TOWN OF MIDDLETOWN, RHODE ISLAND BASIC FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2003

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1 BASIC FINANCIAL STATEMENTS

2 CONTENTS Independent Auditors Report 1-2 Management s Discussion and Analysis 3-13 Basic financial statements: Government-wide financial statements: Statement of net assets 14 Statement of activities 15 Fund financial statements: Balance sheet governmental funds 16 Reconciliation of the governmental funds balance sheet to the statement of net assets 17 Statement of revenues, expenses and changes in funds balances governmental funds 18 Reconciliation of the governmental funds statement of revenues, expenses and changes in fund balances to the statement of activities 19 Statement of net assets - enterprise funds 20 Statement of revenues, expenses and changes in fund net assets - enterprise funds 21 Statement of cash flows - enterprise funds Statement of fiduciary net assets - fiduciary funds 24 Statement of changes in fiduciary net assets - fiduciary funds 25 Notes to basic financial statements Page

3 CONTENTS (CONTINUED) Required supplementary information to financial statements: Page Budgetary comparison schedules Schedule of funding progress 67 Schedule of employer contributions 68 Notes to required supplementary information 69 Supplementary information to financial statements: Tax collector s annual report Independent Auditors Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 72-73

4 Lefkowitz, Garfinkel, Champi & DeRienzo P.C. Certified Public Accountants / Business Consultants Principals Jerome L. Lefkowitz, CPA Stephen M. Garfinkel, CPA Frank J. Champi, CPA Richard J. DeRienzo, CPA Jerrold N. Dorfman, CPA, PFS Peter Mezei, CPA Stephen W. Geremia, CPA Susan R. Johnson, CPA Michael E. Criscione, CPA John E. Finnerty, Jr., CPA Independent Auditors Report The Honorable President and Members of the Town Council Town of Middletown, Rhode Island Middletown, Rhode Island We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the Town of Middletown, Rhode Island (the Town) as of and for the year then ended June 30, 2003, which collectively comprise the Town s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the management of the Town. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States and 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, each major fund, and the aggregate remaining fund information of the Town of Middletown, Rhode Island as of June 30, 2003, 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. As described in Note 1, effective July 1, 2002, the Town adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. This results in a change in the format and content of the basic financial statements. The Management s Discussion and Analysis, budgetary comparison schedules and historical pension information on pages 3 to 13 and pages 63 to 69 are not a required part of the basic financial statements but are supplementary information required by the GASB. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. 10 Weybosset Street Suite 700 Providence, Rhode Island Tel (401) LGCD Fax (401)

5 Independent Auditors' Report (Continued) The Honorable President and Members of the Town Council Town of Middletown, Rhode Island Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Town's basic financial statements. The supplementary information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the basic financial statements of the Town. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated December 23, 2003 on our consideration of the Town s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. December 23,

6 MANAGEMENT S DISCUSSION AND ANALYSIS As management of the Town of Middletown, Rhode Island (the Town), we offer readers of the Town s financial statements this narrative overview and analysis of the financial activities of the Town for the fiscal year ended June 30, Financial Highlights The assets of the Town exceeded its liabilities as of June 30, 2003 by $14,418,925 (net assets). Net assets include $7,626,169 invested in capital assets, net of related debt; $1,056,620 of restricted net assets; and $5,736,136 of unrestricted net assets that may be used to meet the Town s ongoing obligations to citizens and creditors. Total assets were $33,635,045 and total liabilities were $19,216,120 at June 30, The Town s total net assets increased by $3,569,052 in the current fiscal year (FY 2003). As of June 30, 2003, the Town s governmental funds reported combined ending fund balances of $13,700,818, a decrease of $3,891,308 in comparison with the prior year, due primarily to the expenditure of prior year bond proceeds in the Capital Projects Fund. As of June 30, 2003, the unreserved fund balance for the General Fund was $4,989,215, or 14.4% of total budgeted 2003 General Fund expenditures and other financing uses ($34,560,841). This amount is available for spending at the Town s discretion. However, $1,492,393 of this unreserved fund balance was appropriated July 10, 2003, to meet 2004 General Fund expenditures. This reduces the available unreserved fund balance for the General Fund to $3,496,822, or 10% of total budgeted 2004 General Fund expenditures and other financing uses ($34,810,269). The Town s total debt decreased by $2,655,461 (13.8%) during the current fiscal year. The key factors in this decrease were the repayment of principal in the amount of $928,875, a legal settlement of $1,500,000 and deferred charges, net of premiums, of $161,092 on the refunding of debt. Overview of the Financial Statements This discussion and analysis are intended to serve as an introduction to the Town s basic financial statements. These basic financial statements are comprised of three components: government-wide financial statements fund financial statements, and notes to the basic financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. 3

