Lakehaven Utility District King County

Transcription

1 Washington State Auditor s Office Financial Statements Audit Report Lakehaven Utility District King County Audit Period January 1, 2011 through December 31, 2011 Report No Issue Date December 3, 2012

2 Washington State Auditor Brian Sonntag December 3, 2012 Board of Commissioners Lakehaven Utility District Federal Way, Washington Report on Financial Statements Please find attached our report on the Lakehaven Utility District s financial statements. We are issuing this report in order to provide information on the District s financial condition. Sincerely, BRIAN SONNTAG, CGFM STATE AUDITOR Insurance Building, P.O. Box Olympia, Washington (360) TDD Relay (800) FAX (360)

3 Table of Contents Lakehaven Utility District King County January 1, 2011 through December 31, 2011 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards... 1 Independent Auditor s Report on Financial Statements... 3 Financial Section... 5

4 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards Lakehaven Utility District King County January 1, 2011 through December 31, 2011 Board of Commissioners Lakehaven Utility District Federal Way, Washington We have audited the basic financial statements of the Lakehaven Utility District, King County, Washington, as of and for the year ended December 31, 2011, and have issued our report thereon dated September 28, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit, we considered the District s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. 1

5 COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the District s financial statements are free of material misstatement, we performed tests of the District s compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended for the information and use of management and the Board of Commissioners. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. BRIAN SONNTAG, CGFM STATE AUDITOR September 28,

6 Independent Auditor s Report on Financial Statements Lakehaven Utility District King County January 1, 2011 through December 31, 2011 Board of Commissioners Lakehaven Utility District Federal Way, Washington We have audited the accompanying basic financial statements of the Lakehaven Utility District, King County, Washington, as of and for the year ended December 31, 2011, as listed on page 5. These financial statements are the responsibility of the District s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. 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 principles 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 opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Lakehaven Utility District, as of December 31, 2011, and the changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report on our consideration of the District s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal 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. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 6 through 11 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards 3

7 generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during the audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District s basic financial statements. The Statement of Net Position by Division, Statement of Revenues, Expenses, and Changes in Fund Net Position by Division and Statement of Cash Flows by Division are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. BRIAN SONNTAG, CGFM STATE AUDITOR September 28,

8 Financial Section Lakehaven Utility District King County January 1, 2011 through December 31, 2011 REQUIRED SUPPLEMENTARY INFORMATION Management s Discussion and Analysis 2011 BASIC FINANCIAL STATEMENTS Statement of Net Position 2011 Statement of Revenues, Expenses and Changes in Net Position 2011 Statement of Cash Flows 2011 Notes to Financial Statements 2011 SUPPLEMENTARY INFORMATION Statement of Net Position by Division 2011 Statement of Revenues, Expenses, and Changes in Fund Net Position by Division 2011 Statement of Cash Flows by Division

9 Management s Discussion and Analysis Year Ended December 31, 2011 Brief Discussion of the Basic Financial Statements The District s financial statements include a Statement of Net Position; a Statement of Revenues, Expenses & Changes in Fund Net Position; a Statement of Cash Flows; and Notes to the Financial Statements. The financial statements are prepared using the accrual basis of accounting and conform to generally accepted accounting principles as applicable to proprietary funds of governments. The intent of the management s discussion and analysis is to provide highlights of the District s financial activities for the year ended December 31, Readers are encouraged to read this section in conjunction with the accompanying financial statements. Condensed Comparative Statement of Net Position The following condensed statements of net position present the assets of the District and show the mix of liabilities and net assets used to acquire these assets: Assets Current Assets $ 22,351,067 $ 18,846,402 Noncurrent Assets: Capital Assets - Net 216,980, ,222,565 Other 54,667 88,829 Total Assets $ 239,386,117 $ 238,157,796 Liabilities Current Liabilities $ 5,537,861 $ 5,490,458 Noncurrent Liabilities: Long-Term Debt 19,258,082 22,200,026 Other 637, ,948 Total Liabilities $ 25,433,125 $ 28,325,432 Net Position Net Investment in Capital Assets $ 193,562,543 $ 192,942,097 Restricted for Debt Service 2,747,015 2,701,396 Restricted for Capital Projects - 834,003 Unrestricted 17,643,434 13,354,868 Total Net Position $ 213,952,992 $ 209,832,364 6

10 Management s Discussion and Analysis Year Ended December 31, 2011 Analysis of the Condensed Comparative Statement of Net Position Assets Current assets consist of cash and cash equivalents held in the maintenance, construction and revenue bond funds as well as inventory, prepaid expenses, accrued interest and accounts receivable. Current assets increased by $3,504,665 largely due to increases in the maintenance fund cash and cash equivalents held by the King County Investment Pool, as well as increases in accrued revenue. Cash balances in the various funds vary from year to year based on the income from operations, expenses paid for operations and construction costs, transfers into other funds, borrowings and debt service payments. Accrued interest receivable on investments did not materially change in Noncurrent assets consist of net capital assets, which include land, construction in progress, equipment, buildings, infrastructure and intangibles. Noncurrent assets also include assessment receivables and unamortized bond issue costs. Noncurrent assets decreased by $2,276,344 in This decrease was similar to 2010 as capital spending was offset by depreciation expense and fixed asset disposals. Liabilities Current liabilities include accounts payable, deposits, interest payable on debt, retainage and the current portion of long term debt. Current liabilities increased by $47,403 from The current portion of debt, including interest payable and capital lease payable, decreased by $149,198 during the year. This decrease is due to the 1998 bonds being fully repaid during 2010, partially offset by increased principal payments on the 2005 bonds. Amounts held as deposits from developers and customers increased by $165,875, and amounts held as retainage decreased by $12,232. Accounts payable increased by $42,958 during The amount of these costs varies annually with the invoices received from vendors. Noncurrent liabilities include the long term portion of revenue bonds, Public Work Trust Fund loans and the capital lease. Noncurrent liabilities also include compensated absences, unamortized bond charges and co-op certificates. Noncurrent liabilities decreased by $2,939,710 in 2011 primarily due to principal payments on long term debt. Net Position Net position consists of total assets minus total liabilities. Net position is the portion of the assets the District no longer finances with revenue bonds or other liabilities. Net position increased by $4,120,628 in Over time, increases or decreases in the District s net position is an indicator of the District s overall financial growth. An increase in net position is a positive sign of the District s financial strength. 7

11 Management s Discussion and Analysis Year Ended December 31, 2011 Condensed Comparative Statement of Revenues, Expenses & Changes in Fund Net Position The following statement of revenues, expenses, and changes in fund net position present the annual surplus or deficiency of revenues over expenses (the change in net position): Revenues Wastewater Operating Revenue $ 14,480,999 $ 13,414,806 Water Operating Revenue 12,460,535 11,219,934 Investment Income 141, ,614 Other Income 384, ,733 Total Revenues $ 27,467,524 $ 25,039,087 Expenses Wastewater Operations & Maintenance $ 7,812,519 $ 7,843,020 Water Operations & Maintenance 4,843,846 5,236,926 Administrative & General 3,637,131 3,670,636 Depreciation & Amortization 7,543,156 7,384,939 Taxes 836, ,638 Loss on Sale of Fixed Assets 325,905 11,716 Public Works Trust Fund Interest 57,189 62,559 Revenue Bond Interest 620, ,181 Total Expenses $ 25,676,513 $ 25,701,615 Change in Net Position before Capital Contributions $ 1,791,011 $ (662,528) Capital Contributions 2,329,617 2,899,093 Change in Net Position $ 4,120,628 $ 2,236,565 Total Net Position, January 1 $ 209,832,364 $ 207,595,799 Total Net Position, December 31 $ 213,952,992 $ 209,832,364 8

