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3 ANNUAL FINANCIAL REPORT of the For the Year Ended

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5 TABLE OF CONTENTS FINANCIAL SECTION Independent Auditor s Report 1 Management s Discussion and Analysis 5 Basic Financial Statements Government-Wide Financial Statements Statement of Net Position 19 Statement of Activities 20 Fund Financial Statements Governmental Funds: Balance Sheet 22 Reconciliation of the Balance Sheet to the Statement of Net Position- Governmental funds 25 Statement of Revenues, Expenditures, and Changes in Fund Balance- Governmental Funds 26 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 29 Proprietary Funds: Statement of Net Position 30 Statement of Revenues, Expenses, and Changes in Fund Net Position 31 Statement of Cash Flows 32 Notes to Financial Statements 35 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Revenues, Expenditures, and Changes in Fund Balances- Budget and Actual - General Fund 67 Schedule of Changes in Net Pension (Asset) Liability and Related Ratios 68 Schedule of Employer Contributions to Pension Plan 70 Schedule of Changes in OPEB Liability and Related Ratios 71 OTHER SUPPLEMENTARY INFORMATION Schedule of Revenues, Expenditures, and Changes in Fund Balances- Budget and Actual Debt Service Fund 74 Schedule of Revenues, Expenditures, and Changes in Fund Balances- Budget and Actual Capital Projects Fund 75

6 Combining and Individual Fund Financial Statements and Schedules Combining Balance Sheet Nonmajor Governmental Funds 76 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances - Nonmajor Governmental Funds 78

7 To the Honorable Mayor and Members of the City Council : Report on the Financial Statements INDEPENDENT AUDITOR S REPORT We have audited the accompanying financial statements of the governmental activities, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the (the City ), as of and for the year ended, and the related notes to the financial statements, which collectively comprise the City s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements The City s management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of Quinlan EDC. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for Quinlan EDC, is based solely on the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on t he auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control Heathrow Forest Pkwy Suite 530 Houston, TX Tel: Fax:

8 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City as of, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note V.E. to the financial statements, due to the implementation of GASB No. 75, the City restated its beginning net position within governmental activities and business-type activities to properly reflect the total OPEB liability and related deferred outflows and inflows of resources, as prescribed by this accounting standard. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, general fund budgetary comparison information, schedule of changes in net pension liability and related ratios, schedule of employer contributions to pension plan, schedule of changes in postemployment benefits other than pension liability and related ratios to 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 2

9 procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise s basic financial statements. The combining and individual nonmajor fund financial statements and other budgetary comparison information are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. BrooksWatson & Co., PLLC Certified Public Accountants Houston, Texas March 8,

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11 MANAGEMENT'S DISCUSSION AND ANALYSIS 5

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13 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) The purpose of the Management s Discussion and Analysis (the MD&A ) is to give the readers an objective and easily readable analysis of the City of Quinlan s financial activities for the year ending. The analysis is based on currently known facts, decisions, or economic conditions. It presents short and long-term analysis of the City s activities, compares current-year results with those of the prior year, and discusses the positive and negative aspects of that comparison. GASB Statement No. 34 establishes the content of the minimum requirements for the MD&A. Please read the MD&A in conjunction with the City s financial statements, which follow this section. The annual financial report is presented as compliant with the financial reporting model in effect pursuant to GASB Statement No. 34. This financial reporting model requires governments to present certain basic financial statements as well as an MD&A and certain other Required Supplementary Information (RSI). The basic financial statements include (1) government-wide financial statements, (2) individual fund financial statements, and (3) notes to the financial statements. Financial Highlights The City's total combined net position was $6,654,913 at. Of this, $2,454,085 (unrestricted net position) may be used to meet the City s ongoing obligations to its citizens and creditors. At the close of the current fiscal year, the City s governmental funds reported combined fund balances of $2,220,808, an increase of $322,656. As of the end of the year, the unassigned fund balance of the general fund was $1,830,963 or 167% of total general fund expenditures. The City had an overall increase in net position of $175,199, which is primarily attributed to general fund operating revenues exceeding operating expenditures. The City closed the year with a net pension asset of $22,758. Government-Wide Statements The government-wide statements report information for the City as a whole. These statements include transactions and balances relating to all assets, including infrastructure capital assets. These statements are designed to provide information about cost of services, operating results, and financial position of the City as an economic entity. The Statement of Net Position and the Statement of Activities, which appear first in the City s financial statements, report information on the City s activities that enable the reader to understand the financial condition of the City of Quinlan. These statements are prepared using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year s revenues and expenses are taken into account even if cash has not yet changed hands. 7