7 Government-wide financial statements. The government-wide financial statements are designed to provide readers with a broad overview of the Town s finances, in a manner similar to a private-sector business. The statement of net assets presents information on the entire Town s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the Town is improving or deteriorating. The statement of activities presents information showing how the Town s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). Both of the government-wide financial statements distinguish functions of the Town that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the Town include general government, public safety, public works, sanitation, education, library, planning and inspection, and community service. The business-type activities of the Town include a Sewer Fund and a Parks and Recreation Fund. The government-wide financial statements can be found on pages of this report. In the first period that GASB 34 is applied, governments are not required to restate prior periods for purposes of providing comparative data based on government-wide information. Therefore, no comparison to last fiscal year is provided here. In future years, when prior-year information is available, a comparative analysis of government-wide data will be presented. In the Statement of Activities, the operations of the Town are presented in a format that reports the net of expenses and revenues of its individual functions the objective being to report the relative burden of each of the Town s functions to the Taxpayers. Revenues offsetting related functional expenses are separated into three categories: charges for services, operating grants and contributions, and capital grants and contributions. Fund financial statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The Town, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with financerelated legal requirements. All of the funds of the Town can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. 4

8 Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between government funds and governmental activities. The Town maintains twenty-five individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund, the School Department and the Capital Projects Fund, all of which are considered to be major funds. Data for the other twenty-two governmental funds are combined into a single, aggregated presentation. The basic governmental fund financial statements can be found on pages of this report. Proprietary funds. Proprietary funds are used to account for business-like activities provided to the general public (enterprise funds) or within the government (internal service funds). These activities are financed primarily by user charges and the measurement of financial activity focuses on net income measurement similar to the private sector. Both of the Town s enterprise funds, Sewer Fund and Parks and Recreation Fund, are major funds. The Town has no internal service funds. The basic proprietary fund financial statements can be found on pages of this report. Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the Town s own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The basic fiduciary fund financial statements can be found on pages of this report. Notes to the basic financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages of this report. 5

9 Other information. In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information. It presents schedules detailing certain pension information, as well as budgetary comparison schedules for the General Fund and the School Department to demonstrate compliance with their respective budgets. Required supplementary information can be found on pages of this report. Government-wide Financial Analysis As noted earlier, net assets may serve over time as a useful indicator of a government s financial position. In the case of the Town, assets exceeded liabilities by $14,418,925 at June 30, Net assets invested in capital assets, net of related debt, makes up $7,626,169, or 53% of total net assets. This represents the Town s investment in capital assets (e.g., land, buildings, machinery, and equipment), less any related debt used to acquire those assets that is still outstanding. The Town uses these capital assets to provide services to citizens; consequently these assets are not available for future spending. Although the Town s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Town of Middletown s Net Assets Governmental Business-type Activities Activities Total Current and other assets $16,010,463 $1,670,823 $17,681,286 Capital assets 10,215,117 5,738,642 15,953,759 Total assets 26, 225,580 7,409,465 33,635,045 Long-term liabilities outstanding 15,411,444 1,187,355 16,598,799 Other liabilities 1,448,167 1,169,154 2,617,321 Total liabilities 16,859,611 2,356,509 19,216,120 Net assets: Invested in capital assets, net of related debt 3,074,882 4,551,287 7,626,169 Restricted 1,056,620 1,056,620 Unrestricted 5,234, ,669 5,736,136 Total net assets $ 9,365,969 $5,052,956 $14,418,925 A portion of the Town s net assets totaling $1,056,620 (7%) represents resources that are subject to external restrictions on how they may be used. Of these restricted net assets, $168,239 are permanently restricted and are nonexpendable. The remaining balance of unrestricted net assets ($5,736,136) may be used to meet the government s ongoing obligations to citizens and creditors. At June 30, 2003, the Town is able to report positive balances in all three categories of net assets, both for the government as a whole, as well as for its separate governmental and business-type activities. The Town s net assets increased by $3,569,052 during the current fiscal year. 6

10 Governmental activities. Governmental activities increased the Town s net assets by $2,758,719, thereby accounting for 77% of the total growth in the net assets of the Town. Key elements of this increase are as follows: Property taxes were levied for debt service payments and issuance costs. Expenses for governmental activities were less than anticipated, while revenues were favorable. Business-type activities. Business-type activities increased the Town s net assets by $810,333, accounting for 23% of the total growth in the government s net assets. Key elements of this increase are as follows. Sewer user fees were raised for debt service payments and for the purchase of capital items. Unfavorable weather conditions, tempered by increased concession revenue, and a change in staffing lead to favorable operating results for parks and recreation department. 7

