COUNTY OF MAUI, HAWAII STATEMENT OF ANNUAL FINANCIAL INFORMATION AND OPERATING DATA FOR FISCAL YEAR ENDED JUNE 30, 2011

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1 COUNTY OF MAUI, HAWAII STATEMENT OF ANNUAL FINANCIAL INFORMATION AND OPERATING DATA FOR FISCAL YEAR ENDED JUNE 30, 2011 Introduction This Statement of Annual Financial Information and Operating Data dated February 24, 2012 (this "Statement") of the County of Maui, Hawaii (the "County") is prepared and submitted in accordance with the requirements of the County's Continuing Disclosure Undertakings (as defined below) (the "Continuing Disclosure Undertakings"). Set forth below are certain financial information and operating data relating to the County for the fiscal year ended June 30, The audited financial statements of the County for the fiscal year ended June 30, 2011 are attached hereto as Exhibit A. This Statement is of limited scope; it contains only an update of certain financial information and operating data and other information described below. The purpose of the County's undertaking is to comply with the Continuing Disclosure Undertakings. The Continuing Disclosure Undertakings relate to certain requirements placed on the underwriters of the County's Bonds (as defined below) pursuant to Rule 15c2-12 promulgated by the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934 (17 CFR Part 240, c2-12) (the "Rule"). The Continuing Disclosure Undertakings mean each of the Continuing Disclosure Undertakings executed in connection with the following outstanding general obligation bonds of (the "Bonds") of the County: County of Maui, Hawaii General Obligation Bonds 1998 Series B (Taxable); County of Maui, Hawaii General Obligation Bonds 2001 Series B and C; County of Maui, Hawaii General Obligation Bonds 2002 Series B and C; County of Maui, Hawaii General Obligation Bonds 2004 Series A and B; County of Maui, Hawaii General Obligation Bonds 2005 Series A, B and C; County of Maui, Hawaii General Obligation Bonds 2006 Series A; County of Maui, Hawaii General Obligation Bonds 2006 Series B; County of Maui, Hawaii General Obligation Bonds 2008 Series A; and

2 County of Maui, General Obligation Bonds 2010 Series A (Taxable) and 2010 Series B (Tax-Exempt). Terms used and not defined in the Statement shall have the meanings set forth in the Continuing Disclosure Undertakings and the related Official Statements (as defined in each Continuing Disclosure Undertaking). The base CUSIP number of the County is This number is provided for convenience only and the County disclaims any responsibility for its accuracy. [Remainder of Page Intentionally Left Blank]

3 Aggregate Debt Service The following table sets for the principal and interest requirements for the Bonds, rounded to the nearest dollar. COUNTY OF MAUI AGGREGATE DEBT SERVICE FY Ending June 30, Outstanding GO Bond Debt Service (1)(2) State Revolving Fund Total Debt Service (1)(2) 2012 $30,629,485 $7,042,673 $37,672, $28,924,534 $6,978,793 $35,903, $28,437,602 $6,380,941 $34,818, $26,196,048 $6,023,712 $32,219, $23,819,728 $5,972,359 $29,792, $23,715,909 $5,088,753 $28,804, $23,719,905 $4,931,185 $28,651, $18,780,654 $4,736,902 $23,517, $17,783,649 $4,489,825 $22,273, $17,781,198 $4,069,330 $21,850, $11,273,923 $3,950,463 $15,224, $9,193,901 $3,518,032 $12,711, $9,192,535 $3,106,205 $12,298, $9,195,219 $3,081,813 $12,277, $7,424,490 $3,056,751 $10,481, $7,427,134 $2,708,177 $10,135, $5,008,829 $2,076,021 $7,084, $1,809,404 $942,412 $2,751, $1,806,396 $92,174 $1,898, $0 $0 $0 Total $302,120,543 $78,246,520 $380,367, Includes reimbursable water system bonds and non-reimbursable bonds. 2. Does not include cash subsidy payment expected to be received from US Treasury.

4 Statement of Funded Debt County of Maui Statement of Funded Debt as of July 1, 2011 Principal Amount of County of Maui Bonds and Loans Outstanding: General Obligation Bonds $211,813,908 General Obligation Bonds for which reimbursement is required from the Department of Water Supply 17,127,092 Loans Payable: State Revolving Fund 69,169,245 Total - Outstanding Principal $298,110,245 Less Exclusions: General Obligation Bonds for which reimbursement is required from the Board of Water Supply $17,127,092 Net Principal Amount of Bonds and Loans Outstanding $280,983,153 Debt Margin: 15% of total assessed values for tax rate purposes as of latest tax assessments rolls as of January 1, 2011 $5,588,529,000 Less net funded debt of the County as of July 1, ,983,153 Net Legal Debt Margin $5,307,544,847

5 Outstanding Obligations The following table sets forth the County's outstanding obligations for the past ten fiscal years, ending June 30. COUNTY OF MAUI Outstanding Obligations General State Revolving Date Obligation Bonds Fund Loans Debt per June 30, Outstanding Outstanding Total Population Capita 2002 $248,240,000 $23,563,283 $271,803, ,664 $2, ,678,000 30,733, ,411, ,667 2, ,543,500 31,065, ,609, ,851 1, ,591,500 29,554, ,145, ,744 1, ,561,500 27,982, ,543, ,119 1, ,043,500 30,820, ,863, ,523 1, ,102,500 42,082, ,185, ,691 1, ,953, ,591, ,941,000 65,162,960 70,815,378 69,169, ,116, ,406, ,110, , , ,834 1,886 1,785 1,925 Source: County of Maui Department of Finance

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7 Real Property Tax Assessed Valuation, Rate, Levy and Collections COUNTY OF MAUI Real Property Certified Values for Tax Rate Purposes, Tax Rate, Levy and Collections (Values in 000s) FY Ended June 30 Real Property Certified Values for Tax Rate Purposes (1) Property Tax Rate (2) Per $1,000 Real Property Tax Levy (3) Tax Collections Current and Delinquent Amount Percent 2007 $35,104,608,991 $5.61 $196,867,485 $196,528, % ,167,719, ,974, ,767, ,579,098, ,328, ,860, ,068,281, ,039, ,554, ,256,859, ,034, ,205, (1) Certified value for tax rate purposes is equal to the County s net taxable value less 50% of the difference between the County's net taxable value and the value claimed by tax payers who have filed an appeal. (2) Weighted average of the various tax rates applicable to the various classifications of property involved. (3) Real property tax levy after circuit breaker credits of $1,016,796 (2006), $1,302,814 (2007), $1,222,757 (2008), $1,221,832 (2009), $1,362,229 (2010) and $1,105,524 (2011). Does not include valuation under appeal. Includes minimum tax. Source: County of Maui Department of Finance.

8 Ten Largest Taxpayers COUNTY OF MAUI Principal Real Property Taxpayers By Amount of Tax Levied Fiscal Year 2011 Taxpayer Type of Business Real Property Taxes Percent of Levy Assessed Value Westin Maui Corp. (Leasehold), SVO Pacific Corp. Hotel (Westin) / Time Share $12,273, % $ 966,756,500 Marriott Ownership Resorts Time Share 7,343, ,740,900 Maui Land & Pineapple Co, Kapalua Bay LLC, W2005 Kapalua/Gengate Development, Hotel, Golf Course, Time Share, Property Management 6,783, ,656,800 HMC Maui LLC, HMC Kea Lani LLC Hotel (Kea Lani & Hyatt) 4,518, ,545,500 CNL Grand Wailea Resort LP Hotel (Grand Wailea) 3,538, ,951,200 Consolidated Maui Inc. Time Share 3,513, ,983,700 West Maui Resort Partners Time Share/Hotel (Embassy Suites) 2,530, ,981,600 Castle & Cooke Inc & Resorts, Lana`i Properties, Dole Lana`i, Lana`i Developers Alexander & Baldwin, A & B Properties, A & B Hawaii, East Maui Irrigation Development, Hotel, Golf Course, Property Management Sugar, Development, Property Management 2,117, ,213,600 2,105, ,487,100 Makena Hotel, LLC, Makena Golf, LLC Hotel, Golf Course 1,652, ,725,600 Total: $46,376, % $4,702,042,500 Fiscal year 2011 taxes were calculated from the January 1, 2010 assessment. The taxes levied are for the Fiscal Year July 1, 2010 through June 30, Source: County of Maui Department of Finance.

9 COUNTY OF MAUI Principal Real Property Taxpayers By Assessed Value Fiscal Year 2011 Taxpayer Type of Business Real Property Taxes Percent of Levy Assessed Value Westin Maui Corp. (Leasehold), SVO Pacific Corp. Hotel (Westin) / Time Share $12,273, % $ 966,756,500 Marriott Ownership Resorts Time Share 7,343, ,740,900 Maui Land & Pineapple Co, Kapalua Bay LLC, W2005 Kapalua/Gengate Development, Hotel, Golf Course, Time Share, Property Management 6,783, ,656,800 HMC Maui LLC, HMC Kea Lani LLC Hotel (Kea Lani & Hyatt) 4,518, ,545,500 CNL Grand Wailea Resort LP Hotel (Grand Wailea) 3,538, ,951,200 Consolidated Maui Inc. Time Share 3,513, ,983,700 West Maui Resort Partners Time Share/Hotel (Embassy Suites) 2,530, ,981,600 Castle & Cooke Inc & Resorts, Lana`i Properties, Dole Lana`i, Lana`i Developers Alexander & Baldwin, A & B Properties, A & B Hawaii, East Maui Irrigation Development, Hotel, Golf Course, Property Management Sugar, Development, Property Management 2,117, ,213,600 2,105, ,487,100 Makena Hotel, LLC, Makena Golf, LLC Hotel, Golf Course 1,652, ,725,600 Total: $46,376, % $4,702,042,500 Fiscal year 2011 taxes were calculated from the January 1, 2010 assessment. The taxes levied are for the Fiscal Year July 1, 2010 through June 30, Source: County of Maui Department of Finance.

10 Transient Accommodations Tax COUNTY OF MAUI Transient Accommodations Tax Fiscal Year Receipts 2007 $22,911, ,412, ,315, ,971, ,478,628 Source: County of Maui Comprehensive Annual Financial Reports and County of Maui Department of Finance.

11 Special Revenue Fund Statement of Revenues and Expenditures Source: Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2011.

12 Pensions COUNTY OF MAUI Annual Pension Costs (Fiscal Year Ending June 30) Year State Retirement System Cost 2007 $15,785, ,609, ,854, ,702, ,634,092

13 EXHIBIT A AUDITED FINANCIAL STATEMENTS OF THE COUNTY OF MAUI, HAWAII FOR THE FISCAL YEAR ENDED JUNE 30, 2011 Attached are the audited financial statements of the County for the fiscal year ended June 30, 2011.

14 COUNTY OF MAUl STATE OF HAWAII COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2011 Prepared by: DEPARTMENT OF FINANCE Danilo F. Agsalog, Director of Finance

15 COUNTY OF MAUl Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2011 Table of Contents Page Introductory Section: Director of Finance's Letter of Transmittal Certificate of Achievement for Excellence in Financial Reporting Elected Officials and Appointed Department Heads Organization Chart Financial Section: Independent Auditors' Report Management's Discussion and Analysis Basic Financial Statements: Government-Wide Financial Statements: Statement ofnet Assets Statement of Activities Fund Financial Statements: Balance Sheet - Governmental Funds Reconciliation of Fund Balances on the Balance Sheet for Governmental Funds to Net Assets of Governmental Activities on the Statement ofnet Assets Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Government-Wide Statement of Activities- Governmental Activities

16 COUNTY OF MAUl Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2011 Table of Contents Statement of Fund Net Assets- Proprietary Funds Statement of Revenues, Expenses, and Changes in Fund Net Assets - Proprietary Funds Statement of Cash Flows - Proprietary Funds Statement of Assets and Liabilities - Fiduciary Funds Notes to the Basic Financial Statements Page Required Supplementary Information: Schedule of Revenues, Expenditures, and Changes in Umeserved Fund Balance- Budget and Actual: General Fund Highway Fund Sewer Fund Note to the Budgetary Comparison Schedules Schedule of Funding Progress for the EUTF Other Supplementary Information: Combining Balance Sheet- Non-Major Governmental Funds Combining Statement of Revenues, Expenditures, and Changes in Fund Balances- Non-Major Governmental Funds Statement of Changes in Assets and Liabilities - Fiduciary Funds Schedule of Revenues, Expenditures, and Changes in Umeserved Fund Balance - Budget and Actual - Debt Service Fund

17 COUNTY OF MAUl Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2011 Table of Contents Schedule of Revenues - Budget and Actual - General Fund Schedule of Appropriations, Expenditures, and Encumbrances - General Fund Schedule of Revenues -Budget and Actual - Highway Fund Schedule of Appropriations, Expenditures, and Encumbrances - Highway Fund Schedule of Revenues -Budget and Actual - Sewer Fund Schedule of Appropriations, Expenditures, and Encumbrances - Sewer Fund Schedule of Revenues -Budget and Actual - Intergovernmental Grant Funds Schedule of Appropriations, Expenditures, and Encumbrances Intergovernmental Grant Funds Schedule of Revenues - Budget and Actual - Solid Waste Fund Schedule of Appropriations, Expenditures, and Encumbrances - Solid Waste Fund Schedule of Revenues- Budget and Actual Liquor Control Fund Schedule of Appropriations, Expenditures, and Encumbrances - Liquor Control Fund Schedule of Revenues -Budget and Actual - Capital Improvement Projects Fund Schedule of Appropriations, Expenditures, and Encumbrances by Program - Capital Improvement Projects Fund Page

18 COUNTY OF MAUl Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2011 Table of Contents Schedule of Appropriations, Expenditures, and Encumbrances - by Fund- Capital Improvement Projects Fund Capital Assets Used in the Operation of Governmental Funds: Comparative Schedules by Type Schedule by Function and Depmiment Schedule of Changes by Function and Department Page Statistical Section (Unaudited): Table 1 -Net Assets By Component Last Ten Fiscal Years Table 2- Changes in Net Assets Last Ten Fiscal Years Table 3 -Governmental Activities Tax Revenues by Source Last Ten Fiscal Years Table 4 -Fund Balances of Governmental Funds Last Ten Fiscal Years Table 5 -Changes in Fund Balances of Governmental Funds Last Ten Fiscal Years Table 6 Assessed Value and Estimated Actual Value of Taxable Property Last Ten Fiscal Years Table 7- Principal Taxpayers Fiscal Years 2011 and Nine Years Ago Table 8- Property Tax Levies and Collections Last Ten Fiscal Years Table 9- Ratios of Outstanding Debt by Type Last Ten Fiscal Years

19 COUNTY OF MAUl Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2011 Table of Contents Table 10 - Ratios of General Obligation Bond Debt Outstanding Last Ten Fiscal Years Table 11 -Legal Debt Margin Information Last Ten Fiscal Years Table 12- Demographic and Economic Statistics Last Ten Fiscal Years Table 13 -Principal Employers Fiscal Years 2011 and Nine Years Ago Table 14- Full-Time Equivalent County Government Employees by Function Last Ten Fiscal Years Table 15 - Operating Indicators by Function Last Ten Fiscal Years Table 16 - Capital Asset Statistics by Function Last Ten Fiscal Years Page

20 COUNTY OF MAUl Introductory Section

21 ALAN M. ARAKAWA Mayor DANILO F. AGSALOG Director JEREMIAH L. SAVAGE Deputy Director COUNTY OF MAUI DEPARTMENT OF FINANCE 200 S. HIGH STREET WAILUKU, MAUI, HAWAII December 30, 2011 Honorable Mayor Alan M. Arakawa Honorable Danny Mateo, Chair and Members of the County Council 200 South High Street Wailuku, Hawaii Dear Mayor, Chair Mateo and Members of the County Council: Section Audit of Accounts. The Charter ofthe County ofmaui states: "Within six (6) months after the beginning of each fiscal year, the county council shall provide for an independent audit of the accounts and other evidences of financial transactions of the county and of all operations for which the county is responsible... The audit shall include both financial accountability and adequacy of the financial and accounting system... The scope of the audit shall be in accordance with the terms of a written contract signed by the council chair, which contract shall encourage recommendations for better financial controls and procedures and shall provide for the completion of the audit within a reasonable time after the close of the previous fiscal year. A copy of the audit reports shall be filed with the county clerk and shall be a public record" Pursuant to the above requirements, we have prepared and hereby issue the Comprehensive Annual Financial Report (CAFR) of the County ofmaui for the fiscal year ended June 30, This repmi consists of management's representations concerning the finances ofthe County of Maui. Consequently, management assumes full responsibility for the completeness and reliability of the information presented in this report. To provide a reasonable basis for making these representations, management of the County of Maui has established a comprehensive internal control framework that is designed both to protect the County's assets from loss, theft, or misuse, and to compile sufficient reliable information for the preparation of the County's financial statements in conformity with Generally Accepted Accounting Principles (GAAP). Because the cost of internal controls should not outweigh their benefits, the County's comprehensive framework of internal controls has been designed to provide reasonable, rather than absolute, assurances that the financial statement will be free from material misstatement. As management, we asseti that to the best of our knowledge and belief, this financial report is complete and reliable in all material respects. 1

22 As required by the Charter, the County ofmaui's financial statements have been audited by a firm of licensed certified public accountants, Kobayashi, Kanetoku, Doi, Lum & Yasuda CP As LLC. The goal of the independent audit was to provide reasonable assurance that the financial statements of the County of Maui for the fiscal year ended June 30, 2011, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosure in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the County of Maui financial statements for the fiscal year ended June 30, 2011 are fairly presented in conformity with GAAP. The independent auditor's repoti is presented as the first component of the financial section of this report. Since fiscal year 2002, the County of Maui has prepared the CAFR using the financial repotiing requirements as prescribed by the Government Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments (GASB 34). This GASB Statement requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of a Management's Discussion & Analysis (MD&A). This Letter of Transmittal is designed to complement the MD&A and should be read in conjunction with it. THE REPORTING ENTITY AND ITS SERVICES The County consists of the inhabited islands of Maui, Moloka'i and Lana'i and the uninhabited island of Kaho'olawe. The County is the second largest of the four counties in the State of Hawaii, with land area of 1,162 square miles, approximately the size of Rhode Island. The population of the County has grown from 42,855 in 1960, to 46,156 in 1970, to 70,991 in 1980, to 100,504 in 1990, to 128,904 in 2000 and to 154,834 in 2010 according to the date ofthe last census taken by the U.S. Bureau of Census. The increase from 2000 to 2010 of approximately 20.1% was the second highest percentage increase in the State next to the County of Hawaii. The County has 11.4% of the total population and 18.1% of the total land area of the State. The County of Maui provides a range of services, including public safety (police, fire and public prosecutor), sanitation, social services, culture and recreation, planning and zoning, and the construction and maintenance of streets and highways. This CAFR includes all funds of the County including the Depatiment of Water Supply, which as of June 30, 2006 was reported as a businesstype activity. One of the chatier amendments from the November 2002 elections made the Department of Water Supply a depatiment under the control of the Mayor instead of the Board of Water Supply (now an advisory board). Therefore, since fiscal 2003 (effective January 2003), the Department of Water Supply is reported as a proprietary fund instead of a component unit of the County. The County of Maui has operated under the Mayor - County Council form of government since 1969, which is the same form of government as the counties ofkauai, Hawaii, and Honolulu. The executive branch of the County is headed by the Mayor who is elected on a non-partisan basis for a four-year term. The Mayor is the chief executive officer of the County and is responsible for overseeing the day-to-day operations, and for appointing the heads of the various departments. The legislative branch is the County Council, which is composed of nine members who are elected atlarge, to serve two-year terms. The County Council appoints the County Clerk. Each of the nine council members has residency requirements, one each from the islands of Lana'i and Moloka'i, 2

23 and seven from the various districts on the island of Maui. The Council legislates taxes, rates, fees, assessments, bon-owing and appropriations for County purposes (County Budget) by ordinance. In Maui County, as well as in the three other counties within the State, there are no subordinate or separate municipal entities. The State government administers the school system, airport, harbors, hospitals, judicial system, and the State highway system. Most non-federal taxes are administered and collected by the State under Hawaii's highly centralized tax system. The major sources of State revenue are the general excise tax, and the corporate and personal income taxes. There are no State personal or property taxes, local levies for school districts, or special assessments. The annual budget serves as the foundation for the County ofmaui's financial planning and control. The County Charter requires the Mayor on or before March 25 of each year to submit to the County Council an operating budget for the ensuing fiscal year, a capital program and an accompanying message. The operating budget and the capital program are prepared by the Mayor with the assistance of the Depmiment of Finance. The operating budget presents a complete financial plan for the current operations of the County and its departments. The capital program contains capital improvements pending or proposed to be undertaken within the ensuing fiscal year and ensuing five fiscal years, together with the estimated cost of each improvement and pending or proposed method of financing. Chapter 46, Hawaii Revised Statutes was amended in 1993 to permit counties to prepare budgets on a one or two year period. The County Chmier provides for one-year budgets. The County maintains budgetary controls to ensure compliance with legal provisions embodied in the annual budget ordinance approved by the County Council. Activities of the General Fund, special revenue funds, grant revenue, debt service fund, and capital projects fund are included in the annual budget ordinance. The Mayor holds community meetings to receive input from citizens in the eight community plan areas through the County prior to preparing the Mayor's Proposed Budget for the ensuing fiscal year. Upon submission of the proposed budget in March, additional public hearings are held with the community by the County Council between March and April in the year of submission. After public hearing, the operating budget and capital program are subject to review and amendment by the County Council. If, however, the County Council fails to adopt an operating budget on or before June 10 of a given year, the County Charter provides that the operating budget submitted by the Mayor will be deemed enacted as the operating budget for the ensuing fiscal year. The County Chmier further states that the estimated revenues, proposed expenditures and total appropriations for the ensuing fiscal year shall be equal in amount. The appropriated budget is prepared by fund, function, department, and program and/or activity. Every appropriation, except an appropriation for a capital improvement, lapses at the close of the fiscal year to the extent the same has not been expended or encumbered by a written contract. An appropriation for a capital improvement remains in force until the purpose for which it was made has been accomplished or abandoned. Under the current County Charter, an appropriation for a capital improvement will be deemed abandoned six months after the close of the fiscal year to the extent that it has not been expended or encumbered by a written contract. The County Charter provides that no payment may be authorized or made and no obligation incuned against the County except in accordance with appropriations duly made. 3

