pension plans. The changes in net position for fiscal year 2016 compared to 2015 are shown in Figure A-3. Figure A-3: Changes in Net Position from Operating Results (rounded thousands) Governmental Activities Business-Type Activities Total School District Revenues Program Revenues Charges for Services $ 3,393 2,861 2,930 2,996 6,323 $ 5,857 Operating Grants and Contributions 117, , , ,434 Capital Grants and Contributions - 1, ,387 General revenues Property Taxes 66,243 69, ,243 69,939 Impact Fees 2,366 2, ,366 2,056 State Revenue in Lieu of Taxes 32,731 33, ,731 33,531 Unrestricted Investment Earnings Other Total revenues 223, ,921 2,930 3, , ,942 Expenses Instruction 118, , , ,523 Support Services 90,288 91, ,288 91,752 Community Services Intergovernmental Interest and Other Charges 12,200 12, ,200 12,656 Extended Day Program - - 2,680 3,036 2,680 3,036 Total expenses 221, ,074 2,680 3, , ,110 Changes in net position 2,165 3, (15) 2,415 3,832 Net Position, Beginning of Year 98,271 (94,831) 1, ,314 (94,586) Cumulative Change in Accounting Principle (195,267) - (1,048) - (196,315) - Net Position, Beginning of Year, Restated (96,996) (94,831) (5) 245 (97,001) (94,586) Net Position, End of Year $ (94,831) (90,984) (94,586) $ (90,754) 11

18 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE (CONTINUED) Changes in Net Position Revenues. Property taxes and operating grants and contributions account for most of the District s revenue, with property taxes contributing 29% and operating grants contributing 52% for every dollar raised (see Table A-4). The remaining 19% of revenues comes from fees charged for services, impact fees, state revenue in lieu of taxes, interest on investments and other miscellaneous sources. Total revenues increased $11.5 million in fiscal year Table A-4: Sources of Revenues for FY 2016 Property Taxes 29% State Revenue in Lieu of Taxes 14% Charges for Services 3% All Other 2% Operating Grants and Contributions 52% Expenses. Instruction expenses include a) salaries for teachers, teaching assistants and substitutes, b) pupil-use technology and software and c) classroom materials and supplies. Instruction expenses accounted for 54% of total District expenses. Salaries and fringe benefits of instructional staff constitute the largest cost area, 75% of the District s total expenses. Support services include support services, operations and school leadership. These categories include a) guidance and counseling, b) library and media, c) student health and psychological services, d) curriculum and staff development, e) pupil transportation, f) school security, g) building upkeep, utilities and maintenance, h) technology support, and i) business operations and administration. Support services accounted for 39% of total District expenses. Total expenses (Table A-5) for all programs and services increased by $10.1 million. The major changes include increases of $7.8 million and $1.5 million in instruction and support services expenses, respectively. The increases in instruction and support services expenses are due to an $8.8 million increase in salaries and a $4.3 million increase in related benefits due to a 2% cost of living adjustment and a step provided to all staff during fiscal year

19 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE (CONTINUED) Changes in Net Position (Continued) Table A-5: Expenses for Fiscal Year 2016 Extended Day Program 1% Interest and Other Charges 6% All Others 0% Support Services 39% Instruction 54% GOVERNMENTAL ACTIVITIES Figure A-6 presents the cost of the District s governmental activities. The table also shows each activity s net cost (total cost less fees generated by activities and operating grants and contributions provided for specific programs). The net cost is the cost of the activities that were funded by general revenues, i.e., property taxes and federal and state formula aid. Figure A-6: Net Cost of Governmental Activities (rounded thousands) Percent Percent Total Cost of Services Change Net Profit (Cost) of Services Change Instruction $ 118, , % (10,270) $ (11,720) 14.12% Support services 90,288 91, % (77,565) (77,898) 0.43% Community services % (23) (10) % Intergovernmental % (87) (133) 52.87% Interest and other charges 12,200 12, % (12,200) (12,656) 3.74% Total governmental activities $ 221, , % (100,145) $ (102,417) 2.27% 13

