FINAL OFFICIAL STATEMENT DATED JANUARY 21, NEW ISSUE Standard & Poor s: A+

Transcription

1 FINAL OFFICIAL STATEMENT DATED JANUARY 21, 21 NEW ISSUE Standard & Poor s: A+ In the opinion of Miller, Canfield, Paddock and Stone, P.L.C. ( Bond Counsel ) under existing law, as presently interpreted (1) the interest on the Bonds is not excluded from gross income for federal income tax purposes, and (2) Bond Counsel will express no opinion regarding the tax treatment of the interest on the Bonds under the laws of the State of Michigan. See TAX MATTERS herein and Appendix D FORM OF APPROVING OPINION. $4,55, CITY OF SAULT STE. MARIE County of Chippewa, State of Michigan LIMITED TAX GENERAL OBLIGATION BONDS, SERIES 21 (Federally Taxable Build America Bonds Direct Payment) CERTAIN BOND DETAILS Dated... Date of Delivery Principal... Due October 1, Serially Denominations... $5, or Multiples Thereof Registration... Fully Registered, Book-Entry Only Interest... Payable April 1, 21 and Semiannually Thereafter MATURITIES, INTEREST RATES AND YIELDS Due October Principal Amount $155, 16, 165, 165, 175, 18, Interest Rate 1.5% Priced To Yield 1.5% Cusip Number 84413PV PW PX PY PZ QA3 Due October Principal Amount $185, 2, 21, 22, 23, Interest Rate 4.75% Priced to Yield 4.75% Cusip Number 84413QB QC QD QE QF2 $51, 5.8% Term Bonds Due October 1, 223 Priced to Yield 5.85%, Cusip 84413QH8 $565, 6.% Term Bonds Due October 1, 225 Priced to Yield 6.%, Cusip 84413QK1 $1,385, 6.45% Term Bonds Due October 1, 229 Priced to Yield 6.45%, Cusip 84413QP Certain of the Bonds are subject to redemption prior to maturity. See THE BONDS Redemption Prior to Maturity herein. The Bonds are issued only as fully registered bonds without coupons and, when issued, will be registered in the name of Cede & Co., as Bondholder and nominee for The Depository Trust Company ( DTC ), New York, New York. DTC will act as securities depository for the Bonds. Purchases of beneficial interests in the Bonds will be made in book-entry only form in the denomination of $5, or any integral multiple thereof. Purchasers of beneficial interests in the Bonds (the Beneficial Owners ) will not receive certificates representing their beneficial interest in the Bonds purchased. So long as Cede & Co. is the Bondholder, as nominee of DTC, references herein to the Bondholders or registered owners shall mean Cede & Co., as aforesaid, and shall not mean the Beneficial Owners of the Bonds. See THE BONDS-Book-Entry Only System herein. The City of Sault Ste. Marie (the City ) intends to designate the Bonds as Build America Bonds under Section 54AA of the Internal Revenue Code of 1986, as amended (the Code ) and to elect under Code Section 54AA(g) to receive credits from the United States Treasury equal to 35% of the stated interest paid on the Bonds as provided in Code Section However, the City has not covenanted to comply with the requirements of Section 54AA(g) to assure eligibility of the City for receipt of the direct pay interest credit. So long as the City is in compliance with Section 54AA(g), such credits are expected to be paid to the City within 45 days of receipt by the IRS of IRS Form 838-CP with respect to each interest payment date identifying the amount of interest to be paid. Each such Form may not be filed more than 9 nor less than 45 days prior to the relevant interest payment date. In the Resolution (as hereinafter defined), the City has covenanted to deposit all such credits received by the City, if any, into the Debt Retirement Account. This cover page contains certain information for quick reference only. It is not a summary of this issue of Bonds. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Bonds will be offered when, as and if issued by the City and accepted by the Underwriters, identified below, subject to the approving legal opinion of Miller, Canfield, Paddock and Stone, P.L.C., attorneys of Detroit, Michigan. It is expected that the Bonds will be available for delivery in definitive form through the facilities of DTC on or about February 3, 21. Underwriters: ROBERT W. BAIRD & CO. MESIROW FINANCIAL, INC. Selling Group Member: LEONARD CAPITAL MARKETS A Division of Leonard & Company

2 Certain information contained in this Official Statement has been obtained by the City from DTC and other sources that are deemed to be reliable. No representation or warranty is made, however, as to the accuracy or completeness of such information by the City or the Underwriters. Nothing contained in this Official Statement is or shall be relied on as a promise or representation by the Underwriters. This Official Statement is being used in connection with the sale of securities as referred to herein and may not be used, in whole or in part, for any other purpose. The delivery of this Official Statement at any time does not imply that information in it is correct as of any time subsequent to its date. No dealer, broker, salesman, or other person has been authorized by the City or by the Underwriters to give any information or to make any representations other than those contained herein, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy, nor shall there be any sale of the Bonds, by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any other sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City. In connection with the offering of the Bonds, the purchaser may overallot or effect transactions that stabilize or maintain the market price of the Bonds at a level above the level that might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time without notice. The prices and other terms respecting the offering and sale of the Bonds may be changed from time to time by the purchaser after the Bonds are released for sale, and the Bonds may be offered and sold at prices other than the initial offering prices, including sales to dealers who may sell the Bonds into investment accounts. The Bonds have not been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon exemptions contained in such Act. The registration or qualification of the Bonds in accordance with the applicable provisions of securities laws of the states in which the Bonds have been registered or qualified and the exemption from registration or qualification in other state cannot be regarded as a recommendation thereof. In making an investment decision, investors must rely on their own examination of the City s financial records and the terms of the offering, including the merits and risks involved. These securities have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense.

3 TABLE OF CONTENTS Page CITY OF SAULT STE. MARIE OFFICIALS... ii PROFESSIONAL SERVICES... ii INTRODUCTION... 1 THE FINANCING... 1 Description of the Financing... 1 Estimated Sources and Uses of Funds... 1 THE BONDS... 2 Authorization and Security... 2 Optional Redemption Prior to Maturity... 2 Extraordinary Redemption... 2 Mandatory Redemption of Term Bonds... 3 Notice and Manner of Redemption... 3 Registration, Payment and Transfer... 3 Book-Entry Only System... 4 Transfer Outside Book-Entry Only System... 6 CITY OF SAULT STE. MARIE... 6 Introduction... 6 Form of Government... 6 Population... 6 CITY TAXATION AND LIMITATIONS... 6 Property Assessments... 6 Property Valuations... 7 Recent Developments... 1 Property Tax Proposals... 1 Tax Abatement... 1 Property Taxes State Limitations on Property Taxes Property Tax Rates Property Tax Collections Profile of the Ten Largest Taxpayers REVENUES FROM THE STATE OF MICHIGAN CITY DEBT Statutory and Constitutional Debt Provisions Legal Debt Margin Debt Statement Schedule of Bond Maturities... 2 Debt History Short Term Borrowing Future Financing Vacation and Sick Leave Liabilities Other Post-Employment Benefits Pension Plan LABOR CONTRACTS ABSENCE OF CERTAIN LITIGATION BOND RATING BOND COUNSEL S RESPONSIBILITY MUNICIPAL FINANCE QUALIFYING STATEMENT TAX MATTERS Circular LEGAL MATTERS UNDERWRITING CONTINUING DISCLOSURE UNDERTAKING OTHER MATTERS ECONOMIC PROFILE... APPENDIX A GENERAL PURPOSE FINANCIAL STATEMENTS AND RELATED NOTES... APPENDIX B SELECTED GENERAL FUND FINANCIAL INFORMATION... APPENDIX C FORM OF APPROVING OPINION... APPENDIX D CONTINUING DISCLOSURE UNDERTAKING... APPENDIX E (i)

4 CITY OF SAULT STE. MARIE OFFICIALS City Commission Mayor Anthony G. Bosbous Raymond A. Bauer Donald L. Gerrie, Jr. William Munsell Marilyn J. Burton William E. Lynn Jeffery H. Stefanski City Administration City Manager Spencer R. Nebel City Clerk Robin R. Troyer Finance Director John Boger City Engineer David Strickland City of Sault Ste. Marie 325 Court Street Sault Ste. Marie, Michigan Phone: (96) Fax: (96) PROFESSIONAL SERVICES Auditor: Bond Counsel: Pricing Advisor: Transfer Agent : Anderson, Tackman & Company, PLC, Kinross, Michigan Miller, Canfield, Paddock and Stone, P.L.C., Detroit, Michigan Bendzinski & Co., Municipal Finance Advisors, Detroit, Michigan The Bank of New York Mellon Trust Company, N.A., Detroit, Michigan (ii)

5 OFFICIAL STATEMENT of the CITY OF SAULT STE. MARIE County of Chippewa, State of Michigan Relating to its $4,55, LIMITED TAX GENERAL OBLIGATION BONDS, SERIES 21 (Federally Taxable Build America Bonds Direct Payment) INTRODUCTION This Official Statement, including the cover page hereof and the appendices hereto, is provided by the City for the purpose of setting forth information to all who may become registered owners of the Bonds. Description of the Financing THE FINANCING The Bonds are being issued for the purpose of (i) acquiring, constructing, furnishing, equipping and designing certain capital improvements, including the renovation of a new City Hall and water, storm, sanitary sewer, road and related improvements (the Project ) and (ii) paying the expenses relating to the issuance of the Bonds (together with the Project, the Financing ). Estimated Sources and Uses of Funds The sources and uses of funds with respect to the Financing are estimated as follows: Estimated Sources of Funds Par Value of the Bonds... $ 4,55,. Additional Planned Equity Contribution... 19,. Total... $ 4,524,. Estimated Uses of Funds Deposit to the Project Fund... $ 4,414,. Original Issue Discount... 3,425.8 Costs of Issuance (1)... 16,574.2 Total... $ 4,524,. (1) Includes legal, underwriting, rating, printing and other miscellaneous costs of issuance. Source: City of Sault Ste. Marie 1

6 THE BONDS Authorization and Security The Bonds are being issued pursuant to the provisions of Act 34, Public Acts of Michigan, 21, as amended ( Act 34 ), and a bond authorizing resolution to be adopted by the City Commission on January 18, 21 (the Resolution ). The City has pledged its limited tax, full faith and credit as security for the payment of the principal of and interest on the Bonds. The City is obligated to make such payments as a first budget obligation from its general funds, including any collections of ad valorem taxes it may be authorized to levy. The ability of the City to levy such taxes is subject to applicable constitutional, statutory and charter tax rate limitations. See CITY TAXATION AND LIMATATIONS herein. The rights or remedies of Bondholders may be affected by bankruptcy, insolvency, fraudulent conveyance or other laws affecting creditors' rights generally now existing or hereafter enacted and by the application of general principles of equity including those relating to equitable subordination. The City intends to designate the Bonds as Build America Bonds under Section 54AA of the Internal Revenue Code of 1986, as amended (the Code ) and to elect under Code Section 54AA(g) to receive credits from the United States Treasury equal to 35% of the stated interest paid on the Bonds as provided in Code Section However, the City has not covenanted to comply with the requirements of Section 54AA(g) to assure eligibility of the City for receipt of the direct pay interest credit. So long as the City is in compliance with Section 54AA(g), such credits are expected to be paid to the City within 45 days of receipt by the IRS of IRS Form 838-CP with respect to each interest payment date identifying the amount of interest to be paid. Each such Form may not be filed more than 9 nor less than 45 days prior to the relevant interest payment date. In the Resolution, the City has covenanted to deposit all such credits received by the City, if any, into the Debt Retirement Account. Receipt of the Refundable Credit described above is expected by the City, but cannot be assured. The failure to properly and timely file any IRS Form 838-CP could reduce the amount of Refundable Credit paid to the City. In addition, the Refundable Credit described above is payable under current law. There can be no assurance that future changes in the law would not reduce or eliminate such Refundable Credit with respect to the Bonds. However, the security pledged for the payment of the Bonds, as described above, is in no way abated or offset by the anticipated receipt of the Refundable Credit described above, but rather, continues to secure the Bonds whether the anticipated credits are received or not. Redemption Prior to Maturity The Bonds maturing in the years 211 to 219, inclusive, shall not be subject to optional redemption prior to maturity. The Bonds, or portions of Bonds in multiples of $5, maturing in the years 22 to 229, inclusive, shall be subject to redemption at the option of the City in such order of maturity as the City shall determine and within a single maturity by lot on any date on or after April 1, 22 at par plus accrued interest to the date fixed for redemption. Extraordinary Redemption If for any reason (other than because of an action taken by or inaction by the City) the City is held by the Internal Revenue Service to be ineligible to receive all or part of the Refundable Credit or if the United States Department of Treasury or any agency of the United States of America at any time cease to remit to the City all or any part of the Refundable Credit payable in accordance with Section 54AA of the Code, the City has the right at its option to redeem and retire all or any part of the principal amount of the Bonds then outstanding in multiples of $5, within a single maturity in such order of maturity as the City shall determine and within a single maturity by lot on any date at par plus accrued interest but without premium. 2

7 Mandatory Redemption of Term Bonds The Bonds maturing October 1, 223, October 1, 225 and October 1, 229 (the Term Bonds ) are subject to mandatory redemption by the City at par plus accrued interest to the date of redemption on the dates in the principal amount set forth in the following tables. The Term Bonds to be mandatorily redeemed shall be selected by lot in such manner as shall be determined by the Bond Registrar/Paying Agent. Term Bonds Due Term Bonds Due October 1, 223 October 1, 225 Redemption Redemption October 1 Amount October 1 Amount 222 $25, 224 $275, 223 $26, (maturity) 225 $29, (maturity) Redemption October 1 Term Bonds Due October 1, 229 Amount 226 $315, 227 $335, 228 $355, 229 $38, (maturity) Notice and Manner of Redemption Notice of redemption for any Bond shall be given at least thirty (3) days prior to the date fixed for redemption by mail to the registered holder thereof at the address shown on the registration books of the City maintained by The Bank of New York Mellon Trust Company, N.A., Detroit, Michigan (the Transfer Agent ). The Bonds shall be called for redemption in multiples of $5,. The Bonds in denominations of more than $5, shall be treated as representing the number of Bonds obtained by dividing the denomination of the Bond by $5, within a maturity. The Bonds may be redeemed in part. In the event of redemption of the Bonds in part, upon surrender of the Bond to be redeemed a new Bond or Bonds in aggregate principal amount equal to the unredeemed portion of the Bond surrendered shall be issued to the registered owner thereof. No further interest payment on the Bonds or portions of the Bonds called for redemption shall accrue after the date fixed for redemption, whether presented for redemption or not, provided the City has funds on hand with the Transfer Agent to redeem the same. Registration, Payment and Transfer The Bonds are issuable only as fully registered Bonds without coupons, and when issued, will be registered in the name of Cede & Co., as nominee for DTC. New York, New York. DTC will act as securities depository for the Bonds. Purchases of beneficial interests in the Bonds will be made in book-entry-only form, in the denomination of $5, or any integral multiple thereof. Purchasers will not receive certificates representing their beneficial interests in Bonds purchased. So long as Cede & Co. is the Bondholder, as nominee for DTC, references herein to the Bondholders or registered owners shall mean Cede & Co., as aforesaid, and shall not mean the Beneficial Owners (as hereinafter defined) of the Bonds. See THE BONDS Book-Entry Only System herein. The Bonds will be issued in the original aggregate principal amount as shown on the cover of this Official Statement. The Bonds will be dated as of their date of delivery and will bear interest from that date. Interest on the Bonds shall be payable semiannually on April 1 and October 1 of each year commencing on April 1, 21. Interest on the Bonds shall be computed using a 36-day year and twelve 3-day months. The Bonds will mature on the dates and in the principal amounts and will bear interest at the rates as set forth on the cover of this Official Statement. The Bonds will be registered Bonds in the denomination of $5, or multiples thereof not exceeding for each maturity the principal amount of such maturity. The principal and interest shall be payable at the designated corporate trust office of the Transfer Agent or such other transfer agent as the City may hereafter designate by notice mailed to the Bondholders. So long as DTC or its nominee, Cede & Co., is the Bondholder, such payments will be made directly to DTC. Disbursement 3

8 of such payments to the Beneficial Owners is the responsibility of DTC Participants and Indirect Participants (both as hereinafter defined), as more fully described below. Interest shall be paid when due by check or draft mailed to the registered owners of Bonds as shown on the registration books as of the fifteenth day of the calendar month preceding the payment date for each interest payment. Book-Entry Only System The information in this section has been furnished by DTC. No representation is made by the City, Bond Counsel, the Transfer Agent, or the Underwriters as to the completeness or accuracy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof. No attempt has been made by the City, its Bond Counsel, the Transfer Agent, or the Underwriters to determine whether DTC is or will be financially or otherwise capable of fulfilling its obligations. Neither the City nor the Transfer Agent will have any responsibility or obligation to DTC participants, indirect participants or the persons for which they act as nominees with respect to the Bonds, or for any principal or interest payment thereof. The DTC, New York, NY will act as securities depository for the Bonds. The Bonds will be issued as fullyregistered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments from over 1 countries that DTC s participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC, is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. 4

9 Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions and dividend payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from the City or Transfer Agent, on payable date in accordance with their respective holdings on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as in the case with Bonds held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Transfer Agent or the City, subject to any statutory or regulatory requires as may be in effect from time to time. Payments of redemption proceeds, distributions and divided payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or Transfer Agent, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the City or the Transfer Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered to DTC. The City may decide to discontinue use of the system of book-entry only transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC. The City, Bond Counsel, the Transfer Agent, and the Underwriters cannot and do not give any assurances that DTC, the Direct Participants or the Indirect Participants will distribute to the Beneficial Owners of the Bonds (i) payments of principal of or interest on the Bonds, (ii) any document representing or confirming beneficial ownership interests in the Bonds, or (iii) notices sent to DTC or Cede & Co. its nominee, as the registered owner of the Bonds, or that it will do so on a timely basis or that DTC, Direct Participants or Indirect Participants will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with the Participants are on file with DTC. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. Neither the City, Bond Counsel, the Transfer Agent nor the Underwriters will have any responsibility or obligation to any Direct Participant, Indirect Participant or any Beneficial Owner or any other person with respect to: (a) the Bonds; (b) the accuracy of any records maintained by DTC or any Direct Participant or Indirect Participant; (c) the payment by DTC to any Participant, or by any Direct Participant or Indirect Participant to any Beneficial Owner of any amount due with respect to the principal of or interest on the Bonds; (d) the delivery by DTC to any participant, or by and Direct Participant or Indirect Participant to any Beneficial Owner of any notice which is required or permitted under the terms of the authorizing resolution for each issue to be given to Bondholders; (e) the selection of the Beneficial Owners to receive payment in the event of any partial redemption of the Bonds; or (f) any consent given or other action taken by DTC as Bondholder. 5

10 Transfer Outside Book-Entry Only System In the event the book-entry only system is discontinued, the following provisions would apply to the Bonds. The Transfer Agent will act as transfer agent and bond registrar and shall keep the registration books for the Bonds (the Bond Register ) at its corporate trust office. Subject to the further conditions contained in the Resolution, the Bonds may be transferred or exchanged for one or more Bonds in different authorized denominations upon surrender thereof at the corporate trust office of the Transfer Agent by the registered owners or their duly authorized attorneys; upon surrender of any Bonds to be transferred or exchanged, the Transfer Agent shall record the transfer or exchange in the Bond Register and shall authenticate replacement bonds in authorized denominations; during the 15 days immediately preceding the date of mailing ( Record Date ) of any notice of redemption or any time following the mailing of any notice of redemption, the Transfer Agent shall not be required to effect or register any transfer or exchange of any Bond which has been selected for such redemption, except the Bonds properly surrendered for partial redemption may be exchanged for new Bonds in authorized denominations equal in the aggregate to the unredeemed portion; the City and Transfer Agent shall be entitled to treat the registered owners of the Bonds, as their names appear in the Bond Register as of the appropriate dates, as the owner of such Bonds for all purposes under the Resolution. No transfer or exchange made other than as described above and in the Resolution shall be valid or effective for any purposes under the Resolution. Introduction CITY OF SAULT STE. MARIE The City, the Chippewa County seat, encompasses an area of approximately 18 square miles and has a 2 Census population of 14,483. The City is located in Michigan s upper peninsula approximately 35 miles northwest of Detroit. The City is primarily residential and commercial in nature. Residential and commercial valuations accounted for approximately 55.4% and 35.77%, respectively, of the City s Total Taxable Value, as hereinafter defined, for its fiscal year ending June 3, 21. Form of Government The City was incorporated as a village in In 1879, the City was incorporated as a home rule city under a mayorcouncil form of government. The City remained under the mayor-council form of government until 1919 when the commission-manager form of government was adopted. The City Commission is the legislative and governing body of the City. The City Commission consists of a mayor and six commissioners who are elected at large on a nonpartisan basis. The Mayor is elected for a two-year term of office. At each mayoral election, three commissioners are elected to serve four-year terms of office. The City Manager is the chief administrative officer of the City and is appointed by the City Commission to serve at its pleasure. With the exception of the City Attorney who is also appointed by the City Commission, all administrative officers of the City are appointed by the City Manager. The City Commission generally meets on the first and third Monday of each month. Population 196 U.S. Census... 18, U.S. Census... 14, U.S. Census... 15,136 2 U.S. Census... 14, U.S. Census... 14,448 Current Estimate... 14,87 Source: U.S. Department of Commerce - Bureau of Census Property Assessments CITY TAXATION AND LIMITATIONS Real property is land and the things permanently attached to or part of the land ( Real Property ). Examples of Real Property include land, buildings, crops and mineral rights. Personal property is property consisting of movable articles, both corporeal, such as furniture or jewelry, or incorporeal, such as stocks or bonds ( Personal Property ). As of December 1 of each year, Real and Personal Property is assessed, or valued for taxation, by the City, equalized by Chippewa County (the County ) and further equalized by the State of Michigan (the State ). The value as equalized by the State becomes the state equalized valuation ( State Equalized Valuation or SEV ). See Property Valuations following. 6