24 Departments may make transfers of appropriations between indexes and sub-objects within a program. Upon written request of the Mayor part or all of any unencumbered appropriation balance may be transfened within a department by resolution or from one department to another by ordinance, subject to Council approval. Budget-to-actual comparisons are provided in this report for each required governmental fund for which an appropriated annual budget has been adopted. These comparisons are presented in the Required Supplementary Information section of the report. In addition, detail revenues and appropriations schedules for major and non-major funds are presented in the Other Supplementary Information section of the report. ECONOMIC CONDITION AND OUTLOOK The following is excerpted from First Hawaiian Bank's report Economic Forecast, Maui Edition by Dr. Leroy 0. Laney and is reprinted here by permission: "Mixed Bag for Maui: Tourism Robust, Construction Lags Maui 's visitor industry is doing extremely well, thanks to its resilient upscale image -- with resulting higher room rates -- and a welcome growth in airlift, including flights from secondary Mainland cities. However, tourism alone cannot be relied upon to bring Maui back to better times. The job total continues to struggle to return to pre-recession levels. Unfortunately, other sectors of Maui 's economy - especially the construction industry continue to lag significantly. Residential construction is down practically everywhere now, but any progress to resuscitate overall construction -public or private - would result in a more balanced and sustained recovery for Maui. Efforts to diversify the local economy are going and admirable, but the smaller a local economy is, the more elusive the diversification becomes. Jobs Maui continues to lose jobs, the only county in the state for which that's consistently the case -- even though the official end to the recession occurred some time ago. Although the visitor industry is doing quite well, weakness in other sectors of Maui 's economy simply overwhelms that strength. The current slow declines in Maui 's unemployment rate will likely continue in the fitture. But there remains a stark contrast between the current Maui jobless rate and the 2% number that prevailed in the peak year of Tourism Part of the reason the visitor industry is doing so well lies in the fact that Maui continues to hang on to its reputation as a very upscale place for a tropical vacation. That's an asset that is extremely valuable, especially as more competition enters among such locales. And on Maui, more than a lot of similar destinations, there seems to be greater recognition on the part of local residents that tourism is critically important to the economy. Total airline seats for Maui "have increased dramatically so far in 2011, with far stronger growth than elsewhere in the state, a surge of over 11% this year. 4

25 A big reason is the fact that Maui has been picking up direct flights by Hawaiian and Alaska Airlines from secondary cities in the US. and Canada. That, combined with aggressive marketing in those cities, has paid off The strong visitor industry has enabled Maui hotels to raise their room rates, he said, and the island once again has the highest average daily room rate in the state. So reputation does pay off Another comparative advantage, even within the state: Maui has most things a larger city has to offer, but continues to retain its rural environment. Add to that the very wide range of activities available to Maui visitors, and you have a combination that's hard to top. Construction One major reason that Maui lags in job creation is the weakness of its construction sector, which is showing continued job losses. Residential construction is weak just about everywhere nowadays. But help may be on the way, citing these signs that Maui construction will turn up in the fitture: Hyatt is planning a time-share tower in West Maui. Alexander & Baldwin's Maui Business Park Phase IL 179 acres of light industrial development, is ramping up in Kahului. Ground has been broken for a 138-room Courtyard by Marriott hotel in Kahului near the airport. Real Estate In 2011, sales for both single-family and condos have leveled off after strong increases in And median prices have continued to fall. Until the downward pressure on prices abates, there cannot be a sustained recovery in the real estate market. And that has to do with the inventory of short sales and foreclosures that constitute an overhang on the market. In commercial real estate, recent sales are very strong because prices have fallen far enough to bring buyers into the market. Some of this activity reportedly is for investment over the longer term. UH Maui College One growth area in the Maui economy, which also helps to diversify it, is the recently renamed UH Maui College - replacing the old Maui Community College label. That name change reflects the addition of four-year degrees to its curriculum, the first UH community college to grant such degrees. He noted rapid enrollment growth, up 33% in two years to almost 4,400 students. Sugar Things have been looking up recently at HC&S, Hawaii's sole remaining sugar plantation. Annual production is back in a profitable range after two years of very low total production and yields per acre in 2008 and Better age on the crop and slightly better rainfall are the main reasons for the recovery. HC&S estimates that 2011 production should be about 185,000 tons. 5

26 HC&S is important to the Maui economy for several reasons: It's a large employer. It keeps the central valley green. And it provides enough power to Maui 's grid that it is actually a net energy producer. Thus, when energy prices rise, HC&S actually benefits". MAJOR INITIATIVES AND ACHIEVEMENTS For TheY ear. While the County of Maui continued to face the economic challenges, which began in 2008, it outperformed expectations in Fiscal Specifically, revenues outperformed budget projections while expenditures were 3% less than the Fiscal 2011 budget provisions. Management contends that operational efforts to constrain expenditures, enhance revenues, and maximize existing financial components over the last several fiscal years have begun to pay dividends. The County has refilled the internal auditor position to help the County in identifying operational enhancements and revenue growth opportunities through audits of departments and programs. Notwithstanding the results seen in Fiscal 2011, the County will continue to face the challenge of remaining fiscally responsible while looking to enhance public services, improve infrastructure, and help support Maui's workforce. The County did successfully close on a bond sale on December 2, 2010 (Fiscal 2011) for $73.7 million in general obligation bonds. In this issue, the County was able to secure lower interest rates and benefit from the 45% federal subsidy offered under the American Reinvestment and Recovery Act; thereby resulting in significant cost savings in debt issuance in the history of the County. Importantly, Moody's Investors Service, Standard & Poor's and Fitch Ratings assigned upgraded ratings of "Aa1," "AA+" and "AA+", respectively, to the Bonds. All three qualified bond-rating agencies now rate the County's bonded debt at the next-to-highest category for safety. Furthermore, Maui County's bond rating continues to have the highest of any city, county or state jurisdiction in the state of Hawaii. In the past year, the County invested in its infrastructure and capital improvements. Specifically, water source development, water transmission lines, wells, tanl(s, drainage projects, resurfacing and roads were some of the broad categories of these improvements. Some of the individual projects were: Market Street Improvements, Phase 2 Central Maui Landfill Gas Collection System Expansion Wailuku-Kahului WWRF Tsunami Protection Countywide SCDA Upgrade at Various Pump Stations Kihei Pump Station No. 2 Force Main Replacement Countywide Consent Decree Sewer Rehabilitation Waiohonu Temporary Detour Bridge Lahaina Watershed Flood Control Phase 1 Public transpmiation continues to increase significantly in ridership and service demands as the residents of Maui appreciate the consumer convenience and savings it provides. With passenger counts exceeding 2.3 million in FY2011, compared to 2.1 million in Fiscal 2010, 2.0 million in Fiscal 2009, and 1.5 million in Fiscal 2008, it is one of the fastest growing transit systems in the nation. 6

27 In addition, the Maui Bus ADA Para transit program has seen a dramatic increase in ridership with 47,582 clients served, up from an already burgeoning 18,442 clients in Fiscal2010. Along with adding more buses to the fleet, the Department has also started the implementation of transit amenities (bus stop shelters), performed route modifications to keep the service reliable, and offered additional purchasing locations for the very popular $2.00 daily passes in direct response to the growing needs of the transit system. On the human services side of transportation, the Department is working with its service provider, Maui Economic Oppmiunity, Inc. to help facilitate the construction of its transit center, which will further enhance the ability of the Depatiment to deliver services to a broader range of passengers. Committed to continued compliance with the Government Accounting Standards Board (GASB) statements Nos. 43 and 45 regarding Other Post Employment Benefits - Other Than Pensions (OPEB), the County of Maui set aside 100% of its net OPEB obligation in its internal Post-Employment Obligations Fund where it will accrue interest. In April2010, certain information became available from the actuary, AON Hewitt Consulting, which concluded that the State of Hawaii Employer Union Trust Fund (EUTF) was deemed insolvent for GAAP accounting purposes. In light of the implications, the County has not contributed its net OPEB obligation funds to the EUTF since fiscal year 2010, opting to allow the EUTF time to resolve the actuary's concerns and, at the same time, safeguarding its net OPEB obligation funds internally. The funds placed in the Post-Employment Obligations Fund will continue to accrue interest until such time that solvency and confidence returns to the EUTF. During November 2011, the County was informed by the EUTF that during its annual audit for fiscal year 2010 it was determined that the deposits from patiicipating employers (of which the County ofmaui is one) do not meet the criteria of a trust fund under GASB Statement No. 43. As a result of this finding, the total OPEB obligation for the County ofmaui has increased by the amount of funds currently being held by the EUTF with offsetting deposits held by the EUTF for the same amount. Please refer to the Management's Discussion, Analysis, and Footnote 9 of the CAFR for further details. The County of Maui has included in its 2012 budget the estimated Annual Required Contribution (ARC) for fiscal year 2012; and as financial resources will allow and with Council approval, the County intends to budget sufficient funds to satisfy, at a minimum, the full amount of its ARC each year. For The Future. Continued turmoil in the U.S. and world financial markets since 2008 has made the County increasingly aware of the importance of building and strengthening a sound financial base. The 2011 tsunami in Japan only compounded the financial issues for the County with reduced tourism. The County must continue to be more vigilant and proactive in protecting its fiscal health in order to weather difficult troughs in economic cycles. Over the past several years, the County has carefully prepared for the cyclical turn in the market with its early establishment of an Emergency Fund (2005), an Affordable Housing Fund (2006), and it's Post-Employment Obligations Fund (2007). The County is committed to its strategy of continuing to build conservatively upon past funding in order to maintain its financial position in the future. 7

28 The General Plan has and will continue to direct much discussion and will lay the foundation for future strategy for infrastructure development and resources. The Plan addresses the County's anticipated future needs for water source development, capital improvement projects for new facilities, roadways, infrastructure, and all the related issues to sufficiently and strategically provide for continued population growth within the County. While not directly related to the General Plan, initiatives that continue to loom on the legislative horizon include measures to address water resource allocations, continued encouragement of affordable housing and workforce housing development, and initiatives to encourage alternative energy, "green" development and more eco-friendly technologies. Considering the cun-ent state of the economy and the financial markets, there will be a need for greater emphasis on identifying tax and revenue sources for new initiatives. OTHER FINANCIAL INFORMATION Debt Management. The County of Maui' s debt management policy is a written guideline for the amount and type of debt issued by a state or local government, the issuance process, and the management of a debt portfolio. An effective debt management policy improves the quality of decisions, provides justification for the structure of debt issuance, identifies policy goals and demonstrates a commitment to long-term financial planning, including a multi-year capital plan. Adherence to a debt management policy signals to taxpayers, rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner. Maui County's fiscal and debt policies have allowed the County to receive the next-to-highest ratings (AA+ and Aa1) from the three qualified bond-rating agencies. The County's debt policy (revised January 2008) is in compliance with the Hawaii Revised Statutes (Chapter 47) and the County Charter. The general intent of the County's debt policy is that debt is only to be incun-ed when necessary. The County will confine long-term borrowing to capital assets or equipment that cannot be financed from cunent financial resources. The County shall bonow only when necessary and utilize pay-as-you-go financing to the extent possible in order to conserve debt capacity. Furthermore, the County does not use debt for operational needs. Investment Management. The County of Maui maintains an investment policy (revised June 2010) which governs all financial assets of the County. These funds are accounted for in the County's Comprehensive Annual Financial Report and include the General Fund, Special Revenue Funds, Capital Improvement Project Funds, Enterprise Funds, Trust and Agency Funds, Debt Service Funds and any new funds unless specifically exempted. The County's Investment Policy key objectives include: (1) Safety - investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio; the objective will be to mitigate credit risk and interest rate risk, (2) Liquidity- the investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated, and (3) Yield - the investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risks constraints and liquidity needs. The County's investment policy is in confmmance with the Hawaii Revised Statutes, Chapters Cash Management. The primary objectives of the County's cash management and investment program are the safety and preservation of principal, liquidity, and yield. To ensure the most competitive rates on investments, the cash resources of the individual funds are combined to fmm a pool of cash and investments. The investment pmifolio is composed of obligations of the 8

29 U.S. government and its agencies, certificates of deposit, and repurchase agreements fully collateralized by obligations of the U.S. government or its agencies, and short-term notes. Interest income during Fiscal 2011 for the General Fund was in excess of $5.9 million, which was $3.3 million greater than estimates. Real Property Tax. After peaking in calendar year 2009 (Fiscal 2010), Maui County real property values began to decline in Fiscal As such, total assessed values, overall, decreased by 13.5% between FY 10 and FYll and 11.6% between FYll and FY12 primarily due to sluggish market conditions. For Fiscal2011, the majority of the classifications of tax rates were increased to offset the decline in assessments. A new classification called "Commercialized Residential" was added for Fiscal For Fiscal 2012 the Improved Residential and Unimproved Residential classes were merged into a single class called "Residential". All of the exemptions in Fiscal 2011 were unchanged from the previous Fiscal 2010 with the exception of adding an exemption for Kuleana Lands. Risk Management. The County of Maui maintains $25,000,000 in Public Entity Excess Liability coverage. Further, the County ofmaui is afforded Property coverage on a Primary as well as Excess Layers with a limit of liability of $1 00 million on All Risk perils per occurrence, except $75 million for Earthquake, $75 million for Flood, and $25 million on Equipment Breakdown. An Excess Workers' Compensation policy is procured with a limit of $10,000,000. Lastly, the County has a Commercial Crime Policy. During Fiscal2011, the Public Entity Excess Liability and Excess Workers' Compensation policies were subject to a $500,000 self-insurance retention borne on the part of the County prior to the insurer participating in a claim irrespective of the nature of the claim. A Third Party Administrator administers the general liability and Workers' Compensation claims under the purview of the Risk Manager. A WARDS AND ACKNOWLEDGMENTS Award. The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the County of Maui for its Comprehensive Annual Financial Report for the fiscal year ended June 30, This is the twenty-eighth consecutive year that the County has received this prestigious award. To receive the Certificate of Achievement, the government entity must publish an easily readable and efficiently organized Comprehensive Annual Financial Report whose contents conform to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We have ensured that the GFOA standards have been adhered to and believe that the current report, which will be submitted to the GFOA, continues to conform to the Cetiificate of Achievement Program requirements. Aclrnowledgements. The preparation of this report could not have been accomplished without the commitment and dedicated service of the entire staff of the Department of Finance, and the cooperation of the County agencies and depmiments. I wish to express my appreciation to all members ofthe Finance Department and to the auditors, Kobayashi, Kanetoku, Doi, Lum & Yasuda 9

30 CPAs LLC. who assisted and contributed to its efficient pteparation and extensive compilation. We also thank the Honorable Mayor Arakawa and the Maui County Council for their interest, trust and support in the progressive strategic planning and conduct of the financial operations of the County ofmaui. DFA:jem Director of Finance 10

31 Certificate of Achievement for Excellence in Financial Reporting Presented to County of Maui Hawaii For its Comprehensive Annual Financial Report,. for the Fiscal Year Ended June 30,2010 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive anriual financial reports (CAFRs) achieve the highest standards in government accounting and financial reporting. President Executive Director 11

32 COUNTY OF MAUl ELECTED OFFICIALS AND APPOINTED DEPARTMENT HEADS JUNE 30,2011 ELECTED OFFICIALS ADMINISTRATIVE Mayor Alan M. Arakawa LEGISLATIVE Councilpersons Council Chair Danny A. Mateo Gladys C. Baisa Robert Carroll Elle Cochran Donald G. Couch, Jr. Director of Council Services County Clerk Managing Director Corporation Counsel Prosecuting Attorney Director of Finance Council Vice-Chair Joseph Fontanilla APPOINTED DEPARTMENT HEADS G. Riki Hokama Michael P. Victorino Mike White Ken R. Fukuoka Jeffrey T. Kuwada Keith A. Regan Patrick K. Wong John D. Kim Danilo F. Agsalog Director of Environmental Management Director of Public Works Director of Parks & Recreation Fire Chief Planning Director Director of Personnel Services Director of Housing & Human Concerns Director of Transpmtation Director of Water Supply Chief of Police Director of Liquor Control Kyle K. Ginoza David C. Goode Glenn T. Correa Jeffrey A. Murray William R. Spence LanceT. Hiromoto Jo-Ann T. Ridao Jo-Anne Johnson Winer David S. Taylor Gary A. Yabuta Franklyn L. Silva 12

33 II CITIZENS OF MAUl COUNTY II II OFFICE OF THE MAYO,... :: II COUNTY COUNCIL I Committee on the Status of Salary Commission Women ~ H I I Cost of Government Commission ~ Workforce Investment Board I H I Kula Agricultural Park Committee r-- I II I COUNCIL SERVICES COUNTY CLERK I I I I II II I II DEPARTMENT OF MANAGEMENT I ~ CIVIL DEFENSE AGENCY LIQUOR CONTROL POLICE ~ ---1 I I I ~ CORPORATION COUNSEL Liquor Control Commission Police Commission r- I I Liquor Control Adjudication Board f- PROSECUTING ATTORNEY Board of Ethics I I H I PARKS & RECREATION ENVIRONMENTAL H I PUBLIC WORKS I MANAGEMENT ~ H I Arborist Committee I Board of Code Appeals I ~ FINANCE I ~ H I I Commission on Naming Streets, PERSONNEL SERVICES Parks and Facilities I ~ I Real Property Tax Review Board Outdoor Lighting Standards Civil Service Commission I I I I ~ Committee FIRE & PUBLIC SAFETY I ~ I I Fire & Public Safety Commission I PLANNING H I I HOUSING & HUMAN CONCERNS I I Subdivision Engineering Standards ~ Affirmative Action Advisory Council I Committee Board of Variances and Appeals ~ ~ I y Cultural Resources Commission ~ I Animal Control Board I ~ ~ Hana Advisory Committee- MPC I I Commission of Culture and the Arts ~ H I I Lanai Planning Commission Commission on Children & Youth ~ y I I Commission on Persons with Maui Planning Commission Disabilities ~ I Council on Aging ~ I Grants Review Committee ~ Maul Redevelopment Agency ~ I Molokai Planning Commission ~ I Urban Design Review Board ~ I 13 Traffic Safety Council I ~ TRANSPORTATION ---1 I WATER SUPPLY I I I Board of Water Supply I

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35 COUNTY OF MAUl Financial Section

36 KOBAYASHI, KANETOKU, DOl, LUM & YASUDA CPAs LLC 745 Fort Street, Suite 1915 Honolulu, Hawaii Tel (808) Fax (808) Kilani Avenue, Suite 202 Wahiawa, Hawaii Tel (808) Fax (808) Independent Auditors' Report Honorable Danny A. Mateo, Chair and Members of the Council County of Maui Wailuku, Hawaii We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the County ofmaui, State of Hawaii (the County), as of and for the year ended June 30, 2011, which collectively comprise the County's basic financial statements as listed in the table of contents. These financial statements are the responsibility of County's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the County's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the County as of June 30, 2011, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the County adopted GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, effective July 1, In accordance with Government Auditing Standards, we have also issued our report dated December 28, 2011, on our consideration of the County'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 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. 15

37 KOBAYASHI, KANETOKU, DOl, LUM & YASUDA CPAs LLC Honorable Datmy A. Mateo, Chair and Members of the Council Page2 The management's discussion and analysis (pages 17 through 34), the budgetaty comparison schedules for the general fund, the highway fund, and the sewer fund (pages 83 through 87), and the schedule of funding progress for the EUTF (page 88) are not a required part of the basic financial statements but are supplementaty information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementaty infonnation. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the County's basic financial statements. The introductory section, the other supplementary information section, and the statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The other supplementary information section has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductmy and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. ~~ A;~~C!?AJPC. Honolulu, Hawaii December 28,

38 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 This discussion and analysis of the County of Maui's (the County) basic financial statements provides a narrative overview and analysis of the County's financial activities for the fiscal year ended June 30, We encourage readers to consider the information presented here in conjunction with additional infmmation that we have furnished in our letter of transmittal, the basic financial statements, and the accompanying notes to the basic financial statements. FINANCIAL HIGHLIGHTS The assets of the County exceeded its liabilities at the close of the fiscal year by $866.8 million (net assets). The County's total net assets increased by $9.8 million during the current fiscal year. As ofthe close of the fiscal year, the County's governmental funds reported combined ending fund balances of $297.0 million, an increase of $50.2 million in comparison with the prior year. Approximately 29.3% of this total amount, or $87.0 million, is unassigned. The unassigned fund balance of$87.0 million at fiscal year end is available for spending at the County's discretion. This fund designation is consistent with GASB Statement No. 54. This is a change from prior years where funds were either designated as reserved or unreserved. At the end of the current fiscal year, the unassigned fund balance of the General Fund was $87.0 million, or 42.3% of total General Fund expenditures. On December 2, 2010, the County issued $73.7 million in General Obligation (GO) Bonds. Of the total issuance, $23.4 million was comprised of20 10 Series A (Taxable) bonds while $50.3 million was comprised of 2010 Series B (Tax-Exempt) bonds. The 2010 Series A Taxable bonds issued were designated as "Recovery Zone Economic Development Bonds" (RZEDB's). As part ofthe American Recovery and Reinvestment Act of2009, the County will receive a "refundable tax credit" that subsidizes the interest paid on the RZEDB' s from the Federal government equal to 45%. The County's gross amount (before premium and refunding deferral amortization) of GO debt, State Revolving Fund (SRF) Loans and other long-term debt outstanding increased by $21.7 million during the current fiscal year. The increase is primarily reflective of a $23.3 million increase in GO debt due to the issuance of debt in December 2010 partially offset by a net decrease of$1.6 million in SRF loans. In a letter dated November 23, 2011, the Hawaii Employer-Union Health Benefits Trust Fund (EUTF) informed pmiicipating employers (ofwhich the County is one), that their deposits to pre-fund retiree benefits do not meet the criteria of a contribution to a trust fund for other 17