14 MANAGEMENT S DISCUSSION AND ANALYSIS, Continued The statement of net position presents information on all of the City s assets and liabilities. The difference between the two is reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. Other non-financial factors, such as the City s property tax base and the condition of the City s infrastructure, need to be considered in order to assess the overall health of the City. The statement of activities presents information showing how the City s net position changed during the most recent fiscal year. All changes in net position 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 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 City 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 (businesstype activities). The governmental activities of the City include general government, public safety, public works, culture and recreation, and community development. The business-type activities of the City include water, sewer and sanitation operations. The government-wide financial statements include not only the City itself (known as the primary government), but also the legally separate Quinlan Economic Development Corporation for which the City is financially accountable. Financial information for this component unit is reported separately from the financial information presented for the primary government itself. FUND FINANCIAL STATEMENTS Funds may be considered as operating companies of the parent corporation, which is the City of Quinlan. They are usually segregated for specific activities or objectives. The City of Quinlan uses fund accounting to ensure and demonstrate compliance with finance-related legal reporting requirements. The two categories of City funds are governmental and proprietary. 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 year. Such information may be useful in evaluating the City 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 funds with similar information presented for governmental activities in the government-wide financial statements. By 8

15 MANAGEMENT S DISCUSSION AND ANALYSIS, Continued 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 governmental funds and governmental activities. The City of Quinlan maintains six 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 and debt service funds which are considered to be major funds. The City of Quinlan adopts an annual appropriated budget for its general, debt service, and utility funds. A budgetary comparison schedule has been provided to demonstrate compliance with the general fund and debt service fund budgets. Proprietary Funds The City maintains two proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses enterprise funds to account for its water distribution, wastewater collection/treatment, water construction operations and sanitation services. The proprietary fund financial statements provide separate information for the water distribution, wastewater collection/treatment fund, and sanitation funds. The basic proprietary fund financial statements can be found in the basic financial statements of this report. Notes to Financial Statements The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes are the last section of the basic financial statements. Other Information In addition to the basic financial statements, MD&A, and accompanying notes, this report also presents certain Required Supplementary Information (RSI). The RSI that GASB Statement No. 34 requires includes a budgetary comparison schedule for the general fund and schedule of funding progress for Texas Municipal Retirement System. RSI can be found after the basic financial statements. 9

16 MANAGEMENT S DISCUSSION AND ANALYSIS, Continued GOVERNMENT-WIDE FINANCIAL ANALYSIS As noted previously, net position may serve over time as a useful indicator of the City s financial position. For the City of Quinlan, assets exceed liabilities by $6,654,913 as of, in the primary government. The largest portion of the City s net position, $3,912,177, reflects its investment in capital assets (e.g., land, city hall, police station, streets, and drainage systems, as well as the public works facilities), less any debt used to acquire those assets that are still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City 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 assets themselves cannot be used to liquidate these liabilities. Statement of Net Position: The following table reflects the condensed Statement of Net Position: Governmental Business-Type Governmental Business-Type Activities Activities Total Activities Activities Total Current and other assets $ 2,288,654 $ 2,184,900 $ 4,473,554 $ 1,975,361 $ 2,356,921 $ 4,332,282 Long-term assets 769,680 3,365,455 4,135, ,194 3,418,285 4,175,479 Total Assets 3,058,334 5,550,355 8,608,689 2,732,555 5,775,206 8,507,761 Deferred Ouflows of Resources 35,206 14,796 50,002 46,435 19,494 65,929 Other liabilities 96, , ,499 99, , ,713 Long-term liabilities 30,357 1,593,054 1,623,411 89,294 1,641,640 1,730,934 Total Liabilities 127,044 1,799,866 1,926, ,739 1,839,908 2,028,647 Deferred Inflows of Resources 54,109 22,759 76,868 45,999 19,330 65,329 Net Position: Net investment in capital assets 702,979 3,209,198 3,912, ,975 3,323,131 3,988,106 Restricted 288, , , ,145 Unrestricted 1,920, ,328 2,454,085 1,535, ,331 2,147,463 Total Net Position $ 2,912,387 $ 3,742,526 $ 6,654,913 $ 2,544,252 $ 3,935,462 $ 6,479,714 10