11 Article IX, Section 3, of the Michigan Constitution provides that Real and Personal Property assessments will not exceed 5% of true cash value. The Michigan Legislature has provided, by statute, that Real and Personal Property will be assessed at 5% of true cash value. The Michigan Legislature, or the electorate, may change the percentage of true cash value at which Real and Personal Property is assessed. Personal Property assessments also reflect the taxpayer reported cost of the Personal Property and the application of one or more depreciation schedules formulated by the State Tax Commission. The City s assessor determines which depreciation schedule will be used to value the Personal Property. Owners of taxable property may appeal their assessment to the City Assessor, the City s Board of Review and to the State Tax Tribunal. Outstanding appeals are not anticipated to adversely impact the financial condition of the City. Property Valuations On March 15, 1994, the electors of the State approved an amendment to the Michigan Constitution permitting the Legislature to authorize the levy of taxes on a non-uniform basis. The legislation implementing this constitutional amendment added a new measure of property value known as taxable value ( Taxable Value ). Since 1995, property that is taxable has two valuations, SEV and Taxable Value. Michigan statute provides that Real and Personal Property taxes ( Ad Valorem Taxes ) be levied on Taxable Value (the Ad Valorem Tax Roll ). Generally, the Taxable Value of Real or Personal Property is the lesser of (a) the SEV or Taxable Value of the property in the immediately preceding year, adjusted for losses, multiplied by the lesser of the inflation rate, plus additions, or (b) the property s current SEV. Under certain circumstances, the Taxable Value of property may be different from the same property s SEV. When Real or Personal Property is sold or transferred, Taxable Value is adjusted to the SEV, which under existing law is 5% of the true cash value. The Taxable Value of new construction is equal to its SEV. Ad Valorem Taxable Value does not include any value of tax-exempt property (e.g., governmental facilities, churches, public schools, etc.) or property granted tax abatement under Act 198 of the Public Acts of Michigan of 1974, as amended ( Act 198 ). For its fiscal year ending June 3, 21, the equivalent effect of the abatements granted under Act 198 is to understate the City s Taxable Value by $1,888,65 or.66%. Including the Equivalent Taxable Value of these properties, as hereinafter defined, the City s total Taxable Value ( Total Taxable Value ) has increased $3,965,467 or approximately 12.2% between the fiscal years ended or ending June 3, 26 through 21. See the following table and CITY TAXATION AND LIMITATIONS Tax Abatement herein. City of Sault Ste. Marie Total Taxable Value Fiscal Years Ended or Ending June 3, 26 Through 21 Assessed Value as of December Year of State Equalization And Tax Levy City s Fiscal Year Ended or Ending June Ad Valorem Taxable Value $254,452,75 268,798, ,959, ,655,69 Equivalent Taxable Value of Property Granted Tax Abatement Under Act 198 (1) $3,91,7 2,683,4 2,132, 2,214,1 Total Taxable Value $257,544,45 271,482, ,91, ,869,169 Percent Increase Over Prior Year 4.78% ,621,222 1,888,65 288,59, Per Capita Total Taxable Value for the Fiscal Year Ending June 3, 21 (2)... $19,92.59 (1) At the full tax rate. See Tax Abatement herein. (2) Based on the City s 2 Census population of 14,483. Source: City of Sault Ste. Marie 7

12 Including the Equivalent Taxable Value of property granted tax abatement under Act 198, a breakdown of the City s Total Taxable Value by use and class for the fiscal years ended or ending June 3, 26 through 21 is shown below. See Tax Abatement herein. Commercial... Industrial... Residential/Agr.... Utility... Total... City of Sault Ste. Marie Total Taxable Value by Use and Class Fiscal Years Ended or Ending June 3, 26 Through 21 Fiscal Year Ended or Ending June 3 Use $ 96,74,536 $ 12,785,44 $ 14,22,36 $ 1,671,57 17,836,86 17,245,419 17,254,82 19,476, ,868, ,696,61 15,339,21 155,92,71 6,764,1 7,754,8 7,295,3 6,628,5 $ 257,544,45 $ 271,482,269 $ 279,91,177 $ 281,869,169 Real Property... Personal Property... Total... $ 13,192,494 19,634,55 158,793,528 6,889,3 $ 288,59,872 Class $ 233,497,35 $ 246,358,169 $ 254,16,277 $ 257,989,369 24,47,1 25,124,1 24,93,9 23,879,8 $ 257,544,45 $ 271,482,269 $ 279,91,177 $ 281,869,169 Source: City of Sault Ste. Marie City of Sault Ste. Marie Percent of Total Taxable Value by Use and Class Fiscal Years Ended or Ending June 3, 26 Through 21 $ 264,25,122 24,259,75 $ 288,59,872 Fiscal Year Ended or Ending June 3 Use Commercial... Industrial... Residential/Agr... Utility... Total % % 37.86% % 37.34% % 35.72% % 35.77% % Class % 9.75% 91.7% 91.53% % 1.% 1.% 1.% Real Property... Personal Property... Total... Source: City of Sault Ste. Marie 91.59% % Aside from its use in determining Taxable Value for the purpose of levying ad valorem property taxes, SEV is important because of its role in the spreading of taxes between overlapping jurisdictions, the distribution of various State aid programs, State revenue sharing and in the calculation of debt limits. Ad Valorem SEV does not include any value of tax-exempt property (e.g., governmental facilities, churches, public schools, etc.) or property granted tax abatement under Act 198. The effect of the abatements granted under Act 198 is to understate the City s Ad Valorem SEV for its fiscal year ending June 3, 21 by $3,777,3 or 1.22%. Including the SEV of these properties, the City s total SEV ( Total SEV ) has increased $2,993,1 or approximately 7.16% between the fiscal years ended or ending June 3, 26 through 21. See the following table and Tax Abatement herein. 8

13 Assessed Value as of December 31 Year of State Equalization and Tax Levy City of Sault Ste. Marie Total State Equalized Valuation Fiscal Years Ended or Ending June 3, 26 Through 21 City s Fiscal Year Ended or Ending June 3 Ad Valorem SEV SEV of Property Granted Tax Abatement Under Act 198 Percent Increase Over Prior Year Total SEV $286,837,5 $6,183,4 $293,2,9 5.56% ,526,3 5,366,8 38,893, ,254,5 4,264, 313,518, ,535,249 4,428,2 314,963, ,236,7 3,777,3 314,14, (.3) Per Capita Total SEV for the Fiscal Year Ending June 3, 21 (2)... $21, (1) See Tax Abatement herein. (2) Based on the City s 2 Census population of 14,483. Source: City of Sault Ste. Marie Including the value of property granted tax abatement under Act 198, a breakdown of the City s Total SEV by use and class for the fiscal years ended or ending June 3, 26 through 21 is shown below. See Tax Abatement herein. City of Sault Ste. Marie Total SEV by Use and Class Fiscal Years Ended or Ending June 3, 26 Through 21 Fiscal Year Ended or Ending June 3 Use Commercial... $ 13,532,1 $ 11,33,3 $ 11,27,5 $ 18,482,1 $ 19,341, Industrial... 2,948,5 19,943,2 19,395,4 19,765,4 21,523,2 Residential/Agr ,776,2 17,864,8 176,62,3 18,96, ,26,5 Utility... 6,764,1 7,754,8 7,295,3 6,628,5 6,889,3 $ 293,2,9 $ 38,893,1 $ 313,518,5 $ 314,963,449 $ 314,14, Class Real Property... $ 267,626, $ 282,829,5 $ 288,199,6 $ 29,748,949 $ 289,717,7 Personal Property... 25,394,9 26,63,6 25,318,9 24,214,5 24,296,3 $ 293,2,9 $ 38,893,1 $ 313,518,5 $ 314,963,449 $ 314,14, Source: City of Sault Ste. Marie 9

14 City of Sault Ste. Marie Percent of Total SEV by Use and Class Fiscal Years Ended or Ending June 3, 26 Through 21 Fiscal Year Ended or Ending June 3 Use Commercial % 35.72% 35.15% 34.44% 34.82% Industrial Residential/Agr Utility % 1.% 1.% 1.% 1.% Class Real Property % 91.56% 91.92% 92.31% 92.26% Personal Property % 1.% 1.% 1.% 1.% Source: City of Sault Ste. Marie Recent Developments Many municipalities across the United States have experienced a decline in the value of Real and Personal Property valuations since the beginning of 26. The City experienced a slight decrease in its total SEV for the fiscal year ending June 3, 21. If the SEV of a property falls below its Taxable Value, the SEV will become its new Taxable Value. If the City s Total SEV falls below its Total Taxable Value each mill, as hereinafter defined, will produce less property tax receipts than it had in the prior year. The City is aware of the potential consequences of this trend. Property Tax Proposals From time to time the Michigan Legislature considers property tax reform proposals. The ultimate nature, extent and impact of the proposed legislation or other tax and revenue measures, which are from time to time considered, cannot currently be predicted. No assurance can be given that any future legislation or administrative action, if enacted or implemented, will not adversely affect the market price or marketability of the Bonds, or otherwise prevent Bondholders from realizing the full current benefit of an investment therein. Purchasers of the Bonds should be alert to the potential effect of such measures upon the Bonds, the security therefor, and the operations of the City. Tax Abatement The City s Ad Valorem Taxable Value does not include the value of certain facilities which have temporarily been removed from the Ad Valorem Tax Roll pursuant to Act 198. The Act was designed to provide a stimulus in the form of significant tax incentives to industrial enterprises to renovate and expand aging facilities ( Rehab Properties ) and to build new facilities ( New Properties ). Except as indicated below, under the provisions of the Act, a local governmental unit (i.e., a city, village or township) may establish plant rehabilitation districts and industrial development districts and offer industrial firms certain property tax incentives or abatements to encourage restoration or replacement of obsolete facilities and to attract new facilities to the area. An industrial facilities exemption certificate granted under Act 198 entitles an eligible facility to exemption from Ad Valorem Taxes for a period of up to 12 years. In lieu of Ad Valorem Taxes, the eligible facility will pay an industrial facilities tax (the IFT Tax ). For properties granted tax abatement under Act 198 there exists a separate tax roll referred to as the industrial facilities tax roll (the IFT Tax Roll ). The IFT Tax for an obsolete facility which is being restored or replaced is determined in exactly the same manner as the Ad Valorem Tax; the important difference being that the value of the property remains at the Taxable Value level prior to the improvements even though the restoration or replacement substantially increases the value of the facility. For a new facility the IFT Tax is also determined the same as the Ad Valorem Tax but instead of using the total mills levied as Ad Valorem Taxes, a lower millage rate is applied. For abatements granted prior to 1994, this millage rate equals 1/2 of all tax rates levied by other than the State and local school district for operating purposes plus 1/2 of the 1993 rate levied by the local school district for operating purposes. For abatements granted after 1993, this millage rate equals 1/2 of all tax rates levied by other than the State and local school district plus none, 1/2 or the entire State tax rate (as determined by the State Treasurer). 1

15 The City has established goals, objectives and procedures to provide the opportunity for industrial and commercial development and expansion. Since 1974, the City has approved a number of applications for local property tax relief for industrial firms. The SEV of properties that have been granted tax abatement under Act 198, removed from the Ad Valorem Tax Roll and placed on the IFT Tax Roll totaled $3,777,3 for the fiscal year ending June 3, 21. The IFT Taxes paid on these properties is equivalent to Ad Valorem Taxes paid on $1,888,65 of Taxable Value at the full tax rate (the Equivalent Taxable Value ). Upon expiration of the industrial facilities exemption certificates the current equalized valuation of the abated properties will return to the Ad Valorem Tax Roll as Taxable Value. Property Taxes Michigan statute provides that all ad valorem taxes be levied upon Taxable Value. The City s ability to tax is limited by the State Constitution, State statutes and the City Charter. Home rule cities, such as the City, are permitted by Act 279 of the Public Acts of Michigan of 199, as amended (the Home Rule Cities Act ), to authorize by their charters a maximum levy of 2 mills for operating purposes. The City s charter authorized a maximum levy of 2 mills for operating purposes. A mill is equal to $1. for each $1, of Taxable Value. Pursuant to Act 298 of the Public Acts of Michigan of 1917, as amended, home rule cities may authorize an additional levy of up to three mills for refuse collection and disposal. Home rule cities are also authorized to levy up to one mill (plus one additional mill with voter approval) for library purposes pursuant to Act 164 of the Public Acts of Michigan of 1877 as amended. Act 359 of the Public Acts of Michigan of 1925, as amended, also authorizes home rule cities to levy up to $5, for promotional expenses. The City is currently levying mills for operating purposes,.5332 for refuse collection and disposal, for police and fire pensions and.8 for library purposes (see CITY TAXATION AND LIMITATIONS State Limitations on Property Taxes herein). In addition, the electorate may authorize the issuance of general obligation bonds or other obligations which pledge the full faith and credit and unlimited taxing power of the City. However, any millage necessary to meet the City s pledge of its full faith and credit and limited taxing power as security for the payment of principal of and interest on the Bonds is subject to the charter, statutory and constitutional tax rate limitations described herein. See THE BONDS, CITY TAXATION AND LIMITATIONS and CITY DEBT herein. State Limitations on Property Taxes In 1978, the electorate of the State passed an amendment to the State Constitution (the Amendment ) which placed certain limitations on increases of taxes by the State and political subdivisions from currently authorized levels of taxation. The Amendment and the enabling legislation, Act 35 of the Public Acts of Michigan of 1979, may have the effect of reducing the maximum authorized tax rate which could be levied by a local taxing unit. Under the Amendment s millage reduction provisions, should the value of taxable property, exclusive of new construction, increase at a percentage greater than the percentage increase in the Consumer Price Index, the maximum authorized tax rate would be reduced by a factor which would result in the same maximum potential tax revenues to the local taxing unit as if the valuation of taxable property (less new construction) had grown only at the national inflation rate instead of the higher actual growth rate. Thus, should taxable property values rise faster than consumer prices, the maximum authorized tax rate would be reduced accordingly. However, should consumer prices subsequently rise faster than taxable property values, the maximum authorized tax rate would be increased accordingly, but never higher than the statutory or charter tax rate limitation. The Amendment does not limit taxes for the payment of principal of and interest on bonds or other evidences of indebtedness outstanding at the time the Amendment became effective or which have been approved by the electorate of the State or such political subdivision. Since the City s obligation to pay principal of and interest on the Bonds has not been approved by the electorate of the City, the ability of the City to levy taxes to pay the principal of and interest on the Bonds is limited by applicable charter, statutory and constitutional tax limitations. For the fiscal year ending June 3, 21, the Amendment has the effect of reducing the City s authorized millages as follows: 11

16 City of Sault Ste. Marie Maximum Tax Rates Fiscal Year Ending June 3, 21 Millage Classification Operating... Police and Fire Pension (2)... Refuse Collection and Disposal... Library... Millage Authorized Millage Reduction Fraction (1) Maximum Allowable Millage (1) Cumulative. (2) Voted. Source: City of Sault Ste. Marie Property Tax Rates As defined under Property Tax herein, a mill is equal to $1. for each of $1, of Taxable Value. The City is currently authorized to levy mills for operating purposes or a maximum of approximately $ for each $1, of Taxable Value (see State Limitation on Property Taxes herein). Excluding taxes levied by other units of government, the City s property tax rates, expressed as a dollar for each $1, of Taxable Value, for the fiscal years ended or ending June 3, 25 through 29 are shown below. See State Limitations on Property Taxes herein. City of Sault Ste. Marie Property Tax Rates Fiscal Years Ended or Ending June 3, 26 Through 21 Levy July 1 Fiscal Years Ended or Ending June 3 Operating Police and Fire Pension Refuse Collection and Disposal Library Total $ $ $ $ $ Source: City of Sault Ste. Marie In addition to the City s property tax rates, residents of the City must pay property taxes to other units of local government. A State Education Tax of 6. mills has been levied by the State on all real and personal property currently subject to the general property tax. To be eligible for state school aid, a local school district is also required to levy not more than the lesser of 18. mills or the number of mills levied in 1993 for school operating purposes on non-principal Residence property. These property taxes are in lieu of those previously levied for local school district operating purposes. Total rates, expressed as $1. for each $1, of Taxable Value, for the City s fiscal years ended or ending June 3, 25 through 29, are set forth in the following tables: 12

17 City of Sault Ste. Marie Principal Residence (1) Property Tax Rates by Governmental Unit Fiscal Years Ended June 3, 25 Through 29 Fiscal Year Ended June 3 Governmental Unit City of Sault Ste. Marie... Chippewa County... State Education Levy... Sault Ste. Marie Public Schools.. Intermediate School District... Total... $ $ $ $ $ $ $ $ $ $ City of Sault Ste. Marie Non-Principal Residence (1) Property Tax Rates by Governmental Unit Fiscal Years Ended June 3, 25 Through 29 Fiscal Year Ended June 3 Governmental Unit City of Sault Ste. Marie... Chippewa County... State Education Levy... Sault Ste. Marie Public Schools.. Intermediate School District... Total... $ $ $ $ $ $ $ $ $ $ (1) Principal Residence means a dwelling or unit in a multiple-unit dwelling subject to ad valorem property taxes that is owned and occupied as a principal residence by the owner of the dwelling or unit. Principal Residence includes all unoccupied property classified as agricultural adjacent and contiguous to the home of the owner that is not leased or rented by the owner to another person if the gross receipts of the agricultural or horticultural operations, if any, exceed the household income of the owner. If the gross receipts of the agricultural or horticultural operations do not exceed the household income of the owner, the Principal Residence includes only 5 acres adjacent and contiguous to the home of the owner. Principal Residence includes a life care facility registered under the living care disclosure act, Act No. 44 of the Public Acts of 1976, being sections to of the Michigan Compiled Laws. Principal Residence also includes property owned by a cooperative housing corporation and occupied as a principal residence by tenant stockholders. Non-Principal Residence is property not included in the above definition. Source: City of Sault Ste. Marie Property Tax Collections The City s fiscal year begins on July 1. Real and personal property taxes are due July 1 and are payable without penalty until July 31. Property owners who have not paid their property taxes on or before July 31 are required to pay interest and penalties on, and collections fees with respect to, such unpaid taxes. Real property taxes delinquent as of March 1 following the summer and winter levies are turned over to the County for collection ( Delinquent Real Property Taxes ). Such Delinquent Real Property Taxes are subject to additional penalties and interest by the County. Unless the Delinquent Real Property Taxes are paid within approximately 25 months from the date of delinquency the underlying property is foreclosed upon and sold at public auction. Personal property taxes delinquent as of March 1 are collected by the City ( Delinquent Personal Property Taxes ). The City may bring suit to collect Delinquent Personal Property Taxes. The City may also seize the property to satisfy the tax lien thereon. The City s Delinquent Personal Property Taxes are negligible. For the fiscal years ended June 3, 2 through and including 29, the County has purchased the City s Delinquent Real Property Taxes from its delinquent tax payment fund. In return, the City has assigned the County all amounts due from the taxpayers with respect to such Delinquent Real Property Taxes. As a result of these purchases the City s real property tax receipts have approached 1%. 13

18 The continued purchase of Delinquent Real Property Taxes may be dependent upon the sale of delinquent tax notes by the County for that purpose. There is no assurance that the County will issue such delinquent tax notes or purchase such Delinquent Real Property Taxes in any fiscal year. If the Delinquent Real Property Taxes are purchased by the County, they are paid to the City within a month following collection. The following table reflects the actual property tax collections for the City s fiscal years ended or ending June 3, 26 through 21. City of Sault Ste. Marie Property Tax Collections Fiscal Years Ended or Ending June 3, 26 Through 21 Fiscal Year Ended or Ending Collections to March 1 Following Levy July 1 Levy June 3 Tax Levy (1) Percent Collected ,164,33 4,876, ,488,664 5,162, ,525,764 5,185, ,716,741 5,261, ,85,355 (In Process of Collection) (1) Includes all millages levied by the City. Includes certain taxes on properties granted tax abatement under Act 198. See Tax Abatement and Property Tax Rates herein. Source: City of Sault Ste. Marie Profile of the Ten Largest Taxpayers Reflected below are the City s ten largest property taxpayers, their principal product or service and respective Total Taxable Value for the fiscal year ending June 3, 21. City of Sault Ste. Marie Ten Largest Taxpayers Fiscal Year Ending June 3, 21 Percent Taxpayer Principal Product or Service Taxable Value of Total (1) Edison Sault Electric Company... Electric Company... $ 15,295,2 5.3% DDR Michigan II LLC... Cascade Crossing Shopping Mall... 7,785,5 2.7 Pointe West 1 LP... Development... 4,9,6 1.7 Sault Ste. Marie Tribe of Chippewa Indians.. Various... 2,168,12.75 Precision Edge Surgical Products (2)... Medical Products... 1,82,8.63 Key Plastics LLC (2)... Plastics... 1,851,55.64 Wal-Mart Real Estate Business Trust... Retail... 1,563,8.54 Central Savings Bank... Banking... 1,521, Sault Express Limited... Hotel... 1,51,5.52 McGahey, Randall & Judith... Apartment Buildings... 1,53, $ 39,92, % (1) Based on $288,59,872 which the City s Total Taxable Value for its fiscal year ending June 3, 21. Includes the Equivalent Taxable Value of property granted tax abatement under Act 198. See Property Valuations and Tax Abatement herein. (2) Includes the Equivalent Taxable Value of property granted tax abatement under Act 198. See Property Valuations and Tax Abatment herein. Source: City of Sault Ste. Marie 14