39 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 postemployment benefits (OPEB) plan as defined under GASB Statement No. 43. As a result of this interpretation change by the EUTF, the total net OPEB obligation included in the government-wide Statement of Net Assets has increased by $62.0 million to $95.1 million with offsetting deposits held by the EUTF totaling $62.0 million. In accordance with the Governmental Accounting Standards Board (GASB), the County adopted GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions in fiscal year Those changes are reflected in the fund financial statements and all supporting schedules, including this Management's Discussion and Analysis (MD&A). OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the County's basic financial statements. The County's basic financial statements are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Basic Financial Statements Government-Wide Financial Statements. The two government-wide financial statements are designed to provide readers with a broad overview of the County's finances in a manner similar to a private-sector business. They provide a financial overview of the County from the economic resources measurement focus using the accrual basis of accounting. The Statement of Net Assets presents information on all of the County's assets (including capital assets) and liabilities (including long-term obligations), with the difference between the two repmied as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the County is improving or deteriorating. The Statement of Activities presents infmmation showing how the County'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 occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave.) Both of the government-wide financial statements distinguish functions of the County that are principally suppmied by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant pmiion of their costs through user fees and 18

40 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 charges (business-type activities). The governmental activities of the County include general government, public safety, highways and streets, sanitation, social welfare, culture and recreation, and legislative. The County's business-type activities include the Depmiment ofwater Supply, the Housing, Interim Financing, and Buy-Back Revolving Fund, and the Golf Course Special Fund. These government-wide financial statements can be found in the first section of the basic financial statements. Fund Financial Statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The County, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the County's funds can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental funds. Governmental fimds are used to account for essentially the smne functions reported as governmental activities in the government-wide financial statements. However, unlike the govemment-wide financial statements, govemmental fund financial statements focus on near-term inflows and outflows 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 the County's near-term financing requirements. These funds are reported using an accounting method called modified accrual. In accordance with the Governmental Accounting Standards Board (GASB), the County adopted GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions in fiscal year GASB Statement No. 54 creates new fund balance classifications, the use of which is based upon the extent to which a govemmental entity is bound to honor constraints on the specific purposes for which amounts in that fund can be spent. Instead ofthe previous fund categories of reserved and unreserved, there are now five different fund balance categories: nonspendable, restricted, committed, assigned, and unassigned. Nonspendable funds include amounts that cannot be spent because they are either not in spendable form or are legally or contractually required to be maintained intact. Restricted funds are subject to constraint imposed or legally enforceable by extemal pmiies. Funds with restrictions imposed by the Hawaii Revised Statutes and the Maui County Charter are examples of such funds of the County. Committed funds are subject to constraint created by the County and can only be changed by the County's highest level of formal action. Assigned funds are constrained by the County's intent to be used for specific purposes but are neither restricted nor committed. Lastly, unassigned funds have no constraints whatsoever and are available for spending at the County's discretion. 19

41 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 In accordance with GASB Statement No. 54, the County has established a policy relative to the order of the allocation of expenditures. The County's policy is to use resources in all funds in the following order: (1) Restricted, (2) Committed, (3) Assigned and (4) Unassigned. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the County's near-term financing decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental fimds and governmental activities. Most of the County's basic services are reported in the governmental funds. The County maintains eleven individual governmental funds. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balances for the General, Highway, Sewer, Grant, Debt Service, and Capital Improvement Projects, all of which are considered to be major funds. Data from the other five governmental funds are combined into a single, aggregated presentation. Individual fund data from each of these non-major governmental funds is provided in the form of combining statements in the other supplementary information section. The governmental funds financial statements are located immediately after the govemment-wide financial statements in the basic financial statements section. The two fund financial statements are the balance sheet and the statement of revenues, expenditures, and changes in fund balances of the governmental funds. Proprietary funds. Services for which the County operates similar to a business-type activity are generally reported in proprietary funds. These proprietary funds provide the same type of financial information (long and short-term) as the government-wide financial statements, only in more detail. The County's enterprise fimds (one type of proprietary fund) are the same as its business-type activities reported in the government-wide financial statements. The financial statements of the three proprietary funds include the statement of fund net assets, the statement of revenues, expenses, and changes in fund net assets, and the statement of cash flows. These proprietmy funds financial statements provide separate information for the Depmiment of Water Supply, the Housing, Interim Financing, and Buy-Back Revolving Fund, and the Golf Course Special Fund, all ofwhich are considered to be major funds ofthe County. The proprietary funds financial statements are the second set of fund financial statements and follow governmental funds financial statements. 20

42 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the County. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the County's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The statement of assets and liabilities of the agency funds is the last of the fund financial statements and is found after the proprietary fund financial statements. Notes to the Basic Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the basic financial statements are the last section of the basic financial statements. Required Supplementary Information (RSI) The County adopts an annual appropriated budget for the General Fund, the Highway Fund, and the Sewer Fund. Budgetary comparison schedules have been provided for all these funds to demonstrate compliance with this budget. The County is a participating employer in an agent, multiple-employer defined benefit plan providing health care and insurance benefits to all qualified employees and retirees. As described in Note 9, the plan's assets are not held in a separate trust account for payment of benefits. A schedule of funding progress is provided for this postemployment obligation. These schedules are presented as required supplementary infmmation (RSI), which follows the basic financial statements section. Other Supplementary Information (OSI) This section follows the RSI and displays the individual fund data of the five other non-major governmental funds in combining statements for the balance sheet and statement of revenues, expenditures, and changes in fund balances. These non-major governmental funds are the Liquor Control, County, Bikeway, Solid Waste, and Other Assessment Funds. The total of these five nonmajor funds is included in the Other Governmental Funds column in both the balance sheet and the statement of revenues, expenditures, and changes in fund balances for the governmental funds, which are the first two fund financial statements of the basic financial statements section. In addition, the OSI section includes the budgetary comparison schedule for the Debt Service Fund, as well as the detail fund schedules of revenues - budget and actual and schedules of appropriations, expenditures, and encumbrances for the General, Highway, Sewer, Grant, Solid Waste, Liquor Control, and Capital Improvement Projects Funds. Included in the OSI section is the statement of changes in assets and liabilities for the Fiduciary Funds. 21

43 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 The last pali of the OSI section includes three schedules relating to capital assets used in the operation of the governmental funds. The first schedule is by type of capital assets and the next two provide details of capital assets followed by function and depaliment. GOVERNMENT-WIDE FINANCIAL ANALYSIS NET ASSETS June 30, 2011 and 2010 (Dollars in Thousands) Governmental Business-Type Activities Activities Total FY2011 FY2010 FY2011 FY2010 FY2011 FY2010 Assets: Current and other assets $ 398,079 $292,131 $ 57,167 $ 46,570 $ 455,246 $ 338,701 Capital assets 602, , , , , ,991 Total Assets 1,000, , , ,142 1,376,289 1,254,692 Liabilities: Long-term obligations 431, ,230 36,012 33, , ,518 Other liabilities 33,486 42,296 8,525 7,869 42,011 50,165 Total Liabilities 464, ,526 44,537 41, , ,683 Net Assets: Invested in cap ita! assets, net of related debt 361, , , , , ,453 Restricted 91,162 83,950 14,609 14, ,771 98,923 Unrestricted 82,989 82,663 26,167 18, , ,633 Total Net Assets $ 535,173 $538,024 $331,606 $318,985 $ 866,779 $ 857,009 At the end of the current fiscal year, the County repolied positive balances in all of the three categories of net assets both for the govermnent as a whole, as well as for its separate governmental and business-type activities. As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the County, assets exceeded liabilities by $866.8 million at the close ofthe current fiscal year. This compares with the net assets of$857.0 million from the prior year. Total net assets increased by $9.8 million during the current fiscal year. The governmental activities reflected a decrease in net assets of $2.8 million, while the business-type activities increased net assets by $12.6 million. 22

44 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 By far the largest portion of the County's net assets (7 5.2%) reflects its investment in capital assets (e.g., land, buildings, machinery, and equipment) less any related debt used to acquire those assets that is still outstanding. The County uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the County's investment in its capital assets is repmied net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources as the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the County's net assets (12.2%) represents resources that are subject to external restrictions on how they may be used. Umestricted net assets amounted to $109.2 million at the end ofthe current fiscal year, with $83.0 million derived from governmental activities and the balance of $26.2 million from business-type activities. Umestricted net assets increased by $7.5 million as compared to last year due to businesstype activities. The County's net capital assets increased by $5.1 million due to capital improvement projects completed by the County during the current fiscal year. Further discussion on the County's capital assets is provided in the Capital Assets section of Management's Discussion and Analysis. The County's total amount of GO debt, State Revolving Fund (SRF) Loans and other long-term debt outstanding increased by $21.7 million during the current fiscal year. The increase is primarily reflective of a $23.3 million increase in GO debt due primarily to the issuance of debt in December 2010 partially offset by a net decrease of$1.6 million in SRF loans. Other long-term obligations increased from $67.6 million and $3.9 million in fiscal2010, to $160.8 million and $5.2 million in fiscal2011 for governmental and business-type activities, respectively. The increase is primarily due to an increase in the postemployment benefits (OPEB) liability. As previously discussed, the EUTF informed the County that its contributions to the EUTF during the past four years do not meet the GASB's criteria of a contribution to a trust fund for OPEB plans. As a result of this interpretation change by the EUTF, the total net OPEB obligation included in the government-wide Statement of Net Assets at June 30, 2011 increased by $62.0 million with offsetting deposits of $62.0 million (representing amounts held by the EUTF on behalf of the County). The State will be seeking legislation to set up an irrevocable trust that will comply with GASB Statement No. 43 requirements. Once such legislation has been enacted, the liability and offsetting deposits for amounts held by the EUTF will be removed. Refer to Footnote 9 for greater discussion. 23

45 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 CHANGES IN NET ASSETS For the Years Ended June 30, 2011 and 2010 (Dollars in Thousands) Governmental Activities Business-Type Activities Total Revenues: Program Revenues: Charges for services Operating grants and contributions Capital grants and contributions General Revenues: Real property taxes Other taxes Interest and eaming;, net Other revenues Total Revenues FY2011 $ 92,344 35,216 6, ,477 49,126 6, ,242 FY2010 $ 80,293 39,353 7, ,861 48,466 9, ,300 FY2011 FY2010 $ 48,519 $ 47,745 II,900 9, ,335 1, ,017 FY2011 $ 140,863 35,216 18, ,477 49,126 7, ,577 $ FY ,038 39,353 17, ,861 48,466 11, ,317 Expenses: Govemmental Activities: General govermnent Public safety Highway and streets Sanitation Social welfare Culture and recreation Legislative Interest on long-term debt Business-Type Activities: Housing Golf Course Water Supply Total Expenses 126,334 85,000 51,132 58,654 40,781 36,239 5,248 9, ,571 80,480 48,876 69,920 44,303 36,310 5,200 10, ,088 2,389 46,687 46, , ,791 48,981 49, ,334 85,000 51,132 58,654 40,781 36,239 5,248 9, ,088 46, , ,571 80,480 48,876 69,920 44,303 36,310 5,200 10, ,389 46, ,616 Increase (Decrease) in Net Assets Before Transfers (2,584) 25,509 12,354 9,192 9,770 34,701 Transfers Change in Net Assets (:_26_7..:..) (:...4:...,3_08-'--) 26_7 4,:...30_8_ (2,851) 21,201 12,621 13,500 9,770 34,701 Net Assets- Beginning of Year 538, , , , , ,308 Net Assets- End of Year $ 535,173 $ 538,024 $ 331,606 $ 318,985 $ 866,779 $ 857,009 Governmental Activities. Governmental activities decreased the County's net assets by $2.9 million for this year. This compares with last year when net assets increased by $21.2 million. The significant decrease of$24.1 million of change in net assets over last year is primarily attributable to increases in General Government and Public Safety expenses coupled with lower revenues and Sanitation expenses. Real property taxes reflected the largest decrease ($15.4 million) from the previous year. Real property taxes were significantly higher in fiscal 2010 largely due to the settlement of cases that had been appealed in

46 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 General Government and Public Safety expenses increased by $25.8 million and $4.5 million, respectively, from the prior year. The increase in General Government was primarily attributable to claims, settlements, and judgments and other postemployment benefit (OPEB) expense. The increase in Public Safety was due to higher operating and depreciation expenses relating to capital projects being placed into service. Sanitation expenses decreased by $11.3 million from the prior year largely due to solid waste operations. Business-Type Activities. The three business-type activities increased the County ofmaui's net assets by $12.6 million. The Department of Water Supply reflected an increase in net assets of$13.3 million, while the Golf Course Special Fund and Housing Interim Financing reflected decreases in net assets of$0.7 million and $24,193, respectively. The increase in net assets of$12.6 million for this year compares with last year's increase in net assets of $13.5 million. The $0.9 million difference in increases in net assets from 2010 to 2011 is primarily due to reduced net transfers to the Golf Course Special Fund partially offset by greater capital contributions to the Depatiment ofwater Supply. FINANCIAL ANALYSIS OF THE GOVERNMENTAL FUNDS As noted earlier, the County uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The focus of the County's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the County's financing requirements. In particular, the unassigned fund balance may serve as a useful measure of a County's net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the County's governmental funds repmied combined ending fund balances of$297.0 million, representing an increase of$50.2 million (20.4%) as compared to the prior year. The $50.2 million increase in the governmental funds balance is primarily attributable to a (1) $41.8 million increase in the General Fund, (2) $7.7 million increase in the Capital Improvement Projects Fund, (3) $3.3 million increase in the Sewer Fund, (4) $2.6 million increase in the Highway Fund, partially offset by (5) $5.3 million decrease in the Other Governmental Funds where $5.0 million was transferred to the General Fund. The significant increase in the General Fund balance is largely attributable to the transfer of funds related to post-employment benefits. Prior to the implementation of GASB Statement No. 54, the Post-Employment Benefits Fund was reflected as a special revenue fund reflected as part ofthe Non Major Governmental Funds. Under the GASB Statement No. 54 definition, the Post-Employment Benefits Fund no longer qualifies as a special revenue fund. Consequently, these funds are included in the General Fund. 25

47 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 Approximately 29.3% ($87.0 million) of total fund balances ofthe governmental funds is comprised of unassigned funds. Unassigned funds have no constraints whatsoever and are available for spending at the County's discretion. The remainder of total governmental fund balances ($210.0 million) is comprised of restricted ($90.9 million), committed ($92.7 million), and assigned ($26.4 million). There was a total of$89.7 million in encumbered governmental funds comprised of$84.3 million in the major funds and $5.4 million in the non-major funds. General Fund. The General Fund is the chief operating fund for the County. At the end of the current fiscal year, the fund balance ofthe General Fund was $170.3 million, which included $12.1 million in restricted funds, $49.0 million in committed funds, $22.2 million in assigned funds, and $87.0 million of unassigned funds. The unassigned fund balance represents 42.3% of total General Fund expenditures, while the total fund balance of the General Fund represents 82.8% of that same amount. There was a total of $22.2 million in encumbrances in the General Fund at the end of fiscal year The fund balance for the General Fund increased by $41.8 million during the current fiscal year. This compares with an increase of $10.5 million in the prior year. Key factors for the increase of $31.3 million change in fund balance from this year compared to the prior year are as follows: Total revenues decreased $16.6 million or 5.8% from the prior year largely reflective of decreased revenue in (1) taxes ($18.8 million) and (2) interest and investment earnings ($2. 7 million) partly offset by an increase in intergovernmental revenues ($2.5 million) and other revenue ($2.1 million). Total expenditures decreased $9.5 million or 4.4% from the prior year. The $16.6 million reduction in revenue partly offset by the $9.5 million decrease in expenditures resulted in a decrease in revenues over expenditures of$7.1 million as compared to the prior year. Other Financing Uses, net decreased $38.4 million from the prior year primarily due to a reduction in the transfers out to the Other Governmental and Capital Projects Funds. The $38.4 million decrease in financing uses slightly offset by the $7.1 million decrease in revenues over expenditures resulted in the net increase of $31.3 million change in fund balances from the year compared to the prior year. Revenues from taxes decreased dramatically from $244.1 million in fiscal year 2010 to $225.3 million in fiscal year Real property tax is the most significant revenue source for the County. This fiscal year's collection of $220.5 million represents 54.0% of all the revenues for the County governmental funds. This year's collection decreased by $15.4 million (6.5%) from last year's collection of$235.9 million. The decrease in real property tax collection in fiscal 2011 was largely due to the settlement of a significant number of appealed cases in fiscal 2010 resulting in higher revenues in fiscal

48 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 The property tax valuations for tax rate purposes (tax base) decreased from $43.1 billion in fiscal year 2010 to $37.3 billion in fiscal year 2011, representing a decrease of 13.5%. The tax rates increased from fiscal year to fiscal year 2011 for the following classifications of property: improved residential from $4.85 to $5.00, apartment from $4.55 to $5.00, agricultural from $4.50 to $5.00, conservation from $4.75 to $5.00, hotel and resort from $8.20 to $8.30, unimproved residential from $5.35 to $6.25, and homeowner from $2.00 to $2.50. The Maui County Code allows for twenty different tax rates; one for land and one for improvements for each of the ten different classifications of property. The County however, has been utilizing one rate for both land and improvements. Within the ten classifications of property ten different tax rates are used. Included in the Taxes category for the General Fund is the public service company tax. This tax, which is levied against public utilities, provides for a tax of 1.885% of the gross income in lieu of real property tax. Collections for the Public Service Company tax were $6.1 million, representing a decrease of $4.2 million over the prior fiscal year. Interest and investment earnings decreased from $8.6 millionin2010 to$ 5.9 millionin2011. The $2.7 million decrease in interest and investment earnings is largely attributable to a decrease in overall interest rates, along with a reduced write up relating to auction rate securities (ARS) from 2010 to The County reflected a $3.3 million adjustment in 2011 to increase the carrying value of its ARS to their fair value at June 30, This compares to a $5.3 million adjustment made in In September 2011, Menill Lynch and the County ofmaui executed a settlement agreement whereby Metrill Lynch agreed to purchase all ARS holdings from the County at par value. At fiscal year end 2011, the County held investments in ARS, which are collateralized by student loans issued by the Federal government. While these investments continue to pay interest, there had been a number of ARS auctions in previous years that had failed, necessitating investors to hold the securities until maturity. Other revenues increased $2.2 million from the prior year primarily due to nomecmring CZM (Coastal Zone Management) and FEMA program revenue relating to prior years which was received in fiscal year Expenditures for the General Fund amounted to $205.8 million and $215.3 million in fiscal years 2011 and 2010, respectively. The decrease of $9.5 million from the previous year was primarily due to decreases in Social Welfare ($3.6 million), Culture and Recreation ($2.9 million), Highways and Streets ($2.0 million) and Public Safety ($1.1 million). The decrease in both Social Welfare and Highways and Streets is attributable to reduced County grant subsidies. Reduced expenditures in Culture and Recreation and General Government are primarily reflective of reduced salaries and operational costs. The decrease in Public Safety from fiscal year 2010 to fiscal year 2011 is largely due to reduced capital outlays for motor vehicles. 27

49 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 Highway Fund. At the end of the cunent fiscal year, the fund balance ofthe Highway Fund was $12.9 million of which the entire amount was restricted. There was a total of $0.4 million in encumbrances in the Highway Fund at the end of fiscal year The Highway Fund, which is primarily funded by fuel tax ($11.1 million), franchise tax ($8.5 million) and the motor vehicle weight tax ($14.8 million, classified as licenses and permits) collectively made up 8.4% ($34.4 million) of the revenues in the governmental funds. The fiscal year 2011 revenue collection was $7.6 million more than the previous year primarily due to increased motor vehicle license and permit fees. Motor vehicle license and permit fees were $4.7 million greater in fiscal year 2011 than in fiscal year Expenditures for the Highway Fund decreased by $0.5 million (2.2%) to $23.2 million in fiscal year The small decrease in expenditures was attributable to a $1.4 million decrease in capital outlays and a $0.2 million reduction in salaries and wages, partially offset by a $1.0 million increase in operation related expenditures. The increase in operation expenditures primarily relates to County grant subsidies and repairs and maintenance. Transfers in from the General Fund, Special Revenue Funds, Capital Improvement Projects Fund, and Other Governmental Funds decreased from $5.7 million in fiscal year 2010 to $2.9 million in fiscal year Capital improvement projects funded by cash from the Highway Fund increased $0.9 million from $7.7 million in 2010 to $8.6 million in With a beginning fund balance of $10.3 million, the Highway Fund ended with a fund balance of$12.9 million for an increase in fund balance of $2.6 million from fiscal year 2010 to fiscal year Sewer Fund. At the end of the cunent fiscal year, the fund balance of the Sewer Fund was $17.7 million which represented committed funds. There was a total of $1.3 million in encumbrances in the Sewer Fund at the end of fiscal year The Sewer Fund revenues of sewer and cesspool fees of $43.1 million reflect an increase of $0.5 million (1.1%) from last year's revenue collection of $42.6 million. This revenue increase was primarily due to a 5% increase in the sewer rate structure. Expenditures for the fund increased by $0.7 million (3.2%) to $21.7 million in Capital improvement projects funded by cash from the Sewer Fund increased from $4.8 million in 2010 to $5.8 millionin2011. With a beginning fund balance of$14.4 million, the Sewer Fund ended with a fund balance of $17.7 million for an increase in fund balance of $3.3 million from fiscal 2010 to fiscal