17 Statement of Activities: MANAGEMENT S DISCUSSION AND ANALYSIS, Continued The following table provides a summary of the City s changes in net position: For the Year Ended Total Governmental Activities Business-Type Activities Primary Government For the Year Ended September 30, 2017 Total Governmental Business-Type Primary Activities Activities Government Revenues Program revenues: Charges for services $ 78,949 $ 1,032,591 $ 1,111,540 $ 81,546 $ 868,985 $ 950,531 Grants and contributions 51,385-51,385 1,875-1,875 General revenues: Property taxes 516, , , ,046 Sales taxes 791, , , ,975 Franchise and local taxes 102, ,577 93,662-93,662 Investment income ,664 14, Other revenues 77,887-77,887 40,761-40,761 Total Revenues 1,619,492 1,047,255 2,666,747 1,496, ,999 2,365,022 Expenses General government 460, , , ,564 Public safety 479, , , ,167 Public works 276, , , ,744 Interest and fiscal charges 1,378 25,368 26,746 5,477 95, ,631 Water, sewer, & sanitation - 1,248,272 1,248,272-1,280,895 1,280,895 Total Expenses 1,217,908 1,273,640 2,491,548 1,183,952 1,376,049 2,560,001 Change in Net Position Before Transfers 401,584 (226,385) 175, ,071 (507,050) (194,979) Transfers (33,449) 33,449 - (165,607) 165,607 - Total (33,449) 33,449 - (165,607) 165,607 - Change in Net Position 368,135 (192,936) 175, ,464 (341,443) (194,979) Beginning Net Position 2,544,252 3,935,462 6,479,714 2,397,788 4,276,905 6,674,693 Ending Net Position $ 2,912,387 $ 3,742,526 $ 6,654,913 $ 2,544,252 $ 3,935,462 $ 6,479,714 11

18 MANAGEMENT S DISCUSSION AND ANALYSIS, Continued Graphic presentations of selected data from the summary tables are displayed below to assist in the analysis of the City s activities. For the year ended, revenues from governmental activities totaled $1,619,492. Property tax, sales tax, and franchise tax are the City s largest revenue sources. Grants increased by $49,510 due to nonrecurring grants received in the current year. Other revenues increased by $37,126 or 91% primarily due to nonrecurring refunds and reimbursements. All other revenues remained relatively stable when compared to the previous year. This graph shows the governmental function expenses of the City: For the year ended, expenses for governmental activities totaled $1,217,908. This represents an increase of $33,956 or 3% from the prior year. Public works expenditures increased by $28,076 or 11%, which is mainly attributed to increasing salaries and employee benefits due to new hires occurring in the current year. Public safety expenses increased by $29,049 or 6% due to increased motor vehicle repairs and special equipment expenses. All other expenditures remained relatively consistent with the previous year. 12

19 MANAGEMENT S DISCUSSION AND ANALYSIS, Continued Business-type activities are shown comparing operating costs to revenues generated by related services. For the year ended, charges for services by business-type activities totaled $1,032,591, and total expenses totaled $1,273,640. Charges for services increased by $163,606 or 19% primarily due to a mid-year increase in billing rates and increasing customer consumption. Businesstype operating expenses remained relatively consistent with the prior year. Interest and fiscal charges decreased by $69,786 due to the prior year recognition of bond issuance costs, as the City issued certificates of obligation in the prior year. FINANCIAL ANALYSIS OF THE CITY S FUNDS As noted earlier, fund accounting is used to demonstrate and ensure compliance with finance-related legal requirements. Governmental Funds - The focus of the City s governmental funds is to provide information of nearterm inflows, outflows and balances of spendable resources. Such information is useful in assessing the City s financing requirements. In particular, unreserved fund balance may serve as a useful measure of the City s net resources available for spending at the end of the year. As of the end of the year the general fund reflected a total fund balance of $1,830,963. The entire fund balance was unassigned as of yearend. The general fund increased by $292,307 compared to the prior year. This increase was a result of revenues exceeding expenditures and transfers out over the course of the current year. The debt service fund reflected a fund balance of $115,580, an increase of $5,285 compared to the prior year. The increase is attributed to current year revenues exceeding transfers out and expenditures. 13

