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HomeMy WebLinkAboutComprehensive Annual Financial Report - FY2011 CITY OF FRIENDSWOOD, TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT YEAR ENDED SEPTEMBER 30, 2011 Officials Issuing Report: Roger C. Roecker City Manager Cindy S. Edge Director of Administrative Services CITY OF FRIENDSWOOD, TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT YEAR ENDED SEPTEMBER 30, 2011 C O N T E N T S Page(s) INTRODUCTORY SECTION Letter of Transmittal i-iv Principal Officials v GFOA Certificate of Achievement vi Organizational Chart vii FINANCIAL SECTION Independent Auditor's Report 1-2 Management’s Discussion and Analysis (Unaudited) 3-11 Basic Financial Statements Government-wide Financial Statements Statement of Net Assets 12 Statement of Activities 13 Fund Financial Statements Governmental Funds Balance Sheet 14 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets 15 Statement of Revenues, Expenditures and Changes in Fund Balances 16 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities 17 Proprietary Funds Statement of Net Assets 18-19 Statement of Revenues, Expenses and Changes in Fund Net Assets 20 Statement of Cash Flows 21-22 Notes to Basic Financial Statements 23-55 Required Supplementary Information Schedule of Funding Progress for Participation in Texas Municipal Retirement System 56 Schedule of Funding Progress – Post Employment Benefits Plan Other Than Pensions 57 Schedule of Revenues, Expenditures, and Changes in Fund Balance Budget and Actual – General Fund 58-64 Notes to Required Supplementary Information 65-67 Combining and Individual Fund Statements and Schedules Non-major Governmental Funds 68 Combining Balance Sheet 69 Combining Statement of Revenues, Expenditures and Changes in Fund Balances 70 CITY OF FRIENDSWOOD, TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT YEAR ENDED SEPTEMBER 30, 2011 C O N T E N T S – CONTINUED Page(s) Combining and Individual Fund Statements and Schedules – Continued Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual Fire/EMS Donation Fund 71 Debt Service Fund 72 STATISTICAL SECTION (Unaudited) Table Page(s) Financial Trends Net Assets by Component 1 73 Changes in Net Assets 2 74-75 Fund Balances, Governmental Funds 3 76 Changes in Fund Balances, Governmental Funds 4 77 Revenue Capacity Assessed Value and Actual Value of Taxable Property 5 78 Direct and Overlapping Property Tax Rates 6 79 Principal Property Tax Payers 7 80 Property Tax Levies and Collections 8 81 Debt Capacity Ratios of Outstanding Debt by Type 9 82 Ratios of Net General Bonded Debt Outstanding 10 83 Direct and Overlapping Governmental Activities Debt 11 84 Legal Debt Margin Information 12 85 Pledged-Revenue Coverage 13 86 Demographic and Economic Information Demographic and Economic Statistics 14 87 Principal Employers 15 88 Operating Information Full-Time Equivalent City Government Employees by Function/Program 16 89 Operating Indicators by Function/Program 17 90 Capital Asset Statistics by Function/Program 18 91 INTRODUCTORY SECTION v CITY OF FRIENDSWOOD, TEXAS PRINCIPAL OFFICIALS AS OF SEPTEMBER 30, 2011 Elected Officials Position Term Expires David J.H. Smith Mayor May-12 Michael E. Barker Council Member - Position No. 1 May-12 Billy J. Enochs Council Member - Position No. 2 May-14 Jim Hill Council Member - Position No. 3 May-12 Patrick J. McGinnis, MD Council Member - Position No. 4 May-13 John H. Scott Council Member - Position No. 5 May-14 Deirdre Carey Brown Council Member - Position No. 6 May-13 Key Staff Position Roger C. Roecker City Manager Ross, Banks, May, Cron & Cavin, P.C.City Attorney Melinda Welsh City Secretary Cindy S. Edge Director of Administrative Services James Toney Community Services Director Morad Kabiri Community Development Director Terry Byrd Fire Marshal/Emergency Management Coordinator James W. Woltz Judge - Municipal Court Robert B. Weiners Police Chief Kazem Hamidian Public Works Director vi vii CITY OF FRIENDSWOOD ORGANIZATIONAL CHART FINANCIAL SECTION AN INDEPENDENT MEMBER OF BAKER TILLY INTERNATIONAL WEAVER AND TIDWELL LLP CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS WWW.WEAVERLLP.COM HOUSTON 24 GREENWAY PLAZA, SUITE 1800, HOUSTON, TX 77046 P: (713) 850 8787 F: (713) 850 1673 INDEPENDENT AUDITOR’S REPORT To the Honorable Mayor, City Council and City Manager City of Friendswood, Texas We have audited the accompanying financial statements of the governmental activities, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City of Friendswood, Texas (the City) as of and for the year ended September 30, 2011, which collectively comprise the City’s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City’s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the West Ranch Management District, which represents 100 percent of the assets, net assets and revenues of the discretely presented component unit. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for the West Ranch Management District, is based on the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The financial statements of the West Ranch Management District were not audited in accordance with Governmental Auditing Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinions. In our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City as of September 30, 2011, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the basic financial statements, the City implemented Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, for the year ended September 31, 2011. To the Honorable Mayor, City Council and City Manager City of Friendswood, Texas Page 2 2 In accordance with Government Auditing Standards, we have also issued our report dated March 28, 2012, 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 and should be considered in assessing the results of our audit. The management’s discussion and analysis (on pages 3 through 11), the Schedule of Funding Progress for Participation in Texas Municipal Retirement System (on page 56), the Schedule of Funding Progress – Post Employment Benefits Other Than Pensions (on page 57), and the Schedule of Revenues, Expenditures, and Changes in Fund Balance – Budget and Actual – General Fund (on pages 58 through 64) are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the info rmation and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements as a whole. The introductory section, combining and individual nonmajor fund financial statements and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. WEAVER AND TIDWELL, L.L.P. Houston, Texas March 28, 2012 3 Management’s Discussion and Analysis (Unaudited) As Management of the City of Friendswood, we offer readers of the City’s financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30, 2011. This information is not intended to be a complete statement of the City’s financial condition. We recommend and encourage readers to consider the information presented here in conjunction with the accompanying transmittal letter and basic financial statements. FINANCIAL HIGHLIGHTS The assets of the City of Friendswood exceeded its liabilities at the close of the most recent fiscal year by $114,086,244 (net assets). Of this amount, $8,227,254 is unrestricted net assets for governmental activities and $11,373,311 for business-type activities. The City’s net assets increased by $4,343,695. This resulted in an increase of $2,475,504 in unrestricted net assets and an increase of $2,785,305 in net assets invested in capital assets net of related debt offset by a decrease of $917,114 in restricted assets. As of the close of the current fiscal year, the City of Friendswood’s governmental funds reported combined ending fund balances of $13,108,696. Of the ending fund balance, $4,260,151 is restricted for specific purposes (e.g., capital projects, debt service); $1,085,527 is assigned by the City for specific purposes; $251,020 is nonspendable and $7,511,998 is unassigned and available to meet the government’s ongoing obligations in accordance with the City’s fund designation and fiscal policies. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the City’s basic financial statements. The City’s basic financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to 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’s finances, in a manner similar to a private-sector business. The Statement of Net Assets presents information on all of the City’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. This statement combines and consolidates governmental funds’ current financial resources (short-term spendable resources) with capital assets and long-term obligations. Other non-financial factors should also be taken into consideration, such as changes in the City’s property tax base and the condition of the City’s infrastructure (i.e. roads, drainage improvements, storm sewer, water distribution and sewer collection lines, etc.), to assess the overall financial condition of the City. 4 The Statement of Activities presents information showing how the City’s net assets changed during the fiscal year. All of the current year’s revenues and expenses are taken into account regardless of when cash is received or paid. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but not used compensated absences). Both the statement of net assets and the statement of activities are prepared utilizing the accrual basis of accounting as opposed to the modified accrual basis used in the governmental fund statements. Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from functions that are intended to recover all or a significant portion of their costs through user fees (business-type activities). Governmental activities include most of the City’s basic services, (general government, public safety, community development and public works and community services). Property taxes, sales taxes, and franchise fees primarily finance these activities. Business-type activities include the City’s water and sewer system. Charges for services covers all or most of the cost for these services. Component Unit activities include activities of The West Ranch Management District. Fund Financial Statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. Fund accounting is used by state and local governments to control and manage money for particular purposes and to ensure finance-related legal requirements. The City uses two fund types – governmental and proprietary. Governmental funds – Similar to the governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental funds focus on current sources and uses of spendable resources. The governmental fund statement provides a detailed short-term view of the City’s general government operations and helps you determine whether resources are available in the near future to finance City programs. Comparing the information presented for governmental funds with the information presented for governmental activities in the government-wide financial statements will help the reader to better understand the long-term impact of the government’s near-term financing decisions. The governmental funds balance sheet, statement of revenue and expenditures, and changes in fund balances include a reconciliation to provide such comparison. The City maintains eleven governmental funds. Information is presented separately in the governmental funds balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund and the Debt Service Fund; these funds are considered to be major funds. The other nine 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 found in this report. 5 Proprietary funds – The City maintains two types of proprietary funds. The City uses the Enterprise Fund for water and sewer operations. The Enterprise Fund reports the same functions presented as business-type activities in the government-wide financial statement. The second proprietary fund is the Internal Service Fund. This fund is used to account for fleet management services. The Internal Service Fund is included within the governmental activities in the government-wide financial statements. Proprietary fund financial statements provide the same type of information as the government-wide financial statements, with more detail and include the Internal Service Fund type activity. Notes to the Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. Other Information In addition to the basic financial statements and accompanying notes, this report also presents combining and individual fund statements and schedules that further support the information in the financial statements. These statements are presented immediately following the notes to the financial statements. GOVERNMENT-WIDE FINANCIAL ANALYSIS The City’s net assets exceed liabilities by $114.1 million as of September 30, 2011. The largest portion of the City’s net assets (81%) reflects its investments in capital assets (e.g., land, buildings, equipment, improvements, construction in progress and infrastructure), less any related debt used to acquire those assets that are still outstanding. The City uses these capital assets to provide services to citizens; therefore, these assets are not available for future spending. It should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. 6 CITY OF FRIENDSWOOD’S NET ASSETS 2011 2010 2011 2010 2011 2010 Current and other assets 16,625,116$ 14,377,943$ 21,479,959$ 19,981,212$ 38,105,075$ 34,359,155$ Capital assets 87,380,310 86,241,576 54,283,911 52,501,312 141,664,221 138,742,888 Total assets 104,005,426 100,619,519 75,763,870 72,482,524 179,769,296 173,102,043 Long-term liabilities 24,450,283 16,644,650 34,093,976 40,724,281 58,544,259 57,368,931 Other liabilities 3,824,966 3,069,555 3,313,827 2,921,008 7,138,793 5,990,563 Total liabilities 28,275,249 19,714,205 37,407,803 43,645,289 65,683,052 63,359,494 Net assets: Invested in capital assets, net of related debt 66,580,049 70,480,334 26,251,346 19,565,756 92,831,395 90,046,090 Restricted 922,874 1,977,801 731,410 593,597 1,654,284 2,571,398 Unrestricted 8,227,254 8,447,179 11,373,311 8,677,882 19,600,565 17,125,061 Total net assets 75,730,177$ 80,905,314$ 38,356,067$ 28,837,235$ 114,086,244$ 109,742,549$ Governmental Activities Business-type Activities Totals Combined governmental and business-type activities increased the City’s net assets by $4,343,695 in 2011. The following table provides a summary of the City’s operations for the year ended September 30, 2011. The Governmental activities decreased the City of Friendswood’s net assets by ($5,175,137). This decrease is primarily related to the transfer ($5,529,943) from the Debt Service fund to the Water and Sewer fund to refund the Series 2001 Waterworks and Sewer System revenue bonds. Business-type activities increased the City’s net assets by $9,518,832. This increase is related primarily to the following: charges for services exceeded operating expenses ($5,771,431) as a result of increased water revenue due to extreme drought conditions while expenses remained fairly constant and the transfer ($5,529,943) discussed above from the Debt Service fund to the Water and Sewer fund to refund the Series 2001 Waterworks and Sewer System revenue bonds. 7 CITY OF FRIENDSWOOD’S CHANGES IN NET ASSETS 2011 2010 2011 2010 2011 2010 Revenues: Program revenues: Charges for services 2,311,298$ 2,115,519$ 12,726,936$ 9,854,083$ 15,038,234$ 11,969,602$ Operating grants and contributions 3,150,808 2,819,418 - - 3,150,808 2,819,418 Capital grants and contributions - - - - - - General revenues: Property taxes 13,944,725 13,664,765 - - 13,944,725 13,664,765 Sales taxes 4,002,740 3,853,161 - - 4,002,740 3,853,161 Franchise taxes 1,598,407 1,510,794 - - 1,598,407 1,510,794 Other taxes 28,883 28,859 - - 28,883 28,859 Investment earnings 110,863 93,018 55,163 87,056 166,026 180,074 Miscellaneous 150,059 165,192 - 182,198)( 150,059 17,006)( Total revenues 25,297,783 24,250,726 12,782,099 9,758,941 38,079,882 34,009,667 Expenses: General government 4,876,064 5,145,447 - - 4,876,064 5,145,447 Public safety 10,548,568 10,175,028 - - 10,548,568 10,175,028 Public Works 3,517,707 3,853,685 - - 3,517,707 3,853,685 Community development 1,284,188 1,203,204 - - 1,284,188 1,203,204 Community services 3,058,313 3,034,523 - - 3,058,313 3,034,523 Library 979,978 979,084 - - 979,978 979,084 Water and sewer - - 6,955,505 6,663,308 6,955,505 6,663,308 Interest on long-term debt 871,790 789,652 1,644,074 2,037,104 2,515,864 2,826,756 Total expenses 25,136,608 25,180,623 8,599,579 8,700,412 33,736,187 33,881,035 Increases/(Decrease) in net assets before transfers 161,175 929,897)( 4,182,520 1,058,529 4,343,695 128,632 Transfers 5,336,312)( 168,276 5,336,312 168,276)( - - Change in net assets 5,175,137)( 761,621)( 9,518,832 890,253 4,343,695 128,632 Net assets, beginning 80,905,314 81,666,935 28,837,235 27,946,982 109,742,549 109,613,917 Net assets, ending 75,730,177$ 80,905,314$ 38,356,067$ 28,837,235$ 114,086,244$ 109,742,549$ Governmental Activities Business-type Activities Totals 8 FINANCIAL ANALYSIS OF THE GOVERNMENT’S FUNDS Governmental Funds At the end of the current fiscal year, the City’s governmental funds reported combined ending fund balances of $13,108,696. Approximately 57% of this amount ($7,511,998) is unassigned fund balance; however, $5.1 million is set aside for the 90-day operating reserve, as set forth in the City’s financial policies. $5,596,698 is nonspendable, restricted or assigned as follows: Nonspendable (2%) Prepaid items $220,151 Permanent fund 30,869 Restricted (33%) Authorized construction $3,203,056 State and/or federal statutes 300,674 Fire/EMS Donations 60,238 City ordinances 290,224 Debt Service 308,231 Public education and government channels 97,728 Assigned (8%) Encumbrances $1,085,527 In the General Fund, fund balance decreased by $214,869. This decrease is a result of use of undesignated fund balance for street maintenance and capital improvements. In the Debt Service Fund, fund balance decreased by $286,191. This decrease is a result of property taxes collected exceeding debt service payments by $508,700 offset by other financing sources of $222,509 related to the issuance of the 2010B Permanent Improvement and Refunding bonds. Proprietary Fund Unrestricted net assets of the respective proprietary funds are Enterprise, (water and sewer), $11,373,311 and Internal Service Fund (vehicle replacement fund), $434,173. The net assets of the water and sewer fund increased $9,518,832. Water revenue increased due to extreme drought conditions while expenditures remained fairly constant allowing for operating income of $5,771,431. The remaining increase in water and sewer fund net assets is related to the transfer in from the Debt Service fund of $5,529,943 to refund the Series 2001 Waterworks and Sewer System revenue bonds. The net assets of the internal service fund increased by $20,965 primarily as a result of gains recognized on sales of capital assets. General Fund Budgetary Highlights The City made revisions to the original appropriations approved by the City Council. Budgeted revenues increased by $162,064 or 0.8% and expenditures were increased by $4,890,270 or 23.3%. In addition to the appropriation for prior year encumbrances totaling $1.7 million, the expenditure budget increased by $2.7 million as a result of fund balance uses for capital improvement projects. 