50 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 Grant Fund. Total revenue for the Grant Fund was $35.2 million representing a decrease of$0.4 million (1.0%) over last year due to reduced Federal pass-through and State grant activity. Expenditures for the Grant Fund decreased slightly by $0.05 million (0.2%) to $35.6 million. The major program for this fund is the Section 8 Rental Subsidy Program funded by the Department of Housing and Urban Development (HUD). Section 8 Rental Subsidy Program expenditures for fiscal year 2011 were $18.6 million representing an increase of $1.3 million (7.3%) as compared to the previous year. These Section 8 expenditures represent 52.3% of the fund's total expenditures. Capital Improvement Projects Fund. At the end of the current fiscal year, the fund balance of the Capital Improvement Projects Fund was $55.9 million, which included $41.7 million in restricted funds, $9.9 million in committed funds, and $4.3 million in assigned funds. There was a total of $53.3 million in encumbrances in the Capital Improvement Projects Fund at fiscal year end. Expenditures for capital improvement projects for fiscal year 2011 (excluding bond issuance costs) were $57.3 million. This compares with last year's expenditures of$54.8 million representing an increase of $2.5 million or 4.5%. The largest expenditures were reflected in the Government facilities category with expenditures of $18.0 million or 31.4% of total expenditures of the Capital Improvements Projects Fund. The new Kaunakakai Fire Station ($8.9 million), Lanai Senior Center ($1.4 million) and the County morgue ($1.0 million) were the primary projects in this category. The Parks and Recreation category had expenditures of $12.5 million or 21.8% of the total expenditures. The South Maui Community Park ($5.5 million), War Memorial Maehara Baseball Stadium ($0.8 million), War Memorial Football Stadium improvements ($0.8 million), and ADA compliant Countywide improvements ($0.7 million) were the major projects in this category. Roads ($1 0.4 million), which comprised 18.2% of the total expenditures, consisted primarily of the Waiohonu Bridge replacement ($1.6 million), Countywide road resurfacing ($1.5 million), and Market Street improvements ($1. 5 million) in this category. Wastewater Facilities ($8.2 million) comprised 14.3% of total expenditures in the Capital Improvement Projects Fund. Countywide pump station renovation ($1.3 million), the EPA Consent Decree Renovation Project ($1.0 million), and Kihei Main Replacement Project ($0. 7 million) were the major capital improvement projects. Drainage ($4.1 million) comprised 7.2% of total expenditures in the Capital Improvement Projects Fund. The Lahaina Watershed Flood Control project ($2.8 million) and certifications of dams and levees ($0.2 million) were the major projects comprising this category. 29

51 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 Solid Waste Fund. Although the Solid Waste Fund is not a major fund, its revenues of $15.4 million from tipping fees and residential collection fees was 77.2% of all revenues for the non-major funds. This year's revenues increased by $3.4 million (28.3%) over last year, while expenditures decreased by $1.9 million (9. 7%) to $17.2 million. The subsidy from the General Fund decreased by $6.2 million (65.0%) from the prior year to $3.4 million. The net decrease in the fund balance was $1.7 million for the year. BUDGETARY HIGHLIGHTS The major budget amendments for fiscal year 2011 were primarily for the General, Highway, Debt Service, and Other Assessment Funds and consisted of: (1) $3.7 million for Molokai Community Plan (baseyard), (2) $2.5 million for the West Maui Community Plan and Lahaina Watershed Flood Control, (3) $1.8 million for Paia-Haiku Community Plan Area and Makawao-Pukalani-Kula Community Plan Area, and (4) $1.8 million for Hana Community Plan area, road improvements, Kaholopoo and Papahawahawa Bridge. There were four major budget variances (final amended budget and actual amounts) in the General Fund for revenues. Intergovernmental revenues reflected the largest variance with actual revenues of $23.5 million exceeding the budget by $5.9 million. Greater than anticipated transient accommodation taxes were responsible for the budget variance. The positive variance of $3.3 million for the Taxes category was primarily due to a $5.2 million budget to actual variance in real propetiy taxes partially offset by a $1.9 million shortfall in public service company tax. The budget for real property taxes does not provide for revenue relating to penalties and interest. The interest and investment earnings, net category reflected revenue that was $3.0 million more than the budget estimate. The greater than anticipated interest and investment earnings are attributable to a $3.3 million fair value adjustment for fiscal 2011 to increase the canying value of the County's auction rate securities (ARS). In September 2011, Menill Lynch and the County executed a settlement agreement whereby Merrill Lynch agreed to purchase all ARS holdings from the County at par value. The major positive budget variance for expenditures in the General Fund was in Public Safety ($3.4 million) followed by Culture and Recreation ($1.7 million) and Legislative ($1.0 million). Investigative Services ($1.5 million), Technical and Suppmi Services ($0. 7 million) and Unifmmed Patrol Services ($0.5 million) were largely responsible for the savings recorded under Public Safety. 30

52 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 CAPITAL ASS EfS (Dollars in Thousands) Non-Depreciable Assets: Land Construction in progress Governmental Activities Business-Type Activities FY2011 FY2010 FY2011 FY2010 $ 138,236 $ 131,602 $ 9,422 $ 8,822 52, ,359 77,042 73, , ,961 86,464 82,744 Depreciable Assets: Improvements other than buildings 124,004 94,126 2,972 2,972 Buildings and systems 97,625 95,426 8,540 8,540 Machinery and equipment 108, ,760 27,701 27,273 Infi astructure 938, , , ,958 1,268,164 1,159, , ,743 Accumulated Depreciation (856,412) (819,573) (203,365) (191,915) Total Capital Assets, Net $ 602,067 $ 602,419 $318,976 $313,572 FY2011 Total FY2010 $ 147,658 $ 140, , , , , ,976 97, , , , ,033 1,335,074 1,248,677 1,704,041 1,581,774 (1,059,777) (1,011,488) $ 921,043 $ 915,991 Capital Assets. The County's investment in capital assets for its govemmental and business-type activities as of June 30, 2011 amounted to $921.0 million (net of accumulated depreciation). This investment of capital assets includes land, buildings and systems, improvements other than buildings, machinery and equipment, infrastructure (roadways and systems, bridges, landfills and sewer systems) and construction in progress. During fiscal year 2011, capital assets relating to govemmental activities reflected additions of$38.6 million, depreciation expense of $38.9 million, and transfers/retirements of $0.1 million (net), resulting in capital assets of $602.1 million, net. Capital assets relating to business-type activities reflected net additions of $17.3 million and depreciation expense of $11.9 million, resulting in capital assets of $319.0 million. Capital asset additions relating to governmental activities were primarily attributable to road improvement, sewer and landfill infrastructure, and parks (South Maui Community Park and parks ADA improvements). Capital asset additions related to business-type activities were primarily attributable to Department of Water Supply infrastructure projects (waterlines, hydrants, and replacement of pumping equipment). Contractual commitments for capital assets at June 30, 2011 for the governmental and business-type activities amounted to $53.3 million and $14.8 million, respectively. Additional information on the County's capital assets can be found in Footnote (5) in the notes to the basic financial statements of this report. 31

53 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 LONG-TERM DEBT (Dollars in Thousands) Governmental Activities FY2011 FY2010 General Obligation Bonds $ 211,814 $ 189,472 (excluding unamortized premiums and deferrals) State Revolving Fund Loans 56,308 57,993 Other Total Long-Term Debt $ 268,122 $ 247,465 Business-Type Activities FY2011 $ 17,127 12, $ 30,459 FY2010 FY2011 $ 16,120 $ 228,941 12,823 69, $ 29,385 $ 298,581 Total FY2010 $ 205,592 70, $ 276,850 Long-Term Debt. At the end of the current fiscal year, the County had total long-term debt outstanding of $298.6 million ($268.1 million related to governmental activities and $30.5 million related to business-type activities). Of this amount, $228.9 million is comprised of debt backed by the full faith and credit of the government (General Obligation or GO Bonds), while $69.2 million represents State Revolving Fund (SRF) Loans, which are used to construct various County projects for wastewater treatment facilities, solid waste, and EPA compliance, and $0.5 million represents outstanding balances on a line of credit agreement with a banlc The County's total bonds and loans increased by $21.7 million during the current fiscal year. The increase is primarily reflective of a $23.3 million increase in GO debt due primarily to the issuance of debt in December 2010 partially offset by a net decrease of $1.6 million in SRF loans. On December 2, 2010, the County issued $73.7 million in general obligation bonds. Of the total bond issuance, $23.4 million was comprised of20 10 Series A (Taxable) bonds while $50.3 million was comprised of20 10 Series B (Tax-Exempt) bonds. The Series A Taxable bonds were designated as "Recovery Zone Economic Development Bonds" (RZED B 's) which are subsidized by the Federal government to the extent of 45% of interest paid. Moody's Investors Service, Standard & Poors, and Fitch Ratings assigned ratings of"aa1," "AA+," and "AA+", respectively, to the Bonds. All three qualified bond-rating agencies cmtently rate the County's bonded debt at the next-to-highest category for safety. The State Constitution limits the amount of general obligation debt a governmental entity may issue to 15 percent of its total assessed valuation. The cmtent debt limitation for the County ofmaui is $5.588 billion, which is significantly in excess of the County's outstanding general obligation debt. As of June 30,2011, the County's current outstanding debt applicable to the limit of$281.0 million represents only 5.03% of the County's debt limitation. Additional information on the County's long-term debt can be found in Footnote (6) in the notes to the basic financial statements. 32

54 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES First Hawaiian Banlc' s Economic Forecast reports that the County ofmaui showed mixed results in While the Maui visitor industry has done extremely well, construction continues to lag significantly. While all Counties in Hawaii are still below their pre-recession peaks obtained in 2007, Maui is 11% below its peak level. Maui' s 11% shmifall is actually the highest among all the Counties. Likewise, Maui continues to lose jobs as it did in 201 0; it is the only County in the State of Hawaii that has consistently experienced this trend. First Hawaiian Bank projects that the unemployment rate in Maui will decline albeit slowly. All of these factors have been considered in preparing the County's budget for the ensuing fiscal year (fiscal year 2012). At the end ofthe cunent fiscal year, the unassigned fund balance in the General Fund was $87.0 million. The real property tax base for fiscal year 2011 decreased by $5.8 billion (13.5%) to $3 7.3 billion. The real property tax rates (per $1,000 assessed valuation) for fiscal year 2012 increased for eight of the ten classifications of property. Specifically, the following increases were made in these categories: Agricultural from $5.00 to $5.80, Conservation from $5.00 to $5.60, Hotel and Resort from $8.30 to $9.00, Apartment from $5.00 to $5.50, Residential from $5.00 to $5.55, Industrial from $6.50 to $7.00, Time Share from $14.00 to $15.00 and Commercialized Residential from $4.00 to $4.20. The budgeted real propetiytax levy for fiscal2012 decreased by $7.4 million (3.4%) from fiscal year 2011 largely as a result of lower appraised values. The fee structure for the following revenues changed in the fiscal2012 budget: The sewer rate was increased 5% per month for both residential and non-residential customers in fiscal year However, there were no sewer rate increases for fiscal year The water rates increased by $3.50 a month (7%) for the average residential family. For fiscal year 2012, water rates were increased 5.5% with a $3.40 per month increase for the average residential family. The residential collection fee remained the same for fiscal years 2011 and The fiscal year 2012 budget appropriated $22.9 million to the Postemployment Benefits Fund to satisfy the annual required contribution towards its health benefits for its unfunded actuarial liability. 33

55 COUNTY OF MAUl Management's Discussion and Analysis June 30, 2011 REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the County's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Office of the Director of Finance, 200 South High Street, Wailuku, Hawaii

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57 County of Maui Statement of Net Assets As of June 30, 2011 Primary Government Governmental Business-Type Activities Activities Total ASSETS Equity in pooled cash and investments held in County Treasury (Notes 2 and 13) $ 316,198,475 $ 26,738,535 $ 342,937,010 Receivables (Note 3): Property taxes 9,025,589 9,025,589 State of Hawaii 6,360,532 6,360,532 Federal government 982, ,018 Trade accounts, net 4,310,318 7,548,929 11,859,247 Other 461, ,506 Deposits held by the EUTF (Note 9) 61,958,388 61,958,388 Internal balances (Note 4) (2,528,964) 2,528,964 Invent01y 1,655,767 1,655,767 Other assets (Note 6) 1,311, ,821 1,586,839 Restricted assets: Equity in pooled cash and investments held in County Treasury (Notes 2 and 13) 18,419,685 18,419,685 Capital assets (Note 5): Land 138,235,495 9,422, ,657,859 Buildings and systems 97,625,316 8,540, ,165,652 Improvements other than buildings 124,003,477 2,971, ,975,109 Machinery and equipment 108,125,152 27,701, ,826,385 Infrastructure 938,410, ,664,033 1,335,074,042 Construction in progress 52,079,278 77,042, ,121,534 Accumulated depreciation (856,411,710) (203,365,967) (1,059,777,677) Total capital assets, net 602,067, ,975, ,042,904 Total Assets 1,000,145, ,143,588 1,376,289,485 LIABILITIES Accounts payable 22,056,549 3,886,964 25,943,513 Deposits 2,742 2,866,913 2,869,655 Unearned revenue (Note 3) 4,616,401 1,011,084 5,627,485 Advanced collections (Note 3) 3,568, ,412 3,970,446 Interest payable 3,242, ,116 3,599,815 Long-term obligations (Note 6): Due within one year 48,971,516 5,668,932 54,640,448 Due in more than one year 382,515,308 30,343, ,858,796 Total Liabilities 464,973,249 44,536, ,510,158 NET ASSETS Invested in capital assets, net of related debt 361,021, ,830, ,852,009 Restricted for: Highways and streets 12,941,615 12,941,615 Capital projects 42,371,035 42,371,035 Open space and resources 12,113,005 12,113,005 Affordable housing 13,837,502 13,837,502 Water and other assessments (Note 13) 9,898,585 14,609,078 24,507,663 Unrestricted 82,989,082 26,167, ,156,498 Total Net Assets $ 535,172,648 $ 331,606,679 $ 866,779,327 The accompanying notes are an integral part ofthefinancial statements. 36

58 County ofmaui Statement of Activities For the Year Ended June 30, 2011 Program Revenues Operating Capital Grants Net (Expense) Revenue and Changes in Net Assets Primary Government Charges for Grants and and Governmental Business-Type Functions/Programs Expenses Services Contributions Contributions Activities Activities Total Primary Government: Governmental Activities: General government $ 126,333,723 $ 12,126,262 $ 7,454,164 $ 194,755 $ (106,558,542) $ - $ (106,558,542) Public safety 85,000, ,751 4,373,244 - (80,191,513) - (80,191,513) Highway and streets 51,132,494 17,821,200 1,342,257 3,152,995 (28,816,042) - (28,816,042) Sanitation 58,653,848 59,081, ,637 2,671,745 3,476,389-3,476,389 Social welfare 40,781,577 2,359,953 21,121,160 - (17,300,464) - (17,300,464) Culture and recreation 36,238, , , ,569 (35,007,214) - (35,007,214) Legislative 5,247,635 7, (5,239,881) - (5,239,881) Interest on long-term debt 9,438, (9,438,266) - (9,438,266) Total Governmental Activities 412,826,662 92,343,986 35,216,079 6,191,064 (279,075,533) - (279,075,533) Business-Type Activities: Department of Water Supply 46,687,458 47,213,616-11,900,541-12,426,699 12,426,699 Housing, Interim Financing, and Buy-Back Revolving Fund 206, , (58,854) (58,854) Municipal Golf Course 2,087,940 1,158, (929,633) (929,633) Total Business-Type Activities 48,981,413 48,519,084-11,900,541-11,438,212 11,438,212 Total Primary Government $ 461,808,075 $ 140,863,070 $ 35,216,079 $ 18,091,605 (279,075,533) 11,438,212 (267,637,321) General Revenues: Taxes: Property taxes 220,477, ,477,524 Transient acconunodation tax 23,478,627-23,478,627 Public service company tax 6,094,074-6,094,074 Franchise tax 8,468,145 8,468,145 Fuel tax 11,084,813-11,084,813 Interest and investment earnings, net (Note 2) 6,488, ,104 7,405,063 Other 398, ,959 Transfers (Note 4) (267,345) 267,345 Total General Revenues and Transfers 276,223,756 1,183, ,407,205 Change in Net Assets (2,851'777) 12,621,661 9,769,884 Net Assets, Beginning of Year 538,024, ,985, ,009,443 Net Assets, End of Year $ 535,172,648 $ 331,606,679 $ 866,779,327 The accompanying notes are an integral part of the financial statements. 37

59 General Fund ASSETS Equity in pooled cash and investments held in County Treasury (Note 2) $ I 72,679,489 Receivables (Note 3): Real property taxes 9,025,589 State of Hawaii Federal government - Trade accounts, net Other - Due from other funds (Note 4) 7,182,893 Other assets - Total Assets $ 188,887,971 County ofmaui Balance Sheet Governmental Funds As of June 30, 2011 Debt Service Highway Fund Sewer Fund Grant Fund Fund $ 14,175,595 $ 15,836,166 $ 3,144,490 $ ,129-5,218, ,202 2,832, $ 14,903,724 $ 18,668,504 $ 8,996,666 $ Capital Other Total Improvement Governmental Governmental Projects Fund Funds Funds $ 67,701,549 $ 42,661,186 $ 316,198,475-9,025, ,429-6,360, , ,018-1,477,980 4,310, , ,506 7,182, $ 68,925,300 $ 44,139,670 $ 344,521,835 LIABILITIES AND FUND BALANCES Liabilities: Vouchers payable $ 4,944,496 Contract retention payable 5,871 Due to other funds (Note 4) 2,528,964 Deposits payable - Deferred and unearned revenue (Note 3) 6,716,265 Advanced collections (Note 3) 1,215,257 Other 3,148,477 Total Liabilities 18,559,330 Fund Balances (Note 12): Restricted 12,113,004 Committed 49,042,458 Assigned 22,153,080 Unassigned 87,020,099 Total Fund Balances 170,328,641 Total Liabilities and Fund Balances $ 188,887,971 $ 1,824,200 $ 741,436 $ 2,591,585 $ - 1,786 14,800-3,273,461 2, ,421 3,116, , ,276 1,962, ,919 8,996,666 12,941, ,739, ,941,615 17,739,585 - $ 14,903,724 $ 18,668,504 $ 8,996,666 $ $ 5,795,020 $ 732,657 $ 16,629,394 1,835,152 4,292 1,861,901 3,909,432 9,711,857 2,742 1,499, ,785 12,206,872 2,352,777 3,568, ,336 3,565,256 13,039,185 4,059,847 47,546,056 41,700,473 24,125,793 90,880,885 9,932,528 15,954,030 92,668,601 4,253,114-26,406,194 87,020,099 55,886,115 40,079, ,975,779 $ 68,925,300 $ 44,139,670 $ 344,521,835 The accompanying notes are an integral part of the financial statements. 38

60 County of Maui Reconciliation of Fund Balances on the Balance Sheet for Governmental Funds to Net Assets of Governmental Activities on the Statement of Net Assets As of June 30, 2011 Fund Balances - Total Government Funds $ 296,975,779 Amounts repotted for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the governmental funds Unamortized bond issuance costs are capitalized and amortized in the government-wide financial statements but are recorded as an expenditure in the fund financial statements when the bonds are issued. This is the unamortized balance of such costs Revenue deferred for governmental fund purposes but recorded as revenue in statement of activities Long-term liabilities that are not reported in the governmental funds: General obligation bonds SRF loans from the State ofhawaii Accrued vacation Accrued landfill closure costs Accrued postemployment benefits, net of amount deposited with the EUTF (Note 9) Claims and judgments payable Interest payable is not repmted in the governmental funds 602,067,017 1,310,514 7,590,471 (214,401,863) (56,307,651) (27,731,848) (23,553,495) (30,625,646) (16,907,931) (3,242,699) Net Assets of Governmental Activities- Government-Wide Statement ofnet Assets $ 535,172,648 The accompanying notes are an integral part of the financial statements. 39

