Solid Waste Management 2006 Financial Report

Transcription

1 Solid Waste Management 2006 Financial Report City of Tacoma Public Works Environmental Services

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3 Table of Contents Independent Auditor s Report... 2 Management s Discussion and Analysis... 4 Financial Statements Notes to Financial Statements... 17

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5 Independent Auditor s Report

6 INDEPENDENT AUDITOR'S REPORT Honorable Mayor and City Council City of Tacoma, Washington, Public Works Department, Environmental Services, Solid Waste Management Tacoma, Washington We have audited the accompanying balance sheets of City of Tacoma, Washington, Public Works Department, Environmental Services, Solid Waste Management (the Division) as of December 31, 2006 and 2005 and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of City of Tacoma, Washington, Public Works Department, Environmental Services, Solid Waste Management as of December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The management s discussion and analysis preceding the financial statements is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Vancouver, Washington July 27, 2007

7 Management s Discussion and Analysis

8 City of Tacoma, Washington Public Works Department Environmental Services Solid Waste Management Division Management s Discussion and Analysis December 31, 2006 Introduction The following is management s discussion and analysis (MD&A) of the financial activities of the City of Tacoma s Solid Waste Management Division (the Division) for the years ended December 31, 2006 and The MD&A is designed to focus on significant financial transactions and activities and to identify changes in financial position. This information should be read in conjunction with the financial statements taken as a whole. Financial Highlights Total assets are $133.3 million. This is an increase of $23.7 million over 2005 year end and $21.0 million over 2004 due principally to increases in cash from debt financing. Liabilities of $135.1 million are up $18.7 million and $18.2 million for the same periods due to increases in long term debt. Total net assets or assets minus liabilities are ($1.9) million at December 31, 2006 versus ($6.9) million and ($4.6) million at year end 2005 and 2004 respectively. The 2005 amount is after a ($0.1) million restatement for an accounting change. Income net of gross earnings tax, or change in net assets, is $5.0 million in 2006 compared to losses of $2.3 million and $0.7 million in 2005 and 2004 respectively. Gross earnings tax is 8% of gross revenues. Cash flow is $22.8 million in 2006, ($2.6) million in 2005, and $0.2 million in Financial Analysis Condensed Balance Sheets December 31, Current, restricted and other assets $ 79,390,226 $ 56,596,077 $ 58,920,995 Capital assets 53,866,887 52,962,986 53,366,593 Total assets $ 133,257,113 $ 109,559,063 $ 112,287,588 Current liabilities $ 13,535,483 $ 13,336,445 $ 12,989,345 Noncurrent liabilities 121,572, ,084, ,906,237 Total liabilities 135,108, ,421, ,895,582 Invested in capital assets, net of related debt 16,549,926 3,234,505 3,207,443 Unrestricted (18,401,143) (10,096,674) (7,815,437) Total net assets (1,851,217) (6,862,169) (4,607,994) Total liabilities and net assets $ 133,257,113 $ 109,559,063 $ 112,287,588 Included in the $22.8 million increase in current, restricted and other assets is a decrease of $10.0 million in cash used to defease a portion of the 1997 Revenue Refunding Bonds, $0.4 million in cash used to refund the 2001 Revenue and Refunding Bonds and a $29.5 million increase in construction funds from the sale of 2006 Series A Revenue Bonds.

9 Capital assets including assets under construction and net of depreciation are relatively flat in total for each of the three year ends. Refer to the discussion on capital assets below for more detail. Current liabilities increased $0.2 million during 2006 and $0.3 million in In 2006, deferred credits decreased $0.6 million as the rate stabilization funds were used to fund a workers compensation liability adjustment to actual costs. The increase of $1.3 million in payables is due at least in part to construction payables. Noncurrent liabilities increased $18.5 million in 2006 and decreased $0.8 million in Each year, an accrual must be made for the landfill closure and post closure liability. This liability increased $1.1 million in 2006 compared to the $1.6 million in 2005 and $1.2 million in Revenue bonds increased $17.4 million in This is net of refunding the 2001 Revenue and Refunding Bonds with the 2006 Series B Revenue Refunding Bonds, ($0.5) million; the 1997 Revenue Refunding Bond defeasance, ($9.4) million; and the 2006 Series A Revenue Bonds, $29.9 million. Principal payments are $2.8 million in 2006 and $2.6 million in Financial Analysis Condensed Statements of Revenues, Expenses and Changes in Net Assets Year Ended December 31, Operating revenues $ 51,336,933 $ 48,836,608 $ 46,355,275 Operating expenses 40,024,592 44,013,962 40,326,988 Net operating income 11,312,341 4,822,646 6,028,287 Nonoperating revenues (expenses): Interest income 2,038,008 1,063, ,586 Interest expense (3,808,866) (4,175,441) (3,639,444) Other, net (509,816) 68, ,806 Total nonoperating expenses (2,280,674) (3,044,179) (2,755,052) Income before contributions and transfers 9,031,667 1,778,467 3,273,235 Contributions in aid of construction 2,000 Transfers to other funds (192,473) Transfers gross earnings tax (4,022,715) (4,032,642) (3,792,363) Change in net assets 5,010,952 (2,254,175) (711,601) Net assets beginning (6,862,169) (4,607,994) (3,896,393) Net assets ending $ (1,851,217) $ (6,862,169) $ (4,607,994) Operating revenues The operating revenue trend is an annual increase of about $2.5 million due principally to rate increases averaging about 4.7% per year. Revenues for 2006 were increased by $0.6 million due to the transfer out of the Rate Stabilization Fund to a total of $51.3 million.