11 Town of Middletown s Change in Net Assets Governmental Activities Business-type Activities Total Revenues: Program revenues: Charges for services $ 2,307,454 $3,368,316 $ 5,675,770 Operating grants and contributions 15,262,453 3,250 15,265,703 Capital grants and 405,024 39, ,649 contributions General revenues: Property taxes 28,966,443 28,966,443 Grants and contributions not restricted to specific programs 2,170,177 2,170,177 Other 359,798 18, ,417 Total revenues 49,471,349 3,429,810 52,901,159 Expenses: General government 2,919,591 2,919,591 Public safety 7,853,272 7,853,272 Public works/sanitation 1,887,336 1,887,336 Planning/inspection 349, ,926 Library 700, ,176 Education 31,965,239 31,965,239 Community services 529, ,199 Interest on long-term debt 491, ,179 Parks & recreation 749, ,859 Sewer 1,886,330 1,886,330 Total expenses 46,695,918 2,636,189 49,332,107 Increase in net assets before transfers 2,775, ,621 3,569,052 Transfers (16,712) 16,712 - Increase in net assets 2,758, ,333 3,569,052 Net assets - beginning 6,607,250 4,242,623 10,849,873 Net assets ending $ 9,365,969 $ 5,052,956 $14,418,925 Financial Analysis of the Government s Funds As noted earlier, the Town uses fund accounting to ensure and demonstrate compliance with financerelated legal requirements. Governmental funds. The focus of the Town s governmental funds is to provide information on nearterm inflows, outflows, and balances of spendable resources. Such information is useful in assessing the Town s financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government s net resources available for spending at the end of the fiscal year. 8

12 As of June 30, 2003, the Town s governmental funds reported combined ending fund balances of $13,700,818. Unreserved fund balance constitutes $12,259,445, which is available for spending at the government s discretion. The remainder of fund balance is reserved to indicate that it is not available for new spending because it has already been committed 1) to liquidate contracts and purchase orders of the prior period ($754,055), 2) to pay legal settlements ($419,190), 3) to generate income to pay for the perpetual care of the municipal cemetery ($109,520), 4) for long-term notes receivable ($100,000), or 5) other restricted purposes ($58,608). The General Fund is the chief operating fund of the Town. At the end of the current fiscal year, unreserved fund balance of the General Fund was $4,989,215, while total fund balance reached $6,069,195. As a measure of the General Fund s liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represents 14.8% of total general fund expenditures ($33,543,152), while total fund balance represents 18% of that same amount. The fund balance of the Town s General Fund decreased by $1,033,044 during the current fiscal year. The key factor in this reduction was the re-appropriation of prior year fund balance. The School Department, a special revenue fund of the Town, had an unreserved fund balance at June 30, 2003 of $1,102,394, with $375,584 designated to balance fiscal 2004 budget and $84,000 designated for environmental remedial work. The resulting unreserved-undesignated fund balance is $642,810 (2%) of total School Department expenditures ($32,436,064). The Capital Projects Fund is where the Town accounts for the ongoing capital projects resulting from general obligation bond proceeds in Fund balance decreased by $3,182,067 in FY 2003 due to ongoing construction projects. At June 30, 2002, the ending fund balance is $5,892,919 which will all be expended in fiscal years 2004 and 2005 as the Town completes the various construction projects. Proprietary funds. The Town s proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. Net assets of the Sewer Fund at June 30, 2003 amounted to $1,684,386, of which $81,736 is unrestricted. Parks and Recreation Fund net assets amounted to $3,368,570, of which $419,933 is unrestricted. The total growth in net assets for both funds was $663,681 and $146,652, respectively. Other factors concerning the finances of these two funds have already been addressed in the discussion of the Town s business-type activities. General Fund Budgetary Highlights Differences between the original budget and the final amended budget for FY 2003 totaled an increase in appropriation of $1,010,291. The most significant changes are as follows: $64,840 in increases allocated to the Town Engineer, used for the purchase of GPS equipment $134,000 in increases allocated to the Tax Assessor for the purpose of funding the property revaluation process. State aid of $122,460 was received to offset this increase. 9

13 $249,115 in increases allocated to Public Works equipment and for the maintenance of roads and vehicles required as a result of snow and ice weather events $349,000 in increases allocated to the Capital Projects Fund for the purpose of installing a water line $350,000 in increases allocated for the purpose of purchasing land in two locations within the Town Of this increase, $249,649 was to be funded out of miscellaneous increases in various charges for services and transfers from other funds. The remaining $760,642 was to be budgeted from available fund balance. Annually Budgeted Special Revenue Fund Budgetary Highlights (School Department) Differences between the original budget and the final amended budget for FY 2003 totaled an increase in appropriation of $1,153,486, a substantial portion of which can be briefly summarized as follows: $250,000 in reallocated fund balance to buy down the rate at the State Retirement System for the School Aides group entering the system $196,442 in increases allocated to fund technology upgrades at the High School, fully funded by a grant from the Champlin Foundation $255,397 in increases due to prior years Federal Impact Aid payments $130,280 in increase grant awards from the State for specific restricted programs like Robotics and School to Career $59,350 in increase due to the State reinstating the Child Opportunity Zone (COZ) award $68,870 in increased appropriation from the Town for the restricted purpose of temporarily relocating kindergarten students Capital Asset and Debt Administration Capital assets. The Town s investment in capital assets for its governmental and business-type activities as of June 30, 2003 amounts to $15,953,759 (net of accumulated depreciation). This investment in capital assets includes land, buildings and improvements, construction in progress, furniture and equipment, library books, and motor vehicles. The total increase in the Town s investment in capital assets for the current fiscal year was $4,070,748 (34%), of which $3,828,345 is applicable to governmental activities and $242,403 is applicable to business-type activities. Major capital asset events during the current fiscal year included the following: The Town Council approved the implementation of a revised capitalization policy, which specifically addressed the minimum threshold for capital items. This resulted in the opening balance of governmental activities capital assets to be restated by an $8,057,030 decrease. Business-type capital assets were decreased by $168,534. Major roof repairs were completed on the Gaudet Middle School and Kennedy Elementary School. The Library is undergoing a major addition and alterations project. Residential street upgrades encompassed adding water lines, sewer lines, improved drainage, and road re-pavement. 10

