MIDDLETOWN AREA SCHOOL DISTRICT FINANCIAL REPORT JUNE 30, 2018

Transcription

1 FINANCIAL REPORT JUNE 30, 2018

2 CONTENTS INDEPENDENT AUDITOR S REPORT 1-3 Management s Discussion and Analysis 4-17 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Position 18 Statement of Activities 19 Fund Financial Statements: Balance Sheet - Governmental Funds 20 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position 21 Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds 22 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances to the Statement of Activities 23 Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General Fund 24 Statement of Net Position - Proprietary Funds 25 Statement of Revenues, Expenses and Changes in Net Position - Proprietary Funds 26 Statement of Cash Flows - Proprietary Funds 27 Statement of Fiduciary Net Position 28 Statement of Changes in Fiduciary Net Position 29 Notes to Financial Statements 30-70

3 CONTENTS (Continued) REQUIRED SUPPLEMENTARY INFORMATION Schedule of District s Proportionate Share of the Net Pension Liability 71 Schedule of District s Pension Contributions 72 Schedule of Changes in OPEB Liability and Related Ratios - District s Single Employer Plan 73 Schedule of District s Proportionate Share of the Net OPEB Liability - PSERS Cost Sharing Plan 74 Schedule of District s OPEB Contributions - PSERS Cost Sharing Plan 75 SUPPLEMENTARY INFORMATION Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor s Report on Compliance for Each Major Federal Program and Report on Internal Control over Compliance as Required by the Uniform Guidance Schedule of Findings and Questioned Costs Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards 84 Summary Schedule of Prior Year s Audit Findings 85

4 INDEPENDENT AUDITOR'S REPORT Board of School Directors Middletown Area School District Middletown, Pennsylvania Report on the Financial Statements 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 Middletown Area School District, as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the District s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

5 Opinion 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 Middletown Area School District, as of June 30, 2018, and the respective changes in financial position and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As disclosed in Note 1, to the financial statements, the District adopted the provisions of Governmental Accounting Standards Boards ( GASB ) Statement No. 75, Accounting and Financial reporting for Postemployment Benefits Other Than Pensions as of July 1, The District expanded its note disclosures and required supplementary information related to its other post-employment benefits plans. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis on pages 4 through 17 and the required supplementary information as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Middletown Area School District s basic financial statements. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the basic financial statements as a whole. 2

6 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 12, 2018, on our consideration of Middletown Area School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of Middletown Area School District s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Middletown Area School District s internal control over financial reporting and compliance. Camp Hill, Pennsylvania December 12,

7 MANAGEMENT S DISCUSSION AND ANALYSIS Year Ended June 30, 2018 The discussion and analysis of Middletown Area School District s financial performance provides an overall review of the District s financial activities for the fiscal year ended June 30, The intent of this discussion and analysis is to look at the District s financial performance as a whole. Readers should also review the independent auditor s letter, the basic financial statements, the notes to the financial statements, and the supplementary information to enhance their understanding of the District s financial performance. Management s Discussion and Analysis (MD&A) is an element of the reporting model adopted by the Governmental Accounting Standards Board (GASB) in their Statement No. 34 Basic Financial Statements - and Management s Discussion and Analysis - for State and Local Governments issued June Certain comparative information between the current and prior years is required to be presented in the MD&A to present the District s financial performance as a whole. Financial Highlights Key financial highlights for the year ended June 30, 2018, are as follows: In total, net position decreased approximately $9 million. The decrease is related to the treatment of other post-employment benefits. The District was required to implement GASB Statement No. 75 to report other post-employment benefits (OPEB) for the fiscal year ended June 30, In previous years, OPEB were reported under GASB Statement No. 45. Both standards require calculation of a present liability for future non-pension benefits for employees and retirees. Under GASB Statement No. 45, the liability is reported in a footnote to the financial statements with only a portion of the liability recorded in the financial statements. Under GASB Statement No. 75, the full liability is recognized immediately in the financial statements. The amount recorded in the financial statements under GASB Statement No. 45 was based upon an actuarial valuation that accounted for the required annual contribution to fund the benefits plus any unfunded amount amortized over a thirty-year period. The District s OPEB obligation at June 30, 2017 was $917,989. The OPEB obligation at June 30, 2017, was restated under GASB Statement No. 75 as $7,523,957. Beginning with the year ended June 30, 2018, the District was also required to record its proportionate share of the net OPEB liability of the Public School Employees Retirement System (PSERS) under GASB Statement No. 75. The District reported a net OPEB liability for PSERS of $2,653,000 for the year ended June 30, Overall, the net position of governmental activities decreased approximately $9 million. The net position of business-type activities decreased approximately $106,000. Revenues totaled $47.9 million, an increase of approximately $39,000 from the prior fiscal year. General revenues accounted for $36.9 million or 77.1 percent of total revenues. Program specific revenues in the form of charges for services, grants, and contributions accounted for $11.0 million or 22.9 percent of total revenues. The distribution of revenues between general revenues and program specific revenues is consistent with the prior fiscal year. The District had $46.6 million in expenses related to governmental activities, a decrease of approximately $16,000 from the prior year. Of the expenses related to governmental activities, $9.5 million of these expenses were offset by program-specific charges for services, grants, or contributions. General revenues (primarily taxes and subsidies) of $36.9 million were short by $181,000 to fund the remaining cost of programs. Among governmental funds, the general fund had $45.8 million in revenues (approximately the same as the prior fiscal year) and $39.6 million in expenditures (an increase of $1.4 million over the prior fiscal year). The general fund also had $5.3 million (a decrease of $1.9 million) in net other financing uses, primarily consisting of transfers to the debt service fund to meet obligations and to the capital reserve fund for future capital needs. The general fund s fund balance increased by $946,000. 4

