Lynnwood Public Facilities District Snohomish County, Washington $15,605,000 Convention Center Revenue Refunding Bonds, 2015

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1 OFFICIAL STATEMENT DATED APRIL 1, 2015 NEW ISSUE STANDARD AND POOR S RATING: AA+ BOOK-ENTRY ONLY (Not Bank Qualified) (See the caption RATING herein) In the opinion of Bond Counsel, under existing federal law and assuming compliance with applicable requirements of the Code that must be satisfied subsequent to the issue date of the Bonds, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the alternative minimum tax applicable to individuals. However, while interest on the Bonds also is not an item of tax preference for purposes of the alternative minimum tax applicable to corporations, interest on the Bonds received by corporations is taken into account in the computation of adjusted current earnings for purposes of the alternative minimum tax applicable to corporations, interest on the Bonds received by certain S corporations may be subject to tax, and interest on the Bonds received by foreign corporations with United States branches may be subject to a foreign branch profits tax. Receipt of interest on the Bonds may have other federal tax consequences for certain taxpayers. See TAX MATTERS. DATED: Date of Delivery Lynnwood Public Facilities District Snohomish County, Washington $15,605,000 Convention Center Revenue Refunding Bonds, 2015 DUE: December 1, as shown on inside cover Lynnwood Public Facilities District (the District ) is issuing its Convention Center Revenue Refunding Bonds, 2015 (the Revenue Bonds or the Bonds ) in fully registered form under a book-entry only system. When issued, the Bonds will initially be registered in the name of Cede & Co. (the Registered Owner ), as nominee for The Depository Trust Company ( DTC ) New York, New York. Individual purchases of the Bonds will be made in book-entry form only in the principal amount of $5,000 or any integral multiple thereof within a single series and maturity. Purchasers of the Bonds (the Beneficial Owners ) will not receive certificates representing their beneficial ownership interests in the Bonds purchased. The fiscal agent of the state of Washington (the State ) (currently U.S. Bank National Association) will act as the registrar, paying agent, transfer agent and authenticating agent for the Bonds (the Bond Registrar ). Interest on the Bonds will be payable semiannually on each June 1 and December 1, commencing June 1, 2015, to the maturity or prior redemption of the Bonds. The Bonds will mature on the dates and in the amounts and bear interest at the rates set forth on the inside cover. For so long as the Bonds are held in book-entry only form, the principal of and interest on the Bonds will be paid by the Bond Registrar to DTC, which, in turn, is obligated to remit such principal and interest payments to the DTC Participants for subsequent disbursement to the Beneficial Owners. See THE BONDS Registration and Bond Registrar and Appendix F BOOK-ENTRY SYSTEM. MATURITY SCHEDULE SEE INSIDE COVER The Bonds will be subject to optional and/or mandatory redemption prior to maturity as further described herein. See THE BONDS Redemption Provisions. The Revenue Bonds are special revenue obligations of the District and are payable solely from Net Revenue (Intergovernmental Project Payments and Operating Revenue of the Convention Center less Operation and Maintenance Expenses) and other available revenues of the District. See THE REVENUE BONDS Sources of Repayment. Although the Bonds are not direct obligations of the City of Lynnwood, Washington (the City ), the City has agreed to loan the District money from time to time in amounts sufficient to provide for payment of debt service on the Bonds to the extent the District does not have on hand funds sufficient to pay any scheduled payment of principal or interest on the Bonds, and the City has pledged its full faith and credit to make the payments of amounts described in the contingent loan agreement. See CONTINGENT LOAN AGREEMENT herein. The Bonds are payable solely from the specified tax sources and other money legally available therefor, and from the transfer of the loaned amounts by the City to the Bond Registrar. The Bonds are special limited obligations solely of the District and are not obligations of the State, Snohomish County (the County ), the Snohomish County Public Facilities District (the County PFD ), the City or any political subdivision of the State other than the District, and neither the full faith and credit nor the taxing power of the County, the County PFD, the City, the State or any political subdivision thereof (other than the limited taxing power of the District available in respect of the Sales Tax Bonds) is pledged to the payment of the Bonds. The District does not have authority to impose property taxes. The Bonds are offered when, as and if issued, subject to the approving legal opinions of Foster Pepper PLLC, Seattle, Washington, Bond Counsel. The form of Bond Counsel s opinions are attached as Appendix F. Certain matters will be passed upon for the Underwriter by its counsel, Pacifica Law Group LLP, Seattle, Washington. It is expected that the Bonds will be available for delivery through the facilities of DTC in New York, New York or to the Bond Registrar on behalf of DTC by Fast Automated Security Transfer on or about April 15, 2015 (the Issue Date ). This cover page contains certain information for quick reference only. Investors must read the entire Official Statement to obtain information essential for making an informed investment decision.

2 Lynnwood Public Facilities District Snohomish County, Washington MATURITY SCHEDULE, INTEREST RATES, YIELDS, PRICES AND CUSIP NUMBERS $15,605,000 Convention Center Revenue Refunding Bonds, 2015 Due Dec 1 Amount Interest Rate Yield Price CUSIP No. (1) 2018 $310, % 1.45% % BG , BH , BJ , BK , BL7 $4,500, % Term Bond due December 1, 2030 at a yield of 3.25%; CUSIP No. (1) : BM5 (2) $3,590, % Term Bond due December 1, 2030 at a yield of 3.625%; CUSIP No. (1) : BU7 $3,800, % Term Bond due December 1, 2034 at a yield of 3.820%; CUSIP No. (1) : BY9 (1) The CUSIP data herein is provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor s. The CUSIP numbers are not intended to create a database and do not serve in any way as a substitute for the CUSIP service. The CUSIP numbers have been assigned by an independent company not affiliated with the District and are provided solely for convenience and reference. The CUSIP numbers for a specific maturity are subject to change after the issuance of the Bonds. Neither the District nor the Underwriter takes responsibility for the accuracy of the CUSIP numbers. (2) Priced to the par call date of December 1, 2024.

3 LYNNWOOD PUBLIC FACILITIES DISTRICT th Street Lynnwood, Washington (425) BOARD OF DIRECTORS Term Expires George Sherwin, Chair October 2015 Bob Fuller, Vice-Chair October 2017 Andy Olsen, Secretary October 2018 Mike Echelbarger October 2018 Lynn Melby October 2015 City of Lynnwood Finance Director, Treasurer and Ex-Officio Board Member Grant Dull Judy Powell DISTRICT STAFF Executive Director Financial Analyst Bond Counsel Foster Pepper PLLC Financial Advisor A. Dashen & Associates Bond Registrar Washington State Fiscal Agent U.S. Bank National Association The District s website is not part of this official statement and investors should not rely on information that is presented in the District s website in determining whether to purchase the Bonds. This inactive textual reference to the District s website is not a hyperlink and does not incorporate the District s website by reference. i

4 The information within this Official Statement has been compiled from official and other sources considered reliable and, while not guaranteed as to accuracy, is believed by the District to be correct as of its date. The District makes no representation regarding the accuracy or completeness of the information in Appendix D INFORMATION ON THE CITY OF LYNNWOOD, CONTINUING DISCLOSURE UNDERTAKING The City s Undertaking, or LITIGATION, which were obtained from the City, or Appendix G BOOK-ENTRY SYSTEM, which has been obtained from DTC s website, or regarding the Underwriter or the Financial Advisor. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made by use of this Official Statement shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. Information on website addresses set forth in this Official Statement is not incorporated into this Official Statement and cannot be relied upon to be accurate as of the date of this Official Statement, nor can any such information be relied upon in making investment decisions regarding the Bonds. No dealer, broker, salesperson, or other person has been authorized by the District or the Underwriter to give any information or to make any representations with respect to the Bonds other than those contained in this Official Statement, and, if given or made, such information or representations must not be relied upon as having been authorized by the District or the Underwriter. This Official Statement does not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. In connection with this offering, the Underwriter may over allot or effect transactions which stabilize or maintain the market price of the Bonds at levels above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued or recommenced at any time without prior notice to any person. The Bonds have not been registered under the Securities Act of 1933, as amended, and the Bond Resolutions (defined herein) have not been qualified under the Trust Indenture Act of 1939, as amended, in reliance upon exemptions contained in such acts. The Bonds have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary may be a criminal offense. Certain statements contained in this Official Statement do not reflect historical facts, but rather are forecasts and forward-looking statements. No assurance can be given that the future results discussed herein will be achieved, and actual results may differ materially from the forecasts described herein. In this respect, the words estimate, forecast, project, anticipate, expect, intend, believe and other similar expressions are intended to identify forward-looking statements. The forward-looking statements in this Official Statement are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements. All estimates, projections, forecasts, assumptions and other forward-looking statements are expressly qualified in their entirety by the cautionary statements set forth in this Official Statement. These forward-looking statements speak only as of the date they were prepared. The District specifically disclaims any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of this Official Statement. ii

5 LYNNWOOD PUBLIC FACILITIES DISTRICT TABLE OF CONTENTS INTRODUCTION... 1 The District... 1 District Facilities... 1 Purpose of the Bonds... 1 Sources of Payment for the Bonds... 1 Contingent Loan Agreement... 1 Other Information... 1 THE BONDS... 2 Principal Amount, Date, Interest Rates and Maturities 2 Registration and Bond Registrar... 2 Redemption Provisions... 2 Failure to Pay Bonds... 3 Refunding or Defeasance... 4 PURPOSE AND APPLICATION OF BOND PROCEEDS... 4 Estimated Sources and Uses of Funds... 4 Refunding Plan... 4 Certification of Mathematical Calculations... 5 SCHEDULED DEBT SERVICE REQUIREMENTS... 5 Other Debt Obligations... 6 Future Financings... 6 THE SALES TAX BONDS... 6 Sources of Repayment... 6 District Sales Tax... 6 Historical Sales Tax Revenues... 7 Statutory Debt Limitations... 8 THE REVENUE BONDS... 8 Sources of Repayment... 8 County PFD State Sales Tax Revenue... 9 City Hotel-Motel Tax Revenues County Hotel-Motel Tax Revenue SUMMARY OF CERTAIN PROVISIONS OF THE REVENUE BOND RESOLUTION Additional Revenue Bonds Flow of Funds Additional Covenants CONTINGENT LOAN AGREEMENT THE DISTRICT Formation and Authority Governance and Administration District Employees Historical Financial Information Accounting and Auditing Investments Pension System Insurance THE LYNNWOOD CONVENTION CENTER Convention Center Management Convention Center Operations AUXILIARY FACILITIES HISTORICAL AND ESTIMATED CASH FLOW FOR THE DISTRICT Uncertainty of Future Revenue Summary of Certain Assumptions DEMOGRAPHIC AND ECONOMIC INFORMATION27 Economic Indicators BONDHOLDER RISKS Limitations of the Intergovernmental Project Payments and Contingent Loan Agreement Potential Future Federal Tax Law Changes Limited Security No Redemption upon Taxability Enforceability of Remedies Sales Taxes and Hotel-Motel Taxes Initiative and Referendum LITIGATION APPROVAL OF COUNSEL TAX Matters Tax Exemption Certain other Federal Tax Consequences CONTINUING DISCLOSURE UNDERTAKING The District s Undertaking Prior Compliance The City s Undertaking FINANCIAL ADVISOR RATING UNDERWRITING MISCELLANEOUS Official Statement Potential Conflicts of Interest AUDITED FINANCIAL STATEMENTS OF THE DISTRICT... Appendix A FORM OF THE REVENUE BOND RESOLUTION... Appendix C INFORMATION ON THE CITY OF LYNNWOOD... Appendix D 2013 AUDITED FINANCIAL STATEMENTS OF THE CITY OF LYNNWOOD... Appendix E FORM OF LEGAL OPINION... Appendix F BOOK-ENTRY SYSTEM... Appendix G iii

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7 OFFICIAL STATEMENT Lynnwood Public Facilities District $15,605,000 Convention Center Revenue Refunding Bonds, 2015 INTRODUCTION Lynnwood Public Facilities District (the District ), a public facilities district duly organized and existing under and by virtue of the laws of the state of Washington (the State ), furnishes this Official Statement in connection with the offering of the District s Convention Center Revenue Refunding Bonds, 2015 (the Revenue Bonds or the Bonds ). This Official Statement, which includes the cover page, inside cover page and appendices, provides information concerning the District, the Bonds, the Lynnwood Convention Center (the Convention Center ) and the City of Lynnwood, Washington (the City ). The Bonds are issued pursuant to chapters 35.57, and of the Revised Code of Washington ( RCW ) and Resolution No (the Revenue Bond Resolution or Bond Resolution ) adopted by the Board of Directors of the District (the Board ) on April 1, Unless otherwise defined in this Official Statement, capitalized terms used herein have the meanings set forth in the Bond Resolution. See Appendix B FORM OF THE BOND RESOLUTION. The District The District is a municipal corporation of the State created in The boundaries of the District are coterminous with the boundaries of the City, located in Snohomish County, Washington (the County ). The City has an estimated population of 36,030, and the County has an estimated population of 741,000. See DEMOGRAPHIC AND ECONOMIC INFORMATION. The District is governed by a five-member appointed Board. The City Finance Director serves as the Treasurer of the District and is an ex-officio member of the Board. See THE DISTRICT. District Facilities Convention Center. The District owns and operates the Convention Center, which includes over 34,500 sq. ft. of meeting space on two floors. The Convention Center includes state-of-the-art audio/visual equipment and an in-house media services team, plus high speed Internet and wireless access throughout the facility. It services the small- to mid-size convention and conference market, as well as the local meeting industry. Auxiliary Facilities. In conjunction with the acquisition of the Convention Center site, the District acquired adjacent land and buildings ( Auxiliary Facilities ) to be held for potential future expansion of the Convention Center and related parking facilities, and/or for future construction of convention-related facilities such as hotels and other regional center facilities. The Auxiliary Facilities currently consist of a shopping center. See AUXILIARY FACILITIES. Purpose of the Bonds The District currently has outstanding $16,390,000 Convention Center Revenue Bonds, 2005 (the 2005 Revenue Bonds ) all of which will be refunded with proceeds of the Bonds and cash contributions of the District, if necessary. See PURPOSE AND APPLICATION OF BOND PROCEEDS. The District currently has outstanding $9,725,000 Convention Center Sales Tax Bonds, 2004 (the 2004 Sales Tax Bonds ), which are not being refinanced with the Bonds. Sources of Payment for the Bonds The Revenue Bonds are special revenue obligations of the District, payable solely from Net Revenue (Intergovernmental Project Payments and Operating Revenue of the Convention Center less Operation and Maintenance Expenses) and other revenues of the District legally available therefor. See THE REVENUE BONDS Sources of Repayment. Intergovernmental Project Payments are not available to make debt service payments the 2004 Sales Tax Bonds or sales tax bonds issued to refund the 2004 Sales Tax Bonds (collectively, the Sales Tax Bonds ). Contingent Loan Agreement Pursuant to an agreement between the District and the City, the City has agreed to loan the District money from time to time, in amounts sufficient to provide for payment of debt service to the extent the District does not have on hand funds sufficient to pay any scheduled payment of principal or interest on the Bonds. Although the Bonds are not direct obligations of the City, the City has pledged its full faith and credit to make the payments of amounts described in the contingent loan agreement. See CONTINGENT LOAN AGREEMENT and Appendix D INFORMATION ON THE CITY OF LYNNWOOD. Other Information Brief descriptions of the Bonds, the District, the City, and certain agreements, reports and other instruments are included in this Official Statement. Such descriptions do not purport to be comprehensive or definitive. All references to the agreements, reports or other instruments described herein are qualified in their entirety by reference to each such document, statute, report 1

8 or other instrument. The information herein is subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the District since the date of this Official Statement. All of the summaries of provisions of the State Constitution and laws of the State, resolutions of the District, and of other documents contained herein are made subject to the complete provisions thereof and do not purport to be complete statements of such documents, of which copies may be obtained from the District upon request. Certain financial information regarding the District has been taken from the District s audited and unaudited financial statements, budgets and other financial reports, and their accompanying notes. For complete information, copies thereof may be obtained from the District upon request. See Appendix A 2013 AUDITED FINANCIAL STATEMENTS OF THE DISTRICT. Principal Amount, Date, Interest Rates and Maturities THE BONDS The Bonds will be issued in the aggregate principal amount of $15,605,000. The Bonds will be dated and bear interest from their date of initial delivery (the Issue Date ). The Bonds will mature on the dates and in the principal amounts, and will bear interest (payable semiannually on each June 1 and December 1, commencing June 1, 2015) at the respective rates as set forth on the inside front cover of this Official Statement. Interest on the Bonds will be computed on the basis of a 360-day year consisting of twelve 30-day months. Registration and Bond Registrar Book-Entry System. The Bonds will be issued as fully registered bonds and, when issued, will be registered in the name of Cede & Co. as nominee for The Depository Trust Company ( DTC ). DTC will act as the initial securities depository for the Bonds (the Securities Depository ). Individual purchases and sales of the Bonds will be made in book-entry form only in minimum denominations of $5,000 or integral multiples thereof within a series and maturity ( Authorized Denominations ). Purchasers ( Beneficial Owners ) will not receive certificates representing their interests in the Bonds. So long as Cede & Co. is the Registered Owner of the Bonds, as nominee of DTC, references herein to the Registered Owners will mean Cede & Co. or its successor and will not mean the Beneficial Owners of the Bonds. For information about DTC and its book-entry system, see Appendix G BOOK-ENTRY SYSTEM. Neither the District nor the City makes any representation as to the accuracy or completeness of the information in Appendix G provided by DTC. Purchasers of the Bonds should confirm this information with DTC or its broker-dealer participants. Bond Registrar. Principal of and interest on the Bonds will be payable by the fiscal agent of the State (the Bond Registrar ), currently U.S. Bank National Association (or such other fiscal agency or agents as the State may from time to time designate). So long as Cede & Co. is the Registered Owner of the Bonds, principal of and interest on the Bonds are payable by wire transfer by the Bond Registrar to DTC, which, in turn, is obligated to remit such principal and interest to the DTC Participants for subsequent disbursement to the Beneficial Owners of the Bonds, as further described in Appendix G BOOK-ENTRY SYSTEM. Transfer and Exchange; Record Date. A Bond surrendered to the Bond Registrar may be exchanged for a Bond or Bonds of the same series in any Authorized Denomination of an equal aggregate principal amount and of the same interest rate and maturity. The Bond Registrar is not obligated to exchange any Bond or transfer registered ownership during the period between the applicable Record Date and the next interest payment or redemption date. For purposes hereof, Record Date means in the case of each interest payment date, the Bond Registrar s close of business on the 15th day of the month immediately preceding such interest payment date, and, with respect to redemption of a Bond prior to its maturity, the Bond Registrar s close of business on the date on which the Bond Registrar sends the notice of redemption in accordance with the Bond Resolutions. Registered ownership of any Bond registered in the name of the Securities Depository may not be transferred except (1) to any successor Securities Depository; (2) to any substitute Securities Depository appointment by the District; or (3) to any person if the Bond is no longer to be held in book-entry only form. Termination of Book-Entry System. If the Bonds are no longer held in book-entry only form by the Securities Depository, the District will execute, authenticate and deliver, at no cost to the Beneficial Owners, Bonds in fully registered form, in Authorized Denominations. The principal of the Bonds will then be payable upon due presentment and surrender to the Bond Registrar, and interest on the Bonds will then be payable by electronic transfer on the interest payment date, or by check or draft of the Bond Registrar mailed on the interest payment date, to the Registered Owners, at the address appearing upon the registration books on the Record Date. The District is not required to make electronic transfers except pursuant to a request by a Registered Owner in writing received on or prior to the Record Date and at the sole expense of the Registered Owner. Redemption Provisions Optional Redemption. The District has reserved the right and option to redeem the Revenue Bonds maturing on or after December 1, 2025 prior to their stated maturity dates at any time on or after December 1, 2024, as a whole or in part (within 2

9 one or more maturities selected by the District and randomly within a maturity in such manner as the Bond Registrar shall determine), at par plus accrued interest to the date fixed for redemption. Mandatory Redemption. The Revenue Bonds maturing in the years 2030 and 2034 are term bonds (the Term Bonds ) and, if not redeemed under the optional redemption provisions or purchased, will be called for redemption (in such manner as the Bond Registrar shall determine) at par plus accrued interest on December 1 in years and amounts as follows: *Final Maturity 2030 Term Bond (3.625% coupon) 2030 Term Bond (5.000% coupon) 2034 Term Bond Year Amount Year Amount Year Amount 2023 $1,095, $1,185, $ 860, ,200, ,410, , , , , , , * 1,045, , , , * 580, * 215,000 If a Term Bond is redeemed under the optional redemption provisions, defeased or purchased by the District and surrendered for cancellation, the principal amount of the Term Bond so redeemed, defeased or purchased (irrespective of its actual redemption or purchase prices) will be credited against one or more scheduled mandatory redemption installments for that Term Bond. The District will determine the manner in which the credit is to be allocated and notify the Bond Registrar in writing of its allocation prior to the earliest mandatory redemption date for that Term Bond for which notice of redemption has not already been given. Selection of Bonds for Redemption; Partial Redemption. If fewer than all of the outstanding Bonds are to be redeemed at the option of the District, the District will select the series and maturities to be redeemed. If fewer than all of the outstanding Bonds of a maturity of a series are to be redeemed, the Securities Depository will select Bonds registered in the name of the Securities Depository to be redeemed in accordance with the operational procedures referred to in the Letter of Representations, and the Bond Registrar will select all other Bonds to be redeemed randomly in such manner as the Bond Registrar shall determine. All or a portion of the principal amount of any Bond that is to be redeemed may be redeemed in any Authorized Denomination. If less than all of the outstanding principal amount of any Bond is redeemed, upon surrender of that Bond to the Bond Registrar, there shall be issued to the Registered Owner, without charge, a new Bond (or Bonds, at the option of the Registered Owner) of the same series, maturity and interest rate in any Authorized Denomination in the aggregate principal amount to remain outstanding. Notice of Redemption. Notice of redemption of each Bond registered in the name of the Securities Depository will be given in accordance with the Letter of Representations. Notice of redemption of each other Bond, unless waived by the Registered Owner, will be given by the Bond Registrar not less than 20 nor more than 60 days prior to the date fixed for redemption by first-class mail, postage prepaid, to the Registered Owner at the address appearing on the Bond Register at the Bond Registrar s close of business on the date on which the Bond Registrar sends the notice of redemption. The requirements of the preceding sentence will be satisfied when notice has been mailed as so provided, whether or not it is actually received by an Owner. Rescission of Optional Redemption Notice. In the case of an optional redemption, the notice of redemption may state that the District retains the right to rescind the redemption notice and the redemption by giving a notice of rescission to the affected Registered Owners at any time on or prior to the date fixed for redemption. Any notice of optional redemption that is so rescinded will be of no effect, and each Bond for which a notice of redemption has been rescinded will remain outstanding. Effect of Redemption. Interest on each Bond called for redemption will cease to accrue on the date fixed for redemption, unless either the notice of optional redemption is rescinded as set forth above, or money sufficient to effect such redemption is not on deposit in the applicable Debt Service Fund or in a trust account established to refund or defease the Bond. Purchase of Bonds. The District reserves the right to purchase any or all of the Bonds offered to the District at any time at any price acceptable to the District plus accrued interest to the date of purchase. Failure to Pay Bonds If the principal of any Bond is not paid when the Bond is properly presented at its maturity date or date fixed for redemption, the District is obligated to pay interest on that Bond at the same rate provided in the Bond from and after its maturity or date fixed for redemption until that Bond, both principal and interest, is paid in full or until sufficient money for its payment in full is on deposit in the applicable Debt Service Fund, or in a trust account established to refund or defease the Bond, and the Bond has been called for payment by giving notice of that call to the Registered Owner. The Bonds are not subject to acceleration under any circumstances. 3

10 Refunding or Defeasance The District may issue refunding bonds pursuant to State law or use money available from other lawful sources to carry out a refunding or defeasance plan, which may include (a) paying when due the principal of and interest on any or all of the Bonds of a series (the defeased Bonds ); (b) redeeming the defeased Bonds prior to their maturity; and (c) paying the costs of the refunding or defeasance. If the District sets aside special trust fund or escrow account irrevocably pledged to that redemption or defeasance (the trust account ), money and/or Government Obligations maturing at a time or times and bearing interest in amounts sufficient to redeem, refund or defease the defeased Bonds in accordance with their terms, then all right and interest of the Owners of the defeased Bonds in the covenants of the applicable Bond Resolution funds and accounts obligated to the payment of the defeased Bonds, other than the right to receive the funds so set aside and pledged, will cease and become void. Thereafter, the Owners of defeased Bonds will have the right to receive payment of the principal of and interest on the defeased Bonds solely from the trust account and the defeased Bonds will be deemed no longer outstanding. In that event, the District may apply money remaining in any fund or account (other than the trust account) established for the payment or redemption of the defeased Bonds to any lawful purpose. As currently defined in RCW , Government Obligations means (1) direct obligations of or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America and bank certificates of deposit secured by such obligations; (2) bonds, debentures, notes, participation certificates or other obligations issued by the Banks for Cooperatives, the Federal Intermediate Credit Bank, the Federal Home Loan Bank System, the Export-Import Bank of the United States, federal land banks or the Federal National Mortgage Association; (3) public housing bonds and project notes fully secured by contracts with the United States; and (4) obligations of financial institutions insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, to the extent insured or to the extent guaranteed as permitted under any other provision of State law. PURPOSE AND APPLICATION OF BOND PROCEEDS Proceeds of the Revenue Bonds will be used to refund all the outstanding 2005 Revenue Bonds (the Refunded Revenue Bonds and to pay costs of issuance of the Revenue Bonds. The Refunded Revenue Bonds are more specifically described in the table below under Refunding Plan. Estimated Sources and Uses of Funds The following table shows the estimated sources and uses of funds: Sources of Funds Revenue Bonds Par Amount of the Bonds $15,605,000 Net Premium 1,042,345 District Funds 297,281 Total Sources of Funds $16,944,626 Uses of Funds Deposit to Escrow Account $16,753,836 Costs of Issuance (1) 190,790 Total Uses of Funds $16,944,626 (1) Includes bond rating fees, Underwriter s discount, Bond Counsel fees, Financial Advisor s fees, Escrow Agent fees and other costs incurred in connection with the issuance of the Bonds. Refunding Plan The District will use proceeds of the Bonds, together with other available funds of the District, to currently refund all of the Refunded Revenue Bonds. Proceeds of the Bonds will be deposited with U.S. Bank National Association, Seattle, Washington (the Escrow Agent ) and will be used to refund the Refunded Revenue Bonds by either depositing cash or by the purchase of certain obligations of the United States of America (the Acquired Obligations ) which, together with any necessary beginning cash balance, will provide for the payment of the redemption prices of the Refunded Revenue Bonds on the applicable call date including all accrued and unpaid interest. The cash and the Acquired Obligations, if any, will irrevocably be pledged to the payment of the Refunded Revenue Bonds pursuant to an escrow deposit agreement to be executed by the District and the Escrow Agent. 4

11 * Term Bonds Refunded Revenue Bonds Lynnwood Public Facilities District Convention Center Revenue Bonds, 2005 Maturity Date Principal Amount Interest Rate Redemption Date (at par) CUSIP No /1/2015 $ 370, % May 15, 2015 AL8 12/1/ , May 15, 2015 AM6 12/1/ , May 15, 2015 AN4 12/1/ , May 15, 2015 AP9 12/1/ , May 15, 2015 AQ7 12/1/ , May 15, 2015 AR5 12/1/ , May 15, 2015 AS3 12/1/ , May 15, 2015 AT1 12/1/2023 1,025, May 15, 2015 AU8 12/1/2024 1,140, May 15, 2015 AV6 Certification of Mathematical Calculations 12/1/2028* 4,105, May 15, 2015 AZ7 12/1/2034* 5,140, May 15, 2015 BF0 A. Dashen & Associates, Financial Advisor to the District, will certify the accuracy of the mathematical computations concerning the sufficiency of the funds and Acquired Obligations, if any, placed in the escrow account to pay when due, pursuant to the call for redemption, the principal of and interest on the Refunded Revenue Bonds. SCHEDULED DEBT SERVICE REQUIREMENTS The scheduled annual debt service requirements for the Bonds, rounded to the nearest dollar, are set forth in the table below. Source: The District Year Ending Dec. 31 Revenue Bonds Total Revenue Bond Debt Service Principal Interest 2015 $ - $405,380 $ 405, , , , , , , , , ,438 1,361, , ,688 1,414, , ,688 1,477, , ,888 1,531, ,095, ,638 1,592, ,200, ,944 1,657, ,185, ,444 1,599, ,820, ,194 2,175, , , , , , , , , , , , , , ,500 1,002, , ,250 1,025, ,000 75,938 1,055, ,045,000 39,188 1,084,188 Total $15,605,000 $7,720,704 $23,325,705 5

12 Other Debt Obligations Upon issuance of the Bonds and the refunding of the Refunded Revenue Bonds, the District will have $9,725,000 of its 2004 Sales Tax Bonds outstanding. Future Financings The District currently plans to issue bonds to refund the outstanding 2004 Sales Tax Bonds. No other financings are planned for the next three years. Sources of Repayment THE SALES TAX BONDS The outstanding Sales Tax Bonds are limited sales tax obligations of the District issued pursuant to RCW and chapters and RCW. The Sales Tax Bonds are payable from Sales Tax Revenue and Net Auxiliary Facilities Revenue, which are pledged as security for the payment of the principal, premium, if any, and interest on the Sales Tax Bonds. Sales Tax Revenue consists of the money received by the District from the State Department of Revenue on account of the sales and use tax imposed by and collected for the District pursuant to RCW and RCW , as the same may be amended from time to time, or any successor statute (the District Sales Tax ). Net Auxiliary Facilities Revenue is the revenue derived from the Auxiliary Facilities less the operating and maintenance expenses for such facilities. See AUXILIARY FACILITIES for information on the Auxiliary Facilities. The District is not authorized to impose a property tax. The Sales Tax Revenue and Net Auxiliary Facilities Revenue are pledged as security for payment of the principal of and premium, if any, and interest on the Sales Tax Bonds. Such pledge is a prior lien and charge on the Sales Tax Revenue and Net Auxiliary Facilities Revenue superior to all other liens and charges of any kind or nature whatsoever, except that liens on the Sales Tax Revenue and Net Auxiliary Facilities Revenue may be created in favor of any Additional Sales Tax Bonds, in each case on a parity with the pledge thereof in favor of the Sales Tax Bonds. The Sales Tax Bonds are special limited obligations solely of the District and are not obligations of the State, the County, the Snohomish County Public Facilities District (the County PFD ), the City or any political subdivision of the State other than the District, and neither the full faith and credit nor the taxing power of the County, the County PFD, the City, the State or any political subdivision thereof, except the limited taxing power of the District available in respect of the Sales Tax Bonds, is pledged to the payment of the Sales Tax Bonds. District Sales Tax RCW provides that a public facilities district may impose a sales and use tax on taxable events within the District s boundaries, up to a rate of percent (as adjusted in accordance with the Streamlined Sales and Use Tax Agreement, discussed below) of the selling price in the case of the sales tax or the value of the article used in the case of the use tax. The tax applies generally to retail sales, excluding food products for consumption off-premises and certain other exempt items. The amount District Sales Tax is credited against the amount of sales and use tax the State would otherwise collect within the District, so that the overall rate to the taxpayers does not increase. The State imposes a 6.5 percent sales and use tax Statewide, the State s share of which has been reduced in the City to provide percent to the District without increasing the overall rate to the taxpayers. The sales tax is collected at the point of sale by retailers and other sellers of taxable goods and services and is remitted to the State on a periodic basis. A use tax supplements the sales tax by taxing the use in the State of certain services and personal property on which a sales tax has not been paid. The State is responsible for collecting all sales and use taxes and remits the District s portion of the taxes to the District on a monthly basis. The District imposed the District Sales Tax effective August 1, The taxes authorized by RCW may be imposed for 25 years after the tax is first collected; therefore the District s Sales Tax expires on July 31, The District generally receives Sales Tax Revenue from the State about two months after it is collected. The District expects to receive its last payment by October 1, 2025 (prior to the final maturity of the Sales Tax Bonds on December 1, 2025). See HISTORICAL AND ESTIMATED CASH FLOW FOR THE DISTRICT. The County PFD also receives money under the same statute (the County PFD Sales Tax ). Funds received by the District from the County PFD Sales Tax are part of the Intergovernmental Project Payments pledged to the Revenue Bonds and are not pledged to payment of the Sales Tax Bonds. For a discussion of the County PFD and Intergovernmental Project Payments see THE REVENUE BONDS Sources of Repayment. Streamlined Sales and Use Tax Agreement. In 2003, the State Legislature approved legislation authorizing the State s membership in the Streamlined Sales and Use Tax Agreement (the SSTA ), in an effort to make sales and use taxes in the State more uniform with those of other states. The 2003 legislation implemented most of the SSTA s provisions, with the exception of the provisions for determining where a sale is deemed to occur for local sales tax purposes ( sourcing 6

13 provisions). The sourcing provisions shifted local sales tax revenue from the jurisdiction of the location from which a product is shipped to the jurisdiction in which the destination of the shipment or delivery is located. In 2007, the State Legislature enacted the sourcing provisions, which became effective in July As a result, there was a shift in sales tax revenues among taxing jurisdictions in the State. The State Legislature enacted mitigation measures for public facilities districts that experienced reductions in sales and use tax collections for State fiscal years after July 1, 2008 of more than 0.50 percent. Mitigation for the District took the form of incremental increases in the District Sales Tax, from 0.033% of the State sales/use tax collected in the City (authorized as part of the original PFD legislation) to 0.034% in 2009, to 0.035% in 2010, and to 0.036% in 2011, where it is expected to remain through the term of the sales tax collection unless otherwise adjusted by the State Legislature. Local Match Requirement. RCW requires the money collected on account of the District Sales Tax and the County PFD Sales Tax to be matched with an amount from other public or private sources equal to 33% of the amount collected on account of such tax (the local match requirement ). The local match requirement must be satisfied from sources other than the admissions tax and tax on vehicle parking charges that a district is authorized to impose without voter approval. Authorized public and private sources of the local match include cash, in-kind contributions and land that is donated and used for the siting of the regional center. The District is providing for the local match requirement with respect to the District Sales Tax and the portion of the County PFD Sales Tax received by the District from Intergovernmental Project Payments and Auxiliary Facility Revenue. See THE REVENUE BONDS County PFD State Sales Tax Revenue. Through 2014, the District has received a total of $16,161,895 of District Sales Tax and County PFD Sales Tax. The local match during this period from Intergovernmental Project Payments (other than payments from County PFD Sales Tax) and Auxiliary Facilities Revenue totaled $17,415,602, or 107% of the total District Sales Tax and County PFD Sales Tax received by the District, which exceeds the 33% match required by RCW The District estimates the aggregate sum of local match provided by such sources will be greater than 33% of the total District Sales Tax and County PFD Sales Tax received by the District. No court has interpreted the meaning of the local match requirement. However, the local match requirement can be read as a condition subsequent to a public facilities district s authority to continue collecting the sales and use tax, so that a public facilities district may lose such authority if it fails to maintain the aggregate amount of its local match at a level of 33 cents (or more) for every dollar collected on account of the sales and use tax. Because sales and use tax collections can be expected to vary in amount from year to year, there is no guarantee that the District, the County PFD, or any other public facilities district will be able to maintain a sufficient local match if sales and use taxes increase at unexpected rates. Historical Sales Tax Revenues The following table shows the District s Sales Tax Revenues between 2000 and * Partial year collection. Source: The District Historical Sales Tax Revenue of the District Sales Tax Year Revenues 2000* $ 140, , , , , , , , , , , , , , ,155 7

14 Statutory Debt Limitations The Sales Tax Bonds are limited sales tax obligations of the District. See Sources of Repayment above. The amount of general obligation indebtedness that the District may legally incur is limited by the laws of the State. For State law purposes, debt includes any unconditional obligation that is payable from and secured by a pledge of tax revenues, which would include the Sales Tax Bonds. Without the approval of its voters, the District may incur debt in the aggregate amount of up to 0.5 percent of the value of taxable property within the District. Upon the approval of 60% of the District s voters, the District can incur total indebtedness, including non-voted debt, in an amount not to exceed 1.25 percent of the value of taxable property within the District. In determining the total amount of indebtedness outstanding, the District is allowed to offset certain assets against the aggregate amount of debt outstanding. Such assets include taxes and levies of the current year, uncollected taxes that are not delinquent for longer than six years, and cash on hand and received for general business purposes. The District currently has the capacity to issue approximately $23,856,104 of non-voted general obligation bonds (including the Sales Tax Bonds) and $59,640,261 of non-voted and voted general obligation bonds (including the Sales Tax Bonds). The following chart shows the computation of the District s limitation of indebtedness: Computation of Limitation of Indebtedness Assessed Value -- City of Lynnwood, 2015 (1) $4,771,220,851 Total Voter-Approved Tax Levy (1.25% of Assessed Valuation) $ 59,640,261 Less: Outstanding Voter-Approved Debt - Remaining Total Debt Capacity $59,640,261 Total Debt Issued Without Voter Approval (0.50% of Assessed Valuation) $23,856,104 Less: Outstanding Non-Voted Debt (2) ($9,725,000) Remaining Non-Voted Debt Capacity $14,131,104 Remaining Total Debt Capacity (Voted and Non-Voted) $49,915,261 (1) Assessed value of the District is the same as the assessed value of the City; the boundaries are coterminous. (2) Includes the outstanding 2004 Sales Tax Bonds; excludes Revenue Bonds. Sources of Repayment THE REVENUE BONDS The Revenue Bonds are special fund revenue obligations of the District issued pursuant to RCW and chapters and RCW. The Revenue Bonds are payable from the Net Revenue, which is pledged as security for the payment of the principal of, premium, if any, and interest on the Revenue Bonds, subject to the provisions of the Revenue Bond Resolution permitting the application of amounts held thereunder to the purposes set forth therein. Such pledge is a prior lien and charge on the Net Revenue superior to all other liens and charges of any kind or nature whatsoever, except that liens on the Net Revenue may be created in favor of any Additional Revenue Bonds, in each case on a parity with the pledge thereof in favor of the Revenue Bonds. The Revenue Bonds are also secured by a pledge of the Net Auxiliary Facilities Revenue, which pledge is subordinate to the pledge of such revenue to the Sales Tax Bonds. Net Revenue is defined in the Revenue Bond Resolution to mean the Convention Center Revenue less Operation and Maintenance Expenses. Convention Center Revenue is defined as the Intergovernmental Project Payments and the Operating Revenue. Intergovernmental Project Payments include those revenues received by the District derived from payments made by the City, the County and the County PFD to the District pursuant to the Intergovernmental Contracts, which include the (i) the Four-Party Agreement; (ii) the Two-Party Agreement; (iii) the City-District Agreement No. 1; (iv) the City-District Agreement No. 2; (v) the City-District Agreement No. 3, including but not limited to payments derived from excise taxes imposed by the City and the County pursuant to chapter RCW on charges made for lodging within the City and the County, respectively, and from the sales and use tax imposed by the County PFD pursuant to RCW The Intergovernmental Project Payments consist of payments to the District derived from sales tax revenues collected by the County PFD, hotel-motel tax revenues collected by the City (the City Hotel-Motel Tax Revenues ), and hotel-motel tax revenues collected by the County (the County Hotel-Motel Tax Revenues ). Operating Revenue means all earnings, revenue and money, except Intergovernmental Project Payments, received by the District from or on account of the operation and/or ownership of the Convention Center, including any amount transferred from the Contingency Reserve Account to the Convention Center Revenue Account and the income from investments of money in the Convention Center Revenue Account and the Revenue Bond Debt Service Fund or from any other investment thereof 8

15 (except the income from investments irrevocably pledged to the payment of any Revenue Bonds or Additional Revenue Bonds pursuant to a refunding or defeasance plan). See HISTORICAL AND ESTIMATED CASH FLOW FOR THE DISTRICT for additional information on sources of repayment. The Revenue Bonds are special limited obligations solely of the District and are not obligations of the State, the County, the County PFD, the City or any political subdivision of the State other than the District, and neither the full faith and credit nor the taxing power of the County, the County PFD, the City, the State or any political subdivision thereof is pledged to the payment of the Bonds. The City, the County and the County PFD are political subdivisions of the State that are separate from the District. All liabilities incurred by the District shall be satisfied exclusively from the assets, credit and property of the District and no creditor or other person shall have any right of action against or recourse to the County, the City, the County PFD or any of their respective assets, credits or services on account of any debts, obligations, liabilities or omissions of the District. County PFD State Sales Tax Revenue The County PFD is a municipal corporation established by the Snohomish County Council, organized under Amended Ordinance No of Snohomish County in 2001, pursuant to the authority of chapter RCW. The District receives Intergovernmental Project Payments from the County PFD pursuant to an agreement entered into between the District, the County PFD, the County and the City entitled the First Amended and Restated Interlocal Agreement for Development of the Lynnwood Convention Center dated December 20, 2002 (the Four-Party Agreement ). Amended Ordinance No expressly provides: All liabilities incurred by the [County PFD] shall be satisfied exclusively from the assets, credit, and property of the [County PFD], and no creditor or other person shall have any right of action against or recourse to the County, its assets, credit, or services on account of any debts, obligations, liabilities, or omissions of the [County PFD]. The County PFD collects the County PFD Sales Tax in all areas of the County, except for the City of Everett, where the Everett Public Facilities District collects the tax; the City of Edmonds, where the Edmonds Public Facilities District collects the tax; and the City of Lynnwood, where the District collects the tax, as described above. The County PFD has allocated sales and use taxes it collects among five qualifying projects in the County. The Intergovernmental Project Payments that the District receives from the County PFD are derived from proceeds of this sales and use tax imposed by the County PFD. For additional information on the County PFD Sales Tax, see THE SALES TAX BONDS County PFD Sales Tax. In accordance with the Four-Party Agreement, the County PFD agreed to pay a portion of the County PFD Sales Tax to the District in the amounts as set forth in the table below. The County PFD s obligation to provide these payments is limited to the amount of sales and use taxes collected and available after satisfying its obligations to provide funds to the Everett Public Facilities District. The amounts of payments received have matched the amounts allocated in the Four-Party Agreement. The table also shows County PFD revenue available for payments of the District. To date, revenue available to make payments has exceeded actual payments made to the District. The obligation of the County PFD to the District under the Four-Party Agreement is solely the obligation of the County PFD, not the obligation of any other party to the Four-Party Agreement, and is payable solely from its sales and use tax revenues available to be used for that purpose. After meeting its obligations to the District, the County PFD is obligated to provide funds to two other public facility districts in the County. After meeting these obligations, the County PFD allocates any of its remaining sales tax revenues ( Tier 2 Payments ) to the District and other eligible facilities. The Tier 2 Payments allocated to the District also are included in the following table. 9

16 Total County PFD Sales Tax Revenue Collected County PFD Sales Tax Collection Amount Available for Payments to the District (1) Actual/Scheduled Payments to the District (2) Tier 2 Allocation to the District (3) Year 2004 $ 1,437,165 $ 857,563 $ 388,458 $ ,656,761 1,078, , ,919,114 1,355, , ,098,850 1,528, , ,986,781 1,398, , ,777,559 1,214, , , ,797,313 1,231, ,863 16, ,709,806 1,145, ,104 14, ,853,113 1,286, , ,053,713 1,482, , ,227,910 1,648, ,880 11, , , , , , , , , , ,002, ,043, ,086,280 - (1) After providing required amounts to Everett Public Facilities District. (2) Actual payments for , which have been the same as scheduled payments under the Four-Party Agreement. Scheduled are payments for which are set forth in the Four-Party Agreement, including amendments thereto. (3) Subject to availability of funds. The District assumes no additional Tier 2 revenue will be allocated to the District from Source: The District City Hotel-Motel Tax Revenues The City imposes a two percent hotel-motel tax within its boundaries and uses the funds for tourism promotion within the City. In accordance with the Four-Party Agreement, the City agreed to make Intergovernmental Project Payments to the District derived from its hotel-motel taxes in the amounts as set forth in the table below. Pursuant to the Supplemental Agreement to Extend the Hotel-Motel Tax between the City and the District, dated September 14, 2004 ( City-District Agreement No. 3 ), the City agreed to extend the period during which these payments are made to the District through In the Four-Party Agreement, the City acknowledged and agreed that its obligation and pledge to make Intergovernmental Project Payments to the District to the extent and from the source as provided therein constitutes a valid and binding enforceable contractual commitment of the City. The obligation of the City to the District under the Four-Party Agreement is solely the obligation of the City, not the obligation of any other party to the Four-Party Agreement, and is payable from hotel/motel tax revenues and from other money legally available to be used for that purpose. The following table shows the historical amounts paid and the amounts scheduled to be paid by the City to the District under the City-District Agreement No. 3. Through 2014, the amounts received by the District have matched the amounts scheduled to be paid. The City s commitment obligates the City to pay the District payments even if the City hotel-motel tax does not generate enough revenue to pay the District its entire allocation. See Historical Hotel-Motel Tax Collections for the City and County below for the City Hotel-Motel tax collections. 10

17 City Hotel-Motel Tax Payments to District City Hotel-Motel Year Collections 2002 $326,018 $309, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,701 Actual/Scheduled Payments to the District (1) (1) Actual payments for Scheduled payments are from The City s commitment obligates the City to pay the PFD payments even if the City Hotel-Motel tax does not generate enough revenue to pay the PFD its entire allocation. Source: The District County Hotel-Motel Tax Revenue The County imposes a two percent hotel-motel tax County-wide for regional tourism purposes under RCW The County and the City entered into the Interlocal Agreement to Fund Multijurisdictional Convention Center Facility dated March 26, 2003 (the Two-Party Agreement ). Under the Two-Party Agreement, the County agreed to make payments to the City for the Convention Center through The Two-Party Agreement allocates to the City for the District s Convention Center one-third of the County s hotel-motel tax revenues collected in each year up to the maximum allocations set forth in the table below. The maximum allocations are based on $400,000 in 2002 escalating at four percent annually. In October 2004, the County, the City and the District entered into Amendment No. 1 to the Two-Party Agreement, extending the term of the Two-Party Agreement and the allocation of hotel-motel taxes through Under Amendment No. 1, for each of the years 2027 through 2034, amounts paid by the County to the City (and thereby to the District) will not be expended for debt service on bonds issued to finance or refinance the Convention Center unless in any such year City hotel-motel taxes, together with Sales Tax Revenues collected by the District and Intergovernmental Project Payments made by the County PFD are insufficient to provide for debt service and debt service reserve requirements with respect to obligations issued to finance the Convention Center. To the extent that in any year from 2027 through 2034 the amount paid by the County to the City is not expended for financing or refinancing the Convention Center, that amount will be repaid to the County within two months after the end of the year in which it was received by the City, unless the County approves in writing the application of that amount by the City or by another entity for a specified hotel-motel tax purpose. Amendment No. 1 includes refunding bonds (e.g., the Bonds) if the purpose is to reduce annual debt service costs and if such refunding is approved by the County. The County provided such approval through motion adopted on January 27,

18 The Two-Party Agreement provides that the County s obligation to make Intergovernmental Project Payments is limited to payment from its hotel-motel taxes available for that purpose and is not and shall not be deemed to be a general obligation or debt of the County. Pursuant to the Interlocal Agreement Regarding Transfer and Application of Snohomish County Hotel-Motel Tax Proceeds to Fund Multi-jurisdictional Convention Center Facility between the City and the District dated April 15, 2003 ( City-District Agreement No. 2 ), as amended in November 2004, the City agrees to transfer to the District the funds received from the County under the Two-Party Agreement. See BONDHOLDER RISKS Limitations of the Intergovernmental Project Payments and Contingent Loan Agreement. As shown in the following table, the actual amount received has been less than the maximum allocation in some years. For purposes of estimating future cash flows, the District has assumed that the maximum allocation will be received. County Hotel-Motel Tax Allocated to the District Year County PFD Hotel- Motel Taxes Collected (1) Maximum Annual Allocation (2) Actual Amount Received 2004 $1,125,494 $ 432,640 $382, ,272, , , ,573, , , ,824, , , ,872, , , ,535, , , ,601, , , ,775, , , ,873, , , ,104, , , ,151, , , , , , , , , , , , , , ,025, ,066, ,108, ,153, ,199, ,247, ,297, ,349, ,403,223 (1) Equal to one-third of the County Hotel-Motel taxes collected, up to the maximum allocation. (2) Based on $400,000 in 2002, escalating at four percent annually in accordance with the Two-Party Agreement. Source: The District Additional Revenue Bonds SUMMARY OF CERTAIN PROVISIONS OF THE REVENUE BOND RESOLUTION The District has reserved the right to issue additional obligations for any lawful purpose that will be payable from Convention Center Revenue subject to certain conditions as described below. The District shall not issue any series of Additional Revenue Bonds unless: (i) the District shall not have been in Default under the Revenue Bond Resolution for the immediately preceding 12 calendar months; and 12