14 Town of Middletown s Capital Assets (net of depreciation) Governmental activities Business-type activities Total Land $ 1,732,367 $2,728,280 $ 4,460,647 Buildings and improvements 3,912, ,336 3,960,366 Land improvements 155, , ,060 Furniture and equipment 491, , ,109 Infrastructure 23,431 2,055,720 2,079,151 Construction in progress 3,085, ,861 3,394,030 Library books 185, ,144 Motor vehicles 630, ,252 Total $10,215,117 $5,738,642 $15,953,759 Additional information on the Town s capital assets can be found in Note 5 on pages of this report. Long-term debt At June 30, 2003, the Town had total bonded debt outstanding of $12,715,000, entirely backed by the full faith and credit of the Town. An additional $2,221,420 is outstanding loans payable to the Rhode Island Clean Water Finance Agency including $1,034,065 of undrawn loan proceeds held by the State of Rhode Island. The Town has capital leases outstanding at June 30, 2003 in the amount of $411,318. The repayment of capital leases is incumbent upon the appropriation of current financial resources to make annual lease payments. The Town fully expects to appropriate future financial resources for annual lease payments. On October 29, 2002, the Town issued $2,395,000 in General Obligation Bonds with an average interest rate of 3.6% to advance refund $2,395,000 of outstanding 1994 Series bonds with an average interest rate of 5.7%. The net proceeds of $2,371,000 (after payment of $38,000 in underwriting fees, insurance, and other issuance costs) plus an additional Town contribution of $265,000 were used to purchase U.S. Government securities. Those securities were deposited into an irrevocable trust with an escrow agent to provide for all future debt service payments on the 1994 Series bonds. As a result, the 1994 Series bonds are considered to be defeased and the liability for those bonds has been removed from long-term debt. The reacquisition price exceeded the net carrying amount of the old debt by $240,696. The amount is being netted against the new debt and amortized over the remaining life of the refunded debt. The Town advance refunded the 1994 Series bonds to reduce its total debt service payments over the next 10 years by $50,565 and to obtain an economic gain (difference between the present values of the debt service payments on the old and new debt) of $44,

15 Town of Middletown s Outstanding Debt General Obligation Bonds, Loans payable, and Capital Leases Governmental Activities Business-Type Activities Total General Obligation Bonds $12,715,000 $12,715,000 Loans Payable $2,221,420 2,221,420 Capital Leases 411, ,318 Total $13,126,318 $2,221,420 $15,347,738 The Town s total debt decreased by $2,655,461 (13.8%) during the current fiscal year. The key factors in this decrease were due to repayment of principal in the amount of $928,875, a reduction of legal settlements payable of $1,500,000 and deferred charges, net of premiums, of $161,092 due to refunding of debt. The Town s bond rating was increased to an Aa3 in 2002 from Moody s for general obligation debt. Rhode Island general laws cap the amount of each municipality s general obligation bonds that may be outstanding to 3% of its assessed property values. Exceptions apply to bonds financed from non-tax revenues and special exemptions are granted for other purposes as well. The assessed value of the Town s properties at December 31, 2001 was $1,335,360,980, limiting the amount of non-excepted general obligation bonds outstanding to $40,060,799. At June 30, 2003, bonds outstanding totaled $12,715,000, or.96% of assessed property. Detailed information is available in footnote 14, page 62, regarding general obligation bond subsequent events. Economic Factors and Next Year s Budgets and Rates The Town of Middletown enjoys a favorable economic environment and local indicators point to continued stability. The Town has always been economically linked to the urban area of Newport, RI. The region has an agricultural sector, a recreational sector, service industry sector directly associated with national defense related activities, a manufacturing sector, and an expanding tourism sector. The United States Navy remains the most significant public sector employer on Aquidneck Island and still contributes significant employment opportunities in the area. The Town continues to share in a large proportion of the retail business conducted on Aquidneck Island. Presently, there are four large shopping centers and six other significant retail areas in the Town. The Town has a large supply of office space, and has become the center for many of the contract services companies supporting the Naval Undersea Warfare Center and other naval activities. Overall, the light industry and office businesses that have come to the Town have had a positive effect on the economy of the Town and Aquidneck Island. The Town is located in Newport County, which has an employed labor force of approximately 47,000, and an unemployment rate of approximately 3.5% (not seasonally adjusted) as of November