19 STATE SHARED REVENUES The City receives revenue sharing payments from the State of Michigan under the State Constitution and the State Revenue Sharing Act of 1971, as amended (the "Revenue Sharing Act"). The table appearing at the end of this section shows State revenue sharing distributions received by the City during the City's past five fiscal years, and the estimated receipts for the City's most recent fiscal year. The State's fiscal year begins October 1 of each year and ends September 3 of the following calendar year. Before the State's fiscal year, the State shared revenues received from personal income tax, intangibles tax, sales tax and single business tax collections with counties, cities, townships and villages. In 1996, the State legislature began reform of both the formula for distribution of State revenue sharing and the designated sources of revenue to be shared. At that time, the State expressly designated the revenues of the sales tax as the sole source for revenue sharing. The sales tax revenues come from a 6% State levy on retail sales (other than sales of certain exempt items such as food and drugs). The State Constitution limits the rate of sales tax to 6%, and dedicates 1% of the revenue of sales tax imposed at a rate of 2% to the State School Aid Fund. The State Constitution further mandates that 15% of the total revenues collected from sales taxes levied at the remaining 4% be distributed to townships, cities and villages. The Revenue Sharing Act distributes an additional 21.3% of those revenues to Michigan municipalities. The State's ability to make revenue sharing payments to the City in the amounts and at the times specified in the Revenue Sharing Act is subject to the State's overall financial condition and its ability to finance any temporary cash flow deficiencies. Under the revised formula for distribution of revenue sharing moneys, the City receives payments based upon a combination of three equally weighted components: Taxable value per capita Unit type (i.e., city, village or township) and population Yield equalization (to protect all recipients of revenue sharing moneys against unequal taxable value per capita) The City's receipts therefore can vary depending on the population of the City and the City's taxable value per capita compared to the population and taxable value per capita in the State as a whole. In addition to payments of revenue sharing moneys, the State pays the City to support judges' salaries, as well as other miscellaneous state grants. Revenue sharing payments and other moneys paid to municipalities (other than the portion which is mandated by the State Constitution) are subject to annual appropriation by the State Legislature, and may be reduced or delayed by Executive Order during any fiscal year in which the Governor, with the approval of the Legislature's appropriation committees, determines that actual revenues will be less than the revenue estimates on which appropriations were based. The Legislature and Governor have modified the appropriations at various times over the past several years in order to balance the State s general fund budget and may do so in the future. In 24, the Legislature eliminated statutory revenue sharing payments to counties by creating a reserve fund paid for by the permanent advancement of the counties' property tax levy from December to July each year, beginning July 25. Under the enabling legislation, the county revenue generated from the accelerated levy will be placed in a reserve fund that each county would draw against in lieu of their annual revenue sharing payments. State revenue sharing payments to counties would resume in the first year in which a county's property tax revenue reserve is less than the amount the county would have otherwise received in state revenue sharing payments. If revenue sharing dollars received by the State are less than anticipated and the City's revenue sharing distribution is reduced, the City intends to make certain adjustments as necessary to balance its fiscal year 21 budget. Purchasers of the Bonds should be alert to further modifications to revenue sharing payments to Michigan local governmental units, to the potential consequent impact upon the City's general fund condition, and to the potential impact upon the market price or marketability of the Bonds resulting from changes in revenues received by the City from the State. The following table sets forth the annual revenue sharing payments received or anticipated to be received by the City for the fiscal years ended or ending June 3, 25 through June 3,

20 City of Sault Ste. Marie State Shared Revenues Fiscal Years Ended or Ending June 3, 25 Through 21 (1) As budgeted. Source: City of Sault Ste. Marie Fiscal State Year Ended Shared or Ending Revenues 25 $1,765, ,748, ,699, ,699, ,652, (1) 1,711,39 CITY DEBT Statutory and Constitutional Debt Provisions Section 21 of Article VII of the Michigan Constitution establishes the authority, subject to statutory and constitutional limitations, for municipalities to incur debt for public purposes: The legislature shall provide by general laws for the incorporation of cities and villages. Such laws shall limit their rate of ad valorem property taxation for municipal purposes, and restrict the powers of cities and villages to borrow money and contract debts. Each city and village is granted power to levy other taxes for public purposes, subject to limitations and prohibitions provided by this constitution or by law. In accordance with the foregoing authority granted to the State Legislature, the Home Rule Cities Act limits the amount of debt a city may have outstanding at any time. Section 4(a) of this Act provides:...the net indebtedness incurred for all public purpose may be as much as but shall not exceed the greater of the following: (a) (b) Ten percent of the assessed value of all real and personal property in the city. Fifteen percent of the assessed value of all the real and personal property in the city if that portion of the total amount of indebtedness incurred which exceeds 1% is or has been used solely for the construction or renovation of hospital facilities. Significant exceptions to the debt limitation have been permitted by the Home Rule Cities Act for certain types of indebtedness which include: special assessment bonds and Michigan transportation fund bonds (formerly, motor vehicle highway fund bonds), even though they are a general obligation of the City; revenue bonds payable from revenues only, whether secured by a mortgage or not; bonds issued or contract obligations assessments incurred to comply with an order of the Water Resources Commission of the State of Michigan or a court of competent jurisdiction, obligations incurred for water supply, sewage, drainage or refuse disposal or resource recovery projects necessary to protect the public health by abating pollution and bonds issued or assessments or contract obligations incurred for the construction, improvement or replacement of a combined sewer overflow abatement facility. 16

21 Legal Debt Margin Pursuant to the statutory and constitutional debt provisions set forth herein, the following table reflects the amount of additional debt the City may legally incur as of January 2, 21. Debt Limit (1)... $31,41,4 Debt Outstanding (2)... $54,769,365 Less: Exempt Debt (3)... 3,949,425 23,819,94 Legal Debt Margin... $ 7,581,46 (1) 1% of $314,14,, which is the City s State Equalized Valuation for the fiscal year ending June 3, 21. Includes the SEV of property granted tax abatement under Act 198. See Property Valuations and Tax Abatement herein. (2) Includes the Bonds and other bonds described under Future Financing herein. (3) See Statutory and Constitutional Debt Provisions herein. Source: Municipal Advisory Council of Michigan and the City of Sault Ste. Marie Debt Statement The following table reflects a breakdown of the City s direct and overlapping debt as of January 2, 21 including the Bonds and other bonds described under Future Financing herein. Direct debt that is shown as self-supporting is paid from sources other than the City s General Fund. To the extent necessary, the City may levy taxes on all taxable property within its boundaries without limitation as to rate or amount to pay the principal of and interest due on the bonds that are designated as Unlimited Tax ( UT ). However, the City s ability to levy tax to pay the debt service on the bonds that are designated as Limited Tax ( LT ), is subject to applicable charter, statutory and constitutional tax rate limitations. See CITY TAXATION AND LIMITATION herein. 17

22 City Direct Debt Gross Self-Supporting Net Share of County Issued Bonds: Dated February 3, 21 (LT) (4) (6)... Dated December 11, 21 (LT) (4)... Dated November 4, 1998 (LT) (4)... Dated November 29, 1995 (LT)... Subtotal... $ 7,87, 2,13, 1,945, 1,465, $ 13,41, $ 7,87, 2,13, 1,945, 1,465, $ 13,41, $ $ -- Building Authority Bonds: Dated June 1, 1997 (LT)... Dated March 1, Subtotal... $ 365, 266, $ 631, $ 365, 266, $ 631, $ $ -- Michigan Transportation Fund Bonds: Dated September 1, 28 (LT) (4)... Dated November 1, 2 (LT) (4)... Dated June 1, 1997 (LT) (4)... Subtotal... $ 69, 645, 27, $ 1,65, $ 69, 645, 27, $ 1,65, $ $ -- Tax Increment Bonds: Dated April 27, 25 (LT)... Subtotal... $ 5,65, $ 5,65, $ 5,65, $ 5,65, $ -- $ -- Capital Improvement Bonds: Dated February 3, 21 (LT) (5)... Dated January 22, 21 (LT) (6)... Dated November 2, 25 (LT)... Dated March 8, 25 (LT)... Dated October 1, 22 (LT) (4)... Subtotal... $ 4,55, 455, 675, 1,3, 3,15, $ 9,77, $ , 675, 88, 3,15, $ 5,115, $ 4,55, , -- $ 4,655, Water and Sewer Bonds: Dated January 22, 21 (LT) (4) (6)... Dated March 27, 23 (4)... Dated September 26, 22 (LT) (4)... Dated June 1, 22 (UT) (4)... Dated September 28, 21 (4)... Dated September 29, 1998 (LT) (4)... Dated September 29, 1998 (4)... Dated September 3, 1997 (LT) (4)... Dated September 1, 1997 (LT) (4)... Dated September 28, 1995 (LT) (4)... Subtotal... $ 7,5, 2,49, 2,685, 75, 1,35, 2,31, 2,535, 315, 425, 1,735, $ 22,5, $ 7,5, 2,49, 2,685, 75, 1,35, 2,31, 2,535, 315, 425, 1,735, $ 22,5, $ $ -- Installment Purchase Obligations: Dated June 8, 29 (LT)... Dated August 27 (LT)... Dated August 3, 26 (LT)... Dated October 1, 25 (LT)... Dated May 24, 26 (LT)... Subtotal... $ 75,38 76, ,26 246,875 21,42 $ 1,698,365 $ 75,38 38, ,26 246,875 21,42 $ 1,317,934 $ -- 38, $ 38,431 Total... $ 54,769,365 $ 49,733,934 $ 5,35,431 Per Capita Net City Direct Debt (1)... $ Percent of Net Direct Debt to Total SEV (2) % 18

23 Overlapping Debt (3) Sault Ste. Marie Public Schools... Chippewa County... Totals... Gross $ 9,38, 3,725, $ 13,51, City Share As Percent of Gross 57.25% 28.3 Net $ 5,37,5 1,54,175 $ 6,424,225 Per Capita Net Overlapping Debt (1)... $ Percent of Net Overlapping Debt to Total SEV (2) % Per Capita Net Direct and Overlapping Debt (1)... $ Percent of Net Direct and Overlapping Debt to Total SEV (2) % (1) Based on the City s 2 Census population of 14,483. (2) Based on $314,14,, which is the City s State Equalized Valuation for the fiscal year ending June 3, 21. Includes the SEV of property granted tax abatement under Act 198. See Property Valuations and Tax Abatement herein. (3) Overlapping debt is the portion of another taxing unit's debt for which property taxpayers of the City are liable in addition to debt issued by the City. (4) Bonds, or portions of the bonds, are considered to be Exempt Debt for purposes of the Legal Debt Margin calculation. (5) The Bonds described herein. (6) See Future Financing herein. Source: Municipal Advisory Council of Michigan and the City of Sault Ste. Marie 19

24 Schedule of Bond Maturities The following table sets forth the annual maturities of the City s bonded indebtedness by type of issue as of January 2, 21. Fiscal Years Ending June Share of County Issued Bonds (2) 395, 695, 715, 75, 78, 8, 735, 1,2, 1,6, 625, 645, 67, 69, 455, 48, 51, 54, 575, 615, 655, $13,41, Building Authority Bonds 71, 77, 83, 89, 91, 97, 28, 3, 31, 34, $ 631, Michigan Transportation Fund Bonds 9, 125, 13, 185, 19, 25, 215, 6, 6, 65, 65, 7, 7, 75, $ 1,65, Tax Increment Bonds 15, 17, 185, 21, 225, 24, 265, 29, 31, 34, 365, 39, 425, 455, 49, 53, 565, $ 5,65, Capital Improvement Bonds (1) (2) 26, 515, 545, 56, 565, 6, 445, 455, 48, 525, 61, 625, 65, 66, 355, 375, 34, 36, 38, 45, 3, 3, $ 9,77, Water and Sewer Bonds (2) 77, 1,77, 1,8, 1,41, 1,44, 1,475, 1,51, 1,55, 1,35, 1,32, 1,315, 1,75, 86, 885, 79, 395, 45, 415, 425, 435, 445, 46, 47, $ 22,5, (1) Includes the Bonds described herein. (2) Includes other bond issues described under Future Financing herein. Source: Municipal Advisory Council of Michigan and the City of Sault Ste. Marie 2

25 Debt History There is no record of default on obligations by the City. Short Term Borrowing The City does not currently utilize any short term borrowing. Future Financing The City plans to finance certain water, storm, sanitary sewer and road improvements through the issuance of approximately $7.87 million of limited tax general obligation bonds through the County as well as $7.5 million of water and sewer revenue bonds and another $455, of limited tax general obligation bonds through the State's low interest loan program. The proposed bonds that are being financed through the County are expected to be issued concurrently with the Bonds described herein. The proposed bonds that are being issued through the State's low interest loan program are expected to close on January 22, 21. The City does not anticipate any additional debt within the next twelve months. Vacation and Sick Leave Liabilities Employees are granted vacation leave in varying amounts of 1 to 3 days per year based on number of years of service. On an employee s anniversary date he/she may not have more than one year of accumulated vacation without permission of the City Manager. Upon voluntary termination, with reasonable notice, employees are paid for accumulated vacation time. Vacation is not granted until the employee has one year of service. An employee with more than one year of service is allowed 15 sick leave days per year. Employees may accumulate up to a maximum of 12 sick days. Permanent employees leaving service of the City by reason of retirement will be paid a lump sum for 1/2 of all unused sick leave up to a maximum of 3 days pay. Actual vacation and sick leave used during the first two months following completion of the fiscal year (July and August) is recorded as a current liability. The maximum 3-day payment for unused sick leave is the basis for the longterm liability. Under a formula developed by the City s auditors, those employees with five or fewer years before retirement are treated as 1% likely to be paid for 3 days. Employees with 6-1 years remaining before retirement are treated as 75% likely to be paid for 3 days. Employees with more than 1 years remaining before retirement eligibility are treated as 25% likely to receive the payment. Other Post-Employment Benefits The City of Sault Ste. Marie has four post-employment health care reserve funds with different bargaining units. Under terms of union contracts, the City has payments due to these funds on an annual basis. The Police Command unit receives a flat $5, per year each July. The Firefighters, Police Patrol and Public Works were paid $1,372 per unit member in July 29 and will receive $1,46 per unit member in July 21. There is no obligation for the City to provide any other funds to these plans. The City has no further liability under these contracts. The City has no other post-employment benefits. Pension Plan Employees of the City, except fire and police person personnel, are participants in a defined benefit pension plan administered by the Michigan Municipal Employees Retirement System ( MERS ). The City is required to make annual contributions to the plan based on a percentage of covered wages and to contribute amounts sufficient to amortize the prior service costs over a period not exceeding 3 years. Under the plan members contribute 3% of their first $4,2 of compensation and 5% for amounts over $4,2. 21

26 Fire and Police personnel are participants in a defined benefit pension plan administered by the City of Sault Ste. Marie Firemen and Policemen Retirement System. The City is required to make annual contributions to the plan based on a percentage of covered wages and to contribute amounts sufficient to amortize the prior service costs over a period not exceeding 35 years. Membership contribution is required at a rate of 5.6% of wages. The actuary for both of the pension plans is Gabriel, Roeder, Smith and Company of Detroit, Michigan. City of Sault Ste. Marie General Pension System Five-Year History Valuation Date December Actuarial Accrued Liability $18,15,81 19,779,167 19,949,324 2,11,296 21,34,757 Actuarial Value of Assets $18,223,939 18,89,155 19,428,237 19,43,327 2,41,467 Funded Ratio 1.67% Source: City of Sault Ste. Marie City of Sault Ste. Marie Police and Fire Pension System Five-Year History Valuation Date June Actuarial Accrued Liability $19,43,533 (1) 19,529,555 2,238,595 2,321,773 21,6, Actuarial Value of Assets $11,819,254 11,6,524 11,59,91 11,715,957 12,4, Funded Ratio 62.6% (1) After changes in actuarial assumptions. Source: City of Sault Ste. Marie 22

27 LABOR CONTRACTS Approximately 78.74% of the City s permanent employees are represented by labor organizations. The following table illustrates the various labor organizations that represent City employees, the number of members in each and the expiration date of the present contract. United Steelworkers of America-Public Works... United Steelworkers of America-Clerical... United Steelworkers of America-Firefighters... United Steelworkers of America-Fire Captains... Michigan Fraternal Order of Police Labor Council-Patrol Unit... Michigan Fraternal Order of Police Labor Council-Police Records... Michigan Fraternal Order of Police Labor Council-Police Sergeant... Non-Union Employees... Total Permanent City Employees... *In process of negotiation. Source: City of Sault Ste. Marie Membership Current Expiration Date June 3, 211 June 3, 21 June 3, 211 June 3, 212 June 3, 211 June 3, 29* June 3, 211 n/a ABSENCE OF CERTAIN LITIGATION Simultaneously with the delivery of the Bonds the City will certify that there are no actions, proceedings or investigations at law or in equity before or by any court, public board or body, either actual or threatened, which would adversely affect the issuance of the Bonds or materially affect the City s ability to pay the principal of and interest thereon. BOND RATING Standard & Poor s Ratings Services has assigned its rating of A+ to the Bonds. The City furnished to the rating agency certain materials and information in addition to that provided here. Generally, rating agencies base their ratings on such information and materials, and on investigations, studies and assumptions by the rating agencies. The above rating reflects the independent judgment of the rating agency and there is no assurance that such rating will prevail for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agency, if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. Any rating assigned represents only the view of the respective rating agency. The definitions furnished by the rating agency for their rating may be obtained from the rating agency. BOND COUNSEL S RESPONSIBILITY The fees of Miller, Canfield, Paddock and Stone, P.L.C. ( Bond Counsel ) for services rendered in connection with their approving opinion are expected to be paid from the proceeds of the Bonds. Except to the extent necessary to issue their approving opinion as to the validity of the Bonds and except as stated below, Bond Counsel has not been retained to examine or review and has not examined or reviewed any financial documents, statements or materials that have been or may be furnished in connection with the authorization, issuance or marketing of the Bonds, and accordingly will not express any opinion with respect to the accuracy or completeness of any such financial documents, statements or materials. Bond Counsel has reviewed the statements made under the captions entitled THE BONDS (not including the information under the heading Book-Entry Only System ), BOND COUNSEL S RESPONSIBILITY, MUNICIPAL FINANCE QUALIFYING STATEMENT, TAX MATTERS, LEGAL MATTERS and CONTINUING DISCLOSURE UNDERTAKING except for the last paragraph thereof. Bond Counsel has not been retained for review and has not reviewed any other portions of the Official Statement for accuracy or completeness and has not made inquiry of any official or employee of the City, or any other person and has made no independent verification of such portions hereof, and further has not expressed and will not express an opinion as to any portions hereof. 23