20 MANAGEMENT S DISCUSSION AND ANALYSIS, Continued The capital projects fund reflected a fund balance of $140,578, a decrease of $40,001 compared to the prior year. The decrease is a result of current year capital outlay expenditures exceeding revenues and transfers in. There was an increase in governmental fund balance of $322,656 over the prior year. The increase was due to greater than anticipated revenues and less than anticipated expenditures. Proprietary Funds - The City s proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. GENERAL FUND BUDGETARY HIGHLIGHTS There was a total positive budget variance of $217,933 in the general fund. This is a combination of a positive revenues and expenditure variances of $65,211 and $154,602, respectively, offset by a negative interfund transfers (out) variance of $1,880. All expenditures were less than budgeted, with the exception of transfers out. CAPITAL ASSETS As of the end of the year, the City s governmental activities funds had invested $753,656 in a variety of capital assets and infrastructure, net of accumulated depreciation. Depreciation is included with the governmental capital assets as required by GASB Statement No. 34. The City s business-type activities funds had invested $3,358,721 in a variety of capital assets and infrastructure, net of accumulated depreciation. Major capital asset events during the current year include the construction in progress additions of $151,667 for wastewater improvement projects. In addition, the City invested an additional $61,014 for utility system improvements. The City also spent $40,001 to remodel the police department building. The City purchased a new public safety vehicle for $36,733 and new public works equipment for $24,700. More detailed information about the City s capital assets is presented in note IV. C to the financial statements. LONG-TERM DEBT At the end of the current year, the City had total bonds outstanding of $1,680,683. During the year, the City made principal payments on the outstanding bonds of $86,536. More detailed information about the City s long-term liabilities is presented in note IV. D to the financial statements. 14

21 MANAGEMENT S DISCUSSION AND ANALYSIS, Continued ECONOMIC FACTORS AND NEXT YEAR S BUDGET The Mayor and City Council are committed to maintaining and improving the overall wellbeing of the City of Quinlan and improving services provided to their public citizens. The City is budgeting conservatively for the upcoming year and planning to maintain similar services. CONTACTING THE CITY S FINANCIAL MANAGEMENT This financial report is designed to provide a general overview of the City of Quinlan s finances for all those with an interest in the City s finances. Questions concerning this report or requests for additional financial information should be directed to the City Administrator, P.O. Box 2740, Quinlan, Texas

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23 FINANCIAL STATEMENTS 17

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25 Assets Current assets: Cash and cash equivalents $ 2,004,000 $ 578,707 $ 2,582,707 $ 1,718,336 Restricted cash - 1,480,474 1,480,474 - Investments 113,526 8, , ,992 Receivables, net 171, , ,310 63,548 Capital assets: Total Current Assets 2,288,654 2,184,900 4,473,554 1,966,876 Non-depreciable 96, , ,481 - Net depreciable capital assets 657,275 3,155,621 3,812,896 - Net pension asset 16,024 6,734 22,758 - Deferred Outflows of Resources Total Assets STATEMENT OF NET POSITION Governmental Activities Primary Government Business-Type Activities 769,680 3,365,455 4,135,135-3,058,334 5,550,355 8,608,689 1,966,876 Pension contributions 34,706 14,586 49,292 - OPEB contributions OPEB gains Total Component Unit QEDC Total Deferred Outflows of Resources Liabilities Current liabilities: Accounts payable and 35,206 14,796 50,002 - accrued liabilities 39,897 84, , ,461 Customer deposits - 79,691 79,691 - Current portion of long-term debt 56,790 42,981 99,771 - Noncurrent liabilities: 96, , , ,461 Long-term debt due in more than one year 23,907 1,590,343 1,614,250 - OPEB liability 6,450 2,711 9,161 - Total Liabilities 127,044 1,799,866 1,926, ,461 Deferred Inflows of Resources Pension experience vs actual 41,140 17,288 58,428 - Pension investment earnings 12,969 5,471 18,440 - Total Deferred Inflows of Resources Net Position 54,109 22,759 76,868 - Net investment in capital assets 702,979 3,209,198 3,912,177 - Restricted for: Debt service 102, ,372 - Capital projects 182, ,446 - Municipal court 3,833-3,833 - Economic development ,845,415 Unrestricted 1,920, ,328 2,454,085 - Total Net Position See Notes to Financial Statements. $ 2,912,387 $ 3,742,526 $ 6,654,913 $ 1,845,415 19