16 The Town s central business district is expected to maintain its current percent occupancy rate with a variety of stores and commercial businesses. Within the last year, a nationally known home improvement center, and an additional shopping plaza with four nationally known retail stores have opened for business. The Town has recently received an application for the development of a new industrial park. A new 95-room hotel opened for business within the last year. The Town has received applications for the construction of two new hotels that would add 125 rooms to those already available. Meanwhile, there continues to be steady residential development with several new subdivisions under development, and several applications for development at various stages of review by Town Officials. The Town completed the task of revaluing all property (for assessment purposes) for the period ending December 31, Assessed values of residential real property increased by $533,202,000 (61%) from $873,364,100 to $1,406,566,100. Assessed values of commercial real property increased by $95,889,800 (30%) from $319,789,100 to $415,678,900. The Town split the tax rate for residential property and commercial property. On a normalized basis, the tax rate on residential real property increased by $.60/$1,000 of assessed value (4.1%) from $14.70/$1,000 assessed value for 2002 to $15.30/$1,000 assessed value for 2003, and the tax rate on commercial real property increased by $2.60/$1,000 of assessed value (17.7%) from $14.70/$1,000 assessed value for 2002 to $17.30/$1,000 assessed value for Projections from the State of Rhode Island s Budget Office indicate that the State will run a deficit in fiscal year The Town anticipates this will have a negative impact on the amount of State Aid that it receives in fiscal year The Town established a $1,000,000 appropriation to its Capital Improvement Program Fund (CIP) in fiscal year 2004 along with a detailed process and guidelines for expending CIP funds. The Town Council established a local ordinance that provides that this appropriation be made on an annual basis from property taxes collected. In fiscal year 2003, the School District was required to close an elementary school due to the poor condition of the building. Voters did not approve a referendum placed on the November 2003 ballot to borrow $8,500,000 for the purpose of building a replacement school. Displaced students are presently housed temporarily in existing School District facilities and one rental property. The School Committee has assembled a Building Advisory Committee to review the situation and prepare a recommendation for their consideration. Requests for Information This financial report is designed to provide a general overview of the Town of Middletown s finances for all those with an interest in the government s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Office of the Finance Director, 350 East Main Road, Middletown, RI

17 STATEMENT OF NET ASSETS JUNE 30, 2003 Governmental Activities Business-Type Activities Total ASSETS: Cash and cash equivalents $ 7,108,641 $ 1,363,047 $ 8,471,688 Accounts receivable, less allowance for doubtful accounts of $412,465: Property taxes 1,252,594 1,252,594 Federal and state government 458, ,513 Assessments and user fees 237, ,748 Other 95, ,295 Internal balances (8,086) 8,086 - Temporarily restricted assets: Cash and cash equivalents 6,520,847 6,520,847 Investments 38,717 38,717 Receivables - federal and state 70,452 70,452 Receivables - other 182, ,717 Permanently restricted assets: Cash and cash equivalents 58,608 58,608 Investments 109, ,520 Deferred charges 122,620 60, ,587 Capital assets not being depreciated 4,817,536 3,037,141 7,854,677 Capital assets being depreciated, net 5,397,581 2,701,501 8,099,082 Total assets 26,225,580 7,409,465 33,635,045 LIABILITIES: Accounts payable and accrued expenses 1,020,627 1,163,904 2,184,531 Deferred revenue 5,250 5,250 Liabilities payable from restricted assets 427, ,540 Long-term obligations: Due within one year 2,124, ,482 2,267,894 Due in more than one year 13,287,032 1,043,873 14,330,905 Total liabilities 16,859,611 2,356,509 19,216,120 NET ASSETS: Invested in capital assets, net of related debt 3,074,882 4,551,287 7,626,169 Restricted for: Capital projects 187, ,584 Education 208, ,634 Perpetual care: Expendable 78,755 78,755 Nonexpendable 109, ,520 Other: Expendable 413, ,408 Nonexpendable 58,719 58,719 Unrestricted 5,234, ,669 5,736,136 Total net assets $ 9,365,969 $ 5,052,956 $ 14,418,925 See notes to basic financial statements. 14