19 (ii) there shall have been filed a certificate (prepared as described below) demonstrating fulfillment of the minimum funding requirements described therein, commencing with the first full calendar year following the date of issuance of the series of Additional Revenue Bonds. The certificate described in clause (ii) above shall not be required as a condition to the issuance of Additional Revenue Bonds if the Additional Revenue Bonds being issued are for the purpose of refunding outstanding Revenue Bonds or Additional Revenue Bonds and the annual debt service requirements for each year in which Revenue Bonds and Additional Revenue Bonds are then outstanding are not increased by more than $5,000 in any calendar year as a result of the refunding. If required, a certificate may be delivered by the District (executed by the Chair of the Board) certifying either: (i) (ii) that the City has approved the issuance of the Additional Revenue Bonds and that the Contingent Loan Agreement has been amended as necessary to increase the City s contingent loan commitment thereunder to cover the principal of and interest on the Additional Revenue Bonds, which certification shall include a certified copy of the City s approving ordinance or resolution and a certified copy of the executed amendment of the Contingent Loan Agreement; or that the Net Revenue, together with Net Auxiliary Facilities Revenue available to meet Required Debt Service under the subordinate lien pledge in the Revenue Bond Resolution received by the District for any 12 consecutive months out of the 24 full months preceding the issuance of the Additional Revenue Bonds, was equal to or greater than 125% of maximum annual Required Debt Service in each year for the Additional Revenue Bond, proposed to be issued and for all previously issued Revenue Bonds and Additional Revenue Bonds then outstanding. Nothing in the Revenue Bond Resolution prevents the District from issuing Additional Revenue Bonds to refund maturing Revenue Bonds or Additional Revenue Bonds for the payment of which moneys are not otherwise available; provided, such Additional Revenue Bonds will not be issued more than three months prior to the Debt Service Payment Date on which the payment default is otherwise expected to occur. Subordinate Lien Bonds. Nothing in the Revenue Bond Resolution prevents the District from issuing revenue bonds or other obligations that are a charge upon the Convention Center Revenue junior or inferior to the payments required by the Revenue Bond Resolution to be made out of the Convention Center Revenue into the Revenue Bond Debt Service Fund to pay and secure the payment of the Revenue Bonds and any Additional Revenue Bonds. Flow of Funds For so long as the Revenue Bonds and any Additional Revenue Bonds remain outstanding, all Convention Center Revenue is required to be transferred to and deposited into the Convention Center Revenue Account as received by the District. Convention Center Revenue deposited therein is required to be disbursed in the following order of priority: (i) (ii) (iii) (iv) (v) (vi) (vii) to pay Operation and Maintenance Expenses; provided, however, that Operation and Maintenance Expenses shall be paid first from any Sales Tax Revenue available for that purpose under the Sales Tax Bond Resolution, and next from Convention Center Revenue; to make the required deposits into the Revenue Bond Debt Service Fund for the payment of upcoming interest on the Revenue Bonds and any Additional Revenue Bonds; to make the required deposits into the Revenue Bond Debt Service Fund for the payment of principal of the Revenue Bonds and any Additional Revenue Bonds maturing or being redeemed by mandatory redemption of term bonds prior to scheduled maturity; to meet the principal and interest requirements on the District s Sales Tax Bonds for which the District s Sales Tax Revenue and Net Auxiliary Facilities Revenue are insufficient; to reimburse any bond insurer for the Revenue Bonds for any payments made under a bond or reserve insurance policy and other amounts due and owing to any bond insurer in respect of the Revenue Bonds and any Additional Revenue Bonds; to reimburse the City for any payments made by the City under the Contingent Loan Agreement in respect of the Revenue Bonds and any Additional Revenue Bonds; and to make any legal expenditure for District purposes. 13

20 Additional Covenants Rates and Charges. The District has covenanted in the Revenue Bond Resolution that it will fix, maintain and collect rates and charges for the use of the services and facilities and all commodities sold, furnished or supplied by the Convention Center, which will be fair and nondiscriminatory and will adjust such rates and charges from time to time so that: (i) (ii) rates and charges will be at optimal levels, taking into account the potential effects of such adjustments upon Intergovernmental Project Payments, to produce total Convention Center Revenue that will at all times be sufficient, together with any other District funds available and allocated to be used for such purposes, to pay the Operation and Maintenance Expenses, to make any payments required to be made on account of the Revenue Bonds and any Additional Revenue Bonds, as and when the same shall become due and payable, to make all other payments which the District is obligated to make pursuant to the Revenue Bond Resolution, to pay all taxes, assessments or other governmental charges lawfully imposed on the Convention Center or the Convention Center Revenue, and to pay any and all other amounts that the District may now or hereafter become obligated to pay from the Convention Center Revenue by law or contract; and the Net Revenue, together with any other District funds available and allocated to be used for such purpose for each calendar year will equal at least 1.00 times the Revenue Bond Debt Service for such calendar year, or, if the District shall have issued Additional Revenue Bonds pursuant to the provisions of the Revenue Bond Resolution, will equal at least 125% of Revenue Bond Required Debt Service for such calendar year. Reduction of Operation and Maintenance Expenses. The District acknowledges that its ability to generate Operating Revenue may be limited, that the amount of Intergovernmental Project Payments are fixed, and that its ability to pay the principal of and interest on the Revenue Bonds may be adversely affected by increases in Operation and Maintenance Expenses. Accordingly, the District has covenanted to use its best efforts to reduce Operation and Maintenance Expenses when necessary to comply with the covenant above. Such efforts shall include, if necessary, reducing the level of services or operations of the Convention Center, or discontinuing the operation of the Convention Center temporarily or permanently. Liens and Encumbrances. The District has covenanted that it will not at any time create or permit to accrue or to exist any lien or other encumbrance or indebtedness upon the Net Revenue, or any part thereof, prior or superior to the lien thereon for the payment of the Revenue Bonds and any Additional Revenue Bonds, and will pay and discharge, or cause to be paid and discharged, any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the Net Revenue, or any part thereof, prior to or superior to the lien of the Revenue Bonds and any Additional Revenue Bonds, or which might impair the security of the Revenue Bonds and any Additional Revenue Bonds. Authority Regarding the Convention Center. The District has, and will have, as long as any Bonds or Additional Revenue Bonds remain outstanding, good right and lawful authority to own, maintain, operate, improve and reconstruct the Convention Center and to provide for the maintenance, operation, improvement and reconstruction of the Convention Center. The District shall not release or modify the obligations of any user of the Convention Center that would in any way limit any such user s obligation to make payment of such rents, rates, fees or other charges imposed by the District for such use of the Convention Center, unless such action is required by the covenant above entitled Reduction of Operation and Maintenance Expenses. The District shall take all reasonable measures permitted by law to enforce payment to it of all Convention Center Revenue, and shall at all times, to the extent permitted by law, defend, preserve and protect the rights, benefits and privileges of the District and of the Registered Owners under or with respect to this resolution. Enforcement of Obligations. The District has covenanted and agreed in the Revenue Bond Resolution that it will perform its respective obligations and will enforce performance by the other parties thereto under each of the Intergovernmental Contracts, and that it will not amend any Intergovernmental Contract in a manner that adversely affects, in any material respect, the interests of the owners of the Bonds. Insurance. The District has covenanted to keep the Convention Center and the Auxiliary Facilities insured (or cause the Convention Center and the Auxiliary Facilities to be insured), and to carry (or cause to be carried) such other insurance, with responsible insurers, with policies payable to the District, against risks, accidents or casualties, at least to the extent that insurance is usually carried by private corporations operating like properties, or will implement a self-insurance program with reserves adequate, in the judgment of the Board, to protect the District against loss. In the event of any loss or damage, the District will promptly repair or replace (or cause the repair or replacement of) the damaged portion of the insured property and apply the proceeds of any insurance policy for that purpose. Operation of Convention Center. The District shall at all times operate the Convention Center, or cause the Convention Center to be operated, properly as a regional center (as that term is defined in chapter RCW) and as a tourism-related facility (as that term is defined in chapter RCW) and in a sound and economical manner and shall maintain, preserve and keep the same, or cause the same to be maintained, preserved and kept, with the appurtenances and every part and parcel thereof, in good repair, working order and condition, and shall from time to time make, or cause to be made, all necessary and proper repairs, replacements and renewals so that at all times the operation thereof may be properly and advantageously 14

21 conducted. Notwithstanding the foregoing, the District may reduce services or operations of the Convention Center, or discontinue the operation of the Convention Center temporarily or permanently, if such action is required by the covenant above entitled Reduction of Operation and Maintenance Expenses. Sale, Transfer or Disposition of the Convention Center. The District will sell, transfer or otherwise dispose of (each such sale, transfer or other disposition a disposition ) any of the real or personal properties, facilities or other part of the Convention Center only if the disposition is approved by resolution of the Board, the disposition (other than a disposition to the City) is carried out in a bona fide, arm s-length transaction and the District receives from the purchaser or transferee consideration equal to the fair market value of the portion of the Convention Center sold or transferred, for which purpose fair market value means the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the willing buyer and willing seller each acting prudently and knowledgeably. The District will not dispose of any of the real or personal properties, facilities or other part of the Convention Center that is consistent with one or more of the following: (i) (ii) (iii) the facilities or property to be disposed of are not material to the operation of the Convention Center, or shall have become unserviceable, inadequate, obsolete or unfit to be used in the operation of the Convention Center or are no longer necessary, material or useful to the operation of the Convention Center; or the Operating Revenue received by the District from the operation of those facilities or property to be disposed of during the 12 full calendar months before the disposition was less than 10% of total Operating Revenue received by the District during that same period; or the District receives a report from an independent, professional consultant or consulting firm having at least five years of experience in evaluating the financial operations and performance of governmentally-owned, revenue-producing enterprises to the effect that, in his, her, or its professional opinion, upon the disposition of the portion of the Convention Center to be disposed of and the use of proceeds, if any, of the disposition as proposed by the District, the Convention Center will retain its operational integrity and the District will be in compliance with its covenants in the Revenue Bond Resolution during the five fiscal years following the fiscal year in which the disposition is to occur. The proceeds, if any, of any disposition, shall be used (a) to promptly redeem, or irrevocably set aside for the redemption of, the District s outstanding Convention Center Revenue Bonds, and/or (b) to provide for all or part of the cost of capital improvements and/or additions to or expansions of the Convention Center and/or for other regional center or tourism-related facilities authorized under chapters and RCW. Sale, Transfer, Disposition or Demolition of Auxiliary Facilities. The District has covenanted in the Revenue Bond Resolution that it will sell, transfer or otherwise dispose of (each such sale, transfer or other disposition a disposition ) any of the real or personal properties, facilities or other part of the Auxiliary Facilities only if the disposition is approved by resolution of the Board, the disposition is carried out in a bona fide, arm s-length transaction, and the District receives from the purchaser or transferee consideration equal to the fair market value of the portion of the Auxiliary Facilities sold or transferred, for which purpose fair market value means the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the willing buyer and willing seller each acting prudently and knowledgeably. The District has further covenanted that it will demolish any of the real or personal properties, facilities, or other part of the Auxiliary Facilities only if such demolition is approved by resolution of the Board and demolition is consistent with one or more of the subparagraphs (i) through (iii) below. The District, in its discretion, may carry out a disposition or demolition of the Auxiliary Facilities that is consistent with one or more of the following: (i) (ii) (iii) the facilities or property to be disposed of or demolished are not material to the operation of the Auxiliary Facilities, or shall have become unserviceable, inadequate, obsolete or unfit to be used in the operation of the Auxiliary Facilities or are no longer necessary, material or useful to the operation of the Auxiliary Facilities; or the Auxiliary Facilities Revenue received by the District from the operation of those facilities or property to be disposed of or demolished during the 12 full calendar months before the disposition or demolition was less than 10% of total Auxiliary Facilities Revenue received by the District during that same period; or the District receives a report from an independent, professional consultant or consulting firm having at least five years of experience in evaluating the financial operations and performance of governmentally-owned, revenue-producing enterprises to the effect that, in his, her, or its professional opinion, upon the disposition or demolition of the portion of the Auxiliary Facilities to be disposed of or demolished and the use of proceeds, if any, of the disposition or demolition as proposed by the District, the District will be in compliance with its covenants of Section 14(a) of the Revenue Bond Resolution during the five fiscal years following the fiscal year in which the disposition is to occur. 15

22 The proceeds, if any, of any disposition or demolition, shall be used (a) to promptly redeem, or irrevocably set aside for the redemption of, first, Sales Tax Bonds, and, second, the District s outstanding Convention Center Revenue Bonds, and/or (b) to make capital improvements to the remaining Auxiliary Facilities that the District determines are required to enable it to comply with its covenants under the Sales Tax Bond Resolution, and/or (c) provide for all or part of the cost of capital improvements and/or additions to or expansions of the Convention Center and/or for other regional center or tourism-related facilities authorized under chapters and RCW. CONTINGENT LOAN AGREEMENT The City and the District entered into the Supplemental Interlocal Agreement Regarding Financing for Multijurisdictional Convention Center Facility ( City-District Agreement No. 4 or the Contingent Loan Agreement ) dated September 14, 2004, relating to the issuance of the Refunded Revenue Bonds. The Contingent Loan Agreement was reconfirmed by the City to be applicable to the Bonds through the City s adoption of Resolution No , adopted on October 13, Additional information regarding the City is provided in Appendix D. Under the Contingent Loan Agreement, in the event that the District is unable to timely provide for the payment of principal of or interest on the Bonds (defined under the Contingent Loan Agreement as Long-Term Obligations ), the City has agreed to loan the District the amount necessary to make such timely payment. The District agrees to borrow the amounts described above from the City and apply those amounts immediately for the purpose of paying debt service on the Bonds. The obligation of the City to advance funds to the District to make debt service payments is absolute and unconditional, and is not subject to diminution by setoff, counterclaim, abatement or otherwise. The full faith, credit and resources of the City are pledged irrevocably for the payment of the amounts described above. On October 25, 2012, the Washington State Supreme Court in In re Bond Issuance of Greater Wenatchee Regional Event Center Public Facilities District, 175 Wash.2d 788, 287 P.3d 567 (2012) (the Wenatchee Decision ) held in part that the contingent loan agreement between the City of Wenatchee ( Wenatchee ) and the Greater Wenatchee Regional Events Center Public Facilities District (the Wenatchee PFD ) whereby Wenatchee agreed to pay certain debt obligations of the Wenatchee PFD, constituted indebtedness for the purposes of calculating Wenatchee s debt capacity under chapter RCW and Article VIII, Section 6 of the State Constitution. Under the reasoning of the Wenatchee Decision, the principal amount of the Bonds of the District with respect to which the Contingent Loan Agreement in effect is to be counted as non-voted debt of the City. The aggregate principal amount of the Bonds and the District s outstanding 2004 Sales Tax Bonds (i.e., $23,335,000), when added to the amount of the City s outstanding non-voted indebtedness (i.e. $25,948,178) does not exceed the City s nonvoted debt capacity under chapter RCW and Article VIII, Section 6 of the State Constitution (i.e. $71,568,313 based on the City s assessed value for 2015). See Appendix D INFORMATION ON THE CITY OF LYNNWOOD DEBT AND DEBT LIMITATION Debt Capacity Computation. The Contingent Loan Agreement contains certain covenants of the District, as summarized below. Limit on Amount of Long-Term Obligations. The District has covenanted not to issue bonds or other long-term obligations in a total principal amount greater than $33 million without prior approval of the City. District Contingency Reserve Fund. The District has established and covenanted to maintain a Contingency Reserve Fund of $1,000,000 from available District revenues. The purposes of the fund are to cover a variety of repair, replacement and rehabilitation costs for which other money is not available; extraordinary operating costs not covered by the District s budget; debt service on the Bonds; and such other purposes as may be approved by the City. If the fund is drawn below the minimum required balance, the District is required to replenish the fund from the first revenues available after operations and maintenance and debt service on the Bonds. The District may not draw the fund down below $1,000,000 without permission of the City except, in the event that the District needs to use money in the Contingency Reserve Fund to make a required debt service payment on the Bonds, it may do so without permission of the City, after application of all other legally-available amounts for that purpose. The Contingency Reserve Fund is currently fully funded at $1,000,000 and has never been drawn on since its inception in Periodic District Transfers to Debt Service Funds. Each month, the District is required to irrevocably deposit into each of its debt service funds for the Long-Term Obligations (as defined in the Contingent Loan Agreement), an amount equal to approximately 1/12 of the next payment of the principal coming due, and approximately 1/6 of the next payment of interest coming due. The District is required to inform the City immediately if the District fails to make any such deposit in full, and the District also is required to inform the City at any time that the District determines that there is a reasonable possibility that the District may not be able to timely and fully provide for a debt service payment on the Bonds. Consideration for Credit Facility (City Use of Convention Center). In recognition of the credit support provided by the City, the District will, so long as the Bonds are outstanding, provide the City with the right to use or allocate the use of the Convention Center for up to four event days each year, without rental charge. 16

23 Repayment of Loan Amounts. In the event that the City makes any loan under the Contingent Loan Agreement, the District will repay the City from the funds first available after the payment of Operations and Maintenance Expenses and debt service on the Bonds. Such repayment will include interest at a rate specified in the Contingent Loan Agreement. Restriction on Issuance of Additional Parity Bonds. So long as the City is not in default of its obligations under the Contingent Loan Agreement, the District may not (1) issue any bonds with a parity of lien on the revenues pledged to the Revenue Bonds without the City s written approval; and (2) incur any general obligations in excess of $500,000 principal amount outstanding at any time without the City s written approval. Repair, Replacement and Rehabilitation Plan. The District has covenanted to maintain its renewal replacement and rehabilitation ( 3R ) plan and to continue to set aside funds as available to carry out the elements of the plan. The District is in compliance with its covenants in the Contingent Loan Agreement, and to date, the City has not been required to loan any amounts to the District under the Contingent Loan Agreement. Formation and Authority THE DISTRICT The District was established under the authority of the laws of the State, Chapter 165, Laws of 1999, pursuant to Ordinance 2266 of the City Council of the City, passed August 24, Under RCW 35.57, the City has authority to form a public facilities district for the purpose of acquiring, constructing, maintaining and financing a regional center, which may be a convention center. The boundaries of the District are coterminous with the boundaries of the City. Governance and Administration The District is governed by a Board of Directors, which is made up of five citizens appointed by the City Council. The current board members are as follows: Member Position Term Expires George Sherwin Chair October 18, 2015 Bob Fuller Vice Chair October 18, 2017 Andy Olsen Secretary October 19, 2018 Mike Echelbarger Member October 18, 2016 Lynn Melby Member October 18, 2015 The City Finance Director serves as the District Treasurer and as Ex-Officio member of the Board. District Employees The District currently has two employees. They serve in the positions of Executive Director and Financial Analyst. The District has no plans to hire more employees at this time. Grant Dull, Executive Director, has been a manager in both the public and private sectors for the past 32 years. He is past President of Salmon Bay Exhibitions, a company that produced both trade and consumer events in Seattle and San Francisco. Mr. Dull has an MBA from the University of Washington, and has served as the Executive Director of the District since September Judy Powell, Financial Analyst, has been a finance professional for the past seven years. She is a former State Auditor with the Washington State Auditor s Office. Ms. Powell has served as the Financial Analyst of the District since December

24 Historical Financial Information The table below shows the District s operating information for the years : Historical Income Statement Information of the District * Operating Revenues Convention Plaza $819,523 $ 808,631 $ 765,179 $ 832,399 $ 806,638 Lynnwood Convention Center (LCC) 3,141,077 3,065,828 2,527,918 2,204,894 2,043,331 Other Operating - PFD 24,843 24,695 26,062 25,368 25,812 Total Operating Revenues 3,985,442 3,899,154 3,319,159 3,062,661 2,875,781 Operating Expenses Costs of Sales/Services - Plaza 259, , , , ,683 Administrative & General 362, , , , ,231 LCC Operations 3,044,873 3,029,113 2,670,957 2,518,959 2,411,246 Environmental Remediation 974, Depreciation Expense 662, , ,033 1,037,556 1,013,198 Total Operating Expenses 5,304,580 4,329,318 3,963,522 4,204,137 4,027,358 Operating Income (Loss) (1,319,138) (430,164) (644,363) (1,141,476) (1,151,577) Non-Operating Revenues (Expenses) PFD Sales Tax 777, , , , ,013 City of Lynnwood Hotel/Motel Tax 440, , , , ,432 Snohomish County Hotel/Motel Tax 640, , , , ,836 Snohomish County PFD Sales Tax (1) 661, , , , ,413 Interest Income 20,483 24,468 22,992 23,531 30,623 Interest Expense/Financing Costs (1,283,513) (1,317,958) (1,361,607) (1,378,817) (1,393,070) Total Non-Operating Revenues 1,256,667 1,136, , , ,247 Net Income (Loss) (62,471) 706, ,113 (337,081) (449,330) Total Position - Beginning of Year 1,984,140 1,737,011 1,412,898 1,802,724 2,252,054 Restatement/Prior Period Adjustment - (459,660) - (52,746) - Total Net Position - End of Year $ 1,921,669 $1,984,140 $1,737,011 $1,412,898 $1,802,724 (1) Includes Tier 2 payments. * Preliminary; unaudited. The table on the following page shows the District s statement of net position information for the years (The remainder of this page intentionally left blank.) 18

25 Historical Statement of Net Position Information of the District Assets 2014* Current Assets Cash & Cash Equivalents $4,831,686 $ 4,006,930 $ 3,585,021 $ 2,898,893 $3,021,671 Restricted Cash & Cash Equivalents 731, , ,524 1,090, ,937 Restricted Contingency Reserves 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Receivables, net 229, , , , ,958 Prepaid Expenses 76,488 66,700 68,615 65,133 71,203 Inventory 15,039 17,617 19,548 10,617 10,218 Other ,141 21,510 17,334 Total Current Assets 6,884,867 6,225,125 5,788,813 5,305,415 4,850,321 Noncurrent Assets Land 6,788,800 6,788,800 6,788,800 6,788,800 6,788,800 Deferred charges and other assets - 461, , ,707 Capital Assets - Depreciable Website LLC - 2,287 11,432 27,500 - Furniture & Equipment - PFD - 4,436 10,112 87,389 25,289 Furniture & Equipment - LCC 27,158 75, , , ,486 Parking lot improvements 11,212 15,056 18,900 38,441 26,588 Infrastructure 38,365 42,333 46,302 79,375 54,240 Building Improvements 210, , , , ,969 Other improvements 101, ,560 78,894 74,880 43,446 Capital - LCC 208, , , , ,277 RRR - LCC 183, , , ,210 48,097 Building - LCC 15,480,936 15,919,075 16,357,215 19,716,285 17,233,494 Building and System ,922, ,429 Accumulated depreciation (8,037,004) - Total Noncurrent Assets 23,050,686 23,754,125 24,581,906 25,195,735 26,172,822 Total Assets 29,935,553 29,979,250 30,370,719 30,501,150 31,023,143 Liabilities Current Liabilities Accounts Payable 279, , , , ,178 Accrued Expenses 78, ,281 91,626 99, ,813 Advance Deposits - LCC 444, , , , ,345 Current Portion - B&O Tax Deposit 42,462 25, Current Portion Long-term Obligations 970, , , , ,000 Current Portion Environmental Remediation 110, Current Portion - net premium/interest 11,135 11,135 11,136 11,136 - Total Current Liabilities 1,937,491 1,622,302 1,460,196 1,147, ,336 Non-current Liabilities Compensated Absences 15,089 15,276 13, Environmental Remediation 737,989 Operating Deposit 20,000 39,988 59,992 79,996 - B&O Tax Deposit - 33, Series A Sales Tax Bonds , , ,000 Series B Sales Tax Bonds 9,125,000 9,725,000 9,865,000 10,000,000 10,000,000 Revenue Bonds 16,020,000 16,390,000 16,685,000 16,940,000 17,045,000 Security Deposits 31,695 31,524 31,524 30,464 26,788 Net Premium/Interest 126, , , , ,297 Total Non-current Liabilities 26,076,393 26,372,809 27,173,511 27,940,486 28,239,085 Total Liabilities 28,013,884 27,995,111 28,633,707 29,088,256 29,220,421 Net Position Net investment in Capital Assets (3,202,069) (3,314,765) (3,699,974) (3,212,048) (2,594,528) Restricted for Debt Service & Other 1,700,000 1,700,000 1,700,000 2,090,464 1,437,937 Unrestricted 3,423,738 3,598,905 3,736,985 2,534,477 2,959,315 Total Net Position $ 1,921,669 $ 1,984,140 $ 1,737,011 $ 1,412,893 $1,802,724 * Preliminary; unaudited. Source: The District 19

26 Accounting and Auditing The District s financial statements are prepared in conformity with generally accepted accounting principles ( GAAP ) as applied to governmental units. The Governmental Accounting Standards Board is the accepted standard setting body for establishing governmental accounting and financial reporting principles. As required by GAAP, the financial statements are presented, in most respects, on a basis applicable to proprietary funds of governmental units. The account records of the District are maintained in accordance with methods prescribed by the State Auditor under the authority of chapter RCW. The District uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred. Fixed asset purchases are capitalized and long-term liabilities are accounted for in the appropriate funds. The District s financial statements include financial position, results of operations, and statement of cash flows of all enterprise operations which the District manages. The financial statements include, as well, the assets and liabilities of all funds for which the District has a custodial or trust responsibility. The District s financial statements are audited by the State Auditor every year. The District s audited financial statements for the calendar year 2013 are set forth in Appendix A hereto. Investments District funds are invested at the direction of the District Treasurer in accordance with Board policy and applicable law. Currently, all investments of the District s funds are obligations of the U.S. Government, the State Treasurer s Local Government Investment Pool ( LGIP ) or deposits with Washington State banks and savings and loan institutions. The District s deposits and certificates of deposit are entirely covered by federal depository insurance or by collateral held or by the multiple financial collateral pool administered by the Washington Public Deposit Protection Commission. All temporary investments are stated at cost, which approximates market value. The District intends to hold the time deposits and securities until maturity. LGIP. The State Treasurer s Office administers the LGIP, which invests money on behalf of more than 540 cities, counties and special taxing districts. In its management of LGIP, the State Treasurer is required to adhere, at all times, to the principles appropriate for the prudent investment of public funds. These principles are, in order of priority, (i) the safety of principal; (ii) the assurance of sufficient liquidity to meet cash flow demands; and (iii) the attainment of the highest possible yield within the constraints of the first two goals. Historically, the LGIP has had sufficient liquidity to meet all cash flow demands. The LGIP, authorized by chapter RCW, is a voluntary pool which provides its participants the opportunity to benefit from the economies of scale inherent in pooling. It is also intended to offer participants increased safety of principal and the ability to achieve a higher investment yield than would otherwise be available to them. The LGIP is restricted to investments with maturities of one year or less, and the average life typically is less than 90 days. Investments permitted under the guidelines of the LGIP include U.S. government and agency securities, bankers acceptances, high quality commercial paper, repurchase and reverse repurchase agreements, motor vehicle fund warrants, and certificates of deposit issued by qualified Washington State depositories. As of December 31, 2014, the District had the following investments in the following categories: Investment Type Fair Value Local Government Investment Pool $4,382,005 Public Money Market Account 1,354,730 Certificates of Deposits 253,180 Pension System Substantially all of the District s full-time and qualifying part-time employees participate in one of several statewide retirement systems administered by the Washington State Department of Retirement Systems (the DRS ) under cost-sharing multipleemployer public employee defined benefit and defined contribution retirement plans. The DRS, a department within the primary government of the State, issues a publicly available comprehensive annual financial report ( CAFR ) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement Systems, Communications Unit, P.O. Box 48380, Olympia, WA , or by visiting the DRS website at Information on such website is not a part of this Official Statement. The DRS administers the Washington State Public Employees Retirement System ( PERS ) through three different retirement plan options. These plans are administered by the State. PERS Plan 1 and Plan 2 are defined benefit plans. PERS Plan 3 is both a defined benefit plan (employer share) and defined contribution plan (employee share). Contributions by both employees and employers are based on gross wages. PERS participants who joined the system by September 30, 1977, are Plan 1 members. Those PERS participants who joined on or after October 1, 1977, are Plan 2 members, unless they exercise an option to transfer to Plan 3. PERS participants joining on or after September 1, 2002, have the irrevocable option of choosing membership in PERS Plan 2 or PERS Plan 3. 20

27 State law requires systematic actuarial based funding to finance the retirement plans. Actuarial calculations to determine employer and employee contributions are prepared by the Office of the State Actuary ( OSA ), a nonpartisan legislative agency charged with advising the Legislature and Governor on pension benefits and funding policy. To calculate employer and employee contribution rates necessary to fund the plans benefits, OSA uses actuarial cost and asset valuation methods selected by the Legislature as well as economic and demographic assumptions. The Legislature adopted the following economic assumptions for contribution rates beginning July 1, 2013: (i) 7.9% (7.8% as of July 1, 2014) rate of investment return; (ii) general salary increases of 3.75% per annum; (iii) 3.0% rate of Consumer Price Index increase; and (iv) 0.95% growth in membership. The long-term investment return assumption is used as the discount rate for determining the liabilities for a plan. The 10-year ( ) annualized return on the investment of the retirement funds was 8.35%. All State-administered retirement plans are funded by a combination of funding sources: (i) contributions from the State; (ii) contributions from employers (including the State as employer and the District and other governmental employers); (iii) contributions from employees; and (iv) investment returns. The Washington State Investment Board, a 15-member board created by the Legislature in 1981, invests the funds in the plans. Under State statute, contribution rates are adopted by the Pension Funding Council (the Council ) in even-numbered years for the next ensuing State biennium. The rate-setting process begins with an actuarial valuation by the OSA, which makes nonbinding recommendations to the Select Committee on Pension Policy which then recommends contribution rates to the Council. No later than the end of July in even-numbered years, the Council adopts contribution rates, which are subject to revision by the Legislature. The following table outlines the current contribution rates of employers and employees. (1) Contribution Rates for the Biennium (Expressed as a Percentage of Covered Payroll) Employer (1) Employee PERS Plan % 6.00% PERS Plan PERS Plan Variable (2) Includes a 0.18% DRS administration expense fee. (2) Rates vary from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member. Source: State Department of Retirement Systems. In July 2014, the PFC adopted contribution rate increases to be phased in over the next three biennia, beginning with the biennium. For the biennium, the PFC adopted employer rates of 11% (plus an additional 0.18% administration fee) for PERS Plans 1, 2 and 3 (in each case, net of administrative fees), and an employee rate of 6.12% for PERS Plan 2. For additional information, see Note 9 to the Audited Financial Statements for the year ended December 31, 2013, attached hereto as Appendix A. Both the District and the employees made the required contributions. The District s required contributions for the years ending December 31 were made as follows: Year Ending Dec. 31 PERS Plan 1 PERS Plan 2 PERS Plan $0 $17,017 $ , ,707 6,396 While the District s prior contributions represent its full current liability under the retirement systems, any unfunded pension benefit obligations could be reflected in future years as higher contribution rates. It is expected that the contribution rates for employees and employers in the PERS Plans 2 and 3 will increase in the coming years. The OSA website (which is not incorporated into this Official Statement by reference) includes information regarding the values, funding levels and investments of these retirement plans. During the years 2001 through 2010 the rates adopted by the Legislature were lower than those that would have been required to produce actuarially required contributions to PERS Plan 1, a closed plan with a large proportion of the retirees. The State Actuary s actuarial valuation for PERS Plan 1 as of June 30, 2012 showed a 69% funded ratio (unfunded liability of $3.8 billion) while PERS Plans 2 and 3 had valuation assets that exceed their accrued liability by $2.3 billion (a 111% funded ratio) and $1.4 billion (a 135% funded ratio), respectively. The State Actuary s actuarial valuation for PERS Plan 1 as of June 20, 2013 showed a 63% funded ratio (unfunded liability of $4.831 billion) while PERS Plans 2 and 3 had valuation assets that exceed their accrued liability by $537 million (a 102% funded ratio) and $1.1 billion (a 125% funded ratio), respectively. The decrease in the funded status and increase in the unfunded accrued actuarial liability primarily reflect changed demographic assumptions, including projected improvements in mortality rates, and the statutory requirement that the assumed rate of return be reduced to 7.8% from 7.9%. OSA uses the Projected Unit Credit ( PUC ) cost method and the Actuarial Value of Assets 21

28 ( AVA ) to report a plan s funded status. PUC is one of several acceptable measures of a plan s funded status under current GASB rules. The PUC cost method projects future benefits under the plan, using salary growth and other assumptions and applies the service that has been earned as of the valuation date to determine accrued liabilities. The AVA is calculated using a methodology which smoothes the effect of short-term volatility in the Market Value of Assets by deferring a portion of annual investment gains or losses over a period of up to eight years. PERS Plans 2 and 3 are accounted for in the same pension trust fund and may legally be used to pay the defined benefits of any PERS Plan 2 or 3 members. Assets for one plan may not be used to fund benefits for another plan: however, all employers in PERS are required to make contributions at a rate (percentage of payroll) determined by the OSA every two years for the sole purpose of amortizing the PERS Plan 1 unfunded actuarial accrued liability within a rolling 10-year period. The State Legislature has established certain maximum contribution rates that began in 2009 and will continue until 2015 and certain minimum contribution rates that are to become effective in 2015 and remain in effect until the actuarial value of assets in PERS Plan 1 equals 100% of the actuarial accrued liability of PERS Plan 1. These rates are subject to change by future legislation enacted by the State Legislature to address future changes in actuarial and economic assumptions and investment performance. In 2011, the Legislature ended the future automatic annual increase, which is a fixed dollar amount multiplied by the member s total years of service, for most retirees in the PERS Plan 1 plan, which is forecast to reduce the unfunded accrued actuarial liability in PERS Plan 1. The State Supreme Court recently upheld the constitutionality of this legislation. The information in this section has been obtained from the District s financial statements and information on the State Actuary s and State Department of Retirement System s websites. Insurance The District is a member of Enduris Washington ( Enduris ) which is a non-profit risk sharing pool for special purpose districts in the State. Enduris provides per occurrence -based policies for all lines of liability coverage. Members make annual contributions to fund Enduris. In 2014, Enduris had approximately 491 members. Enduris is fully funded by its member participants. Claims are filed by members with Enduris and are administered in-house. The District currently maintains liability insurance and property insurance on the Convention Center and Auxiliary Facilities. The District s liability loss insurance carries a $1 million deductible, and the District is responsible for the first $1,000 of the deductible, while Enduris is responsible for the remainder. The District carries a $250,000 deductible on property loss and boiler and machinery loss; the District is responsible for the first $1,000 of the deductible for each claim of property loss; Enduris is responsible for the remainder. Enduris is also responsible for a $4,000 deductible on boiler and machinery loss. THE LYNNWOOD CONVENTION CENTER The Convention Center is located in Snohomish County at the junction of Interstates 5 and 405. It is 20 minutes from downtown Seattle, Bellevue and Everett, and 40 minutes from SeaTac International Airport. The Convention Center includes over 34,500 sq. ft. of functional meeting space on two floors. The center has 11 flexible meeting rooms that can be combined to create larger spaces with seating for up to 1,200 for a general session or up to 950 for a banquet. The center includes state-of-the-art audio/visual equipment and in-house media services team, plus high speed Internet and wireless access throughout the facility. It services the small- to mid-size convention and conference market, as well as the local meeting industry. There are over 600 parking spaces located on site. Convention Center Management The Convention Center is managed by SMG, which provides management services to more than 230 public assembly facilities including convention and exhibition centers, arenas, stadiums, theatres, performing arts centers, equestrian facilities, science centers and a variety of other venues. SMG provides venue management, sales, marketing, event booking and programming, construction and design consulting, and pre-opening services. The District selected SMG to manage the Convention Center in November 2003; through contract extensions and winning a competitive bid process in 2010, SMG continues to manage the Convention Center. The District s current contract with SMG expires December 31, 2015; the agreement may be amended to retain SMG for an additional five-year term. Convention Center Operations The Convention Center hosts banquets, meetings, consumer shows, conventions, trade shows, and other events. Bookings for most of the event categories have increased from 2009 to The District s revenue from hosting conventions increased from less than $1 million in 2009 to more than $3 million in In 2014, the economic impact on the region of the Convention Center was estimated at $24.8 million, as convention attendees spent money in the community and generated sales and lodging tax revenue. 22

29 AUXILIARY FACILITIES In conjunction with the acquisition of the Convention Center site, the District acquired adjacent land and buildings, including a small shopping center, which includes the Auxiliary Facilities. Auxiliary Facilities are defined in the Revenue Bond Resolution as the land, buildings and other improvements acquired by the District in conjunction with the acquisition of the Convention Center site and held for potential future expansion of the Convention Center and relating parking facilities, and/or for future construction of convention-related facilities such as hotels and other regional center facilities. The term Auxiliary Facilities does not include those buildings currently located on the property and known as Suites 102, 112, 118, 124, and 128 or the vacant building in the southwest corner of the property formerly used as the District offices. The shopping center currently has 11 tenants in stores ranging from 1,575 square feet to 22,150 square feet. However, the District plans to demolish a portion of the shopping center in order to allow for remediation of contaminated soil from a dry cleaning company previously located on the site and to provide for additional parking for the Convention Center. The portion of the shopping center facilities to be demolished are those buildings described above that are excluded from Auxiliary Facilities. The District estimates that the total cost of remediation will be approximately $848,000. The work on the site, including site remediation, will allow the District to better utilize the property in the near term and allow for future development of the property. The following table shows historical net revenues from the Auxiliary Facilities: Historical Net Auxiliary Facility Revenues Source: The District Year Net Auxiliary Facility Revenues 2004 $497, , , , , , , , , , ,640 The following table shows estimated Net Auxiliary Facility Revenues from 2015 through These estimates are made based on a number of assumptions related to the future, including the following: 1. No future revenues are assumed for any of the facilities currently occupied but which will be demolished as a consequence of site remediation. The spaces which will be demolished are not included in the definition of Auxiliary Facilities and any related revenue from those spaces is not included in future revenue projections. 2. One of the shopping center buildings will become partially vacant at the end of April The District is in the process of leasing this retail space. The estimates assume the building will be leased effective July 1, Starting in 2017, the facilities are assumed to remain leased until 2034 with revenues increasing at an assumed rate of one percent annually. No new facilities or additional revenues are assumed. 23

30 Source: The District Estimated Net Auxiliary Facility Revenues Net Auxiliary Year Facility Revenue , , , , , , , , , , , , , , , , , , , ,957 HISTORICAL AND ESTIMATED CASH FLOW FOR THE DISTRICT The following table shows historical and estimated revenues available to pay debt service on the Revenue Bonds and to pay Operation and Maintenance Expenses and other expenses of the District. Sales Tax Revenues and Net Auxiliary Facility Revenues are first pledged for payment of the Sales Tax Bonds. After that, any remaining revenues from Sales Tax Revenue can be used to pay Operations and Maintenance and any remaining Net Auxiliary Facility Revenue can be used for other District purposes, including paying Operation and Maintenance Expenses and paying debt service on Revenue Bonds. The Net Auxiliary Facility Revenues are specifically pledged for payment of the District s Revenue Bonds, but the lien on the pledge on Net Auxiliary Facilities Revenue is junior and subordinate to the lien thereof in favor of the Sales Tax Bonds. RCW authorizes the District to impose a tax on charges, if any, made for parking and admissions at the Convention Center; however, the Convention Center currently provides free parking facilities. If the District ever charges for parking, the District expects to impose a parking tax. The District imposes an admission tax, which generates a small proportion of total District revenue; very few Convention Center events are ticketed. Uncertainty of Future Revenue Cash Flow. The District has developed estimates of cash flow for planning purposes; the estimates are expected to change from time to time. Estimates of cash flow are based, in part, on assumptions made concerning the annual growth rate of Sales Tax Revenues, the amount of Net Auxiliary Facility Revenues, and the annual growth rate and availability of the Intergovernmental Project Payments, among other factors. Investors of the Bonds should not rely on the District s estimates of cash flow as statements of fact, as they are subject to change. If actual results are less favorable than those projected, the District may need to utilize the Contingent Loan Agreement. The District has not committed to provide updated estimates. The occurrence of any number of events could adversely affect sales tax revenues. See BONDHOLDER RISKS. The District and the County PFD have imposed the maximum sales and use tax permitted to public facilities districts without voter approval. Accordingly, the District and the County PFD currently have no further ability to increase the rate of tax, and their ability to generate adequate sales and tax revenues is dependent on the level of economic activity within the District and the County PFD subject to such tax. Levels of sales and use tax collections within the District and the County PFD s boundaries have historically fluctuated, and should be expected to continue to fluctuate as a result of general economic and other conditions beyond the control of the District and the County PFD. Sales and use tax revenue (including Intergovernmental Project Payments from the County PFD) could fall short if sales activity is lower than projected. 24

31 Summary of Certain Assumptions 1. Revenue projections for the Auxiliary Facilities include the following assumptions: Four tenant spaces comprising 8,400 square feet are demolished in 2016 in order to begin remediation of soil and groundwater contaminated by a former dry cleaning establishment. The area comprises 10% of the total leasable space and currently accounts for 18% of total lease revenue. One tenant in a space of 10,535 square feet vacates that space by the end of April, The space is leased by January 1, Rent is collected beginning July 1, Rent begins at $12/square foot. The long-term occupancy forecast is for 89% occupancy. All rents increase by 1% per year. 2. Projected future District Sales Tax Revenue are assumed to increase at one percent annually. 3. Projected County PFD Sales Tax Revenue is assumed to increase in accordance with the projected amounts in the Four- Party Agreement. No Tier 2 County Sales Tax revenues are assumed. 4. Projected County Hotel-Motel taxes are assumed to increase at four percent annually. 5. City Hotel-Motel taxes are assumed to increase in accordance with the Four-Party Agreement and the City-District Agreement No

32 Historical and Estimated Cash Flow for the District Revenues Pledged to Intergovernmental Project Payments Sales Tax Bonds Pledged to Revenue Bonds Convention Balance Net Auxiliary Sales Tax Available for County PFD County City Center/District Available Facility Sales Tax Bonds Sales Bond Other Sales Tax Hotel-Motel Hotel-Motel Net Revenue for Revenue Revenues (1) (2) Debt Service Coverage Purposes Revenues (4) Taxes (5) Taxes (6) (Loss) (7) Bonds (8) Revenue Bond Debt Service (3) Remaining Balance (9) Debt Service Coverage Revenue Bonds 2004 $ 497,672 $ 624,815 $ - $ 1,122,487 $ 388,458 $ 382,354 $ 327,818 $ (678,582) $ 1,542,535 $ , , , ,052, , , ,656 (1,623,017) 626, , , , , , , , , ,782 (659,036) 1,289, , , , , , , , , ,216 (767,247) 1,179, , , , , , , , , ,962 (680,358) 1,167, , , , , , , , , ,031 (710,916) 1,360, , , , , , , , , ,432 (643,711) 1,162, , , , , , , , , ,175 (620,423) 1,302, , , , , , , , , ,271 (441,885) 1,599, , , , , , , , , ,729 (306,387) 1,717,279 1,070, , , , , , , , ,560 (390,143) 1,704,254 1,105, , , ,927 1,048, , , , ,777 (599,634) 1,407, ,380 1,001, , ,776 1,069, , , , ,390 (585,926) 1,461, , , , ,704 1,098, , , , ,412 (582,849) 1,574, , , , ,711 1,124, , , , ,854 (586,721) 1,622, , , , ,798 1,143, , , , ,730 (584,327) 1,699,160 1,361, , , ,966 1,180, , , , ,052 (588,520) 1,754,713 1,414, , , ,215 1,208, , , , ,833 (592,755) 1,820,613 1,477, , , ,548 1,238, , , , ,088 (597,033) 1,888,774 1,531, , , ,963 1,267, , , , ,831 (601,353) 1,960,714 1,592, , , ,463 1,296, ,528 1,002, , ,076 (605,717) 2,033,135 1,657, , , ,031 1,118, (1,138) 1,043, , ,838 (610,124) 2,028,116 1,599, , , ,337 1,086,280 1,025, ,133 (614,575) 2,668,496 2,175, , , ,636-1,066, ,977 (619,071) 1,641, , , , ,978-1,108, ,387 (623,612) 1,703, , , , ,363-1,153, ,378 (628,198) 1,767, , , , ,792-1,199, ,969 (632,830) 1,834, , , , ,266-1,247, ,179 (637,508) 1,903,397 1,002, , , ,784-1,297, ,024 (642,233) 1,974,934 1,025, , , ,348-1,349, ,525 (647,006) 2,049,120 1,055, , , ,957-1,403, ,700 (651,826) 2,126,055 1,084,187 1,041, (1) Estimated net revenues from operation of Convention Plaza; assumes continued operation by the District through (2) Assumed to increase at 1.0% annually. (3) 2015 debt service coverage includes a cash contributions of $297,281 for the Revenue Bonds. (4) Pursuant to the Four Party Agreement; increasing at an average rate of approximately 4.8% annually. (5) Pursuant to the Two Party Agreement; increasing at an average rate of 4.0% annually. 6) Pursuant to the Four Party Agreement; increasing at an average rate of 3.0% annually. (7) Projected Operating Revenues of the Convention Center less Operation and Maintenance Expenses less operating costs of the District. (8) Includes Net Revenues pledged to the Sales Tax Bonds, less Sales Tax Bond Debt Service, plus Intergovernmental Project Payments less Convention Center/District Net Revenue (loss). (9) Pursuant to the Contingent Loan Agreement the District will set aside a portion of this balance for future renewals, replacements and improvements. 26

33 DEMOGRAPHIC AND ECONOMIC INFORMATION The City is located in the commercial hub of south Snohomish County, in the heart of Washington s aerospace, high-tech and bio-med corridors, approximately 15 miles north of Seattle and 12 miles south of Everett. Lynnwood encompasses over seven square miles and serves as the primary business center of southern Snohomish County. Historical population of the City, the County and the State are shown below. Source: U.S. Census Bureau Population City of Lynnwood, Snohomish County and the State of Washington Year City of Lynnwood Snohomish County State of Washington , ,000 6,971, , ,500 6,895, , ,900 6,817, , ,000 6,767, , ,335 6,724,540 The City's economy has a mix of commerce and business, with some industrial activity and a large and diverse residential sector. The City s retail activity is led by the Alderwood Mall, located on 77 acres along the City s eastern border, next to Interstate 5. It has four anchor department stores and 154 specialty shops, making it one of the largest retail malls in the Pacific Northwest. Depending on the season, Alderwood Mall employs from 1,300 people up to an estimated 5,000 people in November and December. Several smaller malls and retail complexes are also located in the City, many of them located adjacent to or near Alderwood Mall, collectively totaling approximately two million square feet of retail space in the City. The Lynnwood area has several manufacturing firms, the largest of which is Crane Aerospace. Crane manufactures electronic sensing systems on a 40-acre site and employs approximately 900 people just outside the City limits. The City itself employs 517 people, and Edmonds Community College employs 962 full- and part-time employees. The Edmonds School District employs approximately 1,200 people. In addition to the City s Convention Center, the City is undertaking a 20-year City Center Project, which will include redevelopment of 400 acres in the City. The project will incorporate mixed residential and commercial uses with open public spaces being developed with public and private funding. Economic Indicators Following are economic and demographic indicators for the City and Snohomish County. Median Household Income Snohomish County and Washington State Year Snohomish County Washington State 2013 $65,981 $58, ,033 56, ,687 55, ,034 54, ,297 55,458 Source: Washington State Office of Financial Management 27

34 Major employers in Snohomish County and the City include the following: Major Employers Snohomish County Employer Product/Business No. of Employees The Boeing Company Aircraft Manufacturing 40,000 Naval Station Everett Military 6,350 State of Washington State Government 5,400 Providence Regional Medical Center Medical Services 3,500 Tulalip Tribes Casino 3,500 Snohomish County County Government 2,700 Everett Clinic Medical Services 2,500 Premera Blue Cross Health Insurance 2,400 Walmart Retail 2,056 Everett School District Education 2,025 Source: Economic Development Council of Snohomish County as of August 2014 and certain individual employers Major Employers City of Lynnwood Employer Business No. of Employees Edmonds School District Education 1,200 Edmonds Community College Education 962 City of Lynnwood Government 525 Crane (1) Manufacturing 502 The Bon/Macy s Retail 376 Nordstrom Inc. Retail 320 Fred Meyer Retail 306 ADP Business Services 242 Sears Retail 233 Target Corporation Retail 229 JC Penney Company Retail 214 (1) Crane is located in the Urban Growth Area outside the City boundaries. Source: City of Lynnwood Business Licensing Department as of September, 2014 Historic personal income and per capita income levels for the County and the State are shown in the table below: Snohomish County and State of Washington Total Personal and Per Capita Income Snohomish County State of Washington Personal Income Personal Income Year ($000) Per Capita Income ($000) Per Capita Income 2013 $34,858,553 $46,733 $332,654,857 $47, ,179,014 46, ,458,394 47, ,389,731 44, ,999,485 44, ,352,011 42, ,862,463 42, ,936,807 42, ,943,954 42,137 Source: U.S. Department of Commerce, Bureau of Economic Analysis (most recent data available as of January 2015) 28

35 Taxable Retail Sales. Taxable retail sales reflect only those sales subject to retail sales tax. Taxable retail sales within Snohomish County (including incorporated and unincorporated areas) and the City, for the years 2009 through 2013, are shown below: Taxable Retail Sales City of Lynnwood and Snohomish County Year City of Lynnwood Snohomish County 2013 $2,078,375,187 $10,764,550, ,971,095,051 9,970,619, ,832,524,975 9,392,065, ,778,026,853 9,327,727, ,742,146,033 9,244,408,434 Source: Washington State Department of Revenue Building Permits. Residential building permits are an indicator of growth within a region. The number and valuation of new single-family and multi-family residential building permits in the City are listed below: City of Lynnwood Building Permit Activity New Single Family New Multi-Family & Commercial Year Count Valuation Count Valuation Total Valuation $3,619, $27,619,751 $31,239, ,404, ,199,186 23,603, ,930, ,371,726 14,302, ,331, ,930,856 27,261, ,863, ,865,541 63,728,805 Source: City of Lynnwood building permit applications Employment in the County and the State is shown in the following table: Labor Force Employment and Unemployment For Snohomish County and Washington State. Annual Average Snohomish County Civilian Labor Force 395, , , , , ,180 Employment 374, , , , , ,490 Unemployment 20,330 22,780 29,310 36,110 41,050 38,690 Unemployment Rate 5.1% 5.8% 7.5% 9.3% 10.5% 10.1% Washington State Civilian Labor Force 3,458,800 3,461,130 3,484,730 3,473,100 3,515,190 3,523,510 Employment 3,216,300 3,218,410 3,203,430 3,153,920 3,166,680 3,194,260 Unemployment 242, , , , , ,250 Unemployment Rate 7.0% 7.0% 8.1% 9.2% 9.9% 9.3% Source: Washington State Department of Employment Security. BONDHOLDER RISKS Prospective purchasers of the Bonds should carefully consider the following risk factors, as well as other information contained in this official statement, prior to purchasing the Bonds. The information contained under this heading is not intended to be an exhaustive discussion of all possible risks involved with owning the Bonds. Prospective purchasers should consult their investment advisors before making any decisions as to the purchase of the Bonds. Limitations of the Intergovernmental Project Payments and Contingent Loan Agreement The obligations of the various parties to the Intergovernmental Contracts and the Contingent Loan Agreement are subject to the conditions and limitations set forth therein, and also are subject to all rights and defenses available to contracting parties generally. The Intergovernmental Contracts and the Contingent Loan Agreement are general contracts, subject to certain conditions and limitations, and are not letters of credit or guarantees. No law expressly requires performance of the Intergovernmental Contracts or the Contingent Loan Agreement, although the non-breaching party would be entitled to 29