10 Operating revenues were derived from the following sources: Year Ended December 31, Residential collection $ 20,120,595 $ 18,568,835 $ 16,275,566 Commercial collection 22,557,852 21,955,325 22,869,534 Disposal revenues 6,547,524 6,279,307 5,041,069 Salvage revenues 1,318,793 1,248,371 1,278,069 City cleanup revenues 408, , ,354 Other operating revenues 383, , ,683 Operating revenues $ 51,336,933 $ 48,836,608 $ 46,355,275 Compared to 2004, 2005 residential revenues increased 14% and disposal revenues 25%, while commercial, salvage and city cleanup revenues decreased slightly revenues increased over 2005 revenues about 7% for residential, 4% for disposal, and 6% for salvage, excluding the rate stabilization transfer, while the other revenue categories increased only slightly. Operating expenses Operating Expenses 10.0 $ʹs In Millions (2.0) (4.0) Collection services Sanitary landfill Long haul Resource recovery Recycling (3.2) Waste to energy plant City cleanup Customer service Depreciation General administration Discontinued projects Other taxes Operating expenses are $40.0 million in 2006, down $4.0 million from 2005 and $0.3 million from Manageable costs, excluding depreciation, taxes, and discontinued operations and projects, have increased almost 3% per year or about on track with inflation rates.

11 Significant events include the $3.4 million waste to energy operating cost reimbursement from the NRG bankruptcy settlement, refer to Note 8. Expenses include the discontinued green house project for $1.0 million in 2006 and the waste to energy operation for $2.0 million in Collection costs increased $1.1 million or 18% over 2005 and $1.0 million or 15% over 2004 due to increased fuel, fleet maintenance and labor costs. The landfill expense decreased by $0.4 million or 7% as the accrual for the landfill closure and post closure costs decreased to $1.1 million in 2006 from $1.6 million in Long haul costs are up $0.7 million or 11% over the previous two years. LRI contract rates increased $2.17 per ton or about $434,000 per year due to LRI s increased landfill closure and post closure costs which can be passed on to the Division in the contractual rates. Other cost increases include fuel, labor and fleet maintenance. Recycling expenses of $6.8 million are $0.4 million or 5% less than in 2005 due to increasing automated collections of both residential recycling ($0.2 million) and residential yard waste ($0.2 million). This is also $0.3 million or 4% less than 2004 expenses other taxes are $0.3 higher than 2006 due to audit tax adjustments. Nonoperating revenues and expenses Significant changes from year to year include an increase of $1.0 million over 2005 and $1.3 million over 2004 for interest income due to increasing interest rates and market values of cash and equity in pooled investments. Interest expense is $0.4 million higher in 2005 compared to 2006 due to debt service restructuring. Included in other, net is the cost to defease a portion of the 1997 Revenue Refunding Bonds of $0.7 million in Financial Analysis Condensed Statements of Cash Flows Net cash from: Year Ended December 31, Operating activities $ 19,711,813 $ 14,251,671 $ 12,651,233 Noncapital financing activities (14,120,886) (3,939,872) (3,393,116) Capital and related financing activities 15,117,089 (13,980,097) (9,840,822) Investing activities 2,086,367 1,097, ,242 Change in cash and equity in pooled investments 22,794,383 (2,570,435) 206,537 Cash and equity in pooled investments beginning 49,338,857 51,909,292 51,702,755 Cash and equity in pooled investments ending $ 72,133,240 $ 49,338,857 $ 51,909,292 Cash increased $22.8 million in 2006 compared to a decrease of $2.6 million in 2005 and a slight increase of $0.2 million in Cash flows are reflected in four areas as discussed below: Operating activities Operating activities include receipts collected from customers, payments to employees and suppliers and taxes paid. In comparing the three years, two changes stand out: increases in receipts from customers and the NRG settlement for wasteto energy operating cost recovery in 2006 of $3.4 million. Receipts from customers are $49.2 million in 2006 versus $47.2 million in 2005 and $44.9 million in After adjusting for the $0.6 million added to revenues from the Rate Stabilization Fund in 2006, the average annual increase is 4.1%. Noncapital financing activities Cash flows from noncapital financing activities include financing related to operations and gross earnings tax. Significant events in 2006 include using operating cash of $0.4 million to refund a portion of the 2001 Revenue and Refunding Bonds and $10.0 million to defease a portion of the 1997 Revenue Refunding Bonds.

