City of Niles Berrien County, Michigan FINANCIAL STATEMENTS. September 30, 2012

Transcription

1 Berrien County, Michigan FINANCIAL STATEMENTS September 30, 2012

2 TABLE OF CONTENTS September 30, 2012 Page INDEPENDENT AUDITOR S REPORT MANAGEMENT S DISCUSSION AND ANALYSIS i-ii iii-xi BASIC FINANCIAL STATEMENTS Government-wide Financial Statements Statement of Net Assets 1 Statement of Activities 2 Fund Financial Statements Balance Sheet - Governmental Funds 3 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets 4 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds 5 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of the Governmental Funds to the Statement of Activities 6 Statement of Net Assets - Proprietary Funds 7-8 Statement of Revenues, Expenses, and Changes in Fund Net Assets - Proprietary Funds 9-10 Statement of Cash Flows - Proprietary Funds Statement of Assets and Liabilities - Fiduciary Fund 15 Statement of Changes in Fiduciary Net Assets - Fiduciary Fund 16 Combining Statement of Net Assets - Component Units 17 Combining Statement of Activities - Component Units 18 Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Budgetary Comparison Schedule - General Fund 42 Schedules of Funding Progress 43 Schedules of Employer Contributions 44 Notes to Required Supplementary Information OTHER SUPPLEMENTARY INFORMATION Combining Balance Sheet - General Fund By Activity 47 Combining Schedule of Revenues, Expenditures, and Changes in Fund Balances - General Fund By Activity 48 Combining Balance Sheet - Nonmajor Governmental Funds Combining Statement of Revenues, Expenditures, and Changes in Fund Balances - Nonmajor Governmental Funds Combining Statement of Net Assets - Nonmajor Enterprise Funds 57 Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets - Nonmajor Enterprise Funds 58 Combining Statement of Cash Flows - Nonmajor Enterprise Funds 59 Combining Statement of Net Assets - Internal Service Funds 60 Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets - Internal Service Funds 61 Combining Statement of Cash Flows - Internal Service Funds 62 Combining Statement of Fiduciary Assets and Liabilities - Agency Funds 63

3 TABLE OF CONTENTS - CONTINUED September 30, 2012 Page COMPONENT UNIT FUND Downtown Development Authority Balance Sheet 65 Reconciliation of the Balance Sheet to the Statement of Net Assets 66 Statement of Revenues, Expenditures, and Changes in Fund Balance 67 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balance of the Governmental Fund to the Statement of Activities 68 DIAL-A-RIDE TRANSPORTATION FUND SCHEDULES Schedule of Local Revenues 69 Schedule of Expenditures of Federal and State Awards 70 Schedule of Operating and Contract Expenses 71 Urban Regular Service Revenue Report (OAR Schedule 4R) 72 Urban Regular Service Expense Report (OAR Schedule 4E) 73 Urban Regular Service Nonfinancial Report (OAR Schedule 4N) (unaudited) 74 Operating Assistance Calculation 75

4 Principals Dale J. Abraham, CPA Michael T. Gaffney, CPA Steven R. Kirinovic, CPA Aaron M. Stevens, CPA Eric J. Glashouwer, CPA Alan D. Panter, CPA William I. Tucker IV, CPA ABRAHAM & GAFFNEY, P.C. Certified Public Accountants 3511 Coolidge Road Suite 100 East Lansing, MI (517) FAX: (517) INDEPENDENT AUDITOR S REPORT To the Honorable Mayor and Members of the City Council City of Niles, Michigan We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Niles, Michigan (the City), as of and for the year ended September 30, 2012, which collectively comprise the City s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the Niles Housing Commission, which represents 95% and 86%, respectively of the total assets and revenues of the component units. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinions, insofar as they relate to the amounts included for the Niles Housing Commission, are based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component unit, each major fund, and the aggregate remaining fund information of the City of Niles, Michigan, as of September 30, 2012, and the respective changes in financial position, and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated February 27, 2013, on our consideration of the City of Niles internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. East Lansing Auburn Hills St. Johns - i -

5 Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, budgetary comparison information, schedules of funding progress, and schedules of employer contributions, as identified 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. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Niles financial statements as a whole. The combining and individual nonmajor fund financial statements and Michigan Department of Transportation Schedules are presented for purposes of additional analysis and are not a required part of the financial statements. The combining and individual nonmajor fund financial statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information except for the Michigan Department of Transportation Schedule marked unaudited, has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. ABRAHAM & GAFFNEY, P.C. Certified Public Accountants February 27, ii -

6 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 The following is a discussion and analysis of City of Niles (the City s) financial performance and position, providing an overview of the activities for the year ended September 30, This analysis should be read in conjunction with the Independent Auditors Report and with the City s financial statements, which follow this section. Government-wide: FINANCIAL HIGHLIGHTS Total net assets were $40,249,557 (excluding component units). Governmental activities net assets were $11,225,013. Business-type activity net assets were $29,024,544. Component Unit net assets were $2,090,103. Fund Level: At the close of the fiscal year, the City s governmental funds reported a combined ending fund balance of $4,959,221 with $2,969,662 being nonspendable, restricted, committed or assigned for specific purposes (cemetery perpetual care and capital projects). The General Fund realized $252,580 less in revenues than anticipated for the fiscal year. The General Fund operations also expended $83,159 less than appropriated. Overall, the General Fund balance decreased by $53,121 to $2,037,602. Capital and Long-term Debt Activities: The total additions to the capital asset schedule for the primary government were $1,801,407. Significant capital purchases during the year included: the purchase and renovation of a new City Administration building ($461,882), rebuild of Southside substation ($42,029), construction of a fuel farm facility at Jerry Tyler Memorial Airport ($297,280), purchase of two (2) police cars ($46,996), purchase of a new sewer truck ($285,600), and Waste Water plant upgrades ($438,132). The total long-term debt for the primary government was $8,633,488, a decrease of $569,719 from the prior year. This decrease was largely due to the long-term debt deletion of $310,000 in the 1998 Building Authority Refunding Bonds, which have been paid in full, and $285,000 in the 2004 Limited Tax General Obligation Bonds in accordance with established debt amortization schedules. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the City s annual financial report. The annual financial report of the City consists of the following components: 1) Independent Auditor s Report; 2) Management s Discussion and Analysis and 3) the Basic Financial Statements (government-wide financial statements, fund financial statements, notes to the financial statements), 4) Required Supplementary Information such as budget to actual comparisons for the General Fund and major Special Revenue Funds, and 5) Other Supplementary Information including combining financial statements for all nonmajor governmental funds and other funds and other financial data. Government-wide Financial Statements (Reporting the City as a Whole) The set of government-wide financial statements are made up of the Statement of Net Assets and the Statement of Activities, which report information about the City as a whole, and about its activities. Their purpose is to assist in answering the question, is the City, in its entirety, better or worse off as a result of this fiscal year s activities? These statements, which include all nonfiduciary assets and liabilities, are reported on the accrual basis of accounting, similar to a private business. This means revenues are accounted for when they are earned and expenses are accounted for when incurred, regardless of when the actual cash is received or disbursed. - iii -

7 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 The Statement of Net Assets (page 1) presents all of the City s assets and liabilities, recording the difference between the two as net assets. Over time, increases or decreases in net assets measure whether the City s financial position is improving or deteriorating. The Statement of Activities (page 2) presents information showing how the City s net assets changed during 2011/2012. All changes in net assets are reported based on the period for which the underlying events giving rise to the change occurs, regardless of the timing of related cash flows. Therefore, revenue and expenses are reported in these statements for some items that will only result in cash flows in future financial periods, such as uncollected taxes and earned but unused employee vacation leave. Both statements report the following activities: Governmental Activities - Most of the City s basic services are reported under this category. Taxes, charges for services and intergovernmental revenue primarily fund these services. Most of the City s general government departments, public safety, public works, economic development, city improvements, street improvements, recreation activities, and other City wide elected official operations are reported under these activities. Business-type Activities - These activities operate like private businesses. The City charges fees to recover the cost of the services provided. The Electric Light and Power System, the Sewage Disposal System and Water System Fund and are examples of these activities. Discretely Presented Component Units - Discretely Presented Component units are legally separate organizations for which the City Council and Administration appoints a majority of the organization s policy board and there is a degree of financial accountability to the City. One organization is included as a discretely presented component unit: the Downtown Development Authority. As stated previously, the government-wide statements report on an accrual basis of accounting. However, the governmental funds report on a modified accrual basis. Under modified accrual accounting, revenues are recognized when they are measurable and available to pay obligations of the fiscal period; expenditures are recognized when they are due to be paid from available resources. Because of the different basis of accounting between the fund statements (described below) and the government-wide statements, pages 5 and 8 present reconciliations between the two statement types. The following summarizes the impact of transitioning from modified accrual to full accrual accounting: Capital assets used in governmental activities (depreciation) are not reported on the fund financial statements of the governmental fund. Capital assets and depreciation expense are reported on the government-wide statements. Capital outlay spending results in capital assets on the government-wide statements, but is reported as expenditures on the fund financial statements of the governmental funds. Internal service funds are reported as governmental activities on the government-wide statements, but are reported as proprietary funds on the fund financial statements. Long-term liabilities, such as amounts accrued for sick and annual leave (compensated absences), etc. appear as liabilities on the government-wide statements; however, they will not appear on the fund financial statements unless current resources are used to pay a specific obligation. Long-term debt proceeds are reported as liabilities on the government-wide statements, but are recorded as other financing sources on the fund financial statements. - iv -

8 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 Fund Financial Statements (Reporting the City's Major Funds) The fund financial statements, which begin on page 3, provide information on the City s significant (major) funds, and aggregated nonmajor funds. A fund is a fiscal and accounting entity with a self-balancing set of accounts that the City uses to keep track of specific sources of funding and spending for a particular purpose. Traditional users of governmental financial statements will find the Fund Financial Statements presentation more familiar. The basic financial statements report major funds as defined by the Government Accounting Standards Board (GASB) in separate columns. Statement 34 defines a major fund as the General Fund, and any governmental or enterprise fund which has either total assets, total liabilities, total revenues or total expenditures/expenses that equal at least ten (10) percent of those categories for either the governmental funds or the enterprise funds and where the individual fund total also exceeds five (5) percent of those categories for governmental and enterprise funds combined. The major funds for City of Niles include the General Fund, the Electric Fund, the Sewer Fund and the Water Fund. All other funds are classified as nonmajor funds and are reported in aggregate by the applicable fund type. The City s funds are divided into three categories - governmental, proprietary, and fiduciary - and use different accounting approaches: Governmental Funds - Most of the City s basic services are reported in the governmental funds. The focus of these funds is how cash and other financial assets that can be readily converted to cash, flow in and out during the course of the fiscal year and how the balances left at year-end are available for spending on future services. Consequently, the governmental fund financial statements provide a detailed short-term view that helps determine whether there are more or fewer financial resources that may be expended in the near future to finance the City s programs. Governmental funds include the General Fund, as well as Special Revenue Funds (use of fund balance is restricted, e.g., income tax, major street, local street, and recreation funds), Capital Projects Funds (used to report major capital acquisitions and construction, e.g., the Capital Improvement Fund), Debt Service Funds (accounts for resources used to pay long-term debt principal and interest, e.g. the building authority fund), and Permanent Funds (accounts for resources permanently restricted from being spent, e.g. the cemetery perpetual care fund). Proprietary Funds - Services for which the City charges customers (whether outside the City structure or a City department) a fee are generally reported in proprietary funds. Proprietary funds use the same accrual basis of accounting used in the government-wide statements and by private business. There are two types of proprietary funds. Enterprise funds report activities that provide supplies and/or services to the general public. An example is the Sewer Fund. Internal Service funds report activities that provide supplies or service to the City s other operations, such as the Motor Pool Fund. Internal Service funds are reported as governmental activities on the government-wide statements. Fiduciary Funds - The City may act as a trustee or fiduciary in certain instances. It is also responsible for other assets that, because of trust arrangements, can only be used for the trust beneficiaries. The City s fiduciary activities are reported in the separate Statement of Assets and Liabilities on page 15. These funds, which include trust and agency funds, are reported using the accrual basis of accounting. The government-wide statements exclude the fiduciary fund activities and balances because these assets are not available to the City to fund its operations. Notes to the Financial Statements The Notes to the Financial Statements provide additional information that is essential to a full understanding of the detail provided in the government-wide and fund financial statements. The Notes can be found beginning on page 19 of this report. - v -

9 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 Required Supplementary Information Following the Basic Financial Statements is additional Required Supplementary Information (RSI), which further explains and supports the information in the financial statements. RSI includes budgetary comparison schedules for the General Fund as well as schedules of funding progress and schedules of employer contributions related to pension and other post employment benefit plans. Other Supplementary Information Other Supplementary Information includes combining financial statements for nonmajor governmental funds, nonmajor enterprise funds, and internal service funds. These funds are added together by fund type and are presented in aggregate single columns in the appropriate single columns in the appropriate basic financial statements. FINANCIAL ANALYSIS OF THE CITY AS A WHOLE As previously stated, the City of Niles combined net assets were $40,249,557 at the end of this fiscal year s operations. The net assets of the governmental activities were $11,225,013; the business-type activities were $29,024,544. Net Assets as of September 30, 2011 and 2012 Governmental Business-type Total Primary Activities Activities Government Current and Other Assets $ 8,700,261 $ 8,899,464 $ 11,434,861 $ 13,414,697 $ 20,135,122 $ 22,314,161 Capital Assets 7,067,528 6,798,159 25,521,517 25,320,974 32,589,045 32,119,133 Total Assets $ 15,767,789 $ 15,697,623 $ 36,956,378 $ 38,735,671 $ 52,724,167 $ 54,433,294 Current Liabilities $ 806,802 $ 3,975,882 $ 8,396,405 $ 1,889,854 9,203,207 $ 5,865,736 Noncurrent Liabilities 3,796, ,728 1,639,921 7,821,273 5,436,867 8,318,001 Total Liabilities $ 4,603,748 $ 4,472,610 $ 10,036,326 $ 9,711,127 $ 14,640,074 $ 14,183,737 Net Assets Invested in Capital Assets (Net of related debt) $ 6,757,528 $ 6,798,159 $ 17,494,860 $ 17,546,516 $ 24,252,388 $ 24,344,675 Restricted 2,441,560 2,874,085 1,463,801 2,067,401 3,905,361 4,941,486 Unrestricted 1,964,953 1,552,769 7,961,391 9,410,627 9,926,344 10,963,396 Total Net Assets $ 11,164,041 $ 11,225,013 $ 26,920,052 $ 29,024,544 $ 38,084,093 $ 40,249,557 The following condensed financial information was derived from the government-wide Statement of Activities and reflects how the City s primary government net assets changed during the fiscal year: - vi -

10 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 Changes in Net Assets for the Fiscal Year Ending September 30, 2011 and 2012 Revenues Program Revenues Charges for Services 883,782 Governmental Business-type Activities Activities Total $ $ 1,816,903 $ 16,590,019 $ 17,828,518 $ 17,473,801 $ 19,645,421 Grants and Contributions 1,733,087 1,368, , ,495 2,322,249 1,751,931 General Revenues Property Taxes 3,106,662 3,193, ,106,662 3,193,563 State Shared Revenue 1,212,576 1,170, ,212,576 1,170,034 Investment Earnings 87,875 83, ,992 87, ,309 Miscellaneous 115, , , ,791 Transfers 811, ,268 (811,147) (871,268) Special Items Total Revenues 7,950,247 8,645,312 16,368,034 17,504,737 24,318,281 26,150,049 Expenses General Government 1,508,251 1,838, ,508,251 1,838,979 Public Safety 3,894,155 3,878, ,894,155 3,878,357 Public Works 238,983 97, ,983 97,337 Highways and Streets 1,234,697 1,513, ,234,697 1,513,551 Transportation 605, , , ,537 Community Develop. 467, , , ,012 Recreation and Culture 281, , , ,988 Other 16,940 10,611 16,538,159 16,176,576 16,555,099 16,187,187 Total Expenses 8,247,799 8,531,372 16,538,159 16,176,576 24,785,958 24,707,948 Increase (decrease) in Net Assets (297,552) 113,940 (170,125) 1,328,161 (467,677) 1,442,101 Restated Net Assets - Beginning 11,461,593 11,111,073 27,090,177 27,696,383 38,551,770 $ 38,807,456 Net Assets - Ending $ 11,164,041 $ 11,225,013 $ 26,920,052 $ 29,024,544 $ 38,084,093 $ 40,249,557 Governmental Activities: The results of 2011/2012 governmental activity was an increase of $113,940 in net assets to $11,225,013. Of the total governmental activities net assets, $6,798,159 is invested in capital assets less related debt, $2,874,085 is reported as restricted, meaning these assets are legally committed for a specific purpose through statute, or by another authority outside the City government. The balance of $1,552,769 is listed as unrestricted, having no legal commitment. - vii -