36 allowable damages if a breach were to occur. If a dispute develops between the District and the other parties to such agreements, the parties will have all defenses allowed by law or in equity to their payment under or other performance of the Contingent Loan Agreement, including disputes (whether valid or not) regarding the authority of any party to enter into or perform the Intergovernmental Contracts or the Contingent Loan Agreement. Potential investors should consult their legal counsel for an explanation of the differences between a general contract and a letter of credit or guaranty. Potential Future Federal Tax Law Changes From time to time, there are legislative proposals in Congress which, if enacted, could require changes in the description of federal tax matters relating to the Bonds set forth below or adversely affect the market value of the Bonds. It cannot be predicted whether future legislation may be proposed or enacted that would affect the federal tax treatment of interest received on the Bonds. Any prospective purchaser of the Bonds should consult with its own tax advisors regarding any proposed or pending legislation that would change the federal tax treatment of interest on the Bonds. Limited Security The Bonds are a special limited obligation of the District. Payment of the principal of and premium, if any, and interest on the Bonds will be a valid claim only against the special fund or funds of the District relating thereto and will not be an obligation of the City, the County, the County PFD, the State or any municipal corporation, subdivision or agency of thereof other than the District. Neither the full faith and credit nor the taxing power of the City, the County, the County PFD, or the State or any municipal corporation, subdivision or agency of thereof is pledged to the payment of the principal of or interest on the Bonds. The District has limited taxing powers. See THE REVENUE BONDS herein. No Redemption upon Taxability The Bonds are not subject to redemption prior to maturity solely as a result of the interest on such Bonds becoming includable in gross income for federal income tax purposes, nor will the interest rates on the Bonds be increased in such an event. The exclusion of interest on the Bonds from gross income for federal income tax purposes depends on the District s continued compliance with federal tax laws, including requirements with respect to the investment of Bonds proceeds. See TAX MATTERS herein. It will not be possible to accelerate the Bonds if interest on the Bonds becomes taxable. Enforceability of Remedies A municipality such as the District must be specifically authorized under state law in order to seek relief under Chapter 9 of the U.S. Bankruptcy Code (the Bankruptcy Code ). Chapter RCW, entitled the Taxing Relief Bankruptcy Act, permits any taxing district (defined to include any municipality or political subdivision) to voluntarily petition for relief under the Bankruptcy Code. A creditor cannot bring an involuntarily bankruptcy proceeding against a municipality, including the District. Under Chapter 9, a federal bankruptcy court may not appoint a receiver for a municipality or order the dissolution or liquidation of the municipality. If a municipality filed for bankruptcy, the bankruptcy court would have some discretion with respect to how to treat past and future obligations of such municipality under a plan for adjustment of debt under Chapter 9 of the Bankruptcy Code. The remedies available to the owner of the Bonds upon an event of default under the Bond Resolutions or other documents described herein are in many respects dependent upon regulatory and judicial actions which are often subject to discretion and delay. Under existing constitutional and statutory law and judicial decisions, including specifically Title 11 of the United States Code, the remedies specified by the federal bankruptcy laws, the Bond Resolutions and the various related documents may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified as to the enforceability of the various legal instruments, by limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by principles of equity. Sales Taxes and Hotel-Motel Taxes Sales taxes and hotel-motel taxes are subject to variable economic cycles and fluctuate in response to local economic activity including without limitation significant local construction projects and changes in local retail activity. It can be expected that over the life of the Bonds there will be one or more economic cycles, resulting in fluctuating sales tax and hotel-motel tax revenues. Initiative and Referendum Under the State Constitution, the voters of the State have the ability to initiate legislation and to modify existing laws through the powers of initiative and referendum, respectively. The initiative power in the State may not be used to amend the State Constitution. Initiatives and referenda are submitted to the voters upon receipt of a petition signed by at least eight percent (initiative) and four percent (referendum) of the number of voters registered and voting for the office of Governor at the preceding regular gubernatorial election. Any law approved in this manner by a majority of the voters may not be amended or repealed by the Legislature within a period of two years following enactment, except by a vote of two-thirds of all members elected to each house of the Legislature. After two years, the law is subject to amendment or repeal by the Legislature in the 30

37 same manner as other laws. Tax and fee initiative measures may be filed in the future. It cannot be predicted whether any such initiatives might gain sufficient signatures to qualify for submission to the Legislature and/or the voters or, if submitted, whether they ultimately would be approved, or if approved and thereafter challenged in litigation, whether they would ultimately be determined to be constitutional. Under the City Code, Lynnwood voters may initiate local legislation, and modify existing legislation, through powers of initiative and referendum. The County Code also provides for initiatives and referenda. Initiative measures affecting local governments such as the City and the County have been filed in the past and may be filed in the future. It cannot be predicted whether or when any such initiatives might gain sufficient signatures to qualify for submission to the City or County Council and/or the voters or, if submitted, whether they ultimately would be approved. LITIGATION There is no controversy or litigation pending or, to the best knowledge of the District, threatened which will affect the issuance and delivery of the Bonds, the collection of sales and use taxes, hotel-motel taxes and other revenue to pay the principal and interest thereon, the proceedings and authority under which the Bonds are issued, or the validity of the Bonds. There is no controversy or litigation pending or, to the best knowledge of the City, threatened which affects or seeks to prohibit, restrain or enjoin the City s obligations under the City-District Agreement No. 4 described above under the heading CONTINGENT LOAN AGREEMENT or questions the powers of the City to carry out the transactions contemplated thereunder. The information provided in this paragraph is provided by the City and not the District. APPROVAL OF COUNSEL Legal matters incident to the authorization, issuance and sale of the Bonds by the District are subject to the approving legal opinion of Foster Pepper PLLC, Seattle, Washington, Bond Counsel. The form of the opinions of Bond Counsel with respect to the Bonds are attached as Appendix F. Foster Pepper PLLC, Seattle Washington, is to provide the opinion with respect to the enforceability of the Contingent Loan Agreement against the City. The opinions of Bond Counsel are given based on factual representations made to Bond Counsel, and under existing law, as of the date of initial delivery of the Bonds, and Bond Counsel assumes no obligation to revise or supplement its opinions to reflect any facts or circumstances that may thereafter come to its attention, or any changes in law that may thereafter occur. The opinions of Bond Counsel are an expression of its professional judgment on the matters expressly addressed in its opinions and do not constitute a guarantee of result. Bond Counsel will be compensated only upon the issuance and sale of the Bonds. Certain legal matters will be passed on for the Underwriter by Pacifica Law Group LLP, Seattle, Washington, Counsel to the Underwriter. Any opinion of such firm will be addressed solely to the Underwriter, will be limited in scope, and cannot be relied upon by investors without the written consent of such firm. Tax Exemption TAX MATTERS Exclusion From Gross Income. In the opinion of Bond Counsel, under existing federal law and assuming compliance with applicable requirements of the Internal Revenue Code of 1986, as amended (the Code ), that must be satisfied subsequent to the Issue Date of the Bonds, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the alternative minimum tax applicable to individuals. Continuing Requirements. The District is required to comply with certain requirements of the Code after the Issue Date of the Bonds in order to maintain the exclusion of the interest on the Bonds from gross income for federal income tax purposes, including, without limitation, requirements concerning the qualified use of Bond proceeds and the facilities financed or refinanced with Bond proceeds, limitations on investing gross proceeds of the Bonds in higher yielding investments in certain circumstances, and the requirement to comply with the arbitrage rebate requirement to the extent applicable to the Bonds. The District has covenanted in the Bond Resolutions to comply with those requirements, but if the District fails to comply with those requirements, interest on the Bonds could become taxable retroactive to the Issue Date of the Bonds. Bond Counsel has not undertaken and does not undertake to monitor the District's compliance with such requirements. Corporate Alternative Minimum Tax. While interest on the Bonds also is not an item of tax preference for purposes of the alternative minimum tax applicable to corporations, under Section 55 of the Code, tax-exempt interest, including interest on the Bonds, received by corporations is taken into account in the computation of adjusted current earnings for purposes of the alternative minimum tax applicable to corporations (as defined for federal income tax purposes). Under the Code, alternative minimum taxable income of a corporation will be increased by 75% of the excess of the corporation's adjusted current earnings (including any tax-exempt interest) over the corporation's alternative minimum taxable income determined without regard to such increase. A corporation's alternative minimum taxable income, so computed, that is in excess of an exemption of $40,000, which exemption will be reduced (but not below zero) by 25% of the amount by which the corporation's alternative minimum taxable income exceeds $150,000, is then subject to a 20% minimum tax. 31

38 A small business corporation is exempt from the corporate alternative minimum tax for any taxable year beginning after December 31, 1997, if its average annual gross receipts during the three-taxable-year period beginning after December 31, 1993, did not exceed $5,000,000, and its average annual gross receipts during each successive three-taxable-year period thereafter ending before the relevant taxable year did not exceed $7,500,000. Tax on Certain Passive Investment Income of S Corporations. Under Section 1375 of the Code, certain excess net passive investment income, including interest on the Bonds, received by an S corporation (a corporation treated as a partnership for most federal tax purposes) that has Subchapter C earnings and profits at the close of the taxable year may be subject to federal income taxation at the highest rate applicable to corporations if more than 25% of the gross receipts of such S corporation is passive investment income. Foreign Branch Profits Tax. Interest on the Bonds may be subject to the foreign branch profits tax imposed by Section 884 of the Code when the Bonds are owned by, and effectively connected with a trade or business of, a United States branch of a foreign corporation. Possible Consequences of Tax Compliance Audit. The Internal Revenue Service (the IRS ) has established a general audit program to determine whether issuers of tax-exempt obligations, such as the Bonds, are in compliance with requirements of the Code that must be satisfied in order for interest on those obligations to be, and continue to be, excluded from gross income for federal income tax purposes. Bond Counsel cannot predict whether the IRS would commence an audit of the Bonds. Depending on all the facts and circumstances and the type of audit involved, it is possible that commencement of an audit of the Bonds could adversely affect the market value and liquidity of the Bonds until the audit is concluded, regardless of its ultimate outcome. Certain other Federal Tax Consequences Bonds Not Qualified Tax Exempt Obligations for Financial Institutions. Section 265 of the Code provides that 100% of any interest expense incurred by banks and other financial institutions for interest allocable to tax-exempt obligations acquired after August 7, 1986, will be disallowed as a tax deduction. However, if the tax-exempt obligations are obligations other than private activity bonds, are issued by a governmental unit that, together with all entities subordinate to it, does not reasonably anticipate issuing more than $10,000,000 of tax-exempt obligations (other than private activity bonds and other obligations not required to be included in such calculation) in the current calendar year, and are designated by the governmental unit as qualified tax-exempt obligations, only 20% of any interest expense deduction allocable to those obligations will be disallowed. The District is a governmental unit that, together with all subordinate entities, reasonably anticipates issuing more than $10,000,000 of tax-exempt obligations (other than private activity bonds and other obligations not required to be included in such calculation) during the current calendar year and has not designated the Bonds as qualified tax-exempt obligations for purposes of the 80% financial institution interest expense deduction. Therefore, no interest expense of a financial institution allocable to the Bonds is deductible for federal income tax purposes. Reduction of Loss Reserve Deductions for Property and Casualty Insurance Companies. Under Section 832 of the Code, interest on the Bonds received by property and casualty insurance companies will reduce tax deductions for loss reserves otherwise available to such companies by an amount equal to 15% of tax exempt interest received during the taxable year. Effect on Certain Social Security and Retirement Benefits. Section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take receipts or accruals of interest on the Bonds into account in determining gross income. Other Possible Federal Tax Consequences. Receipt of interest on the Bonds may have other federal tax consequences as to which prospective purchasers of the Bonds may wish to consult their own tax advisors. Potential Future Federal Tax Law Changes. From time to time, there are legislative proposals in Congress which, if enacted, could adversely affect the tax treatment, market value or marketability of the Bonds. It cannot be predicted whether future legislation may be proposed or enacted that would affect the federal tax treatment of interest received on the Bonds. Prospective purchasers of the Bonds should consult with their own tax advisors regarding any proposed or pending legislation that would change the federal tax treatment of interest on the Bonds. 32

39 The District s Undertaking CONTINUING DISCLOSURE UNDERTAKING To meet the requirements of paragraph (b)(5) of United States Securities and Exchange Commission ( SEC ) Rule 15c2-12 ( Rule 15c2-12 ), as applicable to a participating underwriter for the Bonds, the District will undertake (the Undertaking ) for the benefit of holders of the Bonds to provide or cause to be provided, either directly or through a designated agent, to the Municipal Securities Rulemaking Board ( MSRB ), in an electronic format as prescribed by the MSRB, accompanied by identifying information as prescribed by the MSRB: (a) annual financial information and operating data of the type include in this Official Statement as generally described below ( annual financial information ); and (b) timely notice (not in excess of ten business days after the occurrence of the event) of the occurrence of any of the following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non-payment-related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notice of Proposed Issue (IRS Form 5701 TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) bond calls (other than scheduled mandatory redemptions of Term Bonds), if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the City, as such Bankruptcy Events are defined in Rule 15c2-12; (13) the consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. The District also will provide to the MSRB timely notice of a failure by the District to provide required annual financial information on or before the date specified below. Type of Annual Financial Information Undertaken to be Provided. For the Revenue Bonds, the annual financial information that the District undertakes to provide will consist of (1) annual financial statements prepared (except as noted in the financial statements) in accordance with generally accepted accounting principles applicable to local governmental units of the State such as the District, as such principles may be changed from time to time, which statements may not be audited, provided, that if and when audited financial statements are prepared and available to the District they will be provided; (2) to the extent not otherwise provided in the District s annual financial statements, a summary of revenues provided from Intergovernmental Project Payments, net operating revenue of the Convention Center and Net Auxiliary Facilities Revenue; (3) a statement of authorized, issued and outstanding bonded debt of the District; (4) debt service coverage ratios; and (5) a statement of whether or not the District has drawn on funds of the City pursuant to the Contingent Loan Agreement. The annual financial information will be provided to the MSRB not later than the last day of the ninth month after the end of each fiscal year of the District (currently, a fiscal year ending December 31), as such fiscal year may be changed as required or permitted by State law, commencing with the District s fiscal year ending December 31, The annual financial information may be provided in single or multiple documents, and may be incorporated by specific reference to documents available to the public on the Internet website of the MSRB or filed with the SEC. Amendment of District s Undertaking. The District s Undertaking is subject to amendment after the primary offering of the Bonds without the consent of any holder of any Bond, or of any broker, dealer, municipal securities dealer, participating underwriter, rating agency or the MSRB, under the circumstances and in the manner permitted by Rule 15c2-12. The District will give notice to the MSRB of the substance (or provide a copy) of any amendment to the District s Undertaking and a brief statement of the reasons for the amendment. If the amendment changes the type of annual financial information to be provided, the annual financial information containing the amended financial information will include a narrative explanation of the effect of that change on the type of information to be provided. Beneficiaries. The District s Undertaking will inure to the benefit of the District and the holder of each Bond, and will not inure to the benefit of or create any rights in any other person. Termination of District s Undertaking. The District s obligations under the District s Undertaking will terminate upon the legal defeasance of all of the applicable series of Bonds. In addition, the District s obligations under the District s Undertaking will terminate if those provisions of Rule 15c2-12 that require the District to comply with the District s Undertaking become legally inapplicable in respect of the Bonds for any reason, as confirmed by an opinion of nationally recognized bond counsel or other counsel familiar with federal securities laws delivered to the District, and the District provides timely notice of such termination to the MSRB. 33

40 Remedy for Failure to Comply with Undertaking. As soon as practicable after the District learns of any failure to comply with the Undertaking, the District will proceed with due diligence to cause such noncompliance to be corrected. No failure by the District or other obligated person to comply with the District s Undertaking shall constitute a default in respect of the Bonds. The sole remedy of any holder of a Bond shall be to take such actions as that holder deems necessary, including seeking an order of specific performance from an appropriate court, to compel the District or other obligated person to comply with the District s Undertaking. Prior Compliance The District has entered into certain written agreements for the sole purpose of assisting an underwriter in meeting the requirements of paragraph (b)(5) of Rule 15c2-12, as applicable to a participating underwriter for certain of its bonds that were outstanding in the past five years (the District s Prior Undertakings ). With the following exceptions, in the past five years the District has not otherwise failed to comply with the District s Prior Undertakings in all material respects: (1) the District failed to timely file annual financial statements for fiscal year 2010; (2) the District failed to timely file certain operating data for fiscal years 2009 through 2013, inclusive; and (3) the District failed to timely file notice of certain rating changes. The City s Undertaking As an obligated person with respect to the Bonds pursuant to Rule 15c2-12, the City will undertake (the City s Undertaking ) to provide or cause to be provided, either directly or through a designated agent, to the MSRB, in an electronic format as prescribed by the MSRB, accompanied by identifying information as prescribed by the MSRB: (a) annual financial information and operating data of the type included in Appendix D to this Official Statement for the Bonds and as generally described below ( annual financial information ); and (b) timely notice (not in excess of ten business days after the occurrence of the event) of the occurrence of any of the following events with respect to the City: (1) bankruptcy, insolvency, receivership or similar event of the City, as such Bankruptcy Events are defined in Rule 15c2-12; and (2) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material. The City will also provide to the MSRB timely notice of a failure by the City to provide annual financial information on or before the date specified below. Type of Annual Information Undertaken to Be Provided. The annual financial information that the City undertakes to provide will consist of: (1) annual financial statements prepared (except as noted in the financial statements) in accordance with generally accepted accounting principles applicable to governmental units of the State such as the City, as such principles may be changed from time to time and as permitted by State law, which statements shall not be audited, except, however, that if and when audited financial statements are otherwise prepared and available to the City they will be provided; (2) outstanding general obligation bonds; (3) assessed valuation for the fiscal year; (4) regular property tax levy rate and regular property tax levy rate limit for the fiscal year; and (5) general fund revenues from other major tax sources. The annual financial information will be provided to the MSRB not later than the last day of the ninth month after the end of each fiscal year of the City (currently, a fiscal year ending December 31), as such fiscal year may be changed as required or permitted by Washington law, commencing with the City s fiscal year ending December 31, 2014; and may be provided in a single or multiple documents, and may be incorporated by reference to other documents that have been filed with the MSRB via the prescribed electronic format. Amendment of City s Undertaking. The City s Undertaking is subject to amendment after the primary offering of the Bonds without the consent of any holder of any Bond, or of any broker, dealer, municipal securities dealer, participating underwriter, rating agency, or the MSRB, under the circumstances and in the manner permitted by Rule 15c2-12. The City will give notice to the MSRB by posting, in the prescribed electronic format, the substance (or provide a copy) of any amendment to the City s Undertaking and a brief statement of the reasons for the amendment. If the amendment changes the type of annual financial information to be provided, the annual financial information containing the amended financial information will include a narrative explanation of the effect of that change on the type of information to be provided. Termination of City s Undertaking. The City s obligations under the City s Undertaking will terminate upon the legal defeasance of all of the Bonds. In addition, the City s obligations under the City s Undertaking will terminate if those provisions of Rule 15c2-12 which require the City to comply with the City s Undertaking become legally inapplicable in respect of the Bonds for any reason, as confirmed by an opinion of nationally recognized bond counsel or other counsel familiar with federal securities laws delivered to the City, and the City provides timely notice of such termination to the MSRB via the prescribed electronic format. 34

41 Remedy for Failure to Comply with City s Undertaking. As soon as practicable after the City learns of any failure to comply with the requirements of the City s Undertaking, the City will proceed with due diligence to correct such noncompliance. No failure by the City or other obligated person to comply with the City s Undertaking will constitute a default in respect of any of the City s bonds or the Bonds. The sole remedy of any holder of a District Bond will be to take such actions as that holder deems necessary, including seeking an order of specific performance from an appropriate court, to compel the City or other obligated person to comply with the requirements of the City s Undertaking. Prior Undertakings. The City has entered into certain written agreements for the sole purpose of assisting an underwriter in meeting the requirements of paragraph (b)(5) of Rule 15c2-12, as applicable to a participating underwriter for certain of its bonds that were outstanding in the past five years (the City s Prior Undertakings ). With the following exceptions, in the past five years the City has not otherwise failed to comply with the City s Prior Undertakings in all material respects: (1) the City failed to timely file annual financial statements for fiscal years 2009 through 2011, inclusive; (2) the City failed to timely file certain operating data for fiscal years 2009 through 2013, inclusive, in accordance with certain of the City s Prior Undertakings; and (3) the City failed to timely file notice of certain rating changes. FINANCIAL ADVISOR A. Dashen & Associates (the Financial Advisor ) has served as financial advisor to the District relative to the preparation of the Bonds for sale, timing of the sale and other factors relating to the Bonds. The Financial Advisor, with the assistance of others, prepared the Official Statement. Except as set forth in the Official Statement, the Financial Advisor has not audited, authenticated or otherwise verified the information set forth in this Official Statement or other information provided relative to the Bonds. A. Dashen & Associates makes no guaranty, warranty or other representation on any matter related to the information contained in the Official Statement. The Financial Advisor is an independent financial advisory firm and is not engaged in the business of underwriting, marketing, trading or distributing municipal securities. RATING As noted on the cover page of this Official Statement, Standard and Poor s Corporation, a division of the McGraw-Hill companies, New York, New York ( S&P ) has assigned its municipal bond rating of AA+ to the Bonds. The District applied for the rating and supplied certain information S&P to be considered in evaluating the Bonds. The rating reflects only the view of the rating agency and an explanation of the significance of the ratings may be obtained from the rating agency. There is no assurance that the ratings will be retained for any given period of time or that the ratings will not be revised downward or withdrawn entirely by the rating agency if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of the ratings would be likely to have an adverse effect on the market price of the Bonds. UNDERWRITING The Revenue Bonds are being purchased by the Underwriter at a price of $16,566, The Revenue Bonds will be reoffered at a price of $16,647, The Underwriter of the Bonds may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts) and others at prices lower than the initial offering prices set forth on the inside cover page of this Official Statement, and such initial offering prices may be changed from time to time by the Underwriter. After the initial public offering, the public offering prices may be varied from time to time. Piper Jaffray & Co. and Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, entered into an agreement (the Agreement ) which enables Pershing LLC to distribute certain new issue municipal securities underwritten by or allocated to Piper Jaffray & Co., including the Bonds. Under the Agreement, Piper Jaffray & Co. will share with Pershing LLC a portion of the fee or commission paid to Piper Jaffray & Co. Piper Jaffray & Co. has entered into a distribution agreement ( Distribution Agreement ) with Charles Schwab & Co., Inc. ( CS&Co ) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to the Distribution Agreement, CS&Co. may purchase Bonds from Piper Jaffray & Co. at the original issue price less a negotiated portion of the selling concession applicable to any Bonds that CS&Co. sells. Official Statement MISCELLANEOUS Statements in this Official Statement, including forecasts, estimates and matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Port or the Underwriter and the Owners of the Bonds. The information has been compiled from official sources and, while not guaranteed by the District, is believed to be correct. Distribution of this Official Statement has been authorized by the District. 35

42 Potential Conflicts of Interest The District is aware of the following potential conflicts of interest various parties may have in connection with the issuance of the Bonds. The fees of the Underwriter, Bond Counsel, Underwriter s Counsel, Financial Advisor and other fees are contingent upon the sale of the Bonds. Foster Pepper PLLC represents the District as bond counsel and will provide an opinion to the District and the City regarding the enforceability of the Contingent Loan Agreement against the City. Additionally, from time to time Foster Pepper PLLC serves as bond counsel and outside counsel to the City with respect to transactions other than the issuance of the Bonds. By purchasing a Bond, the purchaser thereof consents to any conflict of interest that could exist by reason of Foster Pepper PPLC s representation of the District and its representation of the City. LYNNWOOD PUBLIC FACILITIES DISTRICT LYNNWOOD, WASHINGTON By: /s/ Grant Dull Authorized Signatory of the District 36

43 APPENDIX A 2013 AUDITED FINANCIAL STATEMENTS OF THE DISTRICT

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45 Washington State Auditor s Office Financial Statements Audit Report Washington State Auditor Troy Kelley Lynnwood Public Facilities District Snohomish County Audit Period January 1, 2013 through December 31, 2013 Report No May 12, 2014 Board of Directors Lynnwood Public Facilities District Lynnwood, Washington Report on Financial Statements Please find attached our report on the Lynnwood Public Facilities District s financial statements. We are issuing this report in order to provide information on the District s financial condition. Sincerely, TROY KELLEY STATE AUDITOR Issue Date May 12, 2014 Insurance Building, P.O. Box Olympia, Washington (360) TDD Relay (800)

46 Table of Contents Lynnwood Public Facilities District Snohomish County January 1, 2013 through December 31, 2013 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards... 1 Independent Auditor s Report on Financial Statements... 3 Financial Section... 6 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Board of Directors Lynnwood Public Facilities District Lynnwood, Washington Lynnwood Public Facilities District Snohomish County January 1, 2013 through December 31, 2013 We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of the Lynnwood Public Facilities District, Snohomish County, Washington, as of and for the year ended December 31, 2013, and the related notes to the financial statements, which collectively comprise the District s basic financial statements, and have issued our report thereon dated April 24, As discussed in Note 14 to the financial statements, during the year ended December 31, 2013, the District implemented Governmental Accounting Standards Board Statement No. 65, Items Previously Reported as Assets and Liabilities. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit of the financial statements, we considered the District s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control. Accordingly, we do not express an opinion on the effectiveness of the District s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 1

47 Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the District s financial statements are free from material misstatement, we performed tests of the District s compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. PURPOSE OF THIS REPORT The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the District s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. TROY KELLEY STATE AUDITOR April 24, 2014 Independent Auditor s Report on Financial Statements Board of Directors Lynnwood Public Facilities District Lynnwood, Washington Lynnwood Public Facilities District Snohomish County January 1, 2013 through December 31, 2013 REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of the Lynnwood Public Facilities District, Snohomish County, Washington, as of and for the year ended December 31, 2013, and the related notes to the financial statements, which collectively comprise the District s basic financial statements as listed on page 6. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 2 3

48 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 financial position of the Lynnwood Public Facilities District, as of December 31, 2013, and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Matters of Emphasis As discussed in Note 14 to the financial statements, in 2013, the District adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 65, Items Previously Reported as Assets and Liabilities. Our opinion is not modified with respect to this matter. is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District s internal control over financial reporting and compliance. TROY KELLEY STATE AUDITOR April 24, 2014 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 7 through 13 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated April 24, 2014 on our consideration of the District s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report 4 5

49 Financial Section Lynnwood Public Facilities District Snohomish County January 1, 2013 through December 31, 2013 REQUIRED SUPPLEMENTARY INFORMATION Management s Discussion and Analysis 2013 BASIC FINANCIAL STATEMENTS Statement of Net Position 2013 Statement of Revenues, Expenses and Changes in Fund Net Position 2013 Statement of Cash Flows 2013 Notes to Financial Statements

50 8 9

51 10 11

52 12 13

53 14 15

54 16 17

55 18 19

56 20 21

57 22 23

58 24 25

59 26 27

60 28 29

61 30 31

62 ABOUT THE STATE AUDITOR'S OFFICE The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four-year terms. We work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Troy Kelley Chief of Staff Doug Cochran Director of Performance and State Audit Chuck Pfeil, CPA Director of Local Audit Kelly Collins, CPA Deputy Director of State Audit Jan M. Jutte, CPA, CGFM Deputy Director of Local Audit Sadie Armijo Deputy Director of Local Audit Mark Rapozo, CPA Deputy Director of Performance Audit Lou Adams, CPA Deputy Director of Quality Assurance Barb Hinton Deputy Director of Communications Thomas Shapley Local Government Liaison Mike Murphy Public Records Officer Mary Leider Main number (360) Toll-free Citizen Hotline (866) Website Subscription Service portal.sao.wa.gov/saoportal/login.aspx 32

63 APPENDIX C FORM OF THE REVENUE BOND RESOLUTION

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65 [FORM OF RESOLUTION] LYNNWOOD PUBLIC FACILITIES DISTRICT RESOLUTION NO A RESOLUTION of Lynnwood Public Facilities District providing for the issuance, sale and delivery of $ aggregate principal amount of Convention Center revenue refunding bonds to provide the funds necessary to refund the District s outstanding Convention Center Revenue Bonds, 2005, and to pay the administrative costs of such refunding and the costs of issuance and sale of the bonds; fixing certain terms and covenants of the bonds; and providing for other related matters. ADOPTED April 1, 2015 This document prepared by: Foster Pepper PLLC 1111 Third Avenue, Suite 3400 Seattle, Washington (206) TABLE OF CONTENTS* Page Section 1. Definitions... 1 Section 2. Findings and Determinations... 7 Section 3. Authorization of Bonds... 8 Section 4. Description of the Bonds... 8 Section 5. Bond Registrar; Registration and Transfer or Exchange of Bonds... 9 Section 6. Form and Execution of Bonds Section 7. Payment of Bonds Section 8. Redemption Provisions and Purchase of Bonds Section 9. Failure To Pay Bonds Section 10. Pledge of Net Revenue; Subordinate Pledge of Net Auxiliary Facilities Revenue Section 11. Funds and Accounts Section 12. Convention Center Revenue Account Section 13. Debt Service Fund Section 14. Additional Covenants Section 15. Additional Revenue Bonds Section 16. Tax Covenants Section 17. Refunding or Defeasance of the Bonds Section 18. Use of Proceeds; the Refunding Plan Section 19. Supplements and Amendments Section 20. Defaults and Remedies Section 21. Sale and Delivery of the Bonds Section 22. Official Statement; Continuing Disclosure Section 23. General Authorization and Ratification Section 24. Severability Exhibit A Form of Undertaking to Provide Continuing Disclosure *The cover page, table of contents and section headings of this resolution are for convenience of reference only, and shall not be used to resolve any question of interpretation of this resolution i-

66 LYNNWOOD PUBLIC FACILITIES DISTRICT RESOLUTION NO A RESOLUTION of Lynnwood Public Facilities District providing for the issuance, sale and delivery of $ aggregate principal amount of Convention Center revenue refunding bonds to provide the funds necessary to refund the District s outstanding Convention Center Revenue Bonds, 2005, and to pay the administrative costs of such refunding and the costs of issuance and sale of the bonds; fixing certain terms and covenants of the bonds; and providing for other related matters. BE IT RESOLVED BY THE BOARD OF DIRECTORS OF LYNNWOOD PUBLIC FACILITIES DISTRICT, as follows: Section 1. Definitions. As used in this resolution, the following capitalized terms shall have the following meanings: (a) 2005 Bonds means the Convention Center Revenue Bonds, 2005, of the District issued pursuant to Resolution No (b) Acquired Obligations means those United States Treasury Certificates of Indebtedness, Notes and Bonds State and Local Government Series and other direct, noncallable obligations of the United States of America purchased to accomplish the refunding of the Refunded Bonds as authorized by this resolution. (c) Additional Revenue Bonds means any bonds that the District may hereafter issue pursuant to Section 15 of this resolution that are secured by a lien upon the Convention Center Revenue that is equal to the lien upon the Convention Center Revenue in favor of the Bonds created by this resolution (d) a maturity. Authorized Denomination means $5,000 or any integral multiple thereof within (e) Auxiliary Facilities means the land, buildings and other improvements acquired by the District in conjunction with the acquisition of the Convention Center site and held for potential future expansion of the Convention Center and related parking facilities and/or for future construction of convention-related facilities such as hotels and other regional center facilities. The term Auxiliary Facilities does not include those buildings currently located on the land that are known as Suites 102, 112, 118, 124 and 128 or the vacant building in the southwest corner of the land formerly used as the District offices. (f) Auxiliary Facilities Operation and Maintenance Expenses means all reasonable expenses incurred by the District in causing the Auxiliary Facilities to be operated, leased and maintained in good repair, working order and condition, including without limitation: management fees or other payments to third parties payable in respect of the operation of the Auxiliary Facilities; personnel costs; the cost of ordinary maintenance and repair; utilities; supplies; equipment purchase and lease payments; administrative expenses; the costs of advertising, marketing, business promotion and move-in and tenant improvement allowances and incentives; deposits, premiums, assessments or other payments for insurance; and taxes and assessments; all as determined in accordance with generally accepted accounting principles applicable to the District and its operations. The term Auxiliary Facilities Operation and Maintenance Expenses does not include any depreciation of or capital expenditure for the Auxiliary Facilities other than non-discretionary expenditures for renewal, replacement or rehabilitation of Auxiliary Facilities or provision of tenant improvements required for the continued operation and leasing of the Auxiliary Facilities. (g) Auxiliary Facilities Revenue means all earnings, revenue and money, except Sales Tax Revenue, received by the District from or on account of the operation, ownership and/or sale or other disposition of the Auxiliary Facilities. (h) Beneficial Owner means, with respect to a Bond, the owner of any beneficial interest in that Bond. (i) Board means the legislative authority of the District, as duly and regularly constituted from time to time. (j) resolution. Bond means each bond issued pursuant to and for the purposes provided in this (k) Bond Counsel means the firm of Foster Pepper PLLC, its successor, or any other attorney or firm of attorneys selected by the District with a nationally recognized standing as bond counsel in the field of municipal finance. (l) Bond Purchase Contract means an offer to purchase the Bonds, setting forth certain terms and conditions of the issuance, sale and delivery of the Bonds, which offer is accepted by the District pursuant to this resolution. (m) Bond Register means the books or records maintained by the Bond Registrar for the purpose of identifying ownership of each Bond. (n) Bond Registrar means the Fiscal Agent, or any successor bond registrar selected by the District. (o) Bondowners Trustee shall have the meaning given such term in Section 20 of this resolution. (p) Chair means the Chair of the Board, or any presiding officer of the Board, or his/her successor in functions, if any. (q) City means the City of Lynnwood, Washington, a municipal corporation of the State of Washington

67 (r) City-District Agreement No. 1 means the Interlocal Agreement Regarding the Financing, Development and Operation of a Regional Center Facility between the City and the District dated July 30, 2001, as the same may be amended from time to time (s) City-District Agreement No. 2 means the Interlocal Agreement Regarding Transfer and Application of Snohomish County Hotel-Motel Tax Proceeds to Fund Multijurisdictional Convention Center Facility between the City and the District dated April 15, 2003, as the same may be amended from time to time. (t) City-District Agreement No. 3 means the Supplemental Agreement to Extend Hotel-Motel Tax (City-District Agreement #3) between the City and the District dated September 14, 2004, as the same may be amended from time to time. (u) City-District Agreement No. 4 means the Supplemental Interlocal Agreement Regarding Financing for Multijurisdictional Convention Center Facility (City-District Agreement #4) between the City and the District dated September 14, 2004, as the same may be amended from time to time, relating to the obligation of the City to make loans to the District if and as necessary to pay debt service on the Bonds. (v) Code means the United States Internal Revenue Code of 1986, as amended, and applicable rules and regulations promulgated thereunder. (w) Contingency Reserve Account means the account of that name created by Resolution No of the District as required by the Contingent Loan Agreement. (x) Contingent Loan Agreement means the City-District Agreement No. 4. (y) Convention Center means the land, real property improvements, buildings, facilities, equipment, support facilities and related parking facilities comprising a conference and convention center of approximately 34,500 square feet, as such facilities may be expanded from time to time, located in the City and constituting a regional center within the meaning of chapter RCW. (z) Convention Center Fund means the fund of that name created by Resolution No of the District and used by the District to account financially for its properties, assets, transactions, revenues and expenditures as required by applicable law and generally accepted accounting principles applicable to governmental entities. (aa) Convention Center Revenue means the Intergovernmental Project Payments and the Operating Revenue. (bb) Convention Center Revenue Account means the account of that name created within the Convention Center Fund pursuant to Resolution No of the District. (cc) Washington. County means Snohomish County, a Class A charter county of the State of (dd) County PFD means the Snohomish County Public Facilities District, a municipal corporation established by amended Ordinance No. 041, adopted by the County Council on June 27, 2001, pursuant to the authority of chapter RCW. (ee) Debt Service Fund means the District s Revenue Bond Debt Service Fund created pursuant to Resolution No of the District. (ff) Debt Service Payment Date means any date on which the principal of and/or interest on the Bonds is due and payable as provided in Section 4 of this resolution. (gg) Default shall have the meaning given such term in Section 20 of this resolution. (hh) District means the Lynnwood Public Facilities District, a municipal corporation duly organized and existing under the laws of the State. (ii) nominee. (jj) DTC means The Depository Trust Company, New York, New York, or its Executive Director means the Executive Director of the District. (kk) Fiscal Agent means the fiscal agent of the State, as the same may be designated by the State from time to time. (ll) Four Party Agreement means the First Amended and Restated Interlocal Agreement for Development of the Lynnwood Convention Center among the City, the County PFD, the County and the District dated December 20, 2002, as the same may be amended from time to time. (mm) Government Obligations has the meaning given in RCW , as now in effect or as may hereafter be amended. (nn) Intergovernmental Contracts means, collectively, (i) the Four Party Agreement; (ii) the Two Party Agreement; (iii) the City-District Agreement No. 1; (iv) the City-District Agreement No. 2; and (v) the City-District Agreement No. 3. (oo) Intergovernmental Project Payments means those revenues received by the District derived from payments made by the City, the County and the County PFD to the District pursuant to the Intergovernmental Contracts, including but not limited to payments derived from excise taxes imposed by the City and the County pursuant to chapter RCW on charges made for lodging within the City and the County, respectively, and from the sales and use tax imposed by the County PFD pursuant to RCW (pp) Issue Date means the date of initial issuance and delivery of the Bonds to the Purchaser in exchange for the purchase price of the Bonds. (qq) Letter of Representations means the Blanket Issuer Letter of Representations between the District and DTC, dated December 2, 2004, as it may be amended from time to time,

68 and any successor or substitute letter relating to the operational procedures of the Securities Depository. (rr) MSRB means the Municipal Securities Rulemaking Board. (ss) Net Auxiliary Facilities Revenue means Auxiliary Facilities Revenue less Auxiliary Facilities Operation and Maintenance Expenses. (tt) Net Revenue means the Convention Center Revenue less Operation and Maintenance Expenses. (uu) Official Statement means an offering document, disclosure document, private placement memorandum or substantially similar disclosure document provided to purchasers and potential purchasers in connection with the initial offering of the Bonds in conformance with Rule 15c2-12 or other applicable regulations of the SEC. (vv) Operating Revenue means all earnings, revenue and money, except Intergovernmental Project Payments, received by the District from or on account of the operation and/or ownership of the Convention Center, including any amount transferred from the Contingency Reserve Account to the Convention Center Revenue Account and the income from investments of money in the Convention Center Revenue Account and the Debt Service Fund or from any other investment thereof (except the income from investments irrevocably pledged to the payment of any Bonds or Additional Revenue Bonds pursuant to a refunding or defeasance plan). (ww) Operation and Maintenance Expenses means all reasonable expenses incurred by the District in causing the Convention Center to be operated and maintained in good repair, working order and condition, including without limitation: management fees or other payments to third parties payable in respect of the operation of the Convention Center; personnel costs; the cost of ordinary maintenance and repair; utilities; supplies; food and beverage service and supply costs; equipment purchase and lease payments; administrative expenses; the costs of advertising, marketing and business promotion; deposits, premiums, assessments or other payments for insurance; taxes and assessments; all as determined in accordance with generally accepted accounting principles applicable to the District and its operations. The term Operation and Maintenance Expenses also includes any transfer from the Convention Center Revenue Account to the Contingency Reserve Account. The term Operation and Maintenance Expenses does not include any depreciation of or capital expenditure for the Convention Center. (xx) Owner. (yy) Owner means, without distinction, the Registered Owner and the Beneficial Purchaser means Piper Jaffray & Co. (zz) Rating Agency means any nationally recognized rating agency then maintaining a rating on the Bonds at the request of the District. (aaa) RCW means the Revised Code of Washington. (bbb) Record Date means the Bond Registrar s close of business on the 15th day of the month preceding an interest payment date. With respect to redemption of a Bond prior to its maturity, the Record Date shall mean the Bond Registrar s close of business on the date on which the Bond Registrar sends the notice of redemption in accordance with Section 8. (ccc) Redemption Date means [ ], (ddd) Refunded Bonds means all of the outstanding 2005 Bonds maturing in the years 2015 through 2024, 2028 and 2034, and bearing interest at various rates from 4.00% to 5.00%. (eee) Refunding Plan means: (a) the placement of sufficient proceeds of the Bonds which, with other money of the District, if necessary, will acquire the Acquired Obligations to be deposited, with cash, if necessary, with the Refunding Trustee; (b) the call, payment, and redemption on the Redemption Date of all of the outstanding Refunded Bonds at a price of par plus accrued interest; and (c) the payment of the costs of issuing the Bonds and the costs of carrying out the foregoing elements of the Refunding Plan. (fff) Refunding Trust Agreement means a Refunding Trust Agreement between the District and the Refunding Trustee substantially in the form which is on file with the Executive Director and by this reference incorporated herein. (ggg) Refunding Trustee means U.S. Bank National Association of Seattle, Washington, serving as trustee or escrow agent or any successor trustee or escrow agent. (hhh) Registered Owner means, with respect to a Bond, the person in whose name that Bond is registered on the Bond Register. For so long as the District utilizes the book-entry only system for the Bonds under the Letter of Representations, Registered Owner shall mean the Securities Depository. (iii) Required Debt Service means, for any calendar year, with respect to the Bonds and each series of Additional Revenue Bonds, the amount required to make scheduled payments of principal of (including mandatory redemption payments with respect to Term Bonds) and interest on the Bonds and such Additional Revenue Bonds in that calendar year. (jjj) Rule 15c2-12 means Rule 15c2-12 promulgated by the SEC under the Securities Exchange Act of 1934, as amended. (kkk) Sales Tax Bond Resolution means the District s Resolution No (lll) Sales Tax Bonds means the District s Convention Center Sales Tax Refunding Bonds, 2015, and any Additional Sales Tax Bonds issued pursuant to the Sales Tax Bond Resolution

69 (mmm) Sales Tax Revenue means the money received by the District from the Washington State Department of Revenue on account of the sales and use tax imposed by and collected for the District pursuant to RCW , as the same may be amended from time to time, or any successor statute, and any amount transferred from the Contingency Reserve Account to the Sales Tax Account. (nnn) SEC means the United States Securities and Exchange Commission. (ooo) Secretary means the Secretary of the Board, or other officer of the Board who is the custodian of the records of the proceedings of the Board, or his/her successor in functions, if any. (ppp) Securities Depository means DTC, any successor thereto, any substitute securities depository selected by the District that is qualified under applicable laws and regulations to provide the services proposed to be provided by it, or the nominee of any of the foregoing. (qqq) State means the State of Washington. (rrr) Term Bond means those Bonds designated as Term Bonds and subject to mandatory redemption in the years and amounts set forth in Section 8(b) and all Additional Revenue Bonds designated as such in the applicable authorizing resolution. (sss) if any. Treasurer means the Treasurer of the District or his/her successor in functions, (ttt) Two Party Agreement means the Interlocal Agreement to Fund Multijurisdictional Convention Center Facility between the City and the County dated March 26, 2003, as the same may be amended from time to time. (uuu) Undertaking means the undertaking to provide continuing disclosure entered into pursuant to Section 22(c) of this resolution. Section 2. Findings and Determinations. The District takes note of the following facts and makes the following findings and determinations: (d) The District has entered into the Intergovernmental Contracts pursuant to which the City, the County and the County PFD have agreed, among other things, to make payments to the District to support the development, maintenance and operation of the Convention Center. (e) Pursuant to Resolution No , the District issued the 2005 Bonds for the purpose of financing a portion of the cost of acquiring, constructing and equipping the Convention Center, and by that resolution reserved the right to redeem the 2005 Bonds prior to their maturity at any time on or after December 1, 2014, at a price of par plus accrued interest to the date fixed for redemption. (f) For the purpose of providing the funds necessary to pay part of the cost of carrying out the current refunding of the Refunded Bonds in accordance with the Refunding Plan and to pay the costs of issuance and selling the Bonds, the Board finds that it is in the best interests of the District and its taxpayers to issue and sell the Bonds to the Purchaser, pursuant to the terms set forth in the Bond Purchase Contract consistent with this resolution. (g) Upon the issuance of the Bonds and carrying out the Refunding Plan, the 2005 Bonds will be fully defeased and no additional revenue bonds will be issued pursuant to the terms of Resolution No of the District. Section 3. Authorization of Bonds. For the purpose of providing funds with which to carry out the Refunding Plan, including paying the costs of issuance of the Bonds, the District is authorized to issue and sell the Bonds, subject to the terms and conditions described in this resolution. Section 4. Description of the Bonds. The Bonds shall be called the Lynnwood Public Facilities District Convention Center Revenue Refunding Bonds, 2015 and shall be issued in the aggregate principal amount of $. The Bonds shall be dated the Issue Date; shall be issued in Authorized Denominations; shall be numbered separately in the manner and shall bear any additional designation as the Bond Registrar deems necessary for purposes of identification; shall bear interest (computed on the basis of a 360-day year of twelve 30-day months) payable semiannually on each June 1 and December 1, commencing June 1, 2015, to the maturity or earlier redemption of the Bonds; and shall mature on December 1 in the years and amounts and bear interest at the rates per annum as follows: State. (a) The District is a duly organized and legally existing municipal corporation of the (b) The District owns, operates and maintains the Convention Center, constituting a regional center within the meaning of chapter RCW. (c) The District anticipates using the Auxiliary Facilities Revenue for the purpose of supporting Convention Center operations. Prior to any disposition of Auxiliary Facilities, it is in the best interest of the District and its taxpayers to maintain the Auxiliary Facilities in good repair, working order and condition

70 Maturity Years Amounts Interest Rates exchange any Bond or transfer registered ownership during the period between the applicable Record Date and the next upcoming interest payment or redemption date. (d) Securities Depository; Book-Entry Only Form. DTC is appointed as initial Securities Depository. Each Bond initially shall be registered in the name of Cede & Co., as the nominee of DTC. Each Bond registered in the name of the Securities Depository shall be held fully immobilized in book-entry only form by the Securities Depository in accordance with the provisions of the Letter of Representations. Registered ownership of any Bond registered in the name of the Securities Depository may not be transferred except: (i) to any successor Securities Depository; (ii) to any substitute Securities Depository appointed by the District; or (iii) to any person if the Bond is no longer to be held in book-entry only form. Upon the resignation of the Securities Depository, or upon a termination of the services of the Securities Depository by the District, the District may appoint a substitute Securities Depository. If (i) the Securities Depository resigns and the District does not appoint a substitute Securities Depository, or (ii) the District terminates the services of the Securities Depository, the Bonds no longer shall be held in book-entry only form and the registered ownership of each Bond may be transferred to any person as provided in this resolution. Section 5. Bond Registrar; Registration and Transfer or Exchange of Bonds. (a) Registration of Bonds; Bond Register. Each Bond shall be issued only in registered form as to both principal and interest and the ownership of each Bond shall be recorded on the Bond Register. The Bond Register shall contain the name and mailing address of each Registered Owner and the principal amount and number of each Bond held by each Registered Owner. (b) Bond Registrar; Duties. The Fiscal Agent is appointed as initial Bond Registrar. The Bond Registrar shall keep, or cause to be kept, sufficient books for the registration and transfer of the Bonds, which shall be open to inspection by the District at all times. The Bond Registrar is authorized, on behalf of the District, to authenticate and deliver Bonds transferred or exchanged in accordance with the provisions of the Bonds and this resolution, to serve as the District s paying agent for the Bonds and to carry out all of the Bond Registrar s powers and duties under this resolution. The Bond Registrar shall be responsible for its representations contained in the Bond Registrar s Certificate of Authentication on each Bond. The Bond Registrar may become an Owner with the same rights it would have if it were not the Bond Registrar and, to the extent permitted by law, may act as depository for and permit any of its officers or directors to act as members of, or in any other capacity with respect to, any committee formed to protect the rights of Owners. (c) Transfer or Exchange. A Bond surrendered to the Bond Registrar may be exchanged for a Bond or Bonds in any Authorized Denomination of an equal aggregate principal amount and of the same interest rate and maturity. A Bond may be transferred only if endorsed in the manner provided thereon and surrendered to the Bond Registrar. Any exchange or transfer shall be without cost to the Owner or transferee. The Bond Registrar shall not be obligated to Neither the District nor the Bond Registrar shall have any obligation to participants of any Securities Depository or the persons for whom they act as nominees regarding accuracy of any records maintained by the Securities Depository or its participants. Neither the District nor the Bond Registrar shall be responsible for any notice that is permitted or required to be given to a Registered Owner except such notice as is required to be given by the Bond Registrar to the Securities Depository. Section 6. Form and Execution of Bonds. (a) Form of Bonds; Signatures and Seal. Each Bond shall be prepared in a form consistent with the provisions of this resolution and State law. Each Bond shall be signed by the Chair and Secretary, either or both of whose signatures may be manual or in facsimile. The Bonds need not be sealed with the corporate seal of the District. If any officer whose manual or facsimile signature appears on a Bond ceases to be an officer of the District authorized to sign bonds before the Bond bearing his or her manual or facsimile signature is authenticated by the Bond Registrar, or issued or delivered by the District, that Bond nevertheless may be authenticated, issued and delivered and, when authenticated, issued and delivered, shall be as binding on the District as though that person had continued to be an officer of the District authorized to sign bonds. Any Bond also may be signed on behalf of the District by any person who, on the actual date of signing of the Bond, is an officer of the District authorized to sign bonds, although he or she did not hold the required office on its Issue Date. (b) Authentication. Only a Bond bearing a Certificate of Authentication in substantially the following form, manually signed by the Bond Registrar, shall be valid or obligatory for any purpose or entitled to the benefits of this resolution: Certificate of Authentication. This Bond is one of the fully registered Lynnwood Public Facilities District Convention Center Revenue Refunding Bonds, 2015, described in the Bond Resolution. The authorized signing of a Certificate of Authentication shall be conclusive evidence that the Bond