26 STATEMENT OF ACTIVITIES For the Year Ended Program Revenues Capital Charges for Grants and Functions/Programs Expenses Services Contributions Primary Government Governmental Activities General government $ 460,494 $ 46,879 $ 51,385 Public safety 479,216 32,070 - Public works 276, Interest and fiscal charges 1, Total Governmental Activities 1,217,908 78,949 51,385 Business-Type Activities Water, Sewer, & Sanitation 1,273,640 1,032,591 - Total Business-Type Activities 1,273,640 1,032,591 - Total Primary Government $ 2,491,548 $ 1,111,540 $ 51,385 Component Unit Economic Development Corporation 395, Total Component Units $ 395,541 $ - $ - General Revenues: Taxes Property taxes Sales taxes Franchise and local taxes Investment income Other revenues Transfers Total General Revenues and Transfers Change in Net Position See Notes to Financial Statements. Beginning Net Position Ending Net Position 20

27 Net (Expense) Revenue and Changes in Net Position Primary Government Governmental Business-Type Activities Activities Total Component Unit QEDC Activities $ (362,230) $ - $ (362,230) $ - (447,146) - (447,146) - (276,820) - (276,820) - (1,378) - (1,378) - (1,087,574) - (1,087,574) - - (241,049) (241,049) - - (241,049) (241,049) - (1,087,574) (241,049) (1,328,623) (395,541) (395,541) 516, , , , , , , ,664 14, ,887-77,887 - (33,449) 33, ,455,709 48,113 1,503, , ,135 (192,936) 175, ,544,252 3,935,462 6,479,714 1,844,847 $ 2,912,387 $ 3,742,526 $ 6,654,913 $ 1,845,415 21

28 BALANCE SHEET GOVERNMENTAL FUNDS General Debt Capital Projects Fund Service Fund Assets Cash and cash equivalents $ 1,662,374 $ 65,356 $ 142,583 Investments 113, Receivables, net 161,320 9,808 - Prepaid expenses - 13,208 - Due from other funds - 37,016 - Total Assets $ 1,937,220 $ 125,388 $ 142,583 Liabilities Accounts payable and accrued liabilities $ 37,855 $ - $ 2,005 Due to other funds 37, Total Liabilities 74,871-2,005 Deferred Inflows of Resources Unavailable revenue - property tax 31,386 9,808 - Total Deferred Inflows of Resources 31,386 9,808 - Fund Balances Nonspendable Prepaid expenses - 13,208 - Restricted for: Debt service - 102,372 - Municipal Court Capital Outlay ,578 CDBG grant Unassigned reported in: General fund 1,830, Total Fund Balances 1,830, , ,578 Total Liabilities and Fund Balances $ 1,937,220 $ 125,388 $ 142,583 See Notes to Financial Statements. 22

29 Nonmajor Governmental Funds Total Governmental Funds $ 133,687 $ 2,004, , ,128-13,208-37,016 $ 133,687 $ 2,338,878 $ - $ 39,860-37,016-76,876-41,194-41,194-13, ,372 3,833 3,833 41, ,446 87,986 87,986-1,830, ,687 2,220,808 $ 133,687 $ 2,297,684 23

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31 RECONCILIATION OF THE BALANCE SHEET TO THE STATEMENT OF NET POSITION GOVERNMENTAL FUNDS Fund Balances - Total Governmental Funds $ 2,220,808 Adjustments for the Statement of Net Position: Capital assets used in governmental activities are not current financial resources and, therefore, not reported in the governmental funds. Capital assets - non-depreciable 96,381 Capital assets - net depreciable 657,275 Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred in the governmental funds. Property taxes 41,194 Net pension asset 16,024 Deferred outflows of resources, represent a consumption of net position that applies to a future period(s) and is not recognized as an outflow of resources (expenditure) until then. Pension contributions 34,706 OPEB contributions 37 Pension investment earnings (12,969) Pension experience vs actual (41,140) OPEB gains 463 Some liabilities, including bonds payable and deferred charges, are not reported as liabilities in the governmental funds. Prepaid expense in government funds for early debt payment (13,208) Accrued interest (37) Non-current liabilities due in one year (56,790) Non-current liabilities due in more than one year (23,907) OPEB liability (6,450) Net Position of Governmental Activities $ 2,912,387 See Notes to Financial Statements. 25

32 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS For the Year Ended General Debt Capital Projects Fund Service Fund Revenues Property tax $ 400,590 $ 118,119 $ - Sales tax 791, Franchise and local taxes 102, Intergovernmental License and permits 46, Fines and forfeitures 30, Investment earnings Other revenue 70, Total Revenues 1,442, ,466 - Expenditures Current: General government 471, Police department 421, Municipal court 9, Public works 192, Debt Service: Principal - 41,536 - Interest and fiscal charges - 2,914 - Capital outlay ,001 Total Expenditures 1,094,686 44,450 40,001 Excess of Revenues Over Expenditures 348,187 74,016 (40,001) Other Financing Sources (Uses) Transfer in Transfers (out) (62,718) (68,731) - Proceeds from sale of capital assets 6, Total Other Financing Sources (Uses) (55,880) (68,731) - Net Change in Fund Balances 292,307 5,285 (40,001) Beginning fund balances 1,538, , ,579 Ending Fund Balances $ 1,830,963 $ 115,580 $ 140,578 See Notes to Financial Statements. 26