11 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 Revenues: The three largest revenue categories were property taxes at 36.9%, charges for services at 21.0%, and grants and contributions at 15.8%. The City levied a property tax millage for the year ended September 30, 2012, for general government operations at mills and mills for the City s transit system. Charges for services, which reimburse the City for specific activities, examples include items such as fire and police fees, recreation fees and contributions, administrative charges, permits and motor pool equipment rental. Expenses: Public Safety is the largest governmental activity, expending approximately 45.4% of the governmental activities total on law enforcement, fire protection, and code enforcement. General government is the second largest area, expending approximately 21.5% of the governmental activities total and includes general government departments (e.g., council, community promotions, city manager, elections, general administration, assessor, city hall maintenance, and cemetery operations. Highways and Streets is the third largest governmental activity, expended 17.7% of the governmental activities total. Business-type Activities: Net assets in business-type activities were increased by $2,104,492 during fiscal year 2011/2012. Of the business-type activities net assets, $17,546,516 is invested in capital assets net of related debt, $2,067,401 is reported as restricted, meaning these assets are legally committed for a specific purpose through statute, or by another authority outside the City government. The balance of $9,410,627 is listed as unrestricted, having no legal commitment. FINANCIAL ANALYSIS OF THE CITY'S MAJOR AND NONMAJOR FUNDS As the City completed 2011/2012, its governmental funds reported combined fund balances of $4,959,221. This is a net increase of $416,536. The net changes are summarized in the following chart: General Fund: Fund Balance 9/30/2011 2,090,723 Nonmajor Total General Governmental Governmental Fund Funds Funds $ $ 2,451,962 $ 4,542,685 Fund Balance 9/30/2012 $ 2,037,602 $ 2,921,619 $ 4,959,221 Net Change $ (53,121) $ 469,657 $ 416,536 The General Fund is the chief operating fund of the City. Unless otherwise required by statute, contractual agreement or Council policy, all City revenues and expenditures are recorded in the General Fund. As of September 30, 2012, the General Fund reported a fund balance of $2,037,602. This amount is a net decrease of $53,121 from the fund balance of $2,090,723 reported as of September 30, The 2011/2012 original budget had called for a $22,273 increase in fund balance. The General Fund 2011/2012 expenses exceeded 2011/2012 revenues by $53,121 largely due to a decrease of $158,553 in budgeted revenues including property taxes, charges for services, and investment earnings. - viii -

12 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 General Fund Budgetary Highlights: The City of Niles s budget is a dynamic document. Although adopted in August (prior to the start of the year), the budget is routinely amended during the course of the year to reflect changing operational demands. Actual General Fund revenue and other financing sources totaled $6,421,862, $353,002 less than the final amended budget. Actual City expenditures and other financing uses for 2011/2012 were $277,608 below the final budget. This was due to a reduction in interfund transfer to the Building Department Fund and reduced spending in the Clerk, Management Services, and Police Department funds. Enterprise Funds As the City completed 2011/2012, its enterprise funds reported combined net assets of $29,024,544. This is a net increase of $1,328,161 resulting from current year operations. The net changes are summarized in the following chart. Nonmajor Electric Sewer Water Enterprise Fund Fund Fund Funds Totals Net Assets 9/30/2011 $ 10,463,759 $ 11,335,975 $ 4,523,784 $ 1,372,865 $ 27,696,383 Net Assets 9/30/2012 $ 11,257,226 $ 11,282,401 $ 4,864,151 $ 1,620,766 $ 29,024,544 Electric Fund: Net Change $ 793,467 $ (53,574) $ 340,367 $ 247,901 $ 1,328,161 As of September 30, 2012, the Electric Fund reported net assets of $11,257,226, an increase of $793,467 from the prior year. Of the entire net assets amount, $5,121,239 is invested in capital assets, net of related debt, and $6,135,987 is unrestricted. Sewer Fund: As of September 30, 2012, the Sewer Fund reported net assets of $11,282,401, a decrease of $53,574 from the prior year. Of the entire net assets, $7,541,387 is invested in capital assets, net of related debt, $2,067,401 is restricted for equipment replacement, and $1,673,613 is unrestricted. Water Fund: As of September 30, 2012, the Water Fund reported net assets of $4,864,151, a net increase of $340,367 from the prior year. Of the entire net assets, $3,583,789 is invested in capital assets, net of related debt and $1,280,362 is unrestricted. - ix -

13 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - At the end of Fiscal Year 2011/2012, the City had invested $32,119,133, and $2,224,944 for the component units, net of accumulated depreciation, in a broad range of capital assets (see table below). Additional information related to capital assets is detailed in Note E of the Financial Statements. Net Book value of capital assets at September 30, 2012, was as follows: Business- Governmental type Component Activities Activities Units Totals Land $ 2,098,110 $ 612,248 $ 227,376 $ 2,937,734 Construction in Progress 43, , ,753 Land Improvements, net 681, ,150 11,797 1,380,417 Buildings, net 2,264,195 5,607,996 1,900,898 9,773,089 Equipment and Furniture, net 594, ,712 84,873 1,094,554 Vehicles and Heavy Equipment, net 970, ,347-1,403,887 Infrastructure Streets and Bridges, net 144,965 17,398,678-17,543,643 Capital Assets, net $ 6,798,159 $ 25,320,974 $ 2,224,944 $ 34,344,077 Long-term Debt - As of September 30, 2012, the City had $8,633,488 in long-term debt outstanding for the primary government. This level of net obligation is $569,719 less than the obligation recorded as of September 30, Outstanding Debt as of September 30, 2012: Primary Government Governmental activities 1998 Building Authority Refunding Bonds 310,000 Balance Balance October 1, 2011 Additions Deletions Sept. 30, 2012 $ $ - $ 310,000 $ - Accumulated compensated absences 481, , , ,129 Retiree life insurance benefit 15,000-5,000 10,000 Business-type activities 2004 Limited Tax G. O. Bonds 4,270, ,000 3,985,000 Unamortized bond premium 16,935-1,402 15, State Revolving Loan 3,739, , ,000 3,773,925 Accumulated compensated absences 334, , , ,901 Retiree life insurance benefit 35, ,000 Total Primary Government 9,203, ,229 1,190,948 8,633,488 Component Unit Accumulated compensated absences 18,523 10,916 3,603 25,836 Total Reporting Entity $ 9,221,730 $ 632,145 $ 1,194,551 $ 8,659,324 A more detailed discussion of the City s long-term debt obligations is presented in Note F to the financial statements. - x -

14 MANAGEMENT S DISCUSSION AND ANALYSIS September 30, 2012 CITY OF NILES GOVERNMENT ECONOMIC OUTLOOK: State revenue sharing decreased overall this year by 3.5% due to the State eliminating statutory revenue sharing and replacing it with the Economic Vitality Incentive Program (EVIP). This will result in a 37% decrease in this portion of our revenue sharing. The City can receive 1/3 of the maximum EVIP amount by fulfilling specific requirements in three categories: Accountability and Transparency, Consolidation of Services, and Employee Compensation. The City met all of the objectives this year, and we are waiting to see what the objectives will be next fiscal year. In an effort to control health insurance costs, the City is working with a consultant to analyze all options, including a high deductible insured plan with a self-insured deductible component, and increasing office and prescription co-pays. We anticipate any plan changes would be implemented January 1, Contributions to the City s two (2) pension plans continue to be a major financial burden. While both plans are well funded (Plan A at 92%, and Plan B at 79%), volatility in the markets make it uncertain what required contributions will be in the future. Taxable values decreased from $210,668,880 in 2010 to $209,723,342 in 2011 (.45%). Taxable values further declined to $197,444,074 ($5.9%) in Although tax revenues slightly increased in fiscal year 2012 (tax year 2011), the anticipated reduction in revenues is estimated at $173,548 for fiscal year Investment earnings are expected to decrease, or at a minimum remain at current levels. The City purchased a vacant bank building in the downtown area during the year, and plans on consolidating City Hall operations with the Utilities Office. This will improve City operations, since it will allow better communication and interaction between staff. In addition, it will improve the delivery of services to the public, since it will provide one location for the public to conduct business. The City is optimistic that economic development will increase in the future due to recent interest in businesses wanting to relocate in Niles. There are multiple projects in the works, and there has been an increase in small business starts in the downtown area. These are all encouraging signs that Niles is an attractive place to live, work and play. CONTACTING THE CITY This financial report is designed to provide our citizens, taxpayers, customers, investors, and creditors with a general overview of the City s finances and to demonstrate the City s accountability for the money it receives. If there are questions about this report, or a need for additional information, contact the City of Niles Finance Director at (269) , ext xi -

15 BASIC FINANCIAL STATEMENTS

16 STATEMENT OF NET ASSETS September 30, 2012 Primary Government Governmental Business-type Component Activities Activities Total Unit ASSETS Current assets Cash and cash equivalents $ 4,613,167 $ 4,891,251 $ 9,504,418 $ 53,662 Cash and cash equivalents - restricted - 2,067,401 2,067,401 31,747 Investments 3,280,960 3,890,000 7,170,960 - Receivables 373,107 1,960,940 2,334, ,204 Internal balances 36,630 (36,630) Due from other governmental units 574, ,946 89,192 Prepaids - 7,463 7, Inventories - 505, ,839 - Other assets 20,654-20,654 - Total current assets 8,899,464 13,286,264 22,185, ,668 Noncurrent assets Deferred bond costs - 128, ,433 - Capital assets not being depreciated 2,142, ,091 2,921, ,376 Capital assets being depreciated, net 4,656,139 24,541,883 29,198,022 1,997,568 Total noncurrent assets 6,798,159 25,449,407 32,247,566 2,224,944 TOTAL ASSETS 15,697,623 38,735,671 54,433,294 2,556,612 LIABILITIES Current liabilities Accounts payable 780,157 1,114,707 1,894, ,978 Accrued liabilities 136,740 61, ,599 79,252 Due to other governmental units 68,148-68,148 3,093 Unearned revenue 2,750,772-2,750,772 68,350 Deposits payable - 356, ,337 - Current portion of compensated absences 240, , ,016 15,206 Current portion of long-term debt - 190, ,000 - Total current liabilities 3,975,882 1,889,854 5,865, ,879 Noncurrent liabilities Retiree life insurance benefit 10,000 35,000 45,000 - Noncurrent portion of compensated absences 240, , ,014 10,630 Noncurrent portion of long-term debt - 7,584,458 7,584,458 - Net other post-employment benefits obligation 246,664 34, ,529 - Total noncurrent liabilities 496,728 7,821,273 8,318,001 10,630 TOTAL LIABILITIES 4,472,610 9,711,127 14,183, ,509 NET ASSETS Invested in capital assets, net of related debt 6,798,159 17,546,516 24,344,675 2,224,944 Restricted for: Capital projects 75,790-75,790 - Cemetery perpetual care, nonexpendable 767, ,151 - State mandated programs 2,031,144-2,031,144 - Equipment replacement - 2,067,401 2,067,401 - Unrestricted 1,552,769 9,410,627 10,963,396 (134,841) TOTAL NET ASSETS $ 11,225,013 $ 29,024,544 $ 40,249,557 $ 2,090,103 See accompanying notes to financial statements

17 STATEMENT OF ACTIVITIES Year ended September 30, 2012 Net (Expense) Revenue and Changes in Net Assets Program Revenues Primary Government Charges for Operating Grants Capital Grants Governmental Business-type Component Functions/Programs Expenses Services and Contributions and Contributions Activities Activities Total Units Primary government Governmental activities General government $ 1,838,979 $ 245,996 $ 13,221 $ - $ (1,579,762) $ - $ (1,579,762) $ - Public safety 3,878, ,461 81, (3,496,350) - (3,496,350) - Public works 97,337 43,748 6,102 - (47,487) - (47,487) - Highways and streets 1,513, , ,800 - (298,416) - (298,416) - Transportation 435,537 60, ,142 99,488 83,429-83,429 - Community and economic development 553, ,433 37,781 - (114,798) - (114,798) - Recreation and culture 203, ,594 3, , ,962 - Interest on long-term debt 10, (10,611) - (10,611) - Total governmental activities 8,531,372 1,816,903 1,268,698 99,738 (5,346,033) -0- (5,346,033) -0- Business-type activities Electric 11,312,078 12,838,669 59, ,586,469 1,586,469 - Sewer 2,629,817 2,514,276 9, (106,130) (106,130) - Water 1,818,626 2,126,935 24, , ,499 - Other 416, , , , ,599 - Total business-type activities 16,176,576 17,828, , ,035,437 2,035, Total primary government $ 24,707,948 $ 19,645,421 $ 1,652,193 $ 99,738 (5,346,033) 2,035,437 (3,310,596) -0- Component units Downtown Development Authority $ 207,622 $ 14,342 $ - $ (193,280) Housing Commission 1,064, , , , ,066 Total component units $ 1,272,566 $ 434,573 $ 315,897 $ 387, (134,214) General revenues Property taxes 3,193,563-3,193, ,100 State shared revenue 1,170,034-1,170,034 - Investment earnings 83, , ,309 - Miscellaneous 141, , ,915 Transfers 871,268 (871,268) Total general revenues and transfers 5,459,973 (707,276) 4,752, ,015 Change in net assets 113,940 1,328,161 1,442,101 74,801 Restated net assets, beginning of the year 11,111,073 27,696,383 38,807,456 2,015,302 Net assets, end of the year $ 11,225,013 $ 29,024,544 $ 40,249,557 $ 2,090,103 See accompanying notes to financial statements

18 Governmental Funds BALANCE SHEET September 30, 2012 Nonmajor Total Governmental Governmental General Funds Funds ASSETS Cash and cash equivalents $ 2,357,258 $ 1,995,405 $ 4,352,663 Investments 2,516, ,588 3,280,960 Receivables Taxes 290,202 10, ,477 Accounts 29,105 41,275 70,380 Due from other governmental units 280, , ,946 Due from other funds 199,038 24, ,991 Assets held for resale 20,654-20,654 TOTAL ASSETS $ 5,692,952 $ 3,131,119 $ 8,824,071 LIABILITIES AND FUND BALANCES LIABILITIES Accounts payable $ 701,033 $ 56,987 $ 758,020 Accrued liabilities 65,257 9,645 74,902 Due to other funds 80, , ,008 Due to other governmental units 58,095 10,053 68,148 Deferred revenue 2,750,772-2,750,772 TOTAL LIABILITIES 3,655, ,500 3,864,850 FUND BALANCES Nonspendable Long-term receivables - 41,275 41,275 Cemetery perpetual care - 767, ,151 Restricted Highways and streets - 1,204,573 1,204,573 Transportation - 215, ,263 Community and economic development - 570, ,033 Capital projects - 75,790 75,790 Committed Capital projects - 47,534 47,534 Assigned Subsequent year's expenditures 48,043-48,043 Unassigned 1,989,559-1,989,559 TOTAL FUND BALANCES 2,037,602 2,921,619 4,959,221 TOTAL LIABILITIES AND FUND BALANCES $ 5,692,952 $ 3,131,119 $ 8,824,071 See accompanying notes to financial statements