12 Management s Discussion and Analysis Year Ended December 31, 2011 Analysis of the Condensed Comparative Statement of Revenues, Expenses, & Changes in Fund Net Position Revenues Wastewater operating revenues were $1,066,193 higher in 2011, primarily due to an 8% rate increase enacted during Water operating revenues were $1,240,601 higher in 2011, primarily due to a 15% rate increase enacted during Investment income decreased by $45,855 in 2011 primarily due to lower interest rates earned on the investments in The average balance being invested also varies by fund from year to year and can result in differences in the interest collected by the District. Other income increased by $167,498 in 2011 primarily due to refunding of taxes by the City of Tacoma on payments that should not have originally been made. Expenses Operations and maintenance costs decreased in 2011 by $423,581. The decrease was driven by a decrease in wages and benefits, an increase in capitalized wages, and delaying certain expenses. Administrative and general expenses decreased in 2011 by $33,505. The decrease was driven mostly by a decrease in wages and benefits and delaying certain expenses. Interest expense decreased by $141,845 compared to This was due to lower average bonds outstanding during the year. The District did not capitalize any interest in Capital Contributions The District experienced a $569,476 decrease in capital contributions. The primary reason for this decrease was a reduction in new construction activity in the District. Net Position In 2011 the District experienced a change in net position of $4,120,628, an increase of $1,884,063 as compared with

13 Management s Discussion and Analysis Year Ended December 31, 2011 Analysis of Overall Financial Condition With operating income, a larger growth in net position, and higher cash flows from operations, the financial condition of the District improved in Capital Assets Capital assets consist of land, construction in progress, equipment, buildings, infrastructure, and intangibles. (See Note 3 for more information). Net capital assets decreased by $2,242,182 in The decrease was primarily driven by depreciation and amortization of $7,543,156 partially offset by acquisitions of depreciable assets and construction in progress of $5,891,218. Principal projects included in the 2011 capital spending were the Second Supply & Filtration projects totaling $739,536, service connections & meter replacements totaling $577,888, the Oasis Phase I project totaling $464,027, Lakota and Redondo treatment upgrades totaling $386,827, the Pump Station 33 Upgrade project totaling $248,902, CMMS upgrades totaling $230,585 and the I&I Study project totaling $166,565. Donated systems (infrastructure donated by developers) in the amount of $1,710,905 are included in the 2011 increase in net capital assets. Over the next ten years it is anticipated that capital spending will be in the range of $135 million with approximately 50% of that going to water projects. The Filtration project will account for approximately $25 million of the total. The areas of major emphasis in the capital budget include upgrades to water treatment & filtration, existing infrastructure, pump stations and additional water sources. Capital assets activity for the year ended December 31, 2011 was as follows: Balance Balance 12/31/11 12/31/10 Change Land $ 6,348,357 $ 6,348,357 $ - Construction in Progress 7,044,169 4,967,533 2,076,636 Equipment 26,002,135 25,738, ,413 Buildings 2,590,482 2,590,482 - Infrastructure 248,511, ,956,373 1,555,170 Intangibles 47,622,324 48,622,073 (999,749) Accumulated Depreciation (121,138,627) (116,000,975) (5,137,652) Total Capital Assets, Net $ 216,980,383 $ 219,222,565 $ (2,242,182) 10

14 Management s Discussion and Analysis Year Ended December 31, 2011 Long-Term Debt In 2011 the long-term debt declined by $2,941,944. The decrease was driven by principal payments on the Public Works Trust Fund loans, the revenue bond and the capital lease. These principal payments totaled $3,068,557. At December 31, 2011, the District had total Public Works Trust Fund loans outstanding of $10,150,348, total revenue bonds outstanding of $11,925,000 and a capital lease payable of $116,913. (See Note 6 for more information). Additional Comments In 2012 there will be an increase in water rates of 15% and an increase in sewer rates of 5%. As the customer base in the District is not experiencing significant growth, any revenue growth will likely be driven by rate increases. The District expects their operating expenses to continue to grow in line with revenues. The District did not take on any additional debt in The District anticipates drawing approximately $7 million from a PWTF loan in 2012 with all of these proceeds used for the Second Supply Filtration project. 11

15 Statement of Net Position December 31, 2011 ASSETS 2011 Current Assets Maintenance Fund: - Cash and Cash Equivalents $ 15,003,234 - Accrued Interest Receivable 6,659 Construction Fund: - Cash and Cash Equivalents 746,777 - Accrued Interest Receivable 357 Accounts Receivable - Customers 1,880,282 Accounts Receivable - Other 56,995 Restricted Assets: Revenue Bond Fund: - Cash and Cash Equivalents 2,831,101 - Accrued Interest Receivable 1,268 Inventory 269,944 Prepaid Expenses 280,392 Accrued Utility Revenue 1,274,058 Total Current Assets $ 22,351,067 Noncurrent Assets Restricted Assets: U.L.I.D. Assessments Receivable $ 344 Capital Assets (Net) 216,980,383 Unamortized Debt Issue Costs 54,323 Total Noncurrent Assets $ 217,035,050 Total Assets $ 239,386,117 See accompanying notes and accountant s report. 12

16 Statement of Net Position December 31, 2011 LIABILITIES 2011 Current Liabilities Accounts Payable - Maintenance $ 1,210,830 Accounts Payable - Construction 408,991 Deposits, Customers & Developers 843,386 Retainage Due Contractors 21,784 Capital Lease Payable (Current Portion) 37,044 Public Works Trust Fund Loans (Current Portion) 867,876 Interest Payable - PWTF Loans 27,252 Payable from Restricted Assets: Revenue Bonds Outstanding (Current Portion) 2,035,000 Bond Interest Payable 85,698 Total Current Liabilities $ 5,537,861 Noncurrent Liabilities Capital Lease Payable (Less Current Portion) $ 79,869 Public Works Trust Fund Loans (Less Current Portion) 9,282,472 Compensated Absences 612,182 Co-Op Certificates 25,000 Payable from Restricted Assets: Revenue Bonds Outstanding (Less Current Portion) 9,890,000 Unamortized Bond Premium 217,842 Less Deferred Charges on Advance Refunding (212,101) Total Noncurrent Liabilities $ 19,895,264 Total Liabilities $ 25,433,125 NET POSITION Net Investment in Capital Assets $ 193,562,543 Restricted for Debt Service 2,747,015 Unrestricted 17,643,434 Total Net Position $ 213,952,992 See accompanying notes and accountant s report. 13