33 Nonmajor Governmental Funds Total Governmental Funds $ - $ 518, , ,577 51,385 51,385-46,879 1,658 32, ,049 53,043 1,614, , , , ,669-41,536-2,914 85, ,564 85,978 1,265,115 (32,935) 349,267 98,000 98,000 - (131,449) - 6,838 98,000 (26,611) 65, ,656 68,622 1,898,152 $ 133,687 $ 2,220,808 27

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35 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES For the Year Ended Amounts reported for governmental activities in the statement of activities are different because: Net changes in fund balances - total governmental funds $ 322,656 Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. Capital outlay 125,564 Depreciation expense (129,102) Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. (1,728) Some expenses 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. Compensated absences (6,375) Pension expense 15,199 OPEB expense (1,151) The issuance of long-term debt (e.g., bonds, leases, certificates of obligation) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net position. Also, governmental funds report the effect of premiums, discounts, and similar items when they are first issued; whereas, these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these debt and related items. Accrued interest 2,124 Debt payments treated as prepaid expense in governmental funds (588) Principal payments 41,536 Change in Net Position of Governmental Activities $ 368,135 See Notes to Financial Statements. 29

36 Assets Current Assets Cash and cash equivalents $ 482,309 $ 96,398 $ 578,707 Restricted cash 1,480,474-1,480,474 Investments 8,537-8,537 Receivables, net 83,050 34, ,182 Due from other funds 17,662-17,662 Noncurrent Assets Capital assets: 2,072, ,530 2,202,562 Non-depreciable 203, ,100 Net depreciable capital assets 3,155,621-3,155,621 Net pension asset 6,734-6,734 Deferred Outflows of Resources 3,365,455-3,365,455 5,437, ,530 5,568,017 Pension contributions 14,586-14,586 OPEB contributions OPEB (gains) losses Liabilities Current Liabilities 14,796-14,796 Accounts payable and accrued liabilities 62,671 21,469 84,140 Customer deposits 79,691-79,691 Due to other funds - 17,662 17,662 Long-term debt due within a year 42,981-42,981 Noncurrent Liabilities 185,343 39, ,474 OPEB liability 2,711-2,711 Long-term debt due in more than a year 1,590,343-1,590,343 Deferred Inflows (Outflows) of Resources 1,778,397 39,131 1,817,528 Pension experience vs actual 17,288-17,288 Pension investment earnings 5,471-5,471 Net Position 22,759-22,759 Net investment in capital assets 3,209,198-3,209,198 Unrestricted 441,929 91, ,328 See Notes to Financial Statements. STATEMENT OF NET POSITION PROPRIETARY FUNDS Total Current Assets Total Noncurrent Assets Total Assets Total Deferred Outflows of Resources Total Current Liabilities Total Liabilities Total Deferred Inflows of Resources Total Net Position 30 Water & Sewer Sanitation Total $ 3,651,127 $ 91,399 $ 3,742,526

37 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PROPRIETARY FUNDS For the Year Ended Water & Sewer Sanitation Total Operating Revenues Water sales $ 460,172 $ - $ 460,172 Sewer revenue 229, ,591 Sanitation revenue - 317, ,384 Other revenue 25,444-25,444 Total Operating Revenues 715, ,384 1,032,591 Operating Expenses Personnel services 182, ,509 Materials and supplies 28,293-28,293 Repairs and maintenance 72,112-72,112 Contractual services 427, , ,698 Other expenses Depreciation 279, ,895 Total Operating Expenses 990, ,196 1,248,272 Operating Income (Loss) (274,869) 59,188 (215,681) Nonoperating Revenues (Expenses) Investment earnings 14,664-14,664 Interest expense (25,368) - (25,368) Total Nonoperating Revenues (Expenses) (10,704) - (10,704) Income Before Transfers (285,573) 59,188 (226,385) Transfers Transfers in 73,449-73,449 Transfers (out) - (40,000) (40,000) Total Transfers 73,449 (40,000) 33,449 Change in Net Position (212,124) 19,188 (192,936) Beginning Net Position 3,863,251 72,211 3,935,462 Ending Net Position $ 3,651,127 $ 91,399 $ 3,742,526 See Notes to Financial Statements. 31

