CITY OF WATER FUND (An Enterprise Fund of the City of Springfield, Illinois) For the Years Ended February 28, 2014 and February 28, 2013
TABLE OF CONTENTS Page(s) Independent Auditor s Report... 1-2 Financial Statements: Balance Sheets... 3-4 Statements of Revenues, Expenses and Changes in Net Position... 5 Statements of Cash Flows... 6-7 Notes to the Financial Statements... 8-36
INDEPENDENT AUDITOR'S REPORT To the Honorable Mayor and Members of the City Council City of Springfield, Illinois We have audited the accompanying financial statements of the Water Fund, an Enterprise Fund of the City of Springfield, Illinois as of and for the years ended February 28, 2014 and 2013, and the related notes to the financial statements, as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. - 1 -
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Water Fund of the City of Springfield, Illinois, as of February 28, 2014 and 2013, and the changes in financial position and the cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1, the financial statements present only the Water Fund and do not purport to, and do not, present fairly the financial position of the City of Springfield, Illinois, as of February 28, 2014 and 2013, the changes in its financial position, and the cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Springfield, Illinois June 25, 2014-2 -
FINANCIAL STATEMENTS
CITY OF SPRINGFIELD WATER FUND Balance Sheets February 28, 2014 and February 28, 2013 2014 2013 Assets Utility plant (Note 2): Property, plant, and equipment in service $ 185,143,529 $ 180,745,581 Less accumulated depreciation 53,615,617 51,947,652 131,527,912 128,797,929 Construction work in progress 48,508,336 22,540,265 Net utility plant 180,036,248 151,338,194 Other property and investments (Note 3): Auxiliary service property 7,570,044 7,240,349 Less accumulated depreciation 3,806,933 3,682,912 3,763,111 3,557,437 Nonutility property, Hunter Lake, nondepreciable 22,716,192 22,659,596 Total other property and investments 26,479,303 26,217,033 Restricted assets: Cash and cash equivalents (Notes 4 and 5) 47,271,159 70,573,463 Investments (Notes 4 and 5) 1,020,500 - Accrued interest receivable 358-48,292,017 70,573,463 Current assets: Cash and cash equivalents (Note 4) 10,629,063 10,094,496 Billed accounts receivable - consumers, net of allowance for doubtful accounts of $127,530; $115,247 in 2014 and 2013, respectively 1,765,302 1,603,711 Unbilled utility and other receivables, net of allowance for doubtful accounts of $143,583; $98,634 in 2014 and 2013, respectively 2,277,049 1,467,657 Inventories - materials and supplies 937,663 1,001,091 Other assets 15,810 15,810 Due from primary government (Note 6) 6,736,920 5,650,105 Prepaid expenses 67,063 61,597 Total current assets 22,428,870 19,894,467 Total assets 277,236,438 268,023,157 Deferred outflows of resources Loss on refunding 429,510 582,489 Total assets and deferred outflows of resources $ 277,665,948 $ 268,605,646 See accompanying notes to financial statements. - 3 -
CITY OF SPRINGFIELD WATER FUND Balance Sheets February 28, 2014 and February 28, 2013 2014 2013 Net position and liabilities: Net position: Net investment in capital assets $ 145,005,269 $ 137,531,142 Restricted for debt service 2,377,242 1,649,017 Restricted for system repairs and improvements 1,824,895 854,701 Unrestricted 7,826,686 9,839,978 Total net position 157,034,092 149,874,838 Noncurrent liabilities: Long-term debt, net of current installments (Note 5) 97,384,652 100,304,918 IMRF pension obligation (Note 8) 557,715 548,097 Other postemployment benefits obligation (Note 12) 5,743,404 4,676,449 Compensated absences (Note 1) 653,892 627,237 Other payables 329,827 363,480 Total noncurrent liabilities 104,669,490 106,520,181 Current liabilities payable from restricted assets: Current installments of long-term debt (Note 5) 2,360,000 1,625,000 Accounts and contracts payable 3,433,191 3,700,450 Accrued interest and taxes payable 2,096,503 2,141,563 Total current liabilities payable from restricted assets 7,889,694 7,467,013 Current liabilities: Current installments of long-term debt (Note 5) 326,143 322,361 Other payables 273,562 176,142 Accounts and contracts payable 5,489,003 2,341,440 Accrued compensation 556,602 482,249 Compensated absences (Note 1) 835,348 783,511 Due to primary government (Note 6) 592,014 637,911 Total current liabilities 8,072,672 4,743,614 Total liabilities $ 120,631,856 118,730,808 Total net position and liabilities $ 277,665,948 $ 268,605,646 See accompanying notes to financial statements. - 4 -
CITY OF SPRINGFIELD WATER FUND Statements of Revenues, Expenses and Changes in Net Position Years Ended February 28, 2014 and February 28, 2013 2014 2013 Operating revenues, water revenues and other $ 30,016,919 $ 30,996,507 Operating expenses: Source of supply 767,307 712,801 Pumping 1,408,361 1,488,749 Purification 3,665,148 3,759,074 Distribution 6,279,981 5,897,243 Accounting and collection 1,675,588 1,565,413 Administrative and general 2,421,497 2,133,995 Other post employment benefits (Note 12) 1,373,461 1,363,516 IMRF pension expense (Note 8) 9,618 122,231 Depreciation 3,133,801 2,981,738 Total operating expenses 20,734,762 20,024,760 Operating income 9,282,157 10,971,747 Nonoperating income (expense): Investment income 4,488 17,703 Auxiliary service property and nonutility property operations, net (Note 3) (1,559,731) (1,910,504) Other income (expense), net (62,837) 1,233,080 Total nonoperating income (expense) (1,618,080) (659,721) Contribution revenue (Note 1) 1,242,564 923,059 Transfer out (Note 11) (490,064) (508,398) Change in net position before interest charges 8,416,577 10,726,687 Interest charges 1,257,323 1,713,525 Change in net position 7,159,254 9,013,162 Net position, beginning of year 149,874,838 140,861,676 Net position, end of year $ 157,034,092 $ 149,874,838 See accompanying notes to financial statements. - 5 -