71 so authenticated has been duly executed, authenticated and delivered and is entitled to the benefits of this resolution. Section 7. Payment of Bonds. Principal of and interest on each Bond shall be payable in lawful money of the United States of America. Principal of and interest on each Bond registered in the name of the Securities Depository is payable in the manner set forth in the Letter of Representations. Interest on each Bond not registered in the name of the Securities Depository is payable by electronic transfer on the interest payment date, or by check or draft of the Bond Registrar mailed on the interest payment date to the Registered Owner at the address appearing on the Bond Register on the Record Date. However, the District is not required to make electronic transfers except pursuant to a request by a Registered Owner in writing received on or prior to the Record Date and at the sole expense of the Registered Owner. Principal of each Bond not registered in the name of the Securities Depository is payable upon presentation and surrender of the Bond by the Registered Owner to the Bond Registrar. The Bonds are not subject to acceleration under any circumstances. Section 8. Redemption Provisions and Purchase of Bonds. (a) Optional Redemption. The Bonds maturing on December 1 in the years 20[ ] through 2024, inclusive, are not subject to redemption at the option of the District prior to maturity. The Bonds maturing on or after December 1, 2025, are subject to redemption at the option of the District in whole or in part on any date on or after December 1, 2024, at a price equal to the stated principal amount to be redeemed plus accrued interest, if any, to the date fixed for redemption. (b) Mandatory Redemption. The Bonds due on December 1 in the years 20[ ] and 20[ ] are Term Bonds and will be called for redemption at a price equal to the stated principal amount to be redeemed, plus accrued interest, on December 1 in the years and amounts as follows: Term Bonds Maturing in 20[ ] Term Bonds Maturing in 20[ ] Mandatory Redemption Years * *final maturity Mandatory Redemption Amounts Mandatory Redemption Years * Mandatory Redemption Amounts If a Term Bond is redeemed under the optional redemption provisions, defeased or purchased by the District and surrendered for cancellation, the principal amount of the Term Bond so redeemed, defeased or purchased (irrespective of its actual redemption or purchase price) shall be credited against one or more scheduled mandatory redemption amounts for that Term Bond. The Executive Director shall determine the manner in which the credit is to be allocated and shall notify the Bond Registrar in writing of that allocation prior to the earliest mandatory redemption date for that Term Bond for which notice of redemption has not already been given. (c) Selection of Bonds for Redemption; Partial Redemption. If fewer than all of the outstanding Bonds are to be redeemed at the option of the District, the District shall select the maturities to be redeemed. If fewer than all of the outstanding Bonds of a maturity are to be redeemed, the Securities Depository shall select Bonds registered in the name of the Securities Depository to be redeemed in accordance with the Letter of Representations, and the Bond Registrar shall select all other Bonds to be redeemed randomly in such manner as the Bond Registrar shall determine. All or a portion of the principal amount of any Bond that is to be redeemed may be redeemed in any Authorized Denomination. If less than all of the outstanding principal amount of any Bond is redeemed, upon surrender of that Bond to the Bond Registrar, there shall be issued to the Registered Owner, without charge, a new Bond (or Bonds, at the option of the Registered Owner) of the same maturity and interest rate in any Authorized Denomination in the aggregate principal amount to remain outstanding. (d) Notice of Redemption. Notice of redemption of each Bond registered in the name of the Securities Depository shall be given in accordance with the Letter of Representations. Notice of redemption of each other Bond, unless waived by the Registered Owner, shall be given by the Bond Registrar not less than 20 nor more than 60 days prior to the date fixed for redemption by first-class mail, postage prepaid, to the Registered Owner at the address appearing on the Bond Register on the Record Date. The requirements of the preceding sentence shall be satisfied when notice has been mailed as so provided, whether or not it is actually received by an Owner. In addition, the redemption notice shall be mailed or sent electronically within the same period to the MSRB (if required under the Undertaking), to each Rating Agency, and to such other persons and with such additional information as the Treasurer shall determine, but these additional mailings shall not be a condition precedent to the redemption of any Bond. (e) Rescission of Optional Redemption Notice. In the case of an optional redemption, the notice of redemption may state that the District retains the right to rescind the redemption notice and the redemption by giving a notice of rescission to the affected Registered Owners at any time on or prior to the date fixed for redemption. Any notice of optional redemption that is so rescinded shall be of no effect, and each Bond for which a notice of redemption has been rescinded shall remain outstanding. (f) Effect of Redemption. Interest on each Bond called for redemption shall cease to accrue on the date fixed for redemption, unless either the notice of optional redemption is rescinded as set forth above, or money sufficient to effect such redemption is not on deposit in the Debt Service Fund or in a trust account established to refund or defease the Bond. (g) Purchase of Bonds. The District reserves the right to purchase any or all of the Bonds offered to the District at any time at any price acceptable to the District plus accrued interest to the date of purchase. Section 9. Failure To Pay Bonds. If the principal of any Bond is not paid when the Bond is properly presented at its maturity or date fixed for redemption, the District shall be

72 obligated to pay interest on that Bond at the same rate provided in the Bond from and after its maturity or date fixed for redemption until that Bond, both principal and interest, is paid in full or until sufficient money for its payment in full is on deposit in the Debt Service Fund, or in a trust account established to refund or defease the Bond, and the Bond has been called for payment by giving notice of that call to the Registered Owner. Section 10. Pledge of Net Revenue; Subordinate Pledge of Net Auxiliary Facilities Revenue. The Net Revenue is hereby pledged, for the equal and ratable benefit of the Owners from time to time of the Bonds, as security for payment of the principal of and premium, if any, and interest on the Bonds, subject to the provisions of this resolution permitting the application of amounts held hereunder to the purposes set forth herein. Such pledge is hereby declared to be a prior lien and charge on the Net Revenue superior to all other liens and charges of any kind or nature whatsoever, except that, subject to the provisions of Section 15 hereof, liens on the Net Revenue may be created in favor of any Additional Revenue Bonds, in each case on a parity with the pledge thereof made under this Section 10 in favor of the Bonds. The Net Auxiliary Facilities Revenue is also hereby pledged, for the equal and ratable benefit of the Owners from time to time of the Bonds, as security for payment of the principal of and premium, if any, and interest on the Bonds, subject and subordinate to the pledge and lien upon Net Auxiliary Facilities Revenue in favor of the District s Sales Tax Bonds. Section 11. Funds and Accounts. The following funds and accounts previously have been established and are maintained in the office of the Treasurer separate and distinct from all other funds and accounts of the District: (a) the Convention Center Fund, including the Convention Center Revenue Account and the Contingency Reserve Account therein, and (b) the Revenue Bond Debt Service Fund (the Debt Service Fund ), which funds are special funds within the meaning of RCW (1). Section 12. Convention Center Revenue Account. For so long as the Bonds and any Additional Revenue Bonds remain outstanding, and unless otherwise specifically provided herein, all Convention Center Revenue shall be transferred to and deposited into the Convention Center Revenue Account as received by the District. Convention Center Revenue deposited therein shall be disbursed in the following order of priority: First, Second, Third, to pay Operation and Maintenance Expenses; provided, however, that Operation and Maintenance Expenses shall be paid first from any Sales Tax Revenue available for that purpose under the Sales Tax Bond Resolution, and next from Convention Center Revenue; to make the required deposits into the Debt Service Fund for the payment of upcoming interest on the Bonds and any Additional Revenue Bonds (as provided in Section 13 of this resolution); to make the required deposits into the Debt Service Fund for the payment of principal of the Bonds and any Additional Revenue Bonds maturing or subject to mandatory redemption installments prior to scheduled maturity (as provided in Section 13 of this resolution); Fourth, Fifth, Sixth, Seventh, to meet the principal and interest requirements of the District s Sales Tax Bonds for which the District s Sales Tax Revenue and Net Auxiliary Facilities Revenue (as defined in the Sales Tax Bond Resolution) are insufficient; to reimburse any bond insurer for any payments made under a bond or reserve insurance policy and other amounts due and owing to any bond insurer in respect of the Bonds and any Additional Revenue Bonds; to reimburse the City for any payments made by the City under the Contingent Loan Agreement in respect of the Bonds and any Additional Revenue Bonds; and to make any legal expenditure for District purposes. The District hereby covenants that it will exercise due regard for the anticipated financial requirements to be satisfied as priorities First through Fifth of this section in each calendar year prior to authorizing or making any disbursement of money in the Convention Center Revenue Account for the purpose identified as priority Sixth. Money in the Convention Center Revenue Account shall be invested by the Treasurer, but only upon the direction of the District, in any legal investment for District funds, and interest earnings shall accrue to and be deposited in the Convention Center Revenue Account. Section 13. Debt Service Fund. Accrued interest on the Bonds and any Additional Revenue Bonds, if any, received from the initial sale and delivery of the Bonds or Additional Revenue Bonds, as applicable, shall be paid into the Debt Service Fund. For so long as the Bonds remain outstanding, the District shall deposit (and the Treasurer is hereby directed to deposit), from the Convention Center Revenue Account, on or before each Debt Service Payment Date amounts that are sufficient, together with other money then on deposit in the Debt Service Fund, to pay the principal of (if any) and the interest on the Bonds that is scheduled to come due on such Debt Service Payment Date. The Board finds and determines that upon the issuance of the Bonds: the Convention Center Revenue to be deposited into the Debt Service Fund on each Debt Service Payment Date will be a fixed amount; that such fixed amount shall be a lien and charge against these Convention Center Revenue, subject only to Operation and Maintenance Expenses; the Board has considered and has had due regard for the cost of operating and maintaining the Convention Center; and the amounts to be deposited into the Debt Service Fund pursuant to this section are not a greater amount of Convention Center Revenue than, in the Board s judgment, will be available over and above the Operation and Maintenance Expenses. The District may, at the Board s sole discretion, fund any deficiency in the Debt Service Fund with available amounts in the Contingency Reserve Account and from other available District sources; however, (i) there is no assurance that money will be available in the Contingency Reserve Account or from other available District sources to fund deposits into the Debt Service Fund if the District encounters financial difficulties, (ii) the District does not expect that money in the Contingency Reserve Account or other available District sources will be used

73 to pay debt service on the Bonds, (iii) amounts in the Contingency Reserve Account and from other available District sources are not pledged to secure the Bonds, and the Owners of the Bonds have no lien or charge on money in such funds, and (iv) the District cannot be compelled, in an action for mandamus or otherwise, to transfer money to the Debt Service Fund from the Contingency Reserve Account or other available District sources. Section 14. Additional Covenants. (a) Rates and Charges. The District shall fix, maintain and collect rates and charges for the use of the services and facilities and all commodities sold, furnished or supplied by the Convention Center, which shall be fair and nondiscriminatory, and shall adjust such rates and charges from time to time so that: (1) rates and charges will be at optimal levels, taking into account the potential effects of such adjustments upon Intergovernmental Project Payments, to produce total Convention Center Revenue that, together with any other District funds available and allocated to be used for such purposes, will at all times be sufficient to pay the Operation and Maintenance Expenses, to make any payments required to be made on account of the Bonds and any Additional Revenue Bonds, as and when the same shall become due and payable, to make all other payments which the District is obligated to make pursuant to this resolution, to pay all taxes, assessments or other governmental charges lawfully imposed on the Convention Center or the Convention Center Revenue, and to pay any and all other amounts that the District may now or hereafter become obligated to pay from the Convention Center Revenue by law or contract; and (2) the Net Revenue, together with any other District funds available and allocated to be used for such purpose, for each calendar year will equal at least 1.00 times the Required Debt Service for such calendar year, or, if the District shall have issued Additional Revenue Bonds pursuant to the provisions of Section 15(c)(2), will equal at least 125% of Required Debt Service for such calendar year. (b) Reduction of Operation and Maintenance Expenses. The District acknowledges that its ability to generate Operating Revenue may be limited, that the amount of Intergovernmental Project Payments are fixed, and that its ability to pay the principal of and interest on the Bonds may be adversely affected by increases in Operation and Maintenance Expenses. Accordingly, the District shall use its best efforts to reduce Operation and Maintenance Expenses when necessary to comply with the covenant set forth in paragraph (a)(2) of this section. Such efforts shall include, if necessary, reducing the level of services or operations of the Convention Center, or discontinuing the operation of the Convention Center temporarily or permanently. (c) Liens and Encumbrances. The District will not at any time create or permit to accrue or to exist any lien or other encumbrance or indebtedness upon the Net Revenue, or any part thereof, prior or superior to the lien thereon for the payment of the Bonds and any Additional Revenue Bonds, and will pay and discharge, or cause to be paid and discharged, any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the Net Revenue, or any part thereof, prior to or superior to the lien of the Bonds and any Additional Revenue Bonds, or which might impair the security of the Bonds and any Additional Revenue Bonds. (d) Authority Regarding the Convention Center. The District has, and will have, as long as any Bonds or Additional Revenue Bonds remain outstanding, good right and lawful authority to own, maintain, operate, improve and reconstruct the Convention Center and to provide for the maintenance, operation, improvement and reconstruction of the Convention Center. The District shall not release or modify the obligations of any user of the Convention Center that would in any way limit any such user s obligation to make payment of such rents, rates, fees or other charges imposed by the District for such use of the Convention Center, unless such action is required by paragraph (b) of this section. The District shall take all reasonable measures permitted by law to enforce payment to it of all Convention Center Revenue, and shall at all times, to the extent permitted by law, defend, preserve and protect the rights, benefits and privileges of the District and of the Registered Owners under or with respect to this resolution. (e) Enforcement of Obligations. The District hereby covenants and agrees that it will perform its respective obligations and will enforce performance by the other parties thereto under each of the Intergovernmental Contracts, and that it will not amend any Intergovernmental Contract in a manner that adversely affects, in any material respect, the interests of the Owners of the Bonds. (f) Operation of Convention Center. The District shall at all times operate the Convention Center, or cause the Convention Center to be operated, properly as a regional center (as that term is defined in chapter RCW) and as a tourism-related facility (as that term is defined in chapter RCW) and in a sound and economical manner and shall maintain, preserve and keep the same, or cause the same to be maintained, preserved and kept, with the appurtenances and every part and parcel thereof, in good repair, working order and condition, and shall from time to time make, or cause to be made, all necessary and proper repairs, replacements and renewals so that at all times the operation thereof may be properly and advantageously conducted. Notwithstanding the foregoing, the District may reduce services or operations of the Convention Center, or discontinue the operation of the Convention Center temporarily or permanently, if such action is required by paragraph (b) of this section. (g) Insurance. The District will keep the Convention Center and the Auxiliary Facilities insured (or cause the Convention Center and the Auxiliary Facilities to be insured), and will carry (or cause to be carried) such other insurance, with responsible insurers, with policies payable to the District, against risks, accidents or casualties, at least to the extent that insurance is usually carried by private corporations operating like properties, or will implement a selfinsurance program with reserves adequate, in the judgment of the Board, to protect the District against loss. In the event of any loss or damage, the District will promptly repair or replace (or cause the repair or replacement of) the damaged portion of the insured property and apply the proceeds of any insurance policy for that purpose. (h) Sale, Transfer or Disposition of the Convention Center. The District will sell, transfer or otherwise dispose of (each such sale, transfer or other disposition a disposition ) any of the real or personal properties, facilities or other part of the Convention Center only if the disposition is approved by resolution of the Board, the conditions of paragraph (1) are satisfied,

74 if applicable, and the disposition is consistent with one or more of the subparagraphs of paragraph (2). (1) The District will not dispose of any of the real or personal properties, facilities or other part of the Convention Center unless: (A) the disposition (other than disposition to the City) is carried out in a bona fide, arm s-length transaction; and (B) the District receives from the purchaser or transferee consideration equal to the fair market value of the portion of the Convention Center sold or transferred, for which purpose fair market value means the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the willing buyer and willing seller each acting prudently and knowledgeably. (2) The District in its discretion may carry out a disposition that is consistent with one or more of the following: (A) the facilities or property to be disposed of are not material to the operation of the Convention Center, or shall have become unserviceable, inadequate, obsolete or unfit to be used in the operation of the Convention Center or are no longer necessary, material or useful to the operation of the Convention Center; or (B) the Operating Revenue received by the District from the operation of those facilities or property to be disposed of during the 12 full calendar months before the disposition was less than 10% of total Operating Revenue received by the District during that same period; or (C) the District receives a report from an independent, professional consultant or consulting firm having at least five years of experience in evaluating the financial operations and performance of governmentally-owned, revenue-producing enterprises to the effect that, in his, her, or its professional opinion, upon the disposition of the portion of the Convention Center to be disposed of and the use of proceeds, if any, of the disposition as proposed by the District, the Convention Center will retain its operational integrity and the District will be in compliance with its covenants in Section 14(a) of this resolution during the five fiscal years following the fiscal year in which the disposition is to occur. (3) The proceeds, if any, of any disposition, under this Section 14(h) shall be used (A) to promptly redeem, or irrevocably set aside for the redemption of, the District s outstanding Convention Center Revenue Bonds, and/or (B) to provide for all or part of the cost of capital improvements and/or additions to or expansions of the Convention Center and/or for other regional center or tourism-related facilities authorized under chapters and RCW. (i) Sale, Transfer, Disposition or Demolition of Auxiliary Facilities. The District will sell, transfer or otherwise dispose of (each such sale, transfer or other disposition a disposition ) any of the real or personal properties, facilities or other part of the Auxiliary Facilities only if such disposition is approved by resolution of the Board, the conditions of paragraph (1) are satisfied, if applicable, and the disposition is consistent with one or more of the subparagraphs of paragraph (2). The District will demolish any of the real or personal properties, facilities or other part of the Auxiliary Facilities only if such demolition is approved by resolution of the Board and the demolition is consistent with one or more of the subparagraphs of paragraph (2). (1) The District will not dispose of any of the real or personal properties, facilities or other part of the Auxiliary Facilities unless: (A) transaction; and the disposition is carried out in a bona fide, arm s-length (B) the District receives from the purchaser or transferee consideration equal to the fair market value of the portion of the Auxiliary Facilities sold or transferred, for which purpose fair market value means the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the willing buyer and willing seller each acting prudently and knowledgeably; (2) The District in its discretion may carry out a disposition or demolition of Auxiliary Facilities that is consistent with one or more of the following: (A) the facilities or property to be disposed of or demolished are not material to the operation of the Auxiliary Facilities, or shall have become unserviceable, inadequate, obsolete or unfit to be used in the operation of the Auxiliary Facilities or are no longer necessary, material or useful to the operation of the Auxiliary Facilities; or (B) the Auxiliary Facilities Revenue received by the District from the operation of those facilities or property to be disposed of or demolished during the 12 full calendar months before the disposition or demolition was less than 10% of total Auxiliary Facilities Revenue received by the District during that same period; or (C) the District receives a report from an independent, professional consultant or consulting firm having at least five years of experience in evaluating the financial operations and performance of governmentally-owned, revenue-producing enterprises to the effect that, in his, her, or its professional opinion, upon the disposition or demolition of the portion of the Auxiliary Facilities to be disposed of or demolished and the use of proceeds, if any, of the disposition or demolition proposed by the District, the District will be in compliance with its covenants of Section 14(a) of this resolution during the five fiscal years following the fiscal year in which the transfer is to occur. (3) The proceeds, if any, of any disposition or demolition under this Section 14(i) shall be used (A) to promptly redeem, or irrevocably set aside for the redemption of, first, Sales Tax Bonds, and, second, Convention Center Revenue Bonds, and/or (B) to make capital improvements to the remaining Auxiliary Facilities that the District determines are required to enable it to comply with its covenants in Section 14(e) of the Sales Tax Bond Resolution, and/or (C) to provide for all or part of the cost of capital improvements and/or additions to or expansions of the Convention Center and/or for other regional center or tourismrelated facilities authorized under chapters and RCW

75 Section 15. Additional Revenue Bonds. (a) Conditions upon the Issuance of Additional Revenue Bonds. As long as any Bonds remain outstanding, the District hereby further covenants and agrees that it will not issue any obligations payable from Convention Center Revenue and further that it will not issue any Additional Revenue Bonds except in accordance with the conditions of this section. The District hereby reserves the right to issue additional obligations for any lawful purpose that will be payable from Convention Center Revenue as provided in this section. Except as provided in subsection (b) below, the District shall not issue any series of Additional Revenue Bonds unless: (1) the District shall not have been in Default under this resolution for the immediately preceding 12 calendar months; and (2) there shall have been filed a certificate (prepared as described in subsection (c) below) demonstrating fulfillment of the minimum funding requirements described therein, commencing with the first full calendar year following the date of issuance of the series of Additional Revenue Bonds. (b) No Certificate or Consent Required. The certificate described in the foregoing subsection (a)(2) shall not be required as a condition to the issuance of Additional Revenue Bonds if the Additional Revenue Bonds being issued are for the purpose of refunding outstanding Bonds or Additional Revenue Bonds and the annual debt service requirements for each year in which Bonds and Additional Revenue Bonds are then outstanding are not increased by more than $5,000 in any calendar year as a result of the refunding. (c) Certificate of the District. If required pursuant to the foregoing subsection (a)(2), a certificate may be delivered by the District (executed by the Chair) certifying either: (1) that the City has approved the issuance of the Additional Revenue Bonds and that the Contingent Loan Agreement has been amended as necessary to increase the City s contingent loan commitment thereunder to cover the principal of and interest on the Additional Revenue Bonds, which certification shall include a certified copy of the City s approving ordinance or resolution and a certified copy of the executed amendment of the Contingent Loan Agreement; or (2) that the Net Revenue, together with Net Auxiliary Facilities Revenue available to meet Required Debt Service under the subordinate lien pledge thereof in Section 10 of this resolution, received by the District for any 12 consecutive months out of the 24 full months preceding the issuance of the Additional Revenue Bonds was equal to or greater than 125% of maximum annual Required Debt Service for the Additional Revenue Bonds proposed to be issued and for all previously issued Bonds and Additional Revenue Bonds then outstanding. (d) Refundings to Cure Pending Defaults. Nothing herein contained shall prevent the District from issuing Additional Revenue Bonds to refund maturing Bonds or Additional Revenue Bonds for the payment of which moneys are not otherwise available; provided, such Additional Revenue Bonds shall not be issued more than three months prior to the Debt Service Payment Date on which the payment default is otherwise expected to occur. (e) Subordinate Lien Bonds. Nothing herein contained shall prevent the District from issuing revenue bonds or other obligations that are a charge upon the Convention Center Revenue junior or inferior to the payments required by this resolution to be made out of the Convention Center Revenue into the Debt Service Fund to pay and secure the payment of the Bonds and any Additional Revenue Bonds. Section 16. Tax Covenants. (a) Preservation of Tax Exemption for Interest on Bonds. The District covenants that it will take all actions necessary to prevent interest on the Bonds from being included in gross income for federal income tax purposes, and it will neither take any action nor make or permit any use of proceeds of the Bonds or other funds of the District treated as proceeds of the Bonds that will cause interest on the Bonds to be included in gross income for federal income tax purposes. The District also covenants that it will, to the extent the arbitrage rebate requirements of Section 148 of the Code are applicable to the Bonds, take all actions necessary to comply (or to be treated as having complied) with those requirements in connection with the Bonds. (b) Post-Issuance Compliance. The Executive Director is authorized and directed to adopt and implement the District s written procedures to facilitate compliance by the District with the covenants in this resolution and the applicable requirements of the Code that must be satisfied after the Issue Date to prevent interest on the Bonds from being included in gross income for federal tax purposes. Section 17. Refunding or Defeasance of the Bonds. The District may issue refunding bonds pursuant to State law or use money available from any other lawful source to carry out a refunding or defeasance plan, which may include (a) paying when due the principal of and interest on any or all of the Bonds (the defeased Bonds ); (b) redeeming the defeased Bonds prior to their maturity; and (c) paying the costs of the refunding or defeasance. If the District sets aside in a special trust fund or escrow account irrevocably pledged to that redemption or defeasance (the trust account ), money and/or Government Obligations maturing at a time or times and bearing interest in amounts sufficient to redeem, refund or defease the defeased Bonds in accordance with their terms, then all right and interest of the Owners of the defeased Bonds in the covenants of this resolution and in the funds and accounts obligated to the payment of the defeased Bonds shall cease and become void. Thereafter, the Owners of defeased Bonds shall have the right to receive payment of the principal of and interest on the defeased Bonds solely from the trust account and the defeased Bonds shall be deemed no longer outstanding. In that event, the District may apply money remaining in any fund or account (other than the trust account) established for the payment or redemption of the defeased Bonds to any lawful purpose. Unless otherwise specified by the District in a refunding or defeasance plan, notice of refunding or defeasance shall be give, and selection of Bonds for any partial refunding or defeasance shall be conducted, in the manner prescribed in this resolution for the redemption of Bonds. If the refunding or defeasance plan provides that the defeased Bonds or the refunding bonds to be issued be secured by money and/or Government Obligations pending the prior redemption of the defeased Bonds and if such refunding plan also provides that certain money

76 and/or Government Obligations are pledged irrevocably for the prior redemption of the defeased Bonds included in that refunding plan, then only the debt service on the Bonds which are not defeased Bonds and the refunding bonds, the payment of which is not so secured by the refunding plan, shall be included in the computation of the coverage requirement for the issuance of Additional Revenue Bonds pursuant to Section 15(c)(2). Section 18. Use of Proceeds; the Refunding Plan. (a) Appointment of Refunding Trustee. U.S. Bank National Association of Seattle, Washington, is appointed to serve as Refunding Trustee and to perform the duties of Refunding Trustee under this resolution. (b) Use of Bond Proceeds; Acquisition of Acquired Obligations. On the Issue Date, sufficient proceeds of the sale of the Bonds shall be deposited with the Refunding Trustee and used to discharge the obligations of the District relating to the Refunded Bonds by carrying out the Refunding Plan in accordance with the Refunding Trust Agreement. To the extent practicable, such obligations shall be discharged fully by the Refunding Trustee s simultaneous purchase of the Acquired Obligations, bearing such interest and maturing as to principal and interest in such amounts and at such times so as to provide, together with a beginning cash balance, if necessary, for the payment of the amount required to be paid by the Refunding Plan. The Acquired Obligations are listed and more particularly described in Schedule A attached to the Refunding Trust Agreement. Any Bond proceeds or other money deposited with the Refunding Trustee not needed to carry out the Refunding Plan shall be returned to the District for deposit in the Debt Service Fund to pay interest on the Bonds on the next upcoming interest payment date. (c) Refunding Trust Agreement; Administration of Refunding Plan. The Executive Director is authorized and directed to execute a Refunding Trust Agreement. Prior to executing the Refunding Trust Agreement, the Executive Director is authorized to make such changes therein that do not change the substance and purpose thereof or that assure that the escrow provided therein and the Bonds are in compliance with the requirements of federal law governing the exclusion of interest on the Bonds from gross income for federal income tax purposes. The Refunding Trustee is authorized and directed to purchase the Acquired Obligations and to make the payments required to be made by the Refunding Plan. All Acquired Obligations and the money deposited with the Refunding Trustee and any income therefrom shall be held irrevocably, invested and applied in accordance with the provisions of Resolution No , this resolution, chapter RCW and other applicable State law and the Refunding Trust Agreement. All administrative costs (including without limitation all necessary and proper fees, compensation, and expenses of the Refunding Trustee for the Bonds and all other costs incidental to the setting up of the escrow to accomplish the Refunding Plan) and costs of issuance of the Bonds shall be paid out of the amounts deposited with the Refunding Trustee or other available money of the District, in accordance with the Refunding Trust Agreement. (d) Call for Redemption of the Refunded Bonds. The District calls the Refunded Bonds for redemption on their Redemption Date at par, plus accrued interest. Such call for redemption shall identify the Refunded Bonds, the maturity dates, the Redemption Date and redemption price (expressed as a percentage of par, plus accrued interest), and shall be irrevocable after the Bonds are delivered to the Purchaser. The Executive Director is authorized and directed to give or cause to be given such notices as required, at the times and in the manner required, pursuant to Resolution No , and to take all other actions necessary to effect the redemption of the Refunded Bonds on the Redemption Date. (e) Findings with Respect to Refunding. The Board finds and determines that the issuance and sale of the Bonds at this time will effect a savings to the District and is in the best interest of the District and in the public interest. In making such determination, the Board has given consideration to the fixed maturities of the Bonds and the Refunded Bonds, the costs of issuance of the Bonds and the known earned income from the investment of the proceeds of the Bonds pending redemption of the Refunded Bonds. The Board further finds and determines that the money to be deposited with the Refunding Trustee for the Refunded Bonds in accordance with Section 18(b) of this resolution will provide sufficient funds to discharge and satisfy the obligations of the District under Resolution No Section 19. Supplements and Amendments. (a) Without Consent of Beneficial Owner. The District from time to time and at any time may adopt a resolution or resolutions supplemental hereof, which resolution or resolutions thereafter shall become a part of this resolution, for one or more or all of the following purposes: (1) To add to the covenants and agreements of the District in this resolution contained and other covenants and agreements thereafter to be observed, which shall not adversely affect in any material respect the interests of the Beneficial Owners of the Bonds, or to surrender any rights or power herein reserved to or conferred upon the District. (2) To cure, correct or supplement any ambiguous or defective provision contained in this resolution in regard to matters or questions arising under the resolution as the Board may deem necessary or desirable and not inconsistent with the resolution and which shall not adversely affect the interest of the Beneficial Owner of Bonds in any material respect. Any such supplemental resolution of the Board may be adopted without the consent of the Beneficial Owner of the Bonds at any time outstanding, notwithstanding any of the provisions of this section. (b) With Beneficial Owner s Consent. With the consent of the Beneficial Owners of Bonds, the Board may adopt a resolution or resolutions supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this resolution or of any supplemental resolution; provided, however, that no such supplemental resolution shall extend the fixed maturity of the Bonds, or reduce the rate of interest thereon, or extend the time of payments of interest from their due date, or reduce the amount of the principal thereof, or reduce any premium payable on the redemption thereof without the consent of the Beneficial Owner of each Bond so affected. It shall not be necessary for the consent of the Beneficial Owner under this subsection to approve the particular form of any proposed supplemental resolution, but it shall be sufficient if such consent shall approve the substance thereof

77 (c) Effective Date of Modification. Upon the adoption of any supplemental resolution pursuant to the provisions of this section, this resolution shall be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations of the District under this resolution shall thereafter be determined, exercised and enforced thereunder, subject in all respect to such modification and amendments, and all the terms and conditions of any such supplemental resolution shall be deemed to be part of the terms and conditions of this resolution for any and all purposes. A copy of each supplemental resolution shall be provided to the Beneficial Owners of the Bonds. Section 20. Defaults and Remedies. The District hereby finds and determines that the operation of the Convention Center as a regional center and the deposit and disbursement of Convention Center Revenue are essential to the payment and security of the Bonds and the failure or refusal of the District or any of its officers to perform the covenants and obligations of this resolution may endanger the application of Convention Center Revenue and such other money, funds and securities to the purposes herein set forth. Accordingly, the provisions of this section are specified and adopted for the additional protection of the Beneficial Owners from time to time of the Bonds. Any one or more of the following events shall constitute a Default under this resolution: (a) The District shall fail to make payment of the principal of any Bond or Additional Revenue Bond when the same shall become due and payable whether by maturity or scheduled redemption prior to maturity; (b) The District shall fail to make payments of any installment of interest on any Bond or Additional Revenue Bond when the same shall become due and payable; or (c) The District shall default in the observance or performance of any other covenants, conditions, or agreements on the part of the District contained in this resolution, and such default shall have continued for a period of 90 days; provided, however, that such default shall not constitute a Default unless the Beneficial Owners of at least a majority of the principal amount of Bonds then outstanding have requested a Bondowners Trustee to declare such default as a Default. In such case, so long as such Default shall not have been remedied, a Bondowners Trustee may be appointed for the Bonds by the Beneficial Owners of a majority in principal amount of the Bonds outstanding by an instrument or concurrent instruments in writing signed and acknowledged by such Beneficial Owners or by their attorneys-in-fact duly authorized and delivered to such Trustee, notification thereof being given to the District. Any Bondowners Trustee appointment under the provisions of this section shall be a bank or trust company organized under the laws of any state or a national banking association. The fees and expenses of a Bondowners Trustee shall be borne by the Beneficial Owners and not by the District. The bank or trust company acting as a Bondowners Trustee may be removed at any time, and a successor Bondowners Trustee may be appointed by the Beneficial Owners of a majority in principal amount of the Bonds outstanding, by an instrument or concurrent instruments in writing signed and acknowledged by such Beneficial Owners or by their attorneys-in-fact duly authorized. A separate bondowners trustee may be retained for each subsequent issue of Additional Revenue Bonds; however, the same bank may represent the Beneficial Owners of the Bonds and the owners of Additional Revenue Bonds in the capacity as bondowners trustee. The Bondowners Trustee appointed in the manner herein provided, and each successor thereto, is hereby declared to be a trustee for the Beneficial Owners of all the Bonds for which such appointment is made and is empowered to exercise all the rights and powers herein conferred on the Bondowners Trustee. A Bondowners Trustee may, upon the happening of a Default and during the continuance thereof, take such steps and institute such suits, actions or other proceedings in its own name, or as trustee, all as it may deem appropriate for the protection and enforcement of the rights of Beneficial Owners to collect any amounts due and owing the District, or to obtain other appropriate relief, and may enforce the specific performance of any covenant, agreement or condition contained in this resolution. Nothing contained in this Section shall, in any event or under any circumstances, be deemed to authorize the acceleration of maturity of principal of the Bonds, and the remedy of acceleration is expressly denied to the Beneficial Owners of the Bonds under any circumstances including, without limitation, upon the occurrence and continuance of a Default. Any action, suit or other proceedings instituted by a Bondowners Trustee hereunder shall be brought in its name as trustee for the Beneficial Owners and all such rights of action upon or under any of the Bonds or the provisions of this resolution may be enforced by a Bondowners Trustee without the possession of any of such Bonds, and without the production of the same at any trial or proceedings relating thereto except where otherwise required by law, and the respective Beneficial Owners of such Bonds by taking and holding the same, shall be conclusively deemed irrevocably to appoint a Bondowners Trustee the true and lawful trustee to the respective Beneficial Owners of such Bonds, with authority to institute any such action, suit or proceeding; to receive as trustee and deposit in trust any sums that become distributable on account of such Bonds; to execute any paper or documents for the receipt of such moneys, and to do all acts with respect thereto that the Beneficial Owners himself might have done in person. Nothing herein contained shall be deemed to authorize or empower any Bondowners Trustee to consent to accept or adopt, on behalf of any Beneficial Owner of such Bonds, any plan of reorganization or adjustment affecting such Bonds or any right of any Beneficial Owner thereof, or to authorize or empower the Bondowners Trustee to vote the claims of the Beneficial Owners thereof in any receivership, insolvency, liquidation, bankruptcy, reorganization or other proceeding to which the District shall be a party. No Beneficial Owner of any one or more of the Bonds shall have any right to institute any action, suit or proceedings at law or in equity for the enforcement of the same, unless Default shall have happened and be continuing, and unless no Bondowners Trustee has been appointed for such Bonds as herein provided, but any remedy herein authorized to be exercised by a Bondowners Trustee may be exercised individually by any Beneficial Owner, in his own name and on his own behalf or for the benefit of all Beneficial Owners, in the event no Bondowners Trustee has been appointed, or with the consent of the Bondowners Trustee if such Bondowners Trustee has been appointed; provided however, that nothing in this resolution or in the Bonds shall affect or impair the obligation of the District, which is absolute and unconditional, to pay from Convention Center Revenue the principal of and interest on such

78 Bonds to the respective Beneficial Owners thereof at the respective due dates therein specified, or affect or impair the right of action, which is absolute and unconditional, of such Beneficial Owners to enforce such payments. The remedies herein conferred upon or reserved to the Beneficial Owners of the Bonds and to a Bondowners Trustee are not intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. The privileges herein granted shall be exercised from time to time and continued so long as and as often as the occasion therefor may arise and no waiver of any default hereunder, whether by a Bondowners Trustee or by the Beneficial Owners of Bonds, shall extend to or shall affect any subsequent default or shall impair any rights or remedies consequent thereon. No delay or omission of the Beneficial Owners or of a Bondowners Trustee to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default or acquiescence therein. Upon any such waiver, such default shall cease to exist, and any Default arising therefrom shall be deemed to have been cured, for every purpose of this resolution; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Section 21. Sale and Delivery of the Bonds. (a) Approval of Bond Purchase Contract; Delivery of Bonds. The Purchaser has presented the Bond Purchase Contract to the District offering to purchase the Bonds, which written Bond Purchase Contract is on file with the Executive Director. The Board finds that entering into the Bond Purchase Contract is in the District s best interest and accepts the offer contained therein and authorizes its execution by the Executive Director. (c) Undertaking to Provide Continuing Disclosure. The Executive Director is authorized to execute a written undertaking to provide continuing disclosure for the benefit of holders of the Bonds in substantially the form attached as Exhibit A. Section 23. General Authorization and Ratification. The Executive Director and other appropriate officers of the District are severally authorized to take such actions and to execute such documents as in their judgment may be necessary or desirable to carry out the transactions contemplated in connection with this resolution, and to do everything necessary for the prompt delivery of the Bonds to the Purchaser thereof and for the proper application, use and investment of the proceeds of the Bonds. All actions taken prior to the effective date of this resolution in furtherance of the purposes described in this resolution and not inconsistent with the terms of this resolution are ratified and confirmed in all respects. Section 24. Severability. The provisions of this resolution are declared to be separate and severable. If a court of competent jurisdiction, all appeals having been exhausted or all appeal periods having run, finds any provision of this resolution to be invalid or unenforceable as to any person or circumstance, such offending provision shall, if feasible, be deemed to be modified to be within the limits of enforceability or validity. However, if the offending provision cannot be so modified, it shall be null and void with respect to the particular person or circumstance, and all other provisions of this resolution in all other respects, and the offending provision with respect to all other persons and all other circumstances, shall remain valid and enforceable. (b) Preparation, Execution and Delivery of the Bonds. The Bonds will be prepared at District expense and will be delivered to the Purchaser in accordance with the Bond Purchase Contract, together with the approving legal opinion of Bond Counsel regarding the Bonds. Section 22. Official Statement; Continuing Disclosure. (a) Preliminary Official Statement Deemed Final. The District has been provided with copies of the preliminary Official Statement dated [ ], 2015, prepared in connection with the sale of the Bonds. For the sole purpose of the Purchaser s compliance with paragraph (b)(1) of Rule 15c2-12, the preliminary Official Statement is deemed final as of its date, except for the omission of information permitted to be omitted by Rule 15c2-12. (b) Approval of Final Official Statement. The District approves the preparation of a final Official Statement for the Bonds to be sold to the public in the form of the preliminary Official Statement, with such modifications and amendments as the Executive Director deems necessary or desirable, and further authorizes the Executive Director to execute and deliver such final Official Statement to the Purchaser if required under Rule 15c2-12. The District authorizes and approves the distribution by the Purchaser of the final Official Statement so executed and delivered to purchasers and potential purchasers of the Bonds

79 Exhibit A ADOPTED by the Board of Directors of the Lynnwood Public Facilities District at a special open public meeting thereof held this first day of April, 2015, the following Directors being present and voting in favor of the resolution. LYNNWOOD PUBLIC FACILITIES DISTRICT Chair and Board Member Secretary and Board Member Board Member [Form of] UNDERTAKING TO PROVIDE CONTINUING DISCLOSURE Lynnwood Public Facilities District (Snohomish County, Washington) Convention Center Revenue Refunding Bonds, 2015 Lynnwood Public Facilities District (the District ) makes the following written Undertaking for the benefit of holders of the above-referenced bonds (the Bonds ), for the sole purpose of assisting the Purchaser in meeting the requirements of paragraph (b)(5) of Rule 15c2-12, as applicable to a participating underwriter for the Bonds. Capitalized terms used but not defined below shall have the meanings given in Resolution No of the District (the Bond Resolution ). (a) Undertaking to Provide Annual Financial Information and Notice of Listed Events. The District undertakes to provide or cause to be provided, either directly or through a designated agent, to the MSRB, in an electronic format as prescribed by the MSRB, accompanied by identifying information as prescribed by the MSRB: Board Member Board Member (i) (ii) Annual financial information and operating data of the type included in the final official statement for the Bonds and described in paragraph (b) ( annual financial information ); Timely notice (not in excess of 10 business days after the occurrence of the event) of the occurrence of any of the following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notice of Proposed Issue (IRS Form 5701 TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) bond calls (other than scheduled mandatory redemptions of Term Bonds), if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes on the Bonds; (12) bankruptcy, insolvency, receivership or similar event of the District, as such Bankruptcy Events are defined in Rule 15c2-12; (13) the consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material A-1

80 (iii) Timely notice of a failure by the District to provide required annual financial information on or before the date specified in paragraph (b). (b) Type of Annual Financial Information Undertaken to be Provided. The annual financial information that the District undertakes to provide in paragraph (a): (i) (ii) (iii) Shall consist of (1) annual financial statements prepared (except as noted in the financial statements) in accordance with applicable generally accepted accounting principles applicable to local governmental units of the State such as the District, as such principles may be changed from time to time, which statements may be unaudited, provided, that if and when audited financial statements are prepared and available they will be provided; (2) a statement of outstanding bonded debt of the District; and (3) information included in the form attached hereto as Exhibit A which may include (a) a summary of revenues provided from Intergovernmental Project Payments, net operating revenue of the Convention Center and Net Auxiliary Facilities Revenue; (b) debt service coverage ratios; and (c) a statement of whether or not the District has drawn on funds of the City pursuant to the Contingent Loan Agreement; Shall be provided not later than the last day of the ninth month after the end of each fiscal year of the District (currently, a fiscal year ending December 31), as such fiscal year may be changed as required or permitted by State law, commencing with the District s fiscal year ending December 31, 2014; and May be provided in a single or multiple documents, and may be incorporated by specific reference to documents available to the public on the Internet website of the MSRB or filed with the SEC. (c) Amendment of Undertaking. This Undertaking is subject to amendment after the primary offering of the Bonds without the consent of any holder of any Bond, or of any broker, dealer, municipal securities dealer, participating underwriter, Rating Agency or the MSRB, under the circumstances and in the manner permitted by Rule 15c2-12. The District will give notice to the MSRB of the substance (or provide a copy) of any amendment to the Undertaking and a brief statement of the reasons for the amendment. If the amendment changes the type of annual financial information to be provided, the annual financial information containing the amended financial information will include a narrative explanation of the effect of that change on the type of information to be provided. (f) Remedy for Failure to Comply with Undertaking. As soon as practicable after the District learns of any failure to comply with this Undertaking, the District will proceed with due diligence to cause such noncompliance to be corrected. No failure by the District or other obligated person to comply with this Undertaking shall constitute a default in respect of the Bonds. The sole remedy of any holder of a Bond shall be to take action to compel the District or other obligated person to comply with this Undertaking, including seeking an order of specific performance from an appropriate court. (g) Designation of Official Responsible to Administer Undertaking. The Executive Director or his or her designee is the person designated, in accordance with the Bond Resolution, to carry out the Undertaking in accordance with Rule 15c2-12, including, without limitation, the following actions: (i) (ii) (iii) (iv) (v) Preparing and filing the annual financial information undertaken to be provided; Determining whether any event specified in paragraph (a) has occurred, assessing its materiality, where necessary, with respect to the Bonds, and preparing and disseminating any required notice of its occurrence; Determining whether any person other than the District is an obligated person within the meaning of Rule 15c2-12 with respect to the Bonds, and obtaining from such person an undertaking to provide any annual financial information and notice of listed events for that person required under Rule 15c2-12; Selecting, engaging and compensating designated agents and consultants, including financial advisors and legal counsel, to assist and advise the District in carrying out this Undertaking; and Effecting any necessary amendment of this Undertaking. (d) Beneficiaries. This Undertaking shall inure to the benefit of the District and the holder of each Bond, and shall not inure to the benefit of or create any rights in any other person. (e) Termination of Undertaking. The District s obligations under this Undertaking shall terminate upon the legal defeasance of all of the Bonds. In addition, the District s obligations under this Undertaking shall terminate if the provisions of Rule 15c2-12 that require the District to comply with this Undertaking become legally inapplicable in respect of the Bonds for any reason, as confirmed by an opinion of Bond Counsel delivered to the District, and the District provides timely notice of such termination to the MSRB A A-3

81 CERTIFICATION I, the undersigned, as Secretary of the Board of Lynnwood Public Facilities District (the District ), hereby certify as follows: 1. The foregoing copy of Resolution No (the Resolution ) is a full, true and correct copy of a Resolution duly adopted at a special meeting of the Board of the District held at the regular meeting place thereof on April 1, 2015, as that Resolution appears on the minute book of the District. 2. At least 24 hours before the time of the special meeting, written notice specifying the time and place of the special meeting and the business to be transacted, a true and complete copy of which is attached as Appendix 1, was provided as follows: a. Given to all members of the Board by mail, fax, electronic mail or personal delivery. b. Prominently displayed at the main entrance of the Lynnwood Convention Center, th St. S.W., Lynnwood, Washington. This page intentionally left blank c. The District is not required to post a notice of special meeting on the District s web site because (i) the District does not have a web site; (ii) the District employs fewer than 10 full-time equivalent employees; or (iii) the District does not employ personnel whose duty, as defined by a job description or existing contract, is to maintain or update a web site. 2. A quorum of the members of the Board was present throughout the meeting and a sufficient number of the members of the Board voted in the proper manner for the adoption of the Resolution. Dated:, LYNNWOOD PUBLIC FACILITIES DISTRICT Secretary

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83 APPENDIX D INFORMATION ON THE CITY OF LYNNWOOD

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85 APPENDIX D TABLE OF CONTENTS INFORMATION ON THE CITY OF LYNNWOOD THE CITY...1 Governance...1 Labor Relations...1 Pension System...1 Other Post-Employment Benefits...3 Risk Management...4 DEBT AND DEBT LIMITATIONS...5 Authorization of Debt...5 Limitations on Indebtedness...5 Outstanding General Obligation Debt...6 Debt Capacity Computation...6 Direct and Estimated Overlapping Debt...7 Debt Service Requirements...9 Debt Payment Record...9 Future General Obligation Debt...9 TAXING AUTHORITY...9 Property Tax Overview Retail Sales and Use Taxes Utility Taxes PROPERTY TAX LIMITATIONS...11 Uniformity Requirement Limitations on Regular Property Taxes Overlapping Levy Rates PROPERTY TAX ASSESSMENT AND COLLECTION PROCEDURES...14 Assessed Value Current and Historical Assessed Value and Property Tax Regular Levy Rates and Amounts for the City Largest Property Taxpayers Property Tax Collection Procedure Collection Record FINANCIAL INFORMATION...16 Fiscal Policies Accounting and Budgeting Policies Investment Practices Auditing of City Finances Historical Operating Results General Fund Budget D-i

86 THE CITY The City of Lynnwood (the City ) was incorporated in 1959, has an estimated population of approximately 36,030 and encompasses more than seven miles in Snohomish County, Washington (the County ). The City s major operations include police and fire protection, parks and recreation, street construction and maintenance, planning and zoning, general administrative services and the water and sewer utilities. Governance The City operates under laws of the State of Washington (the State ) applicable to a Mayor-Council form of government and operates as a non-charter city under Title 35A of the Revised Code of Washington ( RCW ). The City is governed by a fulltime elected Mayor and seven part-time Council Members, all elected at large to staggered four-year terms. The current Mayor and Council Members and their terms of office are as follows: Mayor Term Expires Nicola Smith December 31, 2017 Labor Relations Council Member Position Term Expires Loren Simmonds President December 31, 2015 Sid Roberts Vice-President December 31, 2015 Van AuBuchon Council Member December 31, 2015 M. Christopher Boyer Council Member December 31, 2017 Ian Cotton Council Member December 31, 2017 Benjamin Goodwin Council Member December 31, 2015 Ruth Ross Council Member December 31, 2017 The City currently employs 517 people. The majority of City employees who are eligible under State law to be represented by a labor organization are employed under provisions of negotiated contracts with seven bargaining units. The City enters into written bargaining agreements with each of the organizations listed below. These agreements contain provisions on such matters as salaries, vacation, sick leave, medical and dental insurance, working conditions, and grievance procedures. The City strives to complete agreements with all groups in a timely manner, consistent with all applicable State law and to promote labor relation policies mutually beneficial to management and employees. The City has never had a strike among its employees. Pension System Bargaining Unit No. of Employees Expiration Date Teamsters Local December 31, 2015 Fire Fighters 51 December 31, 2015 Police Officers 48 December 31, 2015 Police Sergeants 13 December 31, 2015 Police Management 6 December 31, 2015 Police Support 24 December 31, 2015 AFSCME 75 December 31, 2016 Substantially all of the full-time and qualifying part-time employees of the City are enrolled in the State Public Employees Retirement System ( PERS ), the Law Enforcement Officers and Fire Fighters Retirement System ( LEOFF ) or the Public Safety Employees Retirement System ( PSERS ). PERS Plans 1 and 2 and LEOFF are defined benefit plans and PERS Plan 3 is both a defined benefit plan (employer share) and defined contribution plan (employee share). These plans are administered by the State. Contributions by both employees and employers are based on gross wages. Those PERS and LEOFF participants who joined the system by September 30, 1977, are Plan 1 members. PERS participants who joined on or after October 1, 1977, are Plan 2 members, unless they exercise an option to transfer to Plan 3. PERS participants joining on or after September 1, 2002, have the irrevocable option of choosing membership in PERS Plan 2 or PERS Plan 3. LEOFF participants who joined on or after October 1, 1977, are Plan 2 members. All PSERS participants are Plan 2 members, which is a defined benefit plan D-1