12 Capital and related financing activities Cash flows for the acquisition of capital assets and related financing are summarized together. The $29.1 million additional cash in 2006 over 2005 and $25.0 million over 2004 is the result of the $29.5 million in proceeds from the sale of revenue bonds. Cash spent on capital projects increased to $8.2 million in 2006 from $7.4 million in 2005 and $3.9 million in Capital spending is addressed under the section capital assets below. Investing activities The $1.0 million increase year to year in cash from investing activities is due to increased interest earned on investments as interest rates moved up. Capital Assets As of the end of 2006, the Division reports $53.9 million in utility plant in service net of accumulated depreciation, $53.0 million in 2005 and $53.4 million in activity Operating capital purchases include vehicles, equipment and other for $2.3 million, containers for $1.2 million and buildings for $3.1 million. The Division disposed of $0.7 million in capital assets, primarily vehicles and equipment during the year. Capital construction project costs include $7.2 million for the White goods, Enviro house and LAIP (landfill access improvement) projects in 2006 after expensing $1.0 million for the Greenhouse project. Accumulated depreciation increased $5.6 million due to $6.3 million in depreciation expense and a decrease of $0.7 million due to dispositions activity In 2005, the Division reported a $0.4 million decrease in total capital assets net of accumulated depreciation. The Division purchased $3.6 million in vehicles, equipment and buildings and other capital assets and $1.9 million in containers during the year. The Division disposed of $1.1 million in capital assets, primarily vehicles and equipment. Construction work in progress decreased $0.1 million due to $2.1 million in new expenditures, the transfer of $0.2 million to new assets and the write off of $2.0 million in RDF (refuse derived fuel) project costs. Accumulated depreciation increased $4.7 million; the change resulted from depreciation expense of $5.8 million before dispositions of $1.1 million activity The Division reported a decrease of capital assets net of accumulated depreciation in 2004 of $1.8 million. The Division purchased $1.1 million in vehicles and equipment and $0.6 million in containers during the year. The Division sold $0.4 million in vehicles and transferred $0.2 million to General Government Fleet. The total amount spent on construction projects was $2.3 million, including $1.4 million for the Greenhouse project and $0.4 million for the Landfill Access West Parking Lot project. Accumulated depreciation increased $5.2 million due to $5.5 million in depreciation expense and $0.3 million decrease due to dispositions including transfers. Restricted Assets Restricted assets consist of cash and equity in pooled investments with restrictions both externally imposed and legally enforceable and established by the City governing board. Principally, restricted assets include bond reserve funds, debt service funds, customer deposits, construction funds and reserve for landfill closure and post closure costs. Total restricted assets increased $30.0 million since 2005 year end and $28.2 million since This increase is primarily due to the $29.5 million in new debt, a 2006 Series A Revenue Bond issue. Debt Administration The Division sale of par value $ million 2006 Series A Revenue Bonds closed on July 12, The total proceeds and increase in long term debt is $29.9 million. The negotiated bond sale was successful with the Division receiving a true interest cost of 4.85%. The proceeds of the sale will be used to fund $29.5 million of capital projects after $0.4 million in issuance costs.

13 The Division used existing operating cash of $10.0 million to defease $9.795 million in principal of the 1997 Revenue Refunding Bonds for a savings of 4.88%. The 2006 financial statements include the cost for defeasance of $0.7 million and reduction in long term debt of $9.4 million. In addition, there is a $0.4 million transfer from the bond reserve fund to the bond construction fund associated with this transaction. On September 26, 2006, the Division sold $ million par value 2006 Series B Revenue Refunding Bonds for total proceeds of $23.8 million. The negotiated bond sale was successful with the Division receiving a true interest cost of 4.37%. The proceeds of the sale plus $0.4 million in operating cash was used to pay the $0.3 million issuance cost and refund $ million of the 2001 Revenue and Refunding Bonds for a savings of 4.22%. This transaction resulted in total long term debt decreasing by $0.5 million. Also in connection with this transaction, $0.1 million was transferred out of the bond reserve fund into the bond construction fund. At December 31, 2006, the Division has $87.9 million in long term debt outstanding, of which $2.9 million is due within one year. All outstanding bonds are insured with underlying ratings of A3 by Moody s Investors Service, A by Fitch, Inc., and AA by Standard & Poor s. Debt service schedules go out to 2026 and interest rates range from 4.0% to 6.0%. Interest is paid semi annually and principal payments are due December 1 st of each year. Principal paid in 2006 is $2.8 million and interest paid is $3.6 million. Please refer to Note 4 for a detail of debt outstanding and debt service payment schedule. Debt Service Coverage The bond coverage ratio is 3.10 at the end of This compares to 1.98 reported in 2005 and 2.01 reported in A bond coverage ratio of 1.25 is required by bond covenants for the Division. Summary In summary, the most significant financial events in 2006 were the sale of revenue and revenue refunding bonds, the partial defeasance of the 1997 Revenue Refunding Bonds with operating funds, and the settlement received from NRG for their share of waste to energy operating costs. Net operating income for the Division is $11.3 million. After nonoperating revenues and expenses and gross earnings tax, the change in net assets is $5.0 million. This Management s Discussion and Analysis should be read in conjunction with the accompanying financial statements and notes. This report is prepared by our Financial Services Team. Moss Adams, LLP independently audited the financial statements and notes. Public Works Management and Finance Management are jointly responsible for the information contained in this report, as well as the financial statements and notes.

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15 Financial Statements

16 City of Tacoma,Washington Public Works Department Environmental Services Solid Waste Management Division Balance Sheets As Restated ASSETS Current assets: Cash and equity in pooled investments $ 12,769,030 $ 19,417,671 Rate stabilization fund 6,900,000 7,500,000 Accounts receivable, net of allowance for uncollectibles of $1,175,713 in 2006 and $831,094 in ,152,487 5,884,545 Due from other funds 6, ,977 Due from other governments 143, ,003 Prepaid expenses December 31, 1,680 Total current assets 25,971,326 33,327,876 Restricted assets: Restricted cash and equity in pooled investments: Bond reserve accounts 4,538,559 4,762,961 Customer deposits 63,310 40,618 Construction accounts 45,456,634 15,324,400 Reserve for landfill closure and post closure costs 2,405,707 2,293,207 Total restricted assets 52,464,210 22,421,186 Capital assets: Assets in service 124,312, ,428,652 Less accumulated depreciation (75,935,888) (70,360,934) Net utility plant in service 48,376,487 48,067,718 Construction work in progress 5,490,400 4,895,268 Net capital assets 53,866,887 52,962,986 Other assets unamortized bond costs 954, ,015 TOTAL ASSETS $ 133,257,113 $ 109,559,063 The accompanying notes are an integral part of the financial statements.