CITY OF SPRINGFIELD WATER FUND Statements of Cash Flows Years Ended February 28, 2014 and February 28, 2013 2014 2013 Cash flows from operating activities: Receipts from customers $ 28,907,264 $ 31,035,322 Receipts from other funds 344,306 456,679 Payments to suppliers (2,676,193) (3,328,102) Payments to employees (10,334,719) (8,336,682) Payments to other funds (572,336) (833,567) Net cash from operating activities 15,668,322 18,993,650 Cash flows from noncapital financing activities: Transfer out (490,064) (508,398) Litigation settlement - 1,319,540 Net payments made on inter-fund borrowing (1,132,712) (1,255,229) Net cash from noncapital financing activities (1,622,776) (444,087) Cash flows from capital and related financing activities: Acquisition and construction of utility plant and auxiliary service property (29,514,161) (12,502,137) Proceeds from ARRA loans - 19,946 Proceeds from 2012 Water Bonds - 76,380,541 Principal paid on revenue bonds, refunding bonds and loan payable (1,947,930) (15,885,000) Interest paid on bonds and loan payable (1,302,249) (1,883,215) Auxiliary service and nonutility property operations, net (1,435,710) (1,800,216) Interest capitalized for the acquisition and construction of utility plant (2,717,550) (1,381,421) Contribution revenue 1,242,564 923,059 Other cash flows from capital and related financing (135,213) 209,610 Net cash from capital and related financing activities (35,810,249) 44,081,167 Cash flows from investing activities: Purchase of investments (1,021,290) - Interest on investments 18,256 47,419 Net cash from investing activities (1,003,034) 47,419 Net increase (decrease) in cash and cash equivalents (22,767,737) 62,678,149 Cash and cash equivalents, beginning of year 80,667,959 17,989,810 Cash and cash equivalents, end of year $ 57,900,222 $ 80,667,959 Cash and cash equivalents, restricted 47,271,159 70,573,463 Cash and cash equivalents, unrestricted 10,629,063 10,094,496 Total cash and cash equivalents 57,900,222 80,667,959 See accompanying notes to financial statements. - 6 -
CITY OF SPRINGFIELD WATER FUND Statements of Cash Flows Years Ended February 28, 2014 and February 28, 2013 2014 2013 Reconciliation of operating income to net cash from operating activities: Operating income $ 9,282,157 $ 10,971,747 Adjustments to reconcile operating income to net cash from operating activities: Depreciation 3,133,801 2,981,738 Change in assets and liabilities: (Increase) decrease in unbilled utility receivables (809,392) 117,779 (Increase) decrease in accounts receivable-consumers (161,591) 229,129 (Increase) decrease in inventories 63,428 86,180 (Increase) decrease in prepaid expenses (5,466) 310 Increase (decrease) in accounts and contracts payable 2,880,304 3,306,930 Increase (decrease) in other payables 63,767 9,864 Increase (decrease) in accrued compensation and compensated absences 152,845 52,182 Increase (decrease) in accrued taxes payable (8,104) 61 Increase (decrease) in IMRF pension obligation 9,618 122,231 Increase (decrease) in OPEB obligation 1,066,955 1,115,499 Net cash from operating activities $ 15,668,322 $ 18,993,650 Supplemental disclosures of noncash: Investing and capital and related financing activities: Unrealized (gain) loss from marking investments to fair value $ (155) $ - Investing, amortization of investment premium 946 - See accompanying notes to financial statements. - 7 -
CITY OF - WATER FUND NOTES TO FINANCIAL STATEMENTS February 28, 2014 and February 28, 2013 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Water Fund, an Enterprise Fund of the City of Springfield, Illinois (the City), have been prepared in conformity with accounting principles generally accepted in the United States of America, as applied to government units hereinafter referred to as generally accepted accounting principles (GAAP). The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting principles and financial reporting practices. The more significant of the Water Fund s accounting policies are described below. A. Fund Accounting and Financial Statement Presentation The Water Fund is a fund of the City and is classified as an Enterprise Fund (proprietary fund type). Enterprise Funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenue earned, expenses incurred, and/or change in net assets is appropriate for capital maintenance, public policy, management control, accountability or other purposes. The financial statements present only the financial position, changes in financial position, and cash flows of the City's Water Fund. These financial statements are not intended to present fairly the financial position, changes in financial position and cash flows of the City in conformity with GAAP. B. Basis of Accounting Basis of accounting refers to when revenue and expenses are recognized in the accounts and reported in the financial statements. The Water Fund utilizes the accrual basis of accounting, which recognizes revenue when it is earned, including an estimate of water revenue unbilled at the end of each accounting period, and expenses when they are incurred. The Water Fund, the Electric Light and Power Fund and the Sewer Fund jointly bill customers for services. - 8 -