19 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS September 30, 2012 Total fund balances - governmental funds $ 4,959,221 Amounts reported for the governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported as assets in the governmental funds. The cost of capital assets is $ 16,472,852 Accumulated depreciation is (9,674,693) Capital assets, net 6,798,159 An Internal Service Fund is used by management to charge the costs of certain activities to individual funds. The assets and liabilities of the Internal Service Fund are included in the governmental activities in the government-wide Statement of Net Assets. 204,426 Long-term liabilities are not due and payable in the current period and therefore are not reported in the Governmental Funds Balance Sheet. Long-term liabilities at year-end consist of: Net other post-employment benefits obligation (246,664) Compensated absences (480,129) Retiree life insurance benefits (10,000) (736,793) Net assets of governmental activities $ 11,225,013 See accompanying notes to financial statements

20 Governmental Funds STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES Year Ended September 30, 2012 Nonmajor Total Governmental Governmental General Funds Funds REVENUES Taxes $ 3,124,846 $ 97,177 $ 3,222,023 Special assessments 7,035-7,035 Intergovernmental 1,303,270 1,540,902 2,844,172 Charges for services 745, , ,239 Licenses and permits 41, , ,335 Fines and forfeitures 82,254-82,254 Interest and rents 68, , ,979 Other 153,633 11, ,007 TOTAL REVENUES 5,526,384 2,247,660 7,774,044 EXPENDITURES Current General government 1,575,531-1,575,531 Public safety 3,589,423-3,589,423 Public works 114, ,506 Highways and streets 834, ,484 1,410,022 Transportation - 435, ,537 Community and economic development 93, , ,392 Recreation and culture 199, ,780 Capital outlay - 37,974 37,974 Debt service 3, , ,611 TOTAL EXPENDITURES 6,410,750 1,818,026 8,228,776 EXCESS OF REVENUES OVER (UNDER) EXPENDITURES (884,366) 429,634 (454,732) OTHER FINANCING SOURCES (USES) Transfers in 895, ,000 1,083,478 Transfers out (64,233) (147,977) (212,210) TOTAL OTHER FINANCING SOURCES (USES) 831,245 40, ,268 NET CHANGE IN FUND BALANCES (53,121) 469, ,536 Fund balances, beginning of year 2,090,723 2,451,962 4,542,685 Fund balances, end of year $ 2,037,602 $ 2,921,619 $ 4,959,221 See accompanying notes to financial statements

21 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF THE GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES Year Ended September 30, 2012 Net change in fund balances - total governmental funds $ 416,536 Amounts reported for governmental activities in the statement of activities are different because: Capital outlays are reported as expenditures in governmental funds. However, in the statement of activities, the cost of capital assets is allocated over their estimated useful lives as depreciation expense. In the current period, these amounts are: Capital outlay $ 265,391 Depreciation expense (534,760) Excess of depreciation expense over capital outlay (269,369) Internal service funds are used by management to charge the costs of certain activities to individual funds. (58,287) Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. (Decrease) in deferred revenue (181,648) Repayment of long-term debt is reported as expenditures in governmental funds, but the repayment reduces long-term liabilities in the statement of net assets. In the current year, this amount consists of: Bond principal retirements 310,000 Some items reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. These activities consist of: (Increase) in net other post-employment benefits obligation (109,965) Decrease in accrued compensated absences 1,673 Decrease in retiree life insurance benefit 5,000 (103,292) Change in net assets of governmental activities $ 113,940 See accompanying notes to financial statements

22 Proprietary Funds STATEMENT OF NET ASSETS September 30, 2012 Business-type Electric Sewer Water ASSETS Current assets Cash and cash equivalents $ 2,890,830 $ 493,719 $ 1,151,309 Cash and cash equivalents - restricted - 2,067,401 - Investments 2,100,000 1,790,000 - Accounts receivable 1,414, , ,950 Interest receivable 3,958 7,857 - Due from other funds 814, Inventories 449,121-56,718 Prepaid expenses 2,947 2,267 2,249 Total current assets 7,675,738 4,641,566 1,464,226 Noncurrent assets Deferred bond costs - 56,461 71,972 Capital assets not being depreciated 352,267 18, ,066 Capital assets being depreciated, net 4,768,972 11,296,500 7,322,256 Total noncurrent assets 5,121,239 11,371,773 7,656,294 TOTAL ASSETS 12,796,977 16,013,339 9,120,520 LIABILITIES Current liabilities Accounts payable 1,029,421 47,171 32,015 Accrued liabilities 22,289 20,592 14,944 Due to other funds 75, ,803 - Deposits payable 288,594 2,050 65,693 Current portion of compensated absences 48,614 59,828 58,509 Current portion of long-term debt - 190,000 - Total current liabilities 1,464,180 1,070, ,161 Noncurrent liabilities Retiree life insurance benefit 16,375 13,000 5,625 Noncurrent portion of compensated absences 48,613 59,828 58,509 Noncurrent portion of long-term debt - 3,583,925 4,000,533 Net other post-employment benefits obligation 10,583 3,741 20,541 Total noncurrent liabilities 75,571 3,660,494 4,085,208 TOTAL LIABILITIES 1,539,751 4,730,938 4,256,369 NET ASSETS Invested in capital assets, net of related debt 5,121,239 7,541,387 3,583,789 Restricted for equipment replacement - 2,067,401 - Unrestricted 6,135,987 1,673,613 1,280,362 TOTAL NET ASSETS $ 11,257,226 $ 11,282,401 $ 4,864,151 See accompanying notes to financial statements

23 Governmental Activities Activities Nonmajor Internal Enterprise Service Funds Total Funds $ 355,393 $ 4,891,251 $ 260,504-2,067, ,890, ,949,125 2,250-11, ,029 26, , , ,393 14,136, , , , ,091-1,154,155 24,541,883-1,300,101 25,449, ,655,494 39,586, ,362 6,100 1,114,707 22,137 4,034 61,859 61,838 24, , , , ,000-34,728 2,740,513 84,936-35, , ,584, , ,821, ,728 10,561,786 84,936 1,300,101 17,546, ,067, ,665 9,410, ,426 $ 1,620,766 $ 29,024,544 $ 204,

24 Proprietary Funds STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS Year Ended September 30, 2012 Business-type Electric Sewer Water OPERATING REVENUES Charges for services $ 12,671,563 $ 2,496,304 $ 2,094,622 Penalties and fees 150,024 13,284 29,770 Rents Other 17,082 4,688 2,543 TOTAL OPERATING REVENUES 12,838,669 2,514,276 2,126,935 OPERATING EXPENSES Production 8,642, ,624 Transmission 12, Distribution 1,080, ,342 Sewage collection - 176,047 - Processing - 1,052,076 - Administrative and general 1,165, , ,814 Public works Other operations - 1,319 - Depreciation 411, , ,498 TOTAL OPERATING EXPENSES 11,312,078 2,532,654 1,643,278 OPERATING INCOME (LOSS) 1,526,591 (18,378) 483,657 NONOPERATING REVENUES (EXPENSES) Rentals 51,522-14,160 Tap fees - - 3,200 Investment income 102,476 52,556 7,868 Intergovernmental Other nonoperating revenue 8,356 9,411 6,830 Interest expense and fees - (97,163) (175,348) TOTAL NONOPERATING REVENUES (EXPENSES) 162,354 (35,196) (143,290) INCOME BEFORE TRANSFERS 1,688,945 (53,574) 340,367 TRANSFERS Transfers in Transfers out (895,478) - - TOTAL TRANSFERS (895,478) CHANGE IN NET ASSETS 793,467 (53,574) 340,367 Restated net assets, beginning of year 10,463,759 11,335,975 4,523,784 Net assets, end of year $ 11,257,226 $ 11,282,401 $ 4,864,151 See accompanying notes to financial statements

25 Governmental Activities Activities Nonmajor Internal Enterprise Service Funds Total Funds $ 230,634 $ 17,493,123 $ 1,888, , , ,895-4,109 28,422 8, ,638 17,828,518 1,896,150-8,853, , ,599, , ,052, ,992 2,538,217 1,903, , , ,968-88,076 1,517, ,717 15,902,727 1,954,918 (66,079) 1,925,791 (58,768) - 65, ,200-1, , , , ,597 - (1,338) (273,849) - 289, , ,691 2,199,429 (58,287) 24,210 24, (895,478) - 24,210 (871,268) ,901 1,328,161 (58,287) 1,372,865 27,696, ,713 $ 1,620,766 $ 29,024,544 $ 204,

26 Proprietary Funds STATEMENT OF CASH FLOWS Year Ended September 30, 2012 Business-type Electric Sewer Water CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers $ 12,785,256 $ 2,483,474 $ 2,107,551 Cash paid to suppliers (2,295,554) (1,831,393) (1,116,302) Cash paid to employees (8,654,501) (52,110) (195,461) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,835, , ,788 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Other nonoperating receipts 59,878 9,411 24,190 Transfers from other funds Operating grants received NET CASH PROVIDED BY NONCAPITAL AND RELATED FINANCING ACTIVITIES 59,878 9,411 24,190 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Transfers to other funds (895,478) - - Proceeds from debt issuance - 219,203 - Payments of borrowing - (185,000) (286,402) Interest paid on financing - (94,026) (168,855) Purchase of capital assets (413,714) (550,716) (49,809) NET CASH (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES (1,309,192) (610,539) (505,066) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (109,598) - - Proceeds from sale of investments - 385,000 - Interest on investments 104,857 51,496 7,868 NET CASH PROVIDED (USED) FROM INVESTING ACTIVITIES (4,741) 436,496 7,868 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 581, , ,780 Cash and cash equivalents, beginning of year 2,309,684 2,125, ,529 Cash and cash equivalents, end of year $ 2,890,830 $ 2,561,120 $ 1,151,309 See accompanying notes to financial statements

27 Governmental Activities Activities Nonmajor Internal Enterprise Service Funds Total Funds $ 348,638 $ 17,724,919 $ 1,880,649 (163,758) (5,407,007) (1,957,687) (173,525) (9,075,597) (50,849) 11,355 3,242,315 (127,887) - 93,479-24,210 24, , , , , (895,478) , (471,402) - (1,338) (264,219) - (302,849) (1,317,088) - (304,187) (2,728,984) (109,598) ,000-1, , , , ,486 1,361,751 (127,406) 332,907 5,596, ,910 $ 355,393 $ 6,958,652 $ 260,

28 Proprietary Funds STATEMENT OF CASH FLOWS - CONTINUED Year Ended September 30, 2012 Business-type Electric Sewer Water Reconciliation of operating income (loss) to net cash provided (used) by operating activities Operating income (loss) $ 1,526,591 $ (18,378) $ 483,657 Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities Depreciation 411, , ,498 (Increase) decrease in: Accounts receivable (151,276) (16,004) (28,076) Due from other governmental units 4,491 25,894 - Due from other funds 52, Inventories 2,271 - (2,643) Prepaids Increase (decrease) in: Accounts payable (40,056) (20,574) 1,497 Accrued liabilities (29,353) (65,246) (2,008) Due to other funds 5,703 (19,626) - Deposits payable 35,543 (500) 8,692 Retiree life insurance benefit 16,375 13,000 5,625 Net other post-employment benefit liability ,005 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 1,835,201 $ 599,971 $ 795,788 See accompanying notes to financial statements

29 Governmental Activities Activities Nonmajor Internal Enterprise Service Funds Total Funds $ (66,079) $ 1,925,791 $ (58,768) 88,076 1,517, (195,356) (897) - 30, ,134 (15,565) - (372) - - 1,187 - (9,947) (69,080) (18,528) 1,467 (95,140) (35,090) (2,162) (16,085) , , ,485 - $ 11,355 $ 3,242,315 $ (127,887)

30 Fiduciary Fund STATEMENT OF ASSETS AND LIABILITIES September 30, 2012 Pension Trust Agency Fund Funds ASSETS Cash and cash equivalents $ 54,571 $ 25,064 Investments 28,539,753 - Due from other governments - 413,740 TOTAL ASSETS 28,594,324 $ 438,804 LIABILITIES Due to other governments - $ 438,804 NET ASSETS Held in trust for pension benefits $ 28,594,324 See accompanying notes to financial statements

31 Fiduciary Fund STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS Year Ended September 30, 2012 Pension Trust Fund ADDITIONS Investment Income Interest and dividends $ 1,587,577 Net increase in fair value of investments 2,690,983 Net investment income 4,278,560 Contributions Employer 544,473 Employee 362,733 Total contributions 907,206 TOTAL ADDITIONS 5,185,766 DEDUCTIONS Benefit payments 2,303,187 Refunds 88,030 Administrative expenses 128,461 TOTAL DEDUCTIONS 2,519,678 CHANGE IN NET ASSETS 2,666,088 Net assets, beginning of year 25,928,236 Net assets, end of year $ 28,594,324 See accompanying notes to financial statements

32 Component Units COMBINING STATEMENT OF NET ASSETS September 30, 2012 ASSETS Current assets Downtown Niles Total Development Housing Component Authority Commission Units Cash and cash equivalents $ 26,820 $ 26,842 $ 53,662 Cash and cash equivalents - restricted - 31,747 31,747 Accounts receivable - 156, ,204 Due from other governmental units 89,192-89,192 Prepaids Total current assets 116, , ,668 Noncurrent assets Capital assets not being depreciated - 227, ,376 Capital assets being depreciated, net 3,120 1,994,448 1,997,568 Total noncurrent assets 3,120 2,221,824 2,224,944 TOTAL ASSETS 119,132 2,437,480 2,556,612 LIABILITIES Current liabilities Accounts payable 19, , ,978 Accrued liabilities ,341 79,252 Due to other governmental units 3,093-3,093 Unearned revenue 64,616 3,734 68,350 Current portion of compensated absences - 15,206 15,206 Total current liabilities 87, , ,879 Noncurrent liabilities Noncurrent portion of compensated absences - 10,630 10,630 TOTAL LIABILITIES 87, , ,509 NET ASSETS Invested in capital assets 3,120 2,221,824 2,224,944 Unrestricted 28,260 (163,101) (134,841) TOTAL NET ASSETS $ 31,380 $ 2,058,723 $ 2,090,103 See accompanying notes to financial statements

33 Component Units COMBINING STATEMENT OF ACTIVITIES Year Ended September 30, 2012 Downtown Niles Total Development Housing Component Authority Commission Units EXPENSES Downtown development $ 207,622 $ - $ 207,622 Housing development - 1,064,944 1,064,944 TOTAL EXPENSES 207,622 1,064,944 1,272,566 REVENUES Program revenues Charges for services 14, , ,573 Operating grants and contributions - 315, ,897 Capital grants and contributions - 387, ,882 Total program revenues 14,342 1,124,010 1,138,352 Net (expense) revenue (193,280) 59,066 (134,214) General revenues Property taxes 102, ,100 Miscellaneous 78,573 28, ,915 Total general revenues 180,673 28, ,015 NET CHANGE IN NET ASSETS (12,607) 87,408 74,801 Restated net assets, beginning of year 43,987 1,971,315 2,015,302 Net assets, end of year $ 31,380 $ 2,058,723 $ 2,090,103 See accompanying notes to financial statements

34 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE A: DESCRIPTION OF CITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Niles is located in Berrien County, Michigan and has a population of approximately 11,600. The City of Niles operates with a City Administrator/Council form of government and provides services to its residents in many areas including general government, law enforcement, highways and streets, human services, and utilities services. The mayor and eight (8) Council members are elected by voters. The Council appoints a city administrator to manage the City on a daily basis. The financial statements of the City have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as applied to city governments. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The City s more significant accounting policies are described below. 1. Reporting Entity As required by accounting principles generally accepted in the United States of America; GASB Statement No. 14, The Financial Reporting Entity (as amended by GASB Statement No. 39); and Statement on Michigan Governmental Accounting and Auditing No. 4, these financial statements present the financial activities of the City of Niles (primary government) and its component units. Discretely presented component units, on the other hand, are reported in a separate column in the government-wide financial statements to emphasize that they are legally separate from the City. The inclusion of the activities of various agencies is based on the manifestation of oversight criteria, relying on such guidelines as the selection of the governing authority, the designation of management, the ability to exert significant influence on operations, and the accountability for fiscal matters. The accountability for fiscal matters considers the possession of the budgetary authority, the responsibility for surplus or deficit, the controlling of fiscal management, and the revenue characteristics, whether a levy or a charge. Consideration is also given to the scope of public service. The scope of public service considers whether the activity is for the benefit of the reporting entity and/or its residents and is within the geographic boundaries of the reporting entity and generally available to its citizens. Based upon the application of these criteria, the financial statements of the City of Niles contain all the funds controlled by the City Council. 2. Discretely Presented Component Units These component units are reported in a separate column to emphasize that, while legally separate, the City remains financially accountable for this entity or the nature and significance of the relationship between these entities and the City is such that exclusion of the entity would render the financial statements misleading or incomplete. The financial statements contain the following discretely presented component units: Downtown Development Authority - The members of the governing board of the Downtown Development Authority (DDA) are appointed by the City Council. The City also has the ability to significantly influence operations of the Downtown Development Authority. The DDA is included in the City s audited financial statements and is not audited separately. Niles Housing Commission - A majority of the members of the governing board of the Housing Commission are appointed by the City Administrator. The City also has the ability to significantly influence operations of the Housing Commission. The Housing Commission has a December 31, 2011 year end, and is audited separately. The financial statements are available at the Housing Commission, 251 Cass Street, Niles, MI