17 Statement of Revenues, Expenses and Changes in Fund Net Position Year Ended December 31, 2011 Operating Revenues 2011 Customer Sales & Service Fees $ 25,782,962 Permits, Inspection & Delinquency Fees 425,487 Developer Revenues & Administrative Charges 391,050 Street Lighting Revenues 342,035 Total Operating Revenues $ 26,941,534 Operating Expenses Maintenance & Operations $ 12,656,365 Administrative & General 3,637,131 Depreciation & Amortization 7,543,156 Taxes, Other Than Income Tax 836,061 Total Operating Expenses $ 24,672,713 Net Operating Income (Loss) $ 2,268,821 Nonoperating Revenues (Expenses) Interest Expense $ (660,756) Amortization of Debt Expenses (17,139) Investment Income 141,759 Gain (Loss) on Sale of Fixed Assets (325,905) Other Income 384,231 Total Nonoperating Revenues (Expenses) $ (477,810) Income (Loss) Before Contributions $ 1,791,011 Capital Contributions 2,329,617 Change in Net Position $ 4,120,628 Total Net Position, January 1 $ 209,832,364 Total Net Position, December 31 $ 213,952,992 See accompanying notes and accountant s report. 14

18 Statement of Cash Flows Year Ended December 31, Cash Flows From Operating Activities Cash Received From Customers $ 27,088,236 Cash Paid to Suppliers (8,043,036) Cash Paid to Employees (9,145,730) Net Cash Provided by Operating Activities $ 9,899,470 Cash Flows From Capital & Related Financing Activities Acquisition & Construction of Capital Assets $ (4,026,765) Payment of Bond Principal & Other Financing (3,033,316) Interest Paid (681,317) Proceeds from Sale of Fixed Assets 264,340 Cash Contributions in Aid of Construction 639,524 Net Cash (Used) by Capital & Related Financing Activities $ (6,837,534) Cash Flows From Investing Activities Interest Received on Investments $ 141,724 Net Cash Provided by Investing Activities $ 141,724 Net Increase (Decrease) in Cash & Cash Equivalents $ 3,203,660 Cash & Cash Equivalents - January 1 15,377,452 Cash & Cash Equivalents - December 31 $ 18,581,112 Noncash Investing, Capital and Financing Activities Contributions of Capital Assets from Developers $ 1,710,905 See accompanying notes and accountant s report. 15

19 Statement of Cash Flows Year Ended December 31, 2011 Reconciliation of Net Operating Income (Loss) to Net Cash Provided by Operating Activities 2011 Net Operating Income (Loss) $ 2,268,821 Adjustments to Reconcile Operating Income (Loss) to Net Cash Provided by Operating Activities Depreciation & Amortization $ 7,543,156 Other Income 384,231 Changes in Assets & Liabilities (Increase) Decrease in Accounts Receivable 48,897 (Increase) Decrease in Inventory (50,512) (Increase) Decrease in Prepaid Expenses (18,740) (Increase) Decrease in Accrued Utility Revenue (286,430) Increase (Decrease) in Accounts Payable 7,813 Increase (Decrease) in Compensated Absences 2,234 Total Adjustments $ 7,630,649 Total Cash Provided by Operating Activities $ 9,899,470 See accompanying notes and accountant s report. 16

20 Statement of Cash Flows Year Ended December 31, 2011 Reconciliation of Cash & Cash Equivalents Per Statement of Cash Flows to the Statement of Net Position Current Assets Restricted Assets Statement of Maintenance Construction Cash Flows Fund Fund Bond Fund Total Cash & Cash Equivalents - Beginning $ 11,755,743 $ 833,570 $ 2,788,139 $ 15,377,452 Net Increase (Decrease) 3,247,491 (86,793) 42,962 3,203,660 Cash & Cash Equivalents - Ending $ 15,003,234 $ 746,777 $ 2,831,101 $ 18,581,112 See accompanying notes and accountant s report. 17

21 Notes to Financial Statements December 31, 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of Lakehaven Utility District conform to generally accepted accounting principles (GAAP) as applicable to proprietary funds of governments. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The following is a summary of the most significant accounting policies of the District: a. Reporting Entity Lakehaven Utility District is a municipal corporation governed by an elected, five member board. The District s primary activity is to provide water and sewer services to residential and commercial customers within the District s boundaries. As required by generally accepted accounting principles, management has considered all potential component units in defining the reporting entity. The District has no component units. b. Basis of Accounting and Presentation The accounting records of the District are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter RCW. The District uses the Budgetary Accounting and Reporting System (BARS). The District uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred. Unbilled utility service receivables are recorded at year end. The District distinguishes between operating revenues and expenses and non-operating revenues and expenses. Operating revenues and expenses result from providing services and producing and delivering goods in connection with the District s principal ongoing operations. The principal operating revenues of the District are charges to customers for water and wastewater sales and services and other related services. Operating expenses pertain to the furnishing of those services which include the cost of sales and services, administration expenses and depreciation expense. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. c. Cash and Cash Equivalents For purposes of the statement of cash flows, the District considers all highly liquid investments (including restricted assets) with a maturity of three months or less when purchased to be cash equivalents. 18

22 Notes to Financial Statements December 31, 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) d. Receivables Receivables consist primarily of amounts due from water and sewer customers. All receivables are recorded when earned. No allowance for uncollectible accounts is provided since the District has power to record liens for its receivables and, generally, does not experience significant uncollectible amounts. e. Inventories Inventories are valued at average cost. f. Investments Investments are recorded at fair market value. See Note 2. g. Compensated Absences Compensated absences are absences for which employees will be paid, such as vacation and sick leave. Employees may accumulate and be paid upon retirement or other separation from employment a maximum of 320 hours of vacation/sick leave time. The District accrues accumulated vacation/sick leave benefits and severance pay benefits as earned. h. Capital Assets Utility plant in service is recorded at cost. The District uses a capitalization threshold of $5,000. Provision for depreciation is computed on the straight-line method with the following useful lives: Equipment, 3-25 years; Buildings, 50 years; Infrastructure, years; Intangibles, years. Upon retirement of an asset, the cost of the asset and the related accumulated depreciation are removed from the property accounts and the gain or loss is reflected in the statement of revenues, expenses and changes in fund net position. Repairs and maintenance are expensed as incurred, while major renewals, replacements and betterments are capitalized. Assets acquired through contributions are recorded as additions to the appropriate property, plant and equipment accounts. Preliminary planning and design costs incurred for proposed projects are deferred pending construction of the facility. Costs relating to projects which are ultimately constructed are transferred to capitalized utility plant. Costs relating to those projects abandoned are charged to expense when it is determined that they will not be completed. See Note 3. 19

23 Notes to Financial Statements December 31, 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Restricted Funds Restricted accounting funds currently include the Revenue Bond Fund. j. Unamortized Debt Discount/Premium Costs relating to the sale of bonds are deferred and amortized over the lives of the various bond issues. k. Unemployment Insurance The District is on the reimbursable method with the State of Washington for unemployment compensation. The District does not have a reserve account for this liability, should it occur. l. Medical Insurance The District s medical, dental and life insurance program is with the Health Care Authority of the State of Washington. m. Costs Arising Out of Developer Extensions The Board of Commissioners adopted resolutions establishing a procedure which reimburses the District for costs associated with the preparation and execution of the Developer Extension Agreements. n. Net Position There are four components of net position: net investment in capital assets; restricted for debt service; restricted for capital projects; and unrestricted net assets. Net investment in capital assets includes utility plant, other deferred charges that are capital in nature, and net unamortized bond issuance costs. o. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 20