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Operating Revenues and Expenses: Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with ongoing operations. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Retail revenue is billed monthly based on rates adopted by the City Council. For the years ended February 28, 2014 and February 28, 2013, retail customers of the water system paid an average price of $3.49 and $3.42, respectively per 100 cubic feet of water. Retail customer class average prices, for the 2014 and 2013 fiscal years, were as follows: 2014 2013 Inside City $ 3.42 $ 3.35 Outside City 4.43 4.28 Southern View 4.79 4.67 D. Utility Plant in Service and Auxiliary Service Property Property, plant and equipment are stated at cost. The cost of property additions, including replacements of units of property and improvements, is capitalized as property, plant and equipment. Cost includes labor, material and similar items, and indirect charges for such items as transportation and supervision. Capital assets are defined as assets with an initial individual cost of more than $5,000 and an estimated useful life in excess of one year. Interest expense incurred during the construction of major projects is included as part of the capitalized cost of the constructed capital assets. Maintenance and repairs of property and replacements of items determined to be less than units of property are charged to operations. Donated fixed assets are valued at their fair market value on the date donated. Depreciation is provided on a straight-line basis over the estimated service lives of depreciable property, ranging from 10 to 100 years for the plant and distribution system, and from 5 to 33 years for equipment. Depreciation provided during the years ended February 28, 2014 and February 28, 2013, was approximately 1.7 percent and 1.6 percent, respectively of depreciable utility plant at February 28, 2014 and February 28, 2013. E. Nonutility and Other Property Nonutility and other property represent property acquired for the proposed John H. Hunter Lake project. The cost of farmland, including legal and other acquisition costs are capitalized assets. Rental revenue and operating expenses are reported on the statements of revenue, expenses and changes in net position. - 9 -
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) F. Restricted Asset Accounts Restricted asset accounts are utilized in the Water Fund to comply with revenue bond ordinances. When both restricted and unrestricted resources are available for use, it is the City s policy to use restricted resources first, then, unrestricted resources, as they are needed. G. Cash and Cash Equivalents For purposes of the statement of cash flows, the Water Fund considers all highly liquid investments (including restricted assets) with an original maturity of three months or less to be cash equivalents. Investments in the Illinois Funds are classified as cash and cash equivalents. H. Investments Investments are recorded at fair value using quoted market prices, except for Certificates of deposit which are recorded at cost. I. Inventories Inventories of materials and supplies are stated at the lower of cost or market, with cost determined on an average cost basis. J. Long-term Debt Issuance Costs, Premiums, Discounts and Deferred Gains/Losses on Refunding Long-term debt premiums, discounts and deferred gains/losses on refunding are amortized over the life of the related issue using the effective interest method. Longterm debt issuance costs are expensed as incurred. K. Contribution Revenue and Related Project Costs In accordance with GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, the Water Fund is required to recognize capital contributions from nonexchange transactions as revenues. Contributions are payments received from contractors and other businesses and individuals for special water construction projects and contributions from other City funds for certain capital projects. Excess contributions are refunded and deficient deposits are billed. Costs of the projects are capitalized and depreciated. - 10 -
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) L. Compensated Absences Water Fund employees are granted vacation and sick pay in varying amounts. In the event of termination, a non-union employee is reimbursed for accumulated vacation days up to the equivalent of two years vacation. A union employee normally must take vacation accrued during the fiscal year of accrual. Vested or accumulated vacation leave is recorded as an expense and liability as the benefits accrue to employees. Union employees may accumulate up to 90 days of sick leave to be paid upon death or retirement. Non-union employees may accumulate an unlimited number of days of sick leave. A portion of accumulated sick leave is to be paid upon death or retirement as decided by the City Council. No sick leave is paid upon termination. An actuarially determined liability is recognized for that portion of accumulated sick leave benefits estimated to be payable upon death or retirement. March 1 Additions Deletions February 28 Current 2014 $ 1,410,748 $ 994,101 $ 915,609 $1,489,240 $ 835,348 2013 1,388,144 964,360 941,756 1,410,748 783,511 M. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net 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 assets that applies to a future period(s) and so will not be recognized as an outflow of resources (expense) 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 assets that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. N. Budget Annually, the City adopts a budget for the Water Fund. The budget is adopted using the accrual basis of accounting. - 11 -