17 LIABILITIES Current liabilities: City of Tacoma, Washington Public Works Department Environmental Services Solid Waste Management Division Balance Sheets December 31, As Restated Accounts payable $ 2,082,333 $ 1,172,773 Accrued wages and benefits payable 206, ,555 Accrued taxes payable 746, ,396 Due other funds 134, ,373 Deferred revenue 83,030 83,742 Deferred credit rate stabilization 6,900,000 7,500,000 Current portion of long term debt 2,690,417 2,539,167 Total current liabilities 12,843,450 12,737,006 Liabilities payable from restricted assets: Current: Customer deposits 62,935 39,961 Bond interest payable 384, ,645 Current portion of long term debt 244, ,833 Noncurrent: Accrued landfill closure and post closure costs 35,457,896 34,358,427 Total liabilities payable from restricted assets 36,149,929 34,957,866 Noncurrent liabilities: Revenue bonds payable, net of unamortized discounts, premiums and loss on refunding 84,947,329 67,553,804 Compensated absences 1,167,622 1,162,148 Capitalized lease obligations 10,408 Total noncurrent liabilities 86,114,951 68,726,360 Total liabilities 135,108, ,421,232 NET ASSETS Invested in capital assets, net of related debt 16,549,926 3,234,505 Unrestricted (18,401,143) (10,096,674) Total net assets (1,851,217) (6,862,169) TOTAL LIABILITIES AND NET ASSETS $ 133,257,113 $ 109,559,063 The accompanying notes are an integral part of the financial statements.

18 City of Tacoma, Washington Public Works Department Environmental Services Solid Waste Management Division Statements of Revenues, Expenses and Changes in Net Assets Year Ended December 31, As Restated OPERATING REVENUES $ 51,336,933 $ 48,836,608 OPERATING EXPENSES Collection services 7,533,842 6,406,093 Sanitary landfill 5,396,122 5,769,463 Long haul 7,020,124 6,311,274 Resource recovery 1,921,085 1,920,480 Recycling 6,799,564 7,157,166 Waste to energy plant (3,226,225) 987,942 City cleanup 321, ,061 Customer service 1,292,462 1,314,071 Depreciation 6,277,401 5,770,552 General administration 4,990,656 4,955,990 Discontinued projects 996,255 2,029,070 Other taxes 701,331 1,015,800 Total operating expenses 40,024,592 44,013,962 Net operating income 11,312,341 4,822,646 NONOPERATING REVENUES (EXPENSES) Interest income 2,038,008 1,063,255 Rental income 36,197 34,608 Gain on sale of property 55,903 40,399 Grant income 194, ,235 Interest expense (3,808,866) (4,175,441) Amortization of debt premium, discount & expense (137,642) (192,119) Bond defeasance costs (669,531) Other income 20,390 29,977 Other expense (9,211) (3,093) Total nonoperating expenses (2,280,674) (3,044,179) Net income before contributions and transfers 9,031,667 1,778,467 Contributions in aid of construction 2,000 Transfers gross earnings tax (4,022,715) (4,032,642) CHANGE IN NET ASSETS 5,010,952 (2,254,175) TOTAL NET ASSETS, AS ORIGINALLY STATED (6,772,857) (4,588,432) CHANGE IN ACCOUNTING PRINCIPLE (89,312) (19,562) TOTAL NET ASSETS BEGINNING OF YEAR (6,862,169) (4,607,994) TOTAL NET ASSETS END OF YEAR $ (1,851,217) $ (6,862,169) The accompanying notes are an integral part of the financial statements.

19 City of Tacoma, Washington Public Works Department Environmental Services Solid Waste Management Division Statements of Cash Flows CASH FLOWS FROM OPERATING ACTIVITIES As Restated Receipts from customers $ 49,172,460 $ 47,213,143 Payments to employees (16,082,803) (15,664,215) Payments to suppliers (14,041,315) (17,509,271) Other operating revenues 1,318,793 1,248,371 Taxes paid Year Ended December 31, (655,322) (1,036,357) Net cash from operating activities 19,711,813 14,251,671 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Refunded 2001 Revenue and Refunding Bonds (379,957) Defeased 1997 Revenue Refunding Bonds (9,977,496) Operating grants received 194, ,235 Gross earnings tax paid (3,957,511) (4,098,107) Net cash from noncapital financing activities (14,120,886) (3,939,872) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from the sale of 2006 Series A Revenue Bonds 29,535,452 Contributions in aid of construction 2,000 Acquisition and construction of capital assets (8,177,557) (7,396,016) Payments on capital leases (10,408) (23,704) Principal paid on revenue bonds (2,770,000) (2,620,000) Interest paid on revenue bonds, net of capitalized interest (3,518,301) (4,010,753) Proceeds from sale of property and equipment 55,903 70,376 Net cash from capital and related financing activities 15,117,089 (13,980,097) CASH FLOWS FROM INVESTING ACTIVITIES Interest and dividends on investments 2,038,008 1,063,255 Rental income 36,197 34,608 Other income, net 12,162 Net cash from investing activities 2,086,367 1,097,863 Net change in cash and equity in pooled investments 22,794,383 (2,570,435) Cash and equity in pooled investments at beginning of year 49,338,857 51,909,292 Cash and equity in pooled investments at end of year $ 72,133,240 $ 49,338,857 The accompanying notes are an integral part of the financial statements.