35 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE A: DESCRIPTION OF CITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED 3. Joint Ventures The City is a part of two joint ventures. The government-wide financial statements do not reflect any financial interest in either entity as there is not a definable interest to recognize at this time. The joint ventures are as follows: Southwest Michigan Community Ambulance Service - On November 10, 1975, the City of Niles, City of Buchanan, Niles Township, Bertrand Township, Buchanan Township and Howard Township created a corporation known as the Southwest Michigan Community Ambulance Service ( SMCAS ). The purpose of this corporation is to provide ambulance and/or emergency medical service within the boundaries of the participating municipalities. The Board of Trustees consists of the one representative from each constituent municipality. The corporation shall continue until dissolved by agreement of the constituent municipalities or by other means. In the event the corporation is dissolved, assets of the corporation shall be divided among the constituent members at the time of dissolution and division shall be made according to population. Likewise, in the event it becomes necessary to finance all or/any part of the operating expenses of the corporation by contribution, such contributions will be made by the participating member on the basis of population. Financial statements of SMCAS are available at its office located at 2100 Chicago Road, Niles, MI As of June 30, 2011, the most recent financial statements available, the Service had net assets of $2,504,071. Southeast Berrien County Landfill Authority - On October 9, 1969, the City of Niles, Bertrand Township, Buchanan Township, Niles Township and the City of Buchanan created the Southeast Berrien County Landfill Authority (the Authority ). The purpose of the Authority is to facilitate the collection and disposal of garbage and rubbish. The governing body of the Authority consists of two representatives from each constituent municipality, one of who must be the Supervisor, President or City Manager. The Authority shall continue until dissolved by all parties or by law. In the event the Authority is dissolved, liabilities shall be assessed and assets of the Authority shall be distributed after payment of all liabilities, obligations and agreements to the constituent municipalities. The method of distribution will be determined by the parties involved at the time. Financial statements of the Authority are available at its office located at 3200 Chamberlain Road, Buchanan, MI As of June 30, 2012, the Authority had net assets of $7,858, Basis of Presentation GOVERNMENT-WIDE FINANCIAL STATEMENTS The statement of net assets and the statement of activities (the government-wide statements) present information for the primary government and its component units as a whole. All non-fiduciary activities of the primary government are included (i.e., fiduciary fund activities are not included in the government-wide statements). For the most part, interfund activity has been eliminated in the preparation of these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support

36 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE A: DESCRIPTION OF CITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 4. Basis of Presentation - continued The statement of activities presents the direct functional expenses of the primary government and its component units and the program revenues that support them. Direct expenses are specifically associated with a service, program, or department and are therefore clearly identifiable to a particular function. Program revenues are associated with specific functions and include charges to recipients for goods or services and grants and contributions that are restricted to meeting the operational or capital requirements of that function. Revenues that are not required to be presented as program revenues are general revenues. This includes all taxes, interest, and unrestricted State revenue sharing payments and other general revenues and shows how governmental functions are either self-financing or supported by general revenues. FUND FINANCIAL STATEMENTS The fund financial statements present the City s individual major funds and aggregated nonmajor funds. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and the major individual enterprise funds are reported as separate columns in the fund financial statements. The City reports the following major governmental fund: a. The General Fund is the City s primary operating fund. It accounts for all financial resources of the general government except for those that are required to be accounted for in another fund. The City reports the following major enterprise funds: a. The Electric Fund is used to account for the operations required to provide electric services to the general public, the costs (expenses, including depreciation) are financed or recovered primarily through user charges. b. The Sewer Fund is used to account for the operations required to provide sewer services to the general public, the costs (expenses, including depreciation) are financed or recovered primarily through user charges. c. The Water Fund is used to account for the operations required to provide water services to the general public, the costs (expenses, including depreciation) are financed or recovered primarily through user charges. Additionally, the City reports internal service funds to account for the management of services provided to other departments on a cost reimbursement basis, and to account for the activities of the City s self-insured employee benefits and sewer maintenance. The City reports a trust fund to account for the accumulation of resources for retirement payments to qualified employees. The City also reports agency funds to account for assets held by the City as the trustee or as the agent for others. Agency Funds are, by nature, custodial; therefore, operational results are not measured. The City s agency funds are the Tax Agency Holding Fund and the Riverfront Amphitheatre Fund, which is an Agency fund for the Downtown Development Authority component unit

37 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE A: DESCRIPTION OF CITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 5. Measurement Focus The government-wide, proprietary, and non-agency fiduciary fund financial statements are presented using the economic resources measurement focus, similar to that used by business enterprises or not-for-profit organizations. Because another measurement focus is used in the governmental fund financial statements, reconciliations to the government-wide statements are provided that explain the differences in detail. All governmental funds are presented using the current financial resources measurement focus. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. Operating statements of these funds present increases (i.e., revenues and other financing sources) and decreases (i.e., expenditures and other financing uses) in net current assets. There is no measurement focus for the fiduciary agency funds since assets equal liabilities. 6. Basis of Accounting Basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. All governmental funds are accounted for using the modified accrual basis of accounting. Under this method, revenues are recognized when they become susceptible to accrual (when they become both measurable and available to finance expenditures of the current period ). The length of time used for available for purposes of revenue recognition in the governmental fund financial statements is 60 days. Revenues that are considered measurable but not available are recorded as receivable and deferred revenue. Significant revenues susceptible to accrual are special assessments and certain intergovernmental revenues. Expenditures are generally recognized under the modified accrual basis of accounting when the related fund liability is incurred, except for interest on long-term debt which is recorded when due. All proprietary and agency funds are accounted for using the accrual basis of accounting. Their revenues are recognized when they are earned, and their expenses are recognized when they are incurred. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund s principal ongoing operations. The principal operating revenues of the Enterprise Funds are charges to customers for sales and services. Operating expenses for enterprise funds include the costs of sales and services, administrative expenses, and other costs of running the activity. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. If/when both restricted and unrestricted resources are available for use, it is the City s policy to use restricted resources first, then unrestricted resources as they are needed

38 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE A: DESCRIPTION OF CITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 7. Budgets and Budgetary Accounting The General and Special Revenue Funds budgets shown as required supplementary information were prepared on the same modified accrual basis used to reflect actual results. This basis is consistent with accounting principles generally accepted in the United States of America. The City employs the following procedures in establishing the budgetary data reflected in the financial statements. a. On the City Council meeting date nearest to the second Monday in July, the City Administrator submits to City Council the proposed operating budgets for the fiscal year commencing the following October 1. The operating budgets include proposed expenditures and resources to finance them. b. A Public Hearing is conducted to obtain taxpayers comments. c. Prior to the first regular council meeting in August, the budget is legally enacted through passage of a resolution. d. The budget is legally adopted at the activity level for the General Fund and total expenditure level for the Special Revenue Funds; however, they are maintained at the account level for control purposes. e. The City does not employ encumbrance accounting as an extension of formal budgetary integration in the governmental funds. Appropriations unused at September 30 are not carried forward to the following fiscal year. f. Budgeted amounts are reported as originally adopted or amended by the City Council during the year. No individual amendments were adopted by the City Council during the year ended September 30, Cash and Cash Equivalents Cash and cash equivalents consist of checking, savings, money market, and certificates of deposit with a maturity from date of purchase of 90 days or less. 9. Investments Investments consist of certificates of deposit, Municipal Securities, Corporate Bonds and Notes, mutual funds, and MBIA funds with original maturities of greater than 90 days. Investments are recorded at market value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. 10. Due from Other Governmental Units Due from other governmental units consists of amounts due from the State of Michigan for various payments and grants and accounts receivable for charges for services provided to local governmental units. 11. Receivables Receivables consist of amounts due related to charges for services, interest receivable, and other amounts owed to the City at year-end

39 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE A: DESCRIPTION OF CITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 12. Property Tax The City of Niles bills and collects its own property taxes and also taxes for other governmental units. The City s property tax revenue recognition policy and related tax calendar disclosures are highlighted in the following paragraph: Property taxes are levied by the City of Niles on July 1 and December 1 and are payable without penalty through September 30 and February 14, respectively. The July 1 levy is composed of the City s millage, the County s millage assessments, and school taxes. The December 1 levy is composed of school taxes. All real property taxes not paid to the City by March 1 are turned over to the Berrien County Treasurer for collection. The Berrien County Treasurer purchases the receivables of all taxing districts on any delinquent real property taxes. Delinquent personal property taxes receivable are retained by the City for subsequent collection. Collections and remittances of all taxes are accounted for in the Tax Holding Agency Fund. City property tax revenues are recognized as revenues in the fiscal year levied. The City is permitted by charter to levy taxes up to 15 mills ($15 per $1,000 of taxable valuation) for general governmental services other than the payment of Debt Service Fund expenditures. For the year ended September 30, 2012, the City levied mills per $1,000 of taxable valuation for general governmental services. The total taxable value for the 2011 levy for property within the City was $209,723,342. In addition, the City levied mills per $1,000 of taxable valuation for the Dial-A-Ride system operations. 13. Prepaids Prepaids consist of amounts paid in the current year that pertain to the following fiscal year and are accounted for using the consumption method. Nonspendable fund balances have been recorded in the applicable funds to indicate that prepaids are not currently available, spendable components of fund balance. 14. Inventories Inventories in the Enterprise Funds consist of supplies which are stated at cost on a first-in/first-out basis. 15. Compensated Absences It is the City s policy to permit employees to accumulate earned but unused vacation and compensatory time benefits, subject to certain limitations. Certain bargaining unit employees are also permitted to accumulate earned but unused sick leave. All vacation pay and 50 percent of sick leave are accrued when incurred in the government-wide and proprietary fund financial statements. A liability for these amounts is reported in governmental funds only if they have matured, for example, as a result of employee resignations or retirements. 16. Interfund Transactions During the course of normal operations, the City has numerous transactions between funds, including expenditures and transfers of resources to provide services, construct assets, and service debt. The accompanying financial statements generally reflect such transactions as transfers. Transfers between governmental or proprietary funds are netted as part of the reconciliation to the government-wide financial statements. The Internal Service Funds record charges for services provided to various City departments and funds as operating revenue. All City funds record these payments as operating expenditures/expenses

40 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE A: DESCRIPTION OF CITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 17. Capital Assets Capital assets are recorded (net of accumulated depreciation, if applicable) in the government-wide financial statements under the governmental activities, business-type activities, and component unit columns. Capital assets are those with an initial individual cost of $2,500 or more and an estimated useful life of more than two years. Capital assets are not recorded in the governmental funds. Instead, capital acquisition and construction are reflected as expenditures in governmental funds, and the related assets are reported in the government-wide financial statements. All purchased capital assets are valued at cost where historical records are available and at an estimated historical cost where no historical records exist. Donated capital assets are valued at their estimated fair market value on the date received. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Depreciation is computed using the straight-line method over the following useful lives: Buildings Infrastructure Machinery and equipment Land and leasehold improvements Vehicles and heavy equipment years years 3-10 years years 3-15 years 18. Deferred/Unearned Revenue Deferred revenue consists of amounts related to certain long-term receivables recorded at the fund level that are not available to finance current period expenditures and are therefore deferred and also amounts received for various grant programs that has not yet been earned. Unearned revenue recorded in governmental activities and proprietary funds are so labeled to indicate that the availability criteria used in modified accrual basis statements does not apply. 19. Long-term Liabilities Long-term debt and other long-term obligations are recognized as a liability in the government-wide financial statements and proprietary fund types when incurred. The portion of those liabilities expected to be paid within the next year is a current liability with the remaining amounts shown as long-term. Long-term debt is recognized as a liability of a governmental fund when due or when resources have been accumulated in a Debt Service Fund for payment early in the following year. For other long-term obligations, only that portion expected to be financed from expendable available financial resources is reported as a fund liability of a governmental fund. 20. Comparative Data Comparative data for the prior year has not been presented in the accompanying financial statements since their inclusion would make the statements unduly complex and difficult to read. 21. Federal Programs Federal Programs are accounted for in the funds to which the programs pertain. The City has not integrated its Single Audit Reports and financial data as part of the financial statements. The Single Audit reports and financial data will be issued under separate cover as supplementary information to the financial statements

41 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE B: CASH, CASH EQUIVALENTS, AND INVESTMENTS The City deposits consist of a common checking, various savings, money market accounts, and certificates of deposit maintained by individual funds and are reported as cash and cash equivalents in the financial statements. In accordance with Michigan Compiled Laws, the City is authorized to invest in the following investment vehicles: a. Bonds, securities, and other obligations of the United States or an agency or instrumentality of the United States. b. Certificates of deposit, savings accounts, deposit accounts, or depository receipts of a State or nationally chartered bank or a State or Federally chartered savings and loan association, savings bank, or credit union whose deposits are insured by an agency of the United Sates government and which maintains a principal office or branch office located in this State under the laws of this State or the United States, but only if the bank, savings and loan association, savings bank or credit union is eligible to be a depository of surplus funds belonging to the State under Section 6 of 1855 PA 105, MCL c. Commercial paper rated at the time of purchase within the three (3) highest classifications established by not less than two (2) standard rating services and which matures not more than 270 days after the date of purchase. d. The United States government or federal agency obligations repurchase agreements. e. Bankers acceptances of United States banks. f. Mutual funds composed of investment vehicles which are legal for direct investment by local units of government in Michigan. Deposits As of September 30, 2012, the carrying amounts and bank balances for each type of bank account are as follows: Carrying Bank ACCOUNT TYPE Amount Balance PRIMARY GOVERNMENT Checking and Savings $ 10,989,429 $ 11,782,815 Certificates of Deposit 1,850,000 1,850, ,839,429 13,632,815 FIDUCIARY FUNDS Checking and Savings 79,635 1,046,986 COMPONENT UNITS Checking 84,359 84,359 TOTAL REPORTING ENTITY $ 13,003,423 $ 14,764,160 The primary government cash and cash equivalents caption on the basic financial statements included $3,280 of imprest cash. The component unit cash and cash equivalents caption on the basic financial statements included $1,050 of imprest cash. Deposits of the City are at federally insured banks located in the State of Michigan with all accounts maintained in the name of the City. As of September 30, 2012, the City accounts were insured by the FDIC for $2,336,580 and the amount of $12,427,580 was uninsured and uncollateralized.