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) O. Net Position Net position represents the difference between assets and deferred outflows and liabilities and deferred inflows in the financial statements. Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balance of any long-term debt used for acquisition, construction or improvement of those assets. Net position invested in capital assets, net of related debt, excludes unspent bond proceeds. Unspent bond proceeds were $38,560,513 and $62,228,194 as of February 28, 2014 and February 28, 2013, respectively. Net position is reported as restricted when there are limitations imposed on their use through external restrictions imposed by creditors, grantors or laws or regulations of other governments. P. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 2. UTILITY PLANT Utility plant activity for the year ended February 28, 2014, consists of the following: March 1 Additions Retirements February 28 Source of supply $ 30,324,582 $ 1,283,145 $ - $ 31,607,727 Pumping 4,688,501 43,311-4,731,812 Purification 27,658,060 963,086 35,000 28,586,146 Distribution 108,899,092 3,204,036 470,500 111,632,628 General purpose 9,175,346 370,206 960,336 8,585,216 Total utility plant $ 180,745,581 $5,863,784 $1,465,836 $ 185,143,529-12 -
2. UTILITY PLANT (Continued) Accumulated depreciation activity for the year ended February 28, 2014 consists of the following: March 1 Additions Retirements February 28 Source of supply $ 5,855,864 $ 245,670 $ - $ 6,101,534 Pumping 2,387,580 120,605-2,508,185 Purification 10,324,119 825,063 35,000 11,114,182 Distribution 26,859,230 1,555,111 470,500 27,943,841 General purpose 6,520,859 387,352 960,336 5,947,875 Total utility plant $ 51,947,652 $ 3,133,801 $ 1,465,836 $ 53,615,617 Utility plant, net of accumulated depreciation $ 128,797,929 $ 2,729,983 $ - $ 131,527,912 March 1 Additions Closeout February 28 Construction work in progress $ 22,540,265 $32,021,714 $ 6,053,643 $ 48,508,336 Net utility plant $ 151,338,194 $34,751,697 $ 6,053,643 $ 180,036,248 Utility plant activity for the year ended February 28, 2013, consists of the following: March 1 Additions Retirements February 28 Source of supply $ 30,244,887 $ 79,695 $ - $ 30,324,582 Pumping 4,688,501 - - 4,688,501 Purification 26,861,434 796,626-27,658,060 Distribution 104,736,896 4,456,496 294,300 108,899,092 General purpose 8,643,060 537,777 5,491 9,175,346 Total utility plant $ 175,174,778 $ 5,870,594 $ 299,791 $ 180,745,581-13 -
2. UTILITY PLANT (Continued) Accumulated depreciation activity for the year ended February 28, 2013 consists of the following: March 1 Additions Retirements February 28 Source of supply $ 5,617,011 $ 238,853 $ - $ 5,855,864 Pumping 2,267,192 120,388-2,387,580 Purification 9,541,810 782,309-10,324,119 Distribution 25,691,981 1,461,549 294,300 26,859,230 General purpose 6,147,711 378,639 5,491 6,520,859 Total utility plant $ 49,265,705 $ 2,981,738 $ 299,791 $ 51,947,652 Utility plant, net of accumulated depreciation $ 125,909,073 $ 2,888,856 $ - $ 128,797,929 March 1 Additions Closeout February 28 Construction work in progress $ 15,187,947 $13,724,721 $ 6,372,403 $ 22,540,265 Net utility plant $ 141,097,020 $16,613,577 $ 6,372,403 $ 151,338,194 Utility plant under construction at February 28, 2014 and February 28, 2013, of $48,508,336 and $22,540,265, respectively includes interest on revenue bonds during construction, proceeds of which are used in financing the construction of certain assets. Interest expense is capitalized net of interest revenue on the investment of unexpended bond proceeds. Net interest expense of $2,703,985 and $1,351,705 was capitalized in fiscal year 2014 and fiscal year 2013, respectively. 3. OTHER PROPERTY AND INVESTMENTS A. Auxiliary Service Property The land surrounding Lake Springfield, owned by the Water Fund, is used for residential properties, private recreational clubs and public purposes. All land except public land is leased under operating leases to individuals and groups for 40 to 99 year periods with options to renew. Auxiliary service property activity for the year ended February 28, 2014, consists of the following: March 1 Additions Retirements February 28 Land $ 1,196,029 $ - $ - $ 1,196,029 Lake buildings and improvements 3,196,889 315,870-3,512,759 Park buildings and improvements 1,215,868 - - 1,215,868 General purpose equipment 1,631,563 13,825-1,645,388 Total auxiliary service property $ 7,240,349 $ 329,695 $ - $ 7,570,044-14 -
3. OTHER PROPERTY AND INVESTMENTS (Continued) A. Auxiliary Service Property (Continued) Accumulated depreciation activity for the year ended February 28, 2014 consists of the following: March 1 Additions Retirements February 28 Lake buildings and improvements $ 1,818,208 $ 65,387 $ - $ 1,883,595 Park buildings and improvements 786,384 10,485-796,869 General purpose equipment 1,078,320 48,149-1,126,469 Total accumulated depreciation $ 3,682,912 $ 124,021 $ - $ 3,806,933 Auxiliary service property, net of accumulated depreciation $ 3,557,437 $ 205,674 $ - $ 3,763,111 March 1 Additions Retirements February 28 Nonutility property, Hunter Lake, nondepreciable $ 22,659,596 $ 56,596 $ - $ 22,716,192 Total other property and investments $ 26,217,033 $ 262,270 $ - $ 26,479,303 Auxiliary service property activity for the year ended February 28, 2013, consists of the following: March 1 Additions Retirements February 28 Land $ 1,196,029 $ - $ - $ 1,196,029 Lake buildings and improvements 2,793,969 402,920-3,196,889 Park buildings and improvements 1,215,868 - - 1,215,868 General purpose equipment 1,620,476 98,888 87,801 1,631,563 Total auxiliary service property $ 6,826,342 $ 501,808 $ 87,801 $ 7,240,349-15 -