20 City of Tacoma, Washington Public Works Department Environmental Services Solid Waste Management Division Statements of Cash Flows (continued) Reconciliation of cash and equity in pooled investments Year Ended December 31, As Restated to balance sheets: Cash and equity in pooled investments in operating funds $ 19,669,030 $ 26,917,671 Cash and equity in pooled investments in restricted funds 52,464,210 22,421,186 $ 72,133,240 $ 49,338,857 Reconciliation of operating income to net cash from operating activities: Operating income $ 11,312,341 $ 4,822,646 Adjustments to reconcile operating income to net cash from operating activities: Depreciation 6,277,401 5,770,552 Discontinued project costs expensed 996,255 2,029,070 Change in operating assets and liabilities: Accounts receivable (267,942) (359,747) Prepaid expenses 1,680 (448) Due from other funds 395,538 (194,474) Due from other governments (21,367) 104,122 Inventory 101,602 Accounts payable 1,293,337 (155,624) Accrued wages, benefits and compensated absenses (76,819) 158,659 Accrued taxes payable 46,009 (20,557) Accrued liabilities (383,777) 253,620 Due other funds (382,574) 121,478 Deferred revenues (712) (13,347) Rate stabilization transfer to operations (600,000) Customer deposits 22,974 (2,000) Closure and post closure liability 1,099,469 1,636,119 Total adjustments 8,399,472 9,429,025 Net cash from operating activities $ 19,711,813 $ 14,251,671 The accompanying notes are an integral part of the financial statements.

21 Notes to Financial Statements

22 City of Tacoma, Washington Public Works Department Environmental Services Solid Waste Management Division Notes to Financial Statements Years Ended December 31, 2006 and 2005 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations of the Solid Waste Management Division. The Solid Waste Management Division (the Division) is a blended component unit of the City of Tacoma (the City) and is presented as an enterprise fund within the Department of Public Works, under the provisions of the City Charter. The Division, with approximately 159 employees, provides mandatory solid waste collection and disposal services for residential and commercial entities located within in the City; the population is approximately 199,600 and covers an area of 49 square miles. Disposal methods include recycling, long haul to an outside landfill and disposal in the City owned landfill. The Division receives certain services from other departments and agencies of the City, including those normally considered to be general and administrative. The Division is charged for services received from other City departments and agencies and, additionally, must pay a gross earnings tax to the City. The Division paid gross earnings tax of $4,022,715 in 2006 and $4,032,642 in These transactions are required to be arms length transactions by law. Basis of Accounting and Presentation. The financial statements of the Division are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). Revenues are recognized when earned and expenses are recognized when incurred. The Division has elected to apply all applicable Governmental Accounting Standards Board (GASB) pronouncements as well as all Financial Accounting Standards Board (FASB) pronouncements and Accounting Principles Board (APB) opinions, unless those pronouncements or opinions conflict with GASB pronouncements. The Division generally follows the uniform system of accounts prescribed by the Division of Audits of the State Auditorʹs Office. The Division is exempt from payment of Federal income tax. Cash and Equity in Pooled Investments and Investments. The Division s cash and investments are deposited with the City Treasurer in the Cityʹs general investment pool for the purpose of maximizing interest earnings through pooled investment activities. Cash and investments in the Cityʹs general investment pool are reported at fair value and allocated changes in unrealized gains and losses are recorded in the Divisionʹs Statements of Revenues, Expenses, and Changes in Net Assets. The allocation is based on a prorated share of equity as of the balance sheet date. Interest earned on such pooled investments is allocated to the participating funds based on each fundʹs average daily cash balance during the allocation period. The general investment pool operates like a demand deposit account in that all City departments may deposit cash into the pool at any time and can also withdraw cash out of the pool without prior notice or penalty. As such, balances are considered to be cash equivalents. Accounts Receivable. Accounts receivable are recorded when invoices are issued and are written off when they are determined to be uncollectible. The allowance for uncollectible accounts is estimated based on taking a percentage of accounts receivable aged balances with consideration given to the Division s historical losses, review of specific problem accounts, the existing economic conditions and the financial stability of its customers. Generally, the Division considers accounts receivable past due after 30 days.