42 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE B: CASH, CASH EQUIVALENTS, AND INVESTMENTS - CONTINUED Investments As of September 30, 2012, the carrying amounts and market values for the investments are as follows: Percent Standard Weighted Carrying Market of & Poor's Average INVESTMENT TYPE Amount Value Portfolio Rating Maturity PRIMARY GOVERNMENT Uncategorized pooled investments $ 229,097 $ 229, % Not rated N/A Money Market Funds 49,705 49, % Not rated N/A U.S. Treasury Notes 1,348,012 1,348, % AA years Federal National Mortgage Association 1,638,669 1,638, % AA years Federal National Mortgage Association Pool 48,001 48, % AA years Federal Home Loan Bank 1,672,744 1,672, % AA years Federal Home Loan Bank Gold Pool 36,951 36, % AA years Federal Home Loan Mortgage Corporation 347, , % AA years Federal Farm Credit Bank 194, , % AA years Government National Mortgage Association 335, , % AA years Total Primary Government 5,900,070 5,900,070 PENSION TRUST FUND Money Market Funds $ 1,120,111 $ 1,120, % Not rated N/A U.S. Treasury Notes 1,746,992 1,746, % AA years U.S. Treasury Bonds 678, , % AA years Federal National Mortgage Association 781, , % AA years Federal Home Loan Bank 96,175 96, % AA years Federal Home Loan Mortgage 1,326,018 1,326, % AA years Federal Farm Credit Bank 200, , % AA years Government National Mortgage Association 181, , % AA years Corporate Bonds 2,495,115 2,495, % Various 8.31 years Fixed Income Funds 1,693,879 1,693, % Not rated N/A Equity Mutual Funds 18,218,879 18,218, % Not rated N/A Total Pension Trust Fund 28,539,753 28,539,753 TOTAL REPORTING ENTITY $ 34,439,823 $ 34,439,

43 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE B: CASH, CASH EQUIVALENTS, AND INVESTMENTS - CONTINUED Credit risk The System s investment policy provides that its investments in fixed income securities be limited to those rated BBB or better by a nationally recognized statistical rating organization. As of September 30, 2012, the System s investments in securities of U.S. agencies were all rated AA+ by Standard & Poor s. The System s investments in corporate securities were rated by Standard & Poor s as follows: Interest rate risk S&P: AAA $ 81,966 AA+ 168,610 AA+/- 258,595 AA 171,145 AA- 51,178 A+ 173,144 A 282,910 A- 613,726 BBB+ 187,282 BBB 183,635 BBB- 91,682 BB+ 55,578 Total S&P 2,319,451 Moody's (not rated by S&P): Aa 58,626 Not rated 117,038 Total corporate bonds $ 2,495,115 The City will minimize interest rate risk, which is the risk that the market value of securities in the portfolio will fall due to changes in market interest rates, by: Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity, and investing operating funds primarily in shorter-term securities, money market mutual funds, or similar investment pools and limiting the average maturity of the portfolio. Concentration of credit risk The City will minimize credit risk, which is the risk of loss due to the failure of the security issuer or backer, by: Limiting investments to the types of securities listed in the Authorized Investments section; pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisers with which the City will do business in accordance with the Authorized Institutions section; and diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized

44 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE B: CASH, CASH EQUIVALENTS, AND INVESTMENTS - CONTINUED Custodial credit risk The City will minimize custodial credit risk, which is the risk of loss due to the failure of the security issuer or backer, by limiting investments to the types of securities authorized by the Council and pre-qualifying the financial institutions, broker/dealers, intermediaries and advisors with which the City will do business in accordance with Council approved policy. The cash and cash equivalents and investments referred to above have been reported in the cash and cash equivalents captions on the basic financial statements, based upon criteria disclosed in Note A. The following summarizes the categorization of these amounts as of September 30, 2012: Primary Government Component Units Fiduciary Funds Reporting Entity Cash and cash equivalents $ 9,504,418 $ 53,662 $ 79,635 $ 9,637,715 Cash and cash equivalents - restricted 2,067,401 31,747-2,099,148 Investments 7,170,960-28,539,753 35,710,713 $ 18,742,779 $ 85,409 $ 28,619,388 $ 47,447,576 Due to significantly higher cash flow at certain periods during the year, the amount the City held as cash and cash equivalents increased significantly. As a result, the amount of uninsured and uncollateralized cash and cash equivalents were substantially higher at these peak periods than at year-end. NOTE C: INTERFUND RECEIVABLES AND PAYABLES The amount of interfund receivables and payables at September 30, 2012, are as follows: Due to General Fund from: Electric Fund $ 75,262 Nonmajor governmental funds 122,815 Internal service funds 961 $ 199,038 Due to nonmajor governmental fund from: General Fund $ 14,953 Nonmajor governmental fund 10,000 $ 24,953 Due to Electric Fund from: General Fund $ 65,240 Sewer Fund 724,195 Nonmajor enterprise fund 24,594 $ 814,029 Due to Internal Service Funds from: Sewer Fund $ 26,

45 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE C: INTERFUND RECEIVABLES AND PAYABLES - CONTINUED Amounts appearing as interfund payables and receivables arise from two types of transactions. One type of transaction is where a fund will pay for a good or service that at least a portion of the benefit belongs to another fund. The second type of transaction is where one fund provides a good or service to another fund. Balances at the end of the year are for transfers that have not cleared as of the balance sheet date. NOTE D: INTERFUND TRANSFERS Permanent reallocation of resources between funds of the reporting entity is classified as interfund transfers. For the purpose of the statement of activities, all interfund transfers between individual governmental funds and business-type funds have been eliminated. Transfer to General Fund from: Electric Fund $ 895,478 Transfers to nonmajor governmental funds from: General Fund $ 63,000 Nonmajor governmental funds 125,000 $ 188,000 Transfers to nonmajor enterprise funds from: General Fund $ 1,233 Nonmajor governmental funds 22,977 $ 24,210 The transfer from the Electric Fund to the General Fund was to record the payment in lieu of tax that the Council has approved to be transferred each year. The transfers to the nonmajor governmental funds and nonmajor enterprise funds were to fund current year projects. NOTE E: CAPITAL ASSETS Capital asset activity for the year ended September 30, 2012, was as follows: Primary Government Balance Balance Oct. 1, 2011 Additions Deletions Sept. 30, 2012 Governmental Activities Capital assets not being depreciated Land $ 2,098,110 $ - $ - $ 2,098,110 Construction in progress - 43,910-43,910 Subtotal 2,098,110 43, ,142,

46 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE E: CAPITAL ASSETS - CONTINUED Primary Government - Continued Governmental Activities - continued Capital assets being depreciated Land improvements 1,321,485 Balance Balance Oct. 1, 2011 Additions Deletions Sept. 30, 2012 $ $ - $ (26,190) $ 1,295,295 Buildings 6,062, ,813-6,180,902 Equipment 3,078,448 30,349 (458,245) 2,650,552 Vehicles and heavy equipment 4,757,929 72,319 (833,254) 3,996,994 Infrastructure 207, ,089 Subtotal 15,427, ,481 (1,317,689) 14,330,832 Less accumulated depreciation for: Land improvements (588,931) (50,888) 25,994 (613,825) Buildings (3,765,939) (150,768) - (3,916,707) Equipment (2,368,878) (137,668) 450,963 (2,055,583) Vehicles and heavy equipment (3,680,033) (179,675) 833,254 (3,026,454) Infrastructure (53,841) (8,283) - (62,124) Subtotal (10,457,622) (527,282) 1,310,211 (9,674,693) Net capital assets being depreciated 4,969,418 (305,801) (7,478) 4,656,139 Capital assets, net $ 7,067,528 $ (261,891) $ (7,478) $ 6,798,159 Depreciation expense was charged to the following governmental activities: General government $ 60,373 Public safety 238,781 Public works 8,283 Highways and streets 60,341 Transportation 81,737 Culture and recreation 83,828 Community development 1,417 Total depreciation expense $ 534,760 The current year depreciation expense for governmental activities of $527,282 has been adjusted by $7,478 for the disposal of capital assets during the year, in accordance with the GASB Statement No. 34 implementation guide which states that immaterial losses may be handled as an adjustment to the current period s depreciation expense

47 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE E: CAPITAL ASSETS - CONTINUED Primary Government - Continued Balance Balance Oct. 1, 2011 Additions Deletions Sept. 30, 2012 Business-type activities Capital assets not being depreciated Land $ 612,248 $ - $ - $ 612,248 Construction in progress 245, ,521 (499,534) 166,843 Subtotal 858, ,521 (499,534) 779,091 Capital assets being depreciated Land improvements 1,328,562 - (5,542) 1,323,020 Buildings 12,699, ,598 (5,375) 12,962,555 Equipment 1,975, ,397 (56,970) 2,221,769 Vehicles and heavy equipment 1,133, ,600 (3,210) 1,415,988 Infrastructure 46,457, ,506-46,996,218 Subtotal 63,594,546 1,396,101 (71,097) 64,919,550 Less accumulated depreciation for: Land improvements (580,023) (61,389) 5,542 (635,870) Buildings (7,023,842) (336,092) 5,375 (7,354,559) Equipment (1,818,375) (45,652) 56,970 (1,807,057) Vehicles and heavy equipment (937,320) (48,531) 3,210 (982,641) Infrastructure (28,571,573) (1,025,967) - (29,597,540) Subtotal (38,931,133) (1,517,631) 71,097 (40,377,667) Net capital assets being depreciated 24,663,413 (121,530) -0-24,541,883 Capital assets, net $ 25,521,517 $ 298,991 $ (499,534) $ 25,320,974 Depreciation expense was charged to the following business-type activities: Electric $ 411,796 Sewer 701,261 Water 316,498 Airport 77,595 Cemetery 2,060 Plym Park Golf 8,421 Total depreciation expense $ 1,517,

48 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE E: CAPITAL ASSETS - CONTINUED Discretely Presented Component Units Balance Balance Oct. 1, 2011 Additions Deletions Sept. 30, 2012 Component Unit-Downtown Development Authority Capital assets being depreciated Equipment $ 35,277 $ - $ - $ 35,277 Less accumulated depreciation for: Equipment (30,075) (2,082) - (32,157) Capital assets, net $ 5,202 $ (2,082) $ -0- $ 3,120 Balance Additions/ Deletions/ Balance Jan. 1, 2011 Reclassifications Reclassifications Dec. 31, 2011 Component Unit - Niles Housing Commission Capital assets not being depreciated Land $ 227,376 $ - $ - $ 227,376 Construction in progress 9, ,991 (289,168) -0- Subtotal 236, ,991 (289,168) 227,376 Capital assets being depreciated Site improvements 257, ,567 Buildings 2,494, ,494,861 Building improvements 3,267, ,034-3,648,009 Non-dwelling structures 100, ,870 Equipment - dwellings 272,276 17, ,300 Furniture and equipment - admin 294, ,925 Subtotal 6,687, , ,085,532 Less accumulated depreciation for: Site improvements (242,518) (3,252) - (245,770) Buildings (2,298,608) (7,139) - (2,305,747) Building improvements (1,782,785) (153,501) - (1,936,286) Non-dwelling structures (100,809) - - (100,809) Equipment - dwellings (217,867) (12,308) - (230,175) Furniture and equipment - admin (262,802) (9,495) - (272,297) Subtotal (4,905,389) (185,695) -0- (5,091,084) Net capital assets being depreciated 1,782, , ,994,448 Capital assets, net $ 2,019,005 $ 491,987 $ (289,168) $ 2,221,

49 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE F: LONG-TERM DEBT The following is a summary of changes in long-term debt (including current portion) of the City for the year ended September 30, Primary Government Governmental Activities 1998 Building Authority Refunding Bonds 310,000 Balance Balance Due Within Oct. 1, 2011 Additions Deletions Sept. 30, 2012 One Year $ $ - $ (310,000) $ -0- $ - Compensated absences 481, ,383 (249,056) 480, ,065 Retiree life insurance benefit 15,000 - (5,000) 10, , ,383 (564,056) 490, ,065 Business-type activities 2004 Limited Tax G. O. Bonds 4,270,000 - (285,000) 3,985,000 - Unamortized bond premium 16,935 - (1,402) 15,533 1, State Revolving Loan 3,739, ,203 (185,000) 3,773, ,000 Compensated absences 334, ,643 (155,490) 333, ,951 Retiree life insurance benefit 35, ,000-8,396, ,846 (626,892) 8,143, ,353 Total Primary Government 9,203, ,229 (1,190,948) 8,633, ,418 Component Unit - Housing Commission Compensated absences 18,523 10,916 (3,603) 25,836 15,206 $ 9,221,730 $ 632,145 $ (1,194,551) $ 8,659,324 $ 613,624 Significant details regarding outstanding long-term debt (including current portion) are presented below: Primary Government General Obligation Bonds $5,800, Limited Tax General Obligation Bond dated January 28, 2004, due in annual installments ranging from $285,000 to $440,000 through October 1, 2023, with interest ranging between 2.50 percent and 4.40 percent, payable annually. $ 3,985,000 $4,581, State Revolving Loan dated April 17, 2009, due in annual installments ranging from $176,000 to $285,000 through April 1, 2030, with interest at 2.50 percent, payable annually. 3,773,925 Compensated Absences $ 7,758,925 Individual employees have vested rights upon termination of employment to receive payments for unused vacation. The dollar amounts of these vested rights including related payroll taxes, which have been accrued on the government-wide financial statements. The total liability amounted to approximately $814,030 at September 30, Of this amount, $480,129 and $333,901 are shown as accrued liabilities in the governmental and business-type activities financial statements, respectively, in accordance with criteria disclosed in Note A

50 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE F: LONG-TERM DEBT - CONTINUED The annual requirements to pay the debt principal and interest outstanding for the long-term debt are as follows: Primary Government Business-Type Activities Year Ending September 30, Principal Interest 2013 $ 190,000 $ 127, , , , , , , , , ,990, , ,125, , ,925 8,672 $ 7,758,925 $ 1,869,702 NOTE G: RETIREMENT PLAN Plan Description The City sponsors two contributory, single-employer defined benefit plans covering substantially all of its employees: Plan A and Plan B. The City has authorized the pension board to establish and amend all plan provisions, subject to the terms of collective bargaining agreements. Membership in Plan A is open to all full-time employees of the City (other than policemen, firemen, those employees earning less than an average of $500 per year, the medical director and independent contractors) including full-time elected officials. Employees who retire at or after age 62 with 10 years of credited service are entitled to a retirement benefit, payable monthly for life, equal to 1.9 percent of average monthly compensation for each year of credited service. Employees are allowed to purchase up to 5 years of military time. Average monthly compensation is equal to 1/36 th of the earnings of the employee during the best 3 consecutive years of the employee s final 10 years of employment with the City. Benefits fully vest upon reaching 10 years of credited service. Employees may retire early on or after age 55 with 10 years of credited service and receive reduced retirement benefits. The Plan also provides death and disability benefits. Membership in Plan B is open to all full-time employees of the police and fire departments, other than those earning less than an average of $500 per year, the medical director and independent contractors. Employees who retire at or after age 55 with 10 years of credited service, or on or after age 52 with 25 years of credited service, are entitled to a retirement benefit, payable monthly for life, equal to 2.6 percent of average monthly compensation (computed in the same manner as Plan A) for each year of credited service up to 30 years, with a maximum of 85 percent of average monthly compensation. Benefits for both police and fire employees fully vest upon reaching 10 years of credited service. Employees age 50 with 10 years of credited service or employees of any age with 25 years of credited service may retire early and receive reduced retirement benefits. The Plan also provides death and disability benefits. Employees are allowed to purchase up to 5 years of military time

51 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE G: RETIREMENT PLAN - CONTINUED Plan Description - continued Plan membership consisted of the following at October 1, 2011 (the date of the most recent actuarial valuation available): Funding Policy Plan A Plan B Total Retired plan members and beneficiaries receiving benefits Terminated plan members entitled to but not yet receiving benefits 6-6 Active plan members Total The obligation to contribute to and maintain the system for these employees was established and may be amended by the pension board. Plan A members are required to contribute 5.92 percent of their annual covered salary. Plan B members are required to contribute 7.00 percent of their annual covered salary. The City is required to contribute at an actuarially determined rate. For the year ended September 30, 2012, the rates were 5.04% and 16.50% of annual covered payroll for Plan A and Plan B, respectively. Annual Pension Cost For year ended September 30, 2012, the City s annual pension cost of $540,823 for the plan was equal to the City s required and actual contribution. The estimated annual required contribution was determined as part of an actuarial valuation at October 1, 2010, using the entry actual age cost method. Actual contributions to the retirement system are based on actual reported monthly payroll. Significant actuarial assumptions used include (a) an 8.00 percent investment rate of return (b) projected salary increases of 4.0 percent per year compounded annually, attributable to inflation (c) additional salary increases ranging from 0% to 8.4% per year depending on age, seniority and merit, and (d) assumption benefits will not increase after retirement. The actuarial value of assets was determined using techniques that smooth the effects of short term volatility over a five (5) year period. The unfunded actuarial liability is being amortized as a level percentage of payroll over a period of twenty-nine (29) years. Three (3) year trend information Plan A Year Ended September 30, Actuarial value of assets $ 17,262,603 $ 17,124,177 $ 16,634,675 Actuarial accrued liability (AAL) (entry age) 17,366,055 17,862,164 17,999,604 Unfunded AAL 103, ,987 1,364,929 Funded ratio 99% 96% 92% Covered payroll 4,430,124 3,968,517 4,113,942 UAAL as a percentage of covered payroll 2.34% 18.60% 33.18%