3. OTHER PROPERTY AND INVESTMENTS (Continued) A. Auxiliary Service Property (Continued) Accumulated depreciation activity for the year ended February 28, 2013 consists of the following: March 1 Additions Retirements February 28 Lake buildings and improvements $ 1,759,831 $ 58,377 $ - $ 1,818,208 Park buildings and improvements 775,900 10,484-786,384 General purpose equipment 1,124,694 41,427 87,801 1,078,320 Total accumulated depreciation $ 3,660,425 $ 110,288 $ 87,801 $ 3,682,912 Auxiliary service property, net of accumulated depreciation $ 3,165,917 $ 391,520 $ - $ 3,557,437 March 1 Additions Retirements February 28 Nonutility property, Hunter Lake, nondepreciable $ 22,530,474 $ 129,122 $ - $22,659,596 Total other property and investments $ 25,696,391 $ 520,642 $ - $26,217,033 B. Nonutility and Other Property As of February 28, 2014 and February 28, 2013, the Water Fund had acquired approximately 5,789 acres of farmland near Springfield for approximately $15,717,000. The land was acquired to construct the proposed John H. Hunter Lake, which would supplement the present Lake Springfield's potable water supply and provide cooling water for the City s Electric Light and Power Fund's generating system. As of February 28, 2014 and February 28, 2013, the Water Fund has incurred a total of $22,716,192 and $22,659,596 for the project, which includes the purchase price of the farmland and additional legal, engineering and other acquisition costs of $6,999,192 and $6,942,596, respectively. The project is classified as non-utility property, pending a final decision on the project. - 16 -
3. OTHER PROPERTY AND INVESTMENTS (Continued) C. Operations Operating revenue and costs of auxiliary service property and nonutility property follow: Year Ended February 28 2014 2013 Revenue $ 1,338,320 $ 1,151,311 Costs and expenses (2,774,030) (2,951,527) Net expense before depreciation (1,435,710) (1,800,216) Less depreciation expense (124,021) (110,288) Net expense $ (1,559,731) $ (1,910,504) 4. DEPOSITS AND INVESTMENTS Following are the components of the Water Fund s cash, cash equivalents and investments: February 28, 2014 Unrestricted Restricted Total Cash and cash equivalents $ 10,629,063 $ 47,271,159 $ 57,900,222 Investments - 1,020,500 1,020,500 $ 10,629,063 $ 48,291,659 $ 58,920,722 February 28, 2013 Unrestricted Restricted Total Cash and cash equivalents $ 10,094,496 $ 70,573,463 $ 80,667,959 Investments - - - $ 10,094,496 $ 70,573,463 $ 80,667,959 Governmental Accounting Standards Board Statement No. 40, Deposit and Investment Risk Disclosures - an Amendment of GASB Statement 3, requires disclosure of credit risk, concentration of credit risk, interest rate risk, and foreign currency risk and modifies previous custodial credit risk disclosure requirements. The City administers and maintains cash deposit accounts that are available for use by all of the City s funds. Further information regarding the City s investment policies and the related disclosures can be obtained in the City s Comprehensive Annual Financial report by writing to the Office of Budget & Management, City of Springfield, Room 210, Municipal Center West, Springfield, Illinois 62701 or on the City s website www.springfield.il.us. - 17 -
4. DEPOSITS AND INVESTMENTS (Continued) A. Custodial Credit Risk Custodial credit risk is the risk a government will not be able to recover deposits or investments that are in possession of an outside party. At February 28, 2014, the carrying amount of the Water Fund s deposits totaled $141,525 and the bank balances totaled $112,223. At February 28, 2013, the carrying amount of the Water Fund s deposits totaled $120,149 and the bank balances totaled $105,656. The City s investment policy requires that deposits with financial institutions be collateralized at 105 percent of the market value of the principal and interest of the deposit. The collateral is to be held by an independent third party with whom the entity has a current custody agreement. The City s bank balances are covered by the Federal Deposit Insurance Corporation (FDIC) and by collateral held in the City s name at the Federal Reserve Bank of Boston. The City requires all security transactions entered into by the City be conducted on a delivery versus payment basis. Securities will be held by a third party custodian designated by the City Treasurer and evidenced by a safekeeping receipt. February 28 2014 2013 Cash and cash equivalents: Restricted $ 47,271,159 $ 70,573,463 Unrestricted 10,629,063 10,094,496 57,900,222 80,667,959 Less: Illinois Funds reclassified as investments (57,758,697) (80,547,810) Carrying amount of deposits $ 141,525 $ 120,149 B. Investments Interest rate risk: The risk that changes in interest rates will adversely affect the fair value of an investment is interest rate risk. In accordance with the master revenue bond ordinance, the Water Fund limits investments to those with a maturity of five years or less. City policy places further limits stating that the City will not directly invest in securities with a maturity of greater than five years three months from the date of purchase. Reserve funds, however, may be invested in securities exceeding five years three months if the maturity of such investments is made to coincide as nearly as practicable with the expected use of funds. At February 28, 2014, the Water Fund s investment balances were as follows: Maturities in Years Fair Market Less Than 6-12 1 3 Value 6 Months Months Years Federal Home Loan Bank $ 1,020,500 $ - $ - $ 1,020,500-18 -
4. DEPOSITS AND INVESTMENTS (Continued) B. Investments (Continued) Credit risk: The risk that an issuer or other counterparty to an investment will not fulfill its obligations is credit risk. The City is empowered by statute to invest in certain types of securities as provided in the Public Funds Investment Act, 30 Illinois Compiled Statutes 235/1 et seq. The Water Fund may only invest in certain securities in accordance with a master revenue bond ordinance. Investments are restricted to U.S. Government issued or secured debt, insured or collateralized certificates of deposits, highly rated state and municipal debt, and state pooled investments. Investments may not mature beyond five years. The associated investments credit risk is noted above. As of February 28, 2014, the Electric Light and Power Fund s investments were rated as follows: Illinois Funds FHLB Investment Type Standard & Poor s AAAm AA+ As of February 28, 2013, the Electric