20 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 GOVERNMENTAL ACTIVITIES (CONTINUED) The expenses of all governmental activities were $231.1 million, an increase of $9.7 million. Net cost of governmental activities was $102.4 million, an increase $2.3 million. Operating grants and contributions subsidized 53.8% of governmental activities. General revenues provided $106.3 million towards the cost of governmental activities, an increase of $4.0 million from BUSINESS-TYPE ACTIVITIES The District s business-type activities are its extended day program for the District s students. Fees charged for services support these operations. Extended day program expenses exceeded revenues by $15 thousand. Charges for services showed an increase of $66 thousand or 2.3% primarily due to increased attendance at the after school programs. Extended day program expenses showed an increase of $356 thousand or 13.3% primarily due the increased demands of the program related to increased attendance as well as the schools spending some of their profits from previous years on school-related activities and supplies. FINANCIAL ANALYSIS OF THE DISTRICT S FUNDS On June 30, 2016 the District s governmental funds reported a combined fund balance of $143.7 million, a decrease of $33.7 million. Major changes were as follows: Fund balance for the General Fund increased $1.5 million as a result of revenues and other financing sources of $177.2 million exceeding expenditures and other financing uses of $175.6 million. General Fund revenues increased $9.3 million mainly due to a $6.7 million increase in state revenues as a result of the increase in base student cost and re-allocations of other state programs to the Education Finance Act ( EFA ) funding as well as a $2.6 million increase in property taxes due to an increase in millage and assessed values. General Fund other financing sources decreased $3.1 million due to a reduction in flexibility transfers as revenues came in higher than initially anticipated. General Fund expenditures increased $7.1 million due to an $8.5 million increase in salaries and a $4.1 million increase in benefits as a result of a 2% cost of living adjustment and step provided to all employees as well as the District taking over the transportation operations. These increases were offset by a decrease in purchased services related to the District terminating the contract for transportation services bringing those operations in-house. General Fund other financing uses decreased $218 thousand. The Special Revenue Fund reports an ending fund balance deficit of $33 thousand, a decrease of $205 thousand from the prior year surplus of $173 thousand, as expenditures and other financing uses of $18.2 million exceeded revenues and other financing sources of $18.0 million. Revenues for the Special Revenue fund increased $2.5 million primarily due to a $1.9 million increase in federal revenues and a $649 thousand increase in local revenues. Federal revenues increased due to the District receiving $1.1 million in FEMA reimbursements related to flood damage from the October 2015 storms as well as the various increases in other federal programs. The increase in local revenues is due to the District receiving $250 thousand in insurance proceeds related to flood damage from the October 2015 storms as well as several large grants passed through to the District from the Educational Foundation. Special Revenue Fund expenditures increased $3.8 million primarily due to the funding increases discussed above. Other financing sources increased $363 thousand due to the Capital Projects District Fund transferring $366 thousand to the Special Revenue Fund as the local match for the FEMA grants. Other financing uses decreased $767 thousand due to a program being funded through EFA funds instead of lottery funds in The Special Revenue EIA Fund reports no ending fund balance as revenues and other financing sources of $10.9 million were equal to expenditures and other financing uses of $10.9 million. Revenues for the Special Revenue fund decreased $930 thousand, expenditures decreased $479 thousand, and transfers out decreased $591 thousand primarily due to the shifting of program funds to EFA funding as noted above. 14