24 Notes to Financial Statements December 31, 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) p. Reclassifications Certain reclassifications have been made to prior year balances to provide a presentation consistent with the current year. q. Subsequent Events Management has evaluated subsequent events through May 29, 2012, the date the financial statements were available to be issued. NOTE 2 - DEPOSITS AND INVESTMENTS The District s cash and investment balances at December 31, 2011 are listed below: Bank Deposits $ 25,850 Investment in King County Investment Pool 18,555,262 Total Cash & Investments $ 18,581,112 The District s deposits in bank accounts are entirely covered by federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). In accordance with state investment laws, the District s governing body has entered into a formal Interlocal agreement with the District s ex officio treasurer, King County, to have all its funds not required for immediate expenditure to be invested in the King County Investment Pool (Pool). As of December 31, 2011, the District had the following investments: Investment Type Fair Value Effective Duration King County Investment Pool $ 18,555, Years Impaired Investments. As of December 31, 2011, all impaired commercial paper investments have completed enforcement events. The King County impaired investment pool (Impaired Pool) held one commercial paper asset where the Impaired Pool accepted an exchange offer and is receiving the cash flows from the investment's underlying securities. The Impaired Pool also held the residual investments in four commercial paper assets that were part of completed enforcement events, where the Impaired Pool accepted the cash-out option. The District s share of the impaired investment pool is $196,699, and the District s unrealized loss for these investments is $110,584 as of December 31,

25 Notes to Financial Statements December 31, 2011 NOTE 2 - DEPOSITS AND INVESTMENTS (Continued) Interest Rate Risk. As of December 31, 2011, the Pool's average duration was 0.72 years. As a means of limiting its exposure to rising interest rates, securities purchased in the Pool must have a final maturity, or weighted average life, no longer than five years. While the Pool's market value is calculated on a monthly basis, unrealized gains and losses are not distributed to participants. The Pool distributes earnings monthly using an amortized cost methodology. Credit Risk. As of December 31, 2011, the District's investment in the Pool was not rated by a nationally recognized statistical rating organization (NRSRO). In compliance with state statutes, Pool policies authorize investments in U.S. Treasury securities, U.S. agency securities and mortgage-backed securities, municipal securities (rated at least "A" by two NRSROs), commercial paper (rated at least the equivalent of "A-1" by two NRSROs), certificates of deposits issued by qualified public depositaries, repurchase agreements, and the Local Government Investment Pool managed by the Washington State Treasurer's office. NOTE 3 - CAPITAL ASSETS Capital assets activity for the year ended December 31, 2011 was as follows: Beginning Ending Balance Increase Decrease Balance Capital assets not being depreciated: Land and Land Rights $ 6,348,357 $ - $ - $ 6,348,357 Construction in Progress 4,967,533 4,124,754 (2,048,118) 7,044,169 Total capital assets not being depreciated 11,315,890 4,124,754 (2,048,118) 13,392,526 Capital assets being depreciated: Equipment 25,738,722 1,111,228 (847,815) 26,002,135 Buildings 2,590, ,590,482 Infrastructure 246,956,373 2,483,134 (927,964) 248,511,543 Intangibles 48,622, ,220 (1,219,969) 47,622,324 Total capital assets being depreciated 323,907,650 3,814,582 (2,995,748) 324,726,484 Less Accumulated Depreciation 116,000,975 7,543,156 (2,405,504) 121,138,627 Total capital assets being depreciated, net 207,906,675 (3,728,574) (590,244) 203,587,857 TOTAL CAPITAL ASSETS, NET $ 219,222,565 $ 396,180 $ (2,638,362) $ 216,980,383 22

26 Notes to Financial Statements December 31, 2011 NOTE 3 - CAPITAL ASSETS (Continued) The District capitalized employee wages and benefit costs in connection with the construction of utility plant assets. In 2011, the total wage and benefit expense was $9,145,730 of which $1,160,590 was capitalized. The District s total interest cost was $660,756 in 2011, of which no amount was capitalized as construction period interest. NOTE 4 - CONSTRUCTION IN PROGRESS Construction in progress represents expenses to date on projects whose authorizations total $103,313,008. Of the committed balance of $96,268,839, the District will be required to raise $7,000,000 in future financing. Project Expended Required Authorization to 12/31/11 Committed Future Financing Oasis Phase I $ 8,783,000 $ 663,158 $ 8,119,842 $ - Oasis Phase II 3,000,000 2,784 2,997,216 - Second Supply Filtration 27,000, ,480 26,181,520 7,000,000 Balance Second Supply 42,364, ,847 41,991,153 - CMMS 775, , ,191 - Lakota Project 5,678,000 1,291,749 4,386,251 - Telemetry Upgrade 670,000 13, ,326 - Pump Station 33 4,495, ,383 3,679,617 - Redondo Project 3,740,000 63,913 3,676,087 - I&I Study 4,872, ,364 4,223,636 - Pacific Highway 1,210,231 1,210, Other Projects 725, , $ 103,313,008 $ 7,044,169 $ 96,268,839 $ 7,000,000 23

27 Notes to Financial Statements December 31, 2011 NOTE 5 - CAPITAL LEASE In 2010, the District entered into a lease agreement for financing the acquisition of on-site generated mixed oxidant equipment. This lease agreement qualifies as a capital lease for accounting purposes and is recorded as an asset and a long-term liability at the present value of the future minimum lease payments as of the date of its inception. The District records lease payments as reductions of the long-term liability and as interest expense over the life of the lease. The future minimum lease payments under the lease agreements are as follows: Year Ending December 31, 2012 $ 55, , ,188 Total future minimum lease payments $ 165,564 Less amount representing maintenance and service (39,420) Less amount representing interest (9,231) Present value of future minimum lease payments $ 116,913 Less current maturities of capital lease obligations (37,044) Obligations under capital lease, non-current portion $ 79,869 NOTE 6 - LONG-TERM DEBT AND LIABILITIES Revenue Bonds At December 31, 2011 revenue bonds consist of the following: Long-Term Short-Term Total 2005 water and sewer revenue refunding bonds, rates 2.70% to 5.00%, due through $ 9,890,000 $ 2,035,000 $ 11,925,000 24

28 Notes to Financial Statements December 31, 2011 NOTE 6 - LONG-TERM DEBT AND LIABILITIES (Continued) In May 2005, the District issued $16,975,000 of water and sewer revenue refunding bonds with principal payments due beginning in 2006 and ending in 2017, with annual interest rates ranging from 2.70% to 5.00%. The advance refunding was undertaken to reduce total debt service payments over the next twelve years by $743,472 and resulted in an economic gain of $290,731. The District defeased certain bonds by placing investments acquired from the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust accounts and the defeased bonds are not included in the District s financial statements. Trustees hold direct obligations of the U.S. Government in irrevocable escrows for the defeasance of all refunded issues. Cash flow from these escrowed investments matches the principal and interest payments of the defeased obligations. The annual requirements to amortize all revenue bond debt outstanding as of December 31, 2011, including interest, are as follows: Principal Interest Total 2012 $ 2,035,000 $ 514,192 $ 2,549, ,050, ,950 2,491, ,990, ,126 2,357, ,955, ,500 2,247, ,950, ,750 2,144, ,945,000 97,250 2,042,250 $ 11,925,000 $ 1,907,768 $ 13,832,768 Debt Service Requirements Debt service income requirements for the year 2011 were: Total Available for Debt Service - (Non-Assessment) $ 10,586,066 Non Assessment Debt Service $ 2,766,442 Coverage Factor - (Non-Assessment) 3.83 Coverage Requirement - (Non-Assessment)