18 STATEMENT OF ACTIVITIES Program Revenues Net (Expenses) Revenues and Changes in Net Assets Charges Operating Capital for Grants and Grants and Governmental Business-type Functions/Programs Expenses Services Contributions Contributions Activities Activities Total Governmental activities: General government $ 2,919,591 $ 488,723 $ 7,251 $ (2,423,617) $ (2,423,617) Public safety 7,853, , ,539 (7,533,856) (7,533,856) Public works and sanitation 1,887, ,275 21,394 (1,758,667) (1,758,667) Planning and inspection 349, ,773 30,000 41,847 41,847 Library 700,176 11,810 59,559 $ 246,877 (381,930) (381,930) Education 31,965,239 1,219,996 14,671,738 (16,073,505) (16,073,505) Community services 529, , ,147 (100,080) (100,080) Interest on long-term debt 491,179 (491,179) (491,179) Total governmental activities 46,695,918 2,307,454 15,262, ,024 (28,720,987) (28,720,987) Business-type activities: Sewer 1,886,330 2,477,014 39,625 $ 630, ,309 Parks and recreation 749, ,302 3, , ,693 Total business-type activities 2,636,189 3,368,316 3,250 39, , ,002 Total $ 49,332,107 $ 5,675,770 $ 15,265,703 $ 444,649 (28,720,987) 775,002 (27,945,985) General revenues: Property taxes 28,966,443 28,966,443 Grants and contributions not restricted to specific programs 2,170,177 2,170,177 Investment earnings 233,425 18, ,044 Miscellaneous 126, ,373 Transfers (16,712) 16,712 - Total general revenues and transfers 31,479,706 35,331 31,515,037 Change in net assets 2,758, ,333 3,569,052 Net assets, beginning (Note 10) 6,607,250 4,242,623 10,849,873 Net assets, ending $ 9,365,969 $ 5,052,956 $ 14,418,925 See notes to basic financial statements. 15

19 BALANCE SHEET - GOVERNMENTAL FUNDS JUNE 30, 2003 ASSETS General Fund School Department Capital Projects Fund Other Governmental Funds Total Governmental Funds Cash and cash equivalents $ 6,069,554 $ 1,228,579 $ 5,944,177 $ 445,786 $ 13,688,096 Investments 148, ,237 Accounts receivable, less allowance for doubtful accounts of $412,465: Property taxes 1,252,594 1,252,594 Federal and state government 385, ,562 7, ,965 Loans 100, ,000 Other 129,294 45, , ,037 Due from other funds 98,688 5, ,893 1, ,734 Total assets $ 7,935,522 $ 1,415,717 $ 6,280,322 $ 706,102 $ 16,337,663 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable and accrued expenses $ 252,992 $ 261,020 $ 382,041 $ 42,117 $ 938,170 Accrued compensated absences 220,632 27, ,840 Due to other funds 391,688 25,095 5,362 27, ,820 Deferred revenue 1,001,015 1,001,015 Total liabilities 1,866, , ,403 69,792 2,636,845 Fund balances: Reserved for: Encumbrances 660,790 93, ,055 Legal settlements 419, ,190 Long-term loans receivable 100, ,000 Perpetual care 109, ,520 Other 58,608 58,608 Unreserved, reported in: General Fund 4,989,215 4,989,215 Special revenue funds 1,102, ,773 1,391,167 Capital Projects Fund 5,799,654 5,799,654 Permanent funds 79,409 79,409 Total fund balances 6,069,195 1,102,394 5,892, ,310 13,700,818 Total liabilities and fund balances $ 7,935,522 $ 1,415,717 $ 6,280,322 $ 706,102 $ 16,337,663 See notes to basic financial statements. 16

20 RECONCILIATION OF GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2003 Total fund balances for governmental funds $ 13,700,818 Assets used in governmental activities which are not financial resources and, therefore, are not reported in the funds: Capital assets, net $ 10,215,117 Deferred charges 122,620 10,337,737 Some taxes and grants will be collected after year end, but are not available soon enough to pay for the current period's expenditures, and therefore, are reported as deferred revenue in the funds. 1,001,015 Liabilities not due and payable in the current period which therefore are not reported in the funds: Bonds payable (12,556,872) Capital leases (411,318) Legal settlements payable (77,000) Compensated absences payable (2,366,254) Accrued interest (262,157) (15,673,601) Net assets of governmental activities $ 9,365,969 See notes to basic financial statements. 17