28 MUNICIPAL FINANCE QUALIFYING STATEMENT The City has filed a Qualifying Statement for the fiscal year ended June 3, 28. The Michigan Department of Treasury has determined that the City is in material compliance with the criteria identified in Act 34 of the Public Acts of Michigan of 21. TAX MATTERS In the opinion of Miller, Canfield, Paddock and Stone, P.L.C., Bond Counsel, the interest on the Bonds is not excluded from gross income for federal income tax purposes under the Code. Bond Counsel expresses no opinion regarding any other federal or state tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. The following is a summary of certain of the United States federal income tax consequences of the ownership of the Bonds as of the date hereof. Each prospective investor should consult with its own tax advisor regarding the application of United States federal income tax laws, as well as any state, local, foreign or other tax laws, to its particular situation. This summary is based on the Code, as well as the Treasury Regulations and administrative and judicial rulings and practice. Legislative, judicial and administrative changes may occur, possibly with retroactive effect, that could alter or modify the continued validity of the statements and conclusions set forth herein. This summary is intended as a general explanatory discussion of the consequences of holding the Bonds generally and does not purport to furnish information in the level of detail or with the investor s specific tax circumstances that would be provided by an investor s own tax advisor. For example, it generally is addressed only to original purchasers of the Bonds that are U.S. holders (as defined below), deals only with those Bonds held as capital assets within the meaning of Section 1221 of the Code and does not address tax consequences to holders that may be relevant to investors subject to special rules, such as individuals, trusts, estates, tax-exempt investors, foreign investors, cash method taxpayers, dealers in securities, currencies or commodities, banks, thrifts, insurance companies, electing large partnerships, mutual funds, regulated investment companies, real estate investment trusts, FASITs, S corporations, persons that hold the Bonds as part of a straddle, hedge, integrated or conversion transaction, and persons whose functional currency is not the U.S. dollar. In addition, this summary does not address alternative minimum tax issues or the indirect consequences to a holder of an equity interest in a holder of the Bonds. As used herein, a U.S. holder is a U.S. person that is a beneficial owner of a Bond. A non U.S. holder is a holder (or beneficial owner) of a Bond that is not a U.S. person. For these purposes, a U.S. person is a citizen or resident of the United States, a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof (except, in the case of a partnership, to the extent otherwise provided in the Treasury Regulations), an estate the income of which is subject to United States federal income taxation regardless of its source or a trust if (i) a United States court is able to exercise primary supervision over the trust s administration and (ii) one or more United States persons have the authority to control all of the trust s substantial decisions. The Bonds will be treated, for federal income tax purposes as a debt instrument. Accordingly, interest will be included in the income of a holder as it is paid (or, if the holder is an accrual method taxpayer. as it is accrued) as interest. Bondholders that have a basis in the Bonds that is greater than the principal amount of the Bonds should consult their own tax advisors with respect to whether or not they should elect to amortize such premium under Section 171 of the Code. If a Bondholder purchases the Bonds for an amount that is less than the adjusted issue price of the Bonds, and such difference is not considered to be de minimis, then such discount will represent market discount. Absent an election to accrue market discount currently, upon a sale or exchange of a Bond, a portion of any gain will be ordinary income to the extent it represents the amount of any such market discount that was accrued through the date of sale. In addition, absent an election to accrue market discount currently, the portion of any interest expense incurred or continued to carry a market discount bond that does not exceed the accrued market discount for any taxable year, will be deferred. Although the Bonds are expected to trade flat, that is, without a specific allocation to accrued interest, for federal income tax purposes, a portion of the amount realized on sale attributed to the Bonds will be treated as accrued interest and thus will be taxed as ordinary income to the seller (and will not be subject to tax in the hands of the buyer). 24

29 The Bonds may be issued with original issue discount ( OID ). Accordingly, Bondholders will be required to include OID in gross income as it accrues under a constant yield method, based on the original yield to maturity of the Bond. Thus, Bondholders will be required to include OID in income as it accrues, prior to the receipt of cash attributable to such income. U.S. holders, however, would be entitled to claim a loss upon maturity or other disposition of such notes with respect to interest amounts accrued and included in gross income for which cash is not received. Such a loss generally would be a capital loss. Bondholders that purchase a Bond for less than its adjusted issue price (generally its accreted value) will have purchased such Bond with market discount unless such difference is considered to be de minimis. Absent an election to accrue market discount currently, upon sale or exchange of a Bond, a portion of any gain will be ordinary income to the extent it represents the amount of any such market discount that was accrued through the date of sale. In addition, absent an election to accrue market discount currently, the portion of any interest expense incurred or continued to carry a market discount bond that does not exceed the accrued market discount for any taxable year will be deferred. A Bondholder that has a basis in the Bond that is greater that its adjusted issue price (generally its accreted value), but that is less than or equal to its principal amount, will be considered to have purchased the Bond with acquisition premium. The amount of OID that such Bondholder must include in gross income with respect to such Bonds will be reduced in proportion that such excess bears to the OID remaining to be accrued as of the acquisition of the Bond. A Bondholder may have a basis in its pro rata share of the Bonds that is greater that the principal amount of such Bonds. Bondholders should consult their own tax advisors with respect to whether or not they should elect to amortize such premium, if any, with respect to such Bonds under Section 171 of the Code. Upon a sale, exchange or retirement of a Bond, a holder generally will recognize taxable gain or loss on such Bond equal to the difference between the amount realized on the sale, exchange or retirement (less any accrued qualified stated interest which will be taxable as such) and the Bondholder s adjusted tax basis in such Bond. Defeasance of the Bonds may result in a reissuance thereof, in which event an owner will also recognize taxable gain or loss as described in the preceding sentence. Such gain or loss generally will be capital gain (although any gain attributable to accrued market discount of the Bond not yet taken into income will be ordinary). The adjusted basis of the holder in a Bond will (in general) equal its original purchase price and decreased by any principal payments received on the Bond. In general, if the Bond is held for longer than one year, any gain or loss would be long term capital gain or loss, and capital losses are subject to certain limitations. Payments on the Bonds to a non-u.s. holder that has no connection with the United States other than holding its Bond generally will be made free of withholding tax, as long as that holder has complied with certain tax identification and certification requirements. Circular 23 Investors are urged to obtain independent tax advice based upon their particular circumstances. The tax discussion above was not intended or written to be used, and cannot be used, for the purposes of avoiding taxpayer penalties. The advice was written to support the promotion or marketing of the Bonds. LEGAL MATTERS Legal matters incident to the authorization, issuance and sale of the Bonds are subject to the approval of Miller, Canfield, Paddock and Stone, P.L.C., Detroit, Michigan, Bond Counsel. A copy of the opinion of Bond Counsel will be delivered with the Bonds, which opinion will be substantially in the form as set forth in Appendix D. UNDERWRITING Robert W. Baird & Co. and Mesirow Financial, Inc. (the Underwriters ), have agreed to purchase the Bonds from the City pursuant to a bond purchase agreement (the Bond Purchase Agreement ) at an aggregate purchase price of $4,456,524.2 (par less an original issue discount of $3,425.8 and an underwriter s discount of $45,5.). The Underwriters are committed to take and pay for all of the Bonds if any are taken. The Bonds are being offered for sale to the public at the prices shown on the cover of this Official Statement. The Underwriters may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts) and others at prices lower than the public offering prices stated on the cover page hereof, which may be changed after the initial offering by the Underwriters. The Bond Purchase Agreement provides that the obligations of the Underwriter are subject to certain conditions, including, among other things, that the market price of the Bonds or their marketability shall not have been materially adversely affected by the occurrence of certain events. 25

30 CONTINUING DISCLOSURE UNDERTAKING In accordance with the requirements of Rule 15c2-12 (the Rule ) promulgated by the Securities and Exchange Commission, the City has covenanted to comply with the Rule and provide a continuing disclosure undertaking substantially in the form attached hereto in Appendix E. The City s continuing disclosure filing for the fiscal year ended June 3, 24 was inadvertently filed after December 31, 24. Otherwise, the City has complied, in all material respects, with the requirements as described in section (b)(5) of the Rule with each undertaking made on or after July 3, OTHER MATTERS All information contained in this Official Statement is subject, in all respects, to the complete body of information contained in the original source thereof and no guaranty, warranty or other representation is made concerning the accuracy or completeness of such information. In particular, no opinion or representation is rendered as to whether any projection will approximate actual results, and all opinions, estimates and assumptions, whether or not expressly identified as such, should not be considered statements of fact. This Official Statement has been duly executed and delivered by the City. City of Sault Ste. Marie By: Its: /s/ John Boger Finance Director 26

31 ECONOMIC PROFILE Appendix A

32 ECONOMIC PROFILE Profile of Major Employers The table located below reflects the diversity of the ten largest employers in the City by the estimated number of employees and the products manufactured or services provided. Company Principal Product or Service Approximate Number of Employees War Memorial Hospital... Health Care... 7 Kewadin Hotel and Convention Center. Casino, Hotel, Convention Center Wal-Mart... Retail Lake Superior State University... Higher Education Sault Area Public Schools... Primary/Secondary Education U.S. Coast Guard.... Military Precision Edge... Surgical Instruments Hiawatha Behavioral Health... Mental Health Agency State of Michigan Offices... Various Governmental Services Chippewa County... County Government Source: City of Sault Ste. Marie Employment Reflected below are the unemployment statistics for the County and the State for the calendar years 24 through 29. County of Chippewa: Employed... Unemployed... Labor Force (2) 16,76 16,12 16,234 16,188 15,811 15,211 1,588 1,57 1,56 1,528 1,718 2,334 17,664 17,627 17,74 17,716 17,529 17,545 Unemployed as Percent of the Labor Force (1)... 9.% 8.5% 8.5% 8.6% 9.8% 13.3% (1) Totals and percentages may differ due to rounding by the Office of Labor Market Information Michigan Department of Labor and Economic Growth. (2) As of November 29. Source: Office of Labor Market Information Michigan Department of Labor and Economic Growth State of Michigan: Employed... Unemployed... Labor Force (1) 4,767, 4,756, 4,629, 4,519, 4,164, 326, 366, 383, 416, 683, 5,93, 5,122, 5,12, 4,936, 4,847, 4,711, 346,2 5,57, Unemployed as Percent of Labor Force (2) % 6.4% 7.1% 7.6% 8.4% 14.1% (1) Data for November 29. (2) Totals and percentages may differ due to rounding by the Office of Labor Market Information Michigan Department of Career Development. Source: Office of Labor Market Information Michigan Department of Career Development A - 1

33 Building Permits The estimated dollar value of building permits issued by the City for the years 25 through 29 are as follows: Calendar Year (1) Number of Permits Issued Value $12,9,432 9,342,25 6,448,179 23,337,498 1,25,95 (1) As of 1/8/9. Source City of Sault Ste. Marie A - 2

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35 Appendix B City of Sault Ste. Marie BASIC FINANCIAL STATEMENTS AND RELATED NOTES Fiscal Year Ended June 3, 29 This Appendix contains the Independent Auditor s Report, and the combined financial statements (excluding supplemental financial information) and related notes for the fiscal year ended June 3, 29. The supplemental financial information for the fiscal year ended June 3, 29, is available from the City upon request.

36 KINROSS OFFiCE ANDERSON, TACKMAN & COMPANY, PLC CERTIFIED PUBLIC ACCOUNTANTS MEMBER AICPA DIVISION FOR CPA FIRMS MEMBER MACPA OFFICES IN MICHIOAN 8< WISCONSIN Honorable Mayor and Members of the City Commission Page 2 In accordance with Government Auditing Standards, we have also issued our report dated November 19, 29, on our consideration of the City of Sault Ste. Marie, Michigan's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the intemal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. B-1 Honorable Mayor and Members of the City Commission City of Sault Ste. Marie Sault Ste. Marie, Michigan INDEPENDENT AUDITOR'S REPORT We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Sault Ste. Marie, Michigan, as of and for the year ended June 3, 29, which collectively comprise the City's basic [mancial statements as listed in the table of contents. These financial statements are the responsibility of the City of Sault Ste. Marie's management. Our responsibility is to express opinions on these [mancial statements based on our audit. The Management's Discussion and Analysis and budgetary comparison information as listed in the table of contents are not a required part of the basic [mancial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain liroited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the infonnation and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the [mancial statements that collectively comprise the City of Sault Ste. Marie, Michigan's basic fmancial statements. The accompanying supplementary information such as the combining nonmajor fund and component unit [mancial statements identified in the table of contents, are presented for purposes of additional analysis and are not a required part of the basic [mancial statements. The accompanying Schedule of Expenditures of Federal Awards is also presented for purposes of additional analysis as required by 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 basic financial statements. Such information have been subjected to the auditing procedures applied in the audit of the basic [mancial statements and, in our opinion, are fairly stated, in all material respects, in relation to basic financial statements taken as a whole. 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 Standard" issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting ptinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the [mancial statements referred to above present fairly, in all material respects, the respective [mancial position of the governmental activities, the business-type activities, the aggregate discretely present component units, each major fund, and the aggregate remaining fund information of the City of Sault Ste. Marie, Michigan as of June 3, 29, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. November 19, 29 Anderson, Tackman & Company, PLC Certified Public A.conntan!s 1G97S S. RILeV AVENUE KINCHELoe. MICHIGAN ) / FAX antack@antack.com 2

37 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis Juue 3, 29 As management of the City of Sault Ste. Marie, Michigan (the "City"), we offer readers of the City's fmancial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended June 3, 29. We encourage readers to consider the information presented here in conjunction with additional information that is furnished in the fmancial statements and notes to the fmancial statements. Financial Highlights The City's total net assets at June 3, 29 were $8,79,67 consisting of$57,522,16 in net assets of our governmental activities and $23,187,51 in net assets of our business type activities. During the fiscal year we completed 3.94 miles of street reconstruction and resurfacing with associated storm sewers, sidewalks, traffic signals and bike paths with a combined value of approximately $4,562,89. The City issued a $695, MTF Bond issue in order to do numerous street projects. Using a combination of General Fund and Osborn fmancing $67,788 was spent for fencing the Maple Ridge Cemetery. B-2 Management's Discussion and Analysis A combination of $35, of Seal Funds and the General fund fmanced the Malcolm Park fencing project. Seal funds of $46,647 paid for the new electronic sign at Pullar Stadium. A $75,365 loan from Central Savings Bank purchased 2 lawnmowers for the Municipal Golf course. A Local Jobs Today Grant of $325,34 was used for the W. Easterday Resurfacing Project and a Buffer zone Grant was used for purchase of $188,395 of security related equipment. $3,557 of grant funds was used to purchase laryngoscopes for the City's ambulances. The General Fund purchased a detective's vehicle, a high volume copier for City hall and a new rider mower at the cemetery for $37,95. The Stock & Equipment Fund purchased a used vehicle for the car pool and 2 patrol units to be rented to the Police Department for $48,762 and used $252,967 of Depreciation Reserve funding to purchase a % ton pickup truck, an asphalt trailer, a tandem dump truck and a complete plow truck. The Water Department purchased a pickup truck and a % ton pickup with plow & lift-gate for $49,33 and continued the meter replacement program for $61,943. During the fiscal year, the City completed $393,23 in water related projects and $326,289 in sewer related projects. $474,61 was spent for projects not yet completed. In the IT fund $79,94 was used for software and equipment upgrades.

38 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis June 3, 29 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis June 3, 29 B-3 After increasing 112% between fiscal year 22 and 25, the cost of health care has been contained through negotiation of caps on the cost of health care in the City's 7 bargaining units. Effective January, 29 at an annual cost of nearly $1.5 million, health care costs exceeded the caps which triggered the implementation of a Special Health Committee which is authorized to implement measures to keep the City costs at threshold levels. Committee membership includes representation from the 7 bargaining units, from non-union employees and department heads as well as the City Attorney and the City Manager. The Committee is authorized to act on insurance issues on behalf of the bargaining units, the City Commission and non-union employees to provide health care plans under the fixed threshold limits. This provision fixes tbe City's cost for health insurance until the City Commission and bargaining units agree on increasing any cost thresholds. The City has been hurt by continual problems with three General Fund revenue components. Property tax growth has been slowing, State Shared Revenne has continued to decline and low interest rates have drastically reduced unrestricted interest earnings. Taxable values increased from $268,788,438 in 26-7 to $276,948,746 in 27-8 and $279,644,638 in Total millage increased from to between fiscal 27-8 and Operating millage at mills and Library millage at.8 were unchanged. Solid Waste millage increased from.4332 to.5332 and PolicelFire Pension millage increased from to Revenue Sbaring was budgeted at $1,745,677 based on State Revenue Sharing esthnates at budget time. Actual receipts were $1,622,59, and budget shortfall of $123,618 and a decrease from 27-8 of $56,477. Revenue Sharing Comparisons If revenue sharing had simply remained at the 2-1 level, the City's General Fund would have realized over $2.7 million more revenue during the last eight years. This doesn't take into account the real dollar loss if inflation were to be factored in. Interest income has declined again after a recent peak in General Fund Interest Comparison $ $ $ $ $ $ $ $ $ 143,87 293,97 36,799 27,1 115,427 7, , , ,44 If interest income had remained at 2-1 levels, $1.49 million more would have been realized. Similar losses have occurred in other funds. Because of debt service requirements, increasing energy costs and steadily declining consumption, water and sewer rates have gone up steadily. 26 consumption fell to the lowest level in 14 years of data used for comparison at 57,55,1 cubic feet. After rebounding slightly in 27, it fell sharply to 54,686,13. This represents a decline in armual consumption of over 12.1 million cubic feet since 2. A recent agreement with the MDEQ requires the City to accelerate the final stages of the CSO abatement program. The acceleration means that the City will not be retiring older debt issues before taking on new debt and ensures rates will continue to increase $ 1,622,59 $ 1,678,536 $ 1,678,536 $ 1,73,57 $ 1,749,523 $ 1,768,85 $ 1,968,64 $ 2,68,81 $ 2,121,96 Since 2-1, the annual sales tax distribution has decreased nearly 24%. As frxtures and equipment become increasingly more efficient, the only way the system can expect to increase consumption is an increase in the number of customers. The Street Funds are continuing to be hurt by an antiquated revenue formula. The gas & weight distribution continues to fall as vehicles become more fuel efficient and receipts decline. Overview oftbe Financial Statements This discussion and analysis is intended to serve as an introduction to the City's basic financial statements. The City's basic fmancial statements comprise three components: I) govemment-wide financial statements, 2) fund fmancial statements and 3) notes to the financial statements. This report also contains other supplementary information in addition to the fmancial statements themselves. 4

39 City of Sault Ste. Marie, Michigan Management'. Discussion and Analysis June 3, 29 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis June 3, 29 Government-wide financial statements. The government-wide financial statements are designed to provide readers with a broad overview of the City's fmances, in a manner similar to a private-sector business. The statements of net assets presents information on all of the City's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. Because the focus of governmental funds is narrower than that of the government-wide fmancial statements, it is useful to compare the information presented for governmental funds with similar infotmation presented for governmental activities in the government-wide fmancial statements. By doing so, readers may better understand the long-term impact of the government's near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditnres, and cbanges in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. B-4 The statement of activities presents infonnation showing how the government's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occnrs, regardless of the timing of related casb flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in futnre fiscal periods (e.g., earned but unused vacation leave and accrued interest expense). Both of tbe government-wide fmancial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include legislative, general government, public safety, public works and recreation and cultnre. The business-type activities include the sewer and water activities. The government-wide financial statements include not only the City itself (known as the primary government), but also the Sault Ste. Marie Downtown Development Authority, EDC, Bayliss, TIFA III and LFDA are legally separate component units for which the City is financially accountable. The government-wide fmancial statements can be found on pages of this report. Fund fmancial statements. Afund is a grouping of related accounts that is used to maintain control over resonrces that have been segregated for specific activities or objective. The City, like otber state and local governments, uses fund accounting to ensnre and demonstrate compliance with financerelated legal requirements. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental funds. Governmental funds are use to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, tmlike the government-wide fmancial statements, governmental fund financial statements focus on near-term inflows and ou!flows of spendable resources. as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government's near-term fmancing requirements. The City maintains 24 individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditnres, and changes in fund balances for the General Fund, Major Street Fund, Local Street Fund, Capital Projects 2 Fund, and Capital Outlay Fund each of which are considered to be major funds. Data from the other 19 governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the fonn of combining statements elsewhere in this report. The City adopts an annual appropriated budget for its General and Special Revenue Funds. Budgetary comparison statements have been provided herein to demonstrate compliance with the General Fund and the major Special Revenue Funds. The basic governmental fund fmancial statements can be found on pages of this report. Proprietary funds. The City maintains two different types of proprietary funds. Enterprise Funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses Enterprise Funds to account for its sewer and water operations. Internal Service Funds are an accounting devise used to accumulate and allocate costs internally among the various City functions. The City of Sault Ste. Marie uses its Internal Service Fund to account for data processing, stock and equipment, and employee health insurance activities. Proprietary funds provide the sarne type of information as the government-wide fmancial statements, only in more detail. The proprietary fund financial statements provide separate information for the sewer and water departments which are considered major enterprise funds of the City. The basic proprietary fund financial statements can be found on 19-2 of this report. Fiduciary funds The City is the tmstee, or fiduciary, for its employees' pension plans. It is also responsible for other assets that, because of a trust arrangement, can be used only for the trust beneficiaries. The City is responsible for ensuring that the assets reported in these funds are used for their intended purposes. All of the City's fiduciary activities are reported in a separate statement of fiduciary net assets and a statement of changes in fiduciary net assets. We exclude these activities from the City's government-wide financial statements because the City carmot use these assets to fmance its operations. The basic fiduciary fund financial statement can be found on page ofthis report. 6 7