21 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 FINANCIAL ANALYSIS OF THE DISTRICT S FUNDS (CONTINUED) Fund balance for the Special Revenue Food Service Fund decreased $2.0 million as a result of expenditures and other financing uses of $12.4 million exceeding revenues and other financing sources of $10.4 million. Food Service fund revenues decreased $432 thousand as a result of a $512 decrease in local revenue, which is the result of school being out six days for inclement weather during the year and a slight decrease in participation. Expenditures increased $973 thousand as a result of a $717 thousand as a result of a $148 thousand increase in salaries, a $90 thousand increase in fringe benefits, a $270k increase in commodity distribution charges, and the purchase of equipment for kiosks at all three high schools. Fund balance for the Special Revenue Educational Foundation Fund decreased $39 thousand as expenditures of $307 thousand exceeded revenues of $267 thousand. Revenues increased $144 thousand and expenditures increased $249 thousand due to several large local grants received by the Educational Foundation and passed through to the District. The Educational Foundation completes an IRS form 990 annually, which can be obtained through various other sources and will provide more detail on the operations of the Educational Foundation. Fund balance for the Debt Service District Fund decreased $256 thousand as a result of expenditures and other financing uses of $26.9 million exceeding revenues and other financing sources of $26.6 million. Debt Service District fund revenues increased $1.0 million primarily due to an $883 thousand increase in property taxes as a result of an increase in assessed values. Expenditures increased $526 thousand due to a $521 thousand increase in interest and fiscal charges due to scheduled increases in interest payments on new debt. Other financing uses increased $715 thousand primarily due to an increase in transfers out as a result of the increased short-term debt issuances in fiscal year Fund balance for the Debt Service GROWTH Fund decreased $204 thousand as a result of expenditures of $8.5 million exceeding revenues and other financing sources of $8.3 million. Revenues for the Debt Service GROWTH Fund decreased $19 thousand due to a decrease in investment earnings as the reserve funds continue to decrease. Expenditures increased $1.0 million primarily due to changes in scheduled principal and interest payments. Other financing sources decreased $44.4 million primarily due to the issuance of $41.9 million in April 2015 GROWTH Installment Purchase Refunding Revenue Bonds and the receipt of a $4.1 million premium on the issuance partially offset by a $1.6 million increase in transfers in from short-term debt issued in the Debt Service District Fund to pay the principal and interest payments on the GROWTH debt. Other financing uses decreased $50.6 million due to the $50.6 million payment to the refunding debt escrow agent in order to refund $46.4 million of the outstanding 2006 GROWTH Installment Purchase Revenue Bonds in April Fund balance for the Capital Projects District fund decreased $32.6 million as a result of expenditures of $85.5 million exceeding revenues and other financing sources of $52.9 million. Revenues for the Capital Projects District fund decreased $431 thousand primarily due to a $310 thousand decrease in impact fees as well as a $115 thousand decrease in investment earnings. Other financing sources increased $40.8 million due to the District issuing $39.9 million in general obligation bonds, receiving a premium of $1.7 million and issuing $1.8 million in a capital lease partially offset by a $2.6 million decrease in transfers in as the GROWTH projects came to an end in The fund financial statements for the Extended Day Fund are presented on the same measurement focus and accounting basis as the government-wide statements and changes have been discussed previously. The District has always maintained a lower-than-average (state-wide) per pupil cost for its operating expenditures yet has not sacrificed the quality of its instructional programs. Figure A-7 represents the per pupil expenditures for all governmental funds based on the Student Enrollment for fiscal year

22 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 FINANCIAL ANALYSIS OF THE DISTRICT S FUNDS (CONTINUED) Figure A-7 Per Pupil Expenditures for Governmental Funds (total expenditures in rounded thousands) Total Expenditures Daily Expenditures Per Pupil Per Pupil * Instruction $ 124,155 4, $ Support services 82,024 3, Community services Intergovernmental Sub-total operating expenditures 206,322 8, Debt service 20, Capital outlay 85,384 3, Total governmental funds $ 312,060 12, $ * Based on 180 days of instruction per year. General Fund Budgetary Highlights The District amended its General Fund budget once during the fiscal year. The amendment reflected revisions in state and local funding and reclassifications in expenditures that had occurred up to the time of the amendment. Actual revenues were greater than budgeted at year-end by $2.3 million primarily due to tax revenues exceeding budget by $1.7 million and state revenues exceeding budget by $520 thousand. Tax revenues exceeded budget primarily due to conservative budgeting information provided by Dorchester County. Actual expenditures were less than budgeted at year-end by $852 thousand primarily due to instruction expenditures coming in $1.1 million under budget offset by support services expenditures exceeding budget by $236 thousand. Other financing sources were $1.6 million less than budgeted primarily due to decreased transfers in as property tax revenues came in higher than expected. Other financing uses were $106 thousand less than budgeted. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets As of June 30, 2016 the District had invested a net amount of $326.2 million in capital assets for its governmental activities and no capital assets in its business-type activities. These assets include land, construction in progress, school buildings and improvements, improvements other than buildings, modular classrooms, and equipment. The District maintains approximately 3 million building square feet. Total depreciation expense for the year was $8.1 million in governmental activities. Figure A-8 presents capital asset balances, net of depreciation for the years ended June 30, 2016 and