29 Notes to Financial Statements December 31, 2011 NOTE 6 - LONG-TERM DEBT AND LIABILITIES (Continued) Public Works Trust Fund Loans The District has entered into agreements with the Department of Community, Trade and Economic Development of the State of Washington to receive the following Public Works Trust Fund loans: 2000 loan - payable at $83,392 annually through the year 2020, plus interest at 1% per annum. Original debt: $1,575,700. $ 750, loan - payable at $529,412 annually through the year 2022, plus interest at ½% per annum. Original debt: $10,000,000. 5,823, loan - payable at $94,507 annually through the year 2024, plus interest at ½% per annum. Original debt: $1,700,000. 1,228, loan - payable at $30,390 annually through the year 2024, plus interest at ½% per annum. Original debt: $600, , loan - payable at $130,175 annually through the year 2026, plus interest at ½% per annum. Original debt: $2,400,000. 1,952,632 $ 10,150,348 Annual payments of principal and interest on these loans are scheduled as follows: Principal Interest Total 2012 $ 867,876 $ 54,504 $ 922, ,876 49, , ,876 44, , ,876 40, , ,876 35, , ,255, ,050 4,362, ,554,980 16,158 1,571,138 $ 10,150,348 $ 347,166 $ 10,497,514 26

30 Notes to Financial Statements December 31, 2011 NOTE 6 - LONG-TERM DEBT AND LIABILITIES (Continued) Changes in Long-Term Debt and Liabilities During the year ended December 31, 2011, the following changes occurred in long-term debt: Balance Balance Due In 1/1/11 Additions Reductions 12/31/11 One Year Revenue Bonds Payable $ 14,070,000 $ - $ (2,145,000) $ 11,925,000 $ 2,035,000 Public Works Trust Fund Loans 11,038,664 - (888,316) 10,150, ,876 Capital Lease 152,154 - (35,241) 116,913 37,044 Compensated Absences 609, ,007 (770,773) 612,182 - Co-Op Certificates 25, ,000 - Unamortized Bond Premium 294,691 - (76,849) 217,842 - Less: Deferred Charges on Advance Refunding (286,926) - 74,825 (212,101) - Less: Current Portion of Long Term Debt (3,068,557) (2,939,920) 3,068,557 (2,939,920) - Totals $ 22,834,974 $ (2,166,913) $ (772,797) $ 19,895,264 $ 2,939,920 NOTE 7 - PENSION PLAN Substantially all District full-time and qualifying part-time employees participate in one of the following statewide retirement systems administered by the Washington State Department of Retirement Systems, under cost-sharing multiple-employer public employee defined benefit and defined contribution retirement plans. The Department of Retirement Systems (DRS), a department within the primary government of the State of Washington, issues a publicly available comprehensive annual financial report (CAFR) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement Systems, Communications Unit, P.O. Box 48380, Olympia, WA ; or it may be downloaded from the DRS website at The following disclosures are made pursuant to GASB Statements No. 27, Accounting for Pensions by State and Local Government Employers and No. 50, Pension Disclosures, an Amendment of GASB Statements No. 25 and No

31 Notes to Financial Statements December 31, 2011 NOTE 7 - PENSION PLAN (Continued) Public Employees Retirement System (PERS) Plans 1, 2 and 3 Plan Description The legislature established PERS in Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals, and Superior courts (other than judges currently in a judicial retirement system); employees of legislative committees; community and technical colleges, college and university employees not participating in national higher education retirement programs; judges of district and municipal courts; and employees of local governments. PERS retirement benefit provisions are established in Chapters and RCW and may be amended only by the State Legislature. PERS is a cost-sharing multiple-employer retirement system comprised of three separate plans for membership purposes: Plans 1 and 2 are defined benefit plans and Plan 3 is a defined benefit plan with a defined contribution component. PERS members who joined the system by September 30, 1977 are Plan 1 members. Those who joined on or after October 1, 1977 and by either February 28, 2002 for state and higher education employees, or August 31, 2002 for local government employees, are Plan 2 members unless they exercise an option to transfer their membership to Plan 3. PERS members joining the system on or after March 1, 2002 for state and higher education employees, or September 1, 2002 for local government employees have the irrevocable option of choosing membership in either PERS Plan 2 or PERS Plan 3. The option must be exercised within 90 days of employment. An employee is reported in Plan 2 until a choice is made. Employees who fail to choose within 90 days default to PERS Plan 3. Notwithstanding, PERS Plan 2 and Plan 3 members may opt out of plan membership if terminally ill, with less than five years to live. PERS Plan 1 and Plan 2 defined benefit retirement benefits are financed from a combination of investment earnings and employer and employee contributions. PERS Plan 1 members are vested after the completion of five years of eligible service. Plan 1 members are eligible for retirement after 30 years of service, or at the age of 60 with five years of service, or at the age of 55 with 25 years of service. The annual benefit is two percent of the average final compensation (AFC) per year of service. (AFC is the monthly average of the 24 consecutive highest-paid service credit months.) The retirement benefit may not exceed 60 percent of AFC. The monthly benefit is subject to a minimum for PERS Plan 1 retirees who have 25 years of service and have been retired 20 years, or who have 20 years of service and have been retired 25 years. Plan 1 members retiring from inactive status prior to the age of 65 may receive actuarially reduced benefits. If a survivor option is chosen, the benefit is further reduced. A cost-of-living allowance (COLA) is granted at age 66 based upon years of service times the COLA amount, which is increased three percent annually. Plan 1 members may also elect to receive an optional COLA that provides an automatic annual adjustment based on the Consumer Price Index. The adjustment is capped at three percent annually. To offset the cost of this annual adjustment, the benefit is reduced. 28