61 County of Maui Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the Year Ended June30,2011 Capital Other Total Debt Service Improvement Governmental Governmental General Fund Highway Fund Sewer Fund Grant Fund Fund Projects Fund Funds Funds REVENUES Taxes $ 225,299,109 $ 19,552,959 $ $ $ $ $ $ 244,852,068 Licenses and permits 5,418,334 14,773,950 22~725 2,147,502 22,362,511 Intergovernmental revenues 23,522,221 34,745,437 5,523,592 1,205 63,792,455 Charges for current services 1,824,732 1,811,113 42,991,245 15,308,015 61,935,105 Fines and forfeitures 2,633, ,028 2,766,534 Interest and investment earnings, net (Note 2) 5,897,188 33, ,825 6,593,905 Assessments 670, ,!18 Other 3,277,851 16,145 39, ,738 (2,644) 1,684,306 5,386,795 Total Revenues 267,872,941 36,154,167 43,053,369 35,151,067 6,183,773 19,944, ,359,491 EXPENDITURES Current: General government 82,370,547 7,454, ,803 90,651,514 Public safety 74,078,406 4,405, ,969 78,703,416 Highways and streets 6,750,278 23,153,032 1,527,257 1,053,640 32,484,207 Sanitation 513,045 21,719, ,432 17,227,685 39,835,217 Social welfare 13,742,877 21,258,600 8,997,913 43,999,390 Culture and recreation 23,086, ,617 16,435 23,651,790 Legislative 5,237,987 5,237,987 Capital outlay 57,278,094 57,278,094 Debt service: Principal 26,893,527 26,893,527 Interest and other issuance costs 9,966, ,911 10,332,371 Total Expenditures 205,779,878 23,153,032 21,719,055 35,569,111 36,859,987 57,644,005 28,342, ,067,513 Excess (Deficiency) ofrevenues Over Expenditures 62,093,063 13,001,135 21,334,314 (418,044) (36,859,987) (51,460,232) (8,398,271) (708,022) OTHER FINANCING SOURCES (USES) Issuance of Debt (Note 6): General obligation bonds 46,300,000 46,300,000 General obligation refunding bonds 23,375,000 23,375,000 Net premiums received 4,605,929 4,605,929 State Revolving Fund loan 2,855,971 2,855,971 Use of Debt: Payments to escrow for bond refunding (25,939,084) (25,939,084) Transfers In (Note 4): General Fund 75, ,940 36,859,987 1,089,803 7,650,037 46,096,767 Special Revenue Funds 18,052,217 10,000 14,345,000 2,020,982 34,428,199 Capital Improvement Projects Fund 3,006,403 2,434,540 2,465, ,607 8,903,212 Proprietary Funds 401, ,818 Other Govermnental Funds 5,030, , ,000 1,450,000 7,520,296 Transfers Out (Note 4): General Fund (4,480,121) (13,568,200) (3,896) (3,006,403) (5,030,296) (26,088,916) Special Revenue Funds (496,940) (10,000) ( 4,900,202) (I,040,000) (6,447,142) Debt Service Fund (36,859,987) (36,859,987) Capital Improvement Projects Fund (1,089,803) (8,575,000) (5,770,000) (1,450,000) (16,884,803) Other Govermnental Funds (7,650,037) (175,000) (1,845,982) (996,607) (I 0,667,626) Proprietary Funds (669,163) (669,163) Total Other Financing Sources (Uses) (20,275,196) (I 0,370,581) (I 8,028,520) 418,044 36,859,987 59,179,407 3,147,330 50,930,471 Net Change in Fund Balances 41,817,867 2,630,554 3,305,794 7,719,175 (5,250,941) 50,222,449 Fund Balances, Beginning of Year, as restated (Note I) 128,510,774 10,3!1,061 ]4,433,791 48,166,940 45,330, ,753,330 Fund Balances, End of Year $ 170,328,641 $ 12,941,615 $ 17,739,585 $ $ $ 55,886,115 $ 40,079,823 $ 296,975,779 The accompanying notes are an integral part of the financial statements. 40

62 County ofmaui Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Govemment-Wide Statement of Activities-Governmental Activities For the Year Ended June 30, 2011 Net Change in Fund Balances-Total Governmental Funds $ 50,222,449 Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures and do not report depreciation expense. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. Capital outlays reported in the Capital Improvement Projects Fund and other funds, net of retirements Depreciation expense 38,565,578 (38,917,891) The issuance oflong-term debt provides current financial resources to governmental funds, while the repayment of principal oflong-term debt consumes current financial resources: This is the amount by which bond proceeds exceed bond principal payments. This is the amount by which note payable principal payments exceeded proceeds. (22,342,408) 1,684,964 Certain expenses related to the accrual of vacation, landfill closure, postemployment benefits, and claims and judgments are not current financial resources and, therefore, are not reported as expenditures in governmental funds: This is the amount by which vacation payments exceeded the accrual. This is the amount by which landfill closure accrual exceeded the payments. This is the amount by which postemployment benefit accrual exceeded payments, net of deposits held by the EUTF. This is the amount by which claims and judgments accrual exceeded the payments. Accrued interest reported is an expense in the statement of activities but not reported as an expenditure in the governmental funds. Certain revenues that were deferred in previous years, were collected and recorded as revenue in the current year for governmental funds. These deferrals were recorded as revenue in previous years in the statement of activities. Bond issue costs and discounts are capitalized and amortized in the government-wide financial statements but recorded as an expenditure in the fund financial statements when the bonds are issued. This is the current year additions, net of current year amotiization of such costs. Bond premiums are deferred and amortized in the government-wide financial statement but recorded as bond proceeds when received in the governmental funds. This is the current year deferrals, net of current year amortization of bond premiums. Losses on early retirement of bonds outstanding are capitalized and amortized in the statement of activities over the life of the debt. This is the current year additions, net of current year amortization. Change in Net Assets of Governmental Activities - Government-Wide Statement of Activities 156,942 (1,138,613) (19,735,110) (10,477,691) 528,804 1,882, ,331 (3,590,673) 143,800 $ (2,851,777) The accompanying notes are an integral part of the financial statements. 41

63 County of Maui Statement of Fund Net Assets Proprietary Funds As of June 30, 2011 Housing, Interim Financing, and Buy-Back Department of Revolving Golf Course Water Supply Fund Special Fund Total ASSETS Current Assets Unrestricted: Equity in pooled cash and investments held in County Treasury (Notes 2 and 13) $ 24,512,497 $ 2,226,038 $ $ 26,738,535 Trade accounts, net (Note 3) 7,543,678 5,251 7,548,929 Due from other funds (Note 4) 2,528,964 2,528,964 Inventory 1,655,767 1,655,767 Other current assets 83, , ,821 Total Current Unrestricted Assets 36,324,765 2,423,251 38,748,016 Restricted: Equity in pooled cash and investments held in County Treasury (Notes 2 and 13) 18,419,685 18,419,685 Total Current Assets 54,744,450 2,423,251 57,167,701 Capital Assets (Note 5): Land 6,619,358 2,427, ,006 9,422,364 Building and systems 3,231,533 1,743,223 3,565,580 8,540,336 Improvements other than buildings 2,971,632 2,971,632 Machinery and equipment 26,833,349 10, ,250 27,701,233 Infrastructure 396,664, ,664,033 Construction in progress 77,042,256 77,042,256 Accumulated depreciation (198,595,027) (878,855) (3,892,085) (203,365,967) Total Capital Assets, net 311,795,502 3,302,002 3,878, ,975,887 Total Assets 366,539,952 5,725,253 3,878, ,143,588 LIABILITIES Current Liabilities: Accounts payable 2,995,270 7, ,804 3,886,964 Bonds payable- current portion (Note 6) 3,031,566 3,031,566 Notes payable- current pmiion (Note 6) 966, ,790 1,436,673 Claims and judgments- current portion (Note 6) 465, ,583 Accrued vacation - current portion (Note 6) 671,583 63, ,110 Deposits 1,705,880 1,161,033 2,866,913 Unearned revenue 1,000,000 11,084 1,011,084 Advance collections 402, ,412 Interest payable ,116 Total Current Liabilities 11,596,293 1,649, ,331 14,193,421 Noncunent Liabilities (Note 6): Bonds payable - less cunent potiion 14,480,246 14,480,246 Notes payable- less current portion 11,894,711 11,894,711 Accrued vacation - less current pmiion 1,303, ,906 1,439,567 Accrued postemployment benefits (Note 9) 2,528,964 2,528,964 Total Liabilities 41,803,875 1,649,797 1,083,237 44,536,909 NET ASSETS Invested in capital assets, net of related debt 283,649,800 3,302,002 3,878, ,830,185 Restricted- water (Note 13) 14,609,078 14,609,078 Unrestricted (deficit) 26,477, ,454 (1,083,237) 26,167,416 Total Net Assets $ 324,736,077 $ 4,075,456 $ 2,795,146 $331,606,679 The accompanying notes are an integral part of the financial statements. 42

64 County of Maui Statement of Revenues, Expenses, and Changes in Fund Net Assets Proprietary Funds For the Year Ended June 30,2011 Housing, Interim Financing, and Buy-Back Department of Revolving Golf Course Water Supply Fund Special Fund Operating Revenues: Charges for services $ 47,213,616 $ 147,161 $ 1,158,307 Operating Expenses: Salaries and personnel services 8,658, ,108 Other operating expenses 25,534, , ,458 Depreciation and amortization (Note 5) 11,502,677 44, ,374 Total Operating Expenses 45,695, ,752 2,087,940 Operating Income (Loss) 1,517,949 (40,591) (929,633) Non-Operating Revenues (Expenses) Interest and investment earnings, net (Note 2) 881,443 34,661 Interest expense, net of capitalized interest (973,909) (18,263) Loss on disposal of capital assets (183) Other (17,699) Total Non-Operating Revenues (Expenses), Net (110,348) 16,398 Income (Loss) Before Contributions and Transfers 1,407,601 (24,193) (929,633) Capital contributions 11,900,541 Transfers in (Note 4) 669,163 Transfers out (Note 4) (401,818) Change in Net Assets 13,308,142 (24,193) (662,288) Net Assets, Beginning ofyear 311,427,935 4,099,649 3,457,434 Net Assets, End of Year $ 324,736,077 $ 4,075,456 $ 2,795,146 Total Proprietary Funds $ 48,519,084 9,452,351 26,618,382 11,900,626 47,971, , ,104 (992,172) (183) (17,699) (93,950) 453,775 11,900, ,163 (401,818) 12,621, ,985,018 $ 331,606,679 The accompanying notes are an integral part of the financial statements. 43

65 County of Maui Statement of Cash Flows Proprietary Funds For the Year Ended June 30,2011 Housing, Interim Financing, and Buy-Back Department of Revolving Golf Course Water Supply Fund Special Fund Total Cash Flow from Operating Activities: Receipts from customers and others $ 46,501,333 $ 134,434 $ 1,127,747 $47,763,514 Payments to suppliers (25,267,908) (144,327) (581,311) (25,993,546) Payments to employees (8,419,080) (783,220) (9,202,300) Net cash provided by (used in) operating activities 12,814,345 (9,893) (236,784) 12,567,668 Cash Flows from Capital and Related Financing Activities: Cash paid for the acquisition and construction of capital assets (8,064,869) (30,561) (8,095,430) Principal paid on bonds and notes payable (3,539,640) (3,539,640) Proceeds from notes payable 4,986,307 4,986,307 Cash received from capital contributions 2,932,212 2,932,212 Interest paid on bonds and notes payable (1,227,374) (18,264) (1,245,638) Cash paid for settlements (17,699) (17,699) Net cash used in capital and related financing activities (4,931,063) (18,264) (30,561) ( 4,979,888) Cash Flows Provided by Non-Capital Financing Activities: Proceeds from notes payable 27,336 27,336 Transfers in 669, ,163 Transfers out (401,818) (401,818) Net cash provided by non-capital financing activities 27, , ,681 Cash Flows Provided by Investing Activities: Interest received from investments 881,443 34, ,104 Change in Cash and Cash Equivalents, Net 8,764,725 33,840 8,798,565 Cash and Cash Equivalents, Beginning of Year 34,167,457 2,192,198 36,359,655 Cash and Cash Equivalents, End of Year $ 42,932,182 $ 2,226,038 $ $ 45,158,220 Reconciliation of Operating Income (Loss) to Cash Flows Provided By (Used In) Operating Activities: Operating income (loss) $ 1,517,949 $ (40,591) $ (929,633) $ 547,725 Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 11,502,677 44, ,374 11,900,626 Bad debt expense 311, ,068 Decrease (increase) in receivables, inventmy, and other current assets 377,628 (12,727) 364,901 Increase in due from other funds (1,237,502) (1,237,502) Increase in accrued postemployment benefits 1,237,502 1,237,502 Increase (decrease) in accounts payable, accrued vacation, and other current liabilities (894,977) (1,150) 339,475 (556,652) Net cash provided by (used in) operating activities $ 12,814,345 $ (9,893) $ (236,784) $ 12,567,668 Noncash Capital Financing Activities: Capital contributions from developers $ 8,968,329 $ $ $ 8,968,329 The accompanying notes are an integral part of the financial statements. 44

66 County of Maui Statement of Assets and Liabilities Fiduciary Funds As of June 30, 2011 ASSETS Equity in pooled cash and investments held in County Treasury (Note 2) Other current assets Other non-current assets Total Assets $ $ Agency Funds 38,676,936 2,653, ,745 41,463,080 LIABILITIES Accounts payable Deposits Due to State of Hawaii Total Liabilities $ $ 85,972 41,228, ,895 41,463,080 The accompanying notes are an integral part of the financial statements. 45

67 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 (1) Reporting Entity, Financial Statement Presentation and Summary of Significant Accounting Policies The accounting policies ofthe County ofmaui, State of Hawaii (the County) conform to accounting principles generally accepted in the United States of America as applicable to governmental units. The following is a summary of the financial reporting entity, financial statement presentation and the more significant accounting policies. The Financial Reporting Entity - County of Maui- The County is a municipal corporation governed by an elected mayor and a nine-member County Council. The County operates under the Charter of the County ofmaui that was last amended in The accompanying basic financial statements present all operations ofthe County as the primary government. The County's governmental activities are organized by the following general functions: general government, public safety, highways and streets, sanitation, social welfare, culture and recreation, and legislative. The County's business-type activities include the Department of Water Supply, the Housing, Interim Financing, and Buy-Back Revolving Fund, and the Golf Course Special Fund. State of Hawaii agencies assume full responsibility for the administration of several major functions usually performed by local governments such as education, welfare, health, and judicial functions. These agencies are not dependent on the County and therefore, are not included in these basic financial statements. There are no separate city, county, or township governments nor any school district, special districts, authorities, public corporations, or component units for which the County is financially accountable. Financial Statement Presentation - Accounting Standards Applied- The financial statements ofthe County have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The Governmental Accounting Standards Board (GASB) is the accepted standardsetting body for establishing governmental accounting and financial reporting principles. The County follows all applicable GASB pronouncements as well as Financial Accounting Standards Board (F ASB) pronouncements, Accounting Principles Board (APB) Opinions, and Accounting Research Bulletins, issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements for governmental and business-type activities and proprietary funds. As permitted by GAAP, the County has elected not to apply F ASB guidance issued after November 30, 1989 to business-type activities and enterprise funds. 46

68 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 The accounts of the County are organized and operated on the basis of funds, each of which is considered a separate fiscal and accounting entity with a self-balancing set of accounts that comprise its assets, liabilities, equity, revenues, and expenditures, or expenses, as appropriate. Government resources are allocated to and accounted for in individual funds based upon the purpose for which they are to be spent and the means by which spending activities are controlled. Government-Wide Financial Statements-The government-wide financial statements (i.e., the statement of net assets and the statement of activities) display information about the primary government (the County). These statements include the financial activities of the overall government, except for fiduciary activities. Eliminations have been made to minimize the double counting of internal activities. For example, the direct expenses charged based on actual use are not eliminated, whereas indirect expense allocations made in the funds are eliminated. These statements distinguish between the governmental and business-type activities of the County. Governmental activities, which normally are suppmied by taxes, intergovernmental revenues, and other non-exchange transactions, are reported separately from business-type activities, which rely to a significant extent on fees charged to external patiies. The statement of activities, which is included in the government-wide financial statements, presents a comparison between the direct expenses and program revenues for each business-type activity of the County and each function ofthe County's governmental activities. Direct expenses are those that are specifically associated with a business-type activity or function. Program revenues include 1) fees, fines, and charges paid by the recipients of goods and services offered by the programs, and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including all taxes, are instead presented as general revenues. Fund Financial Statements - The fund financial statements provide information about the County's funds, including its fiduciary funds. Separate statements for each fund category, such as governmental, proprietary, and fiduciary are presented. The emphasis of fund financial statements are on the major governmental and enterprise funds of the County and are reported separately in the accompanying financial statements. All remaining governmental funds are aggregated and reported as non-major funds in the accompanying fund financial statements. Governmental Fund Financial Statements-Governmental fund financial statements include a balance sheet and statement of revenues, expenditures, and changes in fund balances. The following is a brief summary ofthe County's major governmental funds- General Fund- This is the general operating fund of the County. It is used to account for all financial resources except those required to be accounted for in another fund. 47

69 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Highway Fund - This fund accounts for operations and maintenance of the County's highways and streets. Funding is provided by the County's fuel tax, public utility franchise tax, and the motor vehicle weight tax. These taxes must be used for highway-related purposes. Sewer Fund- This fund accounts for the operations and maintenance of the County's sewer system. Funding is provided by sewer assessment fees. Grant Fund- This fund accounts for the administration of various Federal and State of Hawaii grants. Debt Service Fund - This fund accounts for the accumulation of resources for, and the payment of general long-term principal and interest and related costs. Capital Improvement Projects Fund- This fund accounts for the financial resources to be used for the acquisition or construction of various major capital facilities. Governmental funds are those through which most governmental functions of the County are financed. The acquisition, use and balances of the County's expendable financial resources and the related liabilities (except those accounted for in proprietary funds) are accounted for through governmental funds. Governmental funds are accounted for using a "current financial resources" measurement focus. With this measurement focus, generally only cunent assets and current liabilities are included on the balance sheet. Fund balance is considered a measure of expendable available financial resources. Operating statements of these funds present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) as a net increase or decrease in the respective fund balance. All govermnental funds are accounted for on the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures of the cunent period. Accordingly, revenues are recorded when received in cash, except that revenues subject to accrual (generally received within 60 days after year-end) are recognized when due. The primary revenue sources, which have been treated as susceptible to accrual by the County, are real propetiy taxes, fuel and franchise taxes, assessments, rents and concessions, sewer charges, landfill usage charges, certain state and federal grants, and interest from investments. Licenses and permits, forfeitures, penalties, and other miscellaneous revenues are not susceptible to accrual, because they are not measurable until received in cash. Expenditures are recorded in the accounting period in which the related fund liability is incuned except for debt service expenditures, as well as expenditures related to vacation, landfill closure and postclosure costs, postemployment benefits, and claims and judgments, which are recorded only when payment is due. 48

70 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Proprietary Fund Financial Statements - Proprietary fund financial statements include a statement of fund net assets, a statement of revenues, expenses and changes in fund net assets, and a statement of cash flows. The following is a brief summary of the County's major proprietary funds: Department of Water Supply - The Depatiment was created to develop adequate water sources, storage, and transmission for both urban and agricultural uses for the County. Housing, Interim Financing, and Buy-Back Revolving Fund- This fund was established to account for the developing and selling of housing units on land acquired by the County to moderate and low-income residents, and to account for financing and operation of lowincome rental projects developed by the County. Golf Course Special Fund - This fund was established to account for the financing and operation of the County's golf course, pro-shop, and food and liquor concession. Proprietary funds are accounted for using the "economic resources" measurement focus and the accrual basis of accounting. Accordingly, all assets and liabilities (whether cun-ent or noncun-ent) are included on the statement of fund net assets. The statement of revenues, expenses, and changes in fund net assets presents increases (revenues) and decreases (expenses) in total net assets. Under the accrual basis of accounting, revenues are recognized in the period in which they are earned, while expenses are recognized in the period in which the liability is incun-ed. Proprietary funds distinguish between operating revenues and expenses from non-operating 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 ofthe County's enterprise funds are charges to customers for sales and services. Operating expenses for enterprise 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 non-operating revenues and expenses. Fiduciary Fund Financial Statements-Fiduciaty fund financial statements include a statement of assets and liabilities. These funds account for money received, held and disbursed in a trustee capacity or as an agent for individuals, other governmental units, and other funds. The County's fiduciaty funds represent agency funds, which are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The agency funds are accounted for under the accrual basis of accounting as are the proprietary funds explained above. 49

71 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Fiduciary funds of the County include the following agency funds: Refundable Deposits Fund- This fund is used to account for the bid bond, performance and payment bond, and subdivision bond monies held by the County until the purpose for which the bond was posted is completed. Agency Trust Funds - These funds are used to account for other monies collected in an agency capacity and include motor vehicle registration fees collected on behalf ofthe State of Hawaii and taxes withheld from employee pay. Measurement Focus and Basis of Accounting - The basis of accounting determines when transactions are reported on the financial statements. The government-wide, proprietary, and fiduciary funds (excluding agency funds) financial statements are reported using the economic resources measurement focus. The government-wide and proprietary fund financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incuned, regardless of when the related cash flows take place. Non-exchange transactions, in which the County gives (or receives) value without directly receiving (or giving) equal value in exchange, include property and sales taxes are recognized in the fiscal year for which the taxes are levied. Revenues from sales and use, transient occupancy, and utility user tax are recognized when the underlying transactions take place. Revenues from grants, entitlements, and donations are recognized in the fiscal year in which all eligibility requirements have been satisfied. Governmental funds are reported using the current financial resources management focus. This focus is on the determination of, and changes in financial resources, and generally only cunent assets and current liabilities are included in the balance sheet. These funds use the modified accrual basis of accounting, whereby revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures ofthe fiscal period. For this purpose, the County considers revenues as available if they are collected within sixty days of the end of the cunent fiscal period. Expenditures are generally recorded when a liability is incuned. However, principal and interest on long-term debt and certain estimated liabilities, such as compensated absences and self-insurance claims, are recorded only when payment is due. In governmental funds, revenues from taxes, franchise taxes, interest, certain state and federal grants, and charges for services associated with the cunent fiscal period are all considered to be susceptible to accrual and have been recognized as revenues in the current period. All other revenue items are considered measurable and available only when cash is received by the County. Under the terms of grant agreements, the County funds certain programs by a combination of specific cost-reimbursement grants, categorical block grants, and general revenues. Thus, when program expenses are incuned, there are both restricted and unrestricted net assets available to finance the program. It is the County's policy to first apply restricted cost-reimbursement grant 50