23 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 CAPITAL ASSETS AND DEBT ADMINISTRATION (CONTINUED) Figure A-8 Capital Assets (Net of Depreciation, rounded thousands) Governmental Activities Total School District Percent Change Land $ 13,080 13,080 13,080 $ 13,080 0% Construction in progress 37, ,121 37, , % Buildings & Improvements 193, , , ,586 3% Improvements Other than Buildings 1,540 2,277 1,540 2,277 48% Modular Classrooms 1, , % Equipment 2,722 6,218 2,722 6, % Total $ 249, , ,955 $ 326,196 31% More detailed information about the School District's capital assets can be found in Note III to the financial statements. Long-Term Debt At year-end the District has $200.8 million in long-term general obligation bonds, special obligation bonds, and capital leases an increase of 23% from last year as shown in Figure A-9. GROWTH, a blended component unit, has $133.6 million in installment purchase revenue bonds outstanding, a decrease of 2% from last year. Figure A-9 Outstanding Long-Term Debt for Total School District (rounded thousands) Percentage Long-Term Debt Change District: General obligation bonds $ 156,965 $ 194,690 24% Special obligation bonds 2,435 1,865-23% Capital lease obligations 3,648 4,245 16% Total District $ 163,048 $ 200,800 23% GROWTH Installment purchase revenue bonds $ 136,210 $ 133,615-2% Total GROWTH $ 136,210 $ 133,615-2% 17

24 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 CAPITAL ASSETS AND DEBT ADMINISTRATION (CONTINUED) Long-Term Debt (Continued) The District retired $2.2 million in long-term debt through principal payments on General Obligation Bonds, $570 thousand in principal payments on Special Obligation Bonds, $2.6 million through principal payments on GROWTH s Installment Purchase Revenue Bonds, and $1.2 million in principal payments on capitalized leases. The District borrowed $39.9 million in General Obligation Bonds, which were approved via a voter referendum, to complete the referendum approved construction projects. The District also borrowed $1.8 million in capital leases to finance the purchase of 20 school buses. In addition, the District borrowed $17.3 million in short-term General Obligation Bonds during year that were fully repaid with the exception of $5.8 million related to the May 2016 short-term General Obligation Bonds, which will be repaid in March More detailed information about the School District's debt and other long-term obligations is presented in Note III to the financial statements. ECONOMIC FACTORS BEARING ON THE DISTRICT S FUTURE At the time these financial statements were prepared, the School District was aware of existing circumstances that could significantly affect its financial health in the future: The District is currently involved in litigation with the Home Builders Association of SC and the Charleston-Trident Home Builders Association, Inc. regarding the legality of the District s resolution imposing an impact fee of $2,500 per new residential dwelling unit within the District. On March 11, 2011, the Circuit Court issued a ruling in favor of the School District; however, the Home Builders Association appealed the ruling. The September 11, 2013 Opinion from the Supreme Court of South Carolina reversed a lower court order finding the Act of the General Assembly authorizing the imposition of the fee constitutional and requires that the matter be considered again by the Circuit Court. The outcome of the litigation cannot be predicted with certainty. The District is currently recording the impact fee revenues in the Capital Projects District Fund and has accumulated $13,292,803 in impact fees since the resolution was passed. The district has chosen not to obligate or spend any of the impact fees until the final outcome of the litigation is resolved. The voters of Dorchester County passed a bond referendum in November 2012 authorizing the School District to issue up to $179,910,000 for the construction of three new elementary schools and one new middle school of the arts as well as perform various renovations and other necessary improvements. In addition, the voters authorized the School District to issue up to $7,500,000 in general obligation bonds for the construction of an aquatic center. All three of the elementary schools have been completed and were opened for the beginning of school in August Rollings Middle School of the Arts is still under construction and is to be completed for the beginning of school in August 2017, with the auditorium to be completed in December The six remaining school projects are to be completed by June The District has entered into an agreement with the City of North Charleston to construct the aquatic center. Hurricane Matthew threatened the coast of South Carolina during the first week of October 2016 causing the Governor to close coastal schools, including Dorchester Two, for three days, with the District closing an additional two days for recovery as electricity was restored. Damages are still being evaluated but early estimates indicate minimum damage. The loss of revenues from the cafeteria closures may be comparable to last year s flooding closure in October The flooding damage to Givhans Alternative Program school in October 2015 will have an estimated net effect on the District during the 2016/2017 year of approximately $500,000. Total project damages have been estimated at $3,000,000 with an approximate insurance reimbursement of $1,000,000, and federal and state FEMA reimbursements of $1,500,