32 Notes to Financial Statements December 31, 2011 NOTE 7 - PENSION PLAN (Continued) PERS Plan 1 provides duty and non-duty disability benefits. Duty disability retirement benefits for disablement prior to the age of 60 consist of a temporary life annuity payable to the age of 60. The allowance amount is $350 a month, or two-thirds of the monthly AFC, whichever is less. The benefit is reduced by any workers' compensation benefit and is payable as long as the member remains disabled or until the members attains the age of 60. A member with five years of covered employment is eligible for non-duty disability retirement. Prior to the age of 55, the allowance amount is two percent of the AFC for each year of service reduced by two percent for each year that the member's age is less than 55. The total benefit is limited to 60 percent of the AFC and is actuarially reduced to reflect the choice of a survivor option. A cost-of-living allowance is granted at age 66 based upon years of service times the COLA amount (based on the Consumer Price Index), capped at three percent annually. To offset the cost of this annual adjustment, the benefit is reduced. PERS Plan 1 members can receive credit for military service while actively serving in the military, if such credit makes them eligible to retire. Members can also purchase up to 24 months of service credit lost because of an on-the-job injury. PERS Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members are eligible for normal retirement at the age of 65 with five years of service. The monthly benefit is two percent of the AFC per year of service. (AFC is the monthly average of the 60 consecutive highest-paid service months). PERS Plan 2 members who have at least 20 years of service credit and are 55 years of age or older are eligible for early retirement with a reduced benefit. The benefit is reduced by an early retirement factor (ERF) that varies according to age, for each year before age 65. PERS Plan 2 members who have 30 or more years of service credit and are at least 55 years old can retire under one of two provisions: With a benefit that is reduced by three percent for each year before age 65. With a benefit that has a smaller (or no) reduction (depending on age) that imposes stricter return-to-work rules. PERS Plan 2 retirement benefits are also actuarially reduced to reflect the choice, if made, of survivor option. There is no cap on years of service credit; and a cost-of-living allowance is granted (based on the Consumer Price Index), capped at three percent annually. The surviving spouse or eligible child or children of a PERS Plan 2 member who dies after leaving eligible employment having earned ten years of service credit may request a refund of the member s accumulated contributions. 29

33 Notes to Financial Statements December 31, 2011 NOTE 7 - PENSION PLAN (Continued) PERS Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component, and member contributions finance a defined contribution component. The defined benefit portion provides a monthly benefit that is one percent of the AFC per year of service. (AFC is the monthly average of the 60 consecutive highest-paid service months.) Effective June 7, 2006, PERS Plan 3 members are vested in the defined benefit portion of their plan after ten years of service; or after five years of service, if twelve months of that service are earned after age 44; or after five service credit years earned in PERS Plan 2 prior to June 1, Plan 3 members are immediately vested in the defined contribution portion of their plan. Vested Plan 3 members are eligible for normal retirement at age 65, or they may retire early with the following conditions and benefits: If they have at least ten service credit years and are 55 years old, the benefit is reduced by an ERF that varies with age, for each year before age 65. If they have 30 service credit years and are at least 55 years old, they have the choice of a benefit that is reduced by three percent for each year before age 65; or a benefit with a small (or no) reduction factor (depending on age) that imposes stricter return-to-work rules. PERS Plan 3 defined benefit retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option. There is no cap on years of service credit and Plan 3 provides the same cost-of-living allowance as plan 2. PERS Plan 3 defined contribution retirement benefits are solely dependent upon the results of investment activities. The defined contribution portion can be distributed in accordance with an option selected by the member, either as a lump sum or pursuant to other options authorized by the Director of the Department of Retirement Systems. PERS Plan 2 and Plan 3 provide disability benefits. There is no minimum amount of service credit required for eligibility. The Plan 2 monthly benefit amount is two percent of the AFC per year of service. For Plan 3, the monthly benefit amount is one percent of the AFC per year of service. These disability benefit amounts are actuarially reduced for each year that the member s age is less than 65, and to reflect the choice of a survivor option. There is no cap on years of service credit, and a cost-of-living allowance is granted (based on the Consumer Price Index) capped at three percent annually. 30

34 Notes to Financial Statements December 31, 2011 NOTE 7 - PENSION PLAN (Continued) PERS Plan 2 and Plan 3 members may have up to ten years of interruptive military service credit; five years at no cost and five years that may be purchased by paying the required contribution. Effective July 24, 2005, a member who becomes totally incapacitated for continued employment while serving the uniformed services, or a surviving spouse or eligible children, may apply for interruptive military service credit. Additionally, PERS Plan 2 and Plan 3 members can also purchase up to 24 months of service credit lost because of an on-thejob injury. PERS member may also purchase up to five years of additional service credit once eligible for retirement. This credit can only be purchased at the time of retirement and can be used only to provide the member with a monthly annuity that is paid in addition to the member s retirement benefit. Beneficiaries of a PERS Plan 2 or Plan 3 member with ten years of service who is killed in the course of employment receive retirement benefits without actuarial reduction, if the member was not at normal retirement age at death. This provision applies to any member killed in the course of employment, on or after June 10, 2004, if found eligible by the Department of Labor and Industries. A one-time duty-related death benefit is provided to the estate (or duly designated nominee) of a PERS member who dies in the line of service as a result of injuries sustained in the course of employment, or if the death resulted from an occupational disease or infection that arose naturally and proximately out of said member s covered employment, if found eligible by the Department of Labor and Industries. There are 1,197 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans as of June 30, 2010: Retirees and Beneficiaries Receiving Benefits 76,899 Terminated Plan Members Entitled To But Not Yet Receiving Benefits 28,860 Active Plan Members Vested 105,521 Active Plan Members Non-vested 51,005 Total 262,285 31

35 Notes to Financial Statements December 31, 2011 NOTE 7 - PENSION PLAN (Continued) Funding Policy Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates, Plan 2 employer and employee contribution rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at 6 percent for state agencies and local government unit employees, and 7.5 percent for state government elected officers. The employer and employee contribution rates for Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. All employers are required to contribute at the level established by the Legislature. Under PERS Plan 3, employer contributions finance the defined benefit portion of the plan, and member contributions finance the defined contribution portion. The Director of the Department of Retirement Systems sets Plan 3 employee contribution rates. Six rate options are available ranging from 5 to 15 percent; two of the options are graduated rates dependent on the employee s age. As a result of the implementation of the Judicial Benefit Multiplier Program in January 2007, a second tier of employer and employee rates was developed to fund, along with investment earnings, the increased retirement benefits of those justices and judges that participate in the program. The methods used to determine the contribution requirements are established under state statute in accordance with Chapters and RCW. The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2011 were as follows: PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer* 7.25%** 7.25%** 7.25%*** Employee 6.00%**** 4.64%**** ***** *The employer rates include the employer administrative expense fee currently set at 0.16%. **The employer rate for state elected officials is 10.80% for Plan 1 and 7.25% for Plans 2-3. ***Plan 3 defined benefit portion only. ****The employee rate for state elected officials is 7.50% for Plan 1 and 4.64% for Plan 2. *****Variable from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member. Both the District and the employees made the required contributions. The District s required contribution for the years ended December 31 were as follows: PERS Plan 1 PERS Plan 2 PERS Plan $ 10,745 $ 405,090 $ 8, $ 9,327 $ 359,740 $ 4, $ 12,012 $ 469,085 $ 3,535 32