40 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis June 3, 29 City of Sault Stc. Marie, Michigan Management's Discussion and Analysis June 3, 29 B-5 Notes to the fmaneial statements. The notes provide additional infonnation that is essential to a full understanding of the data provided in the government-wide and fund fmancial statements. The notes to the financial statements can be found on pages of this report. Other information. In addition to the basic financial statements and accompanying notes, this report also presents certain supplementary information including the combining statements referred to earlier in connection with nonmajor governmental funds which arc presented immediately following the notes to the financial statements. Combining fund statemeots and schedules can be found on pages 59-7 of this report. Government-wide Financial Analysis Net assets may serve over time as a useful indicator of a government's financial position. In the case of the Ci1y, assets exceeded liabilities by $8,79,67 at the close of fiscal year 29. Approximately 71% of the Ci1y's net assets reflect its investment in net capital assets (e.g., land, buildings, water, and sewer systems, vehicles, and equipment); less any related debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the Ci1y's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Net assets restricted for Trust represent approxiroately 3.5% of total net assets. The remaining balance of unrestricted net assets $2,453,538 may be used to meet the govermnent's ongoing obligation to citizens and creditors. Assets Current assets Capital assets Total assets Liabilities Current liabilities Noncurrent liabilities Total liabilities Net assets Invested in capital assets, net of related debt Restricted Unrestricted Total Net Assets Ci1y of Sault St Malie Condensed Statement of Net Assets Governmental Business-Type Activities Activities Total $ 23,99,742 $ 23,515,389 $ 7,674,753 $ 8,535,67 $ 3,774,495 $ 32,51, ,17,6 7,86,588 54, ,26 124, ,794 7,186,45 6,31,186 2,731,312 44,48 9,917,762 6,435, ,648,494 11,914, ,892 33,558,588 44,37,386 45,473,358 41,367,4 42,41,15 16,81,33 14,68,929 57,448,37 56,65,79 2,88,32 2,88,648 2,88,32 2,88, At the end of the current fiscal year, the Ci1y is able to report positive balances in all three categories of net assets, for the government as a whole and for its separate govermnental and business-type activities. The Ci1y's net assets decreased $847,829 during the current fiscal year. Ci1y of Sault Ste, Marie Condensed Statement of Changes in Net Assets Governmental Business-Type Activities Activities Total Revenues Program revenues Charges for services 3,49,77 2,713,344 6,12,741 5,783,958 9,53,511 8,497,32 Operating grants and contributions 3,156,477 3,814,977 45,649 3,156,477 4,265,626 Capital grants and contributions 218,952 4,49, ,952 4,49,186 General revenue Property taxes 5,89,525 5,733,111 5,89,525 5,733,111 State revenue sharing 1,622,59 1,697,353 1,622,59 1,697,353 Federal, State, & Local General 114, ,456 Investment earning 391, ,276 85, , ,587 1,9,155 Gain on sale of assets 331,97 331,97 Transfers 12197) Total revenues ,762 5,967,159 21,513,43 25, Expenses Legislative 43,997 48,4 43,997 48,4 General government 1,662,815 2,141,171 1,662,815 2,141,171 Public safety 3,94,76 3,761,158 3,94,76 3,761,158 Public works 6,99,446 4,628,212 6,99,446 4,628,212 Health and Welfare 1,588,984 1,496,427 1,588,984 1,496,427 Recreation and culture 1,775,552 1,785,31 1,775,552 1,785,31 Other expenses 1,279, ,212 1,279, ,212 Interest expense 216, ,78 216, ,78 Water and sewer 5,117,885 5,7,178 5,117,885 5,7,178 Parking deck 452, , , ,135 Parking Total expenses 16571, ,879 5,639, ,128 Changes in net assets (1,423,712) 5,295, , ,332 (847,829) 5,622,65 Net assets - beginning of year 58,945,818 53,758,859 22,611,618 22,284,286 81,557,436 76,43,145 Prior period adjustment ----D.!lf,lli) - (l8314) Net assets- end of year $

41 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis June 3, 29 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis June 3, 29 Governmental activities. Governmental activities decreased the City's net assets by $1,423,712 accounting for substantially all of the decrease in the City's net assets for fiscal year 29. Expenses and Program Revenues - Governmental Activities Business-type activities. Business-type activities increased the City's net assets by $575,883. Expenses and Program Revenues- Business-type Activities B-6 Capital Grants and Contributions $218,952 1% Revenues by Sources - Governmental Activities Federal, State, & Local - General $114,456 State Revenue Sharing 1 % $1,622,59 11% Operating Grants aijd Contributions $3,156,477 21% Charges for Services $3,49,77 23% Investment Earnings $391,262 3% Gain on Sales of Assets $331,97 2% T""" 3&% Substantially all revenues for the business-type activities resulted from charges for services. Financial Analysis of the Government's Funds As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with [mancerelated legal requirements. Governmentalfunds. The focus of the City's governmental fonds is to provide information on nearterm inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unreserved fond balance may serve as a useful measure ofa government's net resources available for spending at the end of the fiscal year. The General Fund is the main operating fund of the City. General Fund balance increased by $427,642 from $2,477,315 to $2,94,957 during 29. Proprietary funds. The City's proprietary fund statements provide the same type of information found in the government-wide financial statements, but in more detail. 1 11

42 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis June 3, 29 City of Sault Ste. Marie, Michigan Management's Discussion and Analysis June 3, 29 General Fund Budgetary Highlights Economic Factors and Next Year's Budgets and Rates B-7 The City's' interest income in fiscal year 29 decreased by 48% over the fiscal year 28 total due to the lower interest rates. Tax revenues and other revenues were at or exceeded expected budgetary levels. Capital Asset and Debt AdmiBistration Capital assets. The City defmes a capital asset as an asset whose cost exceeds $1, and whose useful life is greater than two years. Included in the cost of a capital asset are items such as labor and freight and any other costs associated with bringing the asset into full operation. Assets are depreciated using the straight-line method over the course of their useful lives. Land Construction -in-process Buildings and improvements Land improvements Furniture and equipment Infrastrncture Water and sewer Total City of Sault Ste. Marie Capital Assets (net of depreciation, where applicable) June 3, 28 Governmental Activities Business-type Activities $ 2,42,16 $ 164,243 45,93 5,929,294 13,745,153 3,694,676 3,652,485 1,3,58 3,942, $ 47.7.R5R $ Total $ 2,566,349 45,93 19,674,447 3,694,676 4,953,65 3,942, $ Additional information on the City's capital assets can be found in Note 4 pages of this report. The City's elected and appointed officials considered many factors when setting the fiscal year 21 General Fund Budget. In accordance with the adopted Guiding Financial Principals, the City address anticipated economic changes proactively such as continuing rednctions in State Shared Revenue, small incremental changes in property taxes and reductions in gas& weight taxes when considering the impacts these funding reductions have on local government services. The current Sate budget reduces Revenue Sharing payments to the City by 11% in If the anticipated Revenue Sharing reduction takes place, the 29-1 receipts will be under $1,445 million compared to $2.121 million in Future cuts are anticipated in Preliminary estimated health care cost increases exceed 3%. However, with the health care thresholds in place, the special Health Determining Committee is charged with implementing health care plans that will reduce the City's cost to the threshold caps. Efforts to reduce the strnctural deficit have helped stabilize the General Fund' s fund balance. The City had instituted a hiring freeze on filling City vacancies in which each vacant position is evalnated prior to filling or not filling the vacancy. In addition, an internal task force is to be developed to look at services currently being provided as well as revenue opportunities and report back to the City Commission. The City intends to use SRF funding and a bond through Chippewa County to fund the next phase of CSO remediation. The not to exceed amount of SRF fnnding is $7.5 million. Under the American Reinvestment and Recovering Act (AARA) the City will have 4% principal forgiveness. The County Bonds, not to exceed $8.5 million bonds may be sold as Build America Bonds and qualify for a 35% interest rebate program. In addition, the City is looking at an estimated $5.5 million Capital Outlay Bond for a new city hall, streetscape on Water Street and rebuilding Fort and Emeline Streets. Long-term debt. Debt incurred in the course of constrncting or acquiring a capital asset is recorded and paid for from a Debt Service Fund, Enterprise Fund or Internal Service Fund. Debt is classified as long-term if the debt matures in a period greater than one year. Additional information on the City's long-term debt can be found in Note 6 on pages 4-45 of this report. 12 As water consumption has continued to trend downward and expenses have continued to increase the City has had to increase rates approximately 2.7%. The upcoming CSO phase will require rate increases to cover the added debt service which was evaluated and considered prior to authorizing the accelerated work in order to take advantage of the AARA funding. Request for Information This financial report is designed to provide our citizenlsl taxpayers, customers, investors and creditors with a general overview of the City's fmances and to demonstrate the City's accountability for the money it receives. If you have any questions about this report or need additional information, contact John Boger, Finance Director at 325 Court Street, Sault Ste. Marie, Michigan,

43 City of Sault Ste. Marie, Michillan Statement of Net Assets June 3, 29 Prim!!:!X Government Governmental Business-type Component Activities Activities Totals Unit ASSETS: Current Assets: Cash & Equivalents - Unrestricted 9,529,239 1,453,43 1,982,642 2,586,664 Cash & Equivalents - Restricted 5,512,239 5,512,239 Investments - Unrestricted 2,358,235 16,149 2,464,384 Investments - Restricted 2,464,976 2,464,976 Accounts Receivable 428, , , ,82 Interest Receivable 2,658 2,658 Taxes Receivable 5,73,9 5,73,9 Special Assessments Receivab1e 1,719,534 49,145 1,768,679 15,512 Due from Governmental Units 1,1l3,184 1,113,184 24,782 Inventories 132, ,21 321,789 Other Assets 259, ,281 Prepaid Expenses 1,81 Total Current Assets 23,99,742 7,674,753 3,774, Noncurrent Assets: Capital Asscts Not Depreciated 2,852, ,243 3,16,442 Capital Assets (Net of Accumulated Depreciation) 44,218,659 46,737,397 9,956,56 435,896 Total Noncurrent Assets 47,7,858 46,91,64 93,972, :896 B-8 Basic Financial Statements I I TOTAL ASSETS 7,17,6 54,576,393 $ 124,746,993 3,371,475 LIABILITIES: Current Liabilities: Accounts Payable 624,75 57, ,91 25,233 Accrued Liabilities 59,957 51, ,815 2,845 Accrued Interest Payable 6,69 31, ,318 Deferred Revenue 5,73,9 5,73,9 Due to Governmental Units 127,444 Bonds Payable 33, 2,32, 2,65, Installment Loans 588, ,638 Total Current Liabilities 45 2,731,312 9,917, ,522 Noncurrent Liabilities: Installment Loans 1,875,216 1,875,216 Bonds Payable 2,91, 28,5,67 31,41,67 Compensated Absences 676, , ,81 5,572 Total Noncurrent Liabilities 5,462,44 28,657,58 34,119,624 5,572 TOTAL LIABILITIES 12,648,494 31,388,892 44,37, NET ASSETS: Invested in Capital Assets (net of related debt) 41,367,4 16,81,33 57,448,37 423,722 Res1ricted for Trust 2,88,32 2,88,32 17,432 Unrestricted 13,347,7 7:16,468 2,453,538 2,571,227 TOTAL NET ASSETS 57,522,16 23,187,51 8,79,67 3,165,381 See accompanying notes to financial statements. 14

44 B-9 City of Sault Ste. Marie, Michigan Statement of Activities For the Year Ended June 3, 29 Primary Government: Gavernmental Activities: Legislative General Government Public Safety Public Works Health&WcJfarc Recreation & Culture ''''' lnterestexpense Total Governmental Activities Bminess-typeactivities: Wawr&Sewet Po:rkingDeck Parking Total Business-type Activities Total PriIIlllIY GOYeIllIlleJlt Component Umts: EDC DDA TlFA LPDA Library Total Component Units Total Futlctions!Pro,8!!ms General Revenues: Taxes Payment from City ofsan1! Ste. Marie State Revenue ShlIring Federal, S1.at.e, & Looal- General Investment Earnings (Loss) Gain on Sale of Assets Transfers Total. General Revenues and Transfers Chllllge ill Net Assets NetAssets-BegiIJIling Net Asseh - Ending Net (lli;:p(}ll5e) R<i'vcnuc and Chan!:csinNetAssets P[ORCVCllllCS Operating Capital Primary Government Charges for Grants and Grants and Governmental Bu:;incs>"-Type Component Contributions Contributions Activities 43,997 (43,997) (43,997) 1,662, ,86 (968,955) (%8,955) 3,94,76 439,43 8, ,395 (3,195,975) (3,195,975) 6,99, ,355 2,564,27 (3,37,821) (3,37,821) 1,588,984 1,533,944 89,961 3,557 65,478 65,478 1,775, ,28 421,259 (758,85) (758,85) 1,27CJ,27CJ (1,?:7CJ,?:79) (1,27CJ,27CJ) 5,117,885 5,777,1 659, , ,114 79,97 (372,27) (372,27) $ 9,53,511 S (9,482,319) 3,156,477 $ 218, ,79 75,675 (12,34) 186,239 43,649 (142,59) 38,726 (38,726) 12, $ $ 9,829,694 $ 3,162,427 5,89,525 5,89, ,25 376,12 1,622,59 1,622,59 114, ,456 83, ,262 85, ,587 68, ,97 331,97 5, (1,423,712) 575,883 (847,829) 119,624 81,557,436 $ 57522,16 S 23187,51 $ 879,67 $ 3,165,381 See accompanying notes to financial statements. 15 City of Sault Ste. Marie, Michigan Balance Sheet Governmental Funds June 3, 29 ASSETS: Cash & Equivalents investments - Unretricted Investments _ Restricted AccouTItsReceivable TntcrcstRcooivablc Taxes Receivable Special Assessments Receivable Due from Other FUlIds Due from Governmental Units Inventories Other Assets TOTAL ASSETS Other Major Local Capital Capital Governmental Governmental 1,468,6 (,8, , ,667 5,238,679 8,398, , ,77 995,981 2,358,235 2,464,976 2,464,976 25,923 43, , ,33 2,658 2,658 5,73,9 5,73,9 934,6 334,63 1,719, ,79 299,62\ 254, , , ,71 43,545 1,113,184 7,962 31,813 31,813 3_,53_4 M_' $ $ 162,33 $ 9,97,583 DuetoO!herFwds Accounts Payable AoorucdLiabililics Deferred Revenue TOTAL LIABlllTIES FUND BALANCES: Re.ervedforTmsi Umcscrvoo' Del!ignawd for Carbide Dock Del!ignated for Anne Osoorne Building Reserve Designated for Lawrence Pullar Reserve Designated for Fort S1reet Bridge Designated for Fire RepJacement DC8ignated for Fund Ptnpose Designated for Capital Outlay Designated for Debt Serviee Undesignated TOTAL FUND BALANCES 4,13 8,624 84, ,94 176,68 97,961 3,65 379,116 1,192 1, , '_,1_3 2,88,32 2,88,32 351, , ,192 1,192 25, 25, 538, ,852 2,74,17 918, ,31 777,777 4,446,1 6,176, ,542 1,274, ,2 35,922 35, " ,16,63 TOTAL LIABlllTIES AND FUND BALANCES Reconciliation to amounts reported for governmentrlllctivttles in the strtement of net RSsetS: Capital assets lilied by governmental activities 45,435,556 Special Assessments Receivable recognized as revenue 1,719,534 Long-term notes & leases payable for governmental activities (5,73,854) Cornpell5!ltcdabscnces (642,543) Intemal service funds included in governmental activitics 2,757,5 Accrued interest expense payable Net assets of governmental activities See accompanying notes to financial statements. 16

45 ,, B-1 ""'".. """", "Q :r "' 2:3 " i!l..eil a""... "" "' ;.. r " " =,.. "..,,;:., l: ;!.. ";;9 =a =il.. " a.... '".. OIl " u '" I uu I :i I H >- "' <3 "1 I os S > "' <3,, l l3 3 I "-I, oo 11 I I - ::;5,o " ' ' N E",, l?i_" B g " "i <'l-, s '" o I 1 'I I '"I I " -I I ' ', "; ">"!?i 'n1 I, 'oo gg"!ii " " I I ci iii 3 - I I I I I I I i I ;1 I - N ' -" o u 3 ' " " 2i ;HII " I I I d I HI I -I - i 18 g I ;1 11 : I 11 S:; City of Sault Ste. Marie, Michigau Reconciliation of the Statement of Revennes, Expenditnres, and Changes in Fnnd Balances of Governmental Fnnds to the Statement of Activities For the Year Ended J nne 3, 29 Net Changes in fund balanccs - total governmental funds The change in nei assets reported for governmental activities in the statement of activities is different because: Governmental funds reported capital outlays as expenditures. However, in the statement of activities the cost of those assets is capitalized and is allocated over their estimated useful lives and reported as depreciation expense. This is the arnolmt by which capital outlay $2,713,996 lacked depreciation expense ($2,843,63) and loss on disposal ($19,658) in the current period. Special assessments receivable are long-term in nature and are collectible over several years. However, only the current receipts are reflected as revenues in the funds. Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the statement of net assets. Principal payments Bond proceeds (22,2) (319,725) (416,314) 1,132,549 (1,532,354) [; :fi or c '" ;!::: ;... <:> u l'j.. i ]R] l, oop - fi ],,..!l 8.. 'il.,.g hii 1a.g6 b ]ri f-<., i3.g.g a., '" B...J(!;li>-<t=>..::J:I.e.:::u " i!;' : u "., i!i U g 6 u u i '" ffi ffi ';; ibo; U 6 [;l b OIl.s 6 L ; ooi :g "Ou g :b S:l B u" g 3 i 3 g B j, 11 S- 3l en An internal service fund is used by management to charge the costs of certain activities, such as equipment costs, to individual funds. The nct revenue (expense) of the internal service funds is reported with governmental activities. Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in the funds: Compensatcd absences Accrued Interest Changes in net assets of governmental activities (151,868) (89,457) (24,523) $ (1,423,712) See accompanying notes to financial statements. 18

46 Ci of Sault Ste. Marie, Michigan Ci!1 of Sault Ste. Marie, Michigan Statement of Net Assets Statement of Revennes, Expenses and Proprietary Funds Changes in Net Assets - Proprietary Funds June 3, 29 I I For the Year Ended June 3, 29 BUSlltl88-Type Activities Enterprise Funds Governmental Activities Business-Type Activities Enterprise Funds Governmental Activities B-11 W,,,,. Internal W'W Internal d Parking Nonmajor Service Parking Nonmajor Service d Deck Funds Totals Sewer Deck Funds Totals ---- 'om'" OPERA ring REVENUES: ASSETS: Cash & Equivalents - Unrestricted 13,74 22,691 $ 1,27,945 1,396,71 1,187,453 Charges for Services S 5,53,96 27, ,833 $ 5,687,224 1,895,679 Other Revenue 261, ,764 68,664 Cash & Equivalents - Restricted 5,512,239 5,512,239 Inveslments - Unrestricted 16,149 16,149 Accounts Receivable 364, ,616 17,55 Total Operating Revenues , ,833 5,948,988 1,964,343 Special Assessments Receivable 49,145 49,145 OPERATING EXPENSES: Inventories 189,21 189,21 1,775 Personnel 1,275,63 6,71 125,18 1,46, ,82 OthcrAssets 255,55 Supplies 28, , ,687 :no,5 Capital Assets (Not Depreciated) 164, ,243 Contracted Services 134,462 11,127 9,29 154,798 66,945 Capital Assets (Net of Accumulated Depreciation) 4,172,425 6,545,26 46,737,397 1,635,32 Parking Lot Expenses 6,546 6,546 TOTAL ASSETS $ 6,567,951 $ 1,561,49 $ 54,519,7 3,196,54 Insurance 86, 4,332 6,5 96, ,642 Utilities 37,444 29,74 4,148 71,29 LIABILITIES: Repair & Maintenance 68, ,53 139,654 Due to Other Funds 169,555 Rental 52,68 52,68 ACCOlUlts Payable 47,524 3,419 6,88 57,826 49,981 Depreciation 1,136, ,944 2,69 1,289, ,948 Accrued Liabilities 49,359 l81 2,318 51, ,526 Other Expenses 842, ,65 852,441 61,578 Accrued Interest Payable 261,171 4,457 31,628 Compensated Absences 143,697 13, ,973 34,285 Total Operating Expenses 4,174, 23, ,88 4,597,162 2,17,927 Bonds Payable 2,18, 14, 2,32, Bonds Payable 22,895,67 5,651 28,5,67 OPERATING INCOME (LOSS) 1,591,724 (175,851) (64,47) 1,351,826 (143,584) TOTAL LIABILmES 25,577,358 5,789,57 31,388, ,347 NON OPERA TING REVENUES (EXPENSES); Local Sources 52,476 52,476 NET ASSETS; Interest Income 72,733 3,65 8,987 85,325 22,492 Invested in Capital Assets (net of related debt) 15,96,818 8,26 183,955 16,81,33 1,635,32 Unrestricted (21,366) 7,49,775 1,178,891 Interest E;o;:pense (924,186) (248,832) (1,173,18) Other 11,277 11,277 TOTAL NET ASSETS $ 2,813, ,894 $ 1,538,5-:': 23,13,88 2, Total Non-operating Revenucs (Expcnses) (84,176) (192,751) 8,987 (1,23, Recunci1iation to amounts reported for business activities in the statement of nei assets: (Loss) Income before transfers 751,548 (368,62) (55,6) 327,886 (121,92) Internal service funds included in businclls activities Net assets of business activities TrllIlsfers Operating Transfers In 3,763,393 7,72 162,247 3,933,36 49,525 Operating Transfers Out (3,53,42) (9,744) (125,52 (3,665,664) (1,) Total Transfers 232,973 (2,24) 36, ,696 (5,475) CHANGE IN NET ASSETS 984,521 (37,626) (18,313) 595,582 (171,567) NET ASSETS, JULY I 19,828,821 1,149,52 1,556,885 22,535,226 2,985,76 NET ASSETS, JUNE 3 $ 2,813, ,894 $ 1,538,572 $ 23,13,88 2,814,193 See accompanying notes to financial statements. 19 See accompanying notes to financial statements, 2