38 STATEMENT OF CASH FLOWS PROPRIETARY FUNDS (Page 1 of 2) For the Year Ended Water & Sewer Sanitation Total Cash Flows from Operating Activities Receipts from customers $ 699,985 $ 311,771 $ 1,011,756 Payments to employees (201,417) - (201,417) Payments to suppliers and contractors (508,829) (257,970) (766,799) Net Cash Provided by (Used) for Operating Activities (10,261) 53,801 43,540 Cash Flows from Noncapital Financing Activities Transfers in from other funds 73,449-73,449 Transfers (out) to other funds - (40,000) (40,000) Net Cash Provided by (Used) Noncapital Financing Activities 73,449 (40,000) 33,449 Cash Flows from Capital and Related Financing Activities Capital purchases (220,331) - (220,331) Payments on outstanding debt (45,000) - (45,000) Interest expense paid on debt (25,368) - (25,368) Net Cash Provided by (Used) for Capital and Related Financing Activities (290,699) - (290,699) Cash Flows from Investing Activities Interest received 14,664-14,664 Net Cash Provided by Investing Activities 14,664-14,664 Net Increase (Decrease) in Cash and Cash Equivalents (212,847) 13,801 (199,046) Beginning Cash and Cash Equivalents 2,175,630 82,597 2,258,227 Ending Cash and Cash Equivalents $ 1,962,783 $ 96,398 $ 2,059,181 See Notes to Financial Statements. 32

39 STATEMENT OF CASH FLOWS PROPRIETARY FUNDS (Page 2 of 2) For the Year Ended Reconciliation of Operating Income (Loss) to Net Cash Provided by (Used for) Operating Activities Operating Income (Loss) $ (274,869) $ 59,188 $ (215,681) Adjustments to reconcile operating income to net cash provided: Depreciation 279, ,895 Changes in Operating Assets and Liabilities: (Increase) Decrease in: Investments (15) - (15) Accounts receivable (21,397) (5,613) (27,010) Due from other funds Deferred Outflows of Resources: Pension contributions OPEB actual experience vs. assumption (195) - (195) Deferred Inflows of Resources: Pension actual experience vs. assumption (2,042) - (2,042) Pension investment experience 9,465-9,465 Increase (Decrease) in: Water & Sewer Sanitation Total Accounts payable and accrued liabilities 18, ,069 Due to other funds - (744) (744) Compensated absences (13,005) - (13,005) Customer deposits 6,190-6,190 Net pension liability (asset) (14,709) - (14,709) OPEB liability Net Cash Provided by (Used for) Operating Activities $ (10,261) $ 53,801 $ 43,540 See Notes to Financial Statements. 33

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41 NOTES TO FINANCIAL STATEMENTS I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity The (the City ) was incorporated on October 20, 1896 and operates under a Mayor Council form of government. The City provides: general administrative services; public safety; public works; street repair and maintenance; parks; water; wastewater; and sanitation. The City is an independent political subdivision of the State of Texas governed by an elected council and a mayor and is considered a primary government. As required by generally accepted accounting principles, these basic financial statements have been prepared based on considerations regarding the potential for inclusion of other entities, organizations, or functions as part of the Cityʹs financial reporting entity. The Quinlan Economic Development Corporation, although legally separate, is considered part of the reporting entity. No other entities have been included in the Cityʹs reporting entity. Additionally, as the City is considered a primary government for financial reporting purposes, its activities are not considered a part of any other governmental or other type of reporting entity. Considerations regarding the potential for inclusion of other entities, organizations or functions in the Cityʹs financial reporting entity are based on criteria prescribed by generally accepted accounting principles. These same criteria are evaluated in considering whether the City is a part of any other governmental or other type of reporting entity. The overriding elements associated with prescribed criteria considered in determining that the Cityʹs financial reporting entity status is that of a primary government are that it has a separately elected governing body; it is legally separate; and is fiscally independent of other state and local governments. Additionally prescribed criteria under generally accepted accounting principles include considerations pertaining to organizations for which the primary government is financially accountable, and considerations pertaining to organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entityʹs financial statements to be misleading or incomplete. Discretely Presented Component Unit The Quinlan Economic Development Corporation The Quinlan Economic Development Corporation (the QEDC ) is a discretely presented component unit of the City. The QEDC is governed by a board of seven directors, all of which are appointed by the City Council of the City of Quinlan and whom can be removed from office by the City Council at its will. The QEDC was incorporated in the state of Texas in The nature and significance of the relationship between the primary government and the QEDC is such that exclusion would cause the City s financial statements to be 35