36 Notes to Financial Statements December 31, 2011 NOTE 8 - RISK MANAGEMENT The District is a member of the Water and Sewer Risk Management Pool (Pool). Chapter RCW authorizes the governing body of any one or more governmental entities to form together into or join a pool or organization for the joint purchasing of insurance, and/or joint self-insuring, and/or joint hiring or contracting for risk management services to the same extent that they may individually purchase insurance, self-insurance, or hire or contract for risk management services. An agreement to form a pooling arrangement was made pursuant to the provisions of Chapter RCW, the Interlocal Cooperation Act. The Pool was formed in November of 1987 when water and sewer districts in the State of Washington joined together by signing an Interlocal Government Agreement to pool their self-insured losses and jointly purchase insurance and administrative services. The Pool currently has 64 members. The Pool s fiscal year is November 1st through October 31st. The Pool allows members to jointly purchase insurance coverage, establish a plan of selfinsurance coverage, and provide related services, such as risk management and loss prevention. The Pool provides the following forms of group purchased insurance coverage for its members: Property (including Building, Electronic Data Processing, Boiler & Machinery, and Mobile Equipment); General Liability; Automotive Liability; Excess Liability; Crime; Public Officials Liability; Identity Fraud Reimbursement Program; and bonds of various types. All coverages are on an occurrence basis. Members make an annual contribution to fund the Pool. The Pool purchases insurance policies from unrelated underwriters which are subject to a per occurrence deductible or selfinsured retention as follows: General Liability of $200,000 (including general liability, Public Officials Liability and Automobile Liability); Property Insurance of $25,000 (except earthquake and flood. Earthquake is subject to a deductible of 5% of the values at risk at the time of the loss subject to a minimum of $100,000. For flood, those properties that are NOT located in NFIP Flood Zones A and V are subject to a $100,000 deductible while those properties located in NFIP Flood Zones A and V are subject to a $250,000 deductible); Boiler & Machinery which is $25,000; and Crime which is $25,000 per occurrence. Pool members are responsible for a deductible on each coverage and the Pool is responsible for the remainder of the self-insured retention. The insurance carriers then cover the loss to the maximum limit of the policy. Each member is responsible for the full deductible applicable to the perils of earthquake and flood (the Pool is not responsible for any deductible or selfinsured retention for earthquake and flood claims). 33

37 Notes to Financial Statements December 31, 2011 NOTE 8 - RISK MANAGEMENT (Continued) Upon joining, the members contract to remain in the Pool for one full policy period. Following completion of one full policy period, members must give six months notice before terminating participation (e.g. to withdraw from the Pool on November 1, 2012, written notice must be in the Pool possession by April 30, 2012). The Interlocal Governmental Agreement is renewed automatically each year. Even after termination, a member is still responsible for contributions to the Pool for any unresolved, unreported, and in process claims, for the period that the District was a signatory to the Interlocal Governmental Agreement. The Pool is governed by a Board of Directors, which is comprised of one designated representative from each participating member. An Executive Committee is elected at the annual meeting, and is responsible for conducting the business affairs of the Pool and providing direction to the Pool s Executive Director. During the past three years ( ), the District did not have any settlements which exceeded insurance coverage. NOTE 9 - SECOND SUPPLY PROJECT PARTNERSHIP AGREEMENT During 2002 the District entered into an agreement with the City of Tacoma, Department of Public Utilities, Water Division, the City of Kent, and the Covington Water District to permit, design, finance, construct, operate, and maintain the project and to receive deliveries of project water. The project has been designed to permit all participants to receive at their point(s) of delivery their respective participant share of second diversion water simultaneously. The participants understand and acknowledge that the capability of project facilities at any point in time is dependent upon the use being made of the project by the participants, and external factors as well. Tacoma shall own the project, and all facilities related thereto, up to points of diversion. Each participant has a contractual obligation to pay its participant share of project costs, initially as a capital contribution in exchange for, and to qualify each participant to enjoy, the rights and interest as described in section 5 of the agreement, and upon operation as a share of operating and maintenance costs of a project providing water that is furnished by each of the participants to its customers. It is anticipated that the agreement will have a life of no less than 100 years. There shall be a project committee composed of one representative of each participant. The representatives of the participants shall have the following votes at the project committee meetings: Tacoma (15) votes, Covington Water District (7) votes, Kent (7) votes, Lakehaven Utility District (7) votes. The District has spent $46,420,175 towards this project as of December 31, Further information can be obtained from the District office. 34

38 Notes to Financial Statements December 31, 2011 NOTE 10 - CONTINGENT LIABILITIES The District s financial statements include all material liabilities. There are no material contingent liabilities to record. NOTE 11 OTHER POST-EMPLOYMENT BENEFITS There exists a potential post employment benefits liability of an unknown value arising out of the cost of providing health care insurance to retired District employees. Current and eligible retired District employees receive health care insurance coverage through the Washington State Health Care Authority. The monthly insurance premiums paid by enrolled retirees throughout the State is not sufficient to meet the cost of their coverage; this shortfall is included in the monthly premiums paid by current employees. The District s share of this annual shortfall has been treated as an operating expenditure in the current and prior years. A full actuarial valuation of the estimated future post-employment benefit is planned for the next fiscal year 35

39 Schedule II - Statement of Net Position by Division December 31, 2011 ASSETS Wastewater Water Division Division Total Current Assets Maintenance Fund: - Cash and Cash Equivalents $ 3,178,099 $ 11,825,135 $ 15,003,234 - Accrued Interest Receivable 1,398 5,261 6,659 Construction Fund: - Cash and Cash Equivalents 389, , ,777 - Accrued Interest Receivable Accounts Receivable - Customers 902, ,265 1,880,282 Accounts Receivable - Other 35,067 21,928 56,995 Restricted Assets: Revenue Bond Fund: - Cash and Cash Equivalents 2,259, ,199 2,831,101 - Accrued Interest Receivable 1, ,268 Inventory 269, ,944 Prepaid Expenses 136, , ,392 Accrued Utility Revenue 572, ,546 1,274,058 Total Current Assets $ 7,746,729 $ 14,604,338 $ 22,351,067 Noncurrent Assets Restricted Assets: U.L.I.D. Assessments Receivable $ - $ 344 $ 344 Capital Assets (Net) 109,255, ,724, ,980,383 Unamortized Debt Issue Costs 49,445 4,878 54,323 Total Noncurrent Assets $ 109,304,977 $ 107,730,073 $ 217,035,050 Total Assets $ 117,051,706 $ 122,334,411 $ 239,386,117 36

40 Schedule II - Statement of Net Position by Division December 31, 2011 LIABILITIES Wastewater Water Division Division Total Current Liabilities Accounts Payable - Maintenance $ 535,077 $ 675,753 $ 1,210,830 Accounts Payable - Construction 312,726 96, ,991 Deposits, Customers & Developers 200, , ,386 Retainage Due Contractors 20,603 1,181 21,784 Capital Lease Payable (Current Portion) - 37,044 37,044 Public Works Trust Fund Loans (Current Portion) 623, , ,876 Interest Payable - PWTF Loans 17,630 9,622 27,252 Payable from Restricted Assets: Revenue Bonds Outstanding (Current Portion) 1,852, ,743 2,035,000 Bond Interest Payable 78,003 7,695 85,698 Total Current Liabilities $ 3,640,905 $ 1,896,956 $ 5,537,861 Noncurrent Liabilities Capital Lease Payable (Less Current Portion) $ - $ 79,869 $ 79,869 Public Works Trust Fund Loans (Less Current Portion) 6,428,197 2,854,275 9,282,472 Compensated Absences 297, , ,182 Co-Op Certificates 25,000-25,000 Payable from Restricted Assets: Revenue Bonds Outstanding (Less Current Portion) 9,001, ,125 9,890,000 Unamortized Bond Premium 198,280 19, ,842 Less Deferred Charges on Advance Refunding (179,282) (32,819) (212,101) Total Noncurrent Liabilities $ 15,771,534 $ 4,123,730 $ 19,895,264 Total Liabilities $ 19,412,439 $ 6,020,686 $ 25,433,125 NET POSITION Net Investment in Capital Assets $ 90,845,712 $ 102,716,831 $ 193,562,543 Restricted for Debt Service 2,183, ,977 2,747,015 Unrestricted 4,610,517 13,032,917 17,643,434 Total Net Position $ 97,639,267 $ 116,313,725 $ 213,952,992 37