9 CAPITAL ASSETS The City of Friendswood’s investment in capital assets (net of accumulated depreciation) for its governmental and business-type activities as of September 30, 2011, is $141,664,221. The investment in capital assets includes land, buildings and improvements, equipment, infrastructure, water rights and construction in progress. This year’s major capital events during the current fiscal year included the following: The Downtown Drainage Improvement project was completed. The total cost of the project was approximately $3.0 million. The City’s cost of this project was approximately $1.5 million and the remaining $1.5 million was paid for by Galveston County. The Construction phase of the Beamer Road Water and Sewer Project began in fiscal year 2011. The total cost to date is approximately $1.3 million. This project is being funded by a grant received from the Department of Commerce’s Economic Development Administration (EDA). In fiscal year 2010, the City was awarded a $2.3 million Community Development Block Grant to purchase and install emergency generators to critical infrastructure. Construction began on this project in fiscal year 2011. The total project cost to date is approximately is $1.3 million. The following water and sewer projects are in construction in progress at the end of fiscal year 2011: Water Plant # 2 Rehabilitation ($773,000), Water Plant Rehabilitation #6 (total cost to $1.0 million), and Water Plant #5 Rehabilitation ($1.8 million). CITY OF FRIENDSWOOD’S CAPITAL ASSETS AT YEAR-END 2011 2010 2011 2010 2011 2010 Land 24,007,398$ 24,007,398$ 716,818$ 716,818$ 24,724,216$ 24,724,216$ Buildings and improvements 22,953,911 20,708,083 - - 22,953,911 20,708,083 Equipment 3,461,722 3,653,914 356,220 385,840 3,817,942 4,039,754 Infrastructure 32,066,832 33,618,179 29,816,407 31,263,014 61,883,239 64,881,193 Water rights - - 19,716,695 19,716,695 19,716,695 19,716,695 Construction in progress 4,890,447 4,254,002 3,677,771 418,945 8,568,218 4,672,947 Total capital assets 87,380,310$ 86,241,576$ 54,283,911$ 52,501,312$ 141,664,221$ 138,742,888$ Governmental Activities Business-type Activities Totals Additional information on the City’s capital assets can be found in the notes on pages 38 and 39 of this report. DEBT ADMINISTRATION At the end of the current fiscal year, the City of Friendswood had a total bonded debt and capital lease obligation of $58,800,023. 10 CITY OF FRIENDSWOOD’S OUTSTANDING DEBT AT YEAR-END 2011 2010 2011 2010 2011 2010 General obligations 22,885,000$ 14,800,000$ -$ -$ 22,885,000$ 14,800,000$ Revenue bonds payable - - 35,205,000 42,045,000 35,205,000 42,045,000 Capital leases 710,023 839,928 - - 710,023 839,928 23,595,023$ 15,639,928$ 35,205,000$ 42,045,000$ 58,800,023$ 57,684,928$ Governmental Activities Business-type Activities Totals The City’s General Obligation and Revenue Bond ratings are listed below: Standard & Poor's General Obligation Bonds AA- Revenue Bonds AA- Additional information on the City’s outstanding debt can be found on pages 40 through 45 of this report. ECONOMIC FACTORS AND NEXT YEAR’S BUDGETS AND RATES Friendswood continues to experience moderate growth. The City’s current population is estimated to be 37,247. Friendswood is expected to reach build out with an estimated population of 57,000. The City is continuing to focus on Economic Development initiatives, including the revitalization of downtown and a new large residential and commercial development called West Ranch. The West Ranch residential development is currently under way, with commercial construction scheduled to follow as the area’s residential population grows. The City’s largest single source of revenue in the General Fund continues to be ad valorem taxes. The tax rate was increased .0051 cents from $.5851 to $.5902. This rate consists of a maintenance and operations (M&0) tax rate of $.5218 and an Interest and Sinking (debt service) tax rate of $.0684. The rate was set based on a net assessed value of $2,362,929,430. This is an increase of $26,810,958 in taxable value. This increase is a result of new construction in the City. This additional value results in a total levy increase of $278,586. The City’s financial management policy sets the guideline to maintain the fund balance and retained earnings of the various operating funds at levels sufficient to protect the City’s creditworthiness as well as its financial position from unforeseeable emergencies. The City’s second largest source of revenue in the General Fund is Sales Tax. The City anticipates an increase in this revenue stream from the prior year and has adjusted the budget from $3,748,428 to $3,965,020. Franchise fees budget has been increased from $1,433,742 to $1,511,334 and the budget for municipal court fines has been adjusted from $1,047,212 to $952,020. If all projections are accurate, the total General Fund unassigned fund balance net of the 90-day operating requirement ($5.2 million) is estimated to be approximately $1.7 million at September 30, 2012. 11 Water revenues are budgeted at $5,120,000 which is an increase of $105,000 in revenues, or 2.1%. Sewer revenues are budgeted at $3,840,000. This represents an increase of $25,000 or 0.7%. Water and sewer retained earnings net of the 90-day operating requirement ($2.1 million) is expected to be $6.9 million at the end of fiscal year 2012. Pursuant to the City’s financial management policy, funds in excess of the 90-day operating reserve are designated for future capital improvements. CONTACTING THE CITY’S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, customers, investors, and creditors with a general overview of the City’s finances and to show the City’s accountability for the money it receives. If you have questions about this report or need additional information, contact Administrative Services, P. O. Box 1288, Friendswood, Texas 77549-1288, or call Cindy S. Edge 281-996-3224, or email cedge@friendswood.com. BASIC FINANCIAL STATEMENTS CITY OF FRIENDSWOOD, TEXAS STATEMENT OF NET ASSETS SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 12 Primary Government Governmental Business-type Component Activities Activities Total Unit ASSETS Cash and investments 12,768,719$ 10,170,046$ 22,938,765$ 1,585,751$ Receivables (net of allowances for uncollectibles) Taxes 1,456,579 - 1,456,579 10,267 Customer accounts 186,273 2,422,037 2,608,310 - Other 1,689,851 61,611 1,751,462 1,883 Internal balances (900,000) 900,000 - - Due from other governments 835,563 - 835,563 - Prepaid items 220,151 37,732 257,883 - Working capital deposit - 290,154 290,154 - Deferred charges 367,980 414,174 782,154 494,993 Restricted cash and investments - 7,184,205 7,184,205 - Capital assets Land 24,007,398 716,818 24,724,216 5,929,737 Buildings and improvements 34,779,590 - 34,779,590 - Machinery and equipment 10,357,862 2,978,193 13,336,055 - Infrastructure 67,671,399 - 67,671,399 401,265 Water and sewer system 53,934,137 53,934,137 - Construction in progress 4,890,447 3,677,771 8,568,218 - Water rights - 19,716,695 19,716,695 - Accumulated depreciation (54,326,386) (26,739,703) (81,066,089) - Total capital assets, net 87,380,310 54,283,911 141,664,221 6,331,002 Total assets 104,005,426 75,763,870 179,769,296 8,423,896 LIABILITIES Accounts payable 972,842 1,564,772 2,537,614 77,865 Accrued liabilities 1,226,658 225,118 1,451,776 8,208 Accrued interest 103,933 134,127 238,060 170,725 Customer deposits - 298,347 298,347 - Noncurrent liabilities: Due within one year 1,521,533 1,091,463 2,612,996 - Due in more than one year 24,450,283 34,093,976 58,544,259 11,649,655 Total liabilities 28,275,249 37,407,803 65,683,052 11,906,453 NET ASSETS (DEFICIT) Invested in capital assets, net of related debt 66,580,049 26,251,346 92,831,395 - Restricted for: Debt service 240,869 - 240,869 125,490 Public safety 360,912 - 360,912 - Community development 321,093 - 321,093 - Capital improvements - 731,410 731,410 2,828 Unrestricted 8,227,254 11,373,311 19,600,565 (3,610,875) Total net assets (deficit)75,730,177$ 38,356,067$ 114,086,244$ (3,482,557)$ CITY OF FRIENDSWOOD, TEXAS STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 13 Program Revenues Operating Capital Primary Government Charges for Grants and Grants and Governmental Business - Type Component Program Activities Expenses Services Contributions Contributions Activities Activities Total Unit Primary government Governmental activities General government 4,876,064$ 1,158,392$ - $ - $ (3,717,672)$ - $ (3,717,672)$ - $ Public safety 10,548,568 39,914 3,088,370 - (7,420,284) - (7,420,284) - Public works 3,517,707 158,858 - - (3,358,849) - (3,358,849) - Community development 1,284,188 643,150 - - (641,038) - (641,038) - Community services 3,058,313 267,837 62,438 - (2,728,038) - (2,728,038) - Library 979,978 43,147 - - (936,831) - (936,831) - Interest on long-term debt 871,790 - - - (871,790) - (871,790) - Total governmental activities 25,136,608 2,311,298 3,150,808 - (19,674,502) - (19,674,502) - Business-type activities Water and sewer 8,599,579 12,726,936 - - - 4,127,357 4,127,357 - Total business-type activities 8,599,579 12,726,936 - - - 4,127,357 4,127,357 - Total primary government 33,736,187$ 15,038,234$ 3,150,808$ - $ (19,674,502) 4,127,357 (15,547,145) - Component unit West Ranch Management District (3,730,309) - - - - - - (3,730,309) (3,730,309)$ - $ - $ - $ - - - (3,730,309) GENERAL REVENUES Taxes: Property taxes, levied for general purposes 12,392,254 - 12,392,254 604,783 Property taxes, levied for debt service 1,552,471 - 1,552,471 - Sales taxes 4,002,740 - 4,002,740 - Franchise taxes 1,598,407 - 1,598,407 - Other taxes 28,883 - 28,883 - Penalties and interest - - - 3,736 Interest on investments 110,863 55,163 166,026 9,384 Gain (loss) on sale of capital assets 23,831 - 23,831 - Miscellaneous 126,228 - 126,228 32,419 Transfers (5,336,312) 5,336,312 - - Total general revenues and transfers 14,499,365 5,391,475 19,890,840 650,322 Change in net assets (5,175,137) 9,518,832 4,343,695 (3,079,987) NET ASSETS, beginning of year 80,905,314 28,837,235 109,742,549 (402,570) NET ASSETS, end of year 75,730,177$ 38,356,067$ 114,086,244$ (3,482,557)$ Changes in Net Assets Net (Expense) Revenue and CITY OF FRIENDSWOOD, TEXAS BALANCE SHEET – GOVERNMENTAL FUNDS SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 14 Other Total General Debt Governmental Governmental Fund Service Funds Funds Cash and investments 7,009,382$ 307,755$ 5,017,683$ 12,334,820$ Receivables, net of allowance Taxes 1,420,008 36,571 - 1,456,579 Customer accounts 155,452 - 30,821 186,273 Other 200,637 476 1,488,464 1,689,577 Due from other funds 1,495,557 - - 1,495,557 Receivable from other governments 835,563 - - 835,563 Prepaids and other assets 220,151 - - 220,151 Total assets 11,336,750$ 344,802$ 6,536,968$ 18,218,520$ Liabilities Accounts payable 854,152$ - $ 118,690$ 972,842$ Accrued liabilities 1,093,538 - 133,120 1,226,658 Due to other funds - - 2,395,557 2,395,557 Deferred revenue 473,656 36,571 4,540 514,767 Total liabilities 2,421,346 36,571 2,651,907 5,109,824 Fund Balances Nonspendable Prepaid items 220,151 - - 220,151 Permanent fund - - 30,869 30,869 Restricted for Public education and government channels 97,728 - - 97,728 Debt service - 308,231 - 308,231 Authorized construction - - 3,203,056 3,203,056 State and/or federal statute 300,674 300,674 Fire/EMS donations 60,238 60,238 City ordinances - 290,224 290,224 Assigned 1,085,527 - - 1,085,527 Unassigned 7,511,998 - - 7,511,998 Total fund balances 8,915,404 308,231 3,885,061 13,108,696 Total liabilities and fund balances 11,336,750$ 344,802$ 6,536,968$ 18,218,520$ ASSETS LIABILITIES AND FUND BALANCES CITY OF FRIENDSWOOD, TEXAS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 15 Total fund balances - governmental funds 13,108,696$ Capital assets used in governmental activities are not current financial resources and therefore are not reported in the governmental funds balance sheet.86,594,293 Costs associated with the issuance of governmental long term debt are expensed when incurred in the fund statements and capitalized and amortized over the life of the debt in the government-wide financial statements.367,980 The accruals for net other post employment benefits and net pension obligation do not require the use of current financial resources and are therefore not recorded in the governmental fund financial statements.(1,203,222) Interest payable on long term debt does not require current financial resources;therefore,interest payable is not reported as a liability in the governmental funds balance sheet.(103,933) An internal service fund is used by management to charge the cost of certain activities,such as fleet management,to individual funds.The assets and liabilities of the internal service fund are included in the governmental activities in the statement of net assets.1,220,190 Revenues earned but not available within sixty days of the year end are not recognized as revenue on the fund financial statements.514,767 Long-term liabilities,including bonds payable,capital leases payable, bond premiums and compensated absences are not due and payable in the current period and therefore are not reported in the fund financial statements.(24,768,594) Net assets of governmental activities 75,730,177$ Amounts reported for governmental activities in the statement of net assets are different because: CITY OF FRIENDSWOOD, TEXAS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES – GOVERNMENTAL FUNDS YEAR ENDED SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 16 Other Total General Debt Governmental Governmental Fund Service Funds Funds Revenues Property taxes 12,404,793$ 1,557,269$ - $ 13,962,062$ Sales and alcohol taxes 4,031,623 - - 4,031,623 Franchise taxes 1,598,407 - - 1,598,407 Fines and forfeitures 972,678 - 39,914 1,012,592 Permits and fees 1,017,625 - 52,220 1,069,845 Intergovernmental 647,070 - 2,462,575 3,109,645 Investment earnings 99,116 2,968 7,188 109,272 Donations 27,546 - 248,663 276,209 Miscellaneous 78,243 - - 78,243 Total revenues 20,877,101 1,560,237 2,810,560 25,247,898 Expenditures Current General government 4,324,499 - 73,359 4,397,858 Public safety 9,875,842 - 218,122 10,093,964 Public works 1,637,237 - - 1,637,237 Community development 1,284,188 - - 1,284,188 Community services 2,472,015 - - 2,472,015 Library 979,978 - - 979,978 Capital outlay 1,715,340 - 2,539,242 4,254,582 Debt service Principal - 1,019,562 46,303 1,065,865 Interest and fiscal charges - 849,148 15,598 864,746 Bond issuance costs and fees - 200,227 - 200,227 Total expenditures 22,289,099 2,068,937 2,892,624 27,250,660 Excess (deficiency) of revenues over expenditures (1,411,998) (508,700) (82,064) (2,002,762) Other financing sources (uses) Proceeds from bond issuance - - 3,460,000 3,460,000 Issuance of refunding bonds - 5,460,000 - 5,460,000 Premium on issuance of bonds - 200,191 117,261 317,452 Proceeds from sale of capital assets 8,992 - - 8,992 Insurance recoveries 45,334 - - 45,334 Transfers in 1,143,631 92,261 - 1,235,892 Transfers out (828) (5,529,943) (1,042,261) (6,573,032) Total other financing sources (uses)1,197,129 222,509 2,535,000 3,954,638 Net change in fund balances (214,869) (286,191) 2,452,936 1,951,876 Fund balances, beginning of year 9,130,273 594,422 1,432,125 11,156,820 Fund balances, end of year 8,915,404$ 308,231$ 3,885,061$ 13,108,696$ CITY OF FRIENDSWOOD, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 17 Net change in fund balances - total governmental funds 1,951,876$ 4,254,414 (3,176,588) Proceeds from issuance of long term debt (9,237,452) Long term debt issuance costs 200,227 Amortization of bond issuance costs (23,698) Amortization of premium on bonds payable 30,472 Repayment of long term debt 964,905 (8,065,546) 7,508 (13,818) (20,871) (133,077) 20,965 Change in net assets of governmental activities (5,175,137)$ Current year changes in accrued interest payable do not require the use of current financial resources; therefore, it is not reported as an expenditure in the governmental funds. Certain unearned revenues in the government-wide statement of activities that do not provide current financial resources are not reported as revenue in the governmental funds. The accruals for net other post employment benefits and net pension obligation do not require the use of current financial resources and are therefore not recorded in the governmental fund financial statements. An internal service fund is used by management to charge the cost of fleet management to individual funds. The change in net assets of the internal service fund is included in the governmental activities in the statement of net assets. Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount of capital assets recorded in the current period. Depreciation expense on capital assets is reported in the statement of activities but does not require the use of current financial resources. Therefore, depreciation expense is not reported as expenditures in the governmental funds. The issuance of long term debt (e.g. bonds, capital 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 assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas the amounts are deferred and amortized in the statement of activities. The effect of these differences in the treatment of long-term debt and related items was: Current year changes in long term liability for compensated absences do not require the use of current financial resources; therefore, are not reported as expenditures in governmental funds. CITY OF FRIENDSWOOD, TEXAS STATEMENT OF NET ASSETS – PROPRIETARY FUNDS SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 18 Business Type Activities Governmental Enterprise Fund Activities Water and Sewer Internal Service Current assets Cash and investments 10,170,046$ 433,899$ Accounts receivable, net of allowance Customer accounts 2,422,037 - Other 61,611 274 Due from other funds 900,000 - Prepaids and other assets 37,732 - Restricted cash and investments 7,184,205 - Total current assets 20,775,631 434,173 Noncurrent assets Working capital deposit 290,154 - Deferred charges 414,174 - Capital assets Land 716,818 - Machinery and equipment 2,978,193 1,956,021 Water and sewer system 53,934,137 - Construction in progress 3,677,771 - Water rights 19,716,695 - Accumulated depreciation (26,739,703) (1,170,004) Net capital assets 54,283,911 786,017 Total noncurrent assets 54,988,239 786,017 Total assets 75,763,870 1,220,190 ASSETS CITY OF FRIENDSWOOD, TEXAS STATEMENT OF NET ASSETS – PROPRIETARY FUNDS SEPTEMBER 30, 2011 (CONTINUED) The Notes to the Basic Financial Statements are an integral part of these statements. 