8 Using this Annual Report MIDDLETOWN AREA SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS Year Ended June 30, 2018 The District s annual report consists of a series of financial statements and notes to those statements that show information for the District as a whole, its various funds, and its fiduciary responsibilities. The statements are organized in a manner so that the reader might understand the Middletown Area School District. First, the statements show the District as a financial whole by presenting information on a government-wide basis. Then, the statements provide the reader with a detailed look at specific financial activities of the District. The first two statements are government-wide financial statements - the statement of net position and the statement of activities. These statements provide information about the financial status and operations of the entire District on the accrual basis of accounting, which is different than the basis of accounting used for budgeting and reporting in the governmental funds. Fund financial statements provide the next level of detail, showing the District s most significant funds in separate columns and non-major funds totaled in one column. For governmental funds, these statements tell how the services were financed in the short-term as well as what remains for future spending. Proprietary fund statements show the financial information for activities operated like a business - the food service fund and the WMSS radio station fund. Fiduciary fund statements present information for relationships where the District acts solely as a trustee or agent of the party to whom the resources belong. The notes to financial statements further explain the information presented in the financial statements and provide more detailed data. The notes are an integral part of the financial statements. The notes are followed by a section of supplementary information that further explains and supports the financial statements with additional post-employment benefits plan information. Reporting the District as a Whole The analysis of the District as a whole in the MD&A begins on page 7. While this report contains the large number of funds used by the District to provide programs and activities, the view of the District as a whole looks at all financial transactions and asks the question, Is the condition of the District better or worse as a result of the operations during the school year? The government-wide statements, which begin on page 18, present information about the District as a whole in a way that helps to answer this question. The statement of net position includes all of the District s assets, deferred inflows of resources, deferred outflows of resources and liabilities. All of the current year s revenues and expenses are accounted for in the statement of activities regardless of when cash is received or paid. Both statements are prepared on the accrual basis of accounting, which is similar to the method used by most privatesector companies. The government-wide statements report the District s net position - assets plus deferred outflows of resources less liabilities and deferred inflows of resources, as reported in the statement of net position - as one way to measure the District s financial health, or financial position. Over time, increases or decreases in the District s net position - as reported in the statement of activities - are used as one indicator of whether the District s financial health is improving or deteriorating. The District exists to provide services, primarily educational, to its students, so it does not have the profit-generation goal of privatesector companies. For this reason, the reader must also consider nonfinancial factors, such as the quality of the education provided, when assessing the overall health of the District. 5