72 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 resources to such programs, followed by restricted categorical block grants, and then by unrestricted general revenues. Summary of Significant Accounting Policies - Cash and Investments- Cash balances of the County's funds are pooled and invested by the County Treasury unless otherwise dictated by legal or contractual requirements. Income and losses arising from the investment activity of pooled cash are allocated to patiicipating funds on a periodic basis, based on their proportionate shares of the average cash balances. Cash includes amounts in demand and time deposits primarily with various financial institutions in Hawaii, with fiscal agents, and in imprest and change funds. Cash on deposit with financial institutions are collateralized in accordance with State statutes (see Note 2). For purposes of the statement of cash flows, the enterprise funds consider all equity in pooled cash and investments held in County Treasury (including restricted cash) to be cash equivalents. Investments in time cetiificates of deposits and repurchase agreements are carried at cost, which approximates fair value. Investments in U.S. Treasury and U.S. agencies obligations are cat1'ied at amortized cost, which approximates fair value. Investments in student loan backed auction rate securities are reported at fair value, which is generally valued using the present value of projected cash flows. Real Property Taxes-Real propetiy taxes are assessed and billed annually. The County's real propetiy taxes, which are levied on July 1st and billed by July 20th of each year based on assessed valuations as of January 1st, are due in two equal installments on the following August 20th and February 20th. Accordingly, real property tax receivables at June 30, 2011 are delinquent and amounts, if not collected within sixty days after year-end, are reported as defened revenue in the General Fund. A lien for real property tax is attached as of July 1st of each year. Inventory- Inventory consists entirely of construction and maintenance materials and supplies held by the Department of Water Supply, a proprietary fund, and is stated at cost on an average cost basis. Capital Assets- Capital assets, which include property, plant, equipment, and infrastructure assets (e.g., roads, bridges, sidewalks, sewer systems, and similar items), are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. The County defines capital assets as assets with an initial, individual cost of more than $5,000 for equipment and an estimated useful life in excess of one year. For capital improvement projects, capital assets are defined as capital improvements with initial, individual costs of more than $250,000, while cost for improvements to existing capital improvement projects greater than $100,000 are capitalized. Such assets are recorded at historical cost or 51

73 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 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 assets or materially extend the assets lives are not capitalized but charged to operations as incu11'ed. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incu11'ed 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. Capital assets of the primary government are depreciated using the straight-line method over the following useful lives: Equipment Landfill infrastructure Transportation and construction equipment Building and land improvements Sewer systems Roadway systems Drainage systems Bridges 5-10 years 5 years 5-10 years years years years 50 years years Sales and retirements of depreciable prope1iy are recorded by removing the related cost and accumulated depreciation from the accounts. Gains or losses on sales and retirements of prope1iy are reflected in the statement of activities and proprietary funds' statement of revenues, expenses, and changes in fund net assets. Internal Balances - Significant transfers of financial resources between depmiments and activities included within the same fund, which are recorded as revenues by the transferee and expenditures or expenses by the transferor, have been eliminated. Transfers of revenues from funds authorized to receive them to funds authorized to expend them have been recorded as transfers in the fund financial statements. All inter-fund receivable and payables are eliminated in the government -wide governmental and business-type activities columns of the statement of net assets, except for those amounts due between governmental and business-type activities, which are presented as internal balances. Long-Term Debt- In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are repmied as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type financial statements. Bond premiums and discounts, as well as issuance costs, are defe11'ed and ammiized over the life of the bonds. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as defe11'ed charges and amortized over the term of the related debt. 52

74 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 For advance refundings resulting in the defeasance of debt, the difference between the reacquisition price and the carrying amount of the old debt is deferred. This amount is amortized as a component of interest expense over the remaining life of the old debt or the life of the new debt, whichever is shorter. The amount deferred is repmied as a deduction from or an addition to the new debt liability. In the governmental fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Compensated Absences - In the governmental fund financial statements, vacation pay is recorded as expenditures when liquidated with expendable available financial resources. Vested or accumulated vacation leave of proprietary funds and in the government-wide financial statements is recorded as an expense and liability of those funds and activities as the benefits accrue to employees. Vacation benefits accrue at one and three-quarters working days for each month. Each employee is allowed to accumulate a maximum of 90 days of vacation as of the end of the calendar year. Sick leave accumulates at the rate of one and three-quarters working days for each month, without limit. Sick leave is taken only in the event of illness and is not convertible to pay; accordingly, sick leave is not accrued on either the government-wide or fund financial statements. Employees who retire or leave government service in good standing with sixty or more unused sick leave days are entitled to an additional service credit in the retirement system. At June 30, 2011, accumulated sick leave amounted to approximately $73.1 million. Claims and Judgments-Liabilities for claims and judgments are estimated by a combination of case-by-case review of all claims and the application of historical experience to the outstanding claims. The County's policy is to record claims and judgments as expenditures in its governmental fund financial statements when they are due and payable. Liabilities for claims and judgments are accrued and expensed in the government-wide and proprietary fund financial statements based on the County's exposure to loss. Net Assets- The government-wide and proprietary fund financial statements utilize a net assets presentation. Net assets are categorized as investment in capital assets (net of related debt), restricted and unrestricted. 53

75 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Investment in Capital Assets (net of related debt) -This is intended to reflect the portion of net assets which are associated with non-liquid capital assets less outstanding debt related to these assets. Restricted Net Assets- Restricted net assets have third party (statutory, bond covenant or granting agency) limitations on their use or have restrictions imposed by law through enabling legislation, and include unspent proceeds of bonds issued to acquire or construct assets. The County's policy is generally to use restricted net assets first, as appropriate opportunities arise. Unrestricted Net Assets-Umestricted net assets represent all other net assets not accounted for in the two categories noted above. Fund Balances- The County adopted GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions effective July 1, GASB Statement No. 54 creates new fund balance classifications, the use of which is based upon the extent to which a govemmental entity is bound to honor constraints on the specific purposes for which amounts in that fund can be spent. As of June 30, 2011, fund balances for government funds are comprised of the following: Nonspendable Fund Balance- includes amounts that cannot be spent because they are either not in spendable form or are legally or contractually required to be maintained intact. Restricted Fund Balance-includes amounts that are subject to constraint imposed or legally enforceable by extemal parties. Funds with restrictions imposed by the Hawaii Revised Statutes and the Maui County Charter are examples of such funds of the County. Committed Fund Balance includes amounts that are subject to constraint created by the County and can only be changed by the County's highest level of formal action. Assigned Fund Balance- includes amounts that are constrained by the County's intent to be used for specific purposes but are neither restricted nor committed. Unassigned Fund Balance -includes amounts that have no constraints whatsoever and are available for spending at the County's discretion. In accordance with GASB Statement No. 54, the County has established a policy relative to the order of the allocation of expenditures. The County's policy is to use resources in all funds in the following order: (1) Restricted, (2) Committed, (3) Assigned and (4) Unassigned. GASB Statement No. 54 also provided clarification of the various governmental fund type definitions. The implementation of GASB Statement No. 54 resulted in the reclassification of certain fund balances previously included in Other Governmental Funds to the General Fund. 54

76 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 The July 1, 2010 fund balances have been restated as follows: General Fund Other Governmental Funds Fund Balances at July 1, 2010, as previously reported Adjustment to reclassify certain fund balances to the general fund $ 85,523,666 42,987,108 $ 88,317,872 ( 42,987,1 08) Fund Balances at July 1, 2010, as restated $ 128,510,774 $ 45,330,764 Retirement and Health care Benefits - The County's contributions to the Employees Retirement System of the State of Hawaii, a cost-sharing, multiple-employer defined benefit pension plan, and to the Hawaii Employer- Union Health Benefits Trust Fund (the EUTF), an agent, multiple-employer defined benefit plan, are based upon actuarial computations and includes cunent service costs and amortization of prior service costs. Although the EUTF is a plan, the assets are not held in a separate trust account for payment of benefits (see Note 9). Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenditures or expenses, and other financing sources and uses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements-The County has implemented or is currently analyzing its accounting practices to determine the potential impact on the financial statements for the following GASB Statements: In December 2009, GASB issued Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, which addresses issues related to the measurement of OPEB liabilities by employers with fewer than 100 plan members participating in agent multipleemployer OPEB plans. The provisions of this statement related to the use and reporting of the alternative measurement method and was effective upon issuance while the provisions related to the frequency and the timing of measurements are effective for actuarial valuations for the County's fiscal year ending June 30, In November 2010, GASB issued Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, which improves financial reporting by addressing issues related to recognition, measurement, and disclosure requirements for service concession arrangements. Application of this Statement is effective for the County's fiscal year ending June 30,

77 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 In December 2010, GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 F ASB and AICP A Pronouncements. The objective of this Statement is to enhance the usefulness ofthe Codification of Governmental Accounting and Financial Reporting Standards by incorporating guidance that previously could only be found in certain F ASB and AICP A pronouncements. Application of this Statement is effective for the County's fiscal year ending June 30, 2013, with early adoption encouraged. In June 2011, GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, which provides financial statement presentation guidance for these elements; however, it does not identify any additional items that should be recognized within these element classifications. Statement 63 will apply only to items that have been specifically identified by the GASB as defened outflows of resources or defened inflows of resources. Application of this Statement is effective for the County's fiscal year ending June 30, 2013, with early adoption encouraged. Subsequent events- The County has evaluated subsequent events through December 28,2011, the date the financial statements were available to be issued. (2) Cash, Deposits, and Investments Pooled Cash and Investments Held in County Treasury- Total County cash, deposits, and investments as of June 30, 2011, at fair value, are as follows: Governmental Business-Type Fiducim y Activities Activities Funds Carrying Value Equity in pooled cash and investments $ 316,198,475 $ 26,738,535 $ 38,676,936 $ 381,613,946 Restricted investments -equity in pooled cash and investments 18,419,685 18,419,685 Total equity in pooled cash and investments $ 316,198,475 $ 45,158,220 $ 38,676,936 $ 400,033,631 Cash on hand and deposits Certificates of deposit Investments $ 5,080,145 56,113, ,839,733 Total equity in pooled cash and investments $ 400,033,631 The County maintains a cash and investment pool that is available for use by all funds. Each fund's pmiion of this pool is displayed on the accompanying balance sheets and statements of net assets as "Equity in pooled cash and investments held in County Treasury." 56

78 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 County's Investment Policy- It is the County's policy to invest in accordance with the State of Hawaii statutes, which authorize the County to invest in obligations of the U.S. Treasury and U.S. agencies, obligations of the State and the County, auction rate securities collateralized by student loans, banlc repurchase agreements, commercial paper, banker's acceptances, and money market funds. Specific requirements under the State statutes are as follows: With the exception of U.S. Treasury securities, no more than 50% of the County's investment portfolio will be invested in a single type of security or financial institution. Investment maturities are not to exceed five years. Investments are required to be rated "Aaa" by Moody's and "AAA" by Standard and Poor's at the date of purchase. For purpose of the disclosures required by GASB Statement No. 40, all time certificate of deposits regardless of maturity are considered deposits, and all repurchase agreements and money market investments are considered investments. Investment Risk-The investments are subject to certain types of risk, including interest rate risk, credit quality risk, concentration of credit risk, custodial credit risk, and foreign cuttency risk. Interest Rate Risk-Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The County has a formal investment policy that follows State of Hawaii statutes, which limits investment maturities to five years as a means of managing its exposure to fair value losses arising from increasing interest rates. Credit Risk- Credit risk is the risk that an issuer or counterpmiy to an investment will not fulfill its obligation. The County's investment policy limits investments in state and U.S. Treasury securities, time certificates of deposit, U.S. agency obligations, repurchase agreements, commercial paper, bankers' acceptances, money market funds, and auction rate securities collateralized by student loans maintaining a Triple-A rating. Concentration of Credit Risk- Concentration of credit risk is the risk of loss attributable to the magnitude of the County's investments in a single issuer or investment. The County diversifies its investments to minimize such risk and with the exception ofu.s. Treasury securities, no more than 50% of the investment portfolio can be invested in a single type of security or financial institution. 57

79 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Custodial Credit Risk - Custodial credit risk is the risk that in the event of failure of the counterparty to an investment, the County would not be able to recover the value of investment or collateral securities that are in the possession of an outside party. All of the County's investments are either insured or held by an agent in the name of the County, including the investment collateral underlying the repurchase agreements. Custodial credit risk for bank depository accounts is the risk that in the event of a banlc failure, the County's deposits may not be returned. It is the County's policy to place its banlc deposits with State of Hawaii high credit quality financial institutions that are able to meet the collateral requirements for the County's deposits. As of June 30,2011, all ofthe County's cash balance of $5.1 million and certificate of deposits of $56.1 million was insured and collateralized. Foreign Currency Risk- The risk that changes in exchange rates will adversely affect the fair value of an investment. As of June 30, 2011, the investments in the County's investment pool were not subject to foreign cuti"ency risks. Investments - As of June 30, 2011, the County's investments were as follows: l\'iaturit % Undcr Premiums Carn ing Tl:EC of Investment Yield Dnl:s Dnl:s Dal'S Yenrs {Discounts} Value Federal National Mortgage Association Notes $ $ $ $ 42,000,000 17,721 42,017,721 Federal National Mortgage Association Coupon Notes ,000,000 (410) $ 1,999,590 Federal National Mortgage Association Discount Note ,000,000 (8,552) 11,991,448 Federal Home Loan Mortgage Corporation Notes ,000,000 18,782 5,018,782 Federal Home Loan Mortgage Corporation Coupon Notes l.l ,000,000 13,491 21,013,491 Federal Home Loan Mortgage Corporation Discount Notes ,000,000 10,000,000 2,000,000 (6,703) 21,993,297 Federal Home Loan Bank Discount Notes ,500,000 5,000,000 (7,046) 12,492,954 Federal Home Loan Bank Bank Notes ,000,000 23,200,000 10,000,000 13,000, ,280 51,452,280 Federal Farm Credit Bank Notes ,500,000 3,000,000 4,934 8,504,934 Auction Rate Securities ,000,000 32,000,000 U.S. Treasury Notes O.ll , , , , Total investments 30,000,000 $ 151,200,000 $ 76,000,000 $ 81,000, , ,839,733 Type of Deposits Various certificates of deposit ,000,000 $ 33,729,888 $ 6,653,951 $ 729,914 56,113,753 Total investments and certificates of deposit 394,953,486 Cash on hand and deposits 5,080,145 Total equity in pooled cash and investments $ 400,033,631 58

80 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 In August 2011, Standard & Poor's lowered its long-term credit rating from AAA to AA+ on debt of the U.S. government, U.S. government-sponsored enterprises, and public debt issues that have credit enhancement guarantees by U.S. government sponsored enterprises. Auction Rate Securities - The County's investments include auction rate securities (ARS) collateralized by student loans issued by the federal government. In September 2011, the County and MelTill Lynch executed a settlement agreement whereby MelTill Lynch agreed to purchase all of the County's ARS holdings as of June 30,2011 at par value and to reimburse the County for ce1iain realized losses related to the County's investments in ARS. The County recorded an adjustment of$3.3 million to increase the caitying value of the County's ARS holdings to their fair value at June 30,2011, based upon the terms ofthe settlement agreement, which is included in interest and investment earnings, net in the accompanying financial statements. (3) Receivables Receivables included in the County's governmental funds in the aggregate as of June 30, 2011 were as follows: Capital Non- Total General Highway Sewer Grant Improvements majm Governmental Fund Fund Fund Fund Projects Fund Funds Activities Taxes $ 9,025,589 $ $ $ $ $ $ 9,025,589 Intergovernmental 728,129 5,852, ,245 7,342,550 Sewer charges 3,568,381 3,568,381 Landfill charges 2,013,849 2,013,849 Other 461, ,506 Less: allowance for uncollectible (736,043) (535,869) (1,271,912) Total receivables $ 9,025,589 $ 728,129 $ 2,832,338 $ 5,852,176 $ 1,223, 751 $ 1,477,980 $ 21,139,963 Receivables included in the County's proprietary funds as of June 30, 2011 were as follows: Department of Water Supply Housing, Interim Financing, and Buy- Back Revolving Fund Golf Course Special Fund Total Business Type Activities Charge for water services Less: allowance for uncollectible $ 7,967,791 (424,113) $ 5,251 $ $ 7,973,042 (424,113) Total receivables, net $ 7,543,678 $ 5,251 $ $ 7,548,929 59

81 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Governmental funds report defened revenues in connection with receivables for revenues not considered available to liquidate liabilities ofthe current period. Governmental and enterprise funds also defer revenue recognition in connection with resources that have been received, but not yet earned. For real propetiy tax collections, payments are due August and February. Therefore, property taxes that remain uncollected sixty days after the June fiscal year end are reported as unavailable. At June 30, 2011, the various components of deferred revenue and advanced collections were as follows: Unavailable Unearned Delinquent real property tax receivables not collected within 60 days of year end (General Fund) $ 6,716,265 $ Real property tax collections received in advance (General Fund) 1,215,257 Landfill and sewer fees not collected within 60 days of year end (Non-Major Fund) 874,206 Grant funds received prior to meeting all necessary requirements (Grant Fund) 3,116,820 Capital project grant fund received prior to meeting all necessary requirements (Capital Improvement Projects Fund) 1,499,581 Fees collected in advance for refuse collection and liquor license 2,352,777 $ 7,590,471 $ 8,184,435 ( 4) Inter-fund Receivables, Payables, and Transfers Balances Amounts due from and due to other funds as of June 30, 2011 were as follows: Due From Due To Other Funds Other Funds Major Governmental Funds: General Fund $ 7,182,893 $ 2,528,964 Capital Improvement Projects Fund 3,909,432 Grant Fund 3,273,461 Major Proprietary Fund: Department of Water Supply 2,528,964 Total $ 9,711,857 $ 9,711,857 60

82 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Pursuant to Budget Ordinance, the General Fund advances funds for bond-funded projects, grant funded projects, and operating grants for which proceeds have not yet been received. These amounts are intended to be repaid in one year. The Depatiment of Water Supply advanced funds to the General Fund for its allocated share of postemployment benefit costs. A summary of the inter-fund transfers as of June 30, 2011 are as follows: Major Governmental Funds: General Fund $ Highway Fund Sewer Fund Grant Fund Debt Se1vice Fund Capital Improvement Projects Fund Transfers In 26,490,734 2,859,540 3,165, ,940 36,859,987 16,884,803 Transfers Out $ (46,765,930) (13,230,121) (21,194,182) (3,896) (8,903,212) Non-Major Governmental Funds: County Funds Bikeway Fund Solid Waste Fund Other Assessment Funds Total Non-Major Governmental Funds 4,279, ,366 5,532, ,343 10,667,626 (200,000) (5,370,296) (1,950,000) (7,520,296) Major Proprietary Fund: GolfCourse Special Total $ 669,163 98,019,455 (401,818) $ (98,019,455) The majority of the transfers into the General Fund relate to allocations of debt service for bondfunded projects, employee benefits from special revenues, and lapses of capital projects. Transfers out of the General Fund are predominantly for debt service, transfers for postemployment benefits, affordable housing, supplemental transfers to the Solid Waste and Highway funds, and funding of capital projects. 61

83 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 (5) Capital Assets A summary of capital asset activity of the primary government during the year ended June 30,2011 was as follows: Balance Transfers/ Balance Julr 1, 2010 Additions Retirements June 30, 2011 Governmental Activities: Non-depreciable assets: Land $ 131,602,580 $ 6,632,915 $ $ 138,235,495 Construction in progress 131,358,652 51,849,569 {131,128,943) 52,079, ,961,232 58,482,484 {131, 128,943) 190,314,773 Depreciable assets: Buildings and systems 95,425,684 2,199,632 97,625,316 Improvements other than buildings 94,126,510 29,876, ,003,477 Machinery and equipment 104,760,087 5,516,072 (2,151,007) 108,125,152 Infrastructure 864,718,953 73,691, ,410,009 1,159,031, ,283,727 (2,151,007) 1,268,163,954 Accumulated depreciation: Buildings 64,236,904 3,332,761 67,569,665 Improvements other than buildings 53,742,987 5,595,011 59,337,998 Machinery and equipment 73,730,210 11,495,053 (2,079,317) 83,145,946 Infrastructure 627,863,035 18,495, ,358, ,573,136 38,917,891 {2,079,317) 856,411,710 Total Governmental Activities Capital Assets, Net $ 602,419,330 $ 130,848,320 $(131,200,633) $ 602,067,017 Balance Transfers/ Balance Julr 1, 2010 Additions Retirements June 30, 2011 Business-Type Activities: Non-depreciable assets: Land $ 8,822,364 $ 600,000 $ $ 9,422,364 Construction in progress 73,921,163 7,024,106 (3,903, ,042,256 82,743,527 7,624,106 (3,903,013) 86,464,620 Depreciable assets: Buildings and systems 8,540,336 8,540,336 Improvements other than buildings 2,971,632 2,971,632 Machinery and equipment 27,273, ,767 (449,725) 27,701,233 Infrastructure 383,958,255 12,705, ,664, ,743,414 13,583,545 {449, ,877,234 Accumulated depreciation: Buildings 3,545, ,119 3,820,425 Improvements other than buildings 2,318, ,474 2,449,923 Machinety and equipment 12,236,825 1,143,940 (449,543) 12,931,222 Infrastructure 173,814,304 10,350, ,164, ,914,884 11,900,626 {449, ,365,967 Total Business-Type Activities Capital Assets, Net $ 313,572,057 $ 9,307,025 $ (3,903,195) $ 318,975,887 62