87 State law requires systematic actuarial based funding to finance the retirement plans. Actuarial calculations to determine employer and employee contributions are prepared by the Office of the State Actuary ( OSA ), a nonpartisan legislative agency charged with advising the Legislature and Governor on pension benefits and funding policy. To calculate employer and employee contribution rates necessary to pre-fund the plans benefits, OSA uses actuarial cost and asset valuation methods selected by the Legislature as well as economic and demographic assumptions. The Legislature adopted the following economic assumptions for contribution rates beginning July 1, 2013: (1) 7.9% (7.8% as of July 1, 2014) rate of investment return; (7.5% for LEOFF Plan 2); (2) general salary increases of 3.75%; (3) 3.0% rate of Consumer Price Index increase; and (4) 0.95% growth in membership (1.25% for LEOFF). The long-term investment return assumption is used as the discount rate for determining the liabilities for a plan. The 10-year ( ) annualized return on the investment of the retirement funds was 8.35%. The information under this heading has been obtained from the City s financial statements and information on the State Actuary s and State Department of Retirement System s websites, which are not incorporated herein by reference. See Appendix E 2013 AUDITED FINANCIAL STATEMENTS FOR THE CITY OF LYNNWOOD Note 8 Pension Plans. Plan Funding; Contribution Rates and Amounts. All State-administered retirement plans are funded by a combination of funding sources: (1) contributions from the State for certain plans; (2) contributions from employers (including the State as employer and the City and other governmental employers); (3) contributions from employees; and (4) investment returns. Retirement funds are invested by the Washington State Investment Board, a 15-member board created by the Legislature in The City s total contribution for the year ended December 31, 2014, was $2,095,140, representing 7.37% of covered payroll. The City contributed $1,353,498 to PERS, $673,733 to LEOFF and $67,909 to PSERS in 2014 for all of the City s employees that are covered under PERS, LEOFF and PSERS. Under State statute, contribution rates are adopted by the Pension Funding Council ( PFC ) (and, for LEOFF 2, by the LEOFF 2 Board) in even-numbered years for the next ensuing State biennium. The rate-setting process begins with an actuarial valuation by the OSA, which makes non-binding recommendations to the Select Committee on Pension Policy, which then recommends contribution rates to the PFC and the LEOFF 2 Board. No later than the end of July in evennumbered years, the PFC and the LEOFF 2 Board adopts contribution rates, which are subject to revision by the Legislature. The following table outlines the current contribution rates of employers and employees under PERS, LEOFF and PSERS. Contribution Rates for the Biennium Expressed as a Percentage of Covered Payroll Employer (1) Employee PERS Plan % 6.00% PERS Plan PERS Plan Variable (2) LEOFF Plan LEOFF Plan (3) PSERS Plan (1) Includes a 0.18% DRS administration expense fee. (2) Rates vary from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member. (3) The State also contributes 3.36% to this plan. Source: Department of Retirement Systems. In July 2014, the PFC adopted contribution rate increases to be phased in over the next three biennia, beginning with the biennium. For the biennium, the PFC adopted employer rates of 11% (plus an additional 0.18% administration fee) for PERS Plans 1, 2 and 3 and 11.36% for PSERS Plan 2 (in each case, net of administrative fees), and an employee rate of 6.12% for PERS Plan 2 and 6.59% for PSERS Plan 2. The LEOFF 2 Board did not adopt a rate increase for the Biennium. While the City s prior contributions represent its full current liability under the retirement systems, any unfunded pension benefit obligations could be reflected in future years as higher contribution rates. It is expected that the contribution rates for employees and employers in the PERS Plans 2 and 3 will increase in the coming years. The OSA website (which is not incorporated into this Appendix D by reference) includes information regarding the values, funding levels and investments of these retirement plans. D-2

88 During the years 2001 through 2010 the rates adopted by the Legislature were lower than those that would have been required to produce actuarially required contributions to PERS Plan 1, a closed plan with a large proportion of the retirees. The State Actuary s actuarial valuation for PERS Plan 1 as of June 30, 2012 showed a 69% funded ratio (unfunded liability of $3.8 billion) while PERS Plans 2 and 3 and LEOFF Plans 1 and 2 had valuation assets that exceed their accrued liability by $2.3 billion (a 111% funded ratio), $1.4 billion (a 135% funded ratio) and $1.2 billion (a 119% funded ratio), respectively. The State Actuary s actuarial valuation for PERS Plan 1 as of June 20, 2013, showed a 63% funded ratio (unfunded liability of $4.831 billion) while PERS Plans 2 and 3 and LEOFF Plans 1 and 2 had valuation assets that exceed their accrued liability by $537 million (a 102% funded ratio), $1.1 billion (a 125% funded ratio) and $1.0 billion (a 115% funded ratio), respectively. The decrease in the funded status and increase in the unfunded accrued actuarial liability primarily reflect changed demographic assumptions, including projected improvements in mortality rates, and the statutory requirement that the assumed rate of return be reduced to 7.8% from 7.9%. OSA uses the Projected Unit Credit ( PUC ) cost method and the Actuarial Value of Assets ( AVA ) to report a plan s funded status. PUC is one of several acceptable measures of a plan s funded status under current Governmental Accounting Standards Board ( GASB ) rules. The PUC cost method projects future benefits under the plan, using salary growth and other assumptions and applies the service that has been earned as of the valuation date to determine accrued liabilities. The AVA is calculated using a methodology which smoothes the effect of short-term volatility in the Market Value of Assets by deferring a portion of annual investment gains or losses over a period of up to eight years. PERS Plans 2 and 3 are accounted for in the same pension trust fund and may legally be used to pay the defined benefits of any PERS Plan 2 or 3 members. Assets for one plan may not be used to fund benefits for another plan; however, all employers in PERS are required to make contributions at a rate (percentage of payroll) determined by the OSA every two years for the sole purpose of amortizing the PERS Plan 1 unfunded actuarial accrued liability within a rolling 10-year period. The Legislature has established certain maximum contribution rates that began in 2009 and will continue until 2015 and certain minimum contribution rates that are to become effective in 2015 and remain in effect until the actuarial value of assets in PERS Plan 1 equals 100% of the actuarial accrued liability of PERS Plan 1. These rates are subject to change by future legislation enacted by the State Legislature to address future changes in actuarial and economic assumptions and investment performance. In 2011, the Legislature ended the future automatic annual increase, which is a fixed dollar amount multiplied by the member s total years of service, for most retirees in the PERS Plan 1 plan, which is forecast to reduce the unfunded accrued actuarial liability in PERS Plan 1. The State Supreme Court recently upheld the constitutionality of this legislation. Other Retirement Systems City of Lynnwood Firemen s Pension Fund. The City is the administrator of the Firemen s Pension System, which is shown as a pension trust fund in the City s financial statements. The Firemen s Pension System is a closed, single-employer defined benefit pension plan (the FPF ) that was established in conformance with chapter RCW. This plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Membership in the FPF is limited to firefighters employed before March 1, 1970, when the LEOFF retirement system was established. The City s liability under the FPF consists of all benefits, including payments to beneficiaries, for firefighters retired prior to March 1, 1970, and excess benefits over amounts provided by LEOFF for covered firefighters retired after March 1, As of December 31, 2014, there were a total of five City individuals covered by this plan. Under State law, the FPF is provided an allocation of all money received by the State from taxes on fire insurance premiums, interest earnings, member contributions made prior to the inception of LEOFF and City contributions required to meet project future pension obligations. An actuarial valuation was completed by Milliman USA as of January 1, 2012, and it was determined that current assets of the fund ($698,000), along with future revenues from State fire insurance taxes and interest earnings, will be sufficient to pay all future FPF pension benefits. In 2014, $56,876 was received from the State from taxes on fire insurance premiums. Other Post-Employment Benefits In addition to pensions, many State and local governmental employers provide other post-employment benefits ( OPEB ) as a part of total compensation to attract and retain the services of qualified employees. OPEB includes post-employment health care as well as other forms of post-employment benefits when provided separately from a pension plan. GASB standard concerning Accounting and Financial Reporting by Employers for Post-Employment Benefits Other than Pensions (GASB 45) provides for the measurement, recognition and display of OPEB expenses/expenditures, related liabilities (assets), note disclosures, and, if applicable, required supplementary information in the financial reports. D-3

89 The following table shows the components of the City s annual OPEB cost for 2012 and 2013 and the amount actually contributed to the plan: Other Post-Employment Benefits Summary (Fiscal Years Ended December 31) Actuarial Required Contribution $1,347,439 $1,347,439 Interest on Net OPEB Obligation ( NOO ) 67,847 84,494 Adjustment to NOO 102, ,015 Annual OPEB Cost 1,313,243 1,301,918 Employer Contributions 897, ,145 Increase in NOO 416, ,773 Net OPEB Obligation Beginning of Year 1,696,167 2,112,347 Net OPEB Obligation End of Year $2,112,347 $2,549,120 The City s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for fiscal years ending December 31, 2011, 2012 and 2013 were as follows: Fiscal Year Ended Historical Summary of Other Post-Employment Benefits Annual OPEB Cost Contribution as % of Annual OPEB Cost Net OPEB Obligation 2011 $1,323,781 67% $1,696, ,313, ,112, ,301, ,549,120 See also Note 9 in Appendix E for further information on OPEB of the City. Risk Management The City is a member for liability insurance of the Cities Insurance Association of Washington (the CIAW ). The pool was formed on September 1, 1988, when 32 cities in the State joined together by signing an Interlocal Governmental Agreement to pool their self-insured losses and jointly purchase insurance and administrative services. There are currently over 250 members in the pool. The City has transferred the risk of loss from torts, errors and omissions of City employees, damage to City property, and natural disasters including earthquakes to commercial insurers. There were no settlements in excess of coverage in any of the prior three years. The City and its employees contribute to the State of Washington s Department of Labor and Industries for workers compensation. A review committee periodically reviews the prior year s claims, changes within the City, and the current legal requirements to determine the kind and extent of coverage that will be maintained for the next year for both current and past events. A safety committee is also appointed and a comprehensive, pro-active risk reduction program is maintained for cost containment and the benefit of the City s citizens and employees. The City maintains property insurance with a maximum limit of $100 million any one event and a $25,000 deductible covering City-owned property other than automobiles. Earthquake and flood coverage is maintained with a limit of $25 million. A deductible of 5% of the value of damaged property applies to earthquake loss and a deductible of $100,000 applies to flood loss. For physical damage loss to automobiles, there is a limit of $900,000 any one occurrence and the City is responsible for the first $100,000 in any one occurrence. The City s responsibility for liability claims, including general liability, wrongful acts and automobile liability, is limited to the self-insured retention amounts that generally are $75,000 each occurrence. The City maintains a liability insurance policy providing general liability, wrongful acts and automobile liability with a limit of $10 million each occurrence. An internal service fund was established in February 1981 to accumulate payments from other funds to cover the deductible requirements and support its self-insurance. Charges to the funds are based on historical cost information. Net assets of approximately $1,106,979 are available in order to have a reserve for deductibles and to cover policy exclusions. The unpaid claims amount represents claims that do not exceed the amounts covered by policy deductible limits. The events have occurred and the D-4

90 settlements can be reasonably estimated. Estimated amounts are based on the advice of the City s Claim Management Organization. Authorization of Debt DEBT AND DEBT LIMITATIONS The power of the City to incur debt of any kind is controlled and limited by State law. All debt must be incurred in accordance with detailed budget procedures and paid for out of identifiable receipts and revenues. The budget must be balanced for each fiscal year. It is unlawful for an officer or employee of the City to incur liabilities in excess of budgetary appropriations. In an emergency, the City Council may put a plan into effect and authorize indebtedness outside the current budget. All expenditures for emergency purposes must be paid by checks from any available money in the fund properly chargeable with such expenditures. Limitations on Indebtedness The State Constitution and statutes limit the City s ability to incur general obligation indebtedness based on a percentage of the assessed value of the taxable property within the City at the time the indebtedness is incurred. See PROPERTY TAX ASSESSMENT AND COLLECTION PROCEDURES Assessed Value. Non-Voted Debt. The Bonds are issued as non-voted debt. State law provides that the City may, without voter approval, incur general obligation debt in an amount not to exceed 1.5% of the assessed value of all taxable property within the City. The amount of non-voted debt plus the outstanding voter-approved debt for general municipal purposes also is subject to the aggregate debt limitation described below. Non-voted general obligation debt may be issued as follows: (1) pursuant to an ordinance specifying the amount and object of the expenditure of the proceeds, the City may borrow money for corporate purposes and issue bonds or notes within the constitutional and statutory limitations on indebtedness; (2) the City may execute conditional sales contracts for the purchase of real or personal property; and (3) the City may execute financing leases with or without an option to purchase. Voter-Approved Debt. Subject to 60% voter approval meeting minimum voter turnout requirements, the City may incur general obligation debt in an amount not to exceed 2.5% of assessed value for general municipal purposes (when combined with any outstanding non-voted debt), 2.5% for certain utility purposes, and 2.5% for certain parks, open space, and economic development purposes. The minimum turnout must be at least 40% of City voters who voted at the last preceding State general election. If the ballot proposition approving the issuance of voter-approved debt also approved the levy of taxes without limitation in amounts sufficient to repay those voter-approved bonds, then the bonds will be payable from a special excess tax levy. See PROPERTY TAX LIMITATIONS. Aggregate Debt Limitations. The combination of voter-approved and non-voted general obligation debt for general municipal purposes may not exceed 2.5% of assessed value. The total of all general obligation debt for all purposes may not exceed 7.5% of the City s assessed value. Short-Term Obligations. Within the limitations described above, State law permits municipal corporations to borrow money and issue short-term obligations for any lawful purpose and in anticipation of the receipt of revenues, taxes, grants or the sale of bonds, if the bonds have been authorized by the governing body or the voters, as applicable. Short-term obligations issued in anticipation of taxes must be repaid within six months after the end of the fiscal year in which they are issued. D-5

91 Outstanding General Obligation Debt The City s non-voted general obligation debt outstanding as of December 31, 2014, is listed below. The City has no outstanding voted general obligation debt. Outstanding Non-Voted General Obligation Debt Date of Issue Final Maturity Amount Issued Amount Outstanding Non-Voted General Obligation Bonds LTGO Refunding Bonds, Series 2009B 04/06/ /01/2017 $ 3,980,000 $ 955,000 LTGO Bonds, Series /27/ /01/ ,955,000 24,245,000 $ 25,200,000 Other Non-Voted General Obligation Debt SERS Obligation (1) 06/16/ /01/2019 $ 1,519,147 $ 618,178 Contingent Loan Obligation for PFD Sales Tax Bonds (2) 10,000,000 9,725,000 Contingent Loan Obligation for PFD Revenue Bonds (2) 15,605,000 15,605,000 $25,948,178 Total Non-Voted General Obligation Debt $51,148,178 (1) The City s obligation with respect to its interlocal agreement to repay its share of the Snohomish County bonds which refinanced the Snohomish County Emergency Radio System ( SERS ). The City reports its obligation to pay 5% of the SERS bonds as 2005 general obligation bonds in its financial statements. (2) Includes the amount of refunding bonds issued by the Lynnwood Public Facilities district (the PFD ) pursuant to this Official Statement (the PFD Bonds ) and excludes the refunded PFD bonds. The Court in the Greater Wenatchee Opinion also stated that accrued but unpaid interest on a guaranteed obligation would be treated as a debt of the guarantor. However, the Court did not provide guidance as to how interest should be calculated or when interest should be deemed to accrue for this purpose. With respect to the PFD Bonds, the amount of interest coming due on the next debt service payment date (June 1, 2015), and thus the maximum amount of interest potentially treatable as debt of the City on the issue date of the PFD Bonds, is $82,511. See CONTINGENT LOAN AGREEMENT in the body of this Official Statement. Source: City of Lynnwood. Debt Capacity Computation The City may incur general obligation debt only if, at the time debt is incurred, the City has sufficient debt capacity. Once the debt has been incurred, changes in assessed value have no effect on the validity of outstanding debt or the City s ability to refund outstanding debt. Declines in assessed value can limit the ability to incur additional general obligation debt. The following information shows the assessed value of property within the City and the outstanding general obligation debt of the City. D-6

92 Computation of Debt Capacity (as of December 31, 2014) 2015 Collection Year Assessed Value (1) $ 4,771,220,851 General Purposes Non-Voted Debt Capacity (1.5%) $ 71,568,313 Less: Outstanding Non-Voted Debt (2) 51,148,178 Remaining Non-Voted Debt Capacity $ 20,420,135 Percentage of Non-Voted Debt Capacity Used 71% Total (Voter-Approved and Non-Voted) Debt Capacity (2.5%) $ 119,280,521 Less: Outstanding Voter-Approved Debt 0 Less: Outstanding Non-Voted Debt (2) 51,148,178 Total Remaining (Voter-Approved and Non-Voted) Debt Capacity $ 68,132,343 Percentage of Total Debt Capacity Used 43% Utility Purposes Voter-Approved Debt Capacity (2.5%) $ 119,280,521 Less: Outstanding Voter-Approved Debt 0 Remaining Voter-Approved Debt Capacity $ 119,280,521 Percentage of Voter-Approved Debt Capacity Used 0% Parks, Open Space and Economic Development Purposes Voter-Approved Debt Capacity (2.5%) $ 119,280,521 Less: Outstanding Voter-Approved Debt 0 Remaining Voter-Approved Debt Capacity $ 119,280,521 Percentage of Voter-Approved Debt Capacity Used 0% (1) See PROPERTY TAX ASSESSMENT AND COLLECTION PROCEDURES Assessed Value. (2) Includes the SERS Obligation, the principal amount of the refunding bonds issued by the PFD pursuant to this Official Statement, and the PFD s outstanding sales tax bonds. Excludes the refunded PFD bonds. Source: City of Lynnwood. Direct and Estimated Overlapping Debt The following tables show the outstanding principal amount of general obligation debt incurred by the City ( Direct Debt ) and the estimated allocable share of the outstanding principal amount of general obligation bonds of other taxing districts whose boundaries overlap a part or all of the City ( Overlapping Debt ). The estimated allocable share of Overlapping Debt is calculated based on a percentage of the overlapping taxing district s assessed value that lies within the boundaries of the City. The City has obtained the information regarding the Overlapping Debt from the overlapping taxing districts and Snohomish County (the County ) and other sources the City believes to be reliable, but has not independently verified the accuracy or completeness of such information. The amounts described below show general obligation bonds issued by the various taxing districts and may not reflect certain leases or other contracts that may constitute indebtedness under State law. The tables below do not reflect any special revenue obligations (e.g., utility revenue bonds) issued by any taxing district. The taxing districts listed below may have issued additional general obligation debt since the dates indicated below and may have plans to issue future general obligation debt. D-7

93 Direct Debt (as of December 31, 2014) Amount Outstanding Voter-Approved General Obligation Bonds $ 0 Non-Voted General Obligation Bonds (1) 25,818,178 Total Direct Debt (1) $25,818,178 (1) Includes the SERS Obligation; excludes the PFD contingent loan obligations. See Outstanding Non-Voted General Obligation Debt table above. Source: City of Lynnwood. Estimated Overlapping Bonded Indebtedness (as of December 31, 2014) 2014 Assessed Value Percentage of Overlap (1) Outstanding General Obligation Debt (2) Estimated Overlapping Debt Overlapping Taxing District Snohomish County $88,260,207, % $435,701,801 $ 23,553,417 Edmonds School District No ,605,425, ,865,000 74,528,382 Public Hospital District No. 2 22,193,494, ,160,000 1,109,312 Total Overlapping Debt 99,191,111 Total Direct Debt 25,818,178 Total Direct and Overlapping Debt $125,009,289 (1) Represents the approximate percentage of each taxing district s assessed value that lies within the City. (2) Includes only general obligation bonds outstanding and financing agreements entered into with the State with respect to its Local Option Capital Asset Lending Program, financed through the issuance of State Certificates of Participation. Does not include other types of general obligation indebtedness or utility revenue debt. Source: County Assessor, County Treasurer and individual taxing districts. Debt Ratios (as of December 31, 2014) 2015 Collection Year Assessed Value $4,771,220,851 City Population (2014) (1) 36,030 Ratio of: Direct Debt to Assessed Value 0.54% Direct and Estimated Overlapping Debt to Assessed Value 2.62% Per Capita: Assessed Value $132,424 Direct Debt $717 Direct and Estimated Overlapping Debt $3,470 (1) Source: State Office of Financial Management. D-8

94 Debt Service Requirements The following table provides the debt service schedule for the City s outstanding limited tax general obligations bonds. Bond Debt Service Requirements (1) Year Outstanding Principal Outstanding Interest Total Debt Service 2015 $ 735,000 $ 921,762 $ 1,656, , ,163 1,658, , ,212 1,657, , ,363 1,655, , ,062 1,656, , ,013 1,656, , ,612 1,656, , ,813 1,655, , ,487 1,656, , ,688 1,657, ,020, ,750 1,656, ,060, ,950 1,655, ,095, ,150 1,659, ,130, ,562 1,658, ,170, ,150 1,655, ,215, ,238 1,655, ,265, ,637 1,658, ,310, ,163 1,655, ,360, ,000 1,655, ,415, ,600 1,655, ,475, ,000 1,659, ,530, ,000 1,655, ,595,000 63,800 1,658,800 Totals $25,200,000 $12,904,175 $38,104,178 (1) Excludes SERS obligation and excludes contingent obligations. Source: City of Lynnwood. Debt Payment Record The City has always met principal and interest payments on all of its general obligation bonds when due. The City has never issued refunding bonds for the purpose of preventing an impending default. Future General Obligation Debt The City does not expect to issue any general obligation bonds in the next 12 months. TAXING AUTHORITY The City has statutory authority to levy various taxes within its boundaries, including local option sales and use taxes, excise taxes, utility taxes, property taxes, and other taxes. In some cases, State law specifies the purposes for which various taxes can be used. The City s major sources of general fund tax revenue are its regular property tax levy, sales and use taxes and utility taxes. Neither the State nor any municipal corporation collects a tax on net income. The General Fund is the City s primary operating fund and is used to track the revenues and expenses associated with basic City services that are not required to be accounted for in other funds, including services such as police and general administration. D-9

95 The following table shows the tax revenue in the City s General Fund, by source, for the years 2009 through General Fund Tax Revenues by Source Property Tax $ 7,207,325 $ 7,361,796 $ 8,302,800 $ 8,526,798 $ 8,897,973 Sales Tax 14,393,803 14,652,373 15,298,365 16,501,715 17,680,052 Business Taxes (1) 2,533,476 4,478,193 6,403,886 6,813,243 7,123,961 Other Taxes (2) 164, , , ,779 5,135 Total Taxes $ 24,298,895 $26,654,254 $ 30,170,379 $ 31,993,535 $ 33,707,121 (1) Business Taxes represent business taxes for admissions, cable television, gas, electric, water, storm water and sewer utilities; telephone services, and solid waste. Increased rates account for significant increase between 2009 and (2) Other Taxes includes excise taxes from gambling and leasehold taxes for the years In 2013, Other Taxes excludes gambling taxes, which are reported as Business Taxes. Source: City of Lynnwood audited financial statements for years 2009 to Property Tax Overview Under the State s laws and Constitution, property taxes are classified as either regular property taxes or excess property taxes. The City is authorized to levy both types of taxes. The City adopts a levy ordinance each November, in conjunction with its annual budget process. It submits a levy amount request to the County Assessor, who calculates the levy rate by spreading the levy amount on the tax rolls, following procedures established by the State Department of Revenue ( DOR ). The County Assessor confirms that the levy is within applicable statutory and constitutional limitations and makes any necessary reductions before the County Treasurer may begin to collect the levy on behalf of the City. See PROPERTY TAX ASSESSMENT AND COLLECTION PROCEDURES below. Regular Property Taxes. Regular property taxes are subject to constitutional and statutory limitations as to rate and amount. See PROPERTY TAX LIMITATIONS Limitations on Regular Property Taxes herein. They are usually levied for any general municipal purposes, although certain statutes authorize additional levies for particular limited purposes. General purpose levies may be used for the payment of debt service on limited tax general obligation indebtedness, but State law does not provide any priority of use. In general, regular property taxes for general purposes do not require voter approval, although certain statutes authorizing limited purpose levies may require voter approval. Certain tax limitations may be exceeded upon voter approval. Excess Property Taxes. Excess property taxes are not subject to constitutional or statutory limitation as to rate or amount, but must be authorized by a 60% approving vote meeting minimum voter turnout requirements (expect for certain levies by school districts, which require only a simple majority approval). Excess property tax levies may be made (1) by any taxing district for the repayment of voter-approved general obligation bonds issued for capital purposes, excluding replacement of equipment; (2) by any taxing district for one year for any governmental purpose; or (3) without a vote when necessary to prevent impairment of an obligation of contract, if ordered by a court of last resort. Excess levies for the repayment of voter-approved general obligation bonds must meet a minimum voter turnout of 40% of the number who voted at the last November general election, in addition to receiving 60% approval. Retail Sales and Use Taxes Under State law, the State imposes a statewide sales and use tax of 6.5%. Local governments (cities, counties and certain other municipal corporations) are authorized to levy additional local option sales and use taxes for general governmental purposes. In general, sales taxes are imposed on the purchase by consumers of a broad base of tangible personal property and selected services, including construction (labor and materials), machinery and supplies, services and repair of real and personal property and many other transactions not typically taxed in other states. The use tax supplements the sales tax by taxing the use of certain services and by taxing personal property on which a sales tax has not been paid (such as items purchased in a state that imposes no sales tax). Sales taxes upon applicable retail sales are collected by the seller from the consumer. Use taxes are payable by the consumer upon applicable rendering of services or uses of personal property. Each seller is required to hold taxes collected in trust until remitted to DOR, which usually occurs on a monthly basis. DOR collects and distributes all sales and use tax revenue in the State and retains 1% of all taxes collected to offset administration costs. Distribution to the local governments occurs on a monthly basis and lags approximately two months behind collection. D-10

96 Among the items currently exempt from sales and use taxes are most personal services, motor vehicle fuel, most food sold for consumption off premises, trade-ins and purchases for resale. The State Legislature, and the voters through the initiative process, have changed the base of the sales and use tax on occasion. State law does not provide a general exemption for businesses, nonprofits or governmental entities from payment of sales and use taxes. Local option sales and use taxes are imposed on the same goods and services as the State retail sales and use tax. Receipts from certain local option retail sales and use taxes are restricted to a specific purpose. Some are required to be shared with other local governments. For example, the City receives a portion of the 0.1% sales tax for criminal justice purposes imposed by the County. This tax is distributed with 10% going to the County and the remaining 90% distributed to cities and the County based on population within each city and within the unincorporated areas of the County. An aggregate sales and use tax of 9.5% is currently imposed by the City, which includes the City s 1.0% local sales and use tax. The resulting tax revenues are allocated 0.84% to the City, 0.25% to the County for general purposes, 6.5% to the State, 1.8% to the County for public transit, 0.1% to the County and cities within the County for criminal justice purposes, and 0.01% to the State for administrative charges. Sales & Use Tax Streamlining. In 2003, the State Legislature approved legislation authorizing the State s membership in the national Streamlined Sales and Use Tax Agreement (the SSUTA ), in an effort to make sales and use taxes in the State more uniform with other states. Congress has required that state sales taxes be more uniform before Congress will permit taxation of interstate catalog and internet sales. In 2007, the State Legislature adopted legislation fully conforming to the SSUTA. Effective July 1, 2008, the sales tax system changed in the State from an origin-based system to a destination-based system. Under destination sourcing, sales taxes are credited to the taxing jurisdiction where the purchaser takes delivery of the goods (which may differ from the point of sale with respect to goods delivered to the purchaser). The rate of the tax is now determined by the local rate in the destination taxing jurisdiction. The State Legislature enacted certain provisions to mitigate net losses in sales and use tax collections of local taxing jurisdictions resulting from the change to a destination-based system. To qualify, the local taxing jurisdiction must be negatively impacted by the legislation and the local sales tax must be in effect before July 1, 2008, among other requirements. The State legislation requires the Department of Revenue to determine each local jurisdiction s annual losses, and distributions are required to be made quarterly representing one-fourth of a jurisdiction s annual loss less voluntary compliance revenue from the previous quarter. Losses in sales tax revenues are based on a business by business comparison of sales patterns in each jurisdiction before and after the change to destination-based sales tax. Mitigation payments are distributed at the end of each quarter for the net loss experienced in the second preceding quarter. For example, the first payments were made on December 31, 2008 for July through September (third quarter) The City received $251,544 and $259,924 in 2012 and 2013, respectively, in mitigation payments. The City estimates a mitigation payment of $262,724 for When a jurisdiction s voluntary compliance revenue exceeds its loss of local sales tax revenue, the jurisdiction will cease receiving mitigation payments. Voluntary compliance revenue is the local sales tax revenue gain to each local taxing jurisdiction reported to the Department of Revenue by sellers in other states voluntarily registered through the SSUTA. Utility Taxes The City levies a tax on public utility businesses (the utility tax ), which is based on gross receipts from service provided or revenues generated within the City. It may be collected from investor-owned utilities and utilities operated by the City. In addition, legal authority to impose an excise tax on public utilities owned by other municipal corporations was addressed in a recent decision of the State Court of Appeals (Division III), which held that a city could impose an excise tax on the utility revenue of another municipal corporation, except for revenue derived from governmental functions. Under State law, the tax rate for electric, phone and natural gas utilities is limited to 6.0% without voter approval; there is no limitation on tax rates on other utilities. The City collects a 6.0% utility tax on electricity, telecommunications, nature gas, cable utilities, water, sewer and solid waste. Uniformity Requirement PROPERTY TAX LIMITATIONS The State Constitution requires that property taxes be levied at a uniform rate upon the same class of property within the territorial limits of a taxing district levying the tax. The Constitution also provides that all real estate constitutes a single class, D-11

97 except for certain agricultural properties eligible for special use classification, which may be valued based on current use. It is possible, because of overlapping taxing district boundaries, the maximum permissible levy might vary within the boundaries of a particular taxing district. In that event, to comply with the constitutional requirement for uniformity of taxation, the lowest permissible rate for any part of the taxing district would be applied to the entire taxing district. Limitations on Regular Property Taxes The authority of a taxing district to levy taxes without a vote for general municipal purposes, including the payment of debt service on limited tax general obligation indebtedness, is subject to the limitations described below. The following list of tax limitations is not intended to be a comprehensive list of all possible overlapping levies or limitations. Information relating to regular property tax limitations is based on existing statutes and constitutional provisions. Changes in State law could alter the impact of other interrelated tax limitations on the City. In 2015, the City s regular levy rate is $1.9843/$1,000 on all taxable property within the City. See PROPERTY TAX ASSESSMENT AND COLLECTION PROCEDURES Current and Historical Assessed Value and Property Tax Levy Rates and Amounts for the City. City Regular Levy Rates and Limitations. For general municipal purposes, a city may levy regular property taxes up to $3.375/$1,000 of assessed value. The maximum levy rate for a city that is annexed into a library district or a fire protection district is $3.60/$1,000, less the levy rates imposed by those districts (up to a maximum of $1.50/$1,000 for a fire protection district and $0.50/$1,000 for a library district). The City is annexed into Sno-Isle Intercounty Rural Library District; therefore, its maximum regular levy rate for general municipal purposes is $3.60/$1,000 of assessed value less the levies actually imposed by that district in any given year. The 2015 levy rate of the library district is $0.468/$1,000, effectively limiting the City s regular levy rate to a maximum of $3.132/$1,000 in Cities are also permitted to impose certain additional levies for specific purposes, each of which is subject to its own statutory limitations. Examples of these include a levy for a firefighter pension fund (which may be used for general municipal purposes if not needed for the pension fund) and a voter-approved levy for emergency medical services ( EMS ). The City has a firefighters pension fund and therefore has authority to levy an additional $0.225/$1,000 of assessed value for pension fund purposes, or if not actuarially required for the pension fund, which may be applied to any other general municipal purposes. The City does not currently levy this additional levy. See THE CITY Pension System Other Retirement Systems-City of Lynnwood Firemen s Pension Fund. At the November 5, 2013, general election, the voters of the City approved the renewal of its EMS levy for each of the years 2014 through 2023 at the rate of $0.50/$1,000 of assessed value or less. The EMS levy for collection in 2015 is /$1,000 on all taxable property within the City. Aggregate Levy Rate Limitations. The State Constitution and statutes limit the aggregate of all regular property tax levies imposed on any tax parcel by the State and all overlapping taxing districts, except port districts and public utility districts, to 1% of the true and fair value of property. Within the 1% limitation, the levy by the State may not exceed $3.60/$1,000 and the aggregate of all regular levies by all taxing districts (other than the State and other than certain specified levies) may not exceed $5.90/$1,000 of assessed value. Those specified levies excluded from the $5.90/$1,000 limitation include port or public utility district levies; excess property tax levies; levies for acquiring conservation futures; levies for emergency medical care or emergency medical services; levies to finance affordable housing for very low-income housing; certain portions of levies by metropolitan park districts; certain levies imposed by ferry districts; levies for criminal justice purposes; certain portions of levies by fire protection districts; levies by counties for transit-related purposes; and portions of certain levies by certain flood control zone districts. Because various taxing districts may overlap, the aggregate levy rate applied to any two tax parcels within a single taxing district may not be identical. If the aggregate levy rate exceeds the aggregate rate limitation on any single parcel within a taxing district, the regular levy rates of each taxing district that includes that parcel may be reduced. Because of the constitutional requirement for uniformity of taxation within a taxing district (described above), any reduction affects the entire taxing district. If reductions are required, they are made by the County Assessor, in accordance with State statutes and guidance from the DOR setting forth a prioritization of regular levies. The regular levies of the State, counties, road districts, cities, towns, port districts, and public utility districts are considered senior levies; the regular levies of all other taxing districts are considered junior levies. State statute prescribes the order in which the levies of the various junior levies are reduced or eliminated in order to comply with the aggregate rate limitations. Senior levies, such as the City s, are not subject to reduction or elimination based on aggregate rate limitations. See table titled Overlapping and Aggregate Levy Rates Levied for Collection in 2015 below. D-12

98 Maximum Amount Increase Limitation. State law also limits the amount of a regular levy for any particular year to the highest amount that could have been levied in any prior year, multiplied by a specified percentage (the limit factor ) plus an adjustment for new construction, annexations, certain improvements to property, and state assessed property. The limit factor is defined as the greater of (1) the least of 101% or 100% plus inflation or (2) if approved by a majority plus one vote of the governing body upon a finding of substantial need, any percentage up to 101%. If a taxing district levies less than its highest allowable levy, the amount not levied is nonetheless included in the base for determining the maximum amount increase limitation for succeeding years. The City s actual 2015 levy is $9,459,615. The City has no banked levy capacity. See Overlapping Levy Rates below. The maximum amount increase limitation may be exceeded upon approval of a simple majority of voters. This is known as a levy lid lift. A levy lid lift permits a levy amount increase greater than would otherwise be allowed, which increase may be effective indefinitely or for a limited period of time. Tax receipts from the incremental increase may be (but are not required to be) restricted in the ballot proposition to satisfy a limited purpose. A levy lid lift will not increase the levy if it would cause the taxing district s levy to exceed the applicable maximum rate limitations or the aggregate rate limitations described above. The City does not have any levy lid lifts in effect. Relationship Between Rate and Amount Limitations. Regular levies are limited by both the rate limitation and the amount limitations described above and, therefore, may need to be reduced below one threshold to avoid exceeding the other. Because the regular property tax increase limitation applies to the total dollar amount levied rather than to the levy rate, increases in the assessed value of all property in the taxing district (excluding new construction, improvements and State-assessed property), which exceed the rate of growth in taxes allowed by the limit factor, may result in decreased regular tax levy rates, unless voters authorize a higher levy or the taxing district uses banked levy capacity. Decreases in the assessed value of all property in the taxing district (including new construction, improvements and State-assessed property) or increases in such assessed value that are less than the rate of growth in taxes imposed, among other events, may result in increased regular tax levy rates. As assessed values rise, the levy amount increase limitation may restrict levy growth. As assessed values fall, the levy rate limitation may restrict levy growth. See PROPERTY TAX ASSESSMENT AND COLLECTION PROCEDURES Current and Historical Assessed Value and Property Tax Levy Rates and Amounts for the City herein for a table showing the City s historical assessed value, and regular property tax levy rates and amounts. Guaranty Fund Levies. Outside of the $3.60 per $1,000 and $5.90 per $1,000 limitations described above, but within the constitutional 1% aggregate levy limitation, the City may impose a levy for the maintenance of a local improvement guaranty fund to secure debt of any local improvement district that may be created by the City. The amount of a guaranty fund levy in any given collection year may not exceed the greater of (i) 12% of the outstanding obligations guaranteed by the fund or (ii) the total amount of delinquent assessments and interest accumulated on the delinquent assessments (RCW ). The taxes levied for the maintenance of the guaranty fund will be in addition to and, if need be, in excess of all statutory and charter limitations applicable to tax levies in any city or town. The City previously issued $11,544, of Local Improvement District No Bonds, of which $1,670,000 principal amount is currently outstanding and guaranteed by the local improvement guaranty fund. D-13

99 Overlapping Levy Rates The following table shows the ad valorem property tax rates of all of the overlapping taxing districts that levied ad valorem taxes within the City for collection in The taxing districts listed below may have additional authority to levy taxes not listed below. Other overlapping taxing districts may exist or may in the future be created with authority to impose taxes within the City. Overlapping and Aggregate Levy Rates Levied for Collection in 2015 ($ per $1,000) Maximum Regular Levies by Taxing District 2015 Levy Rates Statutory Levy Rate State of Washington $ $ Regular Levies Subject to $5.90 Limitation and 1% Limitation Senior Taxing Districts: The City County Junior Taxing Districts: Hospital District Library District Total Levies Subject to $5.90 and 1% Limitations Regular Levies Subject to 1% Limitation EMS Levy Other County Levies Total Levies Subject to 1% Limitation Summary of Aggregate Levies Subject to 1% ($10) Limitation: State Levy Total Levies Subject to $5.90 and 1% Limitations Total Levies Subject to 1% Limitation Total of All Levies Subject to 1% Limitation Excess Levies 2015 Levy Rates Maximum Statutory Levy Rate Excess Levies & Other Levies Not Subject to Aggregate Limitation The City Bond Levies - None Port District School District Levies None Total Excess Levies Combined Total of All Overlapping Levies within the City Source: Snohomish County Assessor; Washington State Department of Revenue. Assessed Value PROPERTY TAX ASSESSMENT AND COLLECTION PROCEDURES The County Assessor (the Assessor ) determines the value of all real property and personal property throughout the County that is subject to ad valorem taxation, except certain utility properties that are valued by DOR. The Assessor is an elected official whose duties and methods of determining value are prescribed and controlled by statute and by detailed regulations promulgated by DOR. The assessed value is equal to 100% of fair market value, as determined by the Assessor using procedures prescribed by DOR. State law provides for current use valuation for certain properties designated as farm and agricultural lands or as timber lands, in accordance with DOR regulations. Three approaches may be used to determine the fair market value of real property: market data, replacement cost and income generating capacity. In the County, all property is subject to a revaluation every D-14

100 year based on market statistics and an on-site appraisal every six years. Though the intent is that the assessed value reflect 100% of market value, the infrequency of on-site appraisals can lead to assessed values that lag market and other adjustments. Personal property is valued each year based on affidavits filed by the property owner. The property is listed by the Assessor on a roll at its current assessed value and the roll is filed in the Assessor s office. The Assessor s determinations are subject to revisions by the County Board of Equalization and, for certain property, subject to further revisions by the State Board of Tax Appeals. Current and Historical Assessed Value and Property Tax Regular Levy Rates and Amounts for the City The following table shows the current and historical assessed value and property tax levy rates and levy amounts for the City from 2011 to Current and Historical Assessed Value and Property Tax Regular Levy Rates and Amounts Collection Year Assessed Levy Rate (Dollars/$1,000 of Assessed Value (ending December 31) Value (1) Regular EMS Total (2) 2015 $4,771,220,851 $ $ $ ,404,126, ,077,655, ,207,375, ,726,403, Levy Amounts Regular EMS Total (2) 2015 $9,469,615 $2,221,737 $11,691, ,123,646 2,202,063 11,325, ,123,645 2,038,827 11,162, ,044,225 2,103,687 11,147, ,836,120 2,363,201 11,199,322 (1) Total assessed value used for computation of debt capacity; equal to regular assessed value. (2) Totals may not foot due to rounding. Source: Snohomish County Assessor s Office. Largest Property Taxpayers The following table lists the ten largest property taxpayers within the City for tax collection year 2015 listed in declining order of assessed value. Largest Property Taxpayers Taxpayer Nature of Business Assessed Value (AV) (1) Percentage of Total AV (2) Alderwood Mall LLC Shopping Complex $132,673, % Hudson Northview LLC Real Estate 37,987, ECI Three Alderwood LLC Shopping Complex 35,225, Yonnot Inc. Retail 33,890, Redstone Corporate Center LLC Real Estate 31,028, Lynnwood Center LLC Shopping Complex 29,278, Alderwood Heights Associates II LLC Real Estate 28,350, FO Lynnwood Property LLC Mobile Home Park 24,479, Fred Meyer Stores Inc. Retail 23,418, Whispering Cedars Apartments 20,427, Total $396,757, % (1) Based on assessed value for taxes payable in (2) Totals may not foot due to rounding. Source: Snohomish County Assessor s Office. D-15

101 Property Tax Collection Procedure Property taxes are levied in specific amounts by the taxing districts. The levy rate is calculated and fixed by the Assessor based upon the assessed value of the taxable property within the taxing district and adjusted, in accordance with detailed guidelines from DOR, to comply with statutory and constitutional rate and amount limitations. See TAXING AUTHORITY Property Tax Limitations above. The method of giving notice of payment of taxes due, the accounting for the money collected, the division of the taxes among the various taxing districts, notices of delinquency, and collection procedures are all covered by statute and regulation. The Assessor extends the taxes to be levied within each taxing district upon a tax roll which contains the total amount of taxes to be so levied and collected. The tax roll is delivered to the County Treasurer (the Treasurer ) (an elected official) by January 15 of each year, who creates a tax account for each taxpayer and is responsible for the collection of taxes due for each account. All such taxes are due and payable on April 30 of each year, but if the amount due from a taxpayer exceeds $50, half may be paid by April 30 and the balance no later than October 31. Delinquent taxes are subject to interest at the rate of 12% per year computed on a monthly basis from the date of delinquency until paid. In addition, a penalty of 3% is imposed on June 1 of the year in which the tax is due and 8% on December 1 of that year. Penalties are credited to the account of the taxing district; interest on delinquent taxes is credited to the County s current expense fund. The lien on property taxes is prior to all other liens or encumbrances of any kind on real or personal property subject to taxation except for federal civil judgment liens and the possible application of the State homestead exemption described below. A federal lien on personal property that is filed before the personal property tax is levied is senior to the local personal property tax lien. In addition, a federal civil judgment lien (but not a federal tax lien) is senior to real property taxes that are levied after the judgment lien has been recorded. By law the Treasurer may not commence foreclosure of a tax lien on real property until three years have passed since the first delinquency. The State s courts have not decided whether the Homestead Law (chapter 6.13 RCW) may give the occupying homeowner a right to retain the first $125,000 of proceeds of the forced sale of the family residence or other homestead property for delinquent general property taxes. The United States Bankruptcy Court for the Western District of Washington has held that the homestead exemption applies to the lien securing property taxes, while the State Attorney General has taken the position that it does not. See also Algona v. Sharp, 30 Wn. App. 837, 638 P.2d 627 (1982) (holding that liens securing improvement district assessments are subject to the homestead exemption). Collection Record The following table shows the City s property tax collection record for 2010 through Property Tax Collection Record Collection Total Tax Collected Tax Collected Year Ending Levy In Year of Levy as of December 31, 2014 December 31 Amount (1) Amount % Amount % 2014 $11,325,708 $11,132, % $11,132, % ,162,474 10,975, ,118, ,147,913 10,861, ,111, ,199,322 10,900, ,174, ,497,809 10,204, ,486, (1) Regular property taxes; includes EMS levy. Source: Snohomish County Treasurer s Offices Fiscal Policies FINANCIAL INFORMATION The City has established budget related fiscal goals to guide in financial management decisions. Key goals include: Maintain fund balances equal to 5% of operating expenditures to meet cash flow requirements in the general government operating funds (General Fund and Street Fund), to meet normal operating and contingency obligations. o Maintain a Cash Reserve Fund for revenue stabilization and contingencies equal to 10% of general governmental operating expense. This special reserve account is currently funded at approximately $2.5 million, and is to be used for emergencies and special projects, only with City Council approval. D-16

102 o o Maintain an insurance reserve for property, casualty, unemployment, sewer backup and dental claims in an amount equal to consultant or actuarial requirements. Fund full replacement for fire engines in the equipment rental fund based upon the useful life of the equipment. Accounting and Budgeting Policies The City prepares its financial statements on a modified accrual basis of accounting in conformity with generally accepted accounting principles (GAAP). Revenues on this basis are recognized when measurable and available to finance current expenditures. Expenditures are recognized when goods and services are received and liabilities are due and payable. The City accounts for its proprietary funds (enterprise and internal service) on an accrual basis under which revenues are recognized when earned and expenses are recognized when incurred. The City prepares cash and disbursement-based budgets in accordance with chapter 35A.33 RCW. Annual calendar year budgets (in which appropriations lapse at year-end, are adopted by the City Council for funds providing customary government services. Long-term project-oriented budgets are adopted as well, but only as required or as additional appropriations are needed. Special assessment and certain custodial agency funds, however, are not budgeted. Enterprise and internal service fund budgets are for management control only and, therefore, are not reported. A budget increase or decrease to a fund must be authorized by the City Council, while appropriation transfers within a fund may be authorized by the Mayor. All budgets are controlled on an organizational basis. Estimated purchase order amounts are encumbered prior to release of the order to the vendor. Such encumbrances also serve to provide an additional measure of budgetary control. Open encumbrance s lapse at year-end and must be reappropriated or absorbed in the next year s operating budget. Since City budgets legally are adopted and controlled on a cash basis, the Combined Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual reports actual cash revenues and expenditures compared to budgeted amounts. Investment Practices The City maintains a cash and investment pool that is available for use by all funds. It is the City s policy to invest all surplus cash. To facilitate the investment process, an agency fund (undesignated investment control) has been established as a control conduit for the investment of pooled money from all funds. At year end, for reporting purposes only, investments in this pool are apportioned to individual funds based on monthly participation. Investment income earned as a result of pooling is distributed to the appropriate funds utilizing a formula based on the average monthly balance of cash and marketable securities of each fund. All investments are accounted for at cost except for the investments in the deferred compensation plan, which are accounted for at market value. The City s investment policy calls for the investment of public funds in a manner which will provide the highest investment return commensurate with the preservation of principal while meeting daily cash flow demands and conforming with all State and local statutes governing investment of public funds. The City has established an investment committee consisting of the Mayor, the Finance Director and Assistant Finance Director who are responsible for the investment program, including procedures and controls. As of December 31, 2013, the City s investments at Fair Market Value totaled $40,207,788, all of which was invested in the Washington State Local Government Investment Pool (the LGIP ), which is managed by the State Treasurer. Local Government Investment Pool. The State Treasurer s Office administers the LGIP, which invests money on behalf of more than 450 participants. In its management of the LGIP, the State Treasurer is required to adhere, at all times, to the principles appropriate for the prudent investment of public funds. These are, in priority order, (i) the safety of principal; (ii) the assurance of sufficient liquidity to meet cash flow demands; and (iii) to provide a competitive interest rate relative to other highly liquid investment alternatives. Historically, the LGIP has had sufficient liquidity to meet all cash flow demands. The LGIP, authorized by chapter RCW, is a voluntary pool which provides its participants the opportunity to benefit from the economies of scale inherent in pooling. It is also intended to offer participants increased safety of principal and the ability to achieve a higher investment yield than would otherwise be available to them. The LGIP is restricted to investments with maturities of one year or less, and the average life typically is less than 90 days. Investments permitted under the guidelines of the LGIP include, but are not limited to, U.S. government and agency securities, bankers acceptances, high quality commercial paper, repurchase and reverse repurchase agreements, motor vehicle fund warrants, and certificates of deposit issued by qualified Washington State depositories. The City may withdraw its funds in whole or in part on less than 24 hours notice. D-17