9 Reporting the District as a Whole (Continued) MIDDLETOWN AREA SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS Year Ended June 30, 2018 In the government-wide financial statements, the District s activities are divided into two categories: Governmental Activities - Most of the District s programs and services are reported under this category including instruction, support services, operation and maintenance of plant services, pupil transportation, and extracurricular activities. These activities are primarily financed by local taxes and subsidies and grants from the Federal and state governments. Business-Type Activities - The District operates a food service program whereby it charges students, staff, and other users in order to cover the costs of the food provided. The District also operates a student-run radio station, which is primarily funded by charges for services, contributions and fundraisers. Reporting the District s Most Significant Funds The analysis of the District s major funds in the MD&A begins on page 10. The fund financial statements, which provide detailed information about the most significant funds - not the District as a whole, begin on page 20. The District s funds are divided into three broad types - governmental, proprietary and fiduciary. Each type of fund uses a different accounting approach. Governmental Funds - Most of the District s activities are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending in future periods. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. Governmental fund statements provide a detailed short-term view of the District s general government operations and the basic services it provides. Governmental fund information is used to determine whether there are more or less financial resources that can be spent in the near future to finance District programs. The relationship (or differences) between governmental activities (as reported in the statement of net position and the statement of activities) and governmental funds is described in the financial statements on pages 21 and 23. Proprietary Funds - Proprietary funds consist solely of activities treated as business-type activities in the government-wide financial statements. As the same basis of accounting is used by proprietary funds and business-type activities, the information presented is essentially the same. The fund financial statements do provide some additional detail and information, such as cash flows. Fiduciary Funds - The District is the trustee, or fiduciary, for some scholarship funds. All of the District s fiduciary activities are reported in separate statements beginning on page 28. These activities are excluded from the District s other statements because the District cannot use these assets to finance its operations. 6

10 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 Financial Analysis of the District as a Whole Recall that the statement of net position provides the perspective of the District as a whole. Table 1 provides a comparison of the District s net position at June 30, 2018 and Table 1 - Net Position Governmental Activities Business-Type Activities Total Activities Assets Current Assets $ 28,290,028 $ 28,681,570 $ 501,789 $ 473,638 $ 28,791,817 $ 29,155,208 Capital & Non-Current Assets 84,696,590 86,141, , ,575 85,375,395 86,910,993 Total assets $ 112,986,618 $ 114,822,988 $ 1,180,594 $ 1,243,213 $ 114,167,212 $ 116,066,201 Deferred Outflows of Resources $ 13,550,097 $ 12,783,414 $ 27,325 $ 31,000 $ 13,577,422 $ 12,814,414 Liabilities Current Liabilities $ 4,544,428 $ 4,427,539 $ 49,833 $ 57,644 $ 4,594,261 $ 4,485,183 Long-Term Liabilities 134,624, ,912,232 65,899 19, ,689, ,931,232 Total liabilities $ 139,168,456 $ 131,339,771 $ 115,732 $ 76,644 $ 139,284,188 $ 131,416,415 Deferred Inflows of Resources $ 603,329 $ 541,000 $ 773 $ - $ 604,102 $ 541,000 Net Position Net investment in capital assets $ 26,831,975 $ 24,537,403 $ 678,805 $ 769,575 $ 27,510,780 $ 25,306,978 Restricted 10,231,303 11,876, ,231,303 11,876,355 Unrestricted (50,298,348) (40,688,127) 412, ,994 (49,885,739) (40,260,133) Total net position $ (13,235,070) $ (4,274,369) $ 1,091,414 $ 1,197,569 $ (12,143,656) $ (3,076,800) The District s net position consists of $27.5 million invested in capital assets (buildings, land and equipment). The restricted net position of $10.2 million consists of the proceeds from the sale of one of the District s elementary school buildings that must be used for payment of debt service on the school building that replaced the property that was sold and balances in capital projects funds that are restricted for capital projects. The deficit unrestricted net position of $49.9 million is combined of designated and undesignated amounts. The designated balances are amounts set aside to offset future employer retirement contribution increases, to offset future debt service, to offset health insurance cost increases, to pay health insurance terminal liability costs, to offset future special education costs and to offset future technology replacement costs. 7