21 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS General Fund School Department Capital Projects Fund Other Governmental Funds Total Governmental Funds Revenues: Taxes $ 28,724,462 $ 28,724,462 Intergovernmental 2,377,037 $ 13,570,380 $ 147,004 $ 454,772 16,549,193 Licenses, permits and fees 1,085,477 1,104,227 2,189,704 Interest and investment 110, ,553 15, ,425 State contribution to teachers' pension plan 810, ,611 Other revenues 195, , , ,820 Total revenues 32,493,524 15,893, , ,938 49,314,215 Expenditures: Current: General government 2,252,733 2,252,733 Public safety 7,268,208 48,528 7,316,736 Public works and sanitation 1,745,570 19,498 1,765,068 Planning and inspection 342, ,971 Library 637, ,795 Education 31,911,807 31,911,807 Community services 356, ,568 Other expenditures 2,761,266 2,761,266 Miscellaneous boards and services 34,271 34,271 Capital outlay 124,767 4,080,157 52,148 4,257,072 Debt service: Debt issuance 99,172 99,172 Principal 779,611 5, ,611 Interest 353, , ,649 Total expenditures 16,299,623 32,170,439 4,080, ,500 53,027,719 Excess (deficiency) of revenues over expenditures 16,193,901 (16,277,243) (3,826,600) 196,438 (3,713,504) Other financing sources (uses): Refunding bonds issued 6,864,604 6,864,604 Payment to bond refunding escrow agent (2,635,696) (2,635,696) Payment of BAN (4,390,000) (4,390,000) Transfers from other funds 16,584 16,749, ,533 87,379 17,497,832 Transfers to other funds (17,243,529) (271,015) (17,514,544) Total other financing sources (uses) (17,226,945) 16,588, ,533 (183,636) (177,804) Excess (deficiency) of revenues and other financing sources over expenditures and other financing uses (1,033,044) 311,001 (3,182,067) 12,802 (3,891,308) Fund balance, beginning of year 7,102, ,393 9,074, ,508 17,592,126 Fund balance, end of year $ 6,069,195 $ 1,102,394 $ 5,892,919 $ 636,310 $ 13,700,818 See notes to basic financial statements. 18

22 RECONCILIATION OF GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES Net change in fund balances for governmental fund $ (3,891,308) Governmental funds report capital outlays as expenditures. However, in the statemen of activities these costs are allocated over the life of the related debt and reported as depreciation expense. Capital outlays, including amounts charged to current expenditures $ 4,420,619 Depreciation expense (592,274) 3,828,345 Governmental funds report bond issuance costs as expenditures. However, in the stateme of activities these costs are allocated over the life of the related debt and reported as amortization expense Payment of bond issuance costs 99,172 Amortization (25,270) 73,902 Revenues in the statement of activities that do not provide current financial resource are not reported as revenues in the governmental funds 157,134 The issuance of long-term debt (including premiums or discounts) provides curre resources to governmental funds, but issuing debt increases long-term liabiliti in the statement of net assets. Repayment and refunding of bonds and notes us current financial resources, but decrease long-term liabilities in the statement o net assets. Bond premiums and refunding charges are deferred and amortize as part of future interest expense Issuance of general obligation bonds (6,864,604) Principal repayment on: General obligation bonds 784,611 Bond anticipation note 4,390,000 Payment to bond refunding escrow agent 2,635,696 Amortization of: Deferred charge on refunding (4,500) Bond premiums 1, ,739 Some expenditures requiring the use of current financial resources in governmental fund were previously accrued in the statement of activities and are not expenses this yea Claims and judgments 1,500,000 Accrued compensated absences 128,473 Accrued interest 19,434 1,647,907 Change in net assets of governmental activitie $ 2,758,719 See notes to basic financial statements. 19

23 STATEMENT OF NET ASSETS - ENTERPRISE FUNDS JUNE 30, 2003 Sewer Fund Parks and Recreation Fund Total ASSETS: Current assets: Cash and cash equivalents $ 889,305 $ 473,742 $ 1,363,047 Accounts receivable: Assessments and user fees 237, ,748 Other Due from other funds 62, ,787 Total current assets 1,190, ,532 1,665,557 Noncurrent assets: Deferred charges, net 60,967 60,967 Capital assets not being depreciated 462,904 2,574,237 3,037,141 Capital assets being depreciated, net 2,327, ,400 2,701,501 Total assets 4,040,997 3,424,169 7,465,166 LIABILITIES: Current liabilities: Accounts payable and accrued expenses 1,140,656 2,486 1,143,142 Due to other funds 7,838 47,863 55,701 Accrued compensated absences 20,762 20,762 Deferred revenue 5,250 5,250 Current portion of loans payable 143, ,482 Total current liabilities 1,312,738 55,599 1,368,337 Noncurrent liabilities, loans payable, net of current portion 1,043,873 1,043,873 Total liabilities 2,356,611 55,599 2,412,210 NET ASSETS: Invested in capital assets, net of related debt 1,602,650 2,948,637 4,551,287 Unrestricted 81, , ,669 Total net assets $ 1,684,386 $ 3,368,570 $ 5,052,956 See notes to basic financial statements. 20