19 Business Type Activities Governmental Enterprise Fund Activities Water and Sewer Internal Service Current liabilities Accounts payable 1,564,772 - Accrued liabilities 225,118 - Accrued interest 134,127 - Deposits 298,347 - Compensated absences 15,044 - Bonds and other long-term debt payable 1,076,419 - Total current liabilities 3,313,827 - Noncurrent liabilities Compensated absences 87,752 - Bonds and other long-term debt payable 34,006,224 - Total noncurrent liabilities 34,093,976 - Total liabilities 37,407,803 - Invested in capital assets, net of related debt 26,251,346 786,017 Restricted for capital improvements 731,410 - Unrestricted 11,373,311 434,173 Total net assets 38,356,067$ 1,220,190$ LIABILITIES NET ASSETS CITY OF FRIENDSWOOD, TEXAS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS YEAR ENDED SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 20 Business Type Activities Governmental Enterprise Fund Activities Water and Sewer Internal Service Operating revenues Charges for services 12,726,936$ 318,852$ Total operating revenues 12,726,936 318,852 Operating expenses Personnel services 1,610,261 - Sewer operations 1,348,531 - Water purchases 1,047,333 - Repairs and maintenance 485,634 - Supplies 164,040 50,018 Other services and charges 754,698 - Depreciation 1,545,008 265,180 Total operating expenses 6,955,505 315,198 Operating income 5,771,431 3,654 Nonoperating revenues (expenses) Investment income 55,163 1,591 Gain (loss) on sale of capital assets - 14,892 Interest expense and fiscal charges (1,644,074) - Total nonoperating revenues (expenses)(1,588,911) 16,483 Income before transfers 4,182,520 20,137 Transfers in 6,429,943 828 Transfers out (1,093,631) - Change in net assets 9,518,832 20,965 Net assets, beginning of year 28,837,235 1,199,225 Net assets, end of year 38,356,067$ 1,220,190$ CITY OF FRIENDSWOOD, TEXAS STATEMENT OF CASH FLOWS – PROPRIETARY FUNDS YEAR ENDED SEPTEMBER 30, 2011 The Notes to the Basic Financial Statements are an integral part of these statements. 21 Business Type Activities Governmental Enterprise Fund Activities Water and Sewer Internal Service OPERATING ACTIVITIES Cash received from customers 12,176,477$ 319,046$ Cash payments to suppliers for goods and services (3,018,983) (53,368) Cash payments to employees for services (1,607,051) - Net cash provided by operating activities 7,550,443 265,678 NONCAPITAL FINANCING ACTIVITIES Transfer in - 828 Transfer out (1,093,632) - Net cash provided by (used in) noncapital financing activities (1,093,632) 828 CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from the sale of capital assets - 23,990 Capital expenditures (3,327,606) (335,187) Proceeds from the issuance of debt - - Repayment of debt (1,440,000) - Interest paid on debt (1,653,336) - Net cash used in capital and related financing activities (6,420,942) (311,197) INVESTING ACTIVITIES Investment income 10,862 1,591 Net cash provided by investing activities 10,862 1,591 Net change in cash and cash equivalents 46,731 (43,100) CASH AND CASH EQUIVALENTS, beginning of year 17,307,520 476,999 CASH AND CASH EQUIVALENTS, end of year 17,354,251$ 433,899$ CITY OF FRIENDSWOOD, TEXAS STATEMENT OF CASH FLOWS – PROPRIETARY FUNDS YEAR ENDED SEPTEMBER 30, 2011 (CONTINUED) The Notes to the Basic Financial Statements are an integral part of these statements. 22 Business Type Activities Governmental Enterprise Fund Activities Water and Sewer Internal Service Reconciliation of operating income to net cash provided by operating activities Operating income 5,771,431$ 3,654$ Adjustments to reconcile operating income to net cash provided by operating activities Depreciation and amortization 1,545,008 265,180 Change in assets and liabilities Accounts receivable (554,202) 194 Prepaids and other assets (4,642) - Working capital deposits (1,292) - Accounts payable 633,876 (3,350) Accrued liabilities 156,521 - Deposits 3,743 - Net cash provided by operating activities 7,550,443$ 265,678$ Reconciliation of cash to statement of net assets Cash and investments 10,170,046$ 433,899$ Restricted cash and investments 7,184,205 - CASH AND CASH EQUIVALENTS 17,354,251$ 433,899$ CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 23 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Friendswood, Texas (the City) was incorporated on October 15, 1960. The City charter provides for a City Council-City Manager form of government. The Mayor and six Council members are elected from the City at large serving three-year terms. Currently, the City charter provides for a Council term limitation of four terms. The City Council is the principal legislative body of the City. The City Manager is appointed by a majority vote of the City Council and is responsible to the Council for the administration of all the affairs of the City. The City Manager is responsible for law enforcement, appointment and removal of department directors and employees, supervision and control of all City departments, and preparation of the annual budget. The Mayor presides at meetings of the City Council and can vote. The City provides the following services: public safety, streets, parks and recreation, library, water and sewer, sanitation, planning and zoning, building inspection, code enforcement, and general administrative services. Financial Reporting Entity The City is an independent political subdivision of the State of Texas governed by an elected six-member Council and Mayor and is considered a primary government. As required by generally accepted accounting principles, these financial statements have been prepared based on considerations regarding the potential for inclusion of other entities, organizations, or functions as part of the City’s financial reporting entity. Based on these considerations, the West Ranch Management District has been included in the City’s reporting entity as a discretely presented component unit. Additionally, as the City is considered a primary government for financial reporting purposes, its activities are not considered a part of any other governmental or other type of reporting entity. Consideration regarding the potential for inclusion of other entities, organizations, or functions in the City’s financial reporting entity is based on criteria prescribed by generally accepted accounting principles. These same criteria are evaluated in considering whether the City is a part of any other governmental or other type of reporting entity. The overriding elements associated with prescribed criteria considered in determining that the City’s financial reporting entity status is that of a primary government are that it has a separately elected governing body; it is legally separate; and it is financially independent of other state and local governments. Additional prescribed criteria under generally accepted accounting principles include considerations pertaining to organizations for which the primary government is financially accountable; and considerations pertaining to other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s financial statements to be misleading or incomplete. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 24 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Financial Reporting Entity – Continued The West Ranch Management District (the District), a discretely presented component unit, was created under Section 59, Article XVI of the Texas Constitution added by an Act of the 79th Legislature of the State of Texas, effective June 17, 2005, in accordance with the Texas Water Code, Chapter 54. The District operates in accordance with Chapters 3837, Texas Special District Local Laws Code, Chapters 49 and 54 of the Texas Water Code and Chapter 375 of the Texas Local Government Code, and is subject to the continuing supervision of the Texas Commission on Environmental Quality. The District was created to promote and encourage employment and the public welfare within the District. The affairs of the District are managed by a Board of Directors composed of three directors from a list of persons nominated by the Board and appointed by the City Council and two directors appointed by the City Council. The City is financially accountable for the District because City Council must approve any debt issuances. Complete financial statements from the component may be obtained at the District’s administrative office. Basis of Presentation The government-wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all activities of the primary government and its component unit. 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 revenue, 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 are offset by program revenue. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenue includes 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 of a particular function or segment. Taxes and other items not properly included among program revenue are reported instead as general revenue. Separate financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 25 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Measurement Focus/Basis of Accounting The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary 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 revenue 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 government considers revenue to be available if collected within 60 days of the end of the current fiscal period. 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, franchise taxes, sales taxes, and interest associated with the current fiscal period are all considered to be susceptible to accrual and, accordingly, have been recognized as revenue of the current fiscal 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 primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. The Debt Service Fund is used to account for the property taxes levied for payment of principal and interest on all governmental debt of the City. Other governmental funds is a summarization of all the non-major governmental funds. The City reports the following major enterprise fund: The Water and Sewer Fund is used to account for the activities of the City’s water and wastewater operations. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 26 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Measurement Focus/Basis of Accounting – Continued Additionally, the City reports the following fund type: The Internal Service Fund is used to account for fleet management services provided to other departments of the City on a cost reimbursement basis. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government-wide and enterprise fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board (GASB). Governments also have the option of following subsequent private-sector guidance for their business-type activities and Enterprise Funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are charges between the City’s water and sewer function and various other functions of the government. Elimination of these charges would distort the direct costs and program revenue reported for the various functions concerned. 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 and Sewer enterprise f und and of the City’s internal service fund are charges to customers for sales and services. Operating expenses for the enterprise fund and internal service fund include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenue and expenses not meeting this definition are reported as nonoperating revenue and expenses. Cash and Investments Cash and investments include cash on hand, deposits with financial institutions, short- term investments in a state-managed public funds investment pool account (TexPool), and two privately managed public funds investment pools (Lone Star and Texas Class). Other investments consist mainly of U. S. government treasury bills, treasury notes and other U. S. government obligations. Restricted cash and investments are assets restricted for specific use. Restricted cash includes cash on deposit with financial institutions and investment pools. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 27 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Cash and Investments – Continued In accordance with GASB Statement No. 31, the City’s general policy is to report money market investments and short-term participating interest-earning investment contracts at amortized cost and to report nonparticipating interest-earning investment contracts using a cost-based measure. However, if the fair value of an investment is significantly affected by the impairment of the credit standing of the issuer or by other factors, it is reported at fair value. All other investments are reported at fair value unless a legal contract exists which guarantees a higher value. The term “short-term” refers to investments which have a remaining term of one year or less at time of purchase. The term “nonparticipating” means that the investment’s value does not vary with market interest rate changes. The City maintains a pooled cash and investments account for all funds of the City. Each fund’s positive equity in the pooled cash account is presented as “cash and investments” in the financial statements. Negative equity balances are reclassified and are reflected as interfund accounts payable. Interest income and interest expense are allocated to each respective individual fund monthly based on their representative fund balances. The City’s cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Receivables and Payables Activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either “due to/from other funds” (i.e., the current portion of interfund loans) or “advances to/from other funds” (i.e., the noncurrent portion of interfund loans). 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.” All trade and property tax receivables are shown net of an allowance for uncollectible accounts. Management estimates an allowance for trade accounts receivable based on past experience, historical losses, and other pertinent factors. The property tax receivable allowance is equal to 10 percent of outstanding property taxes at September 30, 2011. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 28 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Receivables and Payables – Continued The City’s property taxes are levied annually in October on the basis of the Appraisal District’s assessed values as of January 1 of that calendar year. Appraised values are established by the Appraisal District at market value and assessed at 100% of appraised value less exemptions. The City’s property taxes are billed and collected by Galveston County. Such taxes are applicable to the fiscal year in which they are levied and become delinquent with an enforceable lien on property on February 1 of the subsequent calendar year. Property taxes are prorated between operations and debt service based on rates adopted for the year of the levy. For the current year, the City levied property taxes of $0.5851 per $100 of assessed valuation that were prorated between operations and debt service in the amounts of $0.5198 and $0.0653, respectively. The resulting tax levies were approximately $12.3 and $1.5 million for operations and debt service, respectively, based on a total taxable valuation of approximately $2.4 billion for the 2010 tax year. At an election held November 8, 2005, voters of the West Ranch Management District, a discretely presented component unit, authorized a maintenance tax not to exceed $0.65 per $100 valuation on all property within the District subject to taxation. The District levied an ad valorem maintenance tax at the rate of $0.6500 per $100 of assessed valuation, which resulted in a tax levy of $604,783 on the taxable valuation of $93,043,423 for the 2010 tax year. The maintenance tax is being used by the District to pay operating expenditures. Prepaid Items Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both government-wide and fund financial statements. The City applies the consumption method in accounting for prepaid items in the governmental funds. Restricted Assets Certain proceeds of the City’s enterprise fund revenue bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 29 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Contract with West Ranch Management District The District approved a contract with the City effective August 15, 2005, as amended. Under the terms of the contract, the District is to pay for construction of water distribution, sanitary sewer, drainage, transportation, education and recreation facilities to serve the District. The District shall be the owner of the system until the system is completed, approved by the City and conveyed to it, at which time ownership will vest in the City. The District will own and operate detention facilities to serve the District. Pursuant to the contract, the District shall have a security interest therein until all bonds issued by the District are retired. Capital Assets Capital assets, which include property, plant, equipment, infrastructure, and water rights, are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. The City defines capital assets as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if actual historical cost is not available. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets’ lives are not capitalized. Property, plant and equipment is depreciated using the straight-line method over the following useful lives: Buildings and improvements 20 - 50 years Machinery and equipment 5 - 10 years Infrastructure 40 - 50 years Water and sewer system 40 - 50 years Compensated Absences The City’s employees earn vacation and sick leave, which may either be taken or accumulated, up to certain amounts, until paid upon resignation or retirement. All vacation and sick leave pay is accrued when incurred in the government-wide and proprietary fund financial statements. A liability for these amounts is reported in governmental funds only if they have matured, for example, as a result of employee resignations and retirements. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 30 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Long-Term Obligations In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight -line method, which approximates the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Fund Balances and Net Assets Government-Wide Financial Statements: Net assets on the Statement of Net Assets includes the following categories: Invested in capital assets, net of related debt – the component of net assets that reports the difference between capital assets less both the accumulated depreciation and the outstanding balance of debt, net of premiums and discounts, excluding unspent proceeds, that is directly attributable to the acquisition, construction or improvement of these capital assets. Restricted – Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the City or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. Unrestricted – the difference between the assets and liabilities that is not reported in any of the classifications above. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 31 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Fund Balances and Net Assets – Continued Governmental Fund Financial Statements: During the year ended September 30, 2011 the City adopted the provisions of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54). The objective of the statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing government fund type definitions. The statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. Fund balance classifications, under GASB 54 are non-spendable, restricted, committed, assigned, and unassigned. These classifications reflect not only the nature of funds, but also provide clarity to the level of restriction placed upon fund balance. Fund balance can have different levels of constraint, such as external versus internal compliance requirements. Unassigned fund balance is a residual classification within the general fund. The general fund should be the only fund that reports a positive unassigned balance. In all other funds, unassigned is limited to negative residual fund balance. In accordance with GASB 54, the City classifies governmental fund balances as follows: Non-spendable – includes amounts that cannot be spent because they are either not in spendable form, or, for legal or contractual reasons, must be kept intact. This classification includes prepaid items and the fund balance of the City’s permanent fund. Restricted – includes fund balance amounts that are constrained for specific purposes which are imposed by providers, such as creditors or amounts restricted due to constitutional provisions or enabling legislation. This classification includes retirement of long term debt, construction programs, City ordinances, and other federal and state grants. Committed – includes fund balance amounts that are constrained for specific purposes that are internally imposed by the City through formal action in an open meeting of the highest level of decision making authority. Committed fund balance is reported pursuant to resolution passed by the City Council. At September 30, 2011, the City had no committed fund balance amounts. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 32 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Fund Balances and Net Assets – Continued Governmental Fund Financial Statements – Continued: Assigned – includes fund balance amounts that are self-imposed by the City to be used for a particular purpose. Fund balance can be assigned by the City Council, the City Manager, or the City Manager’s designee pursuant to the City’s fund balance policy. At September 30, 2011, the City’s assigned fund balance included amounts assigned for encumbrances. Unassigned – includes residual positive fund balance within the general fund which has not been classified within the other above mentioned categories. Unassigned fund balance may also include negative balances for any governmental fund if expenditures exceed amounts restricted, committed, or assigned for those specific purposes. When both restricted and unrestricted fund balances are available for use, it is the City’s policy to use restricted fund balance first, then unrestricted fund balance. Furthermore, committed fund balances 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 are available. The City has established a minimum fund balance policy whereby the City’s unassigned general fund balance will be maintained at levels sufficient to protect the City’s creditworthiness, as well as its financial position, from unforeseeable emergencies. The City will strive to maintain the unassigned general fund balance at a minimum of 90 days of prior year audited operating expenditures. Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 33 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED New Accounting Pronouncements In November 2010, the GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus an Amendment of GASB Statement No. 14 and No. 34 (GASB 61). This statement modifies certain requirements for inclusion of component units in the financial reporting entity, amends criteria for reporting component units as if they were part of the primary government and clarifies the reporting of equity interests in legally separate organizations. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2012. The City will adopt GASB 61 in the fiscal year ending September 30, 2013 and is currently evaluating the impact of this standard on its financial statements. In December 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 Financial Accounting Standards Board (FASB) and American Institute of Certified Public Accountants (AICPA) Pronouncements (GASB 62). This statement incorporates into GASB authoritative literature, certain accounting and financial reporting guidance issued by the FASB and AICPA on or before November 30, 1989, which does not conflict or contradict GASB pronouncements. The requirements of this statement are effective for financial statements for periods beginning after December 15, 2011. The City will adopt GASB 62 in the fiscal year ending September 30, 2013 and is currently evaluating the impact of this standard on its financial statements. NOTE 2. DEPOSITS AND INVESTMENTS Under provisions of state and local statutes, the City’s investment policies, and provisions of the City’s depository contracts with an area financial institution, the City is authorized to place available deposits and investments in the following: 1. Obligations of the U. S., its agencies and instrumentalities; 2. Certificates of Deposit issued by state and national banks or savings or loan associations domiciled in this state that are guaranteed or insured by the Federal Deposit Insurance Corporation or collateralized in accordance with Section 2256.010, the Texas Government Code, in face amount not to exceed $100,000; 3. No-load money market mutual funds; and 4. TexPool, Lone Star Investment Pool and Texas Class. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 34 NOTE 2. DEPOSITS AND INVESTMENTS – CONTINUED The City Council has adopted a written investment policy regarding the investments of its funds as defined by the Public Funds Investment Act of 1995 (Chapter 2256, Texas Government Code). The investments of the City are in compliance with the Council’s investment policies. The City did not have any derivative investment products during the current year. All significant legal and contractual provisions for investments were complied with during the year. Deposits and investments as of September 30, 2011 are classified in the accompanying financial statements as follows: Governmental Activities 12,768,719$ Business-type Activities 17,354,251 30,122,970$ Deposits and investments as of September 30, 2011 consist of the following: Deposits with financial institutions 3,927,229$ Investments 26,195,741 30,122,970$ As of September 30, 2011, the City had the following investments: Fair Value Texas Class 11,332,994$ Lone Star Corporate Overnight Fund 2,434,149 Tex Pool 1,932,039 U.S. Agency Securities: Federal Farm Credit Bank 6,495,969 634 Federal National Mortgage Association 2,500,670 816 Federal Home Loan Mortgage Corporation 1,000,155 736 Federal Home Loan Bank 499,765 677 Total U.S. Agency Securities 10,496,559 Total portfolio 26,195,741$ Investment Type Weighted Average Maturity (Days) CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 35 NOTE 2. DEPOSITS AND INVESTMENTS – CONTINUED The City’s investment pools are 2a7-like pools. A 2a7-like pool is one which is not registered with the Securities and Exchange Commission (SEC) as an investment company, but nevertheless has a policy that it will, and does, operate in a manner consistent with the SEC’s Rule 2a7 of the Investment Company Act of 1940. The City’s investments in these pools are the same as the value of the pool shares, which are valued based on quoted market rates. The City invests in Texas Local Government Investment Pool (TexPool), which was created under the Interlocal Cooperation Act, Texas Government Code Ann. Chapter 791 and the Texas Public Funds Investment Act. The Texas Treasury Safekeeping Trust Company (the Trust) is trustee of TexPool and is a limited purpose trust company authorized pursuant to Texas Government Code Ann. Section 404.103 for which the Texas State Comptroller is sole officer, director and shareholder. The advisory board of TexPool is composed of members appointed pursuant to the requirements of the Texas Public Funds Investment Act. The City invests in Texas Class Investment Pool which was established in 1996 pursuant to the Texas Public Funds Investment Act. The pool is governed by a 7-member board of trustees, who are elected by pool participants. The Cutwater Investor Services Corp. serves as the pools program administrator and Wells Fargo Bank Texas, NA, serves as custodian. The City invests in Lone Star Investment Pool pursuant to the Texas Public Funds Investment Act. This pool is governed by an 11-member board of trustees all of which are pool participants. The Bank of New York Mellon acts as custodian and provides valuation services. Interest Rate Risk. In accordance with its investment policy, the City manages its exposure to declines in fair market values by limiting 30% of its portfolio to be invested for a period of more than two years. As of September 30, 2011, 13% of the City’s investments were invested for a period of more than two years. Custodial Credit Risk. In the case of deposits, this is the risk that in the event of a bank failure, the City’s deposits may not be returned. State statutes require that all deposits in financial institutions be fully collateralized by U. S. Government obligations or its agencies and instrumentalities or direct obligations of Texas or its agencies and instrumentalities that have a fair value of not less than the principal amount of deposits. As of September 30, 2011, all of the City’s $3,927,229 balance on deposit with financial institutions was collateralized with securities held by the pledging financial institution in the City’s name. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 36 NOTE 2. DEPOSITS AND INVESTMENTS – CONTINUED Credit Risk. It is the City’s policy to limit its investments to investment types with an investment quality rating not less than A or its equivalent by a nationally recognized statistical rating organization. The City’s investments as of September 30, 2011, were rated as follows: Rating Rating Agency Texas Class AAAm Standard & Poor's Lone Star Corporate Overnight Fund AAAf Standard & Poor's TexPool AAAm Standard & Poor's U.S. Agency Securities: Federal Farm Credit Bank Aaa Moody's Investor Service Federal National Mortgage Association Aaa Moody's Investor Service Federal Home Loan Mortgage Corporation Aaa Moody's Investor Service Federal Home Loan Bank Aaa Moody's Investor Service Investment Type NOTE 3. ACCOUNTS RECEIVABLE AND DEFERRED REVENUE Receivables as of September 30, 2011 for the City’s individual major funds, nonmajor funds in the aggregate and the Internal Service Fund including the applicable allowances for uncollectible accounts, are as follows: Debt Water and Internal General Service Nonmajor Sewer Service Total Receivables: Property taxes 287,438$ 40,634$ -$ -$ -$ 328,072$ Sales taxes 760,845 - - - - 760,845 Franchise taxes 400,469 - - - - 400,469 Customer accounts 157,452 - 30,821 2,432,037 - 2,620,310 Accrued interest 7,450 476 331 7,438 274 15,969 Court fines 458,650 - 4,554 - - 463,204 Intergovernmental 835,563 - 1,483,579 - - 2,319,142 Other 18,098 - - 54,173 - 72,271 Gross receivables 2,925,965 41,110 1,519,285 2,493,648 274 6,980,282 Less: allowance for uncollectibles 314,305 4,063 - 10,000 - 328,368 Net total receivables 2,611,660$ 37,047$ 1,519,285$ 2,483,648$ 274$ 6,651,914$ Governmental Funds Proprietary Funds CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 37 NOTE 3. ACCOUNTS RECEIVABLE AND DEFERRED REVENUE – CONTINUED Governmental funds report deferred revenue in connection with receivables for revenue that is not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned. At the end of the current fiscal year, the various components of deferred revenue reported in the governmental funds were as follows: Deferred Revenue General Fund Delinquent property taxes 258,695$ Court fines 199,417 Miscellaneous 15,544 Total General Fund 473,656 Court Security and Technology Fund Court fines 4,540 Total Court Security and Technology Fund 4,540 Debt Service Fund Delinquent property taxes 36,571 Total Debt Service Fund 36,571 Total Governmental Funds 514,767$ CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 38 NOTE 4. CAPITAL ASSETS Capital asset activity for the year ended September 30, 2011, was as follows: Beginning Reclassifications/Ending Balance Increases Decreases Balance Governmental activities Capital assets not being depreciated Land 24,007,398$ -$ -$ 24,007,398$ Construction in progress 4,254,002 3,991,962 (3,355,517) 4,890,447 Total capital assets not being depreciated 28,261,400 3,991,962 (3,355,517) 28,897,845 Capital assets being depreciated Buildings and improvements 31,374,231 3,405,359 - 34,779,590 Machinery and equipment 10,078,459 554,039 (274,636) 10,357,862 Infrastructure 67,671,399 - - 67,671,399 Total capital assets being depreciated 109,124,089 3,959,398 (274,636) 112,808,851 Less accumulated depreciation Buildings and improvements 10,666,148 1,159,531 - 11,825,679 Machinery and equipment 6,424,545 730,890 (259,295) 6,896,140 Infrastructure 34,053,220 1,551,347 - 35,604,567 Total accumulated depreciation 51,143,913 3,441,768 (259,295) 54,326,386 Total capital assets being depreciated, net 57,980,176 517,630 (15,341) 58,482,465 Governmental activities capital assets, net 86,241,576$ 4,509,592$ (3,370,858)$ 87,380,310$ CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 39 NOTE 4. CAPITAL ASSETS – CONTINUED Beginning Reclassifications/Ending Balance Increases Decreases Balance Business Type Activities Capital assets not being depreciated Land 716,818$ -$ -$ 716,818$ Water rights 19,716,695 - - 19,716,695 Construction in progress 418,945 3,296,254 (37,428) 3,677,771 Total capital assets not being depreciated 20,852,458 3,296,254 (37,428) 24,111,284 Capital assets being depreciated Machinery and equipment 2,923,388 68,779 (13,974) 2,978,193 Water and sewer system 53,934,135 2 - 53,934,137 Total capital assets being depreciated 56,857,523 68,781 (13,974) 56,912,330 Less accumulated depreciation: Machinery and equipment 2,537,548 98,399 (13,974) 2,621,973 Water and sewer system 22,671,121 1,446,609 - 24,117,730 Total accumulated depreciation 25,208,669 1,545,008 (13,974) 26,739,703 Total capital assets being depreciated, net 31,648,854 (1,476,227) - 30,172,627 Business-type activities capital assets, net 52,501,312$ 1,820,027$ (37,428)$ 54,283,911$ Depreciation expense was charged to functions/programs of the primary government as follows: Governmental activities General government 251,562$ Public safety 457,854 Public works 1,880,790 Community services 586,382 Capital assets held by the City's internal service fund are charged to the various functions based on their usage 265,180 Total depreciation expense - Governmental Activities 3,441,768$ Business-Type activities Water and sewer 1,545,008$ Total depreciation expense - Business-Type Activities 1,545,008$ Unexpended commitments for construction projects in progress were $2,865,396 at September 30, 2011. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 40 NOTE 5. INTERFUND BALANCES AND ACTIVITIES Interfund balances (net) at September 30, 2011 consisted of the following individual fund balances: Due to Fund Due from Fund Amount General TDRA 1,495,557$ Balance of TDRA fund expenditures funded by the general fund, pending grant reimbursements Water and sewer EDA 900,000 Return of excess amount previously transferred, upon decrease in City's obligation under grant award 2,395,557$ Purpose All amounts due are scheduled to be repaid within one year. During the year ended September 30, 2011 transfers between funds occurred as described below: Transfers In Transfers Out Amount General Water and sewer 1,093,631$ To fund indirect costs for administrative expenditures General Park land dedication 50,000 To fund miscellaneous projects Debt service Capital projects 92,261 To fund Series 2010A bond issuance costs Water and sewer Debt service 5,529,943 To refund Series 2001 Waterworks and Sewer System revenue bonds Water and sewer EDA 900,000 Return of excess amount previously transferred, upon decrease in City's obligation under grant award Internal service General 828 Transfer of insurance reimbursement 7,666,663$ Purpose NOTE 6. LONG-TERM DEBT The City issues a variety of long-term debt instruments in order to acquire and/or construct major capital facilities and equipment for governmental and business-type activities. These instruments include general obligation bonds, certificates of obligation, revenue bonds, and capital leases. These debt obligations are secured by either future tax revenue, water and sewer system revenue, or liens on property and equipment. Debt obligations that are intended to be repaid from water and sewer system revenue have been recorded as business-type activities. All other long-term obligations of the City are considered to be governmental type activities. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 41 NOTE 6. LONG-TERM DEBT – CONTINUED Federal Arbitrage General obligation bonds, combination tax and revenue bonds, and certificates of obligation are subject to the provisions of the Internal Revenue Code of 1986 related to arbitrage and interest income tax regulations under those provisions. Bonds Payable and Certificates of Obligation The following schedule summarizes the terms of the City’s general obligation bonds, combination tax and revenue bonds, and certificates of obligation outstanding and their corresponding allocations to the governmental and business-type activities at September 30, 2011: Final Governmental Business-Type Maturity Interest Rate Activities Activities General Obligation Bonds 2003 Permanent Improvement $ 8,700,000 2026 3.65% - 5.5%7,420,000$ -$ 2005 Permanent Improvement and Refunding 9,800,000 2020 2.85% - 4.375%6,705,000 - 2010A Permanent Improvement 3,460,000 2035 1.0% - 4.75%3,385,000 2010B Permanent Improvement and Refunding 5,460,000 2021 1.0% - 4.0%5,375,000 22,885,000 - Revenue Bonds 2006 Waterworks and Sewer System Revenue and Refunding 24,285,000 2031 4.0% - 5.0%- 23,390,000 2009 Waterworks and Sewer System 12,120,000 2028 2.0% - 4.8%- 11,815,000 - 35,205,000 Total Bonds and Certificates of Obligation 22,885,000$ 35,205,000$ Series and Original Issue Amount Annual debt service requirements for the City’s bonds and certificates of obligation are as follows: Year Ending September 30,Principal Interest Principal Interest Total 2012 1,265,000$ 843,193$ 1,090,000$ 1,589,565$ 4,787,758$ 2013 1,310,000 806,156 1,120,000 1,548,303 4,784,459 2014 1,355,000 764,704 1,165,000 1,504,006 4,788,710 2015 1,400,000 721,393 1,205,000 1,457,771 4,784,164 2016 1,455,000 676,122 1,240,000 1,409,734 4,780,856 2017 - 2021 8,175,000 2,524,321 7,020,000 6,208,957 23,928,278 2022 - 2026 6,485,000 1,029,519 9,715,000 4,253,229 21,482,748 2027 - 2031 730,000 244,025 10,330,000 1,670,865 12,974,890 2032 - 2036 710,000 69,350 2,320,000 177,750 3,277,100 22,885,000$ 7,678,783$ 35,205,000$ 19,820,180$ 85,588,963$ Governmental Activities Business -Type Activities CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 42 NOTE 6. LONG-TERM DEBT – CONTINUED Defeasance of Bonds On November 1, 2010, the City issued $5.460 million in Series 2010B Permanent Improvement Refunding Bonds with an average interest rate of 3.093 percent to advance refund $5.400 million of outstanding Series 2001 Waterworks and Sewer System bonds (the Refunded Bonds) with an average interest rate of 4.957 percent. The net proceeds of $5.526 million (after payment of $134,337 in underwriting fees, insurance, and other issuance costs) plus an additional $5,000 of Refunded Bonds sinking fund monies were used to purchase U.S. government securities. Those securities were deposited in an irrevocable trust with an escrow agent to provide for all future debt service payments on the Refunded Bonds. As a result, the Refunded Bonds are considered to be defeased and the liability for those bonds has been removed from the government-wide Statement of Net Assets. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $161,850. This difference, reported in the accompanying financial statements as a deduction from bonds payable, is being charged to operations through the year 2021 using the effective-interest method. The City completed the advance refunding to reduce its total debt service payments over the next 10 years by $654,824 and to obtain an economic gain (difference between the present values of the old and new debt service payments) of $558,948. In prior years, the City defeased certain bonds by placing the proceeds of new bonds in an irrevocable trust to provide future debt service payments on the old bonds. Accordingly, the trust account assets and liabilities for the defeased bonds are not included in the City’s financial statements. On September 30, 2011, $12,180,000 of bonds considered defeased are still outstanding. Obligations Under Capital Leases The City has entered into capital lease agreements in order to purchase machinery and equipment for public works, police and fire departments. The assets acquired through these lease agreements are as follows: Governmental Asset:Activities Machinery and equipment 1,133,460$ Less: accumulated depreciation (190,047) Total 943,413$ CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 43 NOTE 6. LONG-TERM DEBT – CONTINUED Obligations Under Capital Leases – Continued The following is a summary of future lease payments due on this machinery and equipment: Year Ending Lease September 30,Obligation 2012 171,547$ 2013 171,547 2014 171,547 2015 171,547 2016 128,812 Total 815,000 Less: interest portion (104,977) Obligations under capital leases 710,023$ Changes in Long-term Liabilities Long-term liability activity of the primary government for the year ended September 30, 2011, was as follows: Balance Balance Due Beginning End of Within One of Year Increase Decrease Year Year Governmental Type Activities General obligation bonds 14,800,000$ 8,920,000$ (835,000)$ 22,885,000$ 1,265,000$ Premium on bond issuance 121,314 317,452 (30,472) 408,294 30,472 Capital lease obligations 839,928 - (129,905) 710,023 129,904 Net pension obligation 529,869 96,587 - 626,456 - Net OPEB obligation 540,276 36,490 - 576,766 - Compensated absences 772,785 658,363 (665,871) 765,277 96,157 Total governmental type activities 17,604,172 10,028,892 (1,661,248) 25,971,816 1,521,533 Business Type Activities Revenue bonds 42,045,000 - (6,840,000) 35,205,000 1,090,000 Discount on bond issuance (59,945) - 2,498 (57,447) (2,498) Premium on bond issuance 326,279 - (16,278) 310,001 16,274 Deferred loss on refunding bonds (224,237) (161,850) 11,176 (374,911) (27,357) Compensated absences 99,586 63,661 (60,451) 102,796 15,044 Total business type activities 42,186,683 (98,189) (6,903,055) 35,185,439 1,091,463 Total primary government activities 59,790,855$ 9,930,703$ (8,564,303)$ 61,157,255$ 2,612,996$ 19,861,406$ CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 44 NOTE 6. LONG-TERM DEBT – CONTINUED West Ranch Management District The following schedule summarizes the terms of the West Ranch Management District’s general obligation bonds at July 31, 2011: Road Series 2010 Series 2010A Amounts outstanding, July 31, 2011 $6,740,000 $1,815,000 Interest rates 3.25% to 5.25%3.50% to 5.00% Maturity dates, serially beginning/ending September 1, 2012/2040 September 1, 2012/2040 Interest payment dates September 1/March 1 September 1/March 1 Callable dates*September 1, 2020 September 1, 2020 *Or any date thereafter; callable at par plus accrued interest to the date of redemption. Annual debt service requirements for the District’s bonds are as follows: Year Ending July 31,Principal Interest Total 2012 -$ 410,741$ 410,741$ 2013 125,000 408,491 533,491 2014 135,000 403,785 538,785 2015 140,000 398,792 538,792 2016 145,000 393,860 538,860 2017 - 2021 875,000 1,883,939 2,758,939 2022 - 2026 1,145,000 1,677,001 2,822,001 2027 - 2031 1,490,000 1,363,402 2,853,402 2032 - 2036 1,950,000 926,381 2,876,381 2037 - 2041 2,550,000 345,850 2,895,850 8,555,000$ 8,212,242$ 16,767,242$ The District’s bonds are payable from the proceeds of an ad valorem tax levied upon all property within the District subject to taxation, without limitation as to rate or amount. The compensated absences liability attributable to the governmental activities will be liquidated primarily by the General Fund. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 45 NOTE 6. LONG-TERM DEBT – CONTINUED West Ranch Management District – Continued Long-term liability activity of the West Ranch Management District for the year ended July 31, 2011, was as follows: Balance Balance Due Beginning End of Within One of Year Increase Decrease Year Year Component Unit General obligation bonds -$ 8,555,000$ -$ 8,555,000$ -$ Discount on bond issuance - (215,690) 3,385 (212,305) - Bond anticipation note 2,405,000 - (2,405,000) - - Developer advances 160,000 - (120,000) 40,000 - Due to developer 845,175 6,213,785 (3,792,000) 3,266,960 - Total component unit 3,410,175$ 14,553,095$ (6,313,615)$ 11,649,655$ -$ A developer of the West Ranch Management District has advanced $40,000 to the District for operating expenses. The District has agreed to repay these amounts plus interest to the extent approved by the Texas Commission on Environmental Quality from the proceeds of future bond sales. These amounts have been recorded in the financial statements as long-term liabilities. The District is currently unable to estimate when bonds will be issued to pay this liability. Developers of the West Ranch Management District have constructed underground utilities on behalf of the District. The District has agreed to reimburse the developers for these construction costs and interest to the extent approved by the Texas Commission on Environmental Quality. The District estimates reimbursable costs for completed projects are $3,266,960. These amounts have been recorded in the financial statements as long-term liabilities. NOTE 7. RESTRICTED ASSETS The balances of the restricted asset accounts in the enterprise fund are as follows: Cash and investments: Customer deposits 298,347$ Construction 730,888 Construction - 2006 bonds 1,896,303 Construction - 2009 bonds 3,893,628 Debt service reserve 365,039 Total restricted assets 7,184,205$ CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 46 NOTE 8. EMPLOYEE RETIREMENT SYSTEM Plan Description The City provides pension benefits for all of its full-time employees through a non-traditional, joint contributory, hybrid defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS), an agent multiple-employer public employee retirement system. The plan provisions that have been adopted by the City are within the options available in the governing state statutes of TMRS. TMRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information (RSI) for TMRS; the report also provides detailed explanations of the contributions, benefits and actuarial methods and assumptions used by the System. This report may be obtained from TMRS’ website at www.TMRS.com. Benefits Benefits depend upon the sum of the employee's contributions to the plan, with interest, and the City-financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount at least equal to two times what would have been contributed by the employee, with interest, prior to establishment of the plan. Monetary credits for service since the plan began are a percent (100%) of the employee's accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit, which is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the plan began, would be the total monetary credits and employee contributions accumulated with interest if the current employee contribution rate and the City matching percent had always been in existence and if the employee’s salary had always been the average of his salary in the last three years that are one year before the effective date. At retirement, the benefit is calculated as if the sum of the employee's accumulated contributions with interest and the employer-financed monetary credits with interest were used to purchase an annuity. Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. A member is vested after 5 years. The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 47 NOTE 8. EMPLOYEE RETIREMENT SYSTEM Benefits – Continued Plan provisions for the City were as follows: Plan Year Plan Year 2010 2011 Employee deposit rate 7.00%7.00% Matching ratio (city to employee) 2 to 1 2 to 1 Years required for vesting 5 5 Service retirement eligibility (expressed as age / years of 60/5,0/20 60/5,0/20 service) 100% Repeating, 100% Repeating, Updated Service Credit Transfers Transfers 70% of 30% of Annuity Increase (to retirees) CPI Repeating CPI Repeating Contributions Under the state law governing TMRS, the contribution rate for each city is determined annually by the actuary, using the Projected Unit Credit actuarial cost method. This rate consists of the normal cost contribution rate and the prior service cost contribution rate, which is calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the portion of an active member’s projected benefit allocated annually; the prior service contribution rate amortizes the unfunded (overfunded) actuarial liability (asset) over the applicable period for that city. Both the normal cost and prior service contribution rates include recognition of the projected impact of annually repeating benefits, such as Updated Service Credits and Annuity Increases. The City contributes to the TMRS Plan at an actuarially determined rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 48 NOTE 8. EMPLOYEE RETIREMENT SYSTEM Contributions – Continued The annual pension cost and net pension obligation/(asset) are as follows: Annual Required Contribution (ARC) 1,851,292$ Interest on Net Pension Obligation 39,740 Adjustment to the ARC (32,747) Annual Pension Cost (APC) 1,858,285 Contributions made (1,761,698) Increase in net pension obligation 96,587 Net Pension Obligation, beginning of year 529,869 Net Pension Obligation, end of year 626,456$ City historical data is as follows: Fiscal Annual Actual Percentage of Net Pension Obligation Year Pension Cost (APC) Contribution Made APC Contributed at September 30 2009 1,690,675$ 1,465,830$ 87%224,845$ 2010 1,950,342 1,645,318 84%529,869 2011 1,858,285 1,761,698 95%626,456 The required contribution rates for fiscal year 2011 were determined as part of the December 31, 2008 and 2009 actuarial valuations. Additional information as of the latest actuarial valuation, December 31, 2010, also follows: Valuation date 12/31/2008 12/31/2009 12/31/2010 - Prior to restructuring 12/31/2010 - Restructured Actuarial cost method Projected Unit Credit Projected Unit Credit Projected Unit Credit Projected Unit Credit Actuarial assumptions: Investment rate of return * 7.50%7.50%7.50%7.00% * Includes inflation at 3.00%3.00%3.00%3.00% Cost-of-living adjustments 2.10%2.10%0.90%0.90% Varies by age and service 30 years 30 years Level Percent of Payroll 27.2 years: closed period 30 years 10-year Smoothed Market Level Percent of Payroll Level Percent of Payroll 10-year Smoothed Market 10-year Smoothed Market Varies by age and service Varies by age and service Varies by age and service 29.0 years: closed period 28.1 years: closed period 27.1 years: closed period Amortization method GASB 25 Equivalent Single Amortization Period Projected salary increases * Asset valuation method Amortized Cost Level Percent of Payroll Amortization Period for new Gains/Losses 30 years CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 49 NOTE 8. EMPLOYEE RETIREMENT SYSTEM – CONTINUED Funded Status and Funding Progress In June, 2011, SB 350 was enacted by the Texas Legislature, resulting in a restructure of the TMRS funds. This legislation provided for the actuarial valuation to be completed, as if restructuring had occurred on December 31, 2010. In addition, the actuarial assumptions were updated for the new fund structure, based on an actuarial experience study that was adopted by the TMRS Board at their May, 2011 meeting (the review compared actual to expected experience for the four-year period of January 1, 2006 through December 31, 2009). For a complete description of the combined impact of the legislation and new actuarial assumptions, including the effects on TMRS city rates and funding ratios, please see the December 31, 2010 TMRS Comprehensive Annual Financial Report (CAFR). The funded status as of December 31, 2010, under the two separate actuarial valuations, is presented as follows: Actuarial UAAL as a Actuarial Actuarial Accrued Unfunded Percentage Valuation Value of Liability Funded AAL Covered of Covered Date Assets (AAL) Ratio (UAAL) Payroll Payroll (1) (2) (3) (4) (5) (6) (1) / (2) (2) - (1) (4) / (5) 12/31/20101 $27,135,892 $37,169,128 73.0%$10,033,236 $11,160,286 89.9% 12/31/20102 $35,257,370 $43,612,777 80.8%$8,355,407 $11,160,286 74.9% (1)Actuarial valuation performed under the original fund structure (2)Actuarial valuation performed under the new fund structure Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability 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. Actuarial calculations are based on the benefits provided under the terms of the substantive plan in effect at the time of each valuation, and reflect a long-term perspective. Consistent with that perspective, actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. The schedule of funding progress, presented as Required Supplementary Information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability of benefits. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 50 NOTE 9. POST EMPLOYMENT BENEFITS OTHER THAN PENSIONS Retiree Insurance Coverage The City Council has established a single-employer medical, dental, and vision insurance defined benefit plan for retirees. Eligible retirees are provided insurance benefits at a set premium rate equal to the City’s employees’ rate. Eligible retirees may also cover their dependents. Retirees are responsible for paying the premium cost associated with their coverage. A retiree is defined as a person who is receiving lifetime monthly TMRS pension benefit payments and retired directly from active employment at the City. The City will stop insurance coverage on the retiree and all dependents on the last day of the month the retiree fails to submit the required premium payment or upon death of the employee. The retiree health plan does not issue a publicly available financial report. Retirement Benefit Eligibility The retiring employee must be 60 years of age with 5 years of service or have 20 years of service at any age. Employees terminating before normal retirement conditions are met are not eligible for retiree health plans. Retirees are not required to enroll in Medicare Parts A and B once eligible. Plan Participants Permanent full-time employees and any dependents covered on the employee’s last date of employment are eligible for coverage. Dependents are not eligible for coverage unless the retired employee is covered. Should the retiring employee reject any of the plans he/she is never eligible to re-enroll in the rejected plans. At the time of coverage election, the retiring employee has the option of cancelling coverage on any dependent with the understanding that that dependent can never be re-enrolled; new dependents cannot be added to the plan. Medical HMO and/or POS Plan The retiring employee is eligible to retain whichever medical plan the emp loyee had on the last day of employment. Any dependents covered at that time may remain on the retired employee’s plan as long as the retired employee remains active on the plan. The only time the retiree’s plan choice can be changed is at open enrollment. All terms and conditions of the plan are the same as active employees. Dental DMO and/or PPO Plan The retiring employee is eligible to retain whichever dental plan the employee had on the last day of employment. Any dependents covered at that time may remain on the retired employee’s plan as long as the retired employee remains active on the plan. The only time the retiree’s plan choice can be changed is at open enrollment. All terms and conditions of the plan are the same as active employees. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 51 NOTE 9. POST EMPLOYMENT BENEFITS OTHER THAN PENSIONS – CONTINUED Retiree Insurance Coverage – Continued Vision Plan The retiring employee is eligible to retain the vision plan the employee had on the last day of employment. Any dependents covered at that time may remain on the retired employee’s plan as long as the retired employee remains active on the plan. All terms and conditions of the plan are the same as active employees. Premiums Paid All premiums are 100% paid monthly by the retiree. The City does not contribute to any of the plans once an employee retires. Funding Policy and Annual OPEB Cost The City’s annual other post employment benefits (OPEB) cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of expense that, if recognized on an ongoing basis, is projected to cover normal cost each year and to amortize the unfunded actuarial liabilities over a period not to exceed thirty years. The City’s annual OPEB cost for the current year is as follows: Annual required contribution 72,428$ Interest on OPEB obligation 24,312 Adjustment to ARC (13,740) Annual OPEB cost (expense) end of year 83,000 Net estimated employer contributions 46,510 Increase in net OPEB obligation 36,490 Net OPEB obligation – as of beginning of the year 540,276 Net OPEB obligation – as of end of year 576,766$ City historical data is as follows: Fiscal Annual OPEB Actual Percentage of OPEB Net OPEB Obligation Year Cost Contribution Made Cost Contributed at September 30 2009 290,842$ 18,208$ 6%272,634$ 2010 305,150 37,508 12%540,276 2011 83,000 46,510 56%576,766 CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 52 NOTE 9. POST EMPLOYMENT BENEFITS OTHER THAN PENSIONS – CONTINUED Retiree Insurance Coverage – Continued Funding Status and Funding Progress The funded status of the City’s retiree health care plan, under GASB Statement No. 45 as of December 31, 2010, the most recent valuation date, is as follows: Actuarial UAAL as a Actuarial Actuarial Accrued Unfunded Percentage Valuation Value of Liability Funded AAL Covered of Covered Date Assets (AAL) Ratio (UAAL) Payroll Payroll (1) (2) (3) (4) (5) (6) (1) / (2) (2) - (1) (4) / (5) 12/31/2010 $0 $610,795 0.00%$610,795 $11,160,286 5.47% Under the reporting parameters, the City’s retiree health care plan is 0% funded with an estimated actuarial accrued liability exceeding actuarial assets by $610,795 at December 31, 2010. The schedule of funding progress, presented as Required Supplementary Information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability of benefits. Actuarial Methods and Assumptions The Projected Unit Credit actuarial cost method is used to calculate the GASB ARC for the City’s retiree health care plan. Using the plan benefits, the present health premiums and a set of actuarial assumptions, the anticipated future payments are projected. The projected unit credit method then provides for a systematic funding for these anticipated payments. The yearly ARC is computed to cover the cost of benefits being earned by covered members as well as to amortize a portion of the unfunded accrued liability. Projections of health benefits are based on the plan as understood by the City and include the types of benefits in force at the valuation date and the pattern of sharing benefit costs between the City and the City’s employees to that point. Actuarial calculations reflect a long-term perspective and employ methods and assumptions that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 53 NOTE 9. POST EMPLOYMENT BENEFITS OTHER THAN PENSIONS – CONTINUED Retiree Insurance Coverage – Continued Actuarial Methods and Assumptions – Continued Significant methods and assumptions were as follows: Investment rate of return 4.5%, net of expenses Inflation rate 1.50% Healthcare cost trend rates 4.5% to 9.0% Actuarial cost method Projected Unit Credit Cost Method Amortization method Level Percent of Payroll over an open period of 30 years Payroll Growth Rate 3.00% Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events in the future. Amounts determined regarding the funded status and the annual required contributions of the City’s retiree health care plan are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. Supplemental Death Benefits Fund Plan Description The City also participates in the cost sharing multiple-employer defined benefit group-term life insurance plan operated by the Texas Municipal Retirement System (TMRS) known as the Supplemental Death Benefits Fund (SDBF). The City elected, by ordinance, to provide group-term life insurance coverage to both current and retired employees. The City may terminate coverage under and discontinue participation in the SDBF by adopting an ordinance before November 1 of any year to be effective the following January 1. The death benefit for active employees provides a lump-sum payment approximately equal to the employee’s annual salary (calculated based on the employee’s actual earnings, for the 12-month period preceding the month of death); retired employees are insured for $7,500; this coverage is an “other postemployment benefit,” or OPEB. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 54 NOTE 9. POST EMPLOYMENT BENEFITS OTHER THAN PENSIONS – CONTINUED Supplemental Death Benefits Fund – Continued Contributions The City contributes to the SDBF at a contractually required rate as determined by an annual actuarial valuation. The rate is equal to the cost of providing one-year term life insurance. The funding policy for the SDBF program is to assure that adequate resources are available to meet all death benefit payments for the upcoming year; the intent is not to pre-fund retiree term life insurance during employees’ entire careers. The City’s contributions to the TMRS SDBF for the years ended September 30, 2011, 2010 and 2009 were $25,107, $22,282, and $24,533, respectively, which equaled the required contributions each year. NOTE 10. RISK MANAGEMENT The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City’s risk management program encompasses obtaining property and liability insurance through Texas Municipal League (TML), an Intergovernmental Risk Pool. The City has not had any significant reduction in insurance coverage and the amounts of insurance settlements have not exceeded insurance coverage for any of the last three years. The participation of the City in TML is limited to payment of premiums. During the year ended September 30, 2011, the City paid premiums to TML for provisions of various liability, property and casualty insurance. The City has various deductible amounts ranging from $500 to $5,000 on various policies. At year-end, the City did not have any significant open claims. The City also provides workers’ compensation insurance on its employees through TML. Workers’ compensation is subject to change when audited by TML. At year-end, September 30, 2011, the City believed the amounts paid on workers’ compensation would not change significantly from the amounts recorded. During the year ended September 30, 2011, employees of the City were covered by a health and dental insurance plan. Employees have the option to select either a HMO or a Point of Service (POS) plan. If an individual employee chooses to cover only themselves through an HMO plan, the City pays 90% of the monthly premium. If an individual employee chooses to cover themselves and their dependents through an HMO plan, the City pays 70% of the monthly premium. If an employee chooses insurance coverage through the POS plan for themselves or for themselves and their dependents then the City pays up to 90% or 70%, respectively, of the HMO plan monthly premium. CITY OF FRIENDSWOOD, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS 55 NOTE 11. COMMITMENTS AND CONTINGENCIES Southeast Water Purification Plant The City has entered into a contract with the City of Houston for constructing, operating and maintaining a water purification plan known as Southeast Water Purification Plant. The City’s pro rata share of the actual pumping construction costs is 1.33 percent. The City began receiving water from the plant on October 15, 1990. The City is billed on a monthly basis for the actual gallons of water received times the City’s pro rata share of actual costs. At the end of each quarter, the City of Houston computes the total operation and maintenance expense for the quarter just ended, recalculates the cost per one thousand gallons, and adjusts previous billings on the next invoice. As of September 30, 2011, the City has purchased water capacity with an indefinite life of $19,716,695. The relationship of the parties is of a fiduciary character. No partnership or joint venture is created by this contract. Federal and State Programs The City recognizes as revenue grant monies received as reimbursement for costs incurred in certain federal and state programs it administers. Amounts received or receivable from grantor agencies are subject to audit and adjustment by grantor agencies. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of expenditures which may be disallowed by the grantor cannot be determined at this time although the City expects such amounts, if any, to be immaterial. Litigation The City is a defendant in various lawsuits. The outcome and the impact of these lawsuits is not presently determinable. REQUIRED SUPPLEMENTARY INFORMATION (Unaudited) CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF FUNDING PROGRESS FOR PARTICIPATION IN TEXAS MUNICIPAL RETIREMENT SYSTEM SEPTEMBER 30, 2011 56 Actuarial Actuarial UAAL as a Actuarial Value of Accrued Unfunded AAL Covered Percentage of Valuation Date Assets Liability (AAL) Funded Ratio (UAAL)Payroll Covered Payroll (1)(2)(3)(4)(5)(6) (1) / (2) (2) - (1) (4) / (5) 12/31/2008 22,413,171$ 35,257,980$ 63.6%12,844,809$ 10,885,990$ 118.0% 12/31/2009 24,941,996 34,979,418 71.3 10,037,422 11,194,824 89.7 12/31/20101 27,135,892 37,169,128 73.0 10,033,236 11,160,286 89.9 12/31/20102 35,257,370 43,612,777 80.8 8,355,407 11,160,286 74.9 (1)Actuarial valuation performed under the original fund structure (2)Actuarial valuation performed under the new fund structure CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF FUNDING PROGRESS POST EMPLOYMENT BENEFITS PLAN OTHER THAN PENSIONS SEPTEMBER 30, 2011 57 Actuarial Actuarial UAAL as a Actuarial Value of Accrued Unfunded AAL Covered Percentage of Valuation Date Assets Liability (AAL) Funded Ratio (UAAL)Payroll Covered Payroll (1)(2)(3)(4)(5)(6) (1) / (2) (2) - (1) (4) / (5) 12/31/2008 -$ 2,426,788$ 0.0%2,426,788$ 10,885,990$ 22.3% 12/31/2009 *- 2,426,788 0.0 2,426,788 10,885,990 22.3 12/31/2010 - 610,795 0.0 610,795 11,160,286 5.5 *In accordance with GASB Statement No. 45, the City has an actuarial valuation performed every 2 years, which was performed as of 12/31/08 and as of 12/31/10. Therefore data for 2009 is the same as 2008. CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2011 58 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Revenues Property taxes 12,242,920$ 12,242,920$ 12,404,793$ 161,873$ Sales taxes 3,777,287 3,777,287 4,031,623 254,336 Franchise taxes 1,404,742 1,437,913 1,598,407 160,494 Fines and forfeitures 1,047,212 1,047,212 972,678 (74,534) Permits and fees 836,094 843,339 1,017,625 174,286 Intergovernmental 135,922 228,321 647,070 418,749 Investment earnings 100,000 100,000 99,116 (884) Donations 30,000 46,460 27,546 (18,914) Miscellaneous 9,720 14,182 78,243 64,061 Total revenues 19,583,897 19,737,634 20,877,101 1,139,467 Expenditures General government Mayor and council Personnel services 299 299 - 299 Supplies 3,421 3,221 2,353 868 Other services and charges 290,708 296,408 321,040 (24,632) Total mayor and council 294,428 299,928 323,393 (23,465) City manager Personnel services 482,668 484,128 493,084 (8,956) Supplies 6,170 19,475 14,216 5,259 Other services and charges 97,262 115,588 90,151 25,437 Capital outlay - - - - Total city manager 586,100 619,191 597,451 21,740 City secretary Personnel services 349,977 349,977 350,125 (148) Supplies 12,826 14,544 5,723 8,821 Repairs and maintenance 140 140 - 140 Other services and charges 60,273 58,555 34,744 23,811 Total city secretary 423,216 423,216 390,592 32,624 Administrative services Personnel services 680,603 681,403 674,847 6,556 Supplies 6,592 6,592 5,050 1,542 Other services and charges 197,873 197,073 185,194 11,879 Total administrative services 885,068 885,068 865,091 19,977 Budgeted Amounts CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2011 (CONTINUED) 59 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Human resources Personnel services 321,825 317,975 302,316 15,659 Supplies 15,065 13,065 7,823 5,242 Other services and charges 57,436 63,504 51,197 12,307 Total human resources 394,326 394,544 361,336 33,208 Tax Other services and charges 214,478 214,478 208,885 5,593 Total tax 214,478 214,478 208,885 5,593 Economic development Personnel services 136,984 136,984 137,989 (1,005) Supplies 19,453 21,152 7,280 13,872 Other services and charges 101,590 118,588 97,795 20,793 Total economic development 258,027 276,724 243,064 33,660 Municipal court Personnel services 516,836 516,836 531,243 (14,407) Supplies 23,929 23,929 10,398 13,531 Repairs and maintenance 1,480 1,480 848 632 Other services and charges 40,646 40,646 27,963 12,683 Capital outlay - - - - Total municipal court 582,891 582,891 570,452 12,439 Computer services Personnel services 295,307 295,307 305,490 (10,183) Supplies 15,631 19,226 7,250 11,976 Repairs and maintenance 71,724 72,113 68,479 3,634 Other services and charges 314,633 336,973 275,982 60,991 Capital outlay - - - - Total computer services 697,295 723,619 657,201 66,418 Risk management Personnel services 85,159 85,159 83,481 1,678 Supplies 9,438 11,915 10,142 1,773 Other services and charges 16,541 16,323 13,411 2,912 Total risk management 111,138 113,397 107,034 6,363 Total general government 4,446,967 4,533,056 4,324,499 208,557 Budgeted Amounts CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2011 (CONTINUED) 60 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Public safety Police services Personnel services 5,774,115 5,796,379 5,867,494 (71,115) Supplies 318,799 312,375 334,322 (21,947) Repairs and maintenance 117,629 137,963 123,289 14,674 Other services and charges 397,198 406,464 392,542 13,922 Capital outlay 41,412 65,018 7,115 57,903 Total police services 6,649,153 6,718,199 6,724,762 (6,563) Communications Personnel services 892,020 892,020 924,444 (32,424) Supplies 6,149 5,899 4,565 1,334 Repairs and maintenance 17,764 18,263 23,692 (5,429) Other services and charges 17,300 17,550 19,173 (1,623) Total communications 933,233 933,732 971,874 (38,142) Animal control Personnel services 241,461 241,461 205,279 36,182 Supplies 16,583 19,842 21,961 (2,119) Repairs and maintenance 2,373 6,051 4,518 1,533 Other services and charges 14,660 16,160 14,933 1,227 Capital outlay - 4,271 - 4,271 Total animal control 275,077 287,785 246,691 41,094 Fire and EMS Personnel services 528,781 528,781 538,550 (9,769) Supplies 34,288 53,208 48,540 4,668 Repairs and maintenance 4,957 9,957 4,431 5,526 Other services and charges 1,287,476 1,357,038 1,348,109 8,929 Capital outlay - 182,895 167,353 15,542 Total fire and EMS 1,855,502 2,131,879 2,106,983 24,896 Total public safety 9,712,965 10,071,595 10,050,310 21,285 Budgeted Amounts CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2011 (CONTINUED) 61 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Public works Administration Personnel services 212,005 212,005 216,037 (4,032) Supplies 1,801 1,621 709 912 Other services and charges 1,749 1,929 1,523 406 Total administration 215,555 215,555 218,269 (2,714) Streets Personnel services 525,272 525,272 505,410 19,862 Supplies 69,980 70,081 76,088 (6,007) Repairs and maintenance 169,350 169,350 91,395 77,955 Other services and charges 439,296 439,321 405,551 33,770 Capital outlay 50,000 320,367 236,367 84,000 Total streets 1,253,898 1,524,391 1,314,811 209,580 Drainage Personnel services 292,004 292,004 312,523 (20,519) Supplies 6,725 9,435 7,020 2,415 Repairs and maintenance 46,639 41,029 3,526 37,503 Other services and charges 5,978 5,978 3,255 2,723 Capital outlay - 269,478 137,383 132,095 Total drainage 351,346 617,924 463,707 154,217 Sanitation Other services and charges 11,300 14,200 14,200 - Total sanitation 11,300 14,200 14,200 - Total public works 1,832,099 2,372,070 2,010,987 361,083 Budgeted Amounts CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2011 (CONTINUED) 62 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Community development Administration Personnel services 598,930 601,930 605,335 (3,405) Supplies 9,315 8,621 5,604 3,017 Repairs and maintenance 637 675 586 89 Other services and charges 14,193 10,446 6,774 3,672 Total administration 623,075 621,672 618,299 3,373 Planning and zoning Personnel services 132,582 132,582 139,406 (6,824) Supplies 1,585 1,585 308 1,277 Other services and charges 11,274 27,774 25,475 2,299 Total planning and zoning 145,441 161,941 165,189 (3,248) Engineering Personnel services 61,267 62,287 61,580 707 Supplies 1,167 1,667 917 750 Repairs and maintenance 530 492 201 291 Other services and charges 9,205 7,062 5,338 1,724 Total engineering 72,169 71,508 68,036 3,472 Inspection Personnel services 416,615 416,615 405,044 11,571 Supplies 10,265 10,945 12,272 (1,327) Repairs and maintenance 1,167 1,871 1,870 1 Other services and charges 43,119 24,631 13,478 11,153 Total inspection 471,166 454,062 432,664 21,398 Total community