11 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 Financial Analysis of the District as a Whole (Continued) The results of this year s operations as a whole are reported in the statement of activities on page 19. All expenses are reported in the first column. Specific charges, grants, revenues, and subsidies that directly relate to specific expense categories are listed as program revenues in the second, third, and fourth columns. The fifth and sixth columns show the amount of the District s governmental and business-type activities, respectively, that must be supported by other general revenues. The District s two largest general revenues are the basic education subsidy provided by the state and the various taxes paid by residents and employers within the District. Table 2 takes the information from the statement of activities, rounds the numbers, and rearranges them slightly to display total revenues for the year. Table 2 - Changes in Net Position Governmental Activities Business-Type Activities Total Revenues Program Revenues: Charges for Services $ 605,079 $ 686,299 $ 497,799 $ 476,784 $ 1,102,878 $ 1,163,083 Operating Grants and Contributions 8,298,873 7,660, , ,331 9,238,694 8,562,413 Capital Grants and Contributions 636, , , ,422 1,211,295 General Revenue: Property Taxes 21,081,913 21,917, ,081,913 21,917,176 Other Taxes 6,145,151 6,812, ,145,151 6,812,157 Grants, Subsidies, and Contributions 8,966,575 7,949, ,966,575 7,949,713 Investment Earnings 375, ,915 2,796 2, , ,262 Miscellaneous Income 744-1, , Gain (Loss) on Disposition of Capital Assets 72,232 52,121-4,858 72,232 56,979 Special item - LEA joint venture buy-in 278, ,589 - Total revenues 46,460,648 45,867,379 1,442,033 1,995,998 47,902,681 47,863,377 Expenses Instruction 28,888,430 28,363, ,888,430 28,363,034 Support Services: Instructional Student Support 4,358,281 4,177, ,358,281 4,177,652 Administrative and Financial Support Services 4,770,658 4,828, ,770,658 4,828,694 Operation and Maintenance of Plant Services 3,980,813 3,770, ,980,813 3,770,259 Pupil Transportation 1,495,639 1,487, ,495,639 1,487,633 Student Activities 1,560,335 1,436, ,560,335 1,436,721 Community Services 24,529 24, ,529 24,858 Interest on Long-Term Debt 1,559,250 2,565, ,559,250 2,565,362 Food Services - - 1,461,478 1,438,815 1,461,478 1,438,815 Radio Station ,674 49,481 49,674 49,481 Transfers 3,859 3,842 (3,859) (3,842) - - Total expenses 46,641,794 46,658,055 1,507,293 1,484,454 48,149,087 48,142,509 Changes in net position (181,146) (790,676) (65,260) 511,544 (246,406) (279,132) Net position - beginning (as previously reported) (4,274,369) (3,483,693) 1,197, ,025 (3,076,800) (2,797,668) Prior period adjustment (see Note 1) (8,779,555) - (40,895) - (8,820,450) - Net position - beginning (restated) (13,053,924) (3,483,693) 1,156, ,025 (11,897,250) (2,797,668) Net position - ending $ (13,235,070) $ (4,274,369) $ 1,091,414 $ 1,197,569 $ (12,143,656) $ (3,076,800) 8

12 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 Financial Analysis of the District as a Whole (Continued) Table 2 shows that total revenues were less than total expenses for governmental activities of the District by $181,000, total revenues were less than total expenses for business-type activities by $65,000 and total revenues were less than total expenses for all activities by $246,000 for the year ended June 30, It should be noted that although the District is required to present government-wide information using the accrual basis of accounting, as detailed in Table 2, the District must still prepare its general fund budget and report its operations under the modified accrual basis of accounting used in the fund financial statements. Operations in relation to the District s budget will be discussed later in this report under the Analysis of the District by Funds section. The statement of activities breaks the expenses of the District into functions or programs. These expenses are offset by program revenues (charges for services, grants, and contributions) before the general revenues of the District are applied. Table 3 shows the District s governmental activities, the expenses by program, as well as each program s net cost (the total cost less the applicable program revenues). It also shows the net costs offset by other unrestricted grants, subsidies and contributions to identify the cost of these services that must be supported by local tax revenue and other miscellaneous revenues. Table 3 - Total and Net Cost of Program Services - Governmental Activities Total Cost Net Cost of Services of Services Instruction $ 28,888,430 $ 28,363,034 $ 22,314,824 $ 22,244,993 Support Services: Instructional Student Support 4,358,281 4,177,652 3,684,011 3,548,077 Administrative and Financial Support Services 4,770,658 4,828,694 4,212,702 4,323,152 Operation and Maintenance of Plant Services 3,980,813 3,770,259 3,682,140 3,324,681 Pupil Transportation 1,495,639 1,487, , ,873 Student Activities 1,560,335 1,436,721 1,354,369 1,237,104 Community Services 24,529 24,858 11,428 16,744 Interest on Long-Term Debt 1,559,250 2,565, ,960 2,096,292 Total Expenses $ 46,637,935 $ 46,654,213 $ 37,097,561 $ 37,705,916 Less: Unrestricted Grants, Subsidies and Contributions 8,966,575 7,949,713 Total Required Local Taxes and Other General Revenues $ 28,130,986 $ 29,756,203 9