103 Auditing of City Finances Cities in the State of Washington must comply with the Budgeting, Accounting and Reporting System (BARS) prescribed by the Office of the State Auditor as authorized under RCW and State laws also provide for annual independent audits by the Office of the State Auditor and require timely submission of annual financial reports to the State Auditor for review. The financial system of the City incorporates financial and administrative controls that ensure the safeguarding of assets and the reliability of financial reports. These controls are designed to provide reasonable assurance that transactions are executed in accordance with management authorization and are recorded in conformity with generally accepted accounting principles, the accountability of and control over assets and obligations exists, and that sufficient reports and review exist to provide adequate information for analysis and comparability of data. Internal control is an area addressed by the State Auditor when conducting his annual audit. Any recommendations are reviewed by City management and implemented when appropriate. The most recent financial audit of the City covers the year ended December 31, 2013, and is attached as Appendix E. Historical Operating Results The following shows the City s statement of revenues and expenditures for the City s General Fund for the fiscal years ended December 31, 2009 through For fiscal year 2013, the City s General Fund (which includes the Revenue Stabilization Fund and the Program Development Fund), comprised approximately 81.95% of the total revenues of the governmental funds, and approximately 83.30% of the total expenses of the governmental funds. Additional information that may interpret, clarify or modify the data presented below is contained in the complete financial statements, including the accompanying footnotes. See Appendix E 2013 AUDITED FINANCIAL STATEMENTS FOR THE CITY OF LYNNWOOD. [Remainder of page intentionally left blank.] D-18

104 Statement of Revenues and Expenditures for the City s General Fund (For Years Ended December 31) REVENUES Taxes Property $ 7,207,325 $ 7,361,796 $ 8,302,800 $ 8,526,798 $ 8,897,973 Sales 14,393,803 14,652,373 15,298,365 16,501,715 17,680,052 Business 2,533,476 4,478,193 6,403,886 6,813,243 7,123,961 Other 164, , , ,779 5,135 License and Permits 1,802,636 1,785,786 2,978,554 3,196,285 3,201,444 Intergovernmental Revenues 1,850,490 1,625,085 1,712,125 1,922,167 1,591,871 Charges for Services 3,850,209 3,888,376 4,608,366 5,228,653 5,465,893 Fines and Forfeitures 4,733,938 7,486,598 3,872,134 3,924,562 4,373,440 Other - Interest 232,381 34,682 20,532 23,664 22,582 Other - Rents 386, , , , ,296 Miscellaneous 47,985 87, ,599 57,448 92,553 TOTAL REVENUES 37,203,490 41,811,010 43,699,603 46,607,723 48,757,200 EXPENDITURES Current General Government (1) 10,271,860 8,722,772 8,055,919 8,259,347 8,326,570 Public Safety 25,931,390 24,191,356 23,706,754 24,459,030 25,117,755 Judicial - 1,166,313 1,045,954 1,059,661 1,054,756 Utilities & Environment - 2,584,086 1,893,481 2,112,245 1,247,585 Economic Environment 4,796,290 3,112,034 2,839,056 2,664,564 2,786,299 Transportation ,138 Culture and Recreation 5,255,492 3,981,279 4,799,277 5,041,586 5,472,049 Capital Outlay 654, , ,922 1,616,842 1,475,665 Debt Service - Principal Retirement Interest and Fiscal Charges ,725 35,341 35,916 1,008 TOTAL EXPENDITURES 46,910,195 43,981,758 42,487,404 45,249,191 46,163,825 Excess (Deficiency) of Revenues over (Under) Expenditures (9,706,705) (2,170,748) 1,212,199 1,358,532 2,593,375 OTHER FINANCING SOURCES (USES) Transfers In 5,535,285 5,379,719 3,183,022 4,867,321 2,439,762 Transfers out (1,172,782) (1,023,143) (713,459) (1,514,807) (2,105,736) Other (2) 4,400 2,814,864 3,531,547 1,337 1,540 TOTAL OTHER FINANCING SOURCES (USES) 4,366,903 4,356,576 2,469,563 3,353, ,566 Net Change in Fund Balance (5,339,802) 5,000,692 7,213,309 4,712,383 2,928,941 Fund Balances January 1 (3) 6,105,679 (115,732) 5,311,811 12,525,148 18,223,757 Restatement/Prior Period Adjustment (881,610) ,226 - Fund Balances (deficit) December 31 (115,733) 4,884,960 12,525,120 18,223,757 21,152,698 (1) 2009: General Government includes Human Services. (2) Special items: 2010, proceeds from sale of Joint Shop; 2011, proceeds from sale of Business Park (3) $426,851 difference between ending fund balance in 2010 and beginning fund balance in 2011 is due to the City implementing GASB 54 and moving the Program Development into the General Fund. No restatement is necessary for changes in accounting standards. The $28 difference from 2011 ending balance to 2012 beginning fund balance is a round error with the City s software. Source: City of Lynnwood audited financial records. D-19

105 General Fund Budget The following is the City s General Fund Budget General Fund Budget Beginning Fund Balance $ 1,663,493 Revenues Taxes 67,302,453 License and Permits 8,669,497 Intergovernmental Revenues 2,313,872 Charges for Services 11,894,174 Fines and Forfeitures 7,851,300 Miscellaneous Revenues 746,992 Other Financing Sources 4,513,757 Total Revenues $103,292,045 Total Available Resources $104,955,538 Expenditures Administrative Services $ 9,825,201 Community Development 4,289,970 Economic Development 1,183,435 Executive 1,271,661 Fire 19,108,561 Human Resources 1,100,453 Legal 2,550,000 Legislative 829,862 Municipal Court 2,602,743 Non-Departmental 10,403,229 Parks & Recreation 13,100,115 Police 32,503,169 Public Works 5,319,971 Total Expenditures $104,088,370 Estimated Ending Fund Balance $ 867,168 Source: City of Lynnwood. Discussion of 2014 Operating Results. The City is currently working on its 2014 financial statements and expects that 2014 operating results will be similar to the 2013 operating results. D-20

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107 APPENDIX E 2013 AUDITED FINANCIAL STATEMENTS OF THE CITY OF LYNNWOOD

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109 Washington State Auditor Troy Kelley September 18, 2014 Financial Statements and Federal Single Audit Report City of Lynnwood Snohomish County For the period January 1, 2013 through December 31, 2013 Mayor and City Council City of Lynnwood Lynnwood, Washington Report on Financial Statements and Federal Single Audit Please find attached our report on the City of Lynnwood s financial statements and compliance with federal laws and regulations. We are issuing this report in order to provide information on the City s financial condition. Sincerely, TROY KELLEY STATE AUDITOR Published September 18, 2014 Report No

110 Table of Contents City of Lynnwood Snohomish County January 1, 2013 through December 31, 2013 Federal Summary City of Lynnwood Snohomish County January 1, 2013 through December 31, 2013 Federal Summary... 4 Schedule Of Audit Findings And Responses... 6 Status Of Prior Audit Findings Independent Auditor s Report On Internal Control Over Financial Reporting And On Compliance And Other Matters Based On An Audit Of Financial Statements Performed In Accordance With Government Auditing Standards Independent Auditor s Report On Compliance For Each Major Federal Program And On Internal Control Over Compliance In Accordance With OMB Circular A Independent Auditor s Report On Financial Statements Financial Section Corrective Action Plan for Findings Reported Under OMB Circular A About The State Auditor s Office The results of our audit of the City of Lynnwood are summarized below in accordance with U.S. Office of Management and Budget Circular A-133. FINANCIAL STATEMENTS An unmodified opinion was issued on the financial statements of the governmental activities, the business-type activities, each major fund and the aggregate discretely presented component units and remaining fund information. Internal Control Over Financial Reporting: Significant Deficiencies: We identified deficiencies in the design or operation of internal control over financial reporting that we consider to be significant deficiencies. Material Weaknesses: We identified no deficiencies that we consider to be material weaknesses. We noted no instances of noncompliance that were material to the financial statements of the City. FEDERAL AWARDS Internal Control Over Major Programs: Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over major federal programs that we consider to be significant deficiencies. Material Weaknesses: We identified no deficiencies that we consider to be material weaknesses. We issued an unmodified opinion on the City s compliance with requirements applicable to its major federal program. We reported no findings that are required to be disclosed under section 510(a) of OMB Circular A-133. Page 3 Page 4

111 Identification of Major Programs: The following was a major program during the period under audit: CFDA No. Program Title Highway Planning and Construction Cluster - Highway Planning and Construction The dollar threshold used to distinguish between Type A and Type B programs, as prescribed by OMB Circular A-133, was $300,000. The City did not qualify as a low-risk auditee under OMB Circular A-133. Schedule of Audit Findings and Responses City of Lynnwood Snohomish County January 1, 2013 through December 31, The City should continue to improve internal controls over accounting and financial reporting to ensure the financial statements are accurate and complete. Background It is the responsibility of City management to design and follow internal controls that provide reasonable assurance regarding the reliability of financial reporting. In each of our seven previous audits, we have identified and communicated deficiencies in controls that adversely affect the City s ability to produce reliable financial statements. Although the City as a whole has made some improvements to its internal control structure, we continue to note internal control weaknesses that impact the City s ability to produce financial statements that are free from error. Description of Condition We identified the following deficiencies in internal controls over accounting and financial reporting that, when taken together, represent significant deficiencies: The City has known its capital asset system contains errors; however, it chose to continue to use the system to account for capital assets without performing a full review of the system s data and correcting the identified errors. Staff responsible for recording accounting transactions, including complex and unusual transactions, did not adequately research how to appropriately record some transactions. Although the City has procedures to perform a final review of the prepared financial statements, the review was not adequate to ensure errors were detected and corrected prior to audit. Cause of Condition The City did not dedicate sufficient resources to the financial reporting function and experienced turnover in a key accounting position responsible for monitoring a portion of the City s accounting and financial reporting functions. Page 5 Page 6

112 In addition, the City assigned sections of the financial statements to be prepared or reviewed by the departments responsible for the daily accounting operations. However, personnel in each department did not dedicate the necessary time and resources to ensure balances are accurately valued, researched and supported by appropriate documentation. Effect of Condition Inaccurate financial reports limit access to financial information used by City officials, the public, state and federal agencies and other interested parties. It also hinders the audit process and increases audit costs. The following significant errors were not detected by the City but were identified during our audit: The City improperly included assets totaling $19,308,700 as buildings and improvements that should have been classified as infrastructure (sidewalks, streets, pedestrian bridge) based on the City s description. The City did not correct this error. The City included $3,842,920 of assets as construction in progress that were no longer in progress and should have been reclassified as infrastructure. Further, the City understated construction in progress by $1,659,674. The City did not correct this error. The City misclassified restricted cash and restricted fund balance totaling $20,263 as unrestricted cash and unassigned fund balance. The City corrected this error. We identified additional, less significant errors in the financial statements and notes to the financial statements. Despite these internal control issues and noted errors, the City ultimately provided financial statements upon which we are issuing an unmodified opinion. Recommendation We continue to recommend City management take action to establish ongoing, consistent internal controls over its financial accounting and reporting, including: Performing a full inventory of capital assets to ensure capital assets and the associated accumulated depreciation and depreciation expense are correctly reported. Ensuring accounting entries are researched thoroughly for proper accounting. The City should be extra diligent with infrequent or unusual accounting transactions. Providing staff the necessary training, resources, and time to prepare accurate and complete financial statements. The Water and Sewer Utility Fund understated depreciation by $1,573,301 due to the City including salvage values on building and infrastructure assets when it is unlikely the City would realize a revenue at the end of the assets useful life. The City did not correct this error. The City did not remove a parcel of land, valued at $340,682 that was sold by the City in The City did not correct this error. Five of 57 randomly selected machinery and equipment assets and 11 individually significant assets, totaling $34,974 were not owned by the City at year end. The City did not correct this error. The City reports an asset Signal 196th ST SW that it cannot verify existed at year-end. This resulted in buildings and improvements being overstated by $277,852. The City did not correct this error. The City received $730,000 from a private developer for storm water mitigation fees in three installments during Once the final payment was received by the City in November 2013, City staff did not recognize the revenue and continued to report a liability even though the City had fulfilled its obligations. The City did not correct this error. Ensuring individuals responsible for reviewing the financial statements have sufficient time to ensure accurate preparation and reporting. City s Response The City is converting its financial accounting system from GEMS to Munis. Phase 1 of 5 went live on July 1, Munis is a modern enterprise-wide financial system that incorporates sound internal controls over accounting processes and accounting entries. The City is developing a work-plan to perform a full capital asset inventory that will ensure capital assets and their associated accumulated depreciation expenses are properly reported. This plan incorporates our transition to the Munis Fixed Asset module as part of our Phase 2 financial system conversion which is currently ongoing. The City will build adequate time for training, research, and review into the next financial statement preparation process. Auditor s Remarks We appreciate the steps the City is taking to resolve this issue. We will review the condition during our next audit. Page 7 Page 8

113 Applicable Laws and Regulations Government Auditing Standards, December 2011 Revision, paragraph 4.23 states: 4.23 When performing GAGAS financial audits, auditors should communicate in the report on internal control over financial reporting and compliance, based upon the work performed, (1) significant deficiencies and material weaknesses in internal control; (2) instances of fraud and noncompliance with provisions of laws or regulations that have a material effect on the audit and any other instances that warrant the attention of those charged with governance; (3) noncompliance with provisions of contracts or grant agreements that has a material effect on the audit; and (4) abuse that has a material effect on the audit. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 265, as follows:.07 For purposes of generally accepted auditing standards, the following terms have the meanings attributed as follows: Material weakness A deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis. Significant deficiency A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance. RCW , Local government accounting -- Uniform system of accounting, states: isolate and prove the validity of every transaction; all statements and reports made or required to be made, for the internal administration of the office to which they pertain; and all reports published or required to be published, for the information of the people regarding any and all details of the financial administration of public affairs. Budget Accounting and Reporting System (BARS) Manual - Part 3, Accounting, Chapter 1. Accounting Principles and Internal Control, Internal Control, Section states, in part: Internal control is defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), in standards adopted by the American Institute of Certified Public Accountants and by the Federal Office of Management and Budget as follows: Internal control is a process affected by those charged with governance, management and other personnel designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations Compliance with applicable laws and regulations Reliability of financial reporting Management and the governing body are responsible for the government s performance, compliance and financial reporting. Therefore, the adequacy of internal control to provide reasonable assurance of achieving these objectives is also the responsibility of management and the governing body. The governing body has ultimate responsibility for ensuring adequate controls to achieve objectives, even though primary responsibility has been delegated to management. The state auditor shall formulate, prescribe, and install a system of accounting and reporting for all local governments, which shall be uniform for every public institution, and every public office, and every public account of the same class. The system shall exhibit true accounts and detailed statements of funds collected, received, and expended for account of the public for any purpose whatever, and by all public officers, employees, or other persons. The accounts shall show the receipt, use, and disposition of all public property, and the income, if any, derived therefrom; all sources of public income, and the amounts due and received from each source; all receipts, vouchers, and other documents kept, or required to be kept, necessary to Page 9 Page 10

114 Status of Prior Audit Findings City of Lynnwood Snohomish County January 1, 2013 through December 31, 2013 Status The City has partially corrected the internal control weaknesses noted in this finding. The City has purchased accounting software that will enable it to account for its property and equipment, but the system is not yet in place. We will review the City s progress during our next audit. The finding is repeated in the current audit period in Finding 1. The status of findings contained in the prior years audit reports of the City of Lynnwood is provided below: 1. The City should continue to improve internal controls over accounting and financial reporting to ensure the financial statements are accurate and complete. Report No , dated 9/30/2013 Background We identified the following deficiencies in internal controls over accounting and financial reporting that, when taken together, represent significant deficiencies: Although the City has procedures to perform a final review of the prepared financial statements prior to audit, the review was not effective in detecting material errors. Staff responsible for recording accounting transactions, including complex transactions, did not adequately research how to appropriately record some transactions. The City knows its capital asset system contains errors, however, it chose to continue to use the system to account for capital assets without performing a full review of the system s data and correcting the identified errors. Cause of Condition The City hired an outside CPA to perform a final review of its statements; however, the City did not provide sufficient time for the CPA to perform a detailed review of the statements or for the City to correct errors identified by the CPA prior to audit. City management has not dedicated the necessary time and resources to: Ensure staff understand and are trained in proper accounting procedures. Review its capital assets to ensure depreciation is being properly calculated and depreciable values for the assets are appropriate. Page 11 Page 12

115 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Mayor and City Council City of Lynnwood Lynnwood, Washington City of Lynnwood Snohomish County January 1, 2013 through December 31, 2013 We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund and the aggregate discretely presented component units and remaining fund information of the City of Lynnwood, Snohomish County, Washington, as of and for the year ended December 31, 2013, and the related notes to the financial statements, which collectively comprise the City s basic financial statements, and have issued our report thereon dated August 29, As discussed in Note 14 to the financial statements, during the year ended December 31, 2013, the City implemented Governmental Accounting Standards Board Statement No. 65, Items Previously Reported as Assets and Liabilities. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit of the financial statements, we considered the City s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City s internal control. Accordingly, we do not express an opinion on the effectiveness of the City s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of City's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. We did identify certain deficiencies in internal control, described in the accompanying Schedule of Audit Findings and Responses as Finding 1 that we consider to be significant deficiencies. COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the City s financial statements are free from material misstatement, we performed tests of the City s compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. CITY S REPONSE TO FINDINGS The City s response to the findings identified in our audit is described in the accompanying Schedule of Audit Findings and Responses. The City s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the response. PURPOSE OF THIS REPORT The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. TROY KELLEY STATE AUDITOR August 29, 2014 Page 13 Page 14

116 Independent Auditor s Report on Compliance for Each Major Federal Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 Mayor and City Council City of Lynnwood Lynnwood, Washington City of Lynnwood Snohomish County January 1, 2013 through December 31, 2013 REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM We have audited the compliance of the City of Lynnwood, Snohomish County, Washington, with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended December 31, The City s major federal programs are identified in the accompanying Federal Summary. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts and grants applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the City s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. Our audit does not provide a legal determination on the City s compliance. Opinion on Each Major Federal Program In our opinion, the City complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, REPORT ON INTERNAL CONTROL OVER COMPLIANCE Management of the City is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the City s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program in order to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. PURPOSE OF THIS REPORT The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. However, this report is a matter of public record and its distribution is not limited. Page 15 Page 16

117 It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. TROY KELLEY STATE AUDITOR August 29, 2014 Independent Auditor s Report on Financial Statements Mayor and City Council City of Lynnwood Lynnwood, Washington City of Lynnwood Snohomish County January 1, 2013 through December 31, 2013 REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund and the aggregate discretely presented component units and remaining fund information of the City of Lynnwood, Snohomish County, Washington, as of and for the year ended December 31, 2013, and the related notes to the financial statements, which collectively comprise the City s basic financial statements as listed on page 21. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the City 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 City s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Page 17 Page 18

118 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund and the aggregate discretely presented component units and remaining fund information of the City of Lynnwood, as of December 31, 2013, and the respective changes in financial position and, where applicable, cash flows thereof, and the budgetary comparison for the General fund, for the year then ended in accordance with accounting principles generally accepted in the United States of America. Matters of Emphasis As discussed in Note 14 to the financial statements, in 2013, the City adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 65, Items Previously Reported as Assets and Liabilities. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 22 through 31, information on firemen s pension plan on page 98 and LEOFF 1 retiree medical benefits on page 99 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 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 information is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated August 29, 2014 on our consideration of the City s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City s internal control over financial reporting and compliance. TROY KELLEY STATE AUDITOR August 29, 2014 Supplementary and Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City s basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. This schedule is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The 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 Page 19 Page 20

119 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Financial Section City of Lynnwood Snohomish County January 1, 2013 through December 31, 2013 REQUIRED SUPPLEMENTARY INFORMATION Management s Discussion and Analysis 2013 BASIC FINANCIAL STATEMENTS Statement of Net Position 2013 Statement of Activities 2013 Balance Sheet Governmental Funds 2013 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position 2013 Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds 2013 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds to the Statement of Activities 2013 Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual General Fund 2013 Statement of Net Position Proprietary Funds 2013 Statement of Revenues, Expenses and Changes in Net Position Proprietary Funds 2013 Statement of Cash Flows Proprietary Funds 2013 Statement of Net Position Fiduciary Funds 2013 Statement of Changes in Net Position Fiduciary Funds 2013 Notes to Financial Statements 2013 REQUIRED SUPPLEMENTARY INFORMATION Firemen s Pension Plan Schedule of Funding Progress 2013 LEOFF 1 Retiree Medical Benefits Schedule of Funding Progress 2013 SUPPLEMENTARY AND OTHER INFORMATION Schedule of Expenditures of Federal Awards 2013 Notes to the Schedule of Expenditures of Federal Awards 2013 Management s Discussion and Analysis City of Lynnwood management offers this narrative overview and analysis of the financial activities of the City of Lynnwood for the fiscal year ended December 31, Financial Highlights The assets of the City of Lynnwood exceeded its liabilities and deferred inflows at fiscal year-end by $188,938,137 (net position), an increase of $10.7 million or 6.02% over Of this amount, unrestricted net assets total $32,071,767 and may be used to meet the city s ongoing obligations to citizens and creditors. Restricted net assets total $12,116,870 and are earmarked for debt service, capital projects and special revenue funds. At December 31, 2013, the City s governmental funds reported combined ending fund balances of $30,846,615, an increase of $5.6 million over Taxes received exceeded expectations, Transportation Benefit District funds were carried over to the next biennium, the City s newly remodeled Recreation Center continues to outperform budget, and expenditure levels grew minimally. At the end of the 2013 fiscal year, unassigned fund balance for the general fund was $15,683,386 or 32% of total general fund revenues (34% of expenditures). Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City of Lynnwood s basic financial statements. The City of Lynnwood s basic financial statements comprise three components: 1) governmentwide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information intended to furnish additional detail to support the basic financial statements themselves. Government-wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the City of Lynnwood s finances, in a manner similar to a private-sector business. The Statement of Net Position presents financial information on all the City of Lynnwood s assets, liabilities, and deferred inflows/outflows of resources, with the difference 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 of Lynnwood is improving or deteriorating. The Statement of Activities presents information showing how the City of Lynnwood s net position changed during the most recent fiscal year. All changes in the net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the 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 the government-wide financial statements distinguish functions of the City of Lynnwood 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 City of Lynnwood include general government, public safety, highways and streets, economic development, physical environment, and culture and recreation. The businesstype activities of the City include the water, sewer, and storm drainage utility, and a golf course. The City of Lynnwood s (primary government) government-wide financial statements currently include a legally separate entity known as the Lynnwood Public Facilities District (PFD). The City has a degree of Page 21 Page 22

120 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report financial accountability for the PFD and discretely reports the component unit separately within the City s financial statements. On July 12, 2010 the City of Lynnwood s City Council chartered the Lynnwood Transportation Benefit District (TBD) within the City s jurisdiction for the purpose of acquiring, constructing, improving, providing, and funding transportation improvements within the District. The TBD is a separate legal entity governed by a Board of Directors consisting of the seven members of the Lynnwood City Council. The TBD Board authorized a $20 per vehicle annual license fee within the District. The fee went into effect June 1, Whereas the PFD is reported as a discrete component unit the TBD is reported as a blended component unit within the City s special revenue funds. Fund Financial Statements A fund is a grouping of related accounts that are used to maintain control over resources that have been segregated for specific activities or objectives. The City of Lynnwood, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City of Lynnwood can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. 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 statement, 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 the 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 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. 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 and LID 93-1 Fund are considered to be major funds. Data from the other governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements in the combining and individual fund statements and schedules section of this report. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the Water, Sewer and Storm Drainage Utility and the Golf Course as all of which are considered to be major funds of the City of Lynnwood. Conversely, the internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds are provided in the form of combining statements in the combining and individual fund statements and schedules section of this report. Fiduciary Funds Fiduciary funds are used to account for resources held for the benefit of parties outside of the government. Fiduciary funds are not reported in the government-wide financial statements because the resources of those funds are not available to support the City of Lynnwood s own programs. The City of Lynnwood maintains two types of fiduciary funds. The Firefighters Pension Fund accounts for the Firefighters Pension System, which is a single-employer closed pension plan. Membership is limited to firefighters employed by the City prior to March 1, The Agency and Trust Funds report resources held by the City of Lynnwood in a custodial capacity for individuals, private organizations and other governments. Notes to the Financial Statements The notes provide additional information that is essential to acquire a full understanding of the data provided in the government-wide and fund financial statements. Other Information In addition to the basic financial statements and accompanying notes, this report also presents required supplementary information concerning the City of Lynnwood s progress in funding its obligation to provide pension and OPEB benefits to its employees. The combining statements referred to earlier in connection with nonmajor governmental funds and internal service funds are presented immediately following the required supplementary information on pensions and OPEB. Government-wide Overall Financial Analysis As noted earlier, net position over time, may serve as a useful indicator of a government s financial position. In the case of the City of Lynnwood, assets exceeded liabilities by $188,976,716 at the close of the most recent fiscal year. The City of Lynnwood adopts its budget on a biennial basis. The 2013 fiscal year is the first year of the two year budget A budgetary comparison statement has been provided for the general fund to demonstrate compliance with this budget. Proprietary Funds The City of Lynnwood maintains two types of proprietary funds. Enterprise Funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City of Lynnwood uses enterprise funds to account for its Water, Sewer, and Storm Drainage Utility and the Golf Course. Internal Service Funds are an accounting device used to accumulate and allocate costs internally among the City s various functions. The City uses internal service funds to account for its fleet of vehicles, central stores, self-insurance program, and for its retirement contributions. Page 23 Page 24

121 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Programmatic Contribution to Net Position The bar chart below illustrates the contribution that various city functions make to net position from its operations before taxes. If expenses exceed revenues and contributions the function requires a subsidy from tax revenues (not shown) to support its operations. If revenues and contributions exceed expenses then the function adds to city assets. However, it should be noted that if the contribution made to the function is in the form of capital, the function may still require tax support for its operations. The illustration makes it clear that some activities of the city require a significant amount of support through taxes while others are more self-supporting. City of Lynnwood s Net Position The City s overall net position increased $10.7 million (6.02%) from the prior fiscal year. By far, the largest portion of the City s net position ($144,749,500; 76.6%) reflects investment in capital assets (e.g., land, buildings, machinery, equipment, vehicles, and infrastructure), less any related outstanding debt that was used to acquire those assets. The City uses these capital assets to provide a variety of services to citizens. Accordingly, these assets are not available for future spending. Although the City of Lynnwood s investment in capital assets is reported net of related debt, it should be noted that the resources used to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the City s net position ($12,116,870; 6.4%) represents resources that are subject to external restrictions on how they may be used. The remaining balance ($32,071,767; 17%) is unrestricted and may be used to meet the City s ongoing obligations to its citizens and creditors. Public safety (which includes the police, fire and municipal court departments) is particularly dependent on tax support. The utilities (water, sewer, and storm drainage) are completely self-supporting through user fees. The transportation program shows a substantial amount of revenues and contributions. This is due primarily to several capital grants the city has received. These grants add the value of these capital facilities to the City assets in the form of investments in the City s transportation system, including roadways, sidewalks, and traffic signals. Page 25 Page 26

122 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Changes in Net Position During the current fiscal year, net position for governmental activities increased $10.2 million (8.3%). Governmental Activities Business-type Activities Total Revenues Program Revenues Charge for Service $ 19,538,627 $ 12,920,908 $ 17,207,794 $ 15,296,741 $ 36,746,421 $ 28,217,649 Operating Grants & Contributions 1,495,360 1,602, ,158 1,495,360 1,708,743 Capital Grants & Contributions 4,947,471 1,729, , ,736 5,172,565 1,852,758 General Revenues Property Taxes 11,515,054 11,071, ,515,054 11,071,727 Sales Taxes 19,070,344 18,076, ,070,344 18,076,002 Other Taxes 10,574,669 8,572, ,574,669 8,572,801 Other Revenues 208, , ,696 50, , ,110 Total Revenues 67,350,085 54,210,073 17,693,584 15,576,717 85,043,669 69,786,790 Local sales tax revenues increased by nearly $994 thousand, or 5.5% compared to fiscal Property tax revenues collected were $11.5 million, or 4%; an increase of $443 thousand over collections in In 2013, the City received $259,924 in mitigation payments, a decrease of $8,380 (3.3%) from This revenue stream continues to be well below the original estimate prepared by the State Department of Revenue (DOR) in The State of Washington enacted a financial assistance program effective July 1, The program is designed to mitigate the impact of the new sales tax system. The mitigation payments were intended to offset the loss incurred by local governments from destination-based sales (sale transactions that are delivered outside of point-of-sale jurisdictions). Revenues by Source Governmental Activities The following pie chart shows revenues by source for all governmental activities, including capital grants and debt service. Sales taxes represent 28.3% of total governmental revenues. Most capital and operating grants are for transportation purposes. Expenses General Government 12,126,355 7,863, ,126,355 7,863,955 Judicial 1,567,467 1,060, ,567,467 1,060,371 Public Safety 26,683,617 25,551, ,683,617 25,551,751 Physical Environment - 1,984, ,984,451 Utilities 32, ,753 - Transportation 7,361,539 4,982, ,361,539 4,982,635 Natural Environment 153, ,292 - Economic Environment 2,779,605 2,668, ,779,605 2,668,346 Social Services 408, ,259 - Culture & Recreation 8,249,955 7,406, ,249,955 7,406,725 Interest on Long-term Debt 1,118,728 1,208, ,118,728 1,208,975 Disposition of Capital Assets 23,122 66,001 3,668-26,790 66,001 Water - - 4,301,933 4,045,975 4,301,933 4,045,975 Sewer - - 7,752,344 7,631,520 7,752,344 7,631,520 Golf Course ,155 1,067, ,155 1,067,535 Storm Drainage - - 2,243,250 2,636,787 2,243,250 2,636,787 Total Expenses 60,504,692 52,793,210 15,278,350 15,381,817 75,783,042 68,175,027 Increase (Decrease) in Net Position Before Transfers 6,845,393 1,416,863 2,415, ,900 9,260,627 1,611,763 Transfers 1,827,548 1,387,075 (1,827,548) (1,387,075) - - Increase (Decrease) in Net Position 8,672,941 2,803, ,686 (1,192,175) 9,260,627 1,611,763 Net Position - beginning 124,043, ,828,124 54,167,071 55,748, ,210, ,576,747 Prior Period Adjustments 1,597, ,511 (130,343) (389,384) 1,466,866 22,127 Net Position - beginning - Adjusted 125,640, ,239,635 54,036,728 55,359, ,677, ,598,874 Net Position - ending $ 134,313,723 $ 124,043,573 $ 54,624,414 $ 54,167,064 $ 188,938,137 $ 178,210,637 Page 27 Page 28

123 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Governmental expenditures increased $7.7 million or 14.7% from the prior year. Function/Programs 2013 Expenditures 2012 Expenditures $ Increase/ (Decrease) % Increase/ (Decrease) General Government $ 12,126,355 $ 7,863,955 $ 4,262, % Judicial 1,567,467 1,060, , % Public Safety 26,683,617 25,551,751 1,131, % Physical Environment - 1,984,451 (1,984,451) % Utilities 32,753-32, % Transportation 7,361,539 4,982,635 2,378, % Natural Environment 153, , % Economic Environment 2,779,605 2,668, , % Social Services 408, , % Culture & Rec 8,249,955 7,406, , % Interest on Debt 1,118,728 1,208,975 (90,247) -7.5% $ 60,481,570 $ 52,727,209 $ 7,754, % Business-type activities Business-type activities increased the City of Lynnwood s net position by $587,686. Charges for Services revenue increased by $1.9 million (12.5%) from $15.3 million to $17.2 million. Total revenues increased $2.1 million (13.6%). Total expenses decreased from $15.4 million to $15.3 million (-0.7%). Expenses related to water, sewer, and storm utility decreased by approximately $107,135 (-0.1%). Expenses related to the City s golf course decreased by $90,380 (-8.5%). Financial Analysis of the City s Funds As noted earlier, the City of Lynnwood uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental Funds The focus of the City s governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City s financing requirements. In particular, unassigned fund balance may serve as a useful measure of the city s net resources available for discretionary spending at the end of a fiscal year. At December 31, 2013, the City s governmental funds reported combined ending fund balances of $30,846,615, an increase of $5.59 million over General Fund Budgetary Highlights Original budget compared to final budget. During the year there was no need for any significant amendments to either the original estimated revenues or original budgeted appropriations. Final budget compared to actual results. The City of Lynnwood budgets on a biennial basis. The City s Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual is presented as a one year budget for comparison purposes to make it more meaningful to the reader. The most significant differences between estimated revenues and actual revenues were as follows: Sales tax revenues exceeded budget by $1.2 million (7.3%). Fines and forfeitures revenues came in $543 thousand over budget. Total expenditures were $4.05 million under budget. Public safety expenditures were $1.7 million under budget. Additional information is provided in the General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance, Budget and Actual. Capital Assets and Debt Administration Capital Assets The City of Lynnwood s investment in capital assets for its governmental and business-type activities (not including investment in joint venture) as of December 31, 2013, amounts to $184.5 million (net of accumulated depreciation). This investment in capital assets includes land and construction in progress, both of which are not subject to depreciation. The other capital assets, buildings and systems, improvements other than buildings and systems, machinery and equipment, and infrastructure are subject to depreciation. Governmental type capital assets (net of depreciation) totaled $132.5 million in 2013, an increase of $208 thousand from Business-type assets (net of depreciation) totaled $52.1 million, an increase of $1.7 million from More information on the City s Capital Assets can be found in Note 5 Capital Assets, in the Notes to the Financial Statements. Infrastructure, $53,483,793 Machinery and equipment, $11,982,519 Improvements other than buildings, $26,218,689 Capital Assets Net of Depreciation Land, $38,240,933 Buildings, $39,771,334 Easements, $4,586,862 Art, nondepreciable, $164,517 Construction in progress, $10,089,736 Major capital asset events during the current fiscal year included the following: 76 th Sewer line / Sewer main was placed in service at a total cost of $3,174,857; Recreation Center Heating Ventilation, & Air Conditioning upgrade at a total cost of $1,365,699. Page 29 Page 30

124 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Various wastewater treatment plant equipment were placed in service at a total cost of $1,256,138; 48 th Ave W Sidewalk project was completed at a cost of $990,342; Stadler Ridge Park was completed and opened in March 2013 at a cost of $727,575; Purchase of various vehicles and equipment at a total cost of $490,318. Long-Term Debt At the end of 2013, the City of Lynnwood had total bonded debt outstanding of $41.2 million. Of this amount, $26.7 million is backed by the full faith and credit of the City and $2.1 million is special assessment debt. The remainder ($12.4 million) represents bonds secured solely by specified revenue sources (i.e., revenue bonds). Total long-term debt includes compensated absences ($4.7 million) and pension related commitments ($2.8 million) for total long-term debt of $48.7 million. The City s total long-term debt decreased by $2.4 million in 2013 and no new long-term debt was issued. More information on the City s Long-Term Debt can be found in Note 7. Economic Factors and the Next Year s Budgets and Rates Our state and local economies have continued to show signs of slight recovery. But, the uncertainty caused by national decision-making on the federal budget and the federal debt limit, together with state budget problems, directly affect our local economy. The City however continues to successfully adjust to these uncertain times actually increasing our unrestricted General Fund balance from the biennium to the biennium. Other economic factors considered when preparing the City s budget include: In March 2014, the county in which our City is located (Snohomish County) has a not seasonallyadjusted unemployment rate of 6%, up from 5.7% in March The City increased its water rates beginning January 1, The increase was offset somewhat by a reduction in the General Fund tax on utility services. The City s assessed value increased by 8% for tax year The City increased its fee schedule effective June 1, Interest rates are expected to remain low. On the expenditure side, increases are expected for health insurance premiums, labor and other benefit costs. The City of Lynnwood continues to purchase catastrophic property and liability insurance policies to protect itself from unforeseen circumstances. Requests for Information This financial report is designed to provide our citizens, creditors, investors, and other interested parties with a general overview of the City s finances and to show the City accountability for the financial resources it receives. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Finance Director, City of Lynnwood, PO Box 5008, Lynnwood, WA Our web site address is: Select City Finances under City Hall CITY OF LYNNWOOD, WASHINGTON STATEMENT OF NET POSITION DECEMBER 31, 2013 Governmental Activities Primary Government Business-type Activities Total Component Unit Public Facilities District ASSETS CURRENT ASSETS Cash and equivalents $ 26,316,986 $ 14,058,159 $ 40,375,145 $ 4,006,930 Investments Receivables (net of allowance for uncollectibles) 9,399,168 2,699,520 12,098, ,354 Intergovernmental Receivable 188,906 20, ,689 - Internal balances 1,331,991 (1,331,991) - - Inventories - 23,918 23,918 17,617 Prepaid items 417, , ,774 66,700 Restricted cash & investments: Customer deposits - 117, ,879 - Restricted cash & equivalents 378, ,568 1,161,929 1,731,524 Bond covenant accounts - 1,858,187 1,858,187 - Total Current Assets 38,033,155 18,340,054 56,373,209 6,225,125 NONCURRENT ASSETS Long-term notes receivable, net of current portion, net of allowance for uncollectibles 2,292,634 61,322 2,353,956 - Investment in joint ventures 1,591,111-1,591,111 - Capital assets not being depreciated: Land 30,596,230 12,231,563 42,827,793 6,788,800 Other nondepreciable 164, ,517 - Construction in progress 7,695,984 2,393,750 10,089,734 - Capital assets - net of accumulated depreciation: Buildings and improvements 57,883,935 8,106,091 65,990,026 16,965,326 Equipment 9,751,106 2,231,541 11,982,647 - Infrastructure 26,387,864 27,095,931 53,483,795 - Net Capital Assets 132,479,636 52,058, ,538,512 23,754,126 Total Noncurrent Assets 136,363,381 52,120, ,483,579 23,754,126 Total Assets 174,396,536 70,460, ,856,788 29,979,251 LIABILITIES CURRENT LIABILITIES Accounts Payable and Accrued Expenses 3,393,418 1,963,058 5,356, ,294 Unearned Revenue 411, ,225 - Other current liabilities 6,321-6, ,873 Current Liabilities Payable from Restricted Assets: Liabilities Payable from Restricted Assets 110, ,319 1,052,531 - Total Current Liabilities 3,921,176 2,905,377 6,826, ,167 Noncurrent Liabilities: Due Within One Year 2,586, ,389 3,223, ,135 Due in More Than One Year 33,537,003 12,293,072 45,830,075 26,372,809 Total Noncurrent Liabilities 36,123,058 12,930,461 49,053,519 27,213,944 Total Liabilities 40,044,234 15,835,838 55,880,072 27,995,111 DEFERRED INFLOWS OF RESOURCES Grants received in advance 38,579-38,579 - Total Deferred Inflows of Resources 38,579-38,579 - NET POSITION Net Investment in Capital Assets 105,272,605 39,476, ,749,500 (3,314,765) Restricted for: Prepaid items 417, , ,774 - Debt Service 1,386,712 1,128,605 2,515,317 1,700,000 Capital Projects 3,537,859 1,459,582 4,997,441 - Special revenue 3,789,865-3,789,865 - Other 222,920 61, ,336 - Unrestricted 19,686,019 12,387,885 32,073,904 3,598,905 Total Net Position $ 134,313,723 $ 54,624,414 $ 188,938,137 $ 1,984,140 The notes to the financial statements are an integral part of this statement Page 31 Page 32

125 CITY OF LYNNWOOD, WASHINGTON STATEMENT OF ACTIVITIES For the Year Ended December 31, 2013 Expenses Charges for Services Program Revenues Net (Expense) Revenue and Changes in Net Position Operating Capital Grants and Contributions Grants and Contributions Governmental Activities Primary Government Business-type Activities Total Component Unit Public Facilities District Functions/Programs Primary Government Governmental Activities: General Government $ 12,126,355 $ 6,880,253 $ - $ 4,100 $ (5,242,002) $ - $ (5,242,002) $ - Judicial 1,567,467 4,916, ,348,914-3,348,914 - Public Safety 26,683,617 2,052, , (23,997,134) - (23,997,134) - Utilities 32,753 9,285 23, Transportation 7,361,539 1,022,896-4,939,554 (1,399,089) - (1,399,089) - Natural Environment 153,292 44, (108,705) - (108,705) - Economic Environment 2,779,605 1,897, (882,462) - (882,462) - Social Services 408, (408,259) - (408,259) - Culture & Recreation 8,249,955 2,715, ,348 3,302 (4,693,146) - (4,693,146) - Interest on Long-Term Debt 1,118, (1,118,728) - (1,118,728) - Total Governmental Activities 60,481,570 19,538,627 1,495,360 4,947,471 (34,500,112) - (34,500,112) - Business-type activities: Water Services 4,301,933 4,850,642-75, , ,810 - Sewer Services 7,752,344 8,710, , ,824 - Storm Drainage 2,243,250 2,563, , , ,492 - Golf Course 977,155 1,083, , ,080 - Total Business-type Activities 15,274,682 17,207, ,094-2,158,206 2,158,206 - Total Primary Government $ 75,756,252 $ 36,746,421 $ 1,495,360 $ 5,172,565 (34,500,112) 2,158,206 (32,341,906) - Component unit: Public Facilities District $ 5,647,275 $ 3,899,154 $ - $ - (1,748,121) Total Component Unit $ 5,647,275 $ 3,899,154 $ - $ - (1,748,121) General Revenues: Property Taxes Sales Taxes B&O Taxes Other Taxes Investment Earnings Miscellaneous Disposition of capital assets Transfers Total General Revenues and Transfers Change in Net Position Net Position - Beginning Prior Period Items / change in accounting principle (GASB 65) Net Position - Ending 11,515,054-11,515,054-19,070,344-19,070,344 2,430,442 7,123,961-7,123,961-3,450,708-3,450, ,705 27, ,724 24,468 4, , ,532 - (23,122) (3,668) (26,790) - 1,827,548 (1,827,548) ,173,053 (1,570,520) 41,602,533 2,454,910 8,672, ,686 9,260, , ,043,573 54,167, ,210,644 1,737,011 1,597,209 (130,343) 1,466,866 (459,660) $ 134,313,723 $ 54,624,414 $ 188,938,137 $ 1,984,140 The notes to the financial statements are an integral part of this statement. Page 33 CITY OF LYNNWOOD, WASHINGTON BALANCE SHEET GOVERNMENTAL FUNDS December 31, 2013 Other Total Governmental Governmental General Funds LID 93-1 Funds ASSETS Cash and cash equivalents 12,724,035 $ $ 18,646 $ 10,195,360 $ 22,938, Cash with fiscal agent - Receivables, net 7,564,699 2,919,983 1,197,767 11,682,449 Receivables, interfund loans 2,714, ,714,000 Due from other governments 50,736-97, ,407 Prepayments 417, ,743 Due from other funds 16, ,112 Cash - restricted 88, , ,361 Total assets $ 23,575,579 $ 2,938,629 $ 11,780,905 $ 38,295,113 LIABILITIES Accounts payable 1,129,822-1,372,361 2,502,183 Wages payable 626,962-17, ,605 Due to other funds - - 1,139,000 1,139,000 Other current liabilities 370, , ,203 Custodial accounts 6, ,321 Total liabilities 2,133,327-2,732,985 4,866,312 DEFERRED INFLOWS OF RESOURCES Deferred property tax 250, ,973 Unavailable revenue-special assessments - 2,292,634-2,292,634 Grants received in advance 38, ,579 Total deferred inflows of resources 289,552 2,292,634-2,582,186 FUND BALANCES (DEFICITS): Nonspendable: Prepaid Rent 417, ,743 Interfund Advance - Golf 16, ,112 Restricted for: Capital Projects - - 3,537,859 3,537,859 Debt Service - 645, ,717 1,386,712 Law Enforcement - - 1,547,762 1,547,762 Parks & Recreation 86, , ,738 Public Facilities District , ,928 Public Safety , ,941 Transportation - - 1,222,304 1,222,304 Committed to: Capital Projects - - 1,412,792 1,412,792 Cultural ,505 26,505 Other , ,297 Revenue stabilization 2,000, ,000,000 Imprest cash 30, ,260 Assigned to: Sale of property 2,814, ,814,864 Purchases on Order 21, ,492 Transportation , ,731 Other ,545 87,545 Program development 82, ,726 Unassigned 15,683,386 - (1,069,082) 14,614,304 Total fund balances (deficits) 21,152, ,995 9,047,920 30,846,615 Totalliabilities, deferred inflows of resources, and fund balances (deficits) 23,575,579 2,938,629 11,780,905 38,295,113 $ $ $ $ The notes to the financial statements are an integral part of this statement. Page 34

126 CITY OF LYNNWOOD, WASHINGTON RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET POSITION December 31, 2013 Total governmental fund balances $ 30,846,614 Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. Land & art (nondepreciable) 30,760,748 Construction in progress 7,695,984 Buildings and improvements (net of depreciation) 56,330,488 Machinery and Equipment (net of depreciation) 4,898,027 Infrastructure (net of depreciation) 26,387,864 Other long term assets are not available to pay for current period expenditures and therefore reported as unavailable revenue in the funds. 2,543,607 Investment in Joint Venture 1,591,111 Long term liabilities, including bonds payable are not due and payable in the current period and therefore are not reported in the funds. (35,772,503) Internal service funds are used by management to charge the costs of equipment rental, self-insurance and reserve retirement to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net position. 9,031,783 Net position of governmental activities $ 134,313,723 CITY OF LYNNWOOD, WASHINGTON STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended December 31, 2013 General LID 93-1 Other Governmental Funds Total Governmental Funds REVENUES Taxes: Property $ 8,897,973 $ - $ 2,366,108 $ 11,264,081 Sales 17,680,052-1,390,292 19,070,344 Business 7,123, ,123,961 Other 5,135-1,821,776 1,826,911 Licenses and permits 3,201, ,796 3,360,240 Intergovernmental revenues 1,591, ,307 3,612,844 5,740,022 Charges for services 5,465, ,672 6,067,565 Fines and forfeitures 4,373,440-63,400 4,436,840 Other - interest 22, ,748 10, ,614 Other - rent 302, ,296 Miscellaneous 92,553-10, ,320 Total revenues 48,757, ,055 10,035,939 59,495,194 EXPENDITURES Current General government 8,326,570-3,225 8,329,795 Public safety 25,117, ,173 25,308,928 Judicial 1,054, ,054,756 Utilities & environment 1,247,585-32,753 1,280,338 Economic environment 2,786, ,786,299 Transportation 682,138-2,126,051 2,808,189 Culture and recreation 5,472,049-1,135,644 6,607,693 Capital outlay 1,475,665-3,168,757 4,644,422 Debt service - principal - 575, ,887 1,423,887 Debt service - interest and fiscal charges 1, , ,973 1,171,641 Total expenditures 46,163, ,660 8,506,463 55,415,948 Excess (deficiency) of revenues over The notes to the financial statements are an integral part of this statement. expenditures 2,593,375 (43,605) 1,529,476 4,079,246 OTHER FINANCING SOURCES (USES) Transfers in 2,439,762-5,128,463 7,568,225 Transfers out (2,105,736) - (3,329,406) (5,435,142) Insurance recoveries 1, ,540 otal other financing sources (uses) 335,566-1,799,057 2,134,623 Net change in fund balances 2,928,941 (43,605) 3,328,533 6,213,869 Fund balances, January 1 18,223, ,600 6,339,003 25,252,360 Prior period adjustment - - (619,615) (619,615) Fund balances (deficit), December 31 $ 21,152,698 $ 645,995 $ 9,047,921 $ 30,846,614 The notes to the financial statements are an integral part of this statement. Page 35 Page 36

127 CITY OF LYNNWOOD, WASHINGTON RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES For the year ended December 31, 2013 Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances - total governmental funds $ 6,213,869 Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of these assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which depreciation expense exceeded capital outlays in the current period. Capital outlays 4,644,422 Current year depreciation (5,869,706) Disposition of capital assets (23,122) The issuance of long-term debt (e.g., bonds, leases) 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 issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these difference in the treatment of long-term debt and related items. The net effect of various miscellaneous transactions involving capital assets (i.e. sales and donations) is to increase net assets. Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 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 the governmental funds. Increase in other post-employment benefits payable (485,479) Increase in compensated absences payable (207,985) The internal service funds are used by management to charge the costs of fleet management and risk management to individual funds. The net revenue of certain activities of internal service funds is reported with governmental activities. (1,248,406) 1,423, ,477 2,543,607 (693,464) (72,029) Change in net position of governmental activities $ 8,672,941 CITY OF LYNNWOOD, WASHINGTON GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2013 Original Budget Final Budget Actual Amount Variance with Final Budget Positive (Negative) REVENUES Taxes: Property $ 8,519,074 $ 8,519,074 $ 8,897,973 $ 378,899 Sales 16,477,801 16,477,801 17,680,052 1,202,251 Business 6,957,980 6,957,980 7,123, ,981 Other 1,699 1,699 5,135 3,436 Licenses and Permits 3,027,506 3,027,506 3,201, ,938 Intergovernmental Revenues 1,414,082 1,403,082 1,591, ,789 Charges for Services 5,140,897 5,151,897 5,465, ,996 Fines and Forfeitures 3,830,000 3,830,000 4,373, ,440 Other - Interest 42,685 42,685 22,582 (20,103) Other - Rent 240, , ,296 61,746 Miscellaneous 3,180,618 6,625,205 92,553 (6,532,652) TOTAL REVENUE 48,832,892 52,277,479 48,757,200 (3,520,279) EXPENDITURES Current General Government 8,646,513 9,152,135 8,326, ,565 Public Safety 26,204,257 26,800,300 25,117,755 1,682,545 Judicial 1,241,048 1,241,048 1,054, ,292 Transportation 577, , ,138 (104,631) Utilities & Environment 1,386,339 1,386,339 1,247, ,754 Economic Environment 3,351,654 3,361,904 2,786, ,605 Culture and Recreation 5,598,239 5,598,239 5,472, ,190 Capital Outlay 412,500 2,094,858 1,475, ,193 Debt Service - Interest and Fiscal Charges - - 1,008 (1,008) TOTAL EXPENDITURES 47,418,057 50,212,330 46,163,825 4,048,505 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES 1,414,835 2,065,149 2,593, ,226 OTHER FINANCING SOURCES (USES) Transfers In 3,851,425 3,931,783 2,439,762 (1,492,021) Transfers Out (4,164,660) (4,895,332) (2,105,736) 2,789,596 Insurance recoveries - - 1,540 1,540 TOTAL OTHER FINANCING SOURCES (USES) (313,235) (963,549) 335,566 1,299,115 Prior period adjustment reconciliation The amount reported for governmental activities prior period adjustments in the statement of activities is different because: Prior period adjustment - total governmental funds $ (619,615) Depreciation - Infrastructure 2,461, C.I.P. correction (1,265,261) Addition of investment in joint venture - SnoCom 1,020,439 Prior period adjustment - governmental activities $ 1,597,209 NET CHANGE IN FUND BALANCES 1,101,600 1,101,600 2,928,941 1,827,341 Fund Balances, January 1-68,399 18,223,759 18,155,360 FUND BALANCES, DECEMBER 31 $ 1,101,600 $ 1,169,999 $ 21,152,700 $ 19,982,701 The notes to the financial statements are an integral part of this statement. The notes to the financial statements are an integral part of this statement. Page 37 Page 38