47 City of Sault Ste. Marie, Michigan Statement of Cash Flows Proprietary Fund Types For the Year Ended June 3, 29 Business-Type Activities Enterprise Funds Governmental Activities City of Sault Ste. Marie, Michigan Reconciliation of the Statement of Revenues, Expenses, and Changes in Net Assets of Proprietary Funds to the Statement of Activities For the Year Ended June 3, 29 CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from Customers Payments to Suppliers Payments to Employees Water Internal and Parking Nonmajor Service $ 5,788,484 (1,756,319) 31, ,918 $ 5,978,515 $ 1,717,49 (46,68) (94,28) (1,896,415) (96,22) Net changes in fund balances - total proprietary foods The change in net assets reported for business-type activities in the statement of activities is different because: $ 595,582 Net Cash Provided (Used) by Operating Activities 2,77,78 CASH FLOWS FROM NONCAPITAL AND RELATED FINANCING ACTIVITIES: Local Sources Other Revenue Operating transfers in Operating transfers ont 52,476 52,476 11,277 11,277 3,763,393 7,72 162,247 3,933,36 49,525 Internal Service Funds are included as business activities. Changes in net assets of business-type activities (19,699) 575,883 B-12 Net Cash Provided (Used) by Noncapital and Related Financing Activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACITVITIES: Purchase of capital assets Interest Payments Principal Payments Net Cash Provided (Used) by Capital and Related Financing Activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase ofinvestments InterestiuC{)me (544,431) (924,186) (12,3) (556,731) ( ) (1,113,18) (374,792) (1,345) (1,345) Net Cash Provided (Used) by Investing Activities Net Incn:ase (Doorease) in Cash and Equivalents Balances - Beginning of the Year Balances - End of the Year (478,419) (37,644) (26,179) (812,242) (184,379) $ 5,615,313 $ 6,98,949 $ Reconciliation of Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities: Operating Inoomc (Loss) Adjustments to Reconcile Operating Income (Los) 1 Net Cash Provided (Uscd) by Operating Activities: Depreciation Exp= Change in Assets and Liabilities: (Increase) Decrease in Assets: Accounts Receivable Special Assessments Receivable InVClltOry OtherA&sets Inclcase (Decrease) in Liabilities: Accounts Payable Accrued LiabiJities Due to other funds Compensated Absences, 1,591,724 (175,851) $ (64,47) $ 1,351,826 (143,584) 1,136, ,944 2,69 1,289, ,948 6,769 3,682 3,819 14,33 8,652 27,41 27,41 (11.5) (11,5) 1,549 (255,55) 5, (2,812) 3,381 9,65 4,674 (1,213) (11) 3,45 9,88 169, Net Cash Provided (U.sed) by Operating Activities $ (58268) $ 2,77,78 See accompanying notes to financial statements. 21 See accompanying notes to fmandal statements. 22

48 City of Sault Ste. Marie, Michigau Statement of Fiduciary Net Assets Fiduciary Funds June 3, 29 City of Sault Ste. Marie, Michigan Statement of Changes in Fidnciary Net Assets Fiduciary Funds For the Year Ended June 3, 29 ASSETS: Cash & Equivalents - Unrestricted Cash & Equivalents - Restricted Employee Retirement Plan 148,165 Agency FWlds ADDITIONS: Contributions: Taxes Employor & Employee Employee Retirement Plan 876,985 1,44,955 Total Cash & Cash Equivalents 148,165 95,248 Total Contributions 1,921,94 Receivables: Taxes Total Receivables 921, ,352 Investment Earnings: Net (decrease) in fair value of investments Interest, Dividends (2,521,122) 445,487 Investments, at fair value: Money Market Funds Mutual Funds Equity Securities 81,127 4,542,623 4,95,98 858,2 Total Investment Earnings Total Additions (2,75,635) (153,695) B-13 Total Investments TOTAL ASSETS LIABILITIES: Accrued Liabilities Deferred Revenue Due to Governmental Units 9,529,658 1,599, , ,2 953, ,248 DEDUCTIONS: Benefits Other Expenses Administrative Expenses Total Deductions Change in Net Assets 1,38,22 96,74 67,574 2,282,48 (2,436,175) TOTAL LIABILITIES 921, ,25 Net Assets, Beginning of the Year 12,113,998 NET ASSETS: Held in Trust for Pension Benefits and Other Purposes $ 9,677,823 Net Assets, End of the Year 9,677,823 See accompanying notes to fmancial statements. 23 See accompanying notes to financial statements. 24

49 B-14 r"l o a "CS o nl =... = City of Sault Ste. Marie, Michigan Statement of Net Assets Component Units June 3, 29 ASSETS: Cash & Equivalents - Unrestricted Accounts Receivable Special Assessments Receivable Due from Other Governmental Units Prepaid Assets Capital Assets (net) 314,143 21,315 24,782 43,475 DDA 1,85,47 65,481 15,512 TIFAm LDFA Totals 325,25 8,13 854,256 2,586,664 31,24 117,82 15,512 24,782 1,81 1,81 392, TOTAL ASSETS 583,715 1,166,4 325,25 8,13 1,288,52 $ 3,371,475 LIABILITIES: Accounts Payable Accrued Liabilities Due to Governmental Units Compensated Absences 9,421 33,428 3,138 2,845 4,97 12,674 25,233 2, , ,444 12,174 5_,572 TOTAL LIABILITIES 42,849 1, , NET ASSETS: Invested in Capital Assets, net of related debt Restricted for Trust Unrestricted 43, ,391 1,155,OR7 38, ,722 17,432 17, ,25 8,13 585, TOTAL NET ASSETS 54,866 1,155,87 325,25 8,13 1,136, TOTAL LIABILITIES AND NET ASSETS 583,715 1,166,4 325,25 8,13 1,288,52 $ 3,371,475 See accompanying notes to financial statements. 25

50 B-15 City of Sault Ste. Marie, Michigan Statement of Activities Component Unit For the Year Ended June 3, 29 FunctiollslPrO,KramB Economic Development Corp.: General Government DDA; Recreation & Culture TIFA: Recreation & Culture LFDA: Recreation & Culture Library: Recreation & Culture Total Component Units Cilargesfor 177,79 75, ,239 43,549 38,726 12, PrOl[l!!I! Revenues Operating Grants and S 5,95 Capital Grants and Contributions $ (12,34) $ Net (Expense) Revenue and Cges in Net Assets $ (12,34) (142,59) (142,59) (142,59) (38,726) (38.726) (12,) (12,) (365,825) General Revenues: Taxes Local Sources Investment Earnings O"' TransfeTS Total General Revenues and Transfer Change in Net Assets Net Assets - Beginning Net Assets _ Ending 1, 23,251 5, ,217 S 54, ,32 164,93 527,25 276,12 376,12 19,52 6, ,716 68,543 11,826 72,61 88,887 46,47 37,23 8,13 1, , $ 8,13 See accompanying notes to financial statements, 26 a..;. Q "I'i... =... e:...;. e =..;.

51 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NOTEl- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) B-16 A. Reporting Entity As required by accounting principles generally accepted in the United States of America. the financial statements of the reporting entity include those of the City of Sault Ste. Marie (the "City") and its component units. The component units discussed below arc included in the City's reporting entity because of the significance of its operational or financial relationship with the City. Blended Component Unit The Recreational Building Authority is a blended component unit of the City. Discretely Presented Component Units The Economic Development Corporation (EDC), Downtown Development Authority (the"dda"), TIF A Ill, Local Development Financing Authority (LDF A), and Bayliss Public Library (Library) is reported in a separate column to emphasize that it is legally separate from the City. The members of the governing Boards are appointed by the City Commission and the budgets and expenditures must be approved the City Commission. The City also has the ability to significantly influence operations of these organizations. Separate fmancial statements of the EDC are available at the Economic Development Corporation, 131 W. Easterday, Sault Ste. Marie, MI Separate financial statements of the Library are available at Bayliss Public Library, 541 Library Drive, Sault Ste. Marie, MI B. Government-Wide and Fund Financial Statements The government-wide fmancial statements (i.e., the statement of net assets and the statement of activities) report information on all of the nonfiduciary activities of the primary goveroment and its component nnits. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from the legally separate component units for which the primary government is fmancially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given fimctioo or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific fimction or segment. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit form goods, services, or privileges provided by a given fimction or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular fimction or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate fmancial statements are provided for governmental fimds, proprietary fimds, and fiduciary fimds, even though the latter are exclnded from the government-wide fmancial statements. Major individual governmental fimds and major individual proprietary fimds are reported as separate columns in the fuod financial statements. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources ftrst, then unrestricted resources as needed. Fund Financial Statements. The fund financial statements provide information about the City's fimds, including its fiduciary fimds. Separate statements for each fimd category - governmental, proprietary, and fiduciary - are presented. The emphasis of fund financial statements is on major governmental and proprietary fimds, each displayed in a separale column. All remaining governmental fimds are aggregated and reported as nomnajor funds. The City reports the following major governmental fimds: The General Fund is the City's primary operating fimd. It accounts for all financial resources of the general government, except those required to be acconnted for in another fimd. The Major Street Fund accouots for the use of motor fuel taxes which are restricted by State statutes for major street and highway purposes. The Local Street Fund accounts for the use of motor fuel taxes which are restricted by State statute for local street and highway pnrposes. The Capital Projects 2 Fund acconnts for the activity related to various projects. The Capital Outlay Fund accounts for the activity related to various projects_ The City reports the following major proprietary fimds: The Water and Sewer Fund accounts for the operations, maintenance and development of water and sewer facilities. The Parking Deck Fund accounts for the operation and maintenance of the downtown parking deck. Additionally, the City reports the following fimd types: Special Revenue Funds. These fimds account for revenue sources that are legally restricted to expenditures for specific pnrposes not including major capital projects. Debt Service Funds. These fimds account for the resources accumulated and payments made for principal and interest on long-term debt of governmental fimds. Capital Project Funds. These fimds acconnt for the acquisition of capital assets or construction of major capital projects not being fmanced by proprietary fimds. Permanent Funds. The Seal Estate Trost, Governor Osboro Trost, and Cemetery Perpetoal Care Trust are the City's Permanent Fnnds. The principal portion of these fimds must stay intact, but the interest earnings are used to provide for pnrposes defmed by each trust

52 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) B-17 Enterprise Funds. Enterprise Funds are used to account for operations (a) that are financed and operated in a manner similar to provide business enterprises where the intent of the governing body is that the cost (expense including depreciation) of providing goods or services to the general public on a continuing basis be fmanced or recovered primarily though user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriated for capital maintenance, public policy, management control, accountability, or other purposes. Internal Service Funds. These funds account for operations that provide data processing services and machinery and equipment to other departments of the city on a cost-reimbursement basis. Pension Trust Fund This fund accounts for the activities of the City's employee retirement system, which accumulates resources for retirement benefit payments to qualified employees. Agency Fund. These fund accounts for assets held for other governments and employees in an agency capacity. C. Measuremeut Focus, Basis of Accounting, and Financial Statement Presentation Government-wide, Proprietary and Fiduciary Fund Financial Statements. The government-wide, proprietary, and fiduciary fund fmancial statements are reported using the economic resources measurement focus and the accrual basis of accounting, except for agency funds which do not have a measurement focus. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings, result from nonexchange transactions or ancillary activities. Nonexchange transactions, in which the City gives (or receives) value without directly receiving (or giving) equal value in exchange, include property taxes, grants, and donations. On an accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Governmental Frmd Financial Statements. Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The City considers all revenues reported in the governmental funds to be available if they are collected within 6 days after year-end. Property taxes, state revenue, and interest are considered to be susceptible to accrual. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on long-tenn debt, compensated absences, and claims and judgments, which are recognized as expenditures to the extent they have matured. Capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of long-term debt and acquisitions under capital leases, if any, are reported as other financing sources. 29 The government-wide financial statements and proprietary funds of the City follow private-sector standards of accounting and fmancial reporting issued prior to December 1, 1989, unless those standards conflict with gnidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their business-type activities and proprietary type funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. As a general rule the effect of interfund activity has been eliminated from the government-wide fmancial statements. Exceptions to this general rule are payments-in-lieu of taxes and other charges between the City's water and sewer function and various other functions of the City. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided and 2) operating grants and contributions. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. Proprietary funds distingnish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the City's enterprise and internal service funds are charges to customers for sales and services. The City also recognizes as operating revenue the portion of tap fees intended to recover the cost of connecting new customers to the system. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. D. Assets, Liabilities, and Equity Deposits and Investments The City maintains an investment pool for certain City funds, Each fund's portion of the investment pool is displayed on the statement of net assetslbalance sheet as "Cash and equivalents". The debt service and trust and agency funds cash resources are invested separately as required by law. The City's cash and equivalents include cash on hand, demand deposits and short-tenn investments with original maturities of three months or less from the date of acquisition. State statutes authorize the City's to deposit in the accounts of federally insured banks, credit unions and savings and loan associations and to invest in obligations of the U.S. Treasmy, certain commercial paper, repurchase agreements, bankers acceptances, and mutual funds composed of otherwise legal investments. The City's investments during the year consisted of certificate of deposits and an employer benefit plan for pension trust investments. Receivables and Payables All receivables are reported at their gross value, except the General Fund ambulance receivable which is shown net of an estimated allowance for uncollectible accounts of $142,828. 3

53 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Activity between funds that are representative of lendinglborrowing arrangements outstanding at the end of the fiscal year are referred to as either "due to/from other funds" (i.e., the current portion of inter fund loans) or "advances to/from other funds" (i.e., the non-current portion of interfund loans). All other outstanding balances between funds are reports as "due to/from otber funds." Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as "internal balances." Property Taxes The City's property taxes are levied each July I on the taxable valuation of property located in the City as of the preceding December 31, the lien date. Property taxes are payable without penalty and interest through August 31; as of March 1 of the succeeding year, unpaid real property taxes are sold to and collected by Chippewa County. Assessed values, as established annually by the City and subject to acceptance by the County, are equalized by the State at an estimated 5% of current market value. Property taxes are recognized in the fiscal year in which they are levied. Capital assets of the primary government are depreciated using the straight-line method over the following estimated useful lives: Compensated Absences Buildings and building improvements Land improvements Marina Public domain infrastructure Water and wastewater system infrastructure Vehicles Machinery and equipment 15-4 years 1-15 years 7-4 years 1-5 years 2-75 years 2-2 years 5-25 years It is the City's policy to permit employees to accumulate earned but unused sick and vacation time benefits, subject to certain limitations. All sick and vacation time pay is accrued when incurred in the govermnentwide statements. A liability for these amounts is reported in governmental funds only if they have matured, for example as a result of employee resignations or retirements. B-18 Inventories All inventories are valued at cost using the first-inlfrrst-out (FIFO) method. Restricted Assets Certain resources are set aside for repayment of the City's Water and Sewer Enterprise Fund revenue bonds and are classified as restricted assets on the Statement of Net Assets because their use is limited by applicable bond covenants. Capital Assets Capital assets, which include property, plant, equipment, and infrastructure assets (e.g., roads, sidewalks, and similar items), reported in the applicable gove=ental or business-type activities columns in the gove=ent-wide fmancial statements. The City defmes capital assets as assets with an initial, individual cost of more than $1, and an estimated useful life in excess of two years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Maj or outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets of business-type activities, if any, is included as part of the capitalized value of the assets constructed. No such interest expense was incurred during the current fiscal year. 31 Long-Term Obligations In the government-wide financial statements, and proprietary fund types in the fund financial statements, long-term debt and other long-terro obligations are reported as liabilities in the applicable governmental activities business-type activities, or proprietary fund type statement of net assets. In the fund fmancial statements, govermnental funds report the face amount of debt issued as other financing sources. Fund Equity In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. Use of Estimates The preparation of fmaocial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the reporting period. Actual resnits could differ from those estimates. Subsequent Events Management evaluates events occurring subsequent to the date of the financial statements in detennining the accounting for and disclosure of transactions and events that affect the fmancial statements. Subsequent events have been evaluated through the date of the accompanying independent auditor's report, which is the date the fmancial statements were available to be issued. 32

54 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements Jnne 3, 29 NOTE 2 - STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY Budgetary Information Budgetary Information - Annual budgets are adopted on a basis consistent with accounting principles generally accepted in the United States of America. Budgets and Budgetary Control - The City follows these procedures in establishing the budgetary data reflected in the fmancial statements: a. Each April, after receiving input from the individual departments, the City Manager prepares a proposed operating budget for the fiscal period conunencing July 1 and lapses on June 3. The operating budget includes proposed expenditures and the means of financing them. NOTE 3 - DEPOSITS AND INVESTMENTS At year end, the City's deposits and investments were reported in the basic fmancial statements in the following categories: Governmental Business-Type Total Primary Fiduciary Component Activities Activities Government Funds Units Cash and Equivalents - Umestricted 9,529,239 1,453,43 1,982,642 95,248 2,586,664 Cash and Equivalents- Restricted ,512, Total The breakdown between deposits and investments is as follows: B-19 b. Public hearings are conducted to obtain taxpayer conunents. c. Prior to July 1, the budget is legally enacted through a resolution passed by the City CounciL d. Budgetary control is exercised at the departmental level of the General Fund. Any revisions that alter the total expenditures of any department or fund (i.e., budget amendments) require approval by the City CounciL Such amendments are made in accordance with the procedures prescribed under Puhlic Act 621 of e. The budget and approved appropriations lapse at the end of the fiscal year. f. The City does not record encumbrances in the accounting records during the year as normal practice and, therefore, no outstanding encumbrances exist at year end. Budgeted amounts are as originally adopted or amended by the City Council during the year. Individual amendments were not material in relation to the original appropriations which were amended. The modified accrual basis of accounting is used for hudgetary purposes. The General Fund revenue budget was adopted on the basis of activities or programs fmanced by the General Fund. Primary Fiduciary Component Government Funds Units Bank Deposits (checking and savings accounts, certificates of deposit and money market accounts) $ 16,492,24 243,413 $ 2,586,664 Petty Cash and Cash on Hand 2,677 Total $ $ Cash is restricted in the amount of $5,512,239 for the water and sewer fund. Investments are restricted in the amount of$i,492,269 for the Seal Estate Trust and $925, for the Governor Osborn Trust. Investments: U.S. Treasury- Securities Equity Securities Mutual Funds Money Market Certificates of Deposits Total Investments Fair Value Less Than 1 1_-_5 More Than 1 1,92,269 4,95,98 4,95,98 5,4,625 5,4,625 81,127 81, ]53112Q 14, $ - $ - 1,92, Ratings Aaa Not Assigned Not Assigned Not Assigned Not Assigned Michigan Public Act 621 of 1978 (the Budgeting Act) requires that budgets be adopted for Governmental Funds. U.S. generally accepted accounting principles require that the financial statements present budgetary comparisons for the Governmental Fund Types for which budgets were legally adopted. The original bndget adopted for the General fund was modified throughout the year through various budget amendments. The budget document presents information by fund, function, department, and line items. The legal level of budgetary control adopted by the governing body is the department level Government Activities: Unrestricted Restricted Business Activities: Unrestricted Fiduciary: Restricted Total 2,358,235 2,464,976 16, ,66 $

55 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3;29 B-2 NOTE3- DEPOSITS AND INVESTMENTS (Continued) Interest rate risk. The City does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. Credit risk. State law limits investments in commercial paper, corporate bonds, and mutual bond funds to the top two ratings issued by nationally recognized statistical rating organizations. The City has no investment policy that would further limit its investment choices. Credit quality ratings of future money funds were not available from the financial institutions or are unrated. Custodial deposit credit risk. Custodial deposit credit risk is the risk that in the event of a bank failure, the City's deposits may not be returned. State law does not require and the City does not have a policy for deposit custodial credit risk. As of year end, $1,366,685 of the City's bank balance of $19,311,762 was exposed to credit risk because it was uninsured and uncollateralized. Custodial investment credit risk. Custodial investments credit risk is the risk that in the event of the failure of the counterparty, the City will not be able to recover the value of its investments or securities that are in the possession of an outside party. Of the City's $15,317,2 in investments, $ is not in the name of the City, but in the game ofthe agent. Statutory Authority: Michigan Law (Public Act 2 of 1943 as amended) authorizes the City to deposit and invest in one or more of the following: a. Bonds, securities, and other obligations of the United States or an agency or instrumentality of the United States. b. Certificates of deposit, savings accounts, deposit accounts, or depository receipts of a fmancial institution that is eligible to be a depository of funds belonging to the State under a law or rule of this State or the United States. c. Commercial paper rated at the time of purchase within the two highest classifications established by not less than two standard rating services and matures not more than 27 days after the date of purchase. d. Repurchase agreements consisting of ins1ruments listed in a. e. Banker's acceptance of United States banks. f. Obligations of this State or any of its political subdivisions that at the time of purchase are rated as investment grade by not less than one standard rating service. g. Mutual funds registered under the investment company act of 194, Title I of Chapter 686, 54 Stat. 789, 15 U.S.C. 8a-1 to 8a-3 and 8a-4 to 8a-64, with the authority to purchase only investment vehicles that are legal for direct investment by a public corporation. h. Obligations described in a. through g. if purchased through an interlocal agreement under the urban cooperations act of 1967,1967 (Ex Sess) PA 7, MCL to NOTE 3 - DEPOSITS AND INVESTMENTS (Continued) i. Investment pools organized under the surplus funds investment pool act, 1982 PA 367, to j. The investment pools organized under the local government investment pool act, 1985 PA 121, MCL to The City's deposits and investment policy are in accordance with statutory authority. These deposits are in various financial institutions in varying amounts. All accounts are in the name of the City and specific funds. They are recorded in City records at cost. Interest is recorded when the deposits mature or is credited to the applicable account. NOTE 4 - CAPITAL ASSETS Capital asset activity for the primary govemment for the current year was as follows: Governmental Activities: Capital assets not being depreciated: Construction in progress Land Subtotal Capital assets being depreciated: Buildings and improvements Land improvements Furniture & equipment Infrastructure Subtotal Less accumulated depreciation on: Buildings and improvements Land improvements Furniture & equipment Infrastructure Subtotal Net Capital Assets Being Depreciated Governmental Activity Capital Assets, Net of Depreciation Beginning Balances 3,737, ,64,382 4,29,295 8,451, w. (3,198,557 ) (1,46,858) (5,89,355) ( ) ( ) Additions 72, ,48 913, (394,374) (26,169) (623,295) ) ( ) Deductions Ending Balances (3,287,65 ) 45,93 illq) ( ) (25,) 9,462,53 4,947,73 9,365, (25.) ,722 (3,533,29) (1,253,27) (5,712,65) (24,33,591 ) ( ) ) Q3 922 ( )