13 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 Financial Analysis of the District as a Whole (Continued) The dependence upon local taxes for governmental activities is apparent. Program revenue provides only 22.8% of the funding needed for instruction, the major program area of the District. Even if all of the unrestricted grants, subsidies, and contributions are used toward instruction, there remains a need for almost 50% of the funding for instruction to come from local taxes and other general revenues. Put another way, Table 3 reveals that almost ½ of every tax dollar is used to cover the cost of instruction. The community, as a whole, by far provides the primary financial support for the District s students. The District has two business-type activities - food service and the radio station. The total cost of food service operations was approximately $1.5 million. These costs were offset by charges for services (primarily fees paid by students and employees for lunches and breakfasts consumed) of approximately $454,000, operating grants (Federal and state participation in the National School Lunch and National School Breakfast Programs) of approximately $938,000. The total cost of radio station operations was approximately $50,000. These costs were offset by charges for services, contributions and fundraising of approximately $45,000. Generally, the business-type activities receive no support from local tax revenues; however, the radio station received approximately $3,800 in support for engineering and broadcast costs. Financial Analysis of the District by Funds As previously noted, the District uses a number of funds, in accordance with the Pennsylvania Public School Code, to control and manage resources for particular purposes. Information about the District s major governmental funds starts on page 20. These funds are accounted for using the modified accrual basis of accounting. Combined, the governmental funds had total revenues of $45.9 million, expenditures of $47.4 million and net other financing sources of approximately $689,000. The net change in fund balance for the year was a decrease of approximately $763,000. The decrease in fund balance is primarily related to capital improvements during the current fiscal year paid by the capital projects fund using resources accumulated in prior years. General Fund The general fund increased its fund balance by $946,000 to a total of $13.4 million. The District had budgeted for expenditures to exceed revenues requiring the use of fund balance for non-recurring or specific expenditures as part of the District s multi-year planning. The positive variance is attributed to revenues being realized beyond budgeted amounts. These variances are discussed in the Budget Highlights sections of this report. Nonspendable fund balance in the amount of $23,000 corresponds with the prepaid expense amount included in assets. Restricted fund balance in the amount of $467,000 is equal to the proceeds from the sale of an elementary school that must be used toward debt service on the replacement school building. The District has committed fund balance in accordance with GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, to identify and protect resources to address future costs. The District has committed $5.7 million to offset future rate increases in employer retirement contributions to the PSERS system. The District has committed $1.3 million to pay future debt service costs. The District has committed $228,000 to pay terminal liability costs associated with a prior health insurance funding arrangement. The District has committed $1.7 million to stabilize against future health insurance cost increases. The District has also committed $208,000 for technology equipment replacement costs and $87,000 for future special education costs. The District s remaining fund balance of $3.6 million is recorded as unassigned. 10

14 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 Financial Analysis of the District by Funds (Continued) In accordance with Act 1 of 2006 legislation, the District may not adopt a general fund budget that would result in the unassigned fund balance exceeding 8% of the budgeted expenditures for that fiscal year. The District s current unassigned fund balance is 7.5% of the budgeted expenditures. The District s total fund balance provides resources to deal with increasing costs, unexpected costs and future liabilities. The unassigned fund balance also provides resources to pay obligations in the next fiscal year while revenues are being collected. Maintaining a healthy fund balance is important to the District s favorable bond rating and to allow the District to address unanticipated financial challenges. Debt Service Fund The District does not typically maintain a fund balance in the debt service fund. The District makes transfers from its general fund on annual basis to pay the principal and interest obligations for the current fiscal year. Capital Projects Fund The District s capital projects fund consists of the capital reserve fund and the 2014 construction fund. The 2014 construction fund accounts for the costs of constructing a new high school and related athletic facilities. In total, the fund balance for the capital projects fund decreased by $1.7 million to $9.8 million. The District uses the capital reserve fund for major repair and small construction projects that have been identified in the District s facility planning and also to pay a portion of the debt service for the new high school using resources that were previously accumulated in order to avoid the need for a millage increase in the general fund. Expenditures in the capital reserve fund totaled $1.8 million for capital improvements. Transfers from the general fund of $72,000 and interest earnings of $99,000 were less than the expenditures, resulting in a decrease of $1.6 million in the fund balance of the capital reserve fund. The fund balance of the 2014 construction fund decreased by $63,000, reflecting the use of financing resources obtained in a prior fiscal year for the construction and furnishing costs of the new high school. The remaining fund balance of $411 in the 2014 construction fund is expected to be fully expended during the school year. The District s proprietary funds were discussed earlier as business-type activities. significant change in the operation or activity of the District s fiduciary funds. There was no 11