23 Solid Waste Management Division Notes to Financial Statements Continued Interfund Balances. Transactions unsettled between funds at year end are recorded as due to or due from other funds. Restricted Assets. Cash and equity in pooled investments with restrictions both externally imposed and legally enforceable and established by the City governing board. Principally, restricted assets include bond construction, reserve and debt service funds; landfill closure funds and customer deposits. Capital Assets and Depreciation. Capital assets consist of utility plant and are stated at original cost, which includes both direct costs of construction or acquisition and indirect costs. The cost of maintenance and repairs is charged to expense as incurred while the cost of improvements, additions and major renewals that extend the life of an asset are capitalized. Depreciation is recorded using the straight line method based upon estimated useful lives of individual assets. The estimated useful lives range as follows: Years Buildings and Improvements Resource Recovery Facility 5 50 Vehicles 5 10 Containers and Equipment 5 10 Other Assets 3 10 The Division periodically reviews the carrying amount of its capital assets and other long lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is deemed not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows. Management has evaluated the impact of SFAS No. 143, Accounting for Asset Retirement Obligations, and has concluded that the adoption of this statement did not have a material impact on the Division s financial position, results of operations or cash flows. Allowance for Funds Used During Construction. The Division capitalizes as an additional cost of construction work in progress (CWIP), an allowance for funds used during construction (AFUDC), which represents the cost of borrowing funds used for such purposes. The amount capitalized is the net difference between the interest revenue and the interest cost of the debt. During 2006, capitalized interest related to construction projects funded by revenue bonds is $206,480; in 2005 the amount is $42,094. Deferred Credit. In accordance with FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation, and as passed by ordinance by the Tacoma City Council, the Division has established a rate stabilization account for the purposes of better matching revenues with expenses and minimizing future rate fluctuations. Deposits into the fund are not included as revenue in the year the deposit is made. Amounts withdrawn from the fund are considered revenue in the year the withdrawal is made. No transfers were made into this account in 2006 or In 2006, $600,000 was transferred out of this account and revenue was realized. The balance in this account at December 31, 2006 is $6.9 million compared to $7.5 million the previous year end.

24 Solid Waste Management Division Notes to Financial Statements Continued Bond Premium, Discount, Issuance Costs and Refunding Losses. Bond premium, discount, and issuance costs are amortized over the life of the bond by using the weighted balance of the bonds outstanding. In 2006 the Division changed its accounting for the amortization of loss on refunding to the straight line basis. In conjunction with this change, the amortization period also changed for certain refundings. This change in accounting principle resulted in restating net assets by reducing invested in capital assets net of related debt by $89,312 as of December 31, 2005, increasing 2005 amortization by $69,750; $19,562 pertains to years prior to Compensated Absences. Employees accrue vacation in varying amounts in accordance with years of service. The maximum accrual is equal to the amount earned in a two year period, and upon termination employees are entitled to compensation for unused vacation at 100%. Vacation pay is recorded as an expense in the year when earned. Employees accumulate sick leave at the rate of one day per month with no maximum accumulation specified. In the case of termination, the employee receives 25% of the value at retirement or death or 10% upon termination for any other reason. The accrued liability is computed at 10%, which is considered the amount vested. Sick leave pay is recorded as an expense in the year when earned. Employees who earn personal time off (PTO) in lieu of vacation and sick leave accrue PTO in varying amounts in accordance with years of service. The maximum accrual is 960 hours and upon termination, employees are entitled to compensation for unused PTO at 100%. PTO pay is recorded as an expense in the year when earned. Operating Revenues. Revenues are derived from providing solid waste services to both residential and commercial customers. Residential rates are based on the size of the garbage container and include services for recycling, yard waste and costs for other special programs. Commercial rates are based on the garbage container type and frequency of collection with additional charges for recycling services. The rate structure is designed to meet needs and obligations on a cost of service basis while adhering to legal requirements. These legal requirements include computing rates on a reasonable basis, charging rates uniformly within classes, and using the revenues for utility and regulatory purposes. In addition, there may be laws imposed by the State, City Charter or to meet grant or bond requirements. The City has parity bond ordinance that it will establish, maintain and collect rates or charges in connection with the ownership and operation of the utility to 1) pay the cost of maintenance and operation of the utility, 2) to make all payments required to be made for the parity bonds, 3) to make all payments required to be made on any other junior debt, 4) to pay municipal taxes and payments to the City in lieu of taxes, and 5) to prepay debt, invest in improvement projects to utility assets, make payments to the Solid Waste Rate Stabilization Fund, or other lawful City purposes including payment of legal claims and judgments against the utility. Customers are billed on bi monthly or monthly billing cycles. At year end, unbilled revenues are estimated and accrued based on these billing cycles; an estimate is also made of invoices not issued due to amounts exceeding billing parameters.

25 Solid Waste Management Division Notes to Financial Statements Continued Environmental Remediation Costs. The Division accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated costs from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study and the Potential Responsible Party cost allocation. Such accruals are adjusted as further information develops or circumstances change. In general, costs related to environmental matters are charged to expense. Environmental costs are capitalized if the costs increase the value of the property and/or prevent or mitigate contamination from future operations. Costs of future expenditures for environmental remediation obligations are discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as receivables when their receipt is deemed probable. See Note 7. Landfill Closure and Post Closure Costs. In accordance with GASB Statement No. 18, Accounting for Municipal Solid Waste Landfill Closure and Post closure Care Costs, the Division is required to expense a portion of the estimated closure and post closure costs in each period that the landfill accepts solid waste. The Division has been reporting a portion of these costs as a liability and as an operating expense since The liability balance is $35.5 million at December 31, 2006 and $34.4 million at December 31, Net Assets. Net assets consist of the following components: Invested in capital assets, net of related debt This component of net assets consists of capital assets, net of accumulated depreciation and outstanding debt payable, net of unspent bond proceeds, attributable to the acquisition, construction, or improvement of those assets. Restricted This component consists of restricted assets net of related obligations. If obligations exceed assets, the balance is reported as unrestricted. Unrestricted This component consists of net assets available for use. Use of Estimates. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Reclassifications. Changes have been made to prior year account balances as needed to conform to the current year presentation format. These reclassifications include clarifications in restrictions of net assets which resulted in reclassifications of restricted net asset balances as of December 31, 2005, as detailed below: Invested in capital assets 2005 As Previously Accounting 2005 As Currently Reported Reclassification Restatement Reported net of related debt $ 625,050 $ 2,698,767 $ (89,312) $ 3,234,505 Restricted for: Reserve for landfill closure 2,293,207 (2,293,207) Debt reserve funds 550,188 (550,188) Unrestricted (10,241,302) 144,628 (10,096,674) Total net assets $ (6,772,857) $ $ (89,312) $ (6,862,169)