84 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Capitalized interest for business-type activities for the year ended June 30, 2011 was $240,880. Depreciation expense for the year ended June 30, 2011 was charged to functions as follows: Governmental Activities: General Government $ 1,778,777 Public Safety 6,322,450 Highways and Streets 8,117,629 Sanitation 15,506,860 Social and Welfare 662,741 Culture and Recreation 6,519,786 Legislative 9,648 Total Governmental Activities $ 38,917,891 Business Type Activities: Golf Course $ 353,374 Housing Interim Financing 44,575 Depmtment of Water Supply 11,502,677 Total Business-Type Activities $ 11,900,626 Construction in progress is comprised of the following as of June 30, 2011: Project Authorized (ApproEriated) Expended through June 30,2011 Committed (Fncumbered) Governmental Activities Governmental Facilities $ 35,936,326 $ 27,938,335 $ 7,640,014 Roadway Systems 28,417,702 7,944,853 14,997,101 Sewer Systems 30,349,681 7,003,301 10,619,440 Sanitation 2,274,902 1,706, ,895 Parks and Recreation 6,228,282 3,287,562 2,461,968 Drainage 7,410,234 4,199,220 3,208,772 Totals $ 110,617,127 $ 52,079,278 $ 39,496,190 Project Authorized (Appropriated) Business-Type Activities DepartmentofWaterSupply $ 101,984,131 Expended through June 30,2011 $ 77,042,256 Committed (Encumbered) $ 9,853,731 63

85 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 (6) Long-Term Debt and Other General Obligations The following is a summary oflong-term debt transactions of the County during the year ended June 30,2011. Governmental Activities: Balance Reductions/ Balance Due Within June 30,2010 Additions Payments June 30,2011 One Year General Obligation Bonds $ 188,612,580 $ 74,280,929 $ 48,491,646 $214,401,863 $ 17,786,933 State Revolving Fund Loans 57,992,615 2,855,971 4,540,935 56,307,651 4,682,134 Total $246,605,195 $ 77,136,900 $ 53,032,581 $270,709,514 $ 22,469,067 Business-Type Activities: General Obligation Bonds $ 16,103,975 $ 4,020,000 $ 2,612,163 $ 17,511,812 $ 3,031,566 Notes Payable 12,822, , ,477 12,861, ,883 Line ofct edit 442,454 27, , ,790 Total $ 29,369,193 $ 5,013,643 $ 3,539,640 $ 30,843,196 $ 4,468,239 Governmental Activities - General Obligation Bonds - The County issues general obligation bonds for the construction of major capital facilities. General obligation bonds are direct obligations of the County for which its full faith and credit are pledged. Debt service is paid fi om the debt service fund. 64

86 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 General obligation bonds payable reported in the Governmental Activities column of the statement of net assets at June 30, 2011 are comprised ofthe following individual issues: Outstanding Ol'iginal Issue Final Balance June 30, Year Descl'iption Interest Rates Amount Maturity Farmers Home Administration 5.00% $ 1,500, $ 406, Series B GO 5.93%-6.50% 4,255, , Series Band C Refunding 3.00%-5.25% 29,880, ,505, Series B Refunding 2.500%-5.375% 13,550, ,340, Series C GO and Refunding 2.125%-4.75% 12,402, ,925, Series B Refunding 2.00%-5.00% 15,165, ,370, Series A,B,C GO and Refunding 2.50%-5.00% 50,485, ,325, Series A and B GO and Refi.mding 4.00%-5.00% 54,615, ,370, Series A GO 3.50%-5.00% 34,000, ,674, Series A GO % 23,375, ,045, Series B GO and Refunding % 46,300, ,998,478 Total General Obligation Bonds $ 285,527, ,813,908 Unamortized Premium 7,619,683 Unammtized Deferral on Advance Refunding {5,031,728) Net Bonds Outstanding $ 214,401,863 In the government-wide financial statements, bond discounts and premiums, issuance costs, and the difference between the reacquisition price and the carrying amount of old debt in advance of refunding resulting in a defeasance of debt, are defeited and amortized. Deferred bond issuance costs for the Governmental Activities as of June 30, 2011 was $1,310,514. The County issued $73.7 million in general obligation bonds on December 2, 2010, consisting of 2010 Series A bonds of$23.4 million and 2010 Series B bonds of$46.3 million (ofwhich $4.0 million was allocated to the Department of Water Supply). The County's net proceeds of$74.1 million (excluding the Department of Water Supply's allocation and including a premium of$4.6 million and after payment of $211,000 in underwriting fees) were used to fund capital improvement projects throughout the County, as well as to advance refund approximately $25 million of certain outstanding general obligation bonds previously issued. Due to the advanced refunding, the County decreased its total debt service payments over the next 12 years by $3.2 million and obtained an economic gain (difference between the present values ofthe debt service payments on the old and new debt) of$3.0 million. The 2010 Series A bonds were designated as Recovery Zone Economic Development Bonds, which are subsidized by the Federal government under the provisions of the American Reinvestment and Recovery Act of2009, which resulted in an expected Federal subsidy of 45% of interest paid on the general obligation bonds issued under this program. 65

87 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Governmental Activities -State Revolving Fund Loans- The State Revolving Fund Loans are for the construction of necessary water treatment works, and for wastewater reclamation as well as solid waste projects. The notes' original issue amounted to $88.4 million and outstanding principal amounted to $56.3 millionatjune 30,2011, and bear interest at 0.50% to 2.60%. The loans require semi-annual principal and interest payments, and loan fees through fiscal year The County has 22 projects funded with these loans. The schedule below shows the loans outstanding as of June 30, 2011: Original Outstanding Issue Final Balance Year Description Loan Number Amount Maturity June 30, Lahaina Design C $ 500, $ 9, Wailuku/Kahului C ,825, , Lahaina Construction C ,381, , Lahaina Pump Station #3 C ,644, , Kihei Phase lib C ,018, ,780, Kihei Reuse Core Distribution C ,231, ,275, Lahaina Pump Station #17 C , , KuhuaCamp C ,745, , Lahaina Solids C ,344, , Wailuku/Kahului Phase II C ,951, ,813, Lahaina Pump Station 5 & 6 C ,300, ,596, Kahului Pump Station Mod C ,623, ,086, Lahaina Pump Station Cl ,700, ,439, Wailuku Pump Station C ,931, ,769, Wailuku-Kahului Wastewater C ,000, ,802, Lahaina Wastewater Pump C ,050, ,437, Central Maui Landfill Gas Collection NPS ,502, ,163, Islandwide EPA Consent Decree C ,627, ,671, Molokai Integrated Solid Waste NPS ,241, ,052, Front Street Sewer Line Rehabilitation C , , Hyatt/Kaanapali Force Main Replacements C ,737, ,693, Countywide Pump Station Renovation C , ,774 $88,399,703 $ 56,307,651 66

88 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Annual debt service requirements to maturity for these general obligation bonds and State revolving fund loans at June 30, 2011, were as follows: Governmental Activities General Obligation Bonds Year Ending June 30, Princi~al Interest Total 2012 $ 17,786,933 $ 9,121,712 $ 26,908, ,495,391 8,421,021 26,916, ,712,546 7,717,518 26,430, ,220,511 6,966,964 24,187, ,591,378 6,220,726 21,812, ,095,820 20,977,322 95,073, ,010,000 8,041,005 44,051, ,901,329 1,258,791 15,160,120 Total $ 211,813,908 $ 68,725,059 $ 280,538,967 Governmental Activities SRF Loans Year Ending June 30, Princi~al Interest Total 2012 $ 4,682,134 $ 911,464 $ 5,593, ,745, ,105 5,566, ,300, ,621 4,995, ,053, ,176 4,669, ,107, ,112 4,650, ,349,823 1,506,913 17,856, ,015, ,298 13,490, ,053,473 57,574 5,111,047 Total $ 56,307,651 $ 5,626,263 $ 61,933,914 Some of the general obligation bonds may be subject to early redemption at the option of the County during specific years at 100% of their face value. Business-Type Activities- General Obligation Bonds- The Department of Water Supply (the Department) issues general obligation bonds for the construction of major capital facilities. General obligation bonds are direct obligations of the County for which its full faith and credit are pledged. 67

89 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 General obligation bonds payable reported in the Business-Type Activities column of net assets at June 30, 2011 are comprised ofthe following individual issues: Outstanding Final Balance Year Description Interest Rates Maturity June 30, Series A GO Refunding Bond 2.50%-4.00% 9/1/2011 $ 1,685, Series B GO Refunding Bonds 3.50%-5.00% 3/1/2018 6,510, Series A GO Refunding Bonds 3.00%-5.00% 7/1/2027 5,285, Series B GO Refunding Bonds 3.00%-5.00% 6/1/2021 3,646,522 Total General Obligation Bonds 17,127,092 Unamortized premium 723,690 Unamortized defenal on advance refunding {338,970~ Net Bonds Outstanding $ 17,511,812 In the government-wide and proprietary fund financial statements, bond discounts and premiums, issuance costs, and the difference between the reacquisition price and the carry amount of old debt in advance refunding resulting in a defeasance of debt, are deferred and amortized. Annual debt service requirements to maturity for these general obligation bonds at June 30,2011, were as follows: Business-T;rEe Activities General Obligation Bonds Year Ending June 30, PrinciEal Interest Total 2012 $ 3,031,566 $ 689,273 $ 3,720, ,396, ,511 2,008, ,443, ,084 2,007, ,509, ,583 2,008, ,577, ,002 2,007, ,504,180 1,203,993 6,708, ,815, ,062 2,229, ,672 42, ,645 Total $ 17,127,092 $ 4,454,481 $ 21,581,573 Some of the general obligation bonds may be subject to early redemption at the option of the County during specific years at 100% of their face value. Deferred bond issuance costs for the Department as of June 30, 2011 was $83,

90 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Business-Type Activities -Notes Payable -State Revolving Fund Loans - At June 30, 2011, notes payable ofthe Depatiment consisted ofthe following: Note payable to State Revolving Fund for a capital improvement project, payable in semi-annual installments of principal, interest, and loan fees at an interest rate ofl.55% and loan fee rate of3.25%, maturing $ Note payable to State Revolving Fund for a capital improvement project, payable in semi-annual installments of principal, interest, and loan fees at an interest rate of0.15% and loan fee rate of3.25%, maturing Note payable to State Revolving Fund for a capital improvement project, payable in semi-annual installments of principal, interest, and loan fees at an interest rate of0.37% and loan fee rate of3.25%, maturing $ 3,738,924 8,127, ,818 12,861,594 Annual debt service requirements of these notes at June 30, 2011, including interest of approximately $3.5 million were as follows: Business-Tl:Ee Activities Notes Pal:able Year Ending June 30, PrinciEal Interest Total 2012 $ 966,883 $ 482,192 $ 1,449, , ,239 1,417, , ,174 1,385, , ,655 1,353, , ,853 1,321, ,431,689 1,027,571 5,459, ,837, ,438 3,222, ,844 23, ,740 Total $ 12,861,594 $ 3,456,018 $ 16,317,612 Line of Credit- The County has a line of credit agreement with a banlc with a total authorized balance of $1 million, of which $469,790 was outstanding as of June 30,2011. The line of credit was used to purchase and maintain two condominium units under an affordable housing progrmn. The line of credit agreement requires interest-only payments at the banlc' s base rate plus 0.90% (3.94% at June 30, 2011), with all unpaid principal due at the maturity date. The line of credit was originally due on July 30, 2011 and has been renewed to July 30, Legal Debt Limit and Margin - The County's legal debt limit and margin (as defined in Chapter 4 7, Hawaii Revised Statutes) as of June 30, 2011, are approximately $5.6 billion and $5.3 billion, respectively. 69

91 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Arbitrage- The Tax Reform Act of 1986 instituted certain arbitrage restrictions with respect to the issuance of tax-exempt bonds after August 31, Arbitrage regulations deal with the investment of all tax -exempt bond proceeds at an interest yield greater than the interest yield paid to bondholders. Generally, all interest paid to bondholders can be retroactively rendered taxable if applicable rebate liabilities are not reported and paid to the Internal Revenue Service (IRS) at least every five years. During the cun-ent year, the County performed calculations to determine the rebate liabilities for the tax-exempt bond issues listed above. Based on these calculations, no rebate liability existed as of June 30, Refunded Bonds- The County had issued refunding bonds, namely 2006B, 2006C, 201 OA, and 2010 B general obligation bonds, which proceeds were placed in an in-evocable trust, the New York Trust Company, to repay all future debt service payments on the 1998A, 2001A, 2001C, and 2002C general obligation bonds. As of June 30, 2011, the outstanding balance of the unpaid defeased debt was $24.1 million. Accordingly, the assets of the in-evocable trust and the liability for the defeased bonds are not included in the County's basic financial statements. Other Obligations- Other long-term general obligations consist of accrued vacation, accrued landfill closure and postclosure costs, accrued postemployment benefits, and claims and judgments. A summary of long-term debt and other long-term general obligations for the year ended June 30, 2011 is as follows: Balance Reductions/ Balance Due Within July 1, 2010 Additions Pa~ments June 30, 2011 One Year Governmental Activities: Accrued Vacation $ 27,888,790 $ 11,323,896 $11,480,838 $ 27,731,848 $10,578,954 Accrued Landfill Closure and Postclosure Costs (Note 8) 22,414,882 1,348, ,101 23,553, ,564 Accrued Postemployment Benefits (Note 9) 10,890,538 81,693,498 92,584,036 Claims and Judgments (Note 10) 6,430,240 I3,660,427 3,I82,736 16,907,931 I5,707,931 Total- Other General Obligations 67,624, ,026,535 I4,873,675 I60,777,310 26,502,449 Long-Term Debt 246,605,I95 76,177,816 52,073, ,709,514 22,469,067 Total Long-Term Obligations $ 314,229,645 $ 184,204,351 $66,947,172 $ 43 I,486,824 $48,97 I,516 70

92 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Balance Reductions/ Balance Due Within Jull: 1, 2010 Additions Pal:ments June 30, 2011 One Year Business-Type Activities: Accrued Vacation $ 2,068,984 $ 1,022,043 $ 916,350 $ 2,174,677 $ 735,110 Accrued Postemployment Benefits (Note 9) 1,291,462 1,237,502 2,528,964 Claims and Judgments (Note 10) 557, , , , ,583 Total - Other General Obligations 3,918,374 2,425,772 1,174,922 5,169,224 1,200,693 Long-Term Debt 29,369,193 5,013,643 3,539,640 30,843,196 4,468,239 Total Long-Term Obligations $ 33,287,567 $ 7,439,415 $ 4,714,562 $ 36,012,420 $ 5,668,932 (7) Operating Leases The County is pmiy to various operating lease agreements, predominantly for the purposes of office space and facility use. Lease terms range from month-to-month to 9 years and annual rents range from $1 to approximately $400,000. Total annual rent expenditures for the fiscal year 2011 were approximately $2.4 million. As of June 30, 2011, the future minimum noncancellable operating lease payments were as follows: Year Ending June 30, 2012 $ 2,444, ,844, ,755, ,457, ,579 Thereafter 1,491,297 $ 9,710,725 (8) Solid Waste Landfill Closure and Postclosure Care Costs The provisions of GASB Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs, requires that the County recognize closure and postclosure care costs over the life of the landfill. The County owns and operates four landfills. State and federal laws require the County to monitor and maintain each site for thirty years after the facility is closed. Although the closure and postclosure care costs will be paid only near and after the date that the landfill stops accepting waste, the County recognizes a portion of the closure and postclosure care costs in each operating period. The liability for these costs is included in the governmental activities 71

93 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 column ofthe government-wide financial statements. The amount recognized each year is based on the landfill capacity used as of the statement of net assets date. The $23.6 million of accrued landfill closure and postclosure costs at June 30, 2011 represents the cumulative amount reported to date based on the estimated capacity used at each landfill. The County will recognize the remaining estimated cost of closure and postclosure care of $21.1 million as the remaining estimated capacity of each landfill is filled. These amounts are based on what it would cost to perform all closure and postclosure care in Actual costs may be different due to inflation, changes in technology, or changes in regulations. The capacity used to date and the estimated remaining life of each landfill is as follows: Capacity Remaining Life Landfill Used (Years) Central Maui Phase I and II IOO% None Central Maui Phase IV 63% 3 Central Maui Phase V 8% II Han a 28% 68 Molokai 58% 13 Lanai 6I% 27 The County incmted closure costs of approximately $210,000 in fiscal year 2011 with an additional $216,000 estimated to be incuned in fiscal year Postclosure costs of approximately $23.6 million are estimated over the next 30 years. Federal regulations require owners and operators oflandfills to demonstrate financial assurance for the costs of closure and postclosure care. Under the proposed federal rules for financial assurance mechanism available to local governments, the County's cunent investment grade bond ratings of "Aal" and "AA+" by Moody's and Standard and Poor's, respectively, exceed the required rating. (9) Retirement Benefits Defined Benefit Pension Plans - All eligible employees of the County are required by Chapter 88, Hawaii Revised Statutes (HRS), to become members of the Employees' Retirement System of the State of Hawaii (the ERS), a costsharing, multiple-employer defined benefit public employee retirement plan. The ERS is governed by a Board of Trustees. The ERS provides retirement benefits, as well as death and disability benefits, with multiple benefit structures known as the contributory, hybrid, and noncontributory plans. All contributions, benefits, and eligibility requirements are established by Chapter 88, HRS, and can be amended by legislative action. 72

94 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Employees covered by Social Security on June 30, 1984 were given the option of joining the noncontributory plan or remaining in the contributory plan. All new employees hired after June 30, 1984 and before July 1, 2006, who were covered by Social Security, were generally required to join the noncontributory plan. Qualified employees in the contributmy and noncontributory plans were given the option of joining the hybrid plan effective July 1, 2006, or remaining in their existing plan. Effective July 1, 2006, all new employees covered by Social Security are required to join the hybrid plan. The three plans provide a monthly retirement allowance equal to the benefit multiplier percentage (1.25% or 2.00%) multiplied by the average final compensation (AFC) multiplied by years of credited service. The AFC is the average salary eamed during the five highest paid years of service, including the payment of salary in lieu of vacation, or three highest paid years of service, excluding the payment of salary in lieu of vacation, if the employee became a member prior to January 1, The AFC for members hired on or after this date is based on the three highest paid years of service, excluding the payment of salary in lieu of vacation. For postretirement increases, every retiree's original retirement allowance is increased by 2.5% on each July 1 following the calendar year of retirement. This cumulative benefit is not compounded and increases each year by 2.5% ofthe original retirement allowance without a ceiling (2.5% of the original retirement allowance the first year, 5% the second year, 7.5% the third year, etc.). The following summarizes the three plan provisions relevant to the general employees of the respective plan: Contributory Plan- General employees in the contributmy plan are required to contribute 7.8% oftheir salary and are fully vested for benefits upon receiving five years of credited service. The County may also make contributions for these members. Under the contributory plan, employees may retire with full benefits at age 55 and 5 years credited service, or may retire early at any age with at least 25 years of credited service and reduced benefits. The benefit multiplier is 2.0% for employees covered by Social Security. Hybrid Plan- General employees in the hybrid plan are required to contribute 6.0% of their salary and are fully vested for benefits upon receiving five years of credited service. The County may also make contributions for these members. Employees may retire with full benefits at age 62 and 5 years of credited service or at age 55 and 30 years of credited service, or may retire at age 55 and 20 years of service with reduced benefits. The benefit multiplier used to calculate retirement benefits is 2.0%. 73

95 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Noncontributory Plan- General employees in the noncontributory plan are fully vested upon receiving 10 years of credited service. The County is required to make all contributions for these members. Employees may retire with full benefits at age 62 and 10 years of credited service or age 55 and 3 0 years of credited service or age 55 and 20 years of credited service with reduced benefits. The benefit multiplier used to calculate retirement benefits is 1.25%. The ERS funding policy provides for periodic employer contributions at actuarially determined rates, expressed as a percentage of annual covered payroll, such that the employer contributions, along with employee contributions and an actuarially determined rate of investment return, are adequate to accumulate sufficient assets to pay benefits when due. The funding method used to calculate the total employer contribution required is the entry age normal actuarial cost method. Effective July 1, 2005, employer contribution rates are a fixed percentage of compensation, including the normal cost plus amounts required to pay for the unfunded actuarial accrued liability. Employer rates are set by statute based on the recommendation of the ERS actuary resulting from an experience study conducted every five years'. The County's contributions to the ERS for the years ended June 30, 2011, 2010, and 2009 were approximately $22.7 million, $23.7 million, and $20.6 million, respectively, which equal the required contributions for each year. Measurement of assets and actuarial valuations are made for the ERS as a whole and are not separately computed for individual participating employers such as the County. The ERS issues a comprehensive annual financial report that is available to the public. That report may be obtained by writing to the Employees' Retirement System of the State of Hawaii, 201 Merchant Street, Suite 1400, Honolulu, Hawaii or by calling (808) Postemployment Benefits - In addition to providing pension benefits, the County, pursuant to HRS Chapter 87 A, is a participating employer in an agent, multiple-employer defined benefit plan providing certain healthcare and life insurance benefits to all qualified employees and retirees. The Employer Union Health Benefits Trust Fund (the EUTF) was established on July 1, 2003 to design, provide, and administer medical, prescription drug, dental, vision, chiropractic, dual-coverage medical and prescription drug, and group life benefits. For employees hired prior July 1, 1996, the County pays the entire base monthly contribution for employees retiring with 10 or more years of credited service, and 50% of the base monthly contribution for employees retiring with fewer than 10 years of credited service. A retiree can elect a family plan to cover benefits. 74