52 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE G: RETIREMENT PLAN - CONTINUED Three (3) year trend information - continued Plan A - continued Plan B Year Ended September 30, Annual pension cost $ - $ 171,405 $ 212,212 Percentage of APC contributed 100% 100% 100% Net pension obligation Year Ended September 30, Actuarial value of assets $ 12,692,893 $ 12,860,331 $ 12,575,611 Actuarial accrued liability (AAL) (entry age) 14,989,168 15,487,806 15,938,164 Unfunded AAL 2,296,275 2,627,475 3,362,553 Funded ratio 85% 83% 79% Covered payroll 1,908,859 1,878,312 1,940,984 UAAL as a percentage of covered payroll % % % Year Ended September 30, Annual pension cost $ 187,738 $ 279,267 $ 328,611 Percentage of APC contributed 100% 100% 100% Net pension obligation This trend information was obtained from the most recently issued actuarial reports. NOTE H: OTHER POST-EMPLOYMENT BENEFITS Plan Description The City of Niles Retiree Healthcare Plan (the Plan ) is a single-employer defined benefit healthcare plan administered by the City of Niles. The Plan provides certain health care benefits, in accordance with union agreements and/or personnel policies to employees who have retired. Benefit provisions are established by the City Council. During the year ended September 30, 2012, twenty-two (22) retirees were receiving benefits. Expenditures for post-employment benefits are recognized when claims are paid. During the year, expenditures of $138,126 were recognized for post-employment benefits. The plan does not issue a separate stand-alone financial statement. Funding Policy The City has no obligation to make contributions in advance of when the premiums are due for payment (i.e., may be financed on a pay-as-you-go basis). The current contributions being made are to pay the actual current premiums of the retirees. That amount was less than the annual required contribution and is reflected in the schedule that follows

53 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE H: OTHER POST-EMPLOYMENT BENEFITS - CONTINUED Funding Progress For the year ended September 30, 2012, the City has determined an estimated cost of providing postemployment benefits through the actuarial valuation method of calculation as of September 30, The calculation computes an annual required contribution, which represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to cover the amortization of any unfunded actuarial liabilities from the past, over a period not to exceed twenty-seven (27) years. The City s computed contribution and actual funding is summarized as follows: Annual required contribution (ARC) $ 260,105 Interest on net OPEB obligation 6,363 Adjustment to annual required contribution (5,892) Net OPEB cost 260,576 Contributions made 138,126 Change in net OPEB obligation 122,450 OPEB obligation - Beginning of year 159,079 OPEB obligation - End of year $ 281,529 The annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for the last three (3) years, are as follows: Percentage of Year Ended Annual Annual OPEB Net OPEB September 30, OPEB Cost Cost Contributed Obligation 2010 $ 144, % $ 54, , % 159, , % 281,529 The current funding progress of the plan for the last two (2) valuation dates, are as follows: Liability Percentage Actuarial Value of (AAL) Unfunded Funded Covered of Covered Valuation Assets Entry Age AAL Ratio Payroll Payroll Date (a) (b) (b-a) (a/b) (c ) [(b-a)/c] 9/30/2009 $ - $ 1,538,738 $ 1,538, % N/A N/A 9/30/2011-2,574,524 2,574, % N/A N/A

54 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE I: RISK MANAGEMENT The City participates in a pool, the Michigan Municipal League Workers Compensation Fund, with other municipalities for workers compensation losses. The pool is organized under Public Act 317 of 1969, as amended. In the event the pool s claims and expenses for a policy year exceed the total normal annual premiums for said years, all members of the specific pool s policy year may be subject to special assessment to make up the deficiency. The City has not been informed of any special assessments being required. The City also participates in a State pool, the Michigan Municipal League Liability and Property Pool, with other municipalities for property, liability, bonding, and casualty losses. The pool is organized under Public Act 138 of 1982, as amended. In the event the pool s claims and expenses for a policy year exceed the total normal annual premiums for said years, all members of the specific pool s policy year may be subject to special assessment to make up the deficiency. The City has not been informed of any special assessments being required. NOTE J: DETAILS OF FUND BALANCE CATEGORIES AND CLASSIFICATIONS GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The following are the five classifications of fund balance under this standard: Nonspendable - assets that are not available in a spendable form such as inventory, prepaid expenditures, and long-term receivables not expected to be converted to cash in the near term. It also includes funds that are legally or contractually required to be maintained intact such as the corpus of a permanent fund or foundation. Restricted - amounts that are required by external parties to be used for a specific purpose. Constraints are externally imposed by creditors, grantors, contributors, laws, regulations, or enabling legislation. Committed - amounts constrained on use imposed by formal action of the government s highest level of decision making authority (i.e., Board, Council, etc.). Assigned - amounts intended to be used for specific purposes. This is determined by the governing body, the budget or finance committee or a delegated municipality official. Unassigned - all other resources; the remaining fund balance after non-spendable, restrictions, commitments, and assignments. This class only occurs in the General Fund, except for cases of negative fund balances. Negative Fund Balances are always reported as Unassigned, no matter which fund the deficit occurs in. Fund Balance Classification Policies and Procedures For committed fund balance, the City of Niles highest level of decision-making authority is the City Council. The formal action that is required to be taken to establish a fund balance commitment is a resolution by the City Council. For assigned fund balance, the City of Niles has not approved a policy indicating who is authorized to assign amounts to a specific purpose. As a result, this authority is retained by the City Council. The City of Niles has not formally adopted a policy that defines the order of usage for fund balance amounts classified as restricted, committed, assigned, or unassigned. In the absence of such a policy, the City considers restricted amounts to have been spent first when an expenditure is incurred for which both restricted and unrestricted fund balance is available. Also for the classification of fund balances, the City of Niles considers committed, assigned, and then unassigned amounts to have been spent when an expenditure is incurred for purposes for which amounts in any of those unrestricted fund balance classifications could be used

55 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE K: RESTATEMENT OF NET ASSETS Beginning net assets for the Electric Fund, Sewer Fund, and Water Fund have been adjusted for receivables that were unrecorded in the prior year. The Electric Fund s net assets were increased $495,615, the Sewer Fund s net assets were increased $119,340, and the Water Fund s net assets were increased $108,408 to properly record this adjustment. Beginning net assets for the business-type activities at the government-wide level were increased $723,363 to reflect this correction. Beginning net assets for the governmental activities and the business-type activities were adjusted by ($52,968) and $52,968, respectively, to account for a change in the allocation of internal service fund activities between the governmental activities and the business-type activities. NOTE L: UPCOMING ACCOUNTING PRONOUNCEMENTS In November 2010, the GASB issued Statement No. 61, The Financial Reporting Entity Omnibus. This pronouncement, which is an amendment to Statement 14 and Statement 34, modified certain requirements for inclusion of component units in the financial reporting entity. This statement also amends the criteria for reporting component units as if they were part of the primary government (that is, blending) in certain circumstances. Lastly, the statement also clarified the reporting of equity interests in legally separate organizations. The City is currently evaluating the impact this standard will have on their financial statements when adopted during the 2013 fiscal year. In 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. This statement incorporates into GASB literature certain accounting and financial reporting guidance issued on or before November 30, 1989 that is included in FASB Statements and Interpretations, APB Opinions, and Accounting Research Bulletins of the AICPA Committee on Accounting Procedure. The City is currently evaluating the impact this standard will have on the financial statements when adopted during the 2013 fiscal year. In June 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. The statement will be effective for the City s 2013 fiscal year. The statement incorporates deferred outflows of resources and the deferred inflows of resources, as defined by GASB Concepts Statement No. 4, into the definitions of the required components of the residual measure of net position, formerly net assets. This statement also provides a new statement of net position format to report all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position. Once implemented, this statement will impact the format and reporting of the balance sheet at the government-wide level and also at the fund level. In June 2012, the GASB issued Statement No. 67, Financial Reporting for Pension Plans. This statement will be effective for the City s fiscal year. The statement will establish accounting and financial reporting requirements related to defined benefit pension plans and specify the required approach to measuring the pension liability of employers. The statement also enhances accountability and transparency through revised note disclosures and required supplementary information (RSI). The City is currently evaluating the impact this standard will have on the financial statements when adopted. In June 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions. The statement requires governments providing defined benefit pensions to recognize their unfunded pension benefit obligation as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits. The statement also enhances accountability and transparency through revised note disclosures and required supplemental information (RSI). The City is currently evaluating the impact this standard will have on the financial statements when adopted. The provisions of this statement are effective for financial statements for the City s fiscal year

56 NOTES TO FINANCIAL STATEMENTS September 30, 2012 NOTE M: CONTINGENT LIABILITIES The City participates in a number of Federal and State assisted grant programs that are subject to compliance audits. The Single Audit of the Federal programs and the periodic program compliance audits of many of the State programs have not yet been conducted, completed, or resolved. Accordingly, the City s compliance with applicable rant requirements will be established at some future date. The amount, if any, of expenditures which may be disallowed by the granting agencies cannot be determined at this time although the City expects such amounts, if any, to be immaterial. There are potential legal actions pending against the City. Due to the inconclusive nature of many of the actions, it is not possible for Corporation Counsel to determine the probable outcome or a reasonable estimate of the potential liability, if any. These actions, for which a reasonable estimated can be determined of the potential liability, if any, are considered by City management and legal counsel to be immaterial. NOTE N: DIAL-A-RIDE COMPLIANCE REQUIREMENTS The following assurances are related to the Dial-A-Ride Schedules required by the Michigan Department of Transportation beginning on page 67. The methodology used for compiling mileage on the OAR Schedule 4N is an adequate and reliable methodology for recording vehicle mileage. No Office of Passenger Transportation (OPT) approved cost allocation plans are required, and therefore, none were used in the preparation of the financial statements. Operating expenses of $32,962 were subtracted out as ineligible under Other Ineligible Operating Expense paid by Capital Contract because these expenses were paid for with capital funds. No other operating expenses were paid for with capital funds. Ineligible expenses are classified appropriately according to the definition in the local public transit revenue and expense manual. Expenses associated with generating local revenues have been subtracted out as ineligible. The Dial-A-Ride Transportation Fund did not incur any expenses for retirement benefits for the year ended September 30,

57 REQUIRED SUPPLEMENTARY INFORMATION

58 General Fund BUDGETARY COMPARISON SCHEDULE Year Ended September 30, 2012 Variance with Budgeted Amounts Final Budget Positive Original Final Actual (Negative) REVENUES Taxes $ 3,208,800 $ 3,208,800 $ 3,124,846 $ (83,954) Special assessments 6,000 6,000 7,035 1,035 Intergovernmental 1,205,857 1,205,857 1,303,270 97,413 Charges for services 959, , ,015 (214,292) Licenses and permits 33,000 33,000 41,585 8,585 Fines and forfeitures 98,000 98,000 82,254 (15,746) Interest and rents 157, ,500 68,746 (88,754) Other 110, , ,633 43,133 TOTAL REVENUES 5,778,964 5,778,964 5,526,384 (252,580) EXPENDITURES Current General government 1,526,777 1,526,777 1,575,531 (48,754) Public safety 3,704,926 3,704,926 3,589, ,503 Public works 131, , ,506 16,594 Highways and streets 823, , ,538 (10,938) Community and economic development 72,464 72,464 93,771 (21,307) Recreation and culture 215, , ,780 15,262 Debt service 20,000 20,000 3,201 16,799 TOTAL EXPENDITURES 6,493,909 6,493,909 6,410,750 83,159 EXCESS OF REVENUES (UNDER) EXPENDITURES (714,945) (714,945) (884,366) (169,421) OTHER FINANCING SOURCES (USES) Transfers in 995, , ,478 (100,422) Transfers out (258,682) (258,682) (64,233) 194,449 TOTAL OTHER FINANCING SOURCES (USES) 737, , ,245 94,027 NET CHANGE IN FUND BALANCE 22,273 22,273 (53,121) (75,394) Fund balance, beginning of year 2,090,723 2,090,723 2,090, Fund balance, end of year $ 2,112,996 $ 2,112,996 $ 2,037,602 $ (75,394)

59 SCHEDULES OF FUNDING PROGRESS Year Ended September 30, 2012 Defined Benefit Pension Plan A Actuarial Valuation Date Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) Entry Age (b) Unfunded Liability UAAL (b-a) Funded Ratio (a/b) Covered Payroll (c) UAAL as a Percentage of Covered Payroll [(b-a)/c] 1/1/2006 $ 16,441,525 $ 15,880,718 $ (560,807) 104% $ 4,209, % 1/1/ ,091,891 16,043,996 (1,047,895) 107% 4,467, % 1/1/ ,793,064 16,876,026 (917,038) 105% 4,528, % 10/1/ ,262,603 17,366, ,452 99% 4,430, % 10/1/ ,124,177 17,862, ,987 96% 3,968, % 10/1/ ,634,675 17,999,604 1,364,929 92% 4,113, % Defined Benefit Pension Plan B Actuarial Valuation Date Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) Entry Age (b) Unfunded Liability UAAL (b-a) Funded Ratio (a/b) Covered Payroll (c) UAAL as a Percentage of Covered Payroll [(b-a)/c] 1/1/2006 $ 12,531,397 $ 13,177,825 $ 646,428 95% $ 1,764, % 1/1/ ,921,684 13,702, ,220 94% 1,900, % 1/1/ ,401,659 14,157, ,230 95% 1,989, % 10/1/ ,871,893 14,989,168 2,117,275 86% 1,908, % 10/1/ ,860,331 15,487,806 2,627,475 83% 1,878, % 10/1/ ,575,611 15,938,164 3,362,553 79% 1,940, % Retiree Medical Plan Actuarial Valuation Date Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) Entry Age (b) UAAL (Underfunded) (b-a) Funded Ratio (a/b) Covered Payroll (c) UAAL as a Percentage of Covered Payroll [(b-a)/c] 12/31/2008 $ - $ 1,538,738 $ 1,538,738 0% n/a n/a 9/30/2011-2,574,524 2,574,524 0% n/a n/a

60 SCHEDULES OF EMPLOYER CONTRIBUTIONS Year Ended September 30, 2012 Defined Benefit Pension Plan A Percentage of Fiscal Annual Annual Pension Year Ended Pension Cost Cost Contributed 2007 $ % % % % , % , % Defined Benefit Pension Plan B Percentage of Fiscal Annual Annual Pension Year Ended Pension Cost Cost Contributed 2007 $ 155, % , % , % , % , % , % Retiree Medical Plan Percentage of Fiscal Annual Annual OPEB Year Ended OPEB Cost Cost Contributed 2009 $ 141, % , % , % , %

61 NOTES TO REQUIRED SUPPLEMENTARY INFORMATION Year Ended September 30, 2012 NOTE A: EXCESS OF EXPENDITURES OVER APPROPRIATIONS PRIMARY GOVERNMENT In the budgetary comparison schedule, the City s budgeted expenditures in the General Fund has been shown at the activity level. The approved budgets of the City have been adopted at the activity level for the General Fund. The General Fund budgets shown as required were prepared on the same modified accrual basis used to reflect actual results. During the year ended September 30, 2012, the City incurred expenditures in the General Fund in excess of amounts appropriated as follows: Amounts Amounts Appropriated Expended Variance General Fund General government $ 1,526,777 $ 1,575,531 $ (48,754) Highways and streets 823, ,538 (10,938) Community and economic development 72,464 93,771 (21,307) NOTE B: DEFINED BENEFIT PENSION PLAN Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. The accompanying schedule of employer contributions presents trend information about the amounts contributed to the plan by the employer in comparison to the Annual Pension Cost (APC), which is calculated from the Annual Required Contribution (ARC), an amount that is actuarially determined. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost for each year and amortized any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the longterm perspective of the calculations. Significant methods and assumptions were as follows: Defined Benefit Pension Plans A & B Actuarial Valuation Frequency: Annual Latest valuation date October 1, 2011 Basis for contribution October 1, 2010 Actuarial cost method Individual entry age Amortization method Level percentage of payroll on an open basis Remaining amortization period 28 years Asset valuation method 5-year smoothed market Actuarial assumptions: Investment rates of return 8.00%