development 1,311,851 1,309,183 1,284,188 24,995 Budgeted Amounts CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2011 (CONTINUED) 63 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Community services Administration Personnel services 236,702 236,702 243,507 (6,805) Supplies 3,789 4,808 4,104 704 Other services and charges 23,021 22,790 24,500 (1,710) Total administration 263,512 264,300 272,111 (7,811) Parks and recreation Personnel services 655,368 660,175 660,485 (310) Supplies 118,869 110,403 100,062 10,341 Repairs and maintenance 101,652 163,353 142,668 20,685 Other services and charges 582,726 544,003 505,965 38,038 Capital outlay 6,000 132,718 32,970 99,748 Total parks and recreation 1,464,615 1,610,652 1,442,150 168,502 Swimming pool Personnel services 69,735 66,461 51,425 15,036 Supplies 15,199 13,699 10,839 2,860 Repairs and maintenance 11,972 7,897 6,052 1,845 Other services and charges 26,127 25,202 25,444 (242) Total swimming pool 123,033 113,259 93,760 19,499 Building operations Supplies 19,983 30,337 22,597 7,740 Repairs and maintenance 184,318 194,910 174,588 20,322 Other services and charges 563,414 552,989 499,779 53,210 Capital outlay 75,000 2,321,496 1,134,152 1,187,344 Total building operations 842,715 3,099,732 1,831,116 1,268,616 Total community services 2,693,875 5,087,943 3,639,137 1,448,806 Library Personnel services 784,733 784,733 821,669 (36,936) Supplies 156,761 174,722 143,346 31,376 Repairs and maintenance 2,575 2,575 290 2,285 Other services and charges 25,357 25,191 14,673 10,518 Total library 969,426 987,221 979,978 7,243 Interest and fiscal charges - - - - Total expenditures 20,967,183 24,361,068 22,289,099 2,071,969 Deficiency of revenues over expenditures (1,383,286) (4,623,434) (1,411,998) 3,211,436 Budgeted Amounts CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2011 (CONTINUED) 64 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Other financing sources Proceeds from sale of capital assets - - 8,992 8,992 Insurance recoveries 39,632 47,959 45,334 (2,625) Transfers in 1,143,631 1,143,631 1,143,631 - Transfers out - (1,496,385) (828) 1,495,557 Total other financing sources 1,183,263 (304,795) 1,197,129 1,501,924 Net change in fund balances (200,023) (4,928,229) (214,869) 4,713,360 Fund balance, beginning of year 9,130,273 9,130,273 9,130,273 - Fund balance, end of year 8,930,250$ 4,202,044$ 8,915,404$ 4,713,360$ Budgeted Amounts CITY OF FRIENDSWOOD, TEXAS NOTES TO REQUIRED SUPPLEMENTARY INFORMATION 65 NOTE 1. BUDGETARY CONTROL The City’s Code of Ordinances establishes the following framework for the preparation and format of the City’s annual budget: Content The budget shall provide a complete financial plan of all City funds and activities and, except as required by law or this Charter, shall be in such form as the City Manager deems desirable or the Council may require. The budget shall begin with a clear general summary of its contents; shall show in detail all estimated income, the proposed property tax levy, and all proposed expenditures for the ensuing fiscal year, including debt service and an itemized estimate of the expense of conducting each Department of the City. The proposed budget expenditures shall not exceed the total of estimated income. It shall also include, in separate sections: (1) Tax levies, rates, and collections for the preceding five years. (2) The amount required for interest on the City's debts, for sinking fund and for maturing serial bonds. (3) The total amount of outstanding City debts, with a schedule of maturities on bond issues. (4) Anticipated net surplus or deficit for the ensuing fiscal year of each utility owned or operated by the City and the proposed method of its disposition, subsidiary budgets for each such utility giving detailed income and expenditure information shall be attached as appendices to the budget. (5) A capital program, which may be revised and extended each year to indicate capital improvements pending or in process of construction or acquisition, and shall include the following items which shall be attached as appendices to the budget: (a) A summary of proposed programs; (b) A list of all capital improvements which are proposed to be undertaken during the five fiscal years next ensuing, with appropriate supporting informat ion as to the necessity for such improvements; (c) Cost estimates, method of financing and recommended time schedules for each such improvement; and (d) The estimated annual cost of operating and maintaining the facilities to bid constructed or acquired. (6) Such other information as may be required by the Council. Submission On or before the first day of August of each year, the City Manager shall submit to the Council a proposed budget and an accompanying message. The Council shall review the proposed budget and revise as deemed appropriate prior to general circulation for public hearing. CITY OF FRIENDSWOOD, TEXAS NOTES TO REQUIRED SUPPLEMENTARY INFORMATION 66 NOTE 1. BUDGETARY CONTROL – CONTINUED Public Notice and Hearing The Council shall post in the City Hall and publish in the official newspaper a general summary of their [its] proposed budget and a notice stating: (1) The times and places where copies of the message and budget are available for inspection by the public; and (2) The time and place, not less than ten nor more than 30 days after such publication, for a public hearing on the budget. Amendment Before Adoption After the public hearing, the Council may adopt the budget with or without amendment. In amending the budget, it may add or increase programs or amounts and may delete or decrease any programs or amounts, except expenditures required by law or for debt service or for estimated cash deficit, provided that no amendment to the budget shall increase the authorized expenditures to an amount greater than the total of estimated income plus funds available from prior years. Adoption The Council shall adopt its annual budget inclusive of all governmental and proprietary funds by ordinance, on one reading, by the 15th day of September or as soon thereafter as practical. The City legally adopts annual budgets for the general, special revenue and debt service funds. The budgets are adopted on a basis consistent with generally accepted accounting principles. If the Council fails to adopt an annual budget before the start of the fiscal year to which it applies, appropriations of the last budget adopted shall be considered as adopted for the current fiscal year on a month to month, pro rata basis, until the annual budget is adopted. Adoption of the budget shall require an affirmative vote of at least a majority of all members of the Council. Adoption of the budget shall constitute appropriations of the amounts specified therein as expenditures from the funds indicated. CITY OF FRIENDSWOOD, TEXAS NOTES TO REQUIRED SUPPLEMENTARY INFORMATION 67 NOTE 1. BUDGETARY CONTROL – CONTINUED Amendments After Adoption At any time during the fiscal year, the City Manager may transfer part or all of any unencumbered appropriation balance among programs within a department, division, or office, and, upon written request by the City Manager, the Council may by ordinance transfer part or all of any unencumbered appropriation balance from one department, office, or agency to another. No appropriation for debt service may be reduced or transferred and no appropriation may be reduced below any amount required by law to be appropriated or by more than the amount of the unencumbered balance thereof. The City Council made supplemental budgetary appropriation changes during the fiscal year. The reported budgetary data has been revised for these amendments legally authorized during the year. COMBINING AND INDIVIDUAL FUND STATEMENTS AND SCHEDULES NON MAJOR GOVERNMENTAL FUNDS 68 SPECIAL REVENUE FUNDS Special revenue funds are used to account for specific revenues that are legally restricted to expenditures for particular purposes. Police Investigation Fund – This fund is used to account for revenues that are restricted to police investigation expenditures. Fire/EMS Donation Fund – This fund accounts for revenues that are restricted for Fire/EMS capital outlays and debt repayments. EDA Grant Fund – This fund is used to account for receipts and expenditures related to the U.S. Department of Commerce Economic Development Administration grant awarded to the City in fiscal year 2008-2009. TDRA Grant Fund – This fund is used to account for receipts and expenditures related to the Texas Community Development Block Grant awarded to the City in fiscal year 2009-2010. Sidewalk Installation Fund – This fund is used to account for receipts from developers to install sidewalks in neighborhood developments. Park Land Dedication Fund – This fund is used to account for receipts from developers to build or enhance neighborhood and community parks. Court Security and Technology Fund – This fund accounts for revenues that are restricted for court technology and building security. In 1999, the state legislature authorized a court technology and court security fee for municipal court fines. CAPITAL PROJECT FUNDS Capital project funds are used to account for the acquisition and construction of major capital facilities other than those financed by proprietary funds and trust funds. Bond Construction Fund – This fund is used to account for the construction of public safety facilities, and park, streets and drainage improvements that are funded by the proceeds from Permanent Improvement Bonds. PERMANENT FUND The Permanent Fund is used to report resources that are legally restricted to the extent that only earnings, not principal, may be used for purposes that support the City’s programs. 1776 Park Fund – This fund is used to account for assets held by the City in a trustee capacity and the earnings benefit this City Park. CITY OF FRIENDSWOOD, TEXAS COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS SEPTEMBER 30, 2011 69 Capital Projects Permanent Court Total Nonmajor Police Fire/EMS EDA TDRA Sidewalk Park Land Security and Bond Governmental Investigation Donation Grant Grant Installation Dedication Technology Construction 1776 Park Funds Cash and investments 38,441$ 75,342$ 619,525$ 480,891$ 11$ 289,977$ 264,104$ 3,218,545$ 30,847$ 5,017,683$ Receivables, net of allowance Customer accounts - 30,821 - - - - - - - 30,821 Other 40 33 328,064 1,155,515 4 232 4,554 - 22 1,488,464 Total assets 38,481$ 106,196$ 947,589$ 1,636,406$ 15$ 290,209$ 268,658$ 3,218,545$ 30,869$ 6,536,968$ LIABILITIES Accounts payable 1,699$ 45,958$ - $ 55,544$ - $ - $ - $ 15,489$ - $ 118,690$ Accrued liabilities - - 47,589 85,305 - - 226 - - 133,120 Due to other funds - - 900,000 1,495,557 - - - - - 2,395,557 Deferred revenue - - - - - - 4,540 - - 4,540 Total liabilities 1,699 45,958 947,589 1,636,406 - - 4,766 15,489 - 2,651,907 FUND BALANCES Nonspendable - - - - - - 30,869 30,869 Restricted Authorized construction - - - - - - - 3,203,056 - 3,203,056 State and/or federal statute 36,782 - - - - - 263,892 - - 300,674 Fire/EMS donations - 60,238 - - - - - - - 60,238 City ordinances - - - - 15 290,209 - - - 290,224 Total fund balances 36,782 60,238 - - 15 290,209 263,892 3,203,056 30,869 3,885,061 Total liabilities and fund balances 38,481$ 106,196$ 947,589$ 1,636,406$ 15$ 290,209$ 268,658$ 3,218,545$ 30,869$ 6,536,968$ ASSETS LIABILITIES AND FUND BALANCES Special Revenue Funds CITY OF FRIENDSWOOD, TEXAS COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS YEAR ENDED SEPTEMBER 30, 2011 70 Capital Projects Funds Permanent Total Court Nonmajor Police Fire/EMS EDA TDRA Sidewalk Park Land Security and Bond Governmental Investigation Donation Grant Grant Installation Dedication Technology Construction 1776 Park Funds Revenues Fines and forfeitures - $ - $ - $ - $ - $ - $ 39,914$ - $ - $ 39,914$ Permits and fees - - - - - 52,220 - - - 52,220 Intergovernmental 62,438 - 1,090,038 1,310,099 - - - - - 2,462,575 Investment earnings 223 156 - - 15 1,537 - 5,108 149 7,188 Donations - 248,663 - - - - - - - 248,663 Total revenues 62,661 248,819 1,090,038 1,310,099 15 53,757 39,914 5,108 149 2,810,560 Expenditures Current: General government - - - 66,725 - - 6,634 - - 73,359 Public safety 38,641 179,481 - - - - - - - 218,122 Capital outlay 20,000 - 981,816 1,243,374 - 7,000 - 287,052 - 2,539,242 Debt service: Principal - 46,303 - - - - - - - 46,303 Interest and fiscal charges - 15,598 - - - - - - - 15,598 Total expenditures 58,641 241,382 981,816 1,310,099 - 7,000 6,634 287,052 - 2,892,624 Other financing sources (uses) Proceeds from bond issuance - - - - - - - 3,460,000 - 3,460,000 Premium on issuance of bonds - - - - - - - 117,261 - 117,261 Transfers out - - (900,000) - - (50,000) - (92,261) - (1,042,261) Total other financing sources (uses)- - (900,000) - - (50,000) - 3,485,000 - 2,535,000 Net change in fund balances 4,020 7,437 (791,778) - 15 (3,243) 33,280 3,203,056 149 2,452,936 Fund balances, beginning of year 32,762 52,801 791,778 - - 293,452 230,612 - 30,720 1,432,125 Fund balances, end of year 36,782$ 60,238$ - $ - $ 15$ 290,209$ 263,892$ 3,203,056$ 30,869$ 3,885,061$ Special Revenue Funds CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL FIRE/EMS DONATION FUND YEAR ENDED SEPTEMBER 30, 2011 71 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Revenues Interest income 100$ 100$ 156$ 56$ Donations 251,209 251,209 248,663 (2,546) Total revenues 251,309 251,309 248,819 (2,490) Expenditures Current Public safety 189,408 189,408 179,481 9,927 Debt service Principal 46,303 46,303 46,303 - Interest and fiscal charges 15,598 15,598 15,598 - Total expenditures 251,309 251,309 241,382 9,927 Net change in fund balance - - 7,437 7,437 Fund balance, beginning of year 52,801 52,801 52,801 - Fund balance, end of year 52,801$ 52,801$ 60,238$ 7,437$ Budgeted Amounts CITY OF FRIENDSWOOD, TEXAS SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE – BUDGET AND ACTUAL DEBT SERVICE FUND YEAR ENDED SEPTEMBER 30, 2011 72 Variance With Final Budget Actual Positive Original Final Amounts (Negative) Revenues Property taxes 1,550,719$ 1,519,822$ 1,557,269$ 37,447$ Interest income 6,813 6,813 2,968 (3,845) Total revenues 1,557,532 1,526,635 1,560,237 33,602 Expenditures Debt service Principal 880,453 934,764 1,019,562 (84,798) Interest and fiscal charges 652,658 749,272 849,148 (99,876) Bond issuance costs - 225,460 200,227 25,233 Total expenditures 1,533,111 1,909,496 2,068,937 (159,441) Excess (deficiency) of revenues over expenditures 24,421 (382,861) (508,700) (125,839) Other financing sources (uses) Issuance of refunding bonds - 265,192 5,460,000 5,194,808 Premium on issuance of bonds - - 200,191 200,191 Payments to escrow agent - (129,943) - 129,943 Transfers in - 92,261 92,261 - Transfers out - - (5,529,943) (5,529,943) Total other financing sources - 227,510 222,509 (5,001) Net change in fund balance 24,421 (155,351) (286,191) (130,840) Fund balance, beginning of year 594,422 594,422 594,422 - Fund balance, end of year 618,843$ 439,071$ 308,231$ (130,840)$ Budgeted Amounts STATISTICAL SECTION (Unaudited) This part of the City of Friendswood, Texas’ comprehensive annual financial report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about the government’s overall financial health. FINANCIAL TRENDS INFORMATION - information to help the reader understand how the City's financial performance and well-being have changed over time. 1 Net assets by component 2 Changes in net assets 3 Fund balances, governmental funds 4 Changes in fund balances, governmental funds REVENUE CAPACITY INFORMATION - information to help the reader assess the City's most significant local revenue source, the property tax. 5 Assessed value and actual value of taxable property 6 Direct and overlapping property tax rates 7 Principal property tax payers 8 Property tax levies and collections DEBT CAPACITY INFORMATION - information to help the reader assess the affordability of the City's current levels of outstanding debt and the City's ability to issue additional debt in the future. 9 Ratios of outstanding debt by type 10 Ratios of general bonded debt outstanding 11 Direct and overlapping governmental activities debt 12 Legal debt margin information 13 Pledged-revenue coverage DEMOGRAPHIC AND ECONOMIC INFORMATION - information to help the reader understand the environment within which the City's financial activities take place, and to help make comparisons over time and with other governments. 14 Demographic and economic statistics 15 Principal employers OPERATING INFORMATION - service and infrastructure data to help the reader understand how the information in the City's financial report relates to the services the City provides and the activities it performs. 