15 Budget Highlights MIDDLETOWN AREA SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 The District s budget is prepared according to Pennsylvania law and is based on the modified accrual basis of accounting. The only fund with a formally adopted budget is the general fund. During the fiscal year, the District revises its budget as it attempts to deal with unexpected changes in revenues and expenditures. The final amendment to the budget was finalized after year-end, which is not prohibited by state law. A schedule showing the District s original and final budget amounts compared with actual results is shown on page 24 of this report. Total general fund revenue was approximately $1.4 million higher than budgeted. Expenditures were approximately $25,000 less than budgeted. In addition, the District s other financing sources were higher than other financing uses by $59,000. The end result is that instead of using $575,000 of fund balance as budgeted, the District added $946,000 to its fund balance. Relative to the budget, the following significant variations occurred during the fiscal year: Current real estate tax collections exceeded the budget by approximately $207,000 or 1.0 percent. The District budgeted to collect 94.0 percent of real estate taxes during the fiscal year based upon historical trends to account for taxpayers paying less than the face amount in the discount period and for taxpayers turned over to Dauphin County Tax Claim Bureau for delinquent tax collection. Actual collection results revealed a 95.0 percent collection rate. Earned income tax collections exceeded the budget by approximately $219,000 or 4.5 percent. The earned income tax collector hired by the Dauphin County Tax Collection Committee (DCTCC) has performed very well in its collection efforts for the earned income tax with collections regularly exceeding budget estimates. This is partly due to the fact that a budget is developed several months before accrued revenues for the immediate prior year are actually known. Delinquent earned income tax collections exceeded the budget by approximately $57,000 or percent. The budget was based upon historical trends. The District s earned income tax collector made a successful concerted effort to collect taxes that had not been paid. Interest earnings exceeded the budget by $134,000 or 95.7 percent. Interest rates more than doubled during the school year. The budget did not reflect such an extreme change in the interest rates. The District recorded tuition revenue of approximately $481,000 that far exceeded the budget estimate of $300,000. The District participates in a consortium with area school districts to provide special education services to the students within the consortium in order to provide the best possible services at the most efficient cost. The District educates more students in the consortium than any other school district. The District educated more students than originally anticipated at the time of budget development. The District received unbudgeted refunds of prior year expenditures in the amount of $302,000 consisting of a refund from Dauphin County Technical School for surplus operational results in in the amount of $216,000 and refunds from other vendors for expenditures recorded in prior fiscal years. 12

16 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 Budget Highlights (Continued) The District received $135,000 more in basic education subsidy funding from the Pennsylvania Department of Education than budgeted. Pennsylvania s budget for the fiscal year was not adopted until after the District adopted its budget. The District did not have sufficient information to anticipate the amount of an increase in funding from the state when its budget was adopted. The District received approximately $44,000 more in special education subsidy funding than budgeted. As noted above, the District developed its budget with the expectation that there would be no changes in the funding provided by the state. The District received approximately $149,000 more than budgeted in subsidies to offset required employer contributions to the Public School Employees Retirement System (PSERS). The District budgets to receive subsidies equal to 50% of its budgeted expenditures, which is the formula used for employees that are considered existing (enrolled in the PSERS system prior to June 30, 1994). The District receives a higher reimbursement for new employees based upon the District s current market value / personal income aid ratio. Medical assistance reimbursements exceeded budgeted estimates by approximately $106,000 or 88.5 percent. The District incurred special education costs that were not budgeted to address student needs and utilized the medical assistance account to cover the costs of these expenditures. The District received proceeds from equipment sales in the amount of $88,000 that was not budgeted. The majority of the proceeds were received from the sale of formally leased technology equipment to a reseller providing certification that all personal information had been removed from the devices. The District committed the proceeds received toward future technology equipment replacements. The District received $279,000 in unbudgeted revenue as its proportionate share of Harrisburg School District joining the Dauphin County Technical School, of which Middletown Area School District is a member district. The District did not budget for its share of the buy-in as the amount that would be received was not known at the time of budget development. The District s interfund transfers exceeded budget estimates by approximately $314,000 or 5.9 percent. General fund revenue in excess of budget allowed the District to forego use of the capital reserve fund to pay a portion of its debt service obligations. Accordingly, transfers to the debt service fund from the general fund were $315,000 more than the budget. 13