56 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 B-21 NOTE 4- CAPITAL ASSETS (Continued) Depreciation expense was charged to functions/programs of the primary goveroment as follows: Governmental Activities General government Public Safety Public Works Health and Welfare Recreation and Culture Capital assets held by the government's internal service funds are charged to the various functions based on their usage of the assets Total Depreciation Expense -Governmental Activities Business-type Activities: Capital assets not being depreciated: Construction in progress Land Sublotal Capital assets being depreciated: Buildings and improvements Equipment Water and sewer Subtotal Less accumulated depreciation on: Buildings and improvements Equipment Water and sewer Subtotal Net Capital Assets Being Depreciated Beginning Balances Additions Deductions 31,652 (31,652) (31.652) 23,618,799 2,244,55 138, (9,52,652) (37,994) (983,484) (99,351) (8,91.49) (819283) ( ) ( ) (431,244) 51, ,227 2,82,58 32, , $ Ending Balances ,618,799 2,383, (9,873,646) (1,82,835) ( ) ( ) Governmental Activity Capital Assets, Net of Depreciation (431244) (31652) Business-type Activitie. Water and sewer Parking deck Parking Total Depreciation Expense -Business-type Activities 37 $ 1,136, , $ NOTE 4- CAPITAL ASSETS (Continued) Capital asset activity of the Economic Development Corporation for the current year was as follows: Beginning Ending Balances Additions Deductions Balances Capital assets not being depreciated: Land 2 - $ 2 Capital assets being depreciated: Vehicles 15,771 18,889 (15,771 ) 18,889 Equipment Subtotal (15771 ) Less accumulated depreciation: Vehicles (15,771 ) (3,778) 15,771 (3,778) Equipment (17 682) (3398) (218) Subtotal (33453 ) (7176) (24858) Net Capital Assets Being Depreciated Capital assets - Net of depreciation $ Depreciation expense was charged to business activities for economic development in the amount of$7,176. Capital asset activity of the Bayliss Public Library for the current year was as follows: Beginning Ending Balances Additions Deductions Balances Capital assets not being depreciated: Construction in progress 1,284 94,54 14,824 Land Subtotal Capital assets being depreciated: Land improvements 15,25 15,25 Furniture and equipment 17,287 12, ,95 Building and improvements 475, ,98 Book collection Subtotal Less accumulated depreciation: Land improvements (15,25) (15,25) Furniture and equipment (149,435) (9,24) (158,675) Building and improvements (385,718) (12,6) (397,724 ) Book collection ( ) (31949) (29873) Subtotal (817184) (53195) (87379) Net Capital Assets Being Depreciated Capital assets - Net of depreciation $ Depreciation expense for the year ended June 3, 29 of $53,195 has been recorded with recreation and culture expenses. 38

57 ,, B-22 "" :i City of Sault Ste. Marie, Michigan 'Sa; ; "" Notes to Financial Statements ;3 I I I June 3, 29 '" '".13.. CfJ.... ",'.' 'I','I "8 " J.,., NOTE 5- INTERFUND RECEIVABLES, PAYABLES, AND TRANSFERS (Continued).. '" -" " g "" ;-.. ".S "" b " Transfers are used to (I) move revenues from the fund that statute or budget requires to collect them to S "< ''I J the fund that statute or budget requires to expend them, (2) moves receipts restricted to debt service from B.S.g the funds collecting the receipts to the debt service fund as debt service payments become due, and (3) use! ; """" J j uorestricted revenues collected in the general fund to fmance various programs accounted for in other Z ". i'i """, " S E!i,'.' I I funds in accordance with budgetary authorizations. t1,3.[ bj)" NOTE 6 - LONG-TERM DEBT "",,, : n " Z!i3 "" I The government issues bonds to provide for the acquisition and construction of major capital facilities. " H ] "" General obligation bonds are direct obligations and pledge the full faith and credit of the government..! City contractual agreements and installment purchase agreements are also general obligations of the ; '<::... " '" government. " ; " l. 1"'"l 5 'E Bond and contractual obligation activity can be summarized as follows: :S " j 'E v Due Beginning Increases! Ending Within " t:l "!1 H rn1 ", : :-s Balance Adjustments Decreases Balance One Year Q) a " j <3 1;; Primary Government CfJ "" '",S " "' ] ] Governmental Activities.. itl l r' 'I JI CfJ <8 e a8 tij uo '" M 25 General Obligation Limited Tax ;l '" " Bonds, maturing serially to 216 in annual Q) ;. [;3 " b payments ranging from $5, to $175,.so,5 ITI 1=1 and bearing interest ranging from 2.5% to.e:z ;:::." HI %. $ 1,335, $ - $ 14. $ 1,195, $ 165, <,-;3 " o " '" '" 2 Michigan Transportation Authority ".,g " "' S"""" Bonds, maturing serially to 215 in annual '" payments ranging from $25, to ctic $16, ui22 'il.l ' and bearing interest ranging from 5.% to '"O.S """".E a 5.3%. 695, 25, 67, 25, I JI Building Authority Bonds, maturing, S "' Jl " " HI HTI j b serially to 215 in annual amounts ranging E'"d " from $45, to $7, and bearing interest. bj) ranging from 5.15% to 5.5%. 46, 45, 415, 5, ;.s &r''...c: Michigan Transportation Authority " "' U '",,"-. ]1 nt1, Bonds, maturing serially to 212 in annual g oo.s i:2 amounts ranging from $75, to $9\ ggf or " ".2,g,g and bearing interest ranging from 5.1% to 5O. '': z :] S S 5.3%. 35, 8, 27, 85, ; P "" ] I-!-j 1994 Recreational Building Authority Note.sl.. 2] ] 5 r;! -' maturing serially to 219 in annual amoullts "'i3 " ;(l 1<" ", -.=: tl ==.. -Ol", g,ij J i!].=.= 'p:q = & J 24 Building Authority Note, maturing ; b '" Lu5'B'l!z8 o.t:l " in 29 with monthly installments of $23, '" " ] including interest at 3.494%. 2,775 2,775 Q ""' '",. "'.e u b... E ] - a I I b.52 g '" ts.8-",1 [$35, including interest at 5.38%. 28,65 34, ,223 19,683 u z <l:l.:; 4

58 City of Sault Ste. Marie, Michigan City of Sault Ste. Marie, Michigan Notes to Financial Statements Notes to Financial Statements June 3, 29 June 3, 29 NOTE 6- LONG-TERM DEBT (Continued) NOTE 6- LONG-TERM DEBT (Continued) Governmental Activities (Continued) Due Due Beginning Increases! Ending Within Beginning Increases/ Ending Within Balance Adjustments Decreases Balance One Year Balance Adjustments Decreases Balance One Year Governmental Activities (Continued) B cnbg non-interest bearing loan, due 29 Installment Note, with payments In equal annual installments of$39,5 for due the 8 th of every month in the amount 1 years beginning July J, ,375 49, , 29,625 of$1,375, with interest at 3.61%. First payment due July 8, 29 and the last 27 Michigan State Infrastructure Bank payment on June 8, ,365 75,365 14,12 Loan, maturing serially to 213 in annual installments of$166,138 including interest Compensated Absences at 6.1%. 9, 139,138 76, ,312 Total Governmental Activities 28 Michigan Transportation Fund Bonds, LongTcnn Debt maturing serially to 223 in annual installments ranging from $5, to $75, including Business-Type Activities interest ranging from 3.25% to 4.45%. 695, 5, 69, 5, 1998 State Drinking Water Revolving 26 General Obligation Municipal Installment Fund Loan, maturing serially to 22 in Purchase Contract Note, maturing serially to annual installments ranging from $195, 221 in semiannual installments of $31,518 to $26, and bearing interest at 2.5%. 2,735, 2, 2,535, 2, including interest at 4.6%. 628,713 34,57 594,26 36, General Obligation Limited Tax Bonds, Advance from Economic Development maturing serially to 223 in annual installments Corporation (a component unit of the City), ranging from $65, to $325, and bearing maturity in 217 with annual installments interest ranging from 3.% to 5.25%. 3,235, 65, 3,17, 65, ranging from $3,5 to $51,315 including interest at 4,5%. 212,529 6,375 26,154 11, General Obligation Unlimited Tax Refunding Bonds maturing serially to 26 Installment Purchase Note, maturing 2 loin annual instalhnents ranging from In 211 with monthly installments of$953 $61, to $75, and bearing interest Including interest at 4.49% 31,266 1,222 21,44 1,699 ranging from 4.25% to 4.5%. 2,25, 645, 1,38, 675, Note payable to the State of Michigan, 1998 State Revolving Fund Combined Interest at 4%, due annually and the principal Sewer Overflow (eso) Loan, maturing Balance is expected to be repaid using federal serially to 22 in annual installments Advances construction funds as soon as these ranging from $18, to $23, Funds become available but no later than and bearing interest at 2,25%. 2,495, 185, 2,31, 185, September 3, , ,77 35, State Revolving Fund (CSO) Loan, Note payable to the State of Michigan, maturing serially to 217 in annual Interest at 4%, due annually and the principal installments ranging from $19, to Balance is expected to be repaid using federal $23, and bearing interest at 2.25%. 1,925, 195, 1,73, 2, Advances construction funds as soon as these Funds become available but no later than 1998 Water Supply and Sewage Disposal September 3, , ,612 System Limited Tax General Obligation Bonds, maturing serially to 218 in annual Note payable to the State of Michigan, installments ranging from $15, to Interest at 4%, due annually and the principal $45, and bearing interest ranging from Balance is expected to be repaid usmg federal 3.9% to 4.25%. 2,155, 1, 2,55, 11, Advance construction funds as soon as these Funds become available but no later than September 3, , ,67 324, 324, 41 I I 42

59 City of Sault Ste. Marie, Michigan Notes to Financial Statements Jnne 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 NOTE 6- LONG-TERM DEBT (Continued) NOTE 6- LONG-TERM DEBT (Continued) Business-Type Activities (Continued) Due Beginning Increases! Ending Within Balance Adjustments Decreases Balance One Year Business-Type Activities (Continued) Due Beginning Increases! Ending Within Balance Adjustments Decreases Balance One Year 25 Downtown Development Bonds, maturing serially to 226 in annual installments beginning November 26, ranging from $$85, to $565, bearing interest ranging from 4.25% to 4.4% , 9, 5,745, 14, 1997 State Water Pollution Control Revolving Fund Limited Tax General Obligation Bonds, maturing serially to 218 in annual installments ranging from $3, to $35, and bearing interest at 2.25%. 375, 35, 34, 3, 21 Water supply and Sewer System Limited Tax General Obligation Bonds, maturing serially to 222 in annual installments ranging from $65, to $26, and bearing interest ranging from 4.% to ,28, 7, 2,21, 8, 25 General Obligation Limited Tax Bonds (Series B), maturing serially to 225 in installments ranging from $25, to $6, and bearing interest from 3.85% to 4.625%. 735, 3, 75, Accumulated compensated absences ----1lLQlill 3, B Water Supply and Sewage Disposal System Limited Tax General Obligation Bonds, maturing serially to 215 in annual installments ranging from $18, to $28, and bearing interest at 5.%. 22 Clean Water Program State Revolving Fund eso General Obligation Limited Tax Sewage Disposal System Bond, maturing serially to 224 in annual installments ranging from $145, to $21, and bearing interest at 2.5%. 23 Drinking Water Revolving Fund Program General Obligation Limited Tax Water Supply System Improvement Revenue Bonds, maturing serially to 224 in annual installments ranging from $13, to $195, and bearing interest at 2.5%. 1,85, 19, 1,66, 195, 2,83, 145, 2,685, 15, 2,625, 135, 2, Total Business - Type Activities Long-Tenn Debt Total Long-Term Debt Component Units Economic Development Corporation $ Accumulated compensated absences $ 2235 $ - $ Bayliss Public Library Accumulated compensated absences L-J.2.lll Accumulated compensated absences are generally liquidated by the General Fund, Annual debt service requirements to maturity for the above obligations are as follows: Governmental Activities Business-we Activities Year End S;mtember 3 Princi12al Interest Princi12al Interest 21 Drinking Water Revolving Fund Program General Obligation Limited Tax Water Supply system Improvement Revenue Bonds, maturing serially to 223 in annual installments ranging from $8, to $11, and bearing interest at 2.5% Limited Tax General Obligation Bonds, Maturing serially to 217 in annual installments ranging from $35, to $65, and bearing interest ranging from 4.9% to 5.3%. 1,42,67 8, 1,34,67 8, 55, 4, , , ,857 2,32, 1,67, , ,872 2,415, 983, ,386 1,865, 98, ,51 138,657 1,94, ,416 11,618 2,1, 776, ,578, ,728 1,915, 2,83, ,38 43,127 7,655,67 1,95, Total ,97,245 3,82,67 $ 8.592,

60 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Stalemenls Jnne 3, 29 B-25 NOTE 6- LONG-TERM DEBT (Continued) Accumulated Sick and Vacation Pay Employees of the City earn sick and vacation time at varying rates based on the following: Under the terms of the Police and AFCSME union contract (DPW, sewer and clerical employees), sick leave is accumulated at the rate of one day for each month of service, with a maximum accumulation of 6 days. Employees who have accumulated more than 6 days will not be allowed additional accumulation. Upon retirement or death, employees will be paid out 1% of days accumulated up to a maximum of 6 days. As a result of separation for any other reason, the employees will lose all accumulated sick leave. City management personnel eam sick leave at a rate of eight hours per month of service. All unused sick time is paid out, generally in November of each year, at 5% of the employee's current rate of pay. Vacation leave is eamed based on the following schedule for all employees: Vacation Schednle for Office and Professional Employees 1 days after I year of continuous service 15 days after 7 years of continuous service o 2 days after 14 years of continuous service o 25 days after 2 years of continuous service o 3 days after 25 years of continuous service Vacation Schedule for Department Heads 1 days upon initial employment with the City 15 days after 3 years of continuous service 2 days after 1 years of continuous service 25 days after 2 years of continuous service 3 days after 25 years of continuous service No more than 5% of an employee's annual vacation leave may he carried over to the next employment year and no accumulation is allowed beyond six weeks of annual leave. The accumulated sick and vacation pay liability is $887,98 at June 3, 29. Accrued compensated absences are generally liquidated by general fund for govermnental activities, water and sewer fund for business-type activities, and EDC and Bayliss Public Library for component nnits. NOTE7- RISK MANAGEMENT The City is exposed to various risks of losses related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City's current liability and property insurance is through Municipal Underwriters of Michigan representing Gulf Insurance Group. The City continues to carry commercial insurance for all other risks of loss. Settled claims resulting from these risks have not exceeded commercial insurance coverage in any of the past three fiscal years. NOTE8- Plan Description EMPLOYEE RETIREMENT AND BENEFIT SYSTEMS The City's defined benefit pension plan provides retirement, death and disability benefits to plan members and beneficiaries. The City participates in the Municipal Employees Retirement System of Michigan (MERS), an agent multiple-employer plan administered by the MERS Retirement Board. Act No. 427 of the Public Acts of 1984, as amended, establishes and amends the benefit provisions of the participants in MERS. The Municipal Employees Retirement System of Michigan issues a publicly available fmaneial report that includes financial statements and required supplementary information for MERS. That report may be obtained by writing to the Municipal Employees Retirement System of Michigan, 1134 Municipal Way, Lansing, Michigan Funding Policy The City is required to contribute at an actnarially determined rate; the current rate ranges from 6.67% to 6.96% of annual covered payroll. City employees currently make no contributions to the Plan. The contribution requirements of the City are established and may be amended by the Retirement Board of MERS. The contribution requirements of plan members are established and may be amended by the City, depending on the MERS contribution program adopted by the City. Annual Pension Cost For the year ended June 3, 29, the City's annual pension cost of $167,97 for MERS was equal to the City's required and actual contributions. The required contribution was determined using the entry age actuarial cost method. The actuarial assumptions included (a) a rate ofretum on tbe investment of present and future assets of 8%, (b) additional projected salary increases up to 4.2% per year, depending on age, attributable to seniority/merit, and (c) an inflationary rate of 4.5%. The actuarial value ofmers assets was determined on the basis of a valuation method that assumes the fund eams the expected rate of retum, and includes an adjustment to reflect fair value. The City's unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll on an open basis. The remaining amortization period at December 31, 28, the date of the last actuarial valuation, was 28 years. Three-year Trend Information Year Annual Percenlage Net Ended Pension ofapc Pension Dec3! Cost{APC} Contributed Obli!!ation ,66 1% ,692 1% ,97 1% 45 46

61 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 NOTE 8- EMPLOYEE RETIREMENT AND BENEFIT SYSTEMS (Continued) NOTE8- EMPLOYEE RETIREMENT AND BENEF1T SYSTEMS (Continued) FIRE AND POLICE DEPARTMENT PENSION AND RETIREMENT PLAN (ACT 345) Membership consisted of the following at Juoe 3, 29, the date of the latest actuarial valuation: Plan Description The City of Sault Ste. Marie contributes to the City of Sault Ste. Marie Firemen and Policemen Retirement System (the "Retirement System"), which is based on Act No. 345 of the Public Acts of 1937, as amended. The Retirement System is a single employer, contributory defmed benefit pension plan (the "Plan"). The City of Sault Ste. Marie is the Administrator of the Plan. Administrative costs of the Plan are financed through investment earnings. The Plan is included as a pension trust fund in the City's fmancial statements and a stand alone fmancial report of the Plans has not been issued. Retirees and beneficiaries receiving benefits Terminated plan members entitled to, but not yet receiving, benefits Active plan members Total Nmnber of participating employers 56 I..-lOl B-26 Substantially, all full-time Fire and Police Department employees are eligible to participate in the Retirement System. Benefits vest after ten years of service. Fire Department employees who retire at age 5 with 25 or more years of service or age 6 regardless of years of service are entitled to retirement benefits equal to 2.8% of three-year average fmal compensation times the first 25 years of credited service plus I % of average final compensation for year years in excess of 25 years of service. Police patrol employees who retire with 2 or more years of services or age 6, regardless of years of service are entitled to retirement benefits equal to 2.8% of three-year average fmal compensation times first 25 years of service with a maximum of 7% of average fmal compensation. Police sergeants hired after July I, 22 who retire with 25 or more years service regardless of age or age 6 regardless of service are entitled to a straight life pension equal to 2.8% of three-year average fmal compensation times year of service with a maximum of75% average final compensation (Plan B). Police sergeants hired prior to July 1,22 are entitled to Plan B as described above or retirees with 2 or more years of service regardless of age or age 6 regardless of service are entitled to straight life pension equal to 2.6% of three-year average compensation times the first 25 years of service plus I % of average fmal compensation times years of service in excess of 25 years with a maximmn of 85 average fmal compensation. A post retirement benefit increase of 2% and I % respectively, times the nmnber of full years retired for persons retired prior and subsequent to July I, 1976 respectively, was made effective July I, The Plan does not include provisions for other early retirement. Mandatory retirement occurs at age 65. Summary of Significant Acconnting Policies Basis of Accounting The Plan's fmancial statements are prepared using the accrual basis of accouoting. Plan member contrihutions are recognized in the period in which they are due. The City's contributions to the Plan are recognized when due and the employer has made a formal commitment to provide them. Benefits and refunds are recognized when due and payable in accordance with the terms of the Plan. Investments Investments are reported at fair value which is determined using selected bases as follows: short-term investments are reported at cost, which approximates fair value; securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates; investments that do not have established fair values are reported at estimated fair vale; and cash deposits are reported at carrying amounts which reasonable estimates fair vale. Investments representing 5% or more of the Plan's assets available for benefits are as follows at Juoe 3, 29: The Retirement System also provides death and disability benefits, which is computed in the same manner as the retirement benefit at age 55, reduced to 1.5% of average final compensation for non-duty disability benefit is 5% of average final compensation. [f an employee terminated his or her employment with the Police or Fire Departments and is not eligible for any other benefits under the Plan, the employee is entitled to receive a refund of his or her accumulated contribution plus interest. Pimco Total Return Fund [Shares Trust S&P 5 [Shares TR Russell 1 [Shares TR S&P 1 Index Pimeo All Asset Fund IShares TR MSCI EAFE FD Natixis Gateway 1,27,279 1,669,53 1,73,263 1,43, , , ,