Light and Power Fund s investments were rated as follows: Illinois Funds Investment Type Standard & Poor s AAAm As of February 28, 2014 and February 28, 2013, the Water Fund had investments in the Illinois Funds which are valued at amortized cost pursuant to Rule 2a-7 under the Investment Company Act of 1940. C. Concentration of Credit Risk The risk of loss attributed to the magnitude of a government s investments in a single issuer is concentration of credit risk. The City s investment policy calls for diversification of its investments by security type and institution. With the exception of U.S. Treasury notes and authorized pools, no more than 50 percent of the City s total investment portfolio will be invested in a single security type or with a single financial institution. The City s investment policy is written to encompass all City investments. Diversification levels in the policy are for the total investment portfolio. As of February 28, 2014, the Water Fund invested in the Federal Home Loan Bank note and the note did not exceed 5 percent of investments. As of February 28, 2013, the Water Fund was not exposed to a concentration of credit risk as money market mutual funds and external investment pools are exempt given the City does not hold the underlying investment. - 19 -
5. LONG-TERM DEBT Long-term debt activity during the fiscal year ended February 28, 2014, consists of the following: March 1 Additions Retirements February 28 (a) Refunding bonds, Series 1997 $ - $ - $ - $ - (b) IEPA Loan Payable, Series 2002 1,272,345-119,315 1,153,030 (c) Revenue bonds, Series 2004 555,000-270,000 285,000 (d) Revenue bonds, Series 2008 20,990,000-665,000 20,325,000 (e) Revenue bonds, Series 2012 68,050,000-690,000 67,360,000 (f) IEPA Loan Payable L17-2530 3,145,158-174,731 2,970,427 (g) IEPA Loan Payable L17-3756 389,928-28,884 361,044 Unamortized debt discount (341,578) - (28,839) (312,739) Unamortized debt premium 8,191,426-262,393 7,929,033 Total $ 102,252,279 $ - $ 2,181,484 100,070,795 Less current principal maturities (2,686,143) Long-term debt, net of current principal maturities $ 97,384,652 Long-term debt activity during the fiscal year ended February 28, 2013, consists of the following: March 1 Additions Retirements February 28 (a) Refunding bonds, Series 1997 $ 5,980,000 $ - $ 5,980,000 $ - (b) IEPA Loan Payable, Series 2002 1,388,531-116,186 1,272,345 (c) Revenue bonds, Series 2004 9,820,000-9,265,000 555,000 (d) Revenue bonds, Series 2008 21,630,000-640,000 20,990,000 (e) Revenue bonds, Series 2012-68,050,000-68,050,000 (f) IEPA Loan Payable L17-2530 3,298,852-153,694 3,145,158 (g) IEPA Loan Payable L17-3756 418,811-28,883 389,928 Unamortized debt discount (375,867) - (34,289) (341,578) Unamortized debt premium 112,840 8,330,541 251,955 8,191,426 Total $ 42,273,167 $ 76,380,541 $ 16,401,429 102,252,279 Less current principal maturities (1,947,361) Long-term debt, net of current principal maturities $100,304,918 (a) $18,755,000; Water Refunding Bonds, Series 1997; final payment was made March 1, 2013; interest 4.5 percent to 5.4 percent; interest payable March 1 and September 1; principal payable March 1; to be repaid by net revenue of Water Fund. (b) $2,325,284; Loan from the State of Illinois Environmental Protection Agency (IEPA) Water Revolving Fund - Drinking Water Project; final payment due April 28, 2022; interest 2.675 percent; principal and interest payable April 28 and October 28. This represents a subordinate lien obligation of the Water Fund. - 20 -
5. LONG-TERM DEBT (Continued) (c) $10,550,000; Water Revenue Bonds, Series 2004; initial principal payment due March 1, 2009; final payment due March 1, 2019; interest 3.40 percent to 5.25 percent; interest payable March 1 and September 1; principal payable March 1; to be repaid by net revenue of Water Fund. (d) $22,140,000; Water Revenue Bonds, Series 2008; initial principal payment due March 1, 2011; final payment due March 1, 2032; interest 4.0 percent to 5.5 percent; interest payable March 1 and September 1; principal payable March 1; to be repaid by net revenue of Water Fund. (e) $68,050,000; Water Revenue Bonds, Series 2012; initial principal payment due March 1, 2013; final payment due March 1, 2037; interest 1.25 percent to 5 percent; interest payable March 1 and September 1; principal payable March 1; to be repaid by net revenue of Water Fund. (f) $4,532,613; ARRA Loan from the Illinois Environmental Protection Agency (IEPA) Water Revolving Fund, Drinking Water Project L17-2530; $3,375,699 loan payable at 0 percent interest; initial principal payment paid November 3, 2011; final payment due November 3, 2030. This represents a subordinate lien obligation of the Water Fund. (g) $599,757; ARRA Loan from the Illinois Environmental Protection Agency (IEPA) Water Revolving Fund, Drinking Water Project L17-3756; $433,253 loan payable at 0 percent interest; initial principal payment paid December 2, 2011; final payment due June 2, 2026. This represents a subordinate lien obligation of the Water Fund. Debt service requirements to maturity: Fiscal Year Revenue Revenue Loan Loan Ending Bonds Bonds Payable Payable February 29/28 Principal Interest Principal Interest Total 2015 $ 2,360,000 $ 4,130,920 $ 326,143 $ 30,030 $ 6,847,093 2016 2,440,000 4,041,250 329,442 26,730 6,837,422 2017 2,705,000 3,928,575 332,830 23,342 6,989,747 2018 2,830,000 3,835,800 336,310 19,862 7,021,972 2019 2,885,000 3,737,813 339,883 16,289 6,978,985 2020 2024 13,495,000 16,887,373 1,524,567 27,457 31,934,397 2025 2029 16,795,000 13,464,757 945,864-31,205,621 2030 2034 22,010,000 8,558,489 349,462-30,917,951 2035 2038 22,450,000 2,313,250 - - 24,763,250 $87,970,000 $ 60,898,227 $ 4,484,501 $ 143,710 $153,496,438-21 -