128 CITY OF LYNNWOOD, WASHINGTON PROPRIETARY FUNDS STATEMENT OF NET POSITION CITY OF LYNNWOOD, WASHINGTON PROPRIETARY FUNDS STATEMENT OF NET POSITION December 31, 2013 December 31, 2013 Business Type Activities-Enterprise Funds GOVERNMENTAL ACTIVITIES WATER & SEWER UTILITY GOLF COURSE TOTAL INTERNAL SERVICE FUNDS ASSETS Current assets: Cash and cash equivalents $ 13,869,929 $ 188,230 $ 14,058,159 $ 3,378,945 Receivables (net of allowance for uncollectibles): Accounts 2,715,203-2,715,203 49,852 Accrued interest 5,100-5,100 - Prepaid expenses 93,619 16, ,031 - Inventories, at cost - 23,918 23,918 - Restricted assets - cash & investments: Cash 1,459,582-1,459,582 - Customer advance payments 107,479 10, ,879 - Revenue bond current debt service 540, ,000 - Revenue bond future debt service Bond reserve 588, ,605 - Other 39,520 14,048 53,568 - Total current assets 19,419, ,008 19,672,045 3,428,797 Noncurrent Assets Notes receivable-noncurrent 61,322-61,322 - Capital Assets: Land 4,418,074 3,663,369 8,081,443 - Intangible - easements 4,150,120-4,150,120 - Buildings 36,188, ,850 36,388,158 1,862,098 Improvements other than buildings 867,985 1,098,062 1,966,047 15,727 Machinery and equipment 3,638, ,648 4,089,037 10,429,405 Infrastructure 44,322,476-44,322,476 - Construction In progress 2,393,750-2,393,750 - (Less) accumulated depreciation (47,910,737) (1,421,418) (49,332,155) (5,900,708) Net capital assets 48,068,365 3,990,511 52,058,876 6,406,522 Total noncurrent assets 48,129,687 3,990,511 52,120,198 6,406,522 Business Type Activities-Enterprise Funds WATER & SEWER UTILITY GOLF COURSE TOTAL GOVERNMENTAL ACTIVITIES INTERNAL SERVICE FUNDS LIABILITIES Current liabilities (payable from current assets): Accounts payable & accrued expenses $ 1,932,961 $ 30,100 $ 1,963,061 $ 246,627 Compensated absences 74,326 23,063 97,389 11,097 Due to other funds - 1,316,112 1,316, ,000 Claims and judgments ,216 Matured bonds payable 540, ,000 - Gift certificates - 10,400 10,400 - Current liabilities (payable from restricted assets): Accrued revenue bond interest 39,672-39,672 - Customer deposits 878,199 14, ,247 - Total current liabilities 3,465,158 1,393,723 4,858, ,940 Noncurrent liabilities: Compensated absences 184,251 66, ,091 33,596 Revenue bonds, net of current portion 11,870,000-11,870,000 - Unamortized premium 255, ,582 - (Less) Unamortized bond discount (83,601) - (83,601) - Total noncurrent liabilities 12,226,232 66,840 12,293,072 33,596 Total Liabilities 15,691,390 1,460,563 17,151, ,536 NET POSITION Net investment in capital assets 35,486,384 3,990,511 39,476,895 6,406,522 Restricted for: Capital projects 1,459,582-1,459,582 - Debt service 1,128,605-1,128,605 - Other 146,999 24, ,447 - Unrestricted 13,635,764 (1,232,003) 12,403,761 2,625,261 Total net position $ 51,857,334 $ 2,782,956 $ 54,640,290 $ 9,031,783 The notes to the financial statements are an integral part of this statement. Total assets 67,548,724 4,243,519 71,792,243 9,835,319 The notes to the financial statements are an integral part of this statement. Page 39 Page 40

129 CITY OF LYNNWOOD, WASHINGTON PROPRIETARY FUNDS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the Year Ended December 31, 2013 CITY OF LYNNWOOD, WASHINGTON PROPRIETARY FUNDS STATEMENT OF CASH FLOWS For the Year Ended December 31, 2013 Business-Type Activities-Enterprise Funds GOVERNMENTAL ACTIVITIES WATER & SEWER UTILITY GOLF COURSE TOTAL INTERNAL SERVICE FUNDS Operating Revenues Charges for Services/Fees-Water $ 4,850,642 $ - $ 4,850,642 $ - Charges for Services/Fees-Sewer 8,710,168-8,710,168 - Charges for Services/Fees-Storm 2,563,749-2,563,749 - Charges for Sales & Services - 971, ,182 2,991,825 Rentals - 112, ,053 - Other 230,745 2, ,677 4,588 Total Operating Revenues 16,355,304 1,086,167 17,441,471 2,996,413 Operating Expenses Administrative and General-Water 1,178,532-1,178,532 - Administrative and General-Sewer 1,220,194-1,220,194 - Administrative and General-Storm 778, ,623 - Administrative and General - 259, , ,964 Maintenance and Operations-Water 2,557,510-2,557,510 - Maintenance and Operations-Sewer 4,590,518-4,590,518 - Maintenance and Operations-Storm 1,279,982-1,279,982 - Maintenance and Operations - 658, ,138 1,180,065 Insurance and claims ,631 Depreciation-Water 555, ,672 - Depreciation-Sewer 1,811,247-1,811,247 - Depreciation-Storm 179, ,826 - Depreciation - 56,891 56, ,336 Total Operating Expenses 14,152, ,363 15,126,467 2,730,996 Operating Income (Loss) 2,203, ,804 2,315, ,417 Non Operating Revenues (Expenses) Miscellaneous Interest Revenue 26, ,019 4,091 Debt Issuance Costs (5,724) - (5,724) - Interest expense (124,322) (2,290) (126,612) - Gain (Loss) on Dispositions (3,668) - (3,668) (23,122) Other 75,913-75, Net non-operating revenues (expenses) (31,024) (2,048) (33,072) (18,764) Income (loss) before contributions and transfers 2,172, ,756 2,281, ,653 Capital Contributions and Transfers Water 75,101-75,101 - Sewer Storm 74,080-74,080 - Other ,100 Transfers in 228, , , ,838 Transfers out (2,231,115) - (2,231,115) (451,620) Change in Net Position 318, , ,565 (72,029) Total Net Position-Beginning 51,669,308 2,497,763 54,167,071 9,103,812 Prior Period Adjustments (130,343) - (130,343) - Total Net Position--Ending $ 51,857,337 $ 2,782,956 $ 54,640,293 $ 9,031,783 The notes to the financial statements are an integral part of this statement. Governmental Business-Type Activities Activities Water and Internal Sewer Golf Service Utility Course Totals Funds Cash flows from operating activities: Receipts from customers $ 17,025,166 $ 1,083,569 $ 18,108,735 $ 2,998,780 Payments to suppliers (4,682,407) (246,448) (4,928,855) (1,513,289) Payments to employees (3,852,911) (497,227) (4,350,138) (485,913) Payments to other funds for services (1,960,844) (325,169) (2,286,013) - Net cash provided by (used for) operating activities 6,529,004 14,725 6,543, ,578 Cash flows from noncapital financing activities: Operating subsidies and transfers to other funds Interfund loans (paid)/received (20,783) - (20,783) - Interfund loan interest (paid)/received - (1,817) (1,817) - Other Non-Operating Revenues 75,913 75, Transfers in 228, , ,567 (322,782) Transfers (out) (2,231,115) - (2,231,115) - Net cash provided by (used for) noncapital financing activities (1,947,855) 173,620 (1,774,235) (322,515) Cash flows from capital and related financing activities: Acquisition and construction of capital assets (4,167,671) - (4,167,671) (402,070) Proceeds from disposal of capital assets (19,022) Principal paid on revenue bonds (1,170,000) (15,758) (1,185,758) - Interest paid on revenue bonds and contracts (146,162) (473) (146,635) - Net cash provided by (used for) capital and related financing activities (5,483,833) (16,231) (5,500,064) (421,092) Cash flows from investing activities: Interest and dividends on investments 26, ,019 4,091 Net cash provided by (used for) investing activities 26, ,019 4,091 Net increase (decrease) in cash and cash equivalents (875,907) 172,356 (703,551) 260,062 Cash and cash equivalents at beginning of year 17,481,022 40,322 17,521,344 3,118,883 Prior period adjustment Cash and cash equivalents at end of year $ 16,605,115 $ 212,678 $ 16,817,793 $ 3,378,945 Reconciliation to Proprietary Funds Statement of Net Position: Current assets: Cash and cash equivalents 13,869, ,230 14,058,159 3,378,945 Restricted assets: Cash 1,499,102 14,048 1,513,150 - Customer advance payments 107,479 10, ,879 - Bond current debt service 540, ,000 - Bond future debt service 588, ,605 - Cash and cash equivalents at end of year 16,605, ,678 16,817,793 3,378,945 The notes to the financial statements are an integral part of this statement. Page 41 Page 42

130 CITY OF LYNNWOOD, WASHINGTON PROPRIETARY FUNDS STATEMENT OF CASH FLOWS For the Year Ended December 31, 2013 Reconciliation of operating income to net cash provided by operating activities Governmental Business-Type Activities Activities Water and Internal Sewer Golf Service Utility Course Totals Funds Operating income (loss) $ 2,203,200 $ 111,804 $ 2,315,004 $ 265,417 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation expense 2,546,745 56,891 2,603, ,336 Change in assets and liabilities: Receivables, net (40,655) - (40,655) 2,367 Inventories - (6,418) (6,418) - Prepaid expenses Customer deposits 710,517 (2,598) 707,919 - Compensated absences (3,215) 13,794 10,579 - Accounts and other payables 1,112,412 (158,748) 953, ,458 Total adjustments 4,325,804 (97,079) 4,228, ,161 Net cash provided by operating activities $ 6,529,004 $ 14,725 $ 6,543,729 $ 999,578 Noncash investing, capital and financing activities: Gain/(loss) on property dispositions * $ (3,668) $ (23,122) Contributions of capital assets 149,181 4,100 $ 145,513 $ (19,022) CITY OF LYNNWOOD, WASHINGTON STATEMENT OF NET POSITION FIDUCIARY FUNDS December 31, 2013 Randy Terlicker Firefighters' Memorial Pension Scholarship Agency Fund Fund Funds ASSETS Cash and Equivalents $ 652,810 $ - $ 265,975 Restricted Cash & Cash Equivalents - 17,274 - Prepaid Insurance 45, Total Assets 698,136 17, ,975 LIABILITIES Due to Other Governments - - 2,553 Custodial Accounts ,435 Deposits Payable ,987 Total Liabilities ,975 NET POSITION Net Position Held in Trust for Pension Benefits and Other Purposes $ 698,136 $ 17,274 $ - The accompanying notes are an integral part of these statements. The notes to the financial statements are an integral part of this statement. Page 43 Page 44

131 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WASHINGTON STATEMENT OF CHANGES IN NET POSITION FIDUCIARY FUNDS For the year ended December 31, 2013 Firefighters' Pension Fund Randy Terlicker Memorial Scholarship Fund ADDITIONS Intergovernmental Revenue $ 51,360 $ - Contribution from Fund ,247 Interest earnings Total additions 52,346 17,274 DEDUCTIONS Benefits 104,751 - Administrative Expenses Total deductions 105,595 - Change in net position (53,249) 17,274 Net position - beginning 751,385 - Net position - ending $ 698,136 $ 17,274 The accompanying notes are an integral part of these statements. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the City of Lynnwood have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The significant accounting policies are described below. A. Reporting Entity The City of Lynnwood was incorporated on April 23, 1959, and operates under the laws of the state of Washington applicable to an optional code city with a Mayor/Council form of government. The City is governed by an elected mayor and seven-member governing council. As required by the generally accepted accounting principles the financial statements present the City of Lynnwood, the primary government, and its component units. The component units discussed below are included in the City of Lynnwood reporting entity because of the significance of their operational or financial relationships with the City. Blended component units are, in substance, part of the primary government s operations, even though they are legally separate entities. Thus, blended component units are appropriately presented as funds of the primary government. Each discretely presented component unit is reported in a separate column in the government-wide financial statements to emphasize that it is legally separate from the government. Blended Component Unit. The City of Lynnwood Council formed the Transportation Benefit District (TBD) on June 3, 2010 by its adoption of Ordinance No pursuant to RCW and RCW for the purpose of levying of additional revenue sources for the purpose of acquiring, constructing, improving, providing and funding transportation improvements within the District that are consistent with the existing state, regional, and local transportation plans. The Transportation Benefit District is governed by the 7-member Lynnwood City Council acting in an ex officio and independent capacity. Although it is legally separated from the City of Lynnwood the Transportation Benefit District is reported as if it were part of the primary government because its sole purpose is for the construction, preservation, maintenance and operation of City streets. The TBD received its first receipt of funds collected by the Department of Licensing on June 30, Discretely Presented Component Unit. The Lynnwood City Council formed the South Snohomish County Public Facilities District (PFD) on August 24, 1999 by adoption of its Ordinance No The PFD was created under the authority provided by the legislature during the 1999 legislative session and since codified as RCW The purpose of the PFD is to construct and operate a regional center in the City of Lynnwood. RCW defines a regional center as a conference, convention or special events center along with related parking. A five-member board governs the PFD and is appointed to four-year terms by the City Council. The City provides funding for the PFD through hotel/motel taxes, making the PFD dependent upon the City of Lynnwood for its revenue source. The PFD has authority under state law to issue debt, levy certain taxes, and enter into contracts. The legislation provided that the PFD commence construction of its regional center by January 1, The PFD incurred a short-term bank loan in the amount of $1,036,080 and sold short-term commercial paper in the amount of $8,600,000. The Convention Center was completed and had its grand opening on April 29, Page 45 Page 46

132 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report In December 2004 the Lynnwood Public Facilities District issued $1,930,000 Convention Center Sales Tax Bonds, 2004 Series A (Taxable), $10,000,000 Convention Center Sales Tax Bonds, 2004 Series B and $17,265,000 Convention Center Revenue Bonds, The purpose for the issuance of these bonds was to pay a portion of the cost of acquiring, constructing and equipping the Convention Center, to pay a portion of the cost of acquiring auxiliary facilities, to redeem and retire the notes, to fund interest on the Series B Bonds and the Revenue Bonds through October 1, 2005 and to pay costs of issuance of the bonds. The PFD is presented as a discrete component of the City, and more information about the PFD, including complete financial statements, can be obtained at the Lynnwood City Hall. B. Government-Wide and Fund Financial Statements The government-wide financial statements (i.e., the statement of net position and the statement of activities) report information on all of the nonfiduciary 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 revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Our policy is to allocate indirect costs to a specific function or segment. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are -restricted to meeting the operational or capital requirements or a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate fund financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and fiduciary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the City considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. The City considers property taxes as available if they are collected within 60 days after year end. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Property taxes, licenses, and interest associated within the current period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of special assessment receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the City. The City reports the following major governmental funds: The General Fund is the City s operating fund. It accounts for all financial resources of the general government, except those required or elected to be accounted for in another fund. The General Fund includes the following managerial funds which were reported as special revenue funds in prior years: The Revenue Stabilization Fund was established to accumulate money to cover periods of revenue shortages in the General Fund, and for expenditures deemed necessary by the City Council. The Program Development Fund was established to accumulate special appropriations and money from the General Fund that may be used for program development, enhancement or expansion projects, and for matching funds for grants and interlocal agreements. The LID 93-1Fund is a debt service fund used to pay LID Bonds from collected assessments. The City reports the following major proprietary funds: The Water, Sewer and Storm Drainage Utility Fund serves as the main operating fund for providing water service, sewage treatment plant, pumping station and collection systems, as well as storm water runoff drains and catch basins for the citizens of the City. It also acts to perform debt service duties for payment of a revenue bond used to construct the City s sewer treatment plant. This revenue bond has been refunded to provide better interest rates and provide funding for several utility projects around the City. See Note 7 to obtain more information on this refunded revenue bond issue. The Golf Course Fund accounts for all of the City s operation of an 18-hole municipal golf course and pro shop. Additionally, the City reports the following fund types: Special Revenue Funds are used to account for the proceeds of specific revenue sources or to finance specified activities as required by law or administrative regulation. Debt Service Funds are used to account for the accumulation of resources to pay interest and principal on general long-term debt. Page 47 Page 48

133 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Capital Projects Funds are used to account for financial resources to be used for the acquisition and construction of capital facilities other than those financed by the proprietary funds. Internal Service Funds are used to account for goods and services provided to other funds, departments, or governments on a cost-reimbursement basis. The City maintains funds in this category for equipment rental, self-insurance and a reserve retirement fund. Trust Funds are used to account for cash and other assets received and held by the City in a trustee capacity or custodian for outside individuals or private organizations. Pension Trust and Private-Purpose Trust Funds are accounted for in essentially the same manner as proprietary funds, but with an important expanded emphasis on required fund balance reserves. The City maintains the Firefighters Pension Trust Fund and the Randy Terlicker Memorial Scholarship Fund, a private purpose trust fund. The scholarship fund receives contributions, private donations, and interest payments on the reserve, and in turn, awards scholarships to selected and qualified individual recipients from this reserve. Agency funds are used to account for assets held by the City in a custodial capacity (assets equal liabilities) and do not involve measurement of results of operations. The City uses these funds to account for its arbitrage liabilities, and various deposits payable to State and local agencies and private contractors. As a general rule, the effect of the interfund activity has been eliminated for the government-wide financial statements. Exceptions to this rule are charges between the utility function and other functions within the City, and any payments-in-lieu of taxes. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Amounts reported as program revenues include 1) charges to customers, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than program revenues. General revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund s principal ongoing operations. The principal operating revenues of the Water, Sewer and Storm Drainage Utility Fund, and the Golf Course Fund, are charges for services provided. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. D. Budgetary Information 1. Scope of Budget Biennial appropriated budgets are adopted for all funds, with the exception of the LID debt service funds, capital project funds, and custodial agency funds. Budgets for LID debt service and capital project funds are adopted at the level of the individual debt issue or project and for fiscal periods that correspond to the lives of debt issues or projects. These budgets are prepared in accordance with generally accepted accounting principles. Other budgets are adopted at the level of the fund, except in the general (current expense) fund, where expenditures may not exceed appropriations at the department level and the budgets constitute the legal authority for expenditures at that level. The City s Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual is presented as a one year budget for comparison purposes to make it more meaningful to the reader. Appropriations for general and special revenue funds lapse at the end of the biennium (except for appropriations for capital projects, which are carried forward from year to year until fully expended or the purpose of the appropriation has been accomplished or abandoned). An encumbrance system is used for budgetary control purposes to record commitments resulting from approved purchase orders. During the year, encumbrances are recorded in the accounting system at the time purchase orders are issued for goods and services. Upon payment, the encumbrance is reversed and the actual cost of the related item is recorded as a fund expenditure. Encumbrances (e.g., purchase orders, contracts) outstanding at year end are reported as assigned fund balances and do not constitute expenditures or liabilities because the commitments will be reappropriated and honored during the subsequent year. In the year the biennial budget is prepared, the following are the steps in the budget process: January to March The Council establishes a budget process calendar by resolution in January. The Council approves items to be carried over from the previous biennial budget because they did not get done and the money to complete them was unspent as well. This usually occurs in February. The Finance Director provides a first look at the prior year s financial results in late February. March to May The City Council begins to discuss their goals and objectives or any other issues that could have an impact on the budget. Ordinance 2299 calls for the Council to adopt citywide goals and objectives by May of each year. A public hearing is held in late May or early June to assure an opportunity for public input prior to the development of the budget. June to July In June the Finance Director delivers to the department heads the Operating Budget Instructional Manual. This manual encompasses the Mayor s message, which depicts the guidelines for departmental budget projections. Also, included are the City s goals as defined by Council. This manual also provides instructions and samples of the actual working documents that are required of the departments for the development of their budgets. The working documents are due back to the Budget Analyst by the end of July. August to October The Budget Analyst compiles the department s requests for the Mayor s review. The Mayor holds meetings with individual departments to review their budgets and budget issues. The individual Department Heads present their budgets to the Council at a Council Work Session. The budget as presented by the departments and prior to being balanced by the Mayor is known as the Proposed Preliminary Budget (RCW 35A ). A second Public Hearing is held in October to allow the public to comment on the Proposed Preliminary Budget and to discuss any budget issues with the Council. The Mayor prepares recommendations for balancing the budget and presents them to the Council in late October (RCW 35A ). Page 49 Page 50

134 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report November and December The last two Public Hearings are held and the Council conducts work sessions to discuss and understand the budget material presented. The Council adopts the biennial budget. The Administrative Services Department makes the final budget adjustments and provides each department with a working copy of the adopted budget along with the Budget Ordinance. The formal adopted budget is distributed to the Mayor, City Council and to the public upon request. A mid-biennial review shall commence no sooner than eight months after the start nor later than twelve months after the start of the biennium. Public hearings on the proposed budget modification shall be conducted at least two weeks prior to the adoption of the ordinance modifying the biennial budget. In November and December of each year the Capital Facilities plan and other related policy actions are adopted by the Council. 2. Amending the Budget The Mayor is authorized to transfer budgeted amounts between departments within any fund with the exception of the General Fund. Any revisions that alter the total expenditures of a fund, or of a department in the General Fund, must be approved by the City Council. In addition, any revisions that affect the number of authorized employee positions, salary ranges, hours, or other conditions of employment must be approved by the City Council. The budget amounts shown in the financial statements are the final authorized amounts as revised during the year. The financial statements contain the original and final budget information. The original budget is the first complete appropriated budget. The final budget is the original budget adjusted by all reserves, transfers, allocations, supplemental appropriations, and other legally authorized changes applicable for the fiscal year. 3. Deficit Fund Net Position The following funds experienced equity deficits at year end: Olympic View Drive (307) $ (639,970) Traffic Signals (309) (137,043) Roadway surfaces (311) (47,025) Sidewalks/Ped Improvements (312) (190,995) Hardware Software Upgrade (332) (53,671) City-Wide Safety Project (356) (428) Self-Insurance (515) (503,286) The deficits in all funds listed arose due to timing of cash flows and complexities in fund cash management. The deficits were addressed with interfund loans from the general fund. E. Assets, Liabilities, Fund Balance, Net Position 1. Cash and Cash Equivalents It is the City s policy to invest all temporary cash surpluses. At December 31,2013, the treasurer was holding $40,207, in short-term residual investments (LGIP) of surplus cash. This amount is classified on the balance sheet as cash and cash equivalents in various funds. The interest on these investments is prorated to the various funds. Beginning in 2013 compensating balances at US Bank no longer exists. For purposes of the statement of cash flows, the City considers short-term investments (including restricted assets) in the State Treasurer s Investment Pool and any other investment with a maturity of three months or less at acquisition date to be cash equivalents. 2. Investments See Note 3, Deposits and Investments. 3. Receivables Taxes receivable consists of property taxes and related interest and penalties (See Property Taxes Note No. 2). Accrued interest receivable consists of amounts earned on investments, notes, and contracts at the end of the year. Special assessments are recorded when levied. Special assessments receivable consist of current and delinquent assessments and related interest and penalties. Deferred assessments on the fund financial statements consist of unbilled special assessments that are liens against the property benefited. As of December 31, 2013, $2, of special assessments receivable were delinquent. Customer accounts receivable consist of amounts owed from private individuals or organizations for goods and services provided including amounts owed for which billings have not been prepared. When an allowance for uncollectible receivable accounts exists, they are subtracted from Accounts Receivable, which are shown as net. The City accrues accounts receivable consisting primarily of billed water/sewer accounts, court ordered fines, utility taxes, and other various receivables. 4. Amounts Due to and from Other Funds and Governments, Interfund Loans and Advances Receivable Activities between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either interfund loans receivable/payable or advances to/from other funds. All other outstanding balances between funds are reported as due to/from other funds. Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as internal balances. A separate schedule of interfund loans receivable and payable is furnished in Note 4, Interfund Balances and Transfers. Advances between funds, as reported in the fund financial statements, are offset by a fund balance reserve account in applicable governmental funds to indicate that they are not available for appropriation and are not expendable available financial resources. 5. Inventories Inventories are defined as assets that may be held for internal consumption or for resale. Inventory items may be recorded as expenditures when purchased or when consumed. The City of Lynnwood uses the following policies in valuing and recording inventory items: Page 51 Page 52

135 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Governmental Funds - The purchase method is used. Here the item upon purchase is recorded as expenditure at cost. Inventory items remaining at year-end are considered immaterial and are therefore not included in the balance sheets of these funds. Enterprise Funds - A perpetual inventory is maintained whereby expenses are recorded when the item is consumed. The market cost valuation method is used to cost the inventory. A physical inventory is also taken at year-end. Internal Service Funds - A perpetual inventory is maintained whereby expenses are recorded when the item is consumed. The weighted average method of valuation has been used to cost the inventory. A physical inventory is taken at year-end. 6. Restricted Assets and Liabilities These accounts contain resources for construction and debt service in enterprise funds. The current portion of related liabilities is shown as Payables from Current Restricted Assets. Specific debt service reserve requirements are described in Note 7, Long-Term Debt. The restricted assets of the enterprise funds are composed of the following: Cash and equivalents - debt service $ 1,128,605 Cash and equivalents - capital projects $ 729,582 Cash and equivalents - customer deposits $ 901, Capital assets See Note 5, Capital Assets. Capital assets, which include property, plant, equipment, and infrastructure assets (roads, bridges, sidewalks, and similar items) are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. Capital assets are defined by the government as assets with an initial, individual cost of $5,000 or more and an estimated useful life in excess of two years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are valued at fair market value on the date of the donation. Costs for additions or improvements to capital assets are capitalized when they increase the effectiveness or efficiency of the asset. The costs for normal maintenance and repairs are not capitalized. Effective January 1, 2010, the City implemented GASB Statement No Accounting and Financial Reporting for Intangible Assets, which required the capitalization of intangible assets. Intangible assets for the City include easements and are being treated as a nondepreciable asset similar to Land. To account for financing leases, lease-purchases, and installment purchase contracts in Governmental Funds, the City charges payments made or due during the fiscal period as expenditures. Leases that qualify as capital leases are recorded at the present value of their future minimum lease payments as of the inception date. Property, plant, and equipment in the Proprietary Funds are valued at historical cost, estimated historical cost when original cost is not available, or appraised market value at the time received in the case of contributions. Maintenance and repairs are expensed as incurred. Property, plant, and equipment of the primary government, as well as the component units, are depreciated using the straight-line method over the following estimated useful lives: ASSET CLASS USEFUL LIFE (YRS) Buildings Improvements Other Than Buildings Equipment 3-20 Infrastructure Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest costs incurred during capital construction performed by proprietary funds are capitalized within the fund. However, interest expense incurred during construction of capital facilities is not capitalized when the assets will be reported as a governmental capital asset in the entity-wide statement of net assets. 8. Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to future periods and so will not be recognized as an outflow of resources (expense/expenditure) until then. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to future periods and so will not be recognized as an inflow of resources (revenue) until that time. 9. Compensated absences Compensated absences are absences for which employees will be paid, such as vacation and sick leave. The City limits the accumulation of unpaid vacation benefits to two years accrual; any excess accrual would require executive approval. All vacation and sick pay is accrued when incurred in the government-wide and proprietary fund financial statements. Sick leave accumulation is limited to a maximum of 720 hours. Upon termination or retirement of employment, unused sick leave may be converted to pay at the current rate on the following basis: 1. Termination - Voluntary or discharge Five hours of up to 720 hours unused sick leave = 1 hour pay. 2. Termination by layoff Three hours of up to 720 hours unused sick leave = 1 hour pay. Page 53 Page 54

136 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report 3. Retirement Two years accumulation (192) hours One hour unused sick leave = 1 hour pay. Balance of unused sick leave (up to 528 hours). Three hours unused sick leave = 1 hour pay. 10. Other Accrued Liabilities These accounts consist of accrued wages and accrued employee benefits. 11. Long-Term Debt See Note 7, Long-Term Debt. 12. Unearned Revenues This account includes amounts recognized as receivables but not revenues in governmental funds because the revenue recognition criteria have not been met. 13. Fund balance classification In February 2009, the GASB issued Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions. The objective of this Statement is to improve the usefulness, including the understandability, of governmental fund balance information. This Statement provides more clearly defined categories to make the nature and extent of the constraints placed on a government s fund balance more transparent. It also clarifies the existing governmental fund type definitions to improve the comparability of governmental fund financial statements and help financial statement users to better understand the purposes for which governments have chosen to use particular funds for financial reporting. Fund balances are classified as appropriate in the financial statements as follows: Nonspendable Fund Balance - includes amounts that cannot be spent because they are either: a. Not in spendable form; or b. Legally or contractually required to be maintained intact. Restricted Fund Balance - includes amounts restricted to specific purposes when constraints placed on the use of resources are either: a. Externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or b. Imposed by law through constitutional provisions or enabling legislation. Committed Fund Balance - includes amounts that can only be used for specific purposes pursuant to constraints imposed by Council ordinance or resolution prior to the end of the reporting period. Council action is required to commit resources or to rescind the commitment. Assigned Fund Balance - includes amounts that are constrained by the City s intent that the funds be used for specific purposes, but are neither restricted nor committed. This includes outstanding encumbrances at year-end. Unassigned Fund Balance - is the residual classification for the general fund. This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed, or assigned to specific purposes within the general fund. 14. Fund balance flow assumptions F. Other When both restricted and unrestricted resources are available for specified expenditures, restricted resources are considered spent before unrestricted resources. Within unrestricted resources, the city considers that committed funds are reduced first, followed by assigned amounts, and then unassigned amounts when expenditures are incurred for purposes for which amounts in any of those unrestricted fund balance classifications could be used. 1. Stabilization arrangements and minimum fund balance policies Resolution No which was adopted by the City Council on May 9, 2011 revised existing financial management policies and adopted a Long Term Comprehensive Financial Plan for the City. Included in these financial management policies are the following stabilization arrangements and minimum fund balance policies: It is the policy of the City to maintain general governmental reserves and cash balances for general government at two levels and shall be made up of two components; the Revenue Stabilization Fund #198 and the General Fund Unencumbered Fund Balance (Cash Flow Balance): General Fund Unencumbered Fund Balance to provide for adequate operating cash and cover substantial receivables until they are collected: a. The City s General Fund shall maintain an unencumbered fund balance of at least $4,000,000, or the amount of net receivables posted in the annual financial report, whichever is greater. b. Achieving and maintaining this balance is the highest priority over developing and maintaining other general fund reserves. c. The restricted reserves are intended to protect the city from major economic downturns and similar adverse financial conditions. i. It will be the goal of the City to maintain a Revenue Stabilization Fund at a level to cover at least two months operations in the General Fund which is equivalent to $9,000,000 in ii. iii. Since these reserves are not currently available, the city will seek to build gradually to this goal reaching an interim target level of $5,000,000 by Any general fund unencumbered ending balance by the end of the biennium in excess of $4,000,000 shall be transferred by the City Page 55 Page 56

137 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Council to the Revenue Stabilization fund #198 until the target in policy in (c)(ii) above is achieved. d. The City will review the unrestricted General Fund balance and Revenue Stabilization Fund #198 balance each July. To the extent that the City s audited financial statements identify a General Fund balance in excess of the target, the excess shall be allocated by the City Council, pursuant to these policies. NOTE 2 - PROPERTY TAXES AND RECEIVABLES A. Property Taxes The county treasurer acts as an agent for property taxes levied in the county for all taxing authorities. Collections are remitted monthly to the appropriate district by the county treasurer. Property Tax Calendar B. Receivables Amounts are aggregated into single accounts receivable (net of allowance for uncollectibles) line for certain funds and aggregated columns. Below is the detail of receivables for the general and debt service funds and the nonmajor governmental funds in the aggregate, including the applicable allowance for uncollectible accounts: Receivables General Fund Debt Service fund Nonmajor Governmental Internal Service fund Total Accounts $ 18,480,947 $ 462,761 $ 1,202,828 $ 49,852 $ 20,196,388 Property taxes 289,623 2, ,777 Utility Taxes 890, ,658 Sales taxes 3,455,832 3,455,832 Special assessments 2,292,634 2,292,634 Interest 9, ,588 Gross receivables 23,127,029 2,919,983 Less: Allowance for uncollectibles (15,562,330) Net receivables $ 7,564,699 2,919, ,557 1,204,982 49,852 27,301,846 (7,215) (15,569,545) $ $ 1,197,767 $ 49,852 $ 11,732,301 January 1 February 14 April 30 May 31 October 31 Tax is levied and becomes an enforceable lien against properties. Tax bills are mailed. First of two equal installment payments is due. Assessed value of property established for next year s levy at 100 percent of market value. Second installment is due. Based on the payment schedule for special assessment receivables, $1,685,000 of the amount reported in the debt service fund is not expected to be collected within the next year.. Property tax is recorded as a receivable and revenue when levied. Property tax collected in advance of the fiscal year to which it applies is recorded as a deferred inflow and recognized as revenue of the period to which it applies. No allowance for uncollectible tax is established because delinquent taxes are considered fully collectible. Prior year tax levies were recorded using the same principal, and delinquent taxes are evaluated annually. The City may levy up to $3.60 per $1,000 of assessed valuation for general governmental services. The City s regular tax levy was approximately $2.74 (includes a special $.50 for Emergency Medical Services) per $1,000 on a total assessed valuation of $4,077,655,634 for total taxes of $11,162,474. The Washington State Constitution and Washington State law, RCW , limit the rate. Page 57 Page 58

138 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report NOTE 3 DEPOSITS AND INVESTMENTS A. Deposits The City s deposits and certificates of deposit are entirely covered by federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (WPDPC). The FDIC insures the first $250,000 of the City s deposits. The deposit balances over $250,000 are insured by the WPDPC. State statute permits additional amounts to be assessed on a pro rata basis to members of the WPDPC pool in the event the pool s collateral should be insufficient to cover a loss. A reconciliation of cash, cash equivalents (including pooled investments and investments) as shown in the government-wide and fund financial statements is as follows: Total Cash, Cash Equivalents & Investments Amount US Bank Checking $4,107,608 Money Market 103,546 Petty Cash, Change Funds & Advance Travel 30,259 Local Government Investment Pool* 40,207,788 Total $44,449,201 *This includes $754,617of funds for the Transportation Benefit District As Reflected in the Financial Statements: Cash & Cash Equivalents B. Investments Governmental Activities Business-type Activities Total Primary Government Fiduciary Unit Total $ 26,695,348 $16,817,793 $ 43,513,141 $ 936,060 $ 44,449,201 The Local Government Investment Pool (LGIP) is an unrated 2a-7 like pool, as defined by GASB 31. Accordingly, participants balances in the LGIP are not subject to interest rate risk, as the weighted average maturity of the portfolio will not exceed 60 days. Per GASB 40 guidelines the balances are also not subject to custodial credit risk. The credit risk of the LGIP is limited as most investments are either obligations of the US government, government sponsored enterprises, or insured demand deposit accounts and certificates of deposit. Investments or deposits held by the LGIP are either insured or held by a third-party custody provider in the LGIP s name. The fair value of the City s pool investments is determined by the pool s share price. The City has no regulatory oversight responsibility for the LGIP which is governed by the Washington State Finance Committee and is administered by the State Treasurer. The LGIP is audited annually by the Office of the State Auditor, an independently elected public official. The City includes the LGIP as an investment for internal tracking, but it is disclosed on the financial statements as a cash equivalent. As of December 31, 2013, the City had the following investments: Investments Fair Value Maturity Date Local Government Investment Pool $40,207, Total Fair Value $40,207,788 All surplus cash is invested in accordance with an investment policy approved by Lynnwood City Council. The investment policy is in compliance with state law. State law defines eligible investments to only those securities and deposits authorized by statute (RCW 39.58, 39.59, and ). Eligible investments include obligations of the United States government, Treasury and Agency securities, bankers acceptances, certificates of deposit and repurchase agreements. Additionally, the investment policy sets forth maximum concentration guidelines whereby the City will diversify its investments by security type and issuer. Credit Risk: Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The City s investment policy applies the prudent person standard: Investments will be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment purposes. All Agency securities in our portfolio are rated AAA and the Certificates of Deposit are covered by the FDIC and PDPCA. The Washington State Local Government Investment Pool is a Rule 2a7-like pool and is unrated. Custodial credit risk: Custodial credit risk is the risk that, in the event of the failure of the counterparty, the City will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. Concentration of credit risk: Concentration risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The City limits its exposure to concentration risk by requiring diversification by type and institution as follows: Security Type Portfolio Maximum by Portfolio Issuer Maximum US Treasury 100% 100% Federal Home Loan 50% 50% Federal National Mortgage Association 50% 50% Federal Home Loan Mortgage Corp 50% 50% Federal Farm Credit 50% 50% Local Government Investment Pool 100% 100% Certificates of Deposits 25% 50% General Obligation Bonds of State & Local Governments 20% 20% Interest Rate Risk: In accordance with its investment policy, the City manages its exposure to declines in fair values by limiting the maturity of its investments to not more than five years. The average maturity will be consistent with the City s liquidity objective. Page 59 Page 60

139 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report NOTE 4 INTERFUND BALANCES AND TRANSFERS A. Interfund Balances Interfund balances at December 31, 2013 were as follows: NOTE 5 - CAPITAL ASSETS Capital assets activity for the year ended December 31, 2013, was as follows: Due To Capital Projects Funds Golf Cours e - Interfund Loan Due From Golf Cours e - LT Rent Payable Self Insurance Total General Fund $ 1,139,000 $ 1,300,000 $ 16,112 $ 275,000 $ 2,730,112 Total $ 1,139,000 $ 1,300,000 $ 16,112 $ 275,000 $ 2,730,112 Interfund loans to the capital projects funds are for temporary cash flow purposes. An interfund loan of $1,300,000 was made to the Golf Course fund as authorized by resolution , in order to maintain sufficient cash flow in the fund. The repayment date is January 31, 2014, a term of thirteen months. The Council is working on the resolution for the Golf Course fund in B. Interfund Transfers Interfund transfers at December 31, 2013 were as follows: Transfer To General Fund Special Revenue Funds Debt Service Funds Transfer From: Capital Project Funds Utility Fund Internal Service Funds General Fund $ 2,304,491 $ 118,873 $ 16,398 $ 2,439,762 Rec Ctr 2012 LTGO Bonds 1,196,436 $ 1,196,436 Special Revenue Funds 204,582 $ 204,582 Debt Service Funds 654,520 $ 654,520 Capital Projects Funds 200, , , ,024 2,182,448 $ 2,939,694 Utility Fund 54, , ,334 $ 403,567 Internal Service Funds 13,333 64,532 48,667 2,306 $ 128,838 Agency Fund 17,247 $ 17,247 Total $ 2,105,736 $ 2,498,293 $ 379,326 $ 318,556 $ 2,231,115 $ 451,620 $ 7,984,646 Total Transfers are used to 1) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget requires to expend them, 2) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, and 3) use unrestricted revenues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. Page 61 Page 62

140 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Page 63 Page 64

141 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report NOTE 6 OPERATING LEASES NOTE 7 - LONG-TERM DEBT Office, Warehouse, Storage Space, and Access Lease The City leases office, warehouse, storage space, and property/land access are under non-cancellable operating leases. Total costs for these leases for the year ending December 31, 2013 was $250,170 in governmental activities and $65,205 in business-type activities. The future minimum lease payments for these leases are as follows: General Obligation Bonds are direct obligations of the City for which its full faith and credit are pledged. Debt service is paid from the Debt Service Funds. Debt service for voter-approved issues is funded with special property tax levies. Debt service for City Council authorized (councilmanic) issues is funded from the Real Estate Excise Tax Fund and the General Fund. Revenue Bonds are payable from revenues generated by the Water and Sewer Utility Fund. Special Assessment operations are financed by bonds and notes issued after construction has been completed. Interfund loans are utilized for short-term financing and are subsequently repaid when bond proceeds have been received. Bond debt service is paid from assessment collections. LID bonds are callable at par each year without penalty. Although the bonds are secured by liens against assessed properties, the City is also required under State law to establish a guaranty fund to provide a means of paying LID bond debt service obligations in the event there are insufficient resources in the LID Control Fund to do so. Due to the City's legal obligation to maintain the guaranty fund, special assessment bonds are considered a general government obligation. Printers and Copiers The City leases many office printers and copiers under non-cancellable operating leases. Total costs for these leases for the year ending December 31, 2013 was $87,521 in governmental activities and $1,651 in business-type activities. The future minimum lease payments for these leases are as follows: A. CHANGES IN LONG-TERM DEBT The following is a summary of long-term debt transactions of the City for the year ended December 31, 2013: Year Ending December 31 Governmental Activities Business-Type Activities 2014 $ 58,053 $ 1, $ 58,333 $ 1,238 Golf Carts The City leases 22 Yamaha golf carts under non-cancellable operating leases. Total costs for these leases for the year ending December 31, 2013 was $15,314 in business-type activities. The future minimum lease payments for these leases are as follows: The total lease payment due in 2013 was reduced from $17,248 to $15,314 due to changes in the lease during FY Payments on the bonds and notes payable that pertain to the City s governmental activities are made by the debt service funds. The compensated absences liability attributable to the governmental activities will be liquidated by a couple governmental funds. In the past, approximately 97% has been paid by the General Fund and the remaining 3% by the Street Fund. Page 65 Page 66

142 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Long-term debt at December 31, 2013 consisted of the following: REQUIREMENTS TO AMORTIZE THE DEBT OUTSTANDING GENERAL OBLIGATIONS BONDS % INT. MATURITY OUTSTANDING ISSUE NAME RATES ISSUE DATE DATE AUTHORIZED 1/1/2013 CHANGES 12/31/ GO. Bonds (800 Mhz) $ 1,519,147 $ 828,563 $ (102,460) $ 726,103 State Capital Loan * ,295 94,222 (62,185) 32, GO. Refund Bonds ,640,000 1,660,000 (415,000) 1,245, GO. Bonds (Rec Ctr) ,955,000 24,955,000 (285,000) 24,670,000 Total General Obligation Bonds $ 31,648,442 $ 27,537,785 $ (864,645) $ 26,673,140 *State Capital Asset Loan pledging non-voted GO Debt Capacity. REVENUE BONDS % INT. MATURITY OUTSTANDING ISSUE NAME RATES ISSUE DATE DATE AUTHORIZED 1/1/2013 CHANGES 12/31/ Utility Improvement Refunding Bonds $ 10,000,000 $ 5,860,000 $ (1,170,000) $ 4,690, Utility System Revenue Bonds ,720,000 7,720,000 $7,720,000 Total Revenue Bonds $ 17,720,000 $ 13,580,000 $ (1,170,000) $ 12,410,000 SPECIAL ASSESSMENT BONDS % INT. MATURITY OUTSTANDING ISSUE NAME RATES ISSUE DATE DATE AUTHORIZED 1/1/2013 CHANGES 12/31/ LID Bonds $ 11,544,287 $ 3,185,000 $ (1,060,000) $ 2,125,000 Total Special Assessment Bonds $ 11,544,287 $ 3,185,000 $ (1,060,000) $ 2,125,000 The annual total requirements to amortize the debt outstanding for general obligation, revenue bonds, special assessment and installment notes payable as of December 31, 2013, including interest, are as follows: At December 31, 2013, the City has $304,528 available in debt service funds to service the general obligation bonds. Additionally, there is $1,128,605 in restricted assets of the Water and Sewer Utility Fund. These represent sinking funds and reserve requirements as contained in the various bond indentures. General Obligation Bonds YEAR ENDING GOVERNMENTAL ACTIVITIES BUSINESS-TYPE ACTIVITIES 12/31 PRINCIPAL INTEREST PRINCIPAL INTEREST TOTAL ,294,962 1,118, , ,063 3,429, ,267,706 1,066, , ,163 3,349, ,278,171 1,010, , ,763 3,302, ,288, , , ,913 3,256, ,289, , , ,400 3,199, ,854,565 3,824,290 3,445,000 1,644,950 13,768, ,295,000 2,993,100 4,180, ,200 13,366, ,320,000 1,959,188 1,915, ,600 10,309, ,015, , ,628,400 $28,903,140 $14,435,890 $12,410,000 $4,862,052 $60,611,082 The City has one LOCAL loan, dated June 15, 2004, in the amount of $534,295, which is being used to finance the second phase of the City s Energy Conservation Project that included lighting retrofit, HAVAC control upgrade and water conservation enhancements. The interest rate is % over a period of ten years. The City pledged its non-voted debt capacity for this loan. The final principal and interest payment for this loan will be paid in The Limited Tax General Obligation Refunding Bonds Series 2009A and 2009B were issued in April 2009 for the purchase of software, equipment for police vehicles and golf course equipment. Proceeds were also used to refund the City s outstanding Limited Tax General Obligation Refunding Bonds, 1996 and Limited Tax General Obligation Bonds, Annual principal payments range from $290,000 to $995,000 with interest varying from 3% to 4% payable semi-annually. The final principal and interest payment for Series 2009A was paid in 2013, and for Series 2009B will be in The City expensed bond premiums in the year of issuance instead of amortizing them over the life of the bonds. The Snohomish County Emergency Radio System (SERS) was formed in 1999 to provide enhanced emergency communication services to Snohomish County. SERS was created via an interlocal agreement among the cities of Brier, Edmonds, Everett, Lynnwood, Marysville, Mill Creek, Mountlake Terrace, Mukilteo, Woodway, and Snohomish County. Snohomish County Fire District No. 1 joined after the original formation. SERS is a joint venture with each entity s equity interest reported on its financial statements. See Note 12-Joint Ventures for additional information. Snohomish County issued $27,125,000 of limited tax general obligation bonds on October 20, 1999 for multiple purposes, including funding participation in SERS. The City of Lynnwood s original participation was in the amount of Page 67 Page 68

143 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report $1,795,107. Snohomish County refunded these bonds in 2005, including the City s participation amount of $1,519,147. The City reports these bonds as 2005 general obligation bonds. The bonds are amortized over 15 years with interest payable semi-annually. On February 27, 2012 the City issued 25-year Limited Tax General Obligation Bonds for renovating, improving and expanding the City s Recreation Center in the amount of $24,955,000. Annual principal payments range from $285,000 to $1,595,000, with interest varying from 2.0% to 4.0%, paid semiannually. The final principal and interest payment is scheduled for The City expensed bond premiums in the year of issuance instead of amortizing them over the life of the bonds. Revenue Bonds The 2010 Utility System Revenue Bonds were issued on November 9, The proceeds from the sale of the bonds are to be utilized to carry out the Plan of Additions, which is a portion of the capital improvement plan. Some of the projects included in the Plan of Additions are general System improvements consisting of the installation of a computerized monitoring and control system; water improvements including meter, fire hydrant and water main replacements; sewer improvements consisting of upgrades to the main plant drain station and the treatment plant; and storm water improvements including storm basin studies and transportation and storm pipe replacement. A portion of the proceeds also funds issuance and reserve costs associated with the sale. Annual principal payments range from $150,000 to $4,855,000 with interest varying from 2% to 4%. Revenue is provided by the City s Utility Fund by adjusting rates for water, sewer, and storm water services. These bonds carry a Standard and Poor s rating of AA. The 2008 Utility System Improvement and Refunding Bonds were issued on March 24, Proceeds were used to advance refund all of the City s outstanding Water and Sewer Revenue and Refunding Bonds, 1996, part of the cost of carrying out a portion of the plan of additions as well as to pay for administrative and issuance costs. Annual principal payments range from $255,000 to $1,170,000 with interest varying from 2.52% to 5.0% payable semi-annually. Revenue is provided by the City s Waterworks Utility Fund by adjusting rates for water and sewer services. These bonds carry a Standard and Poor s rating of AA. Contingent Liability The Lynnwood Public Facilities District (discrete component unit of the City of Lynnwood) issued bonds December 15, 2004 in the amounts of $1,930,000, $10,000,000, and $17,265,000. These bonds were used to purchase the property and construct the Lynnwood Convention Center. The City is contingently liable for these bonds. Final principal and interest payments of these bonds will be made in B. DEBT LIMIT CAPACITY RCW provides cities with three segments of debt capacity, each equal to two and one-half percent of the city s assessed valuation, for a total of seven and one-half percent (7.5%). Allowable uses of these segments are as follows: remaining one percent (1%), a 60 percent vote in favor of the issue by at least 40 percent of the voters voting in the last general election is required. Segment 2 City-Owned Water and Sewer Purposes The City can incur debt up to an additional two and one-half percent (2.5%) for water and sewer purposes with a 60 percent vote in favor of the issue by at least 40 percent of the voters voting in the last general election. Segment 3 Acquiring and Developing Open Space, Parks Facilities, and Capital Facilities Associated with Economic Development The City can incur debt up to an additional two and one-half percent (2.5%) for acquiring and developing open space, parks facilities, and capital facilities associated with economic development purposes with a 60 percent vote in favor of the issue by at least 40 percent of the voters voting in the last general election. Bond Ratings Water & Sewer Park & Capital Governmental Purposes Purposes Facilities Without Vote (Councilmanic) With Vote With Vote With Vote 1.5% 1.0% 2.5% 2.5% Legal Limits $61,164,835 $40,776,556 $101,941,391 $101,941,391 Net Outstanding Indebtedness ($37,198,213) Margin Available $23,966,622 $40,776,556 $101,941,391 $101,941,391 Tax year 2013 assessed value of $4,077,655,634 was used for this calculation. At December 31, 2013, the City held the following bond ratings: Bond Type General Obligation Revenue - Utility Standard & Poor s A+/Stable AA/Stable Segment 1 General Governmental Purposes The City can incur debt up to one and one-half percent (1.5%) of its assessed valuation solely with a vote of the legislative body (often referred to as councilmanic debt). To use the Page 69 Page 70