26 Solid Waste Management Division Notes to Financial Statements Continued NOTE 2 CAPITAL ASSETS Transfers & 2005 Additions Dispositions Adjustments 2006 Land and improvements $ 3,415,919 $ $ $ $ 3,415,919 Buildings 77,333,811 3,065,430 80,399,241 Vehicles 12,407,351 (702,447) 1,457,117 13,162,021 Containers 12,591,514 1,226,698 13,818,212 Equipment 2,571,267 59,761 2,631,028 Other 10,108,790 (19,434) 796,598 10,885,954 Assets in service 118,428,652 (721,881) 6,605, ,312,375 Accumulated depreciation (70,360,934) (6,277,401) 702,447 (75,935,888) Assets in service, net 48,067,718 (6,277,401) (19,434) 6,605,604 48,376,487 Construction work in progress 4,895,268 8,196,991 (996,255) (6,605,604) 5,490,400 Net capital assets $ 52,962,986 $ 1,919,590 $ (1,015,689) $ $ 53,866,887 NOTE 3 CASH AND EQUITY IN POOLED INVESTMENTS The City of Tacoma Investment Policy permits investments in certificates of deposit, obligations of the U.S. Treasury, agencies and instrumentalities, bankers acceptances, commercial paper and repurchase and reverse repurchase agreements. Repurchase agreements are settled delivered versus payment. The market value of collateralized securities must exceed the dollar amount of the repurchase agreement by 2% over the term of the agreement. Currently the City participates only in overnight agreements. The underlying collateral must be an investment instrument that the City is authorized to purchase. The Division s cash held by the City Treasurer in the general investment pool is entirely covered by Federal depository insurance or on deposit with financial institutions recognized as qualified public depositories of the State of Washington under the Revised Code of Washington (RCW) Chapter 39. NOTE 4 LONG TERM DEBT Long term debt activity for the year ended December 31, 2006 is as follows: Beginning Defeased or Ending Due Within Balance Additions Refunded Payments Balance One Year Revenue bonds $ 71,935,000 $ 51,700,000 $ (32,220,000) $ (2,770,000) $ 88,645,000 $ 2,935,000 Plus: Unamortized premium 770, ,211 1,000,947 (99,514) 2,193,758 Less: Unamortized discount (271,376) 63,902 40,714 (166,760) Less: Unamortized loss on refunding (2,109,934) (986,786) 307,051 (2,789,669) Total long term debt $ 70,323,804 $ 52,222,211 $ (32,141,937) $ (2,521,749) $ 87,882,329 $ 2,935,000

27 Solid Waste Management Division Notes to Financial Statements Continued The Division s long term debt at December 31 st consists of the following payable from revenues of the Division: 1997 Revenue Refunding Bonds, with interest rates ranging from 5.5% to 6.0%, due in yearly installments of $1,860,000 to $2,935,000 through $ 26,455,000 $ 39,020, Revenue and Refunding Bonds, with interest rates ranging from 4.0% to 5.375%, due in yearly installments of $1,405,000 to $1,695,000 through ,490,000 32,915, Series A Revenue Bonds, with interest rates ranging from 4.25% to 5.0%, due in yearly installments of $455,000 to $4,290,000 through ,385, Series B Revenue Refunding Bonds, with an interest rate of 5.0% due in yearly installments of $340,000 to $6,480,000 through ,315,000 Less: Unamortized discount (166,760) (271,376) Unamortized loss on refunding (2,789,669) (2,109,934) Current portion (2,690,417) (2,539,167) Current portion payable from restricted assets (244,583) (230,833) Plus: Unamortized premium 2,193, ,114 $ 84,947,329 $ 67,553,804 Annual debt service requirements to maturity are as follows: Principal Interest Total Debt Service 2007 $ 2,935,000 $ 4,617,775 $ 7,552, ,265,000 4,441,675 7,706, ,435,000 4,273,875 7,708, ,625,000 4,082,375 7,707, ,830,000 3,880,225 7,710, ,700,000 15,987,619 38,687, ,360,000 9,438,250 38,798, ,495,000 3,019,750 22,514,750 $ 88,645,000 $ 49,741,544 $ 138,386,544 The Division sold par value $29,385,000 of 2006 Series A Revenue Bonds on July 12, 2006 for total proceeds of $29,907,211. The Division received a true interest cost of 4.85 percent on the negotiated sale. The proceeds of the sale will be used to fund $29,535,452 in capital projects in addition to paying $371,759 for costs of issuance, bond insurance, and underwriter s fees.