5. LONG-TERM DEBT (Continued) February 28 2014 2013 Current principal maturities by issue: Revenue bonds, Series 2004 285,000 270,000 Revenue bonds, Series 2008 695,000 665,000 Revenue bonds, Series 2012 1,380,000 690,000 IEPA loan payable, Series 2002 122,528 119,315 IEPA loan payable ARRA Large Meter (L17-3756) 28,884 28,884 IEPA loan payable ARRA Chemical Feed (L17-2530) 174,731 174,162 $ 2,686,143 $ 1,947,361 On August 28, 2012, the City issued $68.050 million in Water Revenue Bonds with interest rates of 1.25% to 5%. Proceeds of $61.671 million were deposited into the 2012 Project fund to finance certain improvement expenditures associated with the City s water supply system and related facilities, and to pay the costs of issuance of the Series 2012 Bonds. Proceeds of $ 1.604 million were deposited into the debt service reserve fund to fully fund the Debt Service Reserve Account created under the Bond Ordinance. Additional proceeds of $13.106 million and a transfer from existing debt service reserve funds were deposited with the Escrow Trustee for a total of $14.657 million available to refund the $4.6 million remainder of the 1997 Water Revenue Series Bonds and have a portion of the net proceeds deposited in an irrevocable trust with an escrow agent to provide for future debt service payments on the refunded portion of the 2004 Water Revenue Series bonds. As a result, $9.005 million of the 2004 Series bonds are considered to be defeased and the liability for those bonds has been removed from the Water Fund. The refunding of the 1997 and 2004 Water Revenue Series bonds yielded aggregate savings of $763,409 (net present value $250,854) and $960,555 (net present value $842,935) respectively for the two issues. The Water Fund recorded a net loss on refunding for the 1997 and 2004 Issues of $66,717 and $596,392, respectively. The bond ordinances for the 1997, 2004, 2008 and 2012 bond issues establish certain reserve accounts and restrict transactions of these accounts. A description of these accounts and a schedule of activity for the year ended February 28, 2014 and February 28, 2013, are as follows: 1997, 2004, 2008 and 2012 Bond and Interest Accounts: Established to pay bond principal and interest when due. Amounts are to be deposited monthly to accumulate at a rate equal to a fractional amount of the current portion of long-term debt due plus a fractional amount of the next semi-annual interest payment due. 1997, 2004, 2008 and 2012 Debt Service Reserve Accounts: Established to pay bond principal and interest if sufficient funds are not available from other sources. The amount on deposit in each reserve account is to equal the maximum aggregate interest payment for the related debt issuance. Deposit deficiencies shall be funded in equal installments over thirty-six consecutive months. - 22 -
5. LONG-TERM DEBT (Continued) Emergency Repair Account: Established to pay for emergency repairs and replacements and to pay bond principal and interest when no other funds are available. The amount on deposit is to be not less than $1,000,000 or such other amount as the City Council may determine based upon the recommendation of an independent consulting engineer. Deposit deficiencies shall be funded in equal installments within sixty consecutive months. Renewal, Replacement and Improvement Account: Established to pay the cost of extraordinary maintenance, necessary repairs, and replacements or contingencies; routine maintenance, but only when no other funds are available; improvements and extensions or acquisitions for the system, including equipment; and payment of principal and interest if sufficient funds are not available in the respective Bond and Interest Accounts. Monthly funding is required to be no less than one-twelfth of 15 percent of revenue for the preceding fiscal year less costs of chemicals and pumping expenses. However, monthly funding may fall to one-fifteenth of 15 percent as long as, at the end of each year, the deposits to the account total 15 percent of net revenue less costs for chemicals and pumping expenses. Rebate Fund Account: Established to account for funds required to be deposited in order for the interest paid on the Series 1997, 2004, 2008 and 2012 Bonds to remain tax-exempt. Amounts are to be deposited on each anniversary date equal to the actuarial bond fund earnings for the year less allowable bond fund earnings which represent excess earnings on the gross funds for each computation period. Amounts on deposit must be paid to the U.S. Government on various anniversary dates. 2008 Improvement Account: Established to account for unexpended proceeds from the Series 2008 Bonds to be used to finance certain improvements to the municipal waterworks system. 2012 Improvement Account: Established to account for unexpended proceeds from the Series 2012 Bonds to be used to finance certain improvements to the municipal waterworks system. - 23 -
5. LONG-TERM DEBT (Continued) Various other agreements associated with the bond ordinances require the following: Additional revenue bonds can be issued if: 1. The debt service requirement after a new issuance is no greater than the amount set forth for each bond year prior to the bond issuance except for the last year, and that the debt service requirement after the new issuance is not greater than the average of all bond years (excluding the last) prior to the issuance as determined by an Officer s Certificate; 2. Estimated net revenues will be at least equal to 125 percent of Maximum Annual Debt Service on Outstanding Bonds as computed after the issuance of new bonds for each of the five fiscal years following the later of the date of delivery of new bonds or the last interest payment date for which interest on such bonds has been capitalized, as determined by an Officer s Certificate; or 3. The adjusted net revenue (all