62 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements Jnne 3, 29 NOTE 8- EMPLOYEE RETIREMENT AND BENEFIT SYSTEMS (Continued) NOTE8- EMPLOYEE RETIREMENT AND BENEFIT SYSTEMS (Continued) Funding Policy BAYLISS PUBLIC LIBRARY - COMPONENT UNIT B-27 Covered employees contribute 5.6% (Firefighters and Police Sergeants) to 7.5% (Police Patrol) of their annual compensation. The City is required to contribute the remaining amounts necessary to fund the system, using the actuarial basis specified by statute. Annual Pension Cost The Plan's annual pension cost of $876,985 was equal to the Plan's required and actual contributions for the current year. The annnal required contribution for the current year was determined as part of a June 3, 28 Actuarial valuation using the entry age actuarial cost method. The actuarial assumptions included (a) 8.% investment rate ofretum (net of administrative expenses) and (b) projected salary increases ranging from 8.8% to 5.2% per year. Both (a) and (b) included an inflation component of 5.%. The actuarial value of assets was determined using techniques that smooth the effects of short-term volatility in the fair value of investments over a five-year period. The unfunded actuarial acemed liability is amortized as a level percentage of projected payroll on an open basis. The remaining amortization period at June 3, 28 was 3 years. Three-year Trend Information Year Annual Percentage Net Ended Pension ofapc Pension Dec 31 Cost {APe) Contributed Obli2ation 27 $ 83,238 1% ,21 1% ,985 1% Funded Status and Funding Progress As of June 3, 28, the most recent actuarial valuation date, the plan was 6 percent funded. The actuarial accmed liability for benefits was $21.7 million, and the actuarial value of assets was $12.9 million, resulting in an unfunded actuarial accrued liability (UAAL) of$8.7 million. The covered payroll (annual payroll of active employees covered by the plan) was $2.5 million and the ratio of the UAAL to the covered payroll was 348 percent The Bayliss Public Library participates in a statewide govemment agent multiple-employer public employee pension plan which covers substantially all employees of the Library. Plan Description The Library contributes to the Michigan Municipal Retirement System, an agent multiple employer public employee retirement system that acts as a common investment and administrative agent for units oflocal government in Michigan. The system provides the following provisions: normal retirement, deferred retirement and service retirement to plan members and their beneficiaries. All full-time employees become a member of the System on the first day of employment, and are completely vested after 1 years of service. Service retirement allowances are based upon percentages ranging from I to 2.5 percent of 3 to 5-year fmal average compensation depending on benefit program selected social security coverage, etc. The most recent period of which actuarial data was available was for the fiscal year ended December 3 I, 28. MERS was organized pursuant to Section 12a of Act #156, Public Acts of 1851 (MSA (a); MCLA (a), as amended, State of Michigan. MERS is regulated under Act No. 427 of Public Acts of 1984, sections of which have been approved by the State Pension Commission. MERS issues a publicly available fmancial report that includes financial statements and required supplementary information for the system. That report may be obtained by writing to the MERS at 1134 Municipal Way, Lansing, Michigan Funding Policy The obligation to contribute to and maintain the system for these employees was established by negotiation with the Library's competitive bargaining unit and personnel policy, which requires employees to contribute to the plan. The Library is required to contribute at an actuarially determined rate. The contribution rate as a percentage of payroll at December 31, 28 is as follows: General % The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets are increasing or decreasing over time relative to the actuarial accrued liability for benefits. 49 5

63 City of Sault Ste. Marie, Michigan Notes to Financial Statements Jnne 3, 29 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 B-28 NOTES- Auuual Pension Cost EMPLOYEE RETIREMENT AND BENEFIT SYSTEMS (Continued) During the fiscal year ended June 3, 29, the Library's contributions totaling $ were made in accordance with contribution requirement detennined by an actuarial valuation of the plan as of December 31, 28. The employer contribution rate has been determined based on the entry age normal funding method. Under the entry age normal cost funding method, the total employer contribution is comprised of the normal cost plus the level annual percentage of payroll payment required to amortize the unfunded actuarial accrued liability over 3 years. The employer normal cost is, for each employee, the level percentage of payroll payment required to amortize the unfunded actuarial accrued liability over 3 years. The employer normal cost is, for each employee, the level of percentage of payroll contributions (from entry age to retirement) required to accumulate sufficient assets at the member's retirement to pay for this projected benefit. Significant actuarial assumptions used include a long-term investment yield rate of 8 percent and annual salary increases of 4.5 percent based on an age-related scale to reflect merit, longevity, and promotional salary increases. NOTE9- Year Annual Percentage Ended Pension ofapc Cost CAPC) Contributed 27 % 28 % 29 % SEGMENT INFORMATION - ENTERPRISE FUND Segment information for tbe year ended June 3, 29 is as follows: Nonoperating revenue (expense) Operating income (loss) Changes in net assets Operating revenues Operating expenses Operating transfers - net Depreciation Total assets Current liabilities Long-term debt payable Beginning net assets Ending net assets Water and Sewer Net Pension Obligation $ (84,176) 1,591, ,521 5,765,724 4,174, 232,973 1,136,994 46,39,7 2,681,751 22,895,67 19,828,821 2,813,342 NOTE9 NOTE 1 - SEGMENT INFORMATION - ENTERPRISE FUND (Continued) Cash provided by: Operating activities Noncapital fmancing Capital financing Investing Beginning cash Ending cash COMMITMENTS AND CONTINGENCIES Water and Sewer 2,788, ,25 (3,589,732) 72,733 6,93,732 5,615,313 The City received significant financial assistance from state and federal agencies in the form of various grants. The disbursement of fund received under these programs generally requires compliance with terms and conditions specified in the grant agreement and are subject to audit by the grantor agency. Any disallowed claims will not have material effect on any of the financial statements of the individual fund types included herein or on the overall financial position of the City at June The City leases, under operating lease arrangements, administrative office space and various parcels of land for use as parking lots. The City is also responsible for maintenance and operating expense relating to the property. In addition, the City has entered into an agreement with the Sault St. Marie Country Club (the "Club") whereby the Clnb leases the golf course from the City for an annual lease fee which is equivalent to the City's required $35, payment to the Building Authori to retire its $475, note payable. The balance of this note payable was $245,223 at June 3, 29. The City leases lawn mowing equipment to the Clnb whereby the Club leases the equipment from the City for an annnal lease fee, which is equivalent to the City's required $11,436 payment to retire its $51,121 note payable. The balance of this note payable was paid off as of June 3, 29. A new note was issned in June in the amount of $75,365, which requires an annual lease fee of$16,5. The balance of this note payable was $75,365 as of June 3, 29. In accordance with an agreement, Chippewa County annually pnrchases real property taxes and delinquent special assessments (included on the tax bills), which have not been paid as of March 1" from the City. The County has recourse against the City for amounts which remain unpaid. The City is involved in various lawsuits now pending. It is the opinion of the City and of its Council that the outcome of the various lawsuits will not materially affect the operations or the fmancial position of the City. The amount of all legal costs relating to such actions is not currently determinable

64 City of Sault Ste. Marie, Michigan Notes to Financial Statements June 3, 29 NOTE 11 SUBSEQUENT EVENTS The City anticipates selling Bonds in December for tbe next phase of its mandated CSO elimination program. The 2.25% State Revolving Fund eligible portion of tbe project is $6.92 million. The SRF bonds are eligible for 4% principal forgiveness under the American Reinvestment and Recovery Act. The principal reduction would be $2.768 million leaving a balance of $4.152 million. The ineligible portion of $8.9 million is eligible for 35% interest subsidy. The interest reduction of $1.925 million results in a Net Interest Cost of3.6l %. The City also anticipates selling an estimated $3.5 million of bonds for conversion oftbe former Federal Building into a new City Hall. These bonds also would be eligible for tbe 35% interest subsidy. On October 1, 29, tbe State Legislature passed a budget that included a reduction in State Revenue Sharing. At tbis point we have been unable to determine what the impact on the City of Sault Ste. Marie will be. On September 9, 29 tbe City of Sault Ste. Marie purchased a new ftre truck in tbe amount of $469,97. B-29 53

65 Appendix C City of Sault Ste. Marie SELECTED GENERAL FUND FINANCIAL INFORMATION Fiscal Years Ended June 3, 27, 28 and 29 This Appendix contains excerpts from the City s annual financial reports for the fiscal years ended June 27, 28 and 29. The information contained in this Appendix does not include all of the financial information and disclosures required for a fair presentation of the City s financial position or the City s financial position in conformity with generally accepted accounting principles. The complete audited reports of the City for the same fiscal years are available from the City.

66 City of Sault Ste. Marie Comparative Balance Sheet General Operating Fund Fiscal Years Ended June 3, 27, 28 and 29 ASSETS June Cash and cash equivalents... Investments... Taxes receivables... Accounts receivable... Due from other governmental units... Special Assessments receivable... Due from other funds... Inventories... Prepaid expenditures... Total assets... $ 1,966,629 4,866,188 36,362 8,799 1,18,6 26, ,749 $ 9,244,26 $ 826,131 1,22,74 4,987, ,4 58,84 1,61,858 31,19 $ 9,81,587 $ 1,468,6 673,547 5,73,9 25, , ,6 254,282 31,813 $ 9,467,291 LIABILITIES AND FUND BALANCE LIABILITIES: Accounts payable... Accrued liabilities/expenses... Deferred revenues... Total liabilities... $ 426, ,67 5,974,248 6,744,91 $ 289,82 261,88 6,52,572 6,64,272 $ 176,68 379,116 6,7,15 6,562,334 FUND BALANCE Reserved... Unreserved, designated for: Subsequent years expenditures... Capital outlay... Lawrence Pullar Reserve... Anue-Osborn building reserve... Carbide Dock... Fire equipment... Fort bridge reassembly... Unreserved, undesignated... Total fund balances... $ 142, ,786 1,871,161 2,5,169 $ 31,19 224,315 1,192 92, , ,289 25, 1,111,121 2,477,315 $ 297,542 1, , ,852 25, 1,468,568 2,94,957 Total liabilities and fund balances... $ 9,244,26 $ 9,81,587 $ 9,467,291 C - 1

67 City of Sault Ste. Marie General Operating Fund Statement of Revenues, Expenditures and Changes in Fund Balance Fiscal Years Ended June 3, 27, 28 and 29 REVENUE Taxes... Special assessments... Federal sources... State sources... Local sources... Licenses and permits... Charges for services... Rental..... Interest... Miscellaneous... Total revenue... June $ 5,339, ,94 222,451 2,153, ,432 43,729 2,449, ,729 27,287 11,55,212 $ 5,472,964 46,22 42,422 2,287,55 435,18 42,42 2,58, ,97 118,511 11,678,41 $ 5,546, , ,358 1,84,213 96,551 2,865,381 88,52 152, ,34 11,38,76 EXPENDITURES Legislative... General government... Public safety... Public works... Health and welfare... Culture and recreation... Capital Outlay... Debt service... Other... Total expenditures... 45,437 1,94,355 3,851, ,922 1,485,285 1,368,67 1,834, ,87 432,555 11,844,256 48,4 2,284,256 3,644, ,35 1,496,427 1,29,548 1,82,48 39,11 1,772,961 43,997 1,636,591 3,73, ,766 1,566,112 1,179, ,352 1,75,45 1,582,96 REVENUES OVER (UNDER) EXPENDITURES. (789,44) 95, ,98 OTHER FINANCING SOURCES (USES) Loan Proceeds... Transfers in... Transfers out... Total other financing sources (uses) , ,22 (7,295) 38,454 (1,78,443) 75, ,859 (94,562) NET CHANGE IN FUND BALANCES... (577,52) (134,54) 427,642 FUND BALANCES July ,77,671 2,5,169 2,477,315 Prior period adjustment ,686 FUND BALANCES July 1, as restated... 3,77,671 2,611,855 2,477,315 FUND BALANCES June 3... $ 2,5,169 $ 2,477,315 $ 2,94,957 C - 2

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69 FORM OF APPROVING OPINION Appendix D

70 Founded in 1852 by Sidney Davy Miller Miller, Canfield, Paddock and Stone, P.L.C. 15 West Jefferson, Suite 25 Detroit, Michigan TEL (313) FAX (313) MICHIGAN: Ann Arbor Detroit Grand Rapids Kalamazoo Lansing Saginaw Troy FLORIDA: Naples ILLINOIS: Chicago NEW YORK: New York CANADA: Toronto Windsor CHINA: Shanghai MEXICO: Monterrey POLAND: Gdynia Warsaw Wrocław City of Sault Ste. Marie County of Chippewa State of Michigan Form of Approving Opinion We have acted as bond counsel to the City of Sault St. Marie, County of Chippewa, State of Michigan (the Issuer ) in connection with the issuance by the Issuer of bonds in the aggregate principal sum of $, designated Limited Tax General Obligation Bonds, Series 21 (Federally Taxable Build America Bonds Direct Payment) (the Bonds ). In such capacity, we have examined such law and the transcript of proceedings relating to the issuance of the Bonds and such other proceedings, certifications and documents as we have deemed necessary to render this opinion. The Bonds are in fully-registered form in the denomination of $5, each or multiples thereof, numbered in order of registration, bearing original issue date of, 21, payable as to principal and interest as provided in the Bonds, with the option of redemption prior to maturity in the manner, at the times and at the prices specified in the Bonds. As to questions of fact material to our opinion, we have relied on the certified proceedings and other certifications of public officials and others furnished to us. Based upon the foregoing, we are of the opinion that, under existing law: 1. The Bonds have been duly authorized and executed by the Issuer and are valid and binding obligations of the Issuer. 2. All taxable property within the boundaries of the Issuer is subject to taxation for payment of the Bonds, subject to applicable constitutional, statutory and charter tax rate limitations. 3. Interest on the Bonds is not excluded from gross income for federal income tax purposes under Section 13 of the Internal Revenue Code of 1986, as amended. We express no opinion regarding any other federal or state tax consequences related to the ownership or disposition of, or the actual or receipt of interest on, the Bonds. Investors are urged to obtain independent tax advice based upon their particular circumstances. The tax opinions herein where not intended to be used, and cannot be used, for the purpose of avoiding taxpayer penalties. These opinions were written to support the promotion or marketing of the Bonds.

71 MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. City of Sault Ste. Marie -2- Form of Approving Opinion The rights or remedies of bondholders may be affected by bankruptcy, insolvency, fraudulent conveyance or other laws affecting creditors rights generally, now existing or hereafter enacted, and by the application of general principles of equity, including those relating to equitable subordination. This opinion is given as of the date hereof, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention, or any changes in law that may hereafter occur. Very truly yours, MILLER, CANFIELD, PADDOCK AND STONE, P.L.C \

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73 CONTINUING DISCLOSURE UNDERTAKING Appendix E

74 FORM OF CONTINUING DISCLOSURE UNDERTAKING This Continuing Disclosure Undertaking (the Undertaking ) is executed and delivered by the City of Sault Ste. Marie, County of Chippewa, State of Michigan (the City ), in connection with the issuance of the City s $ Limited Tax General Obligation Bonds, Series 21 (Federally Taxable Build America Bonds Direct Payment) (the Bonds ). The City covenants and agrees for the benefit of the Bondholders, as hereinafter defined, as follows: (a) Definitions. The following terms used herein shall have the following meanings: Audited Financial Statements means the annual audited financial statement pertaining to the City prepared by an individual or firm of independent certified public accountants as required by Act 2, Public Acts of Michigan, 1968, as amended, which presently requires preparation in accordance with generally accepted accounting principles. MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. Bondholders shall mean the registered owner of any Bond or any person (a) with the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bond (including any person holding a Bond through a nominee, depository or other intermediary) or (b) treated as the owner of any Bond for federal income tax purposes. EMMA shall mean the MSRB s Electronic Municipal Market Access System, or such other system, Internet Web site, or repository hereafter prescribed by the MSRB for the submission of electronic filings pursuant to the Rule. MSRB means the Municipal Securities Rulemaking Board. Rule means Rule 15c2-12 promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended. SEC means the United States Securities and Exchange Commission. (b) Continuing Disclosure. The City hereby agrees, in accordance with the provisions of the Rule, to provide or cause to be provided to the MSRB through EMMA, on or before the last day of the 6th month after the end of the fiscal year of the City, the following annual financial information and operating data, commencing with the fiscal year ended June 3, 21, in an electronic format as prescribed by the MSRB: (1) Updates of the numerical financial information and operating data included in the official statement of the City relating to the Bonds (the Official Statement ) appearing in the Tables in the Official Statement as described below: a. Taxable Value; b. Total Taxable Value by Use and Class; c. Percent of Total Taxable Value by Use and Class; d. State Equalized Valuation; E-1

75 e. Total SEV by Use and Class; f. Percent of Total SEV by Use and Class; g. Maximum Tax Rates; h. Property Tax Rates; i. Principal Residence Property Tax Rates by Governmental Unit; j. Non-Principal Residence Property Tax Rates by Governmental Unit; k. Property Tax Collections; l. Ten Largest Taxpayers; m. Revenues from the State of Michigan; n. Legal Debt Margin; o. Other-Post Employment Benefits; p. Labor Contracts; and q. Profile of Major Employers. (2) The Audited Financial Statements. provided, however, that if the Audited Financial Statements are not available by the date specified above, they shall be provided when available and unaudited financial statements will be filed by such date and the Audited Financial Statements will be filed as soon as available MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. Such annual financial information and operating data described above are expected to be provided directly by the City or by specific reference to documents available to the public through EMMA or filed with the SEC. If the fiscal year of the City is changed, the City shall send a notice of such change to the MSRB through EMMA, prior to the earlier of the ending date of the fiscal year prior to such change or the ending date of the fiscal year as changed. (c) Notice of Failure to Disclose. The City agrees to provide or cause to be provided, in a timely manner, to the MSRB through EMMA, in an electronic format as prescribed by the MSRB, notice of a failure by the City to provide the annual financial information with respect to the City described in subsection (b) above on or prior to the dates set forth in subsection (b) above. (d) Occurrence of Events. The City agrees to provide or cause to be provided in a timely manner to the MSRB through EMMA, in an electronic format as prescribed by the MSRB, notice of the occurrence of any of the following events listed in (b)(5)(i)(c) of the Rule with respect to the Bonds, if applicable, if material: (1) principal and interest payment delinquencies (2) non-payment related defaults (3) unscheduled draws on debt service reserves reflecting financial difficulties (4) unscheduled draws on credit enhancements reflecting financial difficulties (5) substitution of credit or liquidity providers, or their failure to perform E-2

76 (6) adverse tax opinions or events affecting the tax-exempt status of the security (7) modifications to rights of security holders (8) bond calls (9) defeasances (1) release, substitution, or sale of property securing repayment of the securities (11) rating changes (e) Materiality Determined Under Federal Securities Laws. The City agrees that its determination of whether any event listed in subsection (d) is material shall be made in accordance with federal securities laws. MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. (f) Identifying Information. All documents provided to the MSRB through EMMA shall be accompanied by the identifying information prescribed by the MSRB. (g) Termination of Reporting Obligation. The obligation of the City to provide annual financial information and notices of material events, as set forth above, shall be terminated if and when the City no longer remains an obligated person with respect to the Bonds within the meaning of the Rule, including upon legal defeasance of all Bonds. (h) Benefit of Bondholders. The City agrees that its undertaking pursuant to the Rule set forth in this Undertaking is intended to be for the benefit of the Bondholders and shall be enforceable by any Bondholder; provided that, the right to enforce the provisions of this Undertaking shall be limited to a right to obtain specific enforcement of the City s obligations hereunder and any failure by the City to comply with the provisions of this Undertaking shall not constitute a default or an event of default with respect to the Bonds. (i) Amendments to the Undertaking. Amendments may be made in the specific types of information provided or the format of the presentation of such information to the extent deemed necessary or appropriate in the judgment of the City, provided that the City agrees that any such amendment will be adopted procedurally and substantively in a manner consistent with the Rule, including any interpretations thereof by the SEC, which, to the extent applicable, are incorporated herein by reference. Such interpretations currently include the requirements that (a) the amendment may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of the City or the type of activities conducted thereby, (b) the undertaking, as amended, would have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances, and (c) the amendment does not materially impair the interests of Bondholders, as determined by parties unaffiliated with the City (such as independent legal counsel), but such interpretations may be changed in the future. If the accounting principles to be followed by the City in the preparing of the Audited Financial Statements are modified, the annual financial E-3

77 information for the year in which the change is made shall present a comparison between the financial statements as prepared on the prior basis and the statements as prepared on the new basis, and otherwise shall comply with the requirements of the Rule, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. A notice of the change in accounting principles shall be sent to the MSRB through EMMA. IN WITNESS WHEREOF, the City has caused this Undertaking to be executed by its authorized officer. CITY OF SAULT STE. MARIE County of Chippewa State of Michigan By: Its: Dated:, 21 MILLER, CANFIELD, PADDOCK AND STONE, P.L.C \ E-4

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80 $4,55, CITY OF SAULT STE. MARIE County of Chippewa, State of Michigan Limited Tax General Obligation Bonds, Series 21 (Federally Taxable Build America Bonds Direct Payment) Robert W. Baird & Co. 11 Bay Street Traverse City, Michigan (231) Printed By