28 Solid Waste Management Division Notes to Financial Statements Continued On July 12, 2006 the Division used operating cash of $9,977,496 to defease $9,795,000 of the 1997 Revenue Refunding Bonds for a savings of 4.88 percent. Loss on the defeasance was $669,531 and the net impact on long term debt was a decrease of $9,373,511. Additionally, $442,000 was transferred from the bond reserve fund to the bond construction fund Series B Revenue Refunding Bonds, par value $22,315,000, were sold on September 26, 2006 for total proceeds of $23,805,957. The Division received a true interest cost of 4.37 percent on the negotiated sale. The proceeds of the sale and $379,957 in operating cash was used to pay the costs of issuance, bond insurance, and underwriter s fee of $259,998 and refund $22,425,000 of the 2001 Revenue and Refunding Bonds for a savings of 4.22 percent. This transaction resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $1,411,128. This difference is reported in the accompanying financial statements as a loss on refunding. The Division completed this refunding to reduce its total debt service payments by $1,443,979 and to obtain an economic gain (the difference between the present values of the old and new debt service payments) of $784,478. Moody s and Fitch maintained their underlying ratings of A3 and A respectively. Standard and Poor s upgraded the Division from A+ to AA. The fair value of the Division s long term debt is based on quoted market prices. At December 31, 2006, the fair market value of long term debt is $93,464,285 and at December 31, 2005, $76,094,163. As of December 31, 2006, the following outstanding bonds are considered defeased or refunded: Issue Amount 1978 Refuse Utility Revenue Bonds $ 1,370, Refuse Utility Revenue Bonds 7,580, Solid Waste System Revenue Bonds (2001) 39,495,000 $ 48,445,000 These defeased or refunded bonds constitute a contingent liability of the Division only to the extent that cash and investments presently in the control of the refunding trustees are not sufficient to meet debt service requirements and therefore are excluded from the financial statements because the likelihood of additional funding requirements is considered remote. The Division s revenue bonds are secured by net operating revenue and cash and equity in pooled investment balances in the bond and construction funds. The bonds are also subject to certain financial and non financial covenants. NOTE 5 INSURANCE The Division s risk exposure include but are not limited to injuries and property damage due to collection and transfer activities, groundwater contamination, chemical spills and asset damage from earthquakes. Mitigating controls, safety procedures, and emergency and business resumption plans are in place. To the extent damage or claims exceed insured values, rates may be impacted. The City of Tacoma has established a Self Insurance Fund to insure the Division and other divisions within the City for certain losses arising from personal and property damage claims by third parties. The Division is required to make payments to the Self Insurance Fund to cover claims incurred by the Division and administrative expenses of the Fund. The Division s premium payments totaled $357,500 both in 2006 and in In addition, the City maintains an excess general liability policy with limits of $10 million, subject to a self insured retention of $3 million.

29 Solid Waste Management Division Notes to Financial Statements Continued The City has a policy to cover extraordinary workers compensation claims with a limit of $25 million ($1 million deductible), and a property coverage policy with a limit of $483 million replacement cost ($100,000 deductible per occurrence). Earthquake coverage has a three percent per building self insured retention. The Division participates in the City s self insurance program for claims that arise during the normal course of business. Environmental claims generally are paid for out of revenue of the Division and not from the Self Insurance Fund. NOTE 6 TACOMA EMPLOYEES RETIREMENT SYSTEM (TERS, OR THE SYSTEM) Employees of the Division are covered by the Tacoma Employees Retirement System, an actuarially funded system operated by the City. The following information is provided on a city wide basis. The System is a local single employer s defined benefit pension retirement plan covering City of Tacoma employees and administered in accordance with RCW Chapter 41.28, and Chapter 1.30 of the Tacoma City Code. There are 1,431 vested retirees and beneficiaries of deceased retirees currently receiving benefits and 308 vested terminated employees entitled to future benefits but not yet receiving them. Currently, 2,968 active members are part of the System. Basis of Accounting. The financial statements are prepared using the accrual basis of accounting. Employee and employer contributions are recognized as revenues in the period in which employee services are performed and expenses are recorded when the corresponding liabilities are incurred, regardless of when payment is made. Investments. Equity securities, fixed income securities, real estate, and short term investments are all reported at fair market value. Fair market value was determined by our custodian bank utilizing standard industry practices and verified by our performance consultant. No investment in any one corporation or organization exceeded five percent of net assets available for benefits. Contracts. The System has no securities of the employer and related parties included in the plan assets. The System has not made any loans to the employer in the form of notes, bonds or other instruments. Contribution Rates. Covered employees are required by Chapter 1.30 of the Tacoma City Code to contribute 6.44% of their gross wages to the System, and the employer contributes 7.56% for a total of 14.0% of gross wages contributed. Contributions city wide in 2006 totaled $24.9 million ($13.2 million employer contributions and $11.7 million employee contributions). The employer contribution rate is determined by actuarial funding method identified as the ʺentry age cost method.ʺ Pursuant to GASB Statement No. 27, the note disclosures above emphasize the employer disclosures and detailed information presented in an independent CAFR issued by the Retirement System. Further detailed information regarding these disclosures can be found in that report which may be obtained by writing to Tacoma Employees Retirement System, 747 Market Street, Room 1544, Tacoma, Washington Funding Status and Progress. Historical trend information about TERS is presented herewith as supplementary information. This information is based on the most recent actuarial valuation performed, dated January 1, 2005 and is intended to help assess TERS funding status on a going concern basis, and assess progress made in accumulating assets to pay benefits when due, and make comparisons with other public employee retirement systems.