62 NOTES TO REQUIRED SUPPLEMENTARY INFORMATION - CONTINUED Year Ended September 30, 2012 NOTE C: OTHER POST-EMPLOYMENT BENEFIT PLAN Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. The accompanying schedule of employer contributions presents trend information about the amounts contributed to the plan by the employer in comparison to the Annual OPEB Cost, which is calculated from the Annual Required Contribution (ARC), an amount that is actuarially determined. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost for each year and amortized any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the longterm perspective of the calculations. Significant methods and assumptions were as follows: City of Niles Retiree Healthcare Plan Actuarial Valuation Frequency: Every three years Latest valuation date September 30, 2011 Actuarial cost method Projected unit credit Amortization method Level dollar, closed Remaining amortization period 27 years Asset valuation method N/A - plan is not prefunded Actuarial assumptions: Investment rates of return N/A - plan is not prefunded Discount rate 4.00% Medical inflation 9.00% graded down to 5% over 4 years

63 OTHER SUPPLEMENTARY INFORMATION

64 General Fund - By Activity COMBINING BALANCE SHEET September 30, 2012 Tax Tax Total Corporate Revolving Collection General Account Account Account Fund ASSETS Cash and cash equivalents $ 1,366,024 $ 129,818 $ 861,416 $ 2,357,258 Investments 2,114, ,984-2,516,372 Receivables Taxes 290, ,202 Accounts 29, ,105 Due from other governmental units 280, ,323 Due from other funds 631, ,542 Assets held for resale 20, ,654 TOTAL ASSETS $ 4,732,238 $ 531,802 $ 861,416 $ 6,125,456 LIABILITIES AND FUND BALANCES LIABILITIES Accounts payable $ 287,074 $ - $ 413,959 $ 701,033 Accrued liabilities 65, ,257 Due to other funds 65, , ,697 Due to other governmental units 58, ,095 Deferred revenue 2,750, ,750,772 TOTAL LIABILITIES 3,226, ,416 4,087,854 FUND BALANCES Assigned for subsequent year's expenditures 48, ,043 Unassigned 1,457, ,802-1,989,559 TOTAL FUND BALANCES 1,505, , ,037,602 TOTAL LIABILITIES AND FUND BALANCES $ 4,732,238 $ 531,802 $ 861,416 $ 6,125,

65 General Fund - By Activity COMBINING SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES Year Ended September 30, 2012 Tax Tax Total Corporate Revolving Collection General Account Account Account Fund REVENUES Taxes $ 2,910,549 $ 214,297 $ - $ 3,124,846 Special assessments - 7,035-7,035 Intergovernmental 1,303, ,303,270 Charges for services 745, ,015 Licenses and permits 41, ,585 Fines and forfeits 82, ,254 Interest and rents 62,070 6,676-68,746 Other 153, ,633 TOTAL REVENUES 5,298, , ,526,384 EXPENDITURES Current General government 1,554,952 20,579-1,575,531 Public safety 3,589, ,589,423 Public works 114, ,506 Highways and streets 834, ,538 Community and economic development 93, ,771 Recreation and culture 199, ,780 Debt service 3, ,201 TOTAL EXPENDITURES 6,390,171 20, ,410,750 EXCESS OF REVENUES OVER (UNDER) EXPENDITURES (1,091,795) 207, (884,366) OTHER FINANCING SOURCES (USES) Transfers in 1,045, ,045,478 Transfers out (64,233) (150,000) - (214,233) TOTAL OTHER FINANCING SOURCES (USES) 981,245 (150,000) ,245 NET CHANGE IN FUND BALANCES (110,550) 57, (53,121) Fund balances, beginning of year 1,616, ,373-2,090,723 Fund balances, end of year $ 1,505,800 $ 531,802 $ -0- $ 2,037,

66 Nonmajor Governmental Funds COMBINING BALANCE SHEET September 30, 2012 Special Community Development Major Local Building Grants Street Street Department and Loans ASSETS Cash and cash equivalents $ 627,884 $ 486,491 $ 33,259 $ 5,599 Investments Receivables Taxes Accounts Due from other governmental units 100,681 37, Due from other funds TOTAL ASSETS $ 728,565 $ 524,476 $ 33,259 $ 5,599 LIABILITIES AND FUND BALANCES LIABILITIES Accounts payable $ 6,403 $ 67 $ 3,301 $ - Accrued liabilities 838 2,673 1,041 - Due to other funds 15,815 22, Due to other governmental units TOTAL LIABILITIES 23,056 25,412 4, FUND BALANCES Nonspendable Long-term receivables Cemetery perpetual care Restricted Highways and streets 705, , Transportation Community and economic development ,917 5,599 Capital projects Committed Capital projects TOTAL FUND BALANCES 705, ,064 28,917 5,599 TOTAL LIABILITIES AND FUND BALANCES $ 728,565 $ 524,476 $ 33,259 $ 5,

67 Debt Revenue Service Economic Downtown Community HUD Development Revolving Development Entitlement Grants Industrial Dial-A-Ride Building Loans Housing Program and Loans Park Transportation Authority $ 760 $ 87,386 $ 6,318 $ 438,593 $ 70,911 $ 122,317 $ ,275-11, , , , ,953 - $ 12,230 $ 87,386 $ 80,435 $ 467,795 $ 70,911 $ 229,988 $ -0- $ - $ - $ 36,750 $ - $ 1,311 $ 9,155 $ , ,322 10, , ,322 56, ,311 14, , , , ,064 23, ,593 69, ,230 3,064 24, ,795 69, , $ 12,230 $ 87,386 $ 80,435 $ 467,795 $ 70,911 $ 229,988 $

68 Nonmajor Governmental Funds COMBINING BALANCE SHEET - CONTINUED September 30, 2012 Capital Projects Local Capital Equipment Improvement Improvement Replacement Revolving ASSETS Cash and cash equivalents $ 37,534 $ 15,241 $ 60,549 Investments Receivables Taxes Accounts Due from other governmental units Due from other funds 10, TOTAL ASSETS $ 47,534 $ 15,241 $ 60,549 LIABILITIES AND FUND BALANCES LIABILITIES Accounts payable $ - $ - $ - Accrued liabilities Due to other funds Due to other governmental units TOTAL LIABILITIES FUND BALANCES Nonspendable Long-term receivables Cemetery perpetual care Restricted Highways and streets Transportation Community and economic development Capital projects - 15,241 60,549 Committed Capital projects 47, TOTAL FUND BALANCES 47,534 15,241 60,549 TOTAL LIABILITIES AND FUND BALANCES $ 47,534 $ 15,241 $ 60,

69 Permanent Fund Cemetery Perpetual Care Total Nonmajor Governmental Funds $ 2,563 $ 1,995, , ,588-10,275-41, ,623-24,953 $ 767,151 $ 3,131,119 $ - $ 56,987-9, ,815-10, ,500-41, , ,151-1,204, , ,033-75,790-47, ,151 2,921,619 $ 767,151 $ 3,131,

70 Nonmajor Governmental Funds COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES Year Ended September 30, 2012 Special Community Development Major Local Building Grants Street Street Department and Loans REVENUES Taxes $ - $ - $ - $ - Intergovernmental 544, , Charges for services 85,063-1,825 - Licenses and permits ,750 - Interest and rents Other TOTAL REVENUES 630, , , EXPENDITURES Current Highways and streets 254, , Transportation Community and economic development ,690 10,000 Capital outlay Debt service TOTAL EXPENDITURES 254, , ,690 10,000 EXCESS OF REVENUES OVER (UNDER) EXPENDITURES 376,382 (97,238) 3,708 (9,974) OTHER FINANCING SOURCES (USES) Transfers in - 165,000 20,000 - Transfers out (125,000) TOTAL OTHER FINANCING SOURCES (USES) (125,000) 165,000 20, NET CHANGE IN FUND BALANCES 251,382 67,762 23,708 (9,974) Fund balances, beginning of year 454, ,302 5,209 15,573 Fund balances, end of year $ 705,509 $ 499,064 $ 28,917 $ 5,

71 Revenue Debt Service Economic Downtown Community HUD Development Revolving Development Entitlement Grants Industrial Dial-A-Ride Building Loans Housing Program and Loans Park Transportation Authority $ - $ - $ - $ - $ - $ 97,177 $ , , , , , , , ,669 1, , , , ,619-5, , , , , , , (950) 1,822 (5,078) 150, (950) 1,822 (5,078) 150, ,228 2,791 25, ,973 74,678 65,255 - $ 12,230 $ 3,064 $ 24,103 $ 467,795 $ 69,600 $ 215,263 $

72 Nonmajor Governmental Funds COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - CONTINUED Year Ended September 30, 2012 Capital Projects Local Capital Equipment Improvement Improvement Replacement Revolving REVENUES Taxes $ - $ - $ - Intergovernmental Charges for services Licenses and permits Interest and rents Other TOTAL REVENUES EXPENDITURES Current Highways and streets Transportation Community and economic development Capital outlay Debt service TOTAL EXPENDITURES EXCESS OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Transfers in - 3,000 - Transfers out TOTAL OTHER FINANCING SOURCES (USES) -0-3, NET CHANGE IN FUND BALANCES 135 3, Fund balances, beginning of year 47,399 11,718 60,360 Fund balances, end of year $ 47,534 $ 15,241 $ 60,

73 Permanent Fund Cemetery Perpetual Care Total Nonmajor Governmental Funds $ - $ 97,177-1,540, , ,750 9, ,233-11,374 9,832 2,247, , , ,621-37, , ,818,026 9, , ,000 (22,977) (147,977) (22,977) 40,023 (13,145) 469, ,296 2,451,962 $ 767,151 $ 2,921,

74 Nonmajor Enterprise Funds COMBINING STATEMENT OF NET ASSETS September 30, 2012 Total Nonmajor Plym Park Enterprise Cemetery Airport Golf Funds ASSETS Current assets Cash and cash equivalents $ 68,749 $ 179,997 $ 106,647 $ 355,393 Noncurrent assets Capital assets not being depreciated 20, ,391 7, ,946 Capital assets being depreciated, net 8,350 1,085,515 60,290 1,154,155 Total noncurrent assets 28,350 1,203,906 67,845 1,300,101 TOTAL ASSETS 97,099 1,383, ,492 1,655,494 LIABILITIES Current liabilities Accounts payable ,835 6,100 Accrued liabilities 1, ,593 4,034 Due to other funds ,594 24,594 TOTAL LIABILITIES 2, ,022 34,728 NET ASSETS Invested in capital assets 28,350 1,203,906 67,845 1,300,101 Unrestricted 66, ,520 74, ,665 TOTAL NET ASSETS $ 94,870 $ 1,383,426 $ 142,470 $ 1,620,

75 Nonmajor Enterprise Funds COMBINING STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS Year Ended September 30, 2012 Total Nonmajor Plym Park Enterprise Cemetery Airport Golf Funds OPERATING REVENUES Charges for services $ 120,269 $ - $ 110,365 $ 230,634 Rents - 46,945 66, ,895 Other 987 2,074 1,048 4,109 TOTAL REVENUES 121,256 49, , ,638 OPERATING EXPENSES Personnel services 73,934 4,860 96, ,992 Supplies 5,491 1,720 7,516 14,727 Contractual services 66,437 1,449 3,461 71,347 Other services and charges 2,065 16,481 47,029 65,575 Depreciation 2,060 77,595 8,421 88,076 TOTAL OPERATING EXPENSES 149, , , ,717 OPERATING INCOME (LOSS) (28,731) (53,086) 15,738 (66,079) NONOPERATING REVENUES (EXPENSES) Intergovernmental - 290, ,016 Investment income ,092 Interest expense and fees - - (1,338) (1,338) TOTAL NONOPERATING REVENUES (EXPENSES) ,606 (1,054) 289,770 INCOME (LOSS) BEFORE TRANSFERS (28,513) 237,520 14, ,691 TRANSFERS IN 22,977 1,233-24,210 CHANGE IN NET ASSETS (5,536) 238,753 14, ,901 Net assets, beginning of year 100,406 1,144, ,786 1,372,865 Net assets, end of year $ 94,870 $ 1,383,426 $ 142,470 $ 1,620,

76 Nonmajor Enterprise Funds COMBINING STATEMENT OF CASH FLOWS Year Ended September 30, 2012 Total Nonmajor Plym Park Enterprise Cemetery Airport Golf Funds CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers $ 121,256 $ 49,019 $ 178,363 $ 348,638 Cash paid to suppliers (73,930) (20,052) (69,776) (163,758) Cash paid to employees (73,471) (4,761) (95,293) (173,525) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (26,145) 24,206 13,294 11,355 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Receipt of interfund balances 22,977 1,233-24,210 Operating grants received - 290, ,016 NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 22, , ,226 CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments ,092 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Interest paid on financing - - (1,338) (1,338) Purchase of capital assets - (302,849) - (302,849) NET CASH (USED) FROM CAPITAL AND RELATED FINANCING ACTIVITIES -0- (302,849) (1,338) (304,187) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,950) 13,196 12,240 22,486 Cash and cash equivalents, beginning of year 71, ,801 94, ,907 Cash and cash equivalents, end of year $ 68,749 $ 179,997 $ 106,647 $ 355,393 Reconciliation of operating income (loss) to net cash provided (used) by operating activities Operating income (loss) $ (28,731) $ (53,086) $ 15,738 $ (66,079) Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities Depreciation 2,060 77,595 8,421 88,076 Increase (decrease) in: Accounts payable 63 (402) (9,608) (9,947) Accrued liabilities ,467 Due to other funds - - (2,162) (2,162) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (26,145) $ 24,206 $ 13,294 $ 11,

77 Internal Service Funds COMBINING STATEMENT OF NET ASSETS September 30, 2012 Total Sewer Internal Insurance Maintenance Service Funds ASSETS Cash and cash equivalents $ 237,079 $ 23,425 $ 260,504 Accounts receivable 2,250-2,250 Due from other funds - 26,608 26,608 TOTAL ASSETS 239,329 50, ,362 LIABILITIES Accounts payable 20,251 1,886 22,137 Accrued liabilities 60,000 1,838 61,838 Due to other funds TOTAL LIABILITIES 80,251 4,685 84,936 NET ASSETS Unrestricted $ 159,078 $ 45,348 $ 204,

78 Internal Service Funds COMBINING STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS Year Ended September 30, 2012 Total Sewer Internal Insurance Maintenance Service Funds OPERATING REVENUES Charges for services $ 1,725,436 $ 162,601 $ 1,888,037 Other 7, ,113 TOTAL OPERATING REVENUES 1,733, ,805 1,896,150 OPERATING EXPENSES Administrative and general 1,800, ,751 1,903,139 Public works - 51,779 51,779 TOTAL OPERATING EXPENSES 1,800, ,530 1,954,918 OPERATING INCOME (LOSS) (67,043) 8,275 (58,768) NONOPERATING REVENUES Interest earned CHANGE IN NET ASSETS (66,638) 8,351 (58,287) Net assets, beginning of year 225,716 36, ,713 Net assets, end of year $ 159,078 $ 45,348 $ 204,

79 Internal Service Funds COMBINING STATEMENT OF CASH FLOWS Year Ended September 30, 2012 Total Sewer Internal Insurance Maintenance Service Funds CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers $ 1,732,448 $ 148,201 $ 1,880,649 Cash paid to suppliers (1,851,507) (106,180) (1,957,687) Cash paid to employees - (50,849) (50,849) NET CASH (USED) BY OPERATING ACTIVITIES (119,059) (8,828) (127,887) CASH FLOWS FROM INVESTING ACTIVITIES Interest earned NET (DECREASE) IN CASH AND CASH EQUIVALENTS (118,654) (8,752) (127,406) Cash and cash equivalents, beginning of year 355,733 32, ,910 Cash and cash equivalents, end of year $ 237,079 $ 23,425 $ 260,504 Reconciliation of operating income (loss) to net cash (used) by operating activities Operating income (loss) $ (67,043) $ 8,275 $ (58,768) Adjustments to reconcile operating income (loss) to net cash (used) by operating activities (Increase) decrease in: Accounts receivable (897) - (897) Due from other funds - (15,565) (15,565) Increase (decrease) in: Accounts payable (15,099) (3,429) (18,528) Accrued liabilities (36,020) 930 (35,090) Due to other funds NET CASH (USED) BY OPERATING ACTIVITIES $ (119,059) $ (8,828) $ (127,887)