42 NOTES TO FINANCIAL STATEMENTS, Continued misleading or incomplete. Separately issued audited financial statements are available from the QEDC, P.O. Box 2319, Quinlan, Texas, The financial statements are formatted to allow the user to clearly distinguish between the primary government and the discretely presented component unit. B. Financial Statement Presentation These financial statements include implementation of Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. Requirements of the statement include the following: A Management s Discussion and Analysis (MD&A) section providing an analysis of the City s overall financial position and results of operations; Financial statements prepared using full accrual accounting for all of the City s activities; A change in the fund financial statements to focus on the major funds. GASB Statement No. 34 established standards for external financial reporting for all state and local governmental entities, which includes a statement of net position and a statement of activities. It requires the classification of net position into three components: invested in net investment in capital assets; restricted; and unrestricted. These classifications are defined as follows: Net investment in capital assets This component of net position consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted This component of net position consists of constraints placed on net position use through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, laws or regulation of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted This component of net position consists of net position that does not meet the definition of restricted or net investment in capital assets. C. Government Wide and Fund Financial Statements The government wide financial statements (i.e., the statement of net position and the statement of changes in net position) report information about the City as a whole. These statements include all activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental 36

43 NOTES TO FINANCIAL STATEMENTS, Continued revenues, are reported separately from business type activities, which rely to a significant extent on fees and charges for support. The statement of activities presents a comparison between direct expenses and program revenues for each segment of the business type activities of the City and for each function of the City s governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Program revenues include charges paid by the recipients of goods or services offered by the programs and grants that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, such as taxes and investment earnings, are presented as general revenues. Separate financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. In the fund financial statements, the accounts of the City are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self balancing accounts that comprise its assets, liabilities, fund equity, revenues, and expenditures or expenses, as appropriate. The government reports the following governmental funds: Governmental Funds Governmental funds are those funds through which most governmental functions are typically financed. General Fund The general fund is used to account for all financial transactions not properly includable in other funds. The principal sources of revenues include local property taxes, sales and franchise taxes, licenses and permits, fines and forfeitures, and charges for services. Expenditures include general government and public safety. The general service fund is considered a major fund for reporting purposes. Debt Service Fund The debt service fund is used to account for the payment of interest and principal on all general obligation bonds and other long term debt of governmental funds. The primary source of revenue for debt service is local property taxes. The debt service fund is considered a major fund for reporting purposes. 37

44 NOTES TO FINANCIAL STATEMENTS, Continued Capital Projects Fund The capital projects fund is used to account for the expenditures of resources accumulated from the sale of bonds and related interest earnings, contributed capital or transfers from other funds, other than those recorded in the enterprise funds, for acquisition of capital facilities. The capital projects fund is considered a major fund for reporting purposes. Public Safety Fund The public safety fund is used to track funds restricted by enabling legislation from municipal court citations. The primary source of revenue for public safety is fines and forfeitures from the City s municipal court system. The public safety fund is considered a nonmajor fund for reporting purposes. Capital Equipment Replacement Fund The capital equipment replacement fund serves as a type of savings fund in the instance that the City needs to purchase capital equipment. The reserves from this fund may be used to purchase capital assets rather than the issuance of debt. The capital equipment replacement fund is considered a nonmajor fund for reporting purposes. Grant Fund The grant fund is used to track the City s grant activity. The grant fund is considered a nonmajor fund for reporting purposes. Proprietary Fund Types Proprietary funds are used to account for activities that are similar to those often found in the private sector. All assets, liabilities, equities, revenues, expenses, and transfers relating to the government s business activities are accounted for through proprietary funds. The measurement focus is on determination of net income, financial position, and cash flows. Proprietary funds distinguish operating revenues and expenses from non operating items. Operating revenues include charges for services. Operating expenses include costs of materials, contracts, personnel, and depreciation. All revenues and expenses not meeting this definition are reported as non operating revenues and expenses. Proprietary fund types follow GAAP prescribed by the Governmental Accounting Standards Board (GASB) and all financial Accounting Standards Board s standards issued prior to November 30, Subsequent to this date, the City accounts for its enterprise funds as presented by GASB. The proprietary fund types used by the City include enterprise funds. 38