17 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 Capital Assets and Debt Administration Section 1.01 Capital Assets At June 30, 2018, the District had total assets of $85.4 million in land, buildings, equipment and books, with $84.7 million of that figure in governmental activities. Table 4 shows the fiscal 2018 balances compared to July 1, 2017: Table 4 - Capital Assets, Net of Depreciation at June 30 Governmental Activities Business-Type Activities Total Activities Land and land Improvements $ 5,715,536 $ 5,360,495 $ - $ - $ 5,715,536 $ 5,360,495 Buildings and building Improvements 75,117,259 76,920, ,117,259 76,920,738 Furniture and equipment 3,824,480 3,830, , ,575 4,503,285 4,599,982 Construction-in-progress 39,315 29, ,315 29,778 $ 84,696,590 $ 86,141,418 $ 678,805 $ 769,575 $ 85,375,395 $ 86,910,993 Net capital assets declined by approximately $1.5 million during fiscal 2018 as additions of $2.5 million were less than the depreciation expense of $4.0 million. Additions of $1.7 million from the capital reserve fund included a mansard roof replacement at the Administration Building, parking lot paving at several District buildings, chiller renewals at Fink Elementary and Reid Elementary, hot water line replacements at Fink Elementary School, chiller replacement at Kunkel Elementary, caulking at Kunkel Elementary, concrete repairs at Kunkel Elementary, door replacement at Kunkel Elementary, an addition to the scoreboard at the High School, retention pond remediation at the High School, weight room equipment replacement at the High School, installation of outdoor concession stands at two athletic fields, HVAC unit replacement at the Operations Building, security system replacement at Reid Elementary, and softball field renovations. Additions of $827,000 from the general fund included technology equipment, textbooks, athletic equipment, grounds equipment, music equipment, special education instructional equipment, custodial equipment, and STEM instructional equipment. Deletions to capital assets of approximately $677,000 during fiscal 2018 consisted primarily of the disposition of leased technology equipment that was replaced with new units. The District received $88,000 for the technology equipment that was sold. 14

18 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 Capital Assets and Debt Administration (Continued) Section 1.02 Debt Administration At June 30, 2018, the District had $53.8 million in general obligation bonds, general obligation notes and capital appreciation bonds outstanding; $4.3 million due within one year. Table 5 summarizes bonds and notes outstanding: Table 5 - Outstanding Debt at June 30 Governmental Activities General Obligation Bonds: Series A of 2014 $ - $ 27,810,000 Series A of ,725,000 - $ 28,725,000 $ 27,810,000 General Obligation Notes: Series of 2008 $ 2,135,000 $ 2,840,000 Series of ,445,000 14,965,000 $ 13,580,000 $ 17,805,000 Capital Appreciation Bonds: Series B of 2014 $ 11,462,476 $ 11,462,476 Total Outstanding Debt $ 53,767,476 $ 57,077,476 The District s outstanding debt decreased by $3.3 million during fiscal 2018 related to principal payments made on the outstanding debt and the refunding of the Series A of 2014 General Obligation Bonds with Series A of 2017 General Obligation Bonds. On October 24, 2016, the District adopted a parameters resolution to issue General Obligation Bonds to refund all or a portion of the Series A of 2014 General Obligation Bonds to obtain interest savings. The bonds were refunded on December 7, 2017 with net present value savings of $2.2 million realized. In its recent bond refunding, the District retained a municipal bond rating of AA- by S&P Global Ratings. In accordance with the Local Government Unit Debt Act, the District s borrowing capacity is capped at 225% of the average net revenues for the prior three fiscal years. The District estimates that its current borrowing limit is approximately $99.5 million. The District estimates that its remaining borrowing capacity is $44.4 million. The District has completed capital improvements or new construction on many of its school buildings. 15