25 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2016 CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT This financial report is designed to provide the District s citizens, 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 Finance Department, Dorchester School District Two; 102 Green Wave Boulevard, Summerville, South Carolina (Telephone: ). 19

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42 Governmental activities business-type activities Direct expenses Program revenues general revenues economic resources measurement focusaccrual basis of accounting, current financial resources measurement focus modified accrual basis of accounting. available 36

43 Governmental fund types General Fund, a major fund Special Revenue Funds 37

44 Debt Service Fund - District, a major fund Debt Service Fund - GROWTH, a major fund Capital Projects Fund - District, a major fund Proprietary Fund types Enterprise Fund - Extended Day Programs, a major fund Fiduciary Fund types The Agency Fund 38

45 1. Cash, Cash Equivalents, and Investments Cash and Cash Equivalents Investments 39

46 1. Cash, Cash Equivalents, and Investments (Continued) Investments (Continued) 2. Interfund Receivables and Payables 40

47 3. Inventories 4. Capital Assets 41

48 5. Compensated Absences Accounting for Compensated Absences. 6. Accrued Liabilities and Long-Term Obligations 7. Fund Balance 42

49 7. Fund Balance (Continued) 43

50 Deferred Outflows and Inflows of Resources deferred outflows of resources advance refunding charges Advance refunding charges advanced refunding charges deferred pension charges deferred pension charges deferred inflows of resources, unavailable revenue property taxes deferred pension credits deferred pension credits 9. Net Position 44

51 10. Pensions 11. Other Postemployment Benefits 12. Fair Value 45

52 12. Fair Value (Continued) 13. Accounting Estimates 14. Comparative Data Budgetary Practices 46

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69 Actuarial Assumptions and Methods 63

70 Long-term Expected Rate of Return 64

71 Pension Liabilities, Pension Expense, and Deferred Outflows/Inflows of Resources Related to Pensions 65

72 Pension Liabilities, Pension Expense, and Deferred Outflows/Inflows of Resources Related to Pensions (Continued) 66

73 Discount Rate Plans Fiduciary Net Position Payable to Plans 67

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126 DORCHESTER COUNTY SCHOOL DISTRICT TWO SUMMERVILLE, SOUTH CAROLINA NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JUNE 30, 2016 A General The accompanying Schedule of Expenditures of Federal Awards (the Schedule ) presents the activity of all federal award programs of Dorchester County School District Two, South Carolina (the School District ) for the year ended June 30, All federal awards received directly from the federal agencies, as well as those passed through other government agencies, are included on the Schedule. B Basis of Accounting The accompanying Schedule is presented using the modified accrual basis of accounting, which is described in the notes to the School District s financial statements. C Relationship to Financial Statements Federal award expenditures are reported in the School District s financial statements as expenditures in the General Fund, Special Revenue Fund, and Special Revenue Food Service Fund. D Relationship to Federal Financial Reports Amounts reported in the accompanying Schedule agree with the amounts reported in the related federal financial reports except for timing differences relating to expenditures made subsequent to the filing of the federal financial reports. E Indirect Costs The School District elected not to use the de minimis indirect cost rate of 10%. 120

127 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 The Board of Trustees Dorchester County School District Two Summerville, South Carolina INDEPENDENT AUDITOR S REPORT We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of Dorchester County School District Two, South Carolina (the School District ) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the School District s basic financial statements, and have issued our report thereon dated October 19, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the School District's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the School District s internal control. Accordingly, we do not express an opinion on the effectiveness of the School District s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the School District s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Greenville Mauldin Mount Pleasant (864) (864) (843)