41 Operating Revenues Lakehaven Utility District Schedule III - Statement of Revenues, Expenses, and Changes in Fund Net Position by Division Year Ended December 31, 2011 Wastewater Water Division Division Total Customer Sales & Service Fees $ 11,646,287 $ 14,136,675 $ 25,782,962 Permits, Inspection & Delinquency Fees 169, , ,487 Developer Revenues & Administrative Charges 302,868 88, ,050 Street Lighting Revenues 342, ,035 Total Operating Revenues $ 12,460,535 $ 14,480,999 $ 26,941,534 Operating Expenses Maintenance & Operations $ 4,843,846 $ 7,812,519 $ 12,656,365 Administrative & General 1,800,318 1,836,813 3,637,131 Depreciation & Amortization 3,657,672 3,885,484 7,543,156 Taxes, Other Than Income Tax 552, , ,061 Total Operating Expenses $ 10,854,414 $ 13,818,299 $ 24,672,713 Net Operating Income (Loss) $ 1,606,121 $ 662,700 $ 2,268,821 Nonoperating Revenues (Expenses) Interest Expense $ (586,187) $ (74,569) $ (660,756) Amortization of Debt Expenses (10,741) (6,398) (17,139) Investment Income 49,710 92, ,759 Gain on Sale of Fixed Assets (4,341) (321,564) (325,905) Other Income 350,453 33, ,231 Total Nonoperating Revenues (Expenses) $ (201,106) $ (276,704) $ (477,810) Income (Loss) Before Contributions $ 1,405,015 $ 385,996 $ 1,791,011 Capital Contributions 1,240,091 1,089,526 2,329,617 Change in Net Position $ 2,645,106 $ 1,475,522 $ 4,120,628 Total Net Position, January 1 $ 94,994,161 $ 114,838,203 $ 209,832,364 Total Net Position, December 31 $ 97,639,267 $ 116,313,725 $ 213,952,992 38

42 Schedule IV - Statement of Cash Flows by Division Year Ended December 31, 2011 Wastewater Water Division Division Total Cash Flows From Operating Activities Cash Received From Customers $ 12,773,409 $ 14,314,827 $ 27,088,236 Cash Paid to Suppliers (2,740,941) (5,302,095) (8,043,036) Cash Paid to Employees (4,524,508) (4,621,222) (9,145,730) Net Cash Provided by Operating Activities $ 5,507,960 $ 4,391,510 $ 9,899,470 Cash Flows From Capital & Related Financing Activities Acquisition & Construction of Capital Assets $ (2,924,608) $ (1,102,157) $ (4,026,765) Payment of Bond Principal & Other Financing (2,576,297) (457,019) (3,033,316) Interest Paid (604,017) (77,300) (681,317) Proceeds from Sale of Fixed Assets 47, , ,340 Cash Contributions in Aid of Construction 350, , ,524 Net Cash (Used) by Capital & Related Financing Activities $ (5,707,156) $ (1,130,378) $ (6,837,534) Cash Flows From Investing Activities Interest Received on Investments $ 50,160 $ 91,564 $ 141,724 Net Cash Provided by Investing Activities $ 50,160 $ 91,564 $ 141,724 Net Increase (Decrease) in Cash & Cash Equivalents $ (149,036) $ 3,352,696 $ 3,203,660 Cash & Cash Equivalents - January 1 5,976,632 9,400,820 15,377,452 Cash & Cash Equivalents - December 31 $ 5,827,596 $ 12,753,516 $ 18,581,112 Noncash Investing, Capital and Financing Activities Contributions of Capital Assets from Developers $ 897,163 $ 813,742 $ 1,710,905 39

43 Schedule IV - Statement of Cash Flows by Division Year Ended December 31, 2011 Reconciliation of Net Operating Income (Loss) to Net Cash Provided by Operating Activities Wastewater Water Division Division Total Net Operating Income (Loss) $ 1,606,121 $ 662,700 $ 2,268,821 Adjustments to Reconcile Operating Income (Loss) to Net Cash Provided by Operating Activities Depreciation & Amortization $ 3,657,672 $ 3,885,484 $ 7,543,156 Other Income 350,453 33, ,231 Changes in Assets & Liabilities (Increase) Decrease in Accounts Receivable 58,760 (9,863) 48,897 (Increase) Decrease in Inventory (50,512) - (50,512) (Increase) Decrease in Prepaid Expenses (4,954) (13,786) (18,740) (Increase) Decrease in Accrued Utility Revenue (96,339) (190,091) (286,430) Increase (Decrease) in Accounts Payable (8,671) 16,484 7,813 Increase (Decrease) in Compensated Absences (4,570) 6,804 2,234 Total Adjustments $ 3,901,839 $ 3,728,810 $ 7,630,649 Total Cash Provided by Operating Activities $ 5,507,960 $ 4,391,510 $ 9,899,470 40

44 Reconciliation of Cash & Cash Equivalents Per Statement of Cash Flows to the Statement of Net Position Water Division Current Assets Restricted Assets Statement of Maintenance Construction Cash Flows Fund Fund Bond Fund Total Cash & Cash Equivalents - Beginning $ 3,071,701 $ 376,003 $ 2,528,928 $ 5,976,632 Net Increase (Decrease) 106,398 13,592 (269,026) (149,036) Cash & Cash Equivalents - Ending $ 3,178,099 $ 389,595 $ 2,259,902 $ 5,827,596 Wastewater Division Cash & Cash Equivalents - Beginning $ 8,684,042 $ 457,567 $ 259,211 $ 9,400,820 Net Increase (Decrease) 3,141,093 (100,385) 311,988 3,352,696 Cash & Cash Equivalents - Ending $ 11,825,135 $ 357,182 $ 571,199 $ 12,753,516 Total Cash & Cash Equivalents - Beginning $ 11,755,743 $ 833,570 $ 2,788,139 $ 15,377,452 Net Increase (Decrease) 3,247,491 (86,793) 42,962 3,203,660 Cash & Cash Equivalents - Ending $ 15,003,234 $ 746,777 $ 2,831,101 $ 18,581,112 41

45 ABOUT THE STATE AUDITOR'S OFFICE The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four-year terms. Our mission is to work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Brian Sonntag, CGFM Chief of Staff Ted Rutt Deputy Chief of Staff Doug Cochran Chief Policy Advisor Jerry Pugnetti Director of Audit Chuck Pfeil, CPA Director of Performance Audit Larisa Benson Director of Special Investigations Jim Brittain, CPA Director for Legal Affairs Jan Jutte, CPA, CGFM Director of Quality Assurance Ivan Dansereau Local Government Liaison Mike Murphy Communications Director Mindy Chambers Public Records Officer Mary Leider Main number (360) Toll-free Citizen Hotline (866) Website Subscription Service (SAO FACTS.DOC - Rev. 09/11)