19 The District s Future MIDDLETOWN AREA SCHOOL DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 The District s current comprehensive plan approved by the Pennsylvania Department of Education identifies the following focus areas for the District - identify academically at-risk students early and provide the necessary supports; utilize standards aligned assessments to monitor student achievement and adjust instructional practices; ensure consistency in instructional delivery throughout the District; and establish systems to foster community support for a positive school climate and participation in the learning process. The fiscal year began with a new program in place at the secondary level to address the needs of a population of at-risk students. Middletown Academy provides an instructional environment for students that might have been placed outside of the District in an alternative-education setting. A dedicated administrator supervises this program along with the District s in-house cyber education program. A team of high school teachers circulate into the classroom setting to provide core instruction in addition to the online learning platform that is used. The Middletown Academy is another example of how the District has embraced technology to provide support to its educational program. Although not addressed in the District s comprehensive plan, one of the District s five goals for the fiscal year was to continue improvement of its instructional and athletic facilities. The District has had a long-standing emphasis on its learning environments with the recognition that they play an important part in academic achievement. Currently, the District has three school buildings that are less than 20 years old. The District opened a brand new high school at the beginning of the fiscal year. This state-of-the-art facility provides the space that is necessary for a high school today and the imagined future, while not imposing a burden on the District s taxpayers. The District s thoughtful planning more than 10 years ago resulted in the construction of a new building with no additional tax burden to the residents. A new middle school opened at the beginning of the fiscal year and the newest of three elementary schools, Robert G. Reid Elementary School, opened at the beginning of the fiscal year. The District s other school buildings consist of Lyall J. Fink Elementary School that was constructed in the 1960 s and received system updates and replacement windows and wall panels several years ago and John C. Kunkel Elementary School that was also constructed in the 1960 s. The Kunkel Elementary School has received minor improvements over the last several years, but is the next building that requires a more extensive renovation. The District filed for state reimbursement for a renovation project at Kunkel Elementary School in May 2016 prior to the implementation of another moratorium on reimbursable construction projects by the state. In recent months, the District has initiated conversations with its financial consultant and architect regarding the renovation project at Kunkel Elementary School that could alter the plans that were identified when the District filed for construction reimbursement in May Properties that surround Kunkel Elementary School have been listed for sale, which could change the school s neighbors from a farm to a more commercial enterprise as the school is located in an area that has been becoming increasing industrialized with warehouse space. The District owns additional land where three of its school buildings are located and has considered whether construction of a new building on that site might better serve the District s needs into the future. The School Board is in the process of compiling information from staff and the community to study a potential change in the elementary grade configuration along with the location of its elementary buildings. The District s attention to its facilities is also evident in the maintenance projects that were completed using the capital reserve fund as well as the complete renovation of the District s softball field. The District engaged an athletic field specialist to develop a master plan to aid the District in identifying additional project(s) that would help to meet the District s needs and sustain its athletic programs. 16

20 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) Year Ended June 30, 2018 The District s Future (Continued) The District has also made progress on the other goals for the fiscal year that focus on student achievement, climate, and fiscal accountability. The District s attention to fiscal accountability is evident in the adoption of a budget for the fiscal year with no tax increase for the fourth year in a row. This was accomplished through an additional refinement of the District s budget process that analyzed costs at the school building level so that the District could ensure that dollars were being focused in areas with the greatest need with the anticipation that would generate the best outcomes. The District prides itself on its success in living within its means in recent years while not giving up on the important goal of increasing student achievement. The District takes seriously its mission to instruct the leaders of tomorrow, but recognizes the need to not be burdensome on the residents of today. In conclusion, Middletown Area School District has committed itself to financial excellence that corresponds with its mission of educational excellence. Contacting the District s Financial Management This financial report is designed to provide our citizens, taxpayers, parents, students, investors, and creditors with a general overview of the District s financial operations and to show the District s accountability for the money it manages. If you have questions about this report or wish to request additional financial information, please contact the Chief Financial Officer/Board Secretary, David A. Franklin, CPA, PRSBA, at Middletown Area School District, 55 West Water Street, Middletown, PA