24 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS - ENTERPRISE FUNDS Sewer Fund Parks and Recreation Fund Total Operating revenues: Assessments and user fees $ 2,462,787 $ 2,462,787 Beach admittance and rental fees $ 741, ,467 Campground admittance and rental fees 112, ,260 Other revenues 14,227 37,575 51,802 Total operating revenues 2,477, ,302 3,368,316 Operating expenses: Salaries and benefits 395, ,508 Materials and supplies 11,728 11,728 Professional services 239, ,655 Repairs and maintenance 95,586 95,586 Utilities 87,586 87,586 Sewerage disposal 921, ,700 Beaches 256, ,901 Lifeguards 163, ,564 Harbormaster 14,044 14,044 Security 25,441 25,441 Campground 23,199 23,199 Recreation 60,628 60,628 Parks and grounds 74,758 74,758 Civic appropriations 23,500 23,500 Miscellaneous 13,721 74,239 87,960 Depreciation 70,448 33, ,033 Total operating expenses 1,835, ,859 2,585,791 Operating income 641, , ,525 Nonoperating revenues (expenses): Interest revenue 16,660 1,959 18,619 Grant revenue 3,250 3,250 Interest expense (45,142) (45,142) Amortization of bond issuance costs (5,256) (5,256) Total nonoperating revenues (expenses) (33,738) 5,209 (28,529) Income before contributions and transfers 607, , ,996 Capital contributions - sewer construction 39,625 39,625 Transfer from special revenue funds 16,712 16,712 Change in net assets 663, , ,333 Net assets, beginning of year: As previously reported 1,139,669 3,287,821 4,427,490 Cumulative effect of change in capitalization policy and prior period adjustments to correct accrued expenses (118,964) (65,903) (184,867) As restated 1,020,705 3,221,918 4,242,623 Net assets, end of year $ 1,684,386 $ 3,368,570 $ 5,052,956 See notes to basic financial statements. 21

25 STATEMENT OF CASH FLOWS - ENTERPRISE FUNDS Sewer Fund Parks and Recreation Fund Total Cash flows from operating activities: Cash received from customers $ 2,393,435 $ 877,977 $ 3,271,412 Cash received from other sources 17,314 13,189 30,503 Cash paid to employees for benefits (393,397) (430,296) (823,693) Cash paid to suppliers (1,263,860) (268,714) (1,532,574) Cash paid to civic groups (151,827) (23,500) (175,327) Net cash provided by operating activities 601, , ,321 Cash flows from noncapital financing activities, interfund balance 178,172 (23,622) 154,550 Cash flows from capital and related financing activities: Transfers from other funds 16,712 16,712 Capital contributions 39,625 39,625 Acquisition and construction of fixed assets (72,273) (6,712) (78,985) Principal paid on bonds and notes (144,265) (144,265) Interest paid on bonds and notes (46,151) (46,151) Net cash used in capital and related financing activities (206,352) (6,712) (213,064) Cash flows from investing activities, interest received 16,660 1,959 18,619 Net increase in cash and cash equivalents 590, , ,426 Cash and cash equivalents, beginning of year 299, , ,621 Cash and cash equivalents, end of year $ 889,305 $ 473,742 $ 1,363,047 (continued) 22

26 STATEMENT OF CASH FLOWS - ENTERPRISE FUNDS (CONTINUED) Sewer Fund Parks and Recreation Fund Total Reconciliation of operating income to net cash provided by operating activities: Operating income $ 641,082 $ 141,443 $ 782,525 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 70,448 33, ,033 Changes in assets and liabilities: Increase in: Accounts receivable, assessments and fees (69,352) (69,352) Accounts receivable, other (135) (135) Accounts payable and accrued expenses 106, ,116 Accrued compensated absences 2,111 2,111 Decrease in: Accounts receivable, other 3,087 3,087 Accounts payable and accrued expenses (6,237) (6,237) Legal settlements payable (151,827) (151,827) Net cash provided by operating activities $ 601,665 $ 168,656 $ 770,321 Supplemental disclosures, noncash capital and related financing activities: Acquisition and construction of fixed assets paid from loan proceeds held by State of Rhode Island $ 60,016 $ 60,016 See notes to basic financial statements. 23

27 STATEMENT OF FIDUCIARY NET ASSETS - FIDUCIARY FUNDS JUNE 30, 2003 Pension Trust Fund Clarke Scholarship Private Purpose Trust Fund Agency Funds ASSETS: Cash and cash equivalents $ 245,540 $ 29,688 $ 197,527 Investments 25,399, ,990 Accounts receivable 2,756 Total assets 25,645,151 32,444 $ 301,517 LIABILITIES: Accounts payable $ 3,604 Deposits held in custody for others 297,913 Total liabilities $ 301,517 NET ASSETS: Held in trust for pension benefits and other purposes $ 25,645,151 $ 32,444 See notes to financial statements. 24

28 Additions to net assets: Contributions: STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS - FIDUCIARY FUNDS Pension Trust Fund Clarke Scholarship Private Purpose Trust Fund Employer $ 1,544,215 Plan members 293,622 Other revenue $ 8,988 1,837,837 8,988 Investment income, net: Interest income 1,309, Net depreciation in fair value of investments (302,896) 1,006, Total additions 2,843,943 9,281 Deductions from net assets: Benefits 1,627,867 Administrative expense 128,407 Scholarships 7,500 Total deductions 1,756,274 7,500 Change in net assets 1,087,669 1,781 Net assets, beginning of year 24,557,482 30,663 Net assets, end of year $ 25,645,151 $ 32,444 See notes to basic financial statements. 25