96 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 For employees hired after June 30, 1996 but before July 1, 2001, and who retire with fewer than 10 years of service, the County makes no contributions. For those retiring with at least 10 years but fewer than 15 years of service, the County pays 50% of the base monthly contribution. For employees who retire with at least 15 years but fewer than 25 years of service, the County pays 7 5% of base monthly contribution. For those retiring with at least 25 years of service, the County pays the entire base monthly contribution. A retiree can elect a family plan to cover dependents. For employees hired after June 30,2001, and who retire with fewer than 10 years of service, the County makes no contributions. For those retiring with at least 10 years but fewer than 15 years of service, the County pays 50% ofthe base monthly contribution. For those retiring with at least 15 years but fewer than 25 years of service, the County pays 75% of the base monthly contribution. For those retiring with at least 25 years of service, the County pays the entire base monthly contribution. Retirees can elect family coverage, but must pay the difference. For active employees, the employee's contributions are based upon negotiated collective bargaining agreements. Employer contributions for employees not covered by collective bargaining agreements and for retirees are prescribed by the HRS. Based on the actuarial valuation study as of July 1, 2009 (the most recent valuation study), the County has 1,051 retirees (including surviving spouses) valued, 166 of deferred vested valued, and 2,390 of actives valued which were used to anive at the actuarial valuation amount. The County's annual other postemployment benefit (OPEB) cost is calculated based on its annual required contribution (ARC), which is an amount actuarially determined in accordance with the parameters of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a period not to exceed thirty (30) years. The current ARC rate is 16.1 % of annual covered payroll used in the actuarial valuation study as of July 1, In a letter dated November 23, 2011, the EUTF informed participating employers (of which the County is one) that their deposits to pre-fund retiree benefits do not meet the criteria of a contribution to a trust fund for OPEB plans as defined under GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. Specifically, the agency fund established by the EUTF covers active employees and retirees and their dependents in a single irrevocable trust rather than having a separate inevocable trust established for retiree OPEB contributions as required under GASB Statement No. 43. As a result of this interpretation change by the EUTF, the total net OPEB obligation as of June 30,2010 has increased by $50,993,000, from $12,182,000to $63,175,000. This additional OPEB obligation was recorded in the current year with an offsetting deposit of $50,993,000 (representing amounts held by the EUTF on behalf of participating employers) in the 75

97 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 accompanying basic financial statements. The State will be seeking legislation to set up an inevocable trust that will comply with GASB Statement No. 43 requirements. Once such legislation has been enacted the OPEB liability and offsetting deposit will be removed. For the year ended June 30, 2011, the County contributed $10,965,000 to the EUTF, which is also recorded as a deposit held by the EUTF in the accompanying basic financial statements. The following tables present the annual OPEB cost, the percentage of annual OPEB cost contributed to the plans, the OPEB liability, and the funding status as of and for the year ended June 30,2011: Annual required contribution Interest on net OPEB obligation Adjustment to annual required contribution Annual OPEB cost OPEB obligation at begirming of year, as adjusted OPEB obligation at end of year $ 31,766, ,000 (681,000) 31,938,000 63,175,000 $ 95,113,000 The actuarial accrued liability as of July 1, 2009 based upon the most recent valuation study and the funded status was as follows: Actuarial accrued liability Actuarial value of plan assets Unfunded actuarial accrued liability (UAAL) Funded Ratio Covered payroll (active plan members) UAAL as a percentage of covered payroll $ 382,835,000 $ 382,835,000 0% $ 135,591, % The annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for the years ended June 30, 2011, 2010, and 2009 were as follows: Fiscal Year Annual Percentage of Annual NetOPEB Ended OPEB Cost OPEB Cost Contributed Obligation 6/30/09 $ 21,034, % $ 41,374,000 6/30/10 21,801, % 63,175,000 6/30/11 31,938, % 95,113,000 76

98 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occunence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the July 1, 2009 actuarial valuation, the entry age normal actuarial cost method was used. The actuarial assumptions included an 7.0% discount rate, which is based on the County's anticipated funding level and an annual healthcare costs trend rate of 10.5% for pre-medicare and 10.25% post-medicare initially, reduced by decrements to an ultimate rate of 5.0% over nine years. The assumptions also include a 3.5% increase in payroll. The UAAL is being amortized as a level percentage of projected payroll on a closed basis. The remaining amortization period at July 1, 2009 was 28 years. The schedule of funding progress, presented as required supplementary information following the notes to the basic financial statements, is designed to present multiyear trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. The EUTF issues an annual financial report that is available to the public. That report is available on-line at their website or by contacting them at P.O. Box 2121, Honolulu, Hawaii Deferred Compensation Plan - The County participates in a defened compensation plan established by the State of Hawaii in accordance with Internal Revenue Code Section 457. The plan is available to all the County employees, and permits employees to defer a pmiion of their salary until future years by contributing to a fund managed by a plan administrator. The defened compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. All plan assets are held in a trust fund to protect them from claims of general creditors and from diversion to any uses other than paying benefits to participants and beneficiaries. The County has no responsibility for loss due to the investment or failure of investment of funds and assets in 77

99 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 the plans, but does have the duty of due care that would be required of an ordinary prudent investor. Therefore, in accordance with GASB Statement No.32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, deferred compensation plan assets are not repmied in the accompanying basic financial statements. (10) Claims and Judgments The County is self-insured for workers' compensation based on a $500,000 self-insured retention. Thereafter, an excess workers' compensation policy takes effect. In addition, the County also has insurance for etrors and omissions and employer's practice liability, with a $500,000 deductible per occurrence up to $25 million in the aggregate. Further, the County is afforded bodily injury and property damage coverage for third party claims in excess of the aforementioned retention on a per occurrence basis. Property policies are layered providing $100 million in total for building and any form of structures. Settled claims have not exceeded these coverages in any of the past three fiscal years. The estimated total liability of the County of$17.4 million, with respect to claims and judgments, including claims incurred but not repmied and related loss adjustment expenses by the claimant and settled claims is presented on the statement of net assets on the government-wide financial statements. Claim liabilities are calculated and periodically re-evaluated taking into consideration the effect of inflation, recent claim settlement trends, including frequency and amount of compensation subject to settlements, and other economic and social factors. Changes in the claims and judgments liability account for the years ended June 30, 2010 and 2011 were as follows: 2011-Ciaims andjudgments Change to Estimate Balance Additions/ Claim Balance Due Within Jul~ 1, 2010 (Reductions} Pa~ments June 30,2011 One Year Governmental Activities: Workers' compensation $ 2,621,521 $ 2,050,809 $ 2,108,855 $ 2,563,475 $ 2,563,475 Automobile, general liability, and other 3,808,719 11,609,618 1,073,881 14,344,456 13,144,456 $ 6,430,240 $ 13,660,427 $ 3,182,736 $ 16,907,931 $ 15,707,931 Business-Type Activities: Workers' compensation $ 356,627 $ 225,688 $ 254,800 $ 327,515 $ 327,515 Automobile, general liability, and other 201,301 (59,461) 3, , ,068 $ 557,928 $ 166,227 $ 258,572 $ 465,583 $ 465,583 78

100 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, Claims and Judgments Change to Fstimate Balance Additions/ Claim Balance Due Within Jut~ 1, 2009 (Reductions} Pa~ents June 30,2010 One Year Governmental Activities: Workers' compensation $ 2,219,046 $ 2,213,325 $ 1,810,850 $ 2,621,521 $ 2,621,521 Automobile, general liability, and other 3,983, , ,317 3,808,719 1,033,719 $ 6,202,637 $ 2,591,770 $ 2,364,167 $ 6,430,240 $ 3,655,240 Business-Type Activities: Workers' compensation $ 169,718 $ 391,065 $ 204,156 $ 356,627 $ 356,627 Automobile, general liability, and other 100, ,065 6, , ,301 $ 269,718 $ 499,130 $ 210,920 $ 557,928 $ 557,928 The estimated total liability has been determined through case-by-case analysis and from historical experience performed by the County's risk management division. Those historical results, combined with the evaluation of pending claims against the County by the County's corporate counsel, aids in this evaluation. Estimated expenditures for such claims are appropriated annually in the general fund with the exception of workers' compensation, which is appropriated annually in the fund that employed the injured worker. Because of the inherent uncetiainties in estimating future projected liabilities of claims and judgments, it is at least reasonably possible that the estimates used may change within the near term. (11) Commitments and Contingencies Contractual commitments - Contractual commitments for capital projects, expenditures, and supplies for the governmental funds amounted to $89.7 million at June 30,2011. Contractual commitments for the proprietary funds amounted to $16.8 million at June 30, Claims- Numerous claims and lawsuits have been filed against the County in the normal course of its operations. A liability for probable losses is included on the government-wide statement of net assets (see Note 10). Although the outcome of the various claims and lawsuits is not presently determinable, in the opinion of the County's Corporation Counsel, the resolution of such matters will not have a material adverse affect on the financial condition of the County. 79

101 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Federal Financial Assistance Programs- The County participates in a number of federally assisted grant programs, primarily with the Department of Housing and Urban Development, the Depatiment of Transportation, the Department oflnterior, the Department of Labor, and the Department of Justice. These progratns are subject to program compliance audits by the grantors of their representatives. Although the County's grant programs have been audited in accordance with the provisions of the Single Audit Act for the fiscal year ended June 30, 2011, these programs are still subject to financial and compliance audits by federal auditors. In the opinion of management of the County, disallowed costs, if any, would not be material. State Grants - The County has received state grants for specific purposes that are subject to review and audit by grantor agencies. Such audits could lead to requests for reimbursement to the grantor agency for expenditures disallowed under terms of the grant. In the opinion of management of the County, disallowed costs, if any, would not be material. (12) Fund Balances Fund balances for all the major and other governmental funds as of June 30, 2011, are distributed as follows: General Fund Highway Fund Capital Other Improvements Govemmental Sewer Fund Projects Fund Funds Total Nonspendable $ $ $ $ $ $ Restricted for: Culture and recreation Social welfare Sanitation Highways and streets Capital projects Subtotal 12,113,004 12,113,004 12,941,615 12,941,615 41,700,473 41,700,473 5,944,570 15,727,062 1,990, ,898 24,125,793 18,057,574 15,727,062 1,990,263 13,405,513 41,700,473 90,880,885 Committed to: General government 49,042,458 Social welfare Highways and streets Culture and recreation Public safety Sanitation Capital projects Subtotal 49,042,458 17,739,585 17,739,585 9,932,528 9,932,528 3,765, ,586 1,777, , ,504 9,290,118 15,954,030 52,808, ,586 1,777, , ,504 27,029,703 9,932,528 92,668,601 Assigned to: General government Capital projects Subtotal 22,153,080 22,153,080 4,253,II4 4,253,114 22,153,080 4,253,114 26,406,194 Unassigned 87,020,099 87,020,099 Total $ 170,328,641 $ 12,941,615 $ 17,739,585 $ 55,886,115 $ 40,079,823 $ 296,975,779 80

102 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Encumbrances - Encumbrance accounting is employed in the governmental funds. Under this method, purchase orders, contracts, and other commitments outstanding at year-end do not constitue expenditures or liabilities. GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, provides additional guidance on the classification within the fund balances section of amounts that have been encumbered. Encumbrances of balances within the General Fund are classified as assigned. Encumbrances of the other governmental funds are classified as restricted, committed, or assigned. These encumbrances at June 30, 2011 are not separately classified in the financial statements, and are summarized as follows: General Fund $ 22,153,080 Highway Fund 377,884 Sewer Fund 1,268,785 Grant Fund 7,223,959 Capital Improvement Projects Fund 53,276,300 Non-Major Governmental Funds 5,385,525 $ 89,685,533 (13) Business-Type Activity- Department of Water Supply The Charter of the County ofmaui provides that the Department is a regular County ofmaui agency subject to the Mayor's executive management and Council's legislative oversight. Unrestricted Cash and Investments - Unrestricted cash, cash equivalents, and investments at June 30, 2011 include funds for the following purposes: Board Designated: Capital improvements $ 5,214,326 Debt Service 2,510,027 Total board-designated 7,724,353 Undesignated 16,788,144 Total $ 24,512,497 At June 30, 2011, construction voucher and contract payables, including retentions, to be paid with board-designated funds were approximately $227,000. Construction contract commitments as of June 30, 2011 to be paid with board-designated funds aggregated approximately $940,000. Included in the construction contract commitment amounts for 2011 are approximately $55,000 for maintenance of compliance-order projects to get the water system up to Environmental 81

103 COUNTY OF MAUl Notes to the Basic Financial Statements June 30, 2011 Protection Agency standards. At June 30, 2011, the Department's management estimates an additional $12.9 million will be needed to complete the compliance projects. Restricted Cash and Investments - Restricted cash and investments consisted of the following at June 30, 2011: Water system development fee Customer deposits Source development fund assessments Special assessment fund for storage Other Total Restricted Cash and Investments $ 13,744,017 1,582, , ,788 2,464,046 $ 18,419,685 At June 30, 2011, construction voucher and contract payables, including retentions, to be paid with restricted assets were approximately $1 million. The construction contract commitments as of June 30, 2011 to be paid with restricted assets approximated $8.9 million. Restricted Net Assets- At June 30, 2011, restricted net assets consisted of the following: Water system development fee Source development fund assessments Special assessment fund for storage Other restricted funds Total Restricted Net Assets $ 13,744, , , ,342 $ 14,609,078 82

104 COUNTY OF MAUl Required Supplementary Information (see Independent Auditors' Report) Required Supplementary Information Schedule of Revenues, Expenditures, and Changes in Unreserved Fund Balance- Budget and Actual General Fund Highway Fund Sewer Fund Schedule of Funding Progress for the EUTF

105 County of Maui General Fund Schedule of Revenues, Expenditures, and Changes in Unreserved Fund Balance -Budget and Actual For the Year Ended June 30,2011 Variance with Budget Amounts Final Budget- Actual Positive Original Final Amounts (Negative) REVENUES Taxes $ 221,992,990 $ 221,992,990 $ 225,299,109 $ 3,306,119 Licenses and permits 4,905,000 4,905,000 5,418, ,334 Intergovernmental revenues 17,590,000 17,590,000 23,522,221 5,932,221 Charges for current services 1,135,000 1,135,000 1,824, ,732 Fines and forfeitures 1,750,000 1,750,000 2,633, ,506 Interest and investment earnings, net 2,610,000 2,610,000 5,637,772 3,027,772 Other revenues 600, ,000 3,277,851 2,677,851 Total Revenues 250,582, ,582, ,613,526 17,030,536 EXPENDITURES Current: General government 87,816,036 86,816,036 86,621, ,387 Public safety 76,815,793 77,787,625 74,369,706 3,417,919 Highways and streets 6,851,063 6,666,063 6,309, ,336 Sanitation 539, , ,749 56,539 Social welfare 14,881,216 14,838,626 14,061, ,591 Culture and recreation 24,859,225 24,859,225 23,143,242 1,715,983 Legislative 6,334,529 6,334,529 5,319,451 1,015,078 Total Expenditures 218,097, ,841, ,307,559 7,533,833 Excess of Revenues over Expenditures 32,485,840 32,741,598 57,305,967 24,564,369 OTHER FINANCING SOURCES (USES) Transfers in: Special Revenue Funds 16,623,067 16,623,067 18,052,217 1,429,150 Capital Improvement Projects Fund 3,006,403 3,006,403 Solid Waste Fund 4,567,801 4,567,801 5,030, ,495 Proprietary Funds 1,100,646 1,100, ,818 (698,828) Transfers out: Special Revenue Funds (75,000) (497,758) (496,940) 818 Debt Service Fund (36,859,987) (36,859,987) (36,859,987) Capital Improvement Projects Fund (967,678) (1,089,803) (1,089,803) Other Governmental Funds (25,635,557) (25,635,557) (25,635,557) Proprietary Funds (669,163) (669,163) (669,163) Total Other Financing Sources (Uses) (41,915,871) (42,460,754) (38,260,716) 4,200,038 Net Change in Unreserved Fund Balance (9,430,031) (9,719,156) 19,045,251 28,764,407 Unreserved Fund Balance-Beginning 67,974,846 67,974,846 67,974,846 Unreserved Fund Balance-Ending $ 58,544,815 $ 58,255,690 $ 87,020,097 $ 28,764,407 See accompanying note to budgetary comparison schedules and independent auditors' report. 83

106 County of Maui Highway Fund Schedule of Revenues, Expenditures, and Changes in Unreserved Fund Balance -Budget and Actual For the Year Ended June 30, 2011 Budget Amounts Actual Original Final Amounts REVENUES Taxes $ 18,250,000 $18,250,000 $ 19,552,959 Licenses and permits 12,600,000 12,600,000 14,773,950 Charges for current services 1,400,000 1,400,000 1,811,113 Other revenues 16,145 Total Revenues 32,250,000 32,250,000 36,154,167 EXPENDITURES Current: Highways and streets 23,873,964 24,288,964 22,882,267 Excess of Revenues over Expenditures 8,376,036 7,961,036 13,271,900 Variance with Final Budget- Positive (Negative) $ 1,302,959 2,173, ,113 16,145 3,904,167 1,406,697 5,310,864 OTHER FINANCING SOURCES (USES) Transfers in: General Fund 75,000 75,000 75,000 Special Revenue Funds 10,000 10,000 10,000 Capital Improvement Projects Fund 2,434,540 Solid Waste Fund 340, , ,000 Transfers out: General Fund (4,480,121) (4,480,121) (4,480,121) Capital Improvement Projects Fund (8,575,000) (8,575,000) (8,575,000) Bikeway Fund (175,000) (175,000) (175,000) Total Other Financing Sources (Uses) (12,805,121) (12,805,121) (10,370,581) Net Change in Unreserved Fund Balance ( 4,429,085) (4,844,085) 2,901,319 2,434,540 2,434,540 7,745,404 Unreserved Fund Balance-Beginning 9,662,412 9,662,412 9,662,412 Unreserved Fund Balance-Ending $ 5,233,327 $ 4,818,327 $ 12,563,731 $ 7,745,404 See accompanying note to budgetary comparison schedules and independent auditors' report. 84

107 County of Maui Sewer Fund Schedule of Revenues, Expenditures, and Changes in Unreserved Fund Balance - Budget and Actual For the Year Ended June 30,2011 Budget Amounts Actual Original Final Amounts REVENUES Licenses and permits $ $ $ 22,725 Charges for current services 41,650,000 41,650,000 42,991,245 Other revenues 35,000 35,000 39,399 Total Revenues 41,685,000 41,685,000 43,053,369 EXPENDITURES Current: Sanitation 25,266,575 25,266,575 21,860,289 Excess of Revenues over Expenditures 16,418,425 16,418,425 21,193,080 Variance with Final Budget- Positive (Negative) $ 22,725 1,341,245 4,399 1,368,369 3,406,286 4,774,655 OTHER FINANCING SOURCES (USES) Transfers in: Capital Improvement Projects Fund 2,465,662 Sewer Assessment Funds 700, , ,000 Transfers out: General Fund (13,568,200) (13,568,200) (13,568,200) Special Revenue Funds (10,000) (10,000) (10,000) Capital Improvement Projects Fund (5,770,000) (5,770,000) (5,770,000) Solid Waste Fund (1,992,000) (1,992,000) (1,845,982) Total Other Financing Sources (Uses) (20,640,200) (20,640,200) (18,028,520) Net Change in Unreserved Fund Balance (4,221,775) (4,221,775) 3,164,560 2,465, ,018 2,611,680 7,386,335 Unreserved Fund Balance-Beginning 13,306,240 13,306,240 13,306,240 Unreserved Fund Balance-Ending $ 9,084,465 $ 9,084,465 $ 16,470,800 $ 7,386,335 See accompanying note to budgetary comparison schedules and independent auditors' report. 85

108 COUNTY OF MAUl Note to the Budgetary Comparison Schedules June 30, 2011 (1) Summary of Significant Accounting Policies Budgets and Budgetary Accounting- On or before March 15th, the Mayor submits to the County Council a proposed operating budget and capital program for the fiscal year commencing the following July 1st. Upon submission, the budget and the capital program are available as public records in the Office of the County Clerk for open inspection. A public hearing is held by the County Council between April I stand 30th in the year of submission. After the public hearing, the County Council shall pass the budget by ordinance with or without amendment on or before May 31st. If the Council fails to do so, the budget, as submitted by the Mayor, is deemed legally enacted as the budget for the ensuing fiscal year. The classification detail upon which the budget is prepared is by fund, depatiment, activity, and subobject. Cetiain depatiments have specific line-item appropriations within a program. The department heads may make transfers between sub-objects and indexes within an activity (line item). The detail at which expenditures may not legally exceed appropriations without amendment is at the program level or the specific line-item appropriations as shown in the schedules by fund. Any transfers or increase of an appropriation require the approval of the County Council. Transfers within a department are approved by resolution, and transfers between departments and increases or decreases in appropriations are approved by ordinance. Legally adopted budgets include the General Fund, Highway Fund, Sewer Fund, Debt Service Fund, Capital Improvement Projects Fund, Liquor Control Fund, Solid Waste Fund, Department ofwater Supply, and the Golf Course Special Fund. The grant fund budgets are based on the respective grants and are not considered to be legally adopted budgets. Appropriations - By Chatier provision, every appropriation, except an appropriation for capital improvement, shall lapse at the close of the fiscal year to the extent that it has not been expended or encumbered by a written contract. Appropriations for capital improvements shall lapse six months after the close of the fiscal year to the extent that they have not been expended or encumbered by a written contract. Formal budgetary integration is employed as a management control device during the year. All budgets are adopted on a basis consistent with accounting principles generally accepted in the United States of America (GAAP basis); except that encumbrances are treated as budgeted expenditures in the year commitments were made. Accordingly, the actual expenditures on a non-gaap budgetary basis presented in the Required Supplementary Information represent the current year's expenditures as recorded on the modified accrual basis, plus encumbrances at year-end, less expenditures related to amounts encumbered in the prior year. The Required Supplementary Information reflects the budgeted and actual amounts (non-gaap budgetary basis) for the General Fund and major Special Revenue Funds that have legally adopted annual operating budgets. 86