80 Agency Funds COMBINING STATEMENT OF FIDUCIARY ASSETS AND LIABILITIES September 30, 2012 Tax Holding Riverfront Total Agency Fund Amphitheatre Agency Funds ASSETS Cash and cash equivalents $ 7,490 $ 17,574 $ 25,064 Due from other governments 413, ,740 TOTAL ASSETS $ 421,230 $ 17,574 $ 438,804 LIABILITIES Due to other governments $ 421,230 $ 17,574 $ 438,

81 Component Unit Fund BALANCE SHEET - DOWNTOWN DEVELOPMENT AUTHORITY September 30, 2012 ASSETS Cash and cash equivalents $ 26,820 Due from other governmental units 89,192 TOTAL ASSETS $ 116,012 LIABILITIES AND FUND BALANCE LIABILITIES Accounts payable $ 19,132 Accrued liabilities 911 Due to other governmental units 3,093 Deferred revenue 64,616 TOTAL LIABILITIES 87,752 FUND BALANCE Unassigned 28,260 TOTAL LIABILITIES AND FUND BALANCE $ 116,

82 Component Unit Fund RECONCILIATION OF THE BALANCE SHEET TO THE STATEMENT OF NET ASSETS - DOWNTOWN DEVELOPMENT AUTHORITY September 30, 2012 Total fund balance - governmental fund $ 28,260 Amounts reported for the governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported as assets in the governmental funds. The cost of capital assets is $ 35,277 Accumulated depreciation is (32,157) Capital assets, net 3,120 Net assets of governmental activities $ 31,

83 Component Unit Fund STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE - DOWNTOWN DEVELOPMENT AUTHORITY Year Ended September 30, 2012 REVENUES Taxes $ 102,100 Intergovernmental 31,939 Charges for services 14,342 Interest and rents 2,851 Contributions 42,199 Other 1,584 TOTAL REVENUES 195,015 EXPENDITURES Current Community and economic development 205,540 NET CHANGE IN FUND BALANCE (10,525) Fund balance, beginning of year 38,785 Fund balance, end of year $ 28,

84 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE OF THE GOVERNMENTAL FUND TO THE STATEMENT OF ACTIVITIES - DOWNTOWN DEVELOPMENT AUTHORITY Year Ended September 30, 2012 Net change in fund balance - governmental fund $ (10,525) Amounts reported for governmental activities in the statement of activities are different because: Capital outlays are reported as expenditures in the governmental fund. However, in the statement of activities, the cost of capital assets is allocated over their estimated useful lives as depreciation expense. In the current period, these amounts are: Depreciation expense (2,082) Change in net assets of governmental activities $ (12,607)

85 DIAL-A-RIDE TRANSPORTATION FUND SCHEDULES

86 DIAL-A-RIDE TRANSPORTATION FUND SCHEDULE OF LOCAL REVENUES Year Ended September 30, /1/2011 to 9/30/2012 Local Revenues Passenger Fares (Urban) $ 60,336 Tax Levy (Urban) 97,177 Sale of Property (Urban) 6,460 Interest Income (Urban) 138 $ 164,

87 DIAL-A-RIDE TRANSPORTATION FUND SCHEDULE OF EXPENDITURES OF FEDERAL AND STATE AWARDS Year Ended September 30, 2012 GRANT NO./ PROGRAM PRIOR AWARD FEDERAL AND STATE GRANTOR/PASS- CFDA AUTHORIZATION AWARD CURRENT YEAR'S EXPENDITURES YEAR'S AMOUNT THROUGH GRANTOR/PROGRAM TITLE NUMBER NUMBER AMOUNT TOTAL FEDERAL STATE LOCAL EXPENDITURES REMAINING U.S. Department of Transportation Direct Assistance Federal Transit Capital Grant - Section 5307 (80/20) Capital X574 $ 134,080 $ - $ - $ - $ - $ 134,080 $ - Capital X ,624 1,949 1, ,478 44,197 Capital X ,250 25,464 24, , ,268 Preventative Maintenance X , ,000 - Capital X ,000 24,248 24, ,823 79,929 Preventative Maintenance X , , , ,332 (1) Capital X ,095 14,865 11,904 2, ,230 Preventative Maintenance X ,136 1,427 1, ,709 Capital X655 47,500 32,962 26,370 6, ,538 Preventative Maintenance X , ,000 Total U.S. Department of Transportation 1,547, , ,189 10, , ,870 Michigan Department of Transportation Operating Assistance - Act 51 Urban n/a n/a 190, , , Prior Years n/a n/a 47,797 47,797-47, Total Michigan Department of Transportation 237, , , Total Expenditures of Federal and State Awards $ 1,785,626 $ 453,525 $ 205,189 $ 248,336 $ - $ 552,231 $ 779,870 Note: The total intergovernmental revenue on the Nonmajor Statement of Revenues, Expenditures, and Changes in Fund Balance for the Dial-A-Ride Transportation Fund is $458,630. The Schedule of Expenditures of Federal and State Awards has total expenditures of $453,525. The difference of $5,105 consists of $5,000 in pass-through revenue from Southwest Michigan Planning Commission and $105 of prior year revenue related to fiscal 2009 reconciled Section 5311 operating funds

88 DIAL-A-RIDE TRANSPORTATION FUND SCHEDULE OF OPERATING AND CONTRACT EXPENSES Year Ended September 30, 2012 Urban Labor $ 245,383 Fringe Benefits 58,529 Services 1,702 Materials and Supplies 74,518 Utilities 14,942 Insurance 5,837 Taxes & Fees 100 Miscellaneous Expenses 5,472 Total Operating Expenses per OAR 406,483 Capital Expenditures (recorded in audited statements) 67,028 Current year refund (netted against expense on OAR) - Total Expenses per Audit $ 473,

89 DIAL-A-RIDE TRANSPORTATION FUND OAR SCHEDULE 4R URBAN REGULAR SERVICE REVENUE REPORT Year Ended September 30, 2012 CODE TOTAL 401: FAREBOX REVENUE: Passenger fares $ 60, : NON-TRANSIT REVENUE Gains from the Sale of Capital Assets 6, : LOCAL REVENUE Taxes levied directly for/by Transit Agency 97, : STATE FORMULAS AND CONTRACTS: State operating assistance 237, : FEDERAL CONTRACTS Preventive Maintenance (80% Fed. Share) 114,669 (State issued toll credits -- Fed covered at 100%) Other Federal Transit Contracts/& Reimbursements 5,000 (FTA Section 8 planning pass-thru - $3,750) 414: OTHER REVENUE Interest income : OTHER REVENUE Prior Year Refunds and Credits 778 Total operating revenues $ 522,

90 DIAL-A-RIDE TRANSPORTATION FUND OAR SCHEDULE 4E URBAN REGULAR SERVICE EXPENSE REPORT Year Ended September 30, 2012 Operations Maintenance Gen. Admin Code Description DR DR DR Total 501 Labor Operators Salaries & Wages $ 98,499 $ - $ - $ 98, Other Salaries & Wages - 54,992 48, , Dispatcher's Salaries & Wages 43, , Fringe Benefits Other Fringe Benefits 25,510 17,785 15,234 58, Services Advertising Fees ($75.64 was subtracted for CY reimb of "stuff-a-bus" expenses) Audit Cost Other Services (New employee checks (credit, medical, DL), towing) 504 Materials and Supplies Fuel & Lubricants 32, , Tires & Tubes Other Material & Supplies 1,031 39,029 1,286 41, Utilities Utilities - 3,258 11,684 14, Insurance Liability Insurance 3,670-1,570 5, Other Insurance Taxes & Fees Taxes & Fees Miscellaneous Expenses Travel, Meetings & Training ,299 3, Association Dues & Subscriptions - - 2,125 2, Other Misc Expenses (New employee testing) 540/550/570/576 Ineligible Expenses Ineligible Expenses (Prior Year Refunds) Ineligible Expenses (Section 8 planning funds) - - 5,000 5, Ineligible Expenses (Fuel reimb from FTA-MI-90-X655-00) ,962 32, Ineligible Preventive Maintenance - 116, ,096 Total Expenses 406,483 Total Ineligible Expenses 154,836 Total Eligible Expenses $ 251,

91 DIAL-A-RIDE TRANSPORTATION FUND OAR SCHEDULE 4N URBAN REGULAR SERVICE NONFINANCIAL REPORT (UNAUDITED) Year Ended September 30, 2012 SENIOR/ VEHICLE VEHICLE REGULAR SENIOR HANDICAPPED HANDICAPPED TOTAL MILES (1) HOURS PASSENGERS PASSENGERS PASSENGERS PASSENGERS PASSENGERS First quarter (October-December) 26,084 1,962 2,208 2,689 2, ,590 Second quarter (January-March) 29,150 2,094 3,084 3,167 2, ,938 Third quarter (April-June) 26,450 1,896 2,540 2,875 2, ,885 Fourth quarter (July-September) 23,863 1,794 2,296 2,611 1, ,231 Total 105,547 7,746 10,128 11,342 8,856 1,318 31,644 (1) The methodology used for compiling mileage has been reviewed and found to be an adequate and reliable method for recording vehicle mileage

92 DIAL-A-RIDE TRANSPORTATION FUND OPERATING ASSISTANCE CALCULATION Year Ended September 30, 2012 Urban Total expenses $ 406,483 Less ineligible expenses Other $ 38,740 Preventative Maintenance 116,096 Total ineligible expenses 154,836 Total State eligible expenses $ 251,647 Eligible expenses for State reimbursement $ 251,647 Reimbursement percentage State operating assistance $ 77,130 ** **Per the State, we are guaranteed a minimum of $190,144, which is a 1997 floor amount

93 Berrien County, Michigan SUPPLEMENTARY INFORMATION TO FINANCIAL STATEMENTS (FEDERAL AWARDS) September 30, 2012

94 TABLE OF CONTENTS September 30, 2012 REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 3 Notes to Schedule of Expenditures of Federal Awards 4 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 5-6 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 7-9 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS Page

95 Principals Dale J. Abraham, CPA Michael T. Gaffney, CPA Steven R. Kirinovic, CPA Aaron M. Stevens, CPA Eric J. Glashouwer, CPA Alan D. Panter, CPA William I. Tucker IV, CPA ABRAHAM & GAFFNEY, P.C. Certified Public Accountants 3511 Coolidge Road Suite 100 East Lansing, MI (517) FAX: (517) REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 To the Honorable Mayor and Members of the City Council City of Niles, Michigan Compliance We have audited the compliance of the City of Niles, Michigan with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to the major federal program for the year ended September 30, The City of Niles major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to the major federal program is the responsibility of the City of Niles management. Our responsibility is to express an opinion on the City of Niles compliance based on our audit. The City of Niles basic financial statements include the operations of the Niles Housing Commission, a discretely presented component unit, which received $703,779 in federal awards which are not included in the Schedule of Expenditures of Federal Awards for the year ended September 30, Our single audit did not include the operations of the Niles Housing Commission, a discretely presented component unit because the component unit engaged other auditors to perform a separate audit in accordance with OMB Circular A-133. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Nonprofit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City of Niles compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the City of Niles compliance with those requirements. In our opinion, the City of Niles, Michigan complied, in all material respects, with the requirements referred to above that are applicable to the major federal program for the year ending September 30, However, the results of our auditing procedures disclosed instances of noncompliance with those requirements which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as items and Internal Control Over Compliance The management of the City of Niles is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the City of Niles internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of the City of Niles internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City of Niles internal control over compliance. East Lansing Auburn Hills St. Johns - 1 -

96 Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be significant deficiencies. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, detect, or correct noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as and to be significant deficiencies. Schedule of Expenditures of Federal Awards We have audited the financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of City of Niles as of and for the year ended September 30, 2012, and have issued our report thereon dated February 27, 2013, which contained unqualified opinions on those financial statements. We did not audit the financial statements of the Niles Housing Commission, which represents 95% and 86%, respectively of the total assets and revenues of the component units. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinions, insofar as they relate to the amounts included for the Niles Housing Commission, are based solely on the reports of the other auditors. Our audit was performed for the purpose of forming opinions on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for the purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 financial statements as a whole. The City of Niles responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit the City s responses and, accordingly, we express no opinion on them. This report is intended solely for the information and use of the Honorable Mayor and members of the City Council of the City of Niles, Michigan, others within the entity, federal awarding agencies, and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. ABRAHAM & GAFFNEY, P.C. Certified Public Accountants February 27,

97 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended September 30, 2012 Pass-Through CFDA Grantors Federal Grantor/Pass Through Grantor/Program Title Number Number Expenditures U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Direct Program Community Development Block Grant (a) B-11-MC $ 314,471 U.S. DEPARTMENT OF JUSTICE Direct Program 2010 COPS Hiring Program Grant UMWX ,763 U.S. DEPARTMENT OF TRANSPORTATION Direct Program Federal Transit Program Capital Grant MI-90-X ,949 Capital Grant (Capital) MI-90-X ,907 Capital Grant (Preventative) MI-90-X ,669 Capital Grant (Capital) MI-90-X ,248 Capital Grant (Preventative) MI-90-X ,142 Capital Grant (Capital) MI-90-X ,904 Capital Grant (Fuel/Capital) MI-90-X , ,189 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 594,423 (a) Denotes programs tested as major programs

98 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended September 30, 2012 NOTE A: BASIS OF PRESENTATION The accompanying Schedule of Expenditures of Federal Awards includes the Federal grant activity of the City of Niles, Michigan and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Nonprofit Organizations. NOTE B: RECONCILIATION TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS The following reconciles the federal revenues reported in the September 30, 2012 basic financial statements to the expenditures of the City administered federal programs reported on the Schedule of Expenditures of Federal Awards: Federal/ Less Federal State State/Local Award Revenue Revenue Expenditures PRIMARY GOVERNMENT GENERAL FUND 2010 COPS Hiring Program Grant $ 74,763 $ - $ 74,763 Other Programs 1,228,507 (1,228,507) -0- TOTAL GENERAL FUND 1,303,270 (1,228,507) 74,763 NONMAJOR GOVERNMENTAL FUNDS HUD Entitlement Program 314, ,471 Dial-A-Ride Transportation 458,630 (253,441) 205,189 Major Street 544,455 (544,455) -0- Local Street 223,346 (223,346) -0- TOTAL NONMAJOR GOVERNMENTAL FUNDS 1,540,902 (1,021,242) 519,660 TOTAL GOVERNMENTAL FUNDS $ 2,844,172 $ (2,249,749) $ 594,

99 Principals Dale J. Abraham, CPA Michael T. Gaffney, CPA Steven R. Kirinovic, CPA Aaron M. Stevens, CPA Eric J. Glashouwer, CPA Alan D. Panter, CPA William I. Tucker IV, CPA ABRAHAM & GAFFNEY, P.C. Certified Public Accountants 3511 Coolidge Road Suite 100 East Lansing, MI (517) FAX: (517) REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Honorable Mayor and Members of the City Council City of Niles, Michigan We have audited the financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Niles, Michigan as of and for the year ended September 30, 2012, and have issued our report thereon dated February 27, We did not audit the financial statements of the Niles Housing Commission, which represents 95% and 86%, respectively of the total assets and revenues of the component units. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinions, insofar as they relate to the amounts included for the Niles Housing Commission, are based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting Management of the City of Niles, Michigan, is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered City of Niles, Michigan s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City s internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of control deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. We did not identify any deficiencies in internal control that we consider to be material weaknesses. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Niles, Michigan s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed an instance of noncompliance or other matters that is required to be reported under Government Auditing Standards, which is described in the accompanying schedule of findings and questioned costs as East Lansing Auburn Hills St. Johns - 5 -