revenue of the system after deduction of the reasonable and necessary expenses of operation and maintenance, but before depreciation, interest expense, and amortization) during any twelve consecutive months within the eighteen months immediately preceding the issuance of new bonds shall be at least equal to 125 percent times the combined maximum annual debt service on the bonds then outstanding and the additional bonds to be issued, as determined by an Officer s Certificate. Subordinate Bonds may be issued for any lawful purpose of the City related to the System as determined by the City Council. Water charges are to be collected from the various City departments. The street and fire departments, however, may receive free water for street cleaning, sewer flushing and for use by the City s fire stations. Disposals of utility plant can only be of a routine operational nature. An annual operating budget for the Water Fund shall be adopted by the City. Investments, if any, are restricted as shown in the Deposits and Investments footnote (Note 4). Net revenue must equal or exceed the greater of 1.25 times principal and interest for each fiscal year, or 1.00 times principal and interest for each fiscal year plus amounts sufficient to meet reserve requirements. As of February 28, 2014, the City was in compliance with the debt covenants of the bond ordinances. Net revenue equaled 2.15 times principal and interest. As of February 28, 2013, the City was in compliance with the debt covenants of the bond ordinances. Net revenue equaled 2.97 times principal and interest. - 24 -
5. LONG-TERM DEBT (Continued) 1997 Bond 2004 Bond 2008 Bond and Interest and Interest and Interest Account Account Account Cash and cash equivalents and investments- February 29, 2012 reserve accounts $ 1,541,569 $ 512,448 $ 1,174,868 Add (deduct) Compliance deposits 851,517 528,840 1,708,491 Bond Proceeds - - Interest income 166 165 482 Bond and interest payments (1,541,460) (524,285) (1,696,775) Transfers to unrestricted accounts - - - Transfers to restricted accounts (851,792) (235,275) - Insurance proceeds - - - (1,541,569) (230,555) 12,198 Cash and cash equivalents and investments- February 28, 2013 reserve accounts - 281,893 1,187,066 Add (deduct) Compliance deposits - 297,500 1,712,214 Bond Proceeds - - - Interest income - 25 104 Bond and interest payments - (288,143) (1,695,675) Transfers to unrestricted accounts - - - Transfers to restricted accounts - - - Insurance proceeds - - - - 9,382 16,643 Associated premium/discount - - - Adjustment to fair market value - - - - - - Cash and cash equivalents and investments- February 28, 2014 reserve accounts $ - $ 291,275 $ 1,203,709-25 -
5. LONG-TERM DEBT (Continued) 2012 Bond 1997 Debt 2004 Debt and Interest Service Reserve Service Reserve Account Account Account Cash and cash equivalents and investments- February 29, 2012 reserve accounts $ - $ 438,649 $ 313,901 Add (deduct) Compliance deposits 2,293,883 - - Bond proceeds - Interest income 395 200 276 Bond and interest payments - - - Transfers to unrestricted accounts - - - Transfers to restricted accounts - (438,849) (25,388) Insurance proceeds - - - 2,294,278 (438,649) (25,112) Cash and cash equivalents and investments- February 28, 2013 reserve accounts 2,294,278-288,789 Add (deduct) Compliance deposits 4,521,534 - - Bond proceeds - - - Interest income 249-70 Bond and interest payments (3,865,072) - - Transfers to unrestricted accounts - - - Transfers to restricted accounts - - - Insurance proceeds - - - 656,711-70 Associated premium/discount - - - Adjustment to fair market value - - - - - - Cash and cash equivalents and investments- February 28, 2014 reserve accounts $ 2,950,989 $ - $ 288,859-26 -
5. LONG-TERM DEBT (Continued) 2008 Debt 2012 Debt Emergency Service Reserve Service Reserve Repair Account Account Account Cash and cash equivalents and investments- February 29, 2012 reserve accounts $ 547,613 $ - $ 1,003,211 Add (deduct) Compliance deposits - - - Bond proceeds 1,604,135 Interest income 510 775 934 Bond and interest payments - - - Transfers to unrestricted accounts - - - Transfers to restricted accounts - - Insurance proceeds - - - 510 1,604,910 934 Cash and cash equivalents and investments- February 28, 2013 reserve accounts 548,123 1,604,910 1,004,145 Add (deduct) Compliance deposits - - - Bond proceeds - - - Interest income 133 1,152 244 Bond and interest payments - - - Transfers to unrestricted accounts - - - Transfers to restricted accounts - - - Insurance proceeds - - - 133 1,152 244 Associated premium/discount - (946) - Adjustment to fair market value - 155 - - (791) - Cash and cash equivalents and investments- February 28, 2014 reserve accounts $ 548,256 $ 1,605,271 $ 1,004,389-27 -
5. LONG-TERM DEBT (Continued) Renewal Replacement & Water 2008 Improvement Rebate Water Account Account Improvement Cash and cash equivalents and investments- February 29, 2012 reserve accounts $ 1,697,978 $ 7,191 $ 5,734,671 Add (deduct) Compliance deposits 4,335,836 - - Bond proceeds - - - Interest income 2,699 7 4,369 Bond and interest payments - - - Transfers to unrestricted accounts (2,745,173) - (3,384,304) Transfers to restricted accounts - - - Insurance proceeds 250 - - 1,593,612 7 (3,379,935) Cash and cash equivalents and investments- February 28, 2013 reserve accounts 3,291,590 7,198 2,354,736 Add (deduct) Compliance deposits 4,237,592 - - Bond Proceeds - - - Interest income 1,034 2 150 Bond and interest payments - - - Transfers to unrestricted accounts (3,523,678) - (2,354,886) Transfers to restricted accounts - - - Insurance proceeds 87,605 - - 802,553 2 (2,354,736) Associated premium/discount - - - Adjustment to fair market value - - - - - - Cash and cash equivalents and investments- February 28, 2014 reserve accounts $ 4,094,143 $ 7,200 $ - - 28 -