144 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report NOTE 8 - PENSION PLANS Substantially all City of Lynnwood full-time and qualifying part-time employees participate in one of the following statewide retirement systems administered by the Washington State Department of Retirement Systems, under cost-sharing multiple-employer public employee defined benefit retirement plans. The Department of Retirement Systems (DRS), a department within the primary government of the State of Washington, issues a publicly available comprehensive annual financial report (CAFR) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement Systems Communications Unit P.O. Box Olympia, WA or it may be downloaded from the DRS website at The following disclosures are made pursuant to the GASB Statement 27, Accounting for Pensions by State and Local Government Employers and the GASB Statement 50, Pension Disclosures, an Amendment of GASB Statements No. 25 and No. 27. A. PUBLIC EMPLOYEES RETIREMENT SYSTEM (PERS) PLANS 1, 2, AND 3 Plan Description The Legislature established PERS in Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals, and Superior courts; employees of legislative committees; employees of district and municipal courts; and employees of local governments. Approximately 49 percent of PERS salaries are accounted for by state employment. PERS retirement benefit provisions are established in Chapters and RCW and may be amended only by the State Legislature. PERS is a cost-sharing multiple-employer retirement system comprised of three separate plans for membership purposes: Plans 1 and 2 are defined benefit plans and Plan 3 is a defined benefit plan with a defined contribution component. PERS members who joined the system by September 30, 1977 are Plan 1 members. Those who joined on or after October 1, 1977 and by either, February 28, 2002 for state and higher education employees, or August 31, 2002 for local government employees, are Plan 2 members unless they exercised an option to transfer their membership to Plan 3. PERS members joining the system on or after March 1, 2002 for state and higher education employees, or September 1, 2002 for local government employees have the irrevocable option of choosing membership in either PERS Plan 2 or Plan 3. The option must be exercised within 90 days of employment. Employees who fail to choose within 90 days default to Plan 3. PERS is comprised of and reported as three separate plans for accounting purposes: Plan 1, Plan 2/3, and Plan 3. Plan 1 accounts for the defined benefits of Plan 1 members. Plan 2/3 accounts for the defined benefits of Plan 2 members, and the defined benefit portion of benefits for Plan 3 members. Plan 3 accounts for the defined contribution portion of benefits for Plan 3 members. Although members can only be a member of either Plan 2 or Plan 3, the defined benefit portions of Plan 2 and Plan 3 are accounted for in the same pension trust fund. All assets of this Plan 2/3 may legally be used to pay the defined benefits of any of the Plan 2 or Plan 3 members or beneficiaries, as defined by the terms of the plan. Therefore, Plan 2/3 is considered to be a single plan for accounting purposes. PERS Plan 1 and Plan 2 retirement benefits are financed from a combination of investment earnings and employer and employee contributions. Employee contributions to the PERS Plan 1 and Plan 2 defined benefit plans accrue interest at a rate specified by the Director of DRS. During DRS Fiscal Year 2013, the rate was five and one-half percent compounded quarterly. Members in PERS Plan 1 and Plan 2 can elect to withdraw total employee contributions and interest thereon, in lieu of any retirement benefit, upon separation from PERS-covered employment. PERS Plan 1 members are vested after the completion of five years of eligible service. PERS Plan 1 members are eligible for retirement from active status at any age with at least 30 years of service, at age 55 with 25 years of service, or at age 60 with at least 5 years of service. Plan 1 members retiring from inactive status prior to the age of 65 may receive actuarially reduced benefits. The monthly benefit is 2% of the average final compensation (AFC) per year of service, but the benefit may not exceed 60% of the AFC. The AFC is the monthly average of the 24 consecutive highest-paid service credit months. PERS Plan 1 retirement benefits are actuarially reduced to reflect the choice, if made, of a survivor option. Plan 1 members may elect to receive an optional COLA that provides an automatic annual adjustment based on the Consumer Price Index. The adjustment is capped at 3% annually. To offset the cost of this annual adjustment, the benefit is reduced. PERS Plan 1 provides duty and non-duty disability benefits. Duty disability retirement benefits for disablement prior to the age of 60 consist of a temporary life annuity. The benefit amount is $350 a month, or two-thirds of the monthly AFC, whichever is less. The benefit is reduced by any workers compensation benefit and is payable as long as the member remains disabled or until the member attains the age of 60, at which time the benefit is converted to the member s service retirement amount. A member with five years of covered employment is eligible for non-duty disability retirement. Prior to the age of 55, the benefit amount is 2% of the AFC for each year of service reduced by 2% for each year that the member s age is less than 55. The total benefit is limited to 60% of the AFC and is actuarially reduced to reflect the choice of a survivor option. Plan 1 members may elect to receive an optional COLA amount (based on the Consumer Price Index), capped at 3% annually. To offset the cost of this annual adjustment, the benefit is reduced. PERS Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members are eligible for normal retirement at the age of 65 with five years of service. The monthly benefit is 2% of the AFC per year of service. The AFC is the monthly average of the 60 consecutive highest-paid service months. There is no cap on years of service credit; and a cost-of-living allowance is granted (based on the Consumer Price Index), capped at 3% annually. PERS Plan 2 members who have at least 20 years of service credit, and are 55 years of age or older, are eligible for early retirement with a reduced benefit. The benefit is reduced by an early retirement factor (ERF) that varies according to age, for each year before age 65. PERS Plan 2 members who have 30 or more years of service credit and are at least 55 years old can retire under one of two provisions, if hired prior to May 1, 2013: Page 71 Page 72

145 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report With a benefit that is reduced by 3% for each year before age 65; or With a benefit that has a smaller (or no) reduction (depending on age) that imposes stricter returnto-work rules. PERS Plan 2 members hired on or after May 1, 2013 have the option to retire early by accepting a reduction of 5% for each year of retirement before age 65. This option is available only to those who are age 55 or older and have at least 30 years of service. PERS Plan 2 retirement benefits are actuarially reduced to reflect the choice, if made, of a survivor option. PERS Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component and member contributions finance a defined contribution component. As established by chapter RCW, employee contribution rates to the defined contribution component range from 5% to 15% of salaries, based on member choice. Members who do not choose a contribution rate default to a 5% rate. There are currently no requirements for employer contributions to the defined contribution component of PERS Plan 3. PERS Plan 3 defined contribution retirement benefits are dependent upon the results of investment activities. Members may elect to self-direct the investment of their contributions. Any expenses incurred in conjunction with self-directed investments are paid by members. Absent a member s self-direction, PERS Plan 3 contributions are invested in the Retirement Strategy Fund that assumes the member will retire at age 65. For DRS Fiscal Year 2013, PERS Plan 3 employee contributions were $99.0 million, and plan refunds paid out were $69.4 million. The defined benefit portion of PERS Plan 3 provides members a monthly benefit that is 1% of the AFC per year of service. The AFC is the monthly average of the 60 consecutive highest-paid service months. There is no cap on years of service credit, and Plan 3 provides the same cost-of-living allowance as Plan 2. Effective June 7, 2006, PERS Plan 3 members are vested in the defined benefit portion of their plan after ten years of service; or after five years of service, if twelve months of that service are earned after age 44; or after five service credit years earned in PERS Plan 2 by June 1, Plan 3 members are immediately vested in the defined contribution portion of their plan. Vested Plan 3 members are eligible for normal retirement at age 65, or they may retire early with the following conditions and benefits: If they have at least ten service credit years and are 55 years old, the benefit is reduced by an ERF that varies with age, for each year before age 65. If they have 30 service credit years and are at least 55 years old, and were hired before May 1, 2013, they have the choice of a benefit that is reduced by 3% for each year before age 65; or a benefit with a smaller (or no) reduction factor (depending on age) that imposes stricter return-towork rules. If they have 30 service credit years, are at least 55 years old, and were hired after May 1, 2013, they have the option to retire early by accepting a reduction of 5% for each year before age 65. PERS Plan 2 and Plan 3 provide disability benefits. There is no minimum amount of service credit required for eligibility. The Plan 2 monthly benefit amount is 2% of the AFC per year of service. For Plan 3, the monthly benefit amount is 1% of the AFC per year of service. These disability benefit amounts are actuarially reduced for each year that the member s age is less than 65, and to reflect the choice of a survivor option. There is no cap on years of service credit, and a cost-of-living allowance is granted (based on the Consumer Price Index) capped at 3% annually. PERS members meeting specific eligibility requirements have options available to enhance their retirement benefits. Some of these options are available to their survivors. A one-time duty-related death benefit is provided to the beneficiary or the estate of a PERS member who dies as a result of injuries sustained in the course of employment, or if the death resulted from an occupational disease or infection that arose naturally and proximately out of the member s covered employment, if found eligible by the Department of Labor and Industries. From January 1, 2007 through December 31, 2007, judicial members of PERS were given the choice to elect participation in the Judicial Benefit Multiplier (JBM) Program enacted in Justices and judges in PERS Plan 1 and Plan 2 were able to make an irrevocable election to pay increased contributions that would fund a retirement benefit with a 3.5% multiplier. The benefit would be capped at 75% of AFC. Judges in PERS Plan 3 could elect a 1.6% of pay per year of service benefit, capped at 37.5% of AFC. Newly elected or appointed justices and judges who chose to become PERS members on or after January 1, 2007, or who had not previously opted into PERS membership, were required to participate in the JBM Program. There are 1,176 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans of June 30, 2012: Retirees and Beneficiaries Receiving Benefits 82,242 Terminated Plan Members Entitled to But Not Yet Receiving Benefits 30,515 Active Plan Members Vested 106,317 Active Plan Members Non-vested 44,273 Total 263,347 Funding Policy Each biennium, the state Pension Funding Council adopts PERS Plan 1 employer contribution rates, PERS Plan 2 employer and employee contribution rates, and PERS Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at 6% for state agencies and local government unit employees, and at 7.5 % for state government elected officials. The employer and employee contribution rates for Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. Under PERS Plan 3, employer contributions finance the defined benefit portion of the plan and member contributions finance the defined contribution portion. The Plan 3 employee contribution rates range from 5% to 15%. As a result of the implementation of the Judicial Benefit Multiplier Program in January 2007, a second tier of employer and employee rates was developed to fund, along with investment earnings, the increased retirement benefits of those justices and judges that participate in the program. PERS Plan 3 benefits are actuarially reduced to reflect the choice, if made, of a survivor option. Page 73 Page 74

146 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report The methods used to determine the contribution requirements are established under state statute in accordance with chapters and RCW. The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2013, are as follows: The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2012, are as follows: Members Not Participating in JBM: PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer* 9.21%** 9.21%** 9.21%*** Employee 6.00%**** 4.92%**** ***** * The employer rates include the employer administrative expense fee currently set at 0.18%. ** The employer rate for state elected officials is 13.73% for Plan 1 and 9.21% for Plan 2 and Plan 3. *** Plan 3 defined benefit portion only. **** The employee rate for state elected officials is 7.50% for Plan 1 and 4.92% for Plan 2. ***** Variable from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member. Members Participating in JBM: PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer-State Agency* 11.71% 11.71% 11.71%** Employer-Local Gov t Units* 9.21% 9.21% 9.21%** Employee-State Agency 9.76% 9.80% 7.50%*** Employee-Local Gov t Units 12.26% 12.30% 7.50%*** * The employer rates include the employer administrative expense fee currently set at 0.18%. ** Plan 3 defined benefit portion only. ***Minimum rate. Both the City of Lynnwood and the employees made the required contributions. The City of Lynnwood s required contributions for the years ending December 31 were as follows: PERS Plan 1* PERS Plan 2 PERS Plan $ 23,982 $ 1,075,419 $ 113, $ 29,308 $ 927,106 $ 87, $ 28,514 $ 813,994 $ 79,330 *PERS Plan 1 trend is lower as employees retired from this program. B. LAW ENFORCEMENT OFFICERS AND FIRE FIGHTERS RETIREMENT SYSTEM (LEOFF) PLANS 1 AND 2 Plan Description LEOFF was established in 1970 by the Legislature. Membership includes all full-time, fully compensated, local law enforcement commissioned officers, firefighters and, as of July 24, 2005, emergency medical technicians. LEOFF membership is comprised primarily of non-state employees, with Department of Fish and Wildlife enforcement officers, who were first included effective July 27, 2003, being an exception. LEOFF retirement benefit provisions are established in chapter RCW and may be amended only by the State Legislature. LEOFF is a cost-sharing multiple-employer retirement system comprised of two separate defined benefit plans. LEOFF members who joined the system by September 30, 1977 are Plan 1 members. Those who joined on or after October 1, 1977 are Plan 2 members. Effective July 1, 2003, the LEOFF Plan 2 Retirement Board was established by Initiative 790 to provide governance of LEOFF Plan 2. The Board s duties include adopting contribution rates and recommending policy changes to the Legislature. LEOFF retirement benefits are financed from a combination of investment earnings, employer and employee contributions, and a special funding situation in which the state pays through legislative appropriations. Employee contributions to the LEOFF Plan 1 and Plan 2 defined benefit plans accrue interest at a rate specified by the Director of DRS. During DRS Fiscal Year 2013, the rate was five and one-half percent compounded quarterly. Members in LEOFF Plan 1 and Plan 2 can elect to withdraw total employee contributions and interest earnings, in lieu of any retirement benefit, upon separation from LEOFF-covered employment. LEOFF Plan 1 members are vested after the completion of five years of eligible service. Plan 1 members are eligible for retirement with five years of service at the age of 50. The benefit per year of service calculated as a percent of final average salary (FAS) is as follows: Term of Service Percent of Final Average Salary 20 or more years 2.0% 10 but less than 20 years 1.5% 5 but less than 10 years 1.0% The FAS is the basic monthly salary received at the time of retirement, provided a member has held the same position or rank for 12 months preceding the date of retirement. Otherwise, it is the average of the highest consecutive 24 months salary within the last 10 years of service. A cost-of-living allowance is granted (based on the Consumer Price Index). LEOFF Plan 1 provides death and disability benefits. Death benefits for survivors of Plan 1 members on active duty consist of the following: (1) If there is an eligible spouse, 50 % of the FAS, plus 5% of the FAS for each eligible surviving child, with a limitation on the combined benefit of 60% of the FAS; or (2) If there is no eligible spouse, eligible children receive 30% of the FAS for the first child plus 10% for each additional child, subject to a 60% limitation of the FAS, divided equally. Page 75 Page 76

147 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report A one-time duty-related death benefit is provided to the beneficiary or the estate of a LEOFF Plan 1 member who dies as a result of injuries or illness sustained in the course of employment, or if the death resulted from an occupational disease or infection that arose naturally and proximately out of the member s covered employment, if found eligible by the Department of Labor and Industries. The LEOFF Plan 1 disability benefit is 50% of the FAS plus 5% for each child up to a maximum of 60%. Upon recovery from disability before the age of 50, a member is restored to service with full credit for service while disabled. Upon recovery after the age of 50, the benefit continues as the greater of the member s disability benefit or service retirement benefit. LEOFF Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members are eligible for retirement at the age of 53 with five years of service, or at age 50 with 20 years of service. Plan 2 members receive a benefit of 2% of the FAS per year of service (the FAS is based on the highest consecutive 60 months), actuarially reduced to reflect the choice of a survivor option. Members who retire prior to the age of 53 receive reduced benefits. If the member has at least 20 years of service and is age 50, the reduction is 3% for each year prior to age 53. Otherwise, the benefits are actuarially reduced for each year prior to age 53. A cost-of-living allowance is granted (based on the Consumer Price Index), capped at 3% annually. LEOFF Plan 2 provides disability benefits. There is no minimum amount of service credit required for eligibility. The Plan 2 benefit amount is 2% of the FAS for each year of service. Benefits are reduced to reflect the choice of survivor option and for each year that the member s age is less than 53, unless the disability is duty-related. If the member has at least 20 years of service and is age 50, the reduction is 3% for each year prior to age 53. A disability benefit equal to 70% of their FAS, subject to offsets for workers compensation and Social Security disability benefits received, is also available to those LEOFF Plan 2 members who are catastrophically disabled in the line of duty and incapable of future substantial gainful employment in any capacity. Effective June 2010, benefits to LEOFF Plan 2 members who are catastrophically disabled include payment of eligible health care insurance premiums. Members of LEOFF Plan 2 who leave service because of a line of duty disability are allowed to withdraw 150% of accumulated member contributions. This withdrawal benefit is not subject to federal income tax. Alternatively, members of LEOFF Plan 2 who leave service because of a line of duty disability may be eligible to receive a retirement benefit of at least 10% of FAS and 2% per year of service beyond five years. The first 10% of the FAS is not subject to federal income tax. LEOFF Plan 2 retirees may return to work in an eligible position covered by another retirement system, choose membership in that system and suspend their pension benefits, or not choose membership and continue receiving pension benefits without interruption. A one-time duty-related death benefit is provided to the beneficiary or the estate of a LEOFF Plan 2 member who dies as a result of injuries or illness sustained in the course of employment, or if the death resulted from an occupational disease or infection that arose naturally and proximately out of the member s covered employment, if found eligible by the Department of Labor and Industries. Benefits to eligible surviving spouses and dependent children of LEOFF Plan 2 members killed in the course of employment include the payment of eligible health care insurance premiums. Legislation passed in 2009 provides to the Washington state registered domestic partners of LEOFF Plan 2 members the same treatment as married spouses, to the extent that the treatment is not in conflict with federal laws. LEOFF members meeting specific eligibility requirements have options available to enhance their retirement benefits. Some of these options are available to their survivors. There are 374 participating employers in LEOFF. Membership in LEOFF consisted of the following as of the latest actuarial valuation date for the plans of June 30, 2012: Retirees and Beneficiaries Receiving Benefits 10,189 Terminated Plan Members Entitled to But Not Yet Receiving Benefits 689 Active Plan Members Vested 14,273 Active Plan Members Non-Vested 2,633 Total 27,784 Funding Policy Employer and employee contribution rates are developed by the Office of the State Actuary to fully fund the plans. Starting on July 1, 2000, Plan 1 employers and employees contribute zero percent, as long as the plan remains fully funded. Plan 2 employers and employees are required to pay at the level adopted by the LEOFF Plan 2 Retirement Board. The Legislature, by means of a special funding arrangement, appropriates money from the state General Fund to supplement the current service liability and fund the prior service costs of Plan 2 in accordance with the recommendations of the Pension Funding Council and the LEOFF Plan 2 Retirement Board. This special funding situation is not mandated by the state constitution and could be changed by statute. For DRS Fiscal Year 2013, the state contributed $54.2 million to LEOFF Plan 2. The methods used to determine the contribution requirements are established under state statute in accordance with chapters and RCW. The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2013, are as follows: LEOFF Plan 1 LEOFF Plan 2 Employer* 0.18% 5.23%** Employee 0.00% 8.41% State N/A 3.36% *The employer rates include the employer administrative expense fee currently set at 0.18%. ** The employer rate for ports and universities is 8.59%. Both the City and the employees made the required contributions. The City s required contributions for the years ended December 31 were as follows: LEOFF Plan 1 LEOFF Plan $ 187 $ 627, $ 322 $ 612, $ 153 $ 611,873 Page 77 Page 78

148 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report C. PUBLIC SAFETY EMPLOYEES RETIREMENT SYSTEM (PSERS) PLAN 2 Plan Description PSERS was created by the 2004 Legislature and became effective July 1, PSERS retirement benefit provisions have been established by Chapter RCW and may be amended only by the State Legislature. PSERS is a cost-sharing multiple-employer retirement system comprised of a single defined benefit plan, PSERS Plan 2. PSERS membership includes: Full-time employees hired by a covered employer before July 1, 2006, who met at least one of the PSERS eligibility criteria and elected membership during the period of July 1, 2006 to September 30, 2006; and Full-time employees, hired on or after July 1, 2006 by a covered employer, that meet at least one of the PSERS eligibility criteria. Covered employers include: State of Washington agencies: Department of Corrections, Department of Natural Resources, Gambling Commission, Liquor Control Board, Parks and Recreation Commission, and Washington State Patrol; Washington State counties; Washington State cities except for Seattle, Tacoma and Spokane; and Correctional entities formed by PSERS employers under the Interlocal Cooperation Act. To be eligible for PSERS, an employee must work on a full-time basis and: Have completed a certified criminal justice training course with authority to arrest, conduct criminal investigations, enforce the criminal laws of Washington and carry a firearm as part of the job; or Have primary responsibility to ensure the custody and security of incarcerated or probationary individuals; or Function as a limited authority Washington peace officer, as defined in RCW ; or Have primary responsibility to supervise eligible members who meet the above criteria. PSERS retirement benefits are financed from a combination of investment earnings and employer and employee contributions. Employee contributions to the plan accrue interest at a rate specified by the Director of DRS. During DRS fiscal year 2013, the rate was five and one-half percent compounded quarterly. Members in PSERS Plan 2 can elect to withdraw total employee contributions and interest thereon upon separation from PSERS-covered employment. PSERS Plan 2 members are vested after completing five years of eligible service. PSERS members may retire with a monthly benefit of 2 percent of the average final compensation (AFC) at the age of 65 with five years of service, or at the age of 60 with at least 10 years of PSERS service credit, or at age 53 with 20 years of service. The AFC is the monthly average of the member s 60 consecutive highest-paid service credit months. There is no cap on years of service credit; and a cost-ofliving allowance is granted (based on the Consumer Price Index), capped at 3 percent annually. PSERS members who retire prior to the age of 60 receive reduced benefits. If retirement is at age 53 or older with at least 20 years of service, a 3 percent per year reduction for each year between the age at retirement and age 60 applies. PSERS Plan 2 provides disability benefits. There is no minimum amount of service credit required for eligibility. The monthly benefit is 2 percent of the AFC for each year of service. The AFC is based on the member s 60 consecutive highest creditable months of service. Benefits are actuarially reduced for each year that the member s age is less than 60 (with ten or more service credit years in PSERS), or less than 65 (with fewer than ten service credit years). There is no cap on years of service credit, and a cost-ofliving allowance is granted (based on the Consumer Price Index), capped at 3 percent annually. PSERS members meeting specific eligibility requirements have options available to enhance their retirement benefits. Some of these options are available to their survivors. A one-time duty-related death benefit is provided to the beneficiary or the estate of a PSERS member who dies as a result of injuries or illness sustained in the course of employment, or if the death resulted from an occupational disease or infection that arose naturally and proximately out of the member s covered employment, if found eligible by the Department of Labor and Industries. There are 75 participating employers in PSERS. Membership in PSERS consisted of the following as of the latest actuarial valuation date for the plan of June 30, 2012: Retirees and Beneficiaries Receiving Benefits 27 Terminated Plan Members Entitled to But Not Yet Receiving Benefits 60 Active Plan Members Vested 2,083 Active Plan Members Nonvested 2,167 Total 4,337 Funding Policy Each biennium, the state Pension Funding Council adopts Plan 2 employer and employee contribution rates. The employer and employee contribution rates for Plan 2 are developed by the Office of the State Actuary to fully fund Plan 2. The methods used to determine the contribution requirements are established under state statute in accordance with Chapters and RCW. The required contribution rates expressed as a percentage of current-year covered payroll, as of December 31, 2013, are as follows: PSERS Plan 2 Employer* 10.54% Employee 6.36% The employer rate includes an employer administrative expense fee of 0.18%. Both the City and the employees made the required contributions. The City s required contributions for the years ended December 31 were as follows: Page 79 Page 80

149 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report PSERS Plan $ 53, $ 43, $ 39,844 D. FIREMEN'S PENSION FUND (FPF) The City is the administrator of the Firemen's Pension System, which is shown as a pension trust fund in the City's financial statements. The Firemen's Pension System is a single-employer closed pension system that was established in conformance with Revised Code of Washington (RCW) Chapter Membership is limited to fire fighters employed prior to March 1, 1970 when the LEOFF retirement system was established. The City's liability under the Firemen's Pension System consists of all benefits, including payments to beneficiaries, for firemen retired prior to March 1, 1970, and excess benefits over amounts provided by LEOFF for covered fire fighters retired after March 1, Under the Firemen's Pension System, eligible fire fighters may retire at age 50 with 25 years of service. Death and disability benefits are also provided, as established under the governing State law. Individuals who terminate employment prior to retirement may withdraw their contributions to the plan plus accumulated interest, but by doing so, forfeit their rights to future pension benefits. No separate financial report is issued for the plan. Accordingly, the required supplemental information is included in this note. As of December 31, 2013, there were a total of 5 individuals covered by this system. The City reports under GASB Statement 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, GASB Statement 27 Accounting for Pensions by State and Local Government Employers, and GASB Statement 50 Pension Disclosures Amendments for financial accounting requirements. The Firemen s Pension Fund is presented in the Statement of Fiduciary Net Position, and The Statement of Changes in Fiduciary Net Position. The required supplementary information has been prepared using the best available information. The most recent actuarial study of the Firemen's Pension System was conducted by Milliman USA to determine future funding requirements as of January 1, 2012 and updated annually thereafter. The report is prepared in accordance with generally accepted actuarial principles consistent with the Actuarial Standards Board (ASB) and the Code of Professional Conduct and Qualification Standards for Public Statements of Actuarial Opinion of the American Academy of Actuaries. This cost was funded out of the Firemen s Pension Fund. Significant actuarial assumptions used in making these projections include: a) projected annual salary increases of 3.5% including inflation; b) projected investment earnings of 3.75%; c) no growth in membership; d) projected post-retirement benefit increases related to salaries of 3.5% and benefit increases related to annual increases in the Consumer Price Index of 2.5%; e) a 2.5% projected annual growth in fire insurance premium tax revenues received by the fund; f) amortization period of 30 years, and g) the mortality and turnover assumptions were based on the Experience Study for the Law Enforcement Officers and Firefighters Retirement System prepared by the Office of the State Actuary. The financial statements are prepared using the accrual basis of accounting. Employer contributions to the plan are recognized when due and the City has made a formal commitment to provide the contributions. Benefits are recognized when due and payable in accordance with the terms of the plan. Investments are reported at fair value. Short-term investments are reported at cost, which approximates fair value. Investments that do not have an established market are reported at estimated fair value. The annual pension cost was computed using the Entry Age Cost Normal Method. Under this method the projected benefits are allocated on a level basis as a percentage of salary over the earnings of each individual between entry age and assumed exit age. The amount allocated to each year is called the Normal Cost and the portion of the Actuarial Present Value of all benefits not provided for by future Normal Cost payments is called the Actuarial Liability. Since all members have already retired, the amount of the annual Normal Cost is small. The Unfunded Actuarial Liability (UAL) is the Actuarial Liability minus the actuarial value of the Fund s assets. The Unfunded Actuarial Accrued Liabilities (UAAL) is amortized as a level dollar amount over a closed 30-year period beginning January 1, The City's obligations under the Firemen's Pension Fund are limited to the benefits provided to firefighters retired prior to March 1, 1970, plus payments of excess retirement benefits to active members as of that date. In order to meet these obligations, the City may contribute annually to the Fund the amount raised by levying all or part of a tax of up to $0.45 per $1,000 of true and fair market value of assessed property, the maximum provided by law for maintaining the Fund. On the basis of the actuarial assumptions used in this valuation, it was estimated that the current assets of the Fund, along with future revenues from state fire insurance premiums and investment earnings, will be sufficient to pay all future FPF pension benefits. The State fire insurance premiums, and the interest earned on investments are received into the General Fund and allocated into the Firemen s Pensions Fund. Accordingly, the Actuary recommended that the City make no additional contributions to the Fund until the next actuarial valuation is performed. ANNUAL PENSION COST AND NET PENSION OBLIGATION Annual required contribution (ARC) Annual Normal Cost Beginning of Year $0 $0 $0 Amortization of UAAL Beginning of Year 47,574 49,948 49,948 Interest to End of Year 1,903 1,998 1,998 ARC at End of Year (not less than 0) 49,477 51,946 51,946 Interest on Net Pension Obligation (NPO) 2,398 4,747 6,578 Adjustment to ARC 4,553 9,380 13,571 Annual Pension Cost (APC) 47,322 47,313 44,953 Employer Contributions* (11,407) 1,536 (3,753) Change in NPO 58,729 45,777 48,706 NPO at Beginning of Year 59, , ,454 NPO at End of Year $118,677 $164,454 $213,160 *Employer contributions for pensions are total contributions to the Fund net of disbursements from Fund for medical expenses under RCW and administrative expenses. The following historical trend information shows the system's progress in accumulating sufficient assets to pay benefits when due: Page 81 Page 82

150 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report The Schedule of Funding Progress is included in the Required Supplementary Information section at the end of the Notes to the Financial Statements. EMPLOYER CONTRIBUTIONS Annual Required Contributions Fire Fiscal Employer Insurance Employer Required Percentage Year Contributions Premiums Contributions Contributions Contributed 2008 (56,172) 44,227 (11,945) 40,127 (30) 2009 (37,772) 44,559 6,787 40, (45,397) 46,599 1,202 49, (57,431) 46,024 (11,407) 49,477 (23) 2012 (44,814) 46,350 1,536 51, (55,112) 51,359 (3,753) (7) SCHEDULE OF FUNDING PROGRESS (rounded to thousands) Unfunded Actuarial Actuarial Actuarial UAAL As A Valuation Value of Accrued Accrued Funded Covered Percentage of Date Assets Liabilities Liabilities Ratio Payroll Covered Payroll 1/1/98 $785 $883 $98 89% % 1/1/ N/A 1/1/ (327) N/A 1/1/04 1, (54) N/A 1/1/ , N/A 1/1/ , N/A 1/1/ , N/A 1/1/ , N/A portion of their salary until future years. The deferred compensation is payable to employees upon termination, retirement, death, or unforeseen emergency. As noted in Statement No. 32, GASB does not regard Section 457 plans as pension plans because there are no required employer contributions to the plans; they are more in the nature of tax-deferred employee savings plans. The City has placed the deferred compensation plan assets into trust for the exclusive benefit of plan participants and beneficiaries in accordance with GASB Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans. The plan is administered by the ICMA Retirement Corporation. The City has little administrative involvement, does not hold the assets in a trustee capacity, and does not perform fiduciary accountability for the plan. Therefore, the City employee s deferred compensation plan created in accordance with IRC 457 is not reported in the financial statements of the City. F. FIREFIGHTER S SUPPLEMENTAL RETIREMENT PLAN The City offers an additional supplemental retirement plan for firefighters, per negotiated labor contract. The City contributes up to 6.2% of an employee s base salary to their existing deferred compensation plan provided the employee matches at least 67% of the employer s contribution; such that, for example for every dollar contributed to the plan, a minimum of forty cents ($.40) shall be contributed by the employee. The City s fiscal year 2013 contributions to the plan totaled $297,910. G. RETIREE HEALTH SAVINGS PLAN The City offers a Retiree Health Savings (RHS) Plan for certain employees, per negotiated contracts. The plan is administered by the ICMA Retirement Corporation. The RHS plan provides tax-free savings for payment of medical expenses eligible under Internal Revenue Code (IRC) Section 213, other than direct long-term care expenses. Participants contribute 1% of their earnings to this account, and are eligible to receive benefits upon reaching age 55. In addition, upon termination of employment any accumulated sick leave payout for these employees is deposited to their RHS plan, in accordance with the limits disclosed in Note 1. M. Compensated Absences. THREE-YEAR TREND INFORMATION Annual Pension Contribution as Net Pension Fiscal Year Ending Cost (APC) Percentage of APC Obligation 12/31/ ,322 (24)% 118,677 12/31/ ,313 3 % 164,454 12/31/ ,953 (8)% 213,160 E. DEFERRED COMPENSATION PLAN The City offers its employees a voluntary deferred compensation plan created in accordance with Internal Revenue Code (IRC) Section 457. The plan, available to all eligible employees, permits them to defer a Page 83 Page 84

151 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report NOTE 9 - OTHER POST EMPLOYMENT BENEFITS In accordance with the Revised Code of Washington (RCW) 41.26, the City provides post-retirement health care benefits for members of the Law Enforcement Officers and Firefighters (LEOFF) retirement system hired prior to October 1, The plan is a closed, single-employer defined benefit healthcare plan administered by the City. The City provides medical, vision, and long-term care insurance, and reimburses for all Board approved claims for medical, dental, vision, and hospitalization costs not covered by standard benefit plan provisions. As of December 31, 2013, there were 48 retirees and 1 active employee. Financial reporting for the LEOFF retiree healthcare plan is included in the City s Comprehensive Annual Financial Report. The plan does not issue stand-alone financial statements. The date of the last actuarial valuation financial report prepared by Milliman was January 1, Funding Policy Funding for LEOFF retiree healthcare costs is provided entirely by the City as required by RCW. The City s funding policy is based upon pay-as-you-go financing requirements. The plan member is not required to contribute to the cost of the plan. Annual OPEB Cost and Net OPEB Obligation The City s annual other postemployment benefit (OPEB) cost is calculated based on the annual required contribution (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. For GASB purposes, the Annual Required Contribution (ARC) was calculated using the Entry Age Normal Cost Method, one of the acceptable actuarial funding methods. Under this method the projected benefits are allocated on a level basis as a percentage of salary over the earnings of each individual between entry age and assumed exit age. The net OPEB obligation of $2,549,120 (FY 2013) is included as a noncurrent liability on the City s Statement of Net Position. The City s OPEB cost, the percentage of OPEB cost contributed to the plan, and the net OPEB obligation for 2011, 2012 and 2013 were, as follows: Funded Status and Funding Progress As of January 1, 2011, the most recent actuarial valuation date, the plan was 0% funded. The accrued liability for benefits was $21,614,000 and the actuarial value of the assets was $0 resulting in an unfunded actuarial accrued liability (UAAL) of $21,614,000. Funding for LEOFF 1 retiree healthcare costs is provided entirely by the City on a pay-as-you-go basis. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial liabilities for benefits. Actuarial Assumptions Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities, consistent with the long-term perspective of the calculations. The assumptions used by Milliman for the January 1, 2011 actuarial valuation include the following: Valuation Date January 1, 2011 Actuarial Cost Method Entry Age Normal Amortization Method 30-year, closed as of January 1, 2008 Remaining Amortization Period 27 years Investment Rate of Return 3.75% Medical Trend Year Medical Cost Rate % % % % % % Long-Term Care Inflation Rate Dental Trend 4.75% 5.0% Page 85 Page 86

152 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Association of Washington Cities Employee Benefit Trust Trust Description. The City is a participating Employer in the Association of Washington Cities Employee Benefit Trust ( Trust ), a cost-sharing multiple employer welfare benefit plan administered by the Association of Washington Cities. The Trust provides medical benefits to certain eligible retired employees of Participating Employers and their eligible family members. Under Article VII of the Trust document, the Trustees have the authority and power to amend the amount and nature of the medical and other benefit provided by the Trust. The Trust issues a publicly available financial report that includes financial statements and required supplementary information for the Trust. That report, along with a copy of the Trust document, may be obtained by writing to the Trust at 1076 Franklin Street SE, Olympia, WA or by calling Funding Policy. The Trust provides that contribution requirements of Participating Employer and of participating employees, retirees and other beneficiaries, if any, are established and may be amended by the Board of Trustees of the Trust. Retirees of the City receiving medical benefits from the Trust contribute the following monthly amounts: AWC HealthFirst 1000 Health First 1000 $ for non-medicare enrolled retiree coverage $ for non-medicare enrolled spouse coverage $ for Medicare enrolled retiree coverage $ for Medicare enrolled spouse coverage AWC HealthFirst 2500 $ for non-medicare enrolled retiree coverage $ for non-medicare enrolled spouse coverage $ for Medicare enrolled retiree coverage $ for Medicare enrolled spouse coverage Participating Employers are not contractually required to contribute an assessed rate each year by the Trust for the non-leoff I retirees. The retiree pays for 100% of the premium. The City s contributions to the Trust for the year ended December 31, 2013 was $682,733. The City covers also medical benefits for LEOFF retirees beyond allowable medical charges by the Trust. As such, the City s additional contributions aggregate to $88,326 in NOTE 10 RISK MANAGEMENT The City of Lynnwood is a member of Cities Insurance Association of Washington. Chapter RCW authorizes the governing body of any one or more governmental entities to form together into or join a program or organization for the joint purchasing of insurance, and/or joint self-insuring, and/or joint hiring or contracting for risk management services to the same extent that they may individually purchase insurance, self-insure, or hire or contract for risk management services. An agreement to form a pooling arrangement was made pursuant to the provisions of Chapter RCW, the lnterlocal Cooperation Act. The program was formed on September 1, 1988, when 34 cities in the state of Washington joined together by signing an lnterlocal Governmental Agreement to pool their self-insured losses and jointly purchase insurance and administrative services. As of September 1, 2013, there are 236 members in the program. The program provides the following forms of joint self-insurance and excess coverage for its members: Property, including Automobile Comprehensive, and Collision; Equipment Breakdown, and Crime Protection; and Liability, including General, Automobile, and Wrongful Acts, are included to fit members' various needs. The program acquires liability insurance through their Administrator, Canfield that is subject to a peroccurrence self-insured retention of $100,000. The standard member deductible is $1,000 for each claim (deductible may vary per member), while the program is responsible for the $100,000 selfinsured retention. Insurance carriers cover insured losses over $101,000 to the limits of each policy. Since the program is a cooperative program, there is a joint liability among the participating members towards the sharing of the $100,000 of the self-insured retention. The program also purchases a Stop Loss Policy, with an attachment point of $3,247,000, to cap the total claims paid by the program in any one year. Lynnwood purchased property insurance outside of the CIAW pool. Property insurance is subject to a per-occurrence deductible of $25,000. Property insurance is subject to a per-occurrence self-insured retention of $25,000. Members are responsible for a $1,000 deductible for each claim. The program bears the $25,000 self-insured retention, in addition to the deductible. Equipment Breakdown insurance is subject to a per-occurrence deductible of $2,500 ($10,000 for Pumps & Motors). Members are responsible for the deductible amount of each claim. There is no program self-insured retention on this coverage. Members contract to remain in the program for a minimum of one year, and must give notice before August 31 terminating participation the following September 1. The lnterlocal Agreement is renewed automatically each year. In the event of termination, a member is still responsible for contributions to the program for any unresolved, unreported, and in-process claims for the period they were a signatory to the lnterlocal Agreement. A board of ten members is selected by the membership from three geographic areas of the state on a staggered term basis and is responsible for conducting the business affairs of the program. The program has no employees. Claims are filed by members with Canfield, which has been contracted to perform program administration, claims adjustment and administration, and loss_prevention for the program. Fees paid to the third party administrator under this arrangement for the year ending August 31, 2013, were $1,423, Page 87 Page 88

153 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report The City and its employees contribute to the State of Washington s Department of Labor and Industries for workers compensation. There were no settlements in excess of coverage in any of the prior three years. CITY OF LYNNWOOD INSURANCE IN FORCE AS OF DECEMBER 31, 2013 POLICY AMOUNT OF INSURANCE COMPANY/COVERAGE NUMBER COVERAGE ClAW/Brit Insurance & Torus Specialty Policy Effective Dates: 9/1/13 9/1/14 CIAW Commercial General Liability General Liability, Law Enforcement Liability, $10,000,000 Vehicle Liability Liability Deductible: $75,000 Auto Physical Damage Deductible: $100,000. Wrongful Acts Liability Public Official s Liability, $10,000,000 Employment Practices Liability, Sexual Harassment Deductible: $75,000 CITY OF LYNNWOOD INSURANCE IN FORCE AS OF DECEMBER 31, 2013 POLICY AMOUNT OF INSURANCE COMPANY/COVERAGE NUMBER COVERAGE National Union Fire Insurance Company SRG A Police Effective Dates: 4/20/13 4/20/14 Volunteer Accidental Death or Dismemberment $25,000 Volunteer Medical Benefits $2,500 Deductible: $250 Great American Insurance Company BTA Policy Effective Dates: 2/11/13-2/11/14 $500,000 each claim/$1,000,000 aggregate Storage Tank Pollution Liability Scheduled Storage Tanks Deductible: $5,000 Navigators Specialty Insurance Company SF13ESP0A4C2QNC Police Effective Dates: 2/25/13-2/25/14 Environmental Impairment Liability - $1,000,000 each claim/$5,000,000 aggregate Treatment Plant Deductible: $25,000 Crime Employee Theft $900,000 Forgery or Alteration $900,000 Theft of Money & Securities/Inside $900,000 Theft of Money & Securities/Outside $900,000 Deductible: $100,000 Affiliated FM Insurance Company Policy Effective Dates: 4/23/13 4/23/14 KTKCMB9C897 Primary Property Insurance Limit other than Flood and Quake $100,000,000 Deductible $25,000 Flood Limit $5,000,000 Flood Deductible $100,000 Earthquake Limit $5,000,000 Earthquake Deductible 5% of the value of the property damaged/$100,000 Minimum National Union Fire Insurance Company GTP Policy Effective Dates: 1/1/13 1/1/14 Accidental Death or Dismemberment $150,000 for Council Members & Mayor Page 89 Page 90

154 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report NOTE 11 CONTINGENCIES AND LITIGATIONS NOTE 12 - JOINT VENTURES In the normal course of its various operations, the City is involved in lawsuits and is the recipient of claims for damages alleging that the City is responsible for damages incurred by third parties. Claims and/or litigation arise in areas such as building, zoning, sewer construction and other land-use regulations, as well as other areas. These claims or lawsuits are relatively natural consequences of conducting the City s business. Please refer to Risk Management on Note 10. The City has recorded in its financial statements all material liabilities, including an estimate for situations which are not yet resolved but where, based on available information, management believes it is probable that City will have to make payment. In the opinion of management, the City s insurance policies and insurance reserves are adequate to pay all known or pending claims. As discussed in Note 7, Long-Term Debt, as of December 31, 2013, the City is contingently liable for $27,068,891 of 2004 variable rate Revenue and Sales Tax bonds issued by the Public Facilities District. Please see the Reporting Entity section of Note 1 for more details. The City participates in a number of federal- and state-assisted programs. These grants are subject to audit by the grantors or their representatives. Such audits could result in requests for reimbursement to grantor agencies for expenditures disallowed under the terms of the grants. City management believes that such disallowances, if any, will be immaterial. Joint Recreation Facilities The City of Lynnwood, the City of Edmonds, Snohomish County and Edmonds School District No. 15 entered into an agreement to develop Meadowdale Playfields and Recreation Complex. The Edmonds School District provided a 25-acre site adjacent to Meadowdale Elementary, Meadowdale Middle School and Meadowdale High School. The City of Lynnwood was responsible for the construction and maintenance of the complex and bills 50% of the associated costs to the City of Edmonds on a quarterly basis. The ownership, based on total costs, is as follows: Edmonds School District No land $1,000,000 33% Snohomish County - construction contribution 150,000 5% City of Lynnwood - construction cost 940,000 31% City of Edmonds - construction cost 940,000 31% Snohomish County Emergency Radio System The Snohomish County Emergency Radio System (SERS) was formed in 1999 via an interlocal agreement among the cities of Brier, Edmonds, Everett, Lynnwood, Marysville, Mill Creek, Mountlake Terrace, Mukilteo, Woodway, and Snohomish County to provide enhanced emergency communication services to Snohomish County. Snohomish County Fire District No. 1 joined after the original formation. SERS is responsible for design, development, financing, acquisition, operation, maintenance, and repair of the 800-megahertz emergency radio system. A 10-member Board of Directors is appointed by the cities and County to govern SERS. Each of the cities and the County are represented in the Board. Snohomish County issued limited tax general obligation bonds in 1999 for funding participation in SERS. The City of Lynnwood s original funding participation was in the amount of $1,795,107. In 2005 Snohomish County refunded these bonds, with the City s refunded participation amount being $1,519,147. See Note 7 Long-Term Debt for additional information. The City of Lynnwood s net equity interest in SERS as of December 31, 2013 is $570, Equity Interest As of 12/31/13 Members Beg Bal Net Equity Interest Change in Equity Phase 1 Change in Equity Phase 2 Change in Equity O&M Change in Equity R&R End Bal Net Equity Interest Edmonds $ 494,337 $ (54,096) $ 16,355 $ 4,511 $ 461,107 Fire District 1 454,547 (51,286) 14,810 4, ,156 Lynnw ood 610,371 (65,422) 20,162 5, ,672 Marysville 429,276 (43,689) 29,890 8, ,722 Mill Creek 150,445 (16,523) 7,058 1, ,927 Mountlake Terrace 299,454 (32,869) 9,296 2, ,445 Snohomish County 7,101,025 (163,289) (342,669) 220,707 60,877 6,876,651 Woodw ay 19,041 (2,231) ,517 Brier 89,839 (9,926) 2, ,194 Everett 1,877,244 (196,807) 66,088 18,229 1,764,754 Mukilteo 267,759 (28,758) 8,348 2, ,652 Total $ 11,793,337 $ (664,895) $ (342,669) $ 395,840 $ 109,184 $ 11,290,796 Note: amounts are rounded to nearest dollar Page 91 Page 92

155 CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report CITY OF LYNNWOOD, WA FY 2013 Annual Financial Report Southwest Snohomish County Public Safety Communications Agency The City of Lynnwood participates in a single joint venture with other local governments in the Southwest Snohomish County Public Safety Communications Agency, (SNOCOM) a public non-profit corporation formed in 1971 and incorporated in The purpose of SNOCOM is to provide public safety communications, records retention and usage and other board approved functions. SNOCOM was established via an interlocal agreement between the City of Lynnwood, six other cities and Snohomish County Fire District 1 all located within the county. Each member city and the Fire District provide voting members to the SNOCOM board of directors. The purpose of SNOCOM is to provide communications and dispatching for public health and safety services in Southwest Snohomish County. The Cities of Brier, Edmonds, Lynnwood, Mill Creek, Mountlake Terrace, Mukilteo, Woodway and Fire District 1 are jointly responsible for the financing of SNOCOM. The interlocal agreement details clearly an allocation formula that determines each member's share in the joint venture and its reported equity interest in their respective financial statements. It incorporates each agency s population, assessed value and usage of 911 calls for service. Each member provides a voting representative to SNOCOM governing board of directors. The SNOCOM board has the authority to approve project expenditures and adopt SNOCOM budget. At December 31, 2013, the City of Lynnwood owned an equity interest in the SNOCOM joint venture of $1,020,439. This value has been recorded in the government wide statements as an asset for the year ended December 31, The equity interest is adjusted to the extent of revenues and expenditure transactions occurring between the City of Mountlake Terrace and SNOCOM as recorded in the City of Mountlake Terrace s financial system. The City of Mountlake Terrace, who acts as the entity's fiscal agent under the Interlocal Agreement for Financial Services signed on November 25, 2009, prepares the unaudited financial information. Separate financial statements for the Snohomish County Public Safety Communication Agency can be obtained from the City of Mountlake Terrace, Finance Department, th St SW, Suite 200, Mountlake Terrace, WA AHA Alliance for Housing Affordability: In September, 2013, the City of Lynnwood joined the cities of Everett, Granite Falls, Lake Stevens, Marysville, Mill Greek, Mountlake Terrace, Mukilteo, and Snohomish, the Town of Woodway, and Snohomish County to establish the Alliance for Housing Affordability (AHA). The agreement was amended in May, 2014 to add the City of Arlington and in June, 2014 to add the City of Stanwood. The purpose of AHA is to cooperatively formulate affordable housing goals and policies and to foster efforts to provide affordable housing by providing expertise and information to member jurisdictions. Operating funding is provided by the member cities. AHA is governed by a Joint Board composed of an elected official from each member. The Joint Board is responsible for review and approval of all budgetary, financial, policy, and contractual matters. The Board is assisted by an administrative staff housed at the Housing Authority for Snohomish County. Fiscal agent duties are performed by the City of Mountlake Terrace. Each member city is responsible for contributing operating revenues as determined from the AHA annual budget. Contributions from the member cities are based on each member's population. A grant from the Gates Foundation provided $50,000 to assist with the first two years of organizational start-up. The City of Lynnwood s equity share to date is: Year AHA Budget Lynnwood s Share Lynnwood Share as % of AHA Budget 2013 $89,850 $2, % 2014 $92,543 $2, % Members withdrawing from the agreement relinquish all rights to any reserve funds, equipment, or material purchased. Upon dissolution, the agreement provides for distribution of net assets among the members based on the percentage of the total annual contributions during the period of the Agreement paid by each member. Budget monitoring information can be obtained from Sonja Springer, Finance Director, City of Mountlake Terrace, th Street SW, Mountlake Terrace WA (or sspringer@ci.mlt.wa.us) or from Kristina Gallant, Housing Analyst, Alliance for Housing Affordability, th Ave W, Suite 200, Everett, WA Page 93 Page 94