16 Full-time equivalent city government employees by function/program 17 Operating indicators by function/program 18 Capital asset statistics by function/program Sources: Unless otherwise noted, the information in these schedules is derived from the comprehensive annual financial reports for the relevant year. STATISTICAL SECTION (Unaudited) 73 Table 1 City of Friendswood Net Assets by Component Last Nine Fiscal Years (accrual basis of accounting) (unaudited) 2003 2004 2005 2006 2007 2008 2009 2010 2011 Governmental activities Invested in capital assets, net of related debt 49,742,075$ 29,632,831$ 32,533,863$ 32,849,446$ 71,777,140$ 70,591,236$ 69,313,348$ 70,480,334$ 66,580,049$ Restricted 585,080 1,271,568 1,576,829 2,034,157 2,391,482 2,773,910 2,461,510 1,977,801 922,874 Unrestricted 5,468,870 7,125,997 7,527,573 10,391,123 10,785,998 10,548,129 9,892,077 8,447,179 8,227,254 Total governmental activities net assets 55,796,025$ 38,030,396$ 41,638,265$ 45,274,726$ 84,954,620$ 83,913,275$ 81,666,935$ 80,905,314$ 75,730,177$ Business-type activities Invested in capital assets, net of related debt 17,656,296$ 17,174,525$ 16,823,526$ 16,815,130$ 16,884,376$ 20,375,620$ 21,122,644$ 19,565,756$ 26,251,346$ Restricted 305,660 444,548 445,086 41,057 162,218 27,246 93,526 593,597 731,410 Unrestricted 4,058,223 4,337,137 5,228,802 6,574,920 7,475,597 4,227,253 6,730,812 8,677,882 11,373,311 Total business-type activities net assets 22,020,179$ 21,956,210$ 22,497,414$ 23,431,107$ 24,522,191$ 24,630,119$ 27,946,982$ 28,837,235$ 38,356,067$ Primary government Invested in capital assets, net of related debt 67,398,371$ 46,807,356$ 49,357,389$ 49,664,576$ 88,661,516$ 90,966,856$ 90,435,992$ 90,046,090$ 92,831,395$ Restricted 890,740 1,716,116 2,021,915 2,075,214 2,553,700 2,801,156 2,555,036 2,571,398 1,654,284 Unrestricted 9,527,093 11,463,134 12,756,375 16,966,043 18,261,595 14,775,382 16,622,889 17,125,061 19,600,565 Total primary government net assets 77,816,204$ 59,986,606$ 64,135,679$ 68,705,833$ 109,476,811$ 108,543,394$ 109,613,917$ 109,742,549$ 114,086,244$ Note:Accrual-basis financial information for the city as a whole is only available back to fiscal year 2003, the year GASB Statement 34 was implemented. Fiscal Year 74 Table 2 City of Friendswood Changes in Net Assets Last Nine Fiscal Years (accrual basis of accounting) (unaudited) 2003 2004 2005 2006 2007 2008 2009 2010 2011 Expenses Governmental activities: General government 2,923,552$ 3,375,283$ 3,438,849$ 3,330,439$ 4,472,602$ 4,339,620$ 5,164,623$ 5,145,447$ 4,876,064$ Public safety 5,760,097 6,026,272 7,318,886 7,060,800 7,565,797 12,652,812 14,929,941 10,175,028 10,548,568 Community development and public works 3,383,229 2,569,356 2,576,447 2,813,857 5,475,447 4,921,298 5,292,000 - - Public works - - - - - - - 3,853,685 3,517,707 Community development - - - - - - - 1,203,204 1,284,188 Community services 2,747,438 3,081,717 3,075,023 3,098,013 3,420,244 3,841,387 4,002,165 3,034,523 3,058,313 Library - - - - - - - 979,084 979,978 Interest and fiscal charges 128,192 465,770 478,495 857,602 835,511 803,733 678,705 789,652 871,790 Total governmental activities expenses 14,942,508 15,518,398 16,887,700 17,160,711 21,769,601 26,558,850 30,067,434 25,180,623 25,136,608 Business-type activities: Water and sewer 5,457,496 5,614,077 6,251,251 6,078,881 5,711,063 6,523,501 6,640,062 6,663,308 6,955,505 Interest and fiscal charges 1,063,940 999,219 963,355 962,989 1,583,551 1,543,859 1,604,174 2,037,104 1,644,074 Total business-type activities expenses 6,521,436 6,613,296 7,214,606 7,041,870 7,294,614 8,067,360 8,244,236 8,700,412 8,599,579 Total primary government expenses 21,463,944 22,131,694 24,102,306 24,202,581 29,064,215 34,626,210 38,311,670 33,881,035 33,736,187 Program Revenues Governmental activities: Charges for services General government 647,958 958,665 1,176,086 1,238,631 1,353,160 1,178,523 1,327,484 1,072,289 1,158,392 Public safety 9,433 9,141 15,013 54,653 23,267 21,356 46,773 38,438 39,914 Community development and public works 1,865,086 822,927 758,487 805,710 998,625 838,060 602,265 - - Public works - - - - - - - 152,163 158,858 Community development - - - - - - - 550,286 643,150 Community services 66,862 65,850 66,281 112,681 219,944 132,244 411,207 258,030 267,837 Library - - - - - - - 44,313 43,147 Operating grants and contributions 661,568 778,261 1,271,119 771,477 489,707 4,021,908 5,755,038 2,819,418 3,150,808 Capital grants and contributions 749,772 239,200 235,300 - - - - - - Total governmental activities program revenues 4,000,679 2,874,044 3,522,286 2,983,152 3,084,703 6,192,091 8,142,767 4,934,937 5,462,106 Business-type activities: Charges for services Water and sewer 7,275,746 7,203,736 8,390,761 8,392,277 8,021,040 8,624,546 12,028,895 9,854,083 12,726,936 Total business-type activities program revenues 7,275,746 7,203,736 8,390,761 8,392,277 8,021,040 8,624,546 12,028,895 9,854,083 12,726,936 Total primary government program revenues 11,276,425 10,077,780 11,913,047 11,375,429 11,105,743 14,816,637 20,171,662 14,789,020 18,189,042 Net (Expense)/Revenues Governmental activities (10,941,829) (12,644,354) (13,365,414) (14,177,559) (18,684,898) (20,366,759) (21,924,667) (20,245,686) (19,674,502) Business-type activities 754,310 590,440 1,176,155 1,350,407 726,426 557,186 3,784,659 1,153,671 4,127,357 Total primary government net expense (10,187,519)$ (12,053,914)$ (12,189,259)$ (12,827,152)$ (17,958,472)$ (19,809,573)$ (18,140,008)$ (19,092,015)$ (15,547,145)$ (Continued) Fiscal Year 75 2003 2004 2005 2006 2007 2008 2009 2010 2011 General Revenues and Other Changes in Net Assets Governmental activities: Taxes Property 9,706,202$ 10,931,393$ 11,352,598$ 11,304,684$ 11,876,246$ 12,512,950$ 13,481,500$ 13,664,765$ 13,944,725$ Sales 2,875,071 1,119,328 3,199,136 3,658,699 3,904,436 3,767,526 3,871,995 3,853,161 4,002,740 Franchise 1,058,726 2,833,290 1,176,460 1,220,581 1,239,167 1,317,166 1,363,221 1,510,794 1,598,407 Other 79,691 71,028 53,790 11,940 16,186 25,429 28,859 28,859 28,883 Investment earnings 154,558 219,085 376,435 915,710 1,063,715 648,301 166,492 93,018 110,863 Gain (loss) on sale of capital assets - - - - 345,976 - 4,320 33,647 23,831 Miscellaneous 30,826 - 51,503 21,556 4,152 73,026 214,484 131,545 126,228 Transfers 664,102 714,278 763,361 680,850 875,616 981,016 547,456 168,276 (5,336,312) Total governmental activities 14,569,176 15,888,402 16,973,283 17,814,020 19,325,494 19,325,414 19,678,327 19,484,065 14,499,365 Business-type activities: Investment earnings 160,629 59,869 114,932 262,761 1,236,092 531,758 128,338 87,056 55,163 Gain (loss) on sale of capital assets - - - - - - (48,678) (182,198) - Miscellaneous 12,777 - 13,478 1,375 4,182 - - - - Extraordinary item 100,000 - - - - - - - - Transfers (664,102) (714,278) (763,361) (680,850) (875,616) (981,016) (547,456) (168,276) 5,336,312 Total business-type activities (390,696) (654,409) (634,951) (416,714) 364,658 (449,258) (467,796) (263,418) 5,391,475 Total primary government 14,178,480 15,233,993 16,338,332 17,397,306 19,690,152 18,876,156 19,210,531 19,220,647 19,890,840 Change in Net Assets Governmental activities 3,627,347 3,244,048 3,607,869 3,636,461 640,596 (1,041,345) (2,246,340) (761,621) (5,175,137) Business-type activities 363,614 (63,969) 541,204 933,693 1,091,084 107,928 3,316,863 890,253 9,518,832 Total primary government 3,990,961$ 3,180,079$ 4,149,073$ 4,570,154$ 1,731,680$ (933,417)$ 1,070,523$ 128,632$ 4,343,695$ (Concluded) Note:Accrual-basis financial information for the city as a whole is only available back to fiscal year 2003, the year GASB Statement 34 was implemented. Community Development and Publics Works were shown as one department from 2003 to 2009. From 2003 to 2009, the Library was included with Community Services. Fiscal Year 76 Table 3 City of Friendswood Fund Balances, Governmental Funds Last Ten Fiscal Years (modified accrual basis of accounting) (unaudited) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 General Fund Reserved 1,196,255$ 683,459$ 635,182$ 511,197$ 1,313,829$ 601,646$ 1,037,279$ 686,404$ 1,731,056$ -$ Unreserved 2,766,577 5,055,679 5,971,319 7,032,843 8,973,646 9,926,479 9,177,390 9,185,590 7,399,217 - Nonspendable - - - - - - - - - 220,151 Restricted - - - - - - - - - 97,728 Assigned - - - - - - - - - 1,085,527 Unassigned - - - - - - - - - 7,511,998 Total general fund 3,962,832$ 5,739,138$ 6,606,501$ 7,544,040$ 10,287,475$ 10,528,125$ 10,214,669$ 9,871,994$ 9,130,273$ 8,915,404$ All Other Governmental Funds Reserved 109,799$ 254,568$ 829,701$ 1,395,767$ 4,220,225$ 3,575,592$ 2,310,481$ 1,385,265$ 667,682$ -$ Unreserved, reported in:- - - - - - - - - - Special revenue funds 177,390 263,242 411,229 175,192 404,749 558,653 643,223 1,075,343 1,328,145 - Capital projects funds - 7,342,304 5,171,662 8,584,781 3,943,654 1,957,116 323,597 326,600 - - Permanent fund 24,707 25,232 25,587 26,292 27,477 28,901 30,070 30,507 30,720 - Nonspendable - - - - - - - - - 30,869 Restricted - - - - - - - - - 4,162,423 Total all other governmental funds 311,896$ 7,885,346$ 6,438,179$ 10,182,032$ 8,596,105$ 6,120,262$ 3,307,371$ 2,817,715$ 2,026,547$ 4,193,292$ Note: In fiscal year 2011, the City implemented GASB 54 which changed the fund balance classifications to nonspendable, restricted, committed, assigned and unassigned. See Note 1 to the Basic Financial Statements. Fiscal Year 77 Table 4 City of Friendswood Changes in Fund Balances, Governmental Funds Last Ten Fiscal Years (modified accrual basis of accounting) (unaudited) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Revenues Taxes 12,515,917$ 13,688,737$ 14,843,855$ 15,779,126$ 16,190,756$ 16,961,818$ 17,606,273$ 18,763,998$ 19,104,625$ 19,592,092$ Fines and penalties 631,066 639,678 879,369 1,112,916 1,163,984 1,288,794 1,161,903 1,143,102 1,043,126 1,012,592 Licenses and permits 922,808 856,721 807,041 717,607 769,352 1,017,502 944,756 966,797 960,479 1,069,845 Intergovernmental 16,294,283 526,316 795,325 985,339 535,074 248,702 3,801,013 5,794,303 2,652,037 3,109,645 Investment earnings 269,109 153,848 218,419 375,123 906,552 1,054,698 639,402 161,106 90,337 109,272 Donations - 235,749 215,535 213,381 219,353 229,939 265,535 272,911 280,223 276,209 Other revenues 509,560 794,228 152,616 414,923 277,995 279,788 37,876 34,448 81,366 78,243 Total revenues 31,142,743 16,895,277 17,912,160 19,598,415 20,063,066 21,081,241 24,456,758 27,136,665 24,212,193 25,247,898 Expenditures General government 2,897,613 3,042,541 3,249,965 3,420,274 3,315,844 4,605,245 4,114,662 4,178,062 4,224,384 4,397,858 Public safety 4,961,812 5,530,953 5,810,503 7,127,975 6,903,806 7,482,603 12,404,745 14,717,404 9,799,372 10,093,964 Community development and public works - 4,987,392 2,511,125 2,436,359 2,579,398 3,600,798 3,045,904 3,406,881 - - Public works 2,092,488 - - - - - - - 1,956,479 1,637,237 Community development 19,464,924 - - - - - - - 1,208,899 1,284,188 Community services 4,250,205 2,751,993 2,655,315 2,626,329 2,630,094 2,866,388 3,266,250 3,439,475 2,458,422 2,472,015 Library - - - - - - - - 979,084 979,978 Capital outlay 195,385 1,442,339 4,033,197 7,040,173 4,292,854 3,711,569 4,339,546 2,489,845 3,799,303 4,254,582 Debt principal payment 548,205 468,987 469,930 459,422 608,184 658,073 774,584 787,293 787,590 1,065,865 Interest and fiscal agent charges 188,958 213,741 476,207 594,076 757,402 739,487 704,136 691,638 773,744 864,746 Bond issuance costs and fees - - - - - - - - - 200,227 Total expenditures 34,599,590 18,437,946 19,206,242 23,704,608 21,087,582 23,664,163 28,649,827 29,710,598 25,987,277 27,250,660 Excess of revenues under expenditures (3,456,847) (1,542,669) (1,294,082) (4,106,193) (1,024,516) (2,582,922) (4,193,069) (2,573,933) (1,775,084) (2,002,762) Other Financing Sources (Uses) Sale of capital assets - 15,826 - - 187,345 785,942 22,600 - 23,340 8,992 Insurance recoveries - - - - - - 63,106 123,707 50,579 45,334 Issuance of debt 229,460 8,701,495 - 8,024,224 - - - - - 3,460,000 Capital lease proceeds - - - - - - - 1,133,460 - - Refunding bonds issued 1,629,707 - - - - - - - - 5,460,000 Payment to refunding bond escrow agent (1,611,304) - - - - - - - - - Premium on issuance of debt - - - - - - - - - 317,452 Transfer in 17,225,350 1,955,635 853,073 923,361 904,955 1,226,304 992,586 2,098,405 1,512,987 1,235,892 Transfer out (16,621,918) (1,382,860) (138,795) (160,000) (224,105) (350,688) (11,570) (1,613,970) (1,344,711) (6,573,032) Total other financing sources (uses)851,295 9,290,096 714,278 8,787,585 868,195 1,661,558 1,066,722 1,741,602 242,195 3,954,638 Net change in fund balance (2,605,552)$ 7,747,427$ (579,804)$ 4,681,392$ (156,321)$ (921,364)$ (3,126,347)$ (832,331)$ (1,532,889)$ 1,951,876$ Debt service as a percentage of noncapital expenditures 2.1%4.0%6.2%6.3%8.1%7.0%6.1%5.4%7.0%8.4% Note:From 1997 to 2002, Public Works and Community Development were two separate departments. From 2003 to 2009, the departments were combined. In 2010, they are shown as separate departments. In 2001 and 2002, the City participated in the FEMA Hazard Mitigation Grant Buyout Program. The City's participation costs resulted in a reduction of fund balance. In 2002, the City adopted a Financial Policy. Based on this policy, undesignated fund balance shall be allowed to accumulate to establish a 90-day operating reserve. After the reserve is established, additional undesignated funds are allowed to accumulate for future capital projects. Fiscal Year 78 Table 5 City of Friendswood Assessed Value and Actual Value of Taxable Property Last Ten Fiscal Years (Unaudited) Fiscal Total Estimated Year Commercial Total Taxable Direct Actual Ended Residential and Industrial Other Tax Exempt Assessed Tax Taxable September 30,Property Property Property Property Value Rate Value 2002 1,418,354,411$ 101,081,380$ 170,988,340$ 90,631,200$ 1,781,055,331$ 0.63850 1,690,424,131$ 2003 1,549,261,881 109,659,080 176,329,200 96,366,250 1,931,616,411 0.63850 1,835,250,161 2004 1,770,911,545 116,739,133 186,106,639 105,017,040 2,178,774,357 0.63850 2,073,757,317 2005 1,868,119,395 119,696,390 173,923,130 121,988,410 2,283,727,325 0.63850 2,161,738,915 2006 1,984,426,335 122,337,518 167,808,785 125,184,070 2,399,756,708 0.60400 2,274,572,638 2007 2,147,192,985 151,086,039 193,971,876 147,461,610 2,639,712,510 0.58210 2,492,250,900 2008 2,289,027,422 154,237,707 202,571,688 149,658,030 2,795,494,847 0.57640 2,645,836,817 2009 1,923,530,682 135,428,527 169,686,128 108,171,840 2,336,817,177 0.57970 2,228,645,337 2010 1,971,335,722 136,962,495 172,946,410 111,507,506 2,392,752,133 0.57970 2,281,244,627 2011 2,010,938,042 136,878,595 158,702,975 113,790,301 2,420,309,913 0.58510 2,306,519,612 Source: Galveston County Tax Assessor/Collector and City of Friendswood records. Note: Property in the City of Friendswood is reassessed once every two years on average. (Source: Galveston Central Appraisal District) Tax rates per $100 of assessed value. Residential property includes both single-family and multi-family properties. 79 Table 6 City of Friendswood Direct and Overlapping Property Tax Rates Last Ten Fiscal Years (unaudited) (rate per $100 of assessed value) Fiscal Year Friendswood Clear Creek Galveston County Ended Debt Total Independent Independent Drainage Galveston Harris September 30,General Service Direct School District School District District County County 2002 0.5547$ 0.0838$ 0.6385$ 1.6170$ 1.7250$ 0.1500$ 0.5654$ 0.63998$ 2003 0.5547 0.0838 0.6385 1.6370 1.7400 0.1550 0.6063 0.63998 2004 0.5547 0.0838 0.6385 1.6370 1.7300 0.1500 0.6063 0.63998 2005 0.5547 0.0838 0.6385 1.6370 1.7450 0.1483 0.6388 0.63998 2006 0.5243 0.0797 0.6040 1.5070 1.7750 0.1450 0.5874 0.63998 2007 0.5120 0.0701 0.5821 1.5700 1.6300 0.1450 0.5874 0.63998 2008 0.5016 0.0748 0.5764 1.1770 1.3200 0.1425 0.5686 0.62998 2009 0.5097 0.0700 0.5797 1.3670 1.3600 0.1425 0.5586 0.62998 2010 0.4997 0.0800 0.5797 1.3670 1.3600 0.1425 0.6186 0.62998 2011 0.5198 0.0653 0.5851 1.3670 1.3600 0.1425 0.6198 0.62998 Source: Galveston County Tax Assessor/Collector and City of Friendswood records. Note:Overlapping rates are those of local and county governments that apply to property owners within the City of Friendswood. Not all overlapping rates apply to all property owners. Overlapping rates for Friendswood Independent School District, Galveston County Consolidated Drainage District and Galveston County apply only to residents whose property is in Galveston County. Overlapping rates for Clear Creek Independent School District and Harris County apply only to residents whose property is in Harris County. City Direct Rates Overlapping Rates 80 Table 7 City of Friendswood Principal Property Tax Payers Current Year and Nine Years Ago (Unaudited) Percentage Percentage of Total City of Total City Taxable Taxable Taxable Taxable Assessed Assessed Assessed Assessed Taxpayer Value Value Value Value Texas-New Mexico Power Co. 10,225,400$ 0.43%7,772,680$ 0.56% H.E. Butt Grocery Company 8,489,480 0.36%- - HCP Friendswood LLC 6,995,240 0.29%- - Autumn Creek Dev LTD 5,762,590 0.14%7,701,520 0.55% Buzbee Family LTD Partnership 5,679,200 0.24%- - MB Friendswood Parkwood LP 5,383,320 0.22%- - Friendswood Retirement 5,379,393 0.22%8,369,445 0.60% Comcast of Houston LLC 4,413,130 0.18%- - Creekwood Associates LLC 4,367,180 0.18%- - HEB Pantry Foods 3,544,905 0.14%- - Kroger Texas, LP 3,486,520 0.15%- - Friendswood Huntington Woods 3,470,400 0.16%- - Friendswood Realty LP 3,419,464 0.14%- - Rebescher, J Michael & TR 3,295,830 0.14%- - Maxi-Ban LTD 3,184,380 0.15%- - Frontier Land V P L L 2,891,265 0.12%- - Howard, Jack A 2,636,610 0.15%- - Raton Plaza Shop Cntr Investors LTD 2,558,050 0.10%- - Buzbee Family Limited Partnership 2,509,010 0.11%- - Stuart, Edward F, Jr 2,583,220 0.11%- - Exxon Corporation - - 12,059,180 0.87% Southwestern Bell Telephone Co. - - 13,190,740 0.95% Blackhawk Apartments - - 9,235,710 0.67% Southwest Properties - - 7,907,970 0.57% Albertson's - - 5,880,495 0.42% Mystic LTD - - 3,933,640 0.28% ACMC Friendswood Inc.- - 4,929,600 0.36% Total 90,274,587 3.73%80,980,980 5.83% All other taxpayers 2,330,035,326 96.27%1,307,257,768 94.17% 2,420,309,913$ 100.00%1,388,238,748$ 100.00% Source: Galveston County Appraisal District 2011 2002 81 Table 8 City of Friendswood Property Tax Levies and Collections Last Ten Fiscal Years (Unaudited) Fiscal Collections Year Taxes Levied (adjustments) Ended for the Percentage in Subsequent Percentage September 30,Fiscal Year Amount of Levy Years Amount of Levy 2002 8,863,904$ 8,721,196$ 98.39%137,121$ 8,858,317$ 99.94% 2003 9,642,413 9,496,887 98.49%134,973 9,631,860 99.89% 2004 10,785,308 10,630,820 98.57%144,308 10,775,128 99.91% 2005 11,221,282 11,078,265 98.73%132,051 11,210,316 99.90% 2006 11,151,572 11,019,314 98.81%133,099 11,152,413 100.01% 2007 11,740,541 11,532,882 98.23%191,793 11,724,675 99.86% 2008 12,351,183 12,193,715 98.73%203,267 12,396,982 100.37% 2009 13,230,005 13,113,928 99.12%145,400 13,259,328 100.22% 2010 13,482,173 13,395,543 99.36%80,102 13,475,645 99.95% 2011 13,680,511 13,608,076 99.47%- 13,608,076 99.47% Source: Galveston County Tax Assessor/Collector and City of Friendswood records. Collected within the Fiscal Year of the Levy Total Collections to Date 82 Table 9 City of Friendswood Ratios of Outstanding Debt by Type Last Ten Fiscal Years (Unaudited) General Certificates General Certificates Water Total Percentage of Fiscal Obligation of Revenue Capital Obligation of Revenue Primary Personal Per Year Bonds Obligation Bonds Leases Bonds Obligation Bonds Government Income Capita 2002 1,915,518$ -$ -$ 713,060$ 2,994,109$ 2,714,826$ 14,091,221$ 22,428,734$ 0.28%670$ 2003 10,375,891 - - 510,858 2,468,558 2,635,000 14,185,000 30,175,307 0.36%893 2004 10,059,865 - - 362,154 1,830,135 2,535,000 14,160,000 28,947,154 0.33%848 2005 17,590,000 - - 237,597 3,310,000 470,000 14,020,000 35,627,597 0.39%1,040 2006 17,150,000 - - 168,957 2,855,000 280,000 30,665,000 51,118,957 0.50%1,490 2007 16,660,000 - - 96,380 2,375,000 50,000 30,515,000 49,696,380 0.46%1,430 2008 16,065,000 - - 16,351 1,680,000 - 30,355,000 48,116,351 0.41%1,355 2009 15,445,000 - - 982,518 865,000 - 42,260,000 59,552,518 0.50%1,582 2010 14,800,000 - - 839,928 - - 42,045,000 57,684,928 N/A 1,516 2011 22,885,000 - - 710,023 - - 35,205,000 58,800,023 N/A 1,579 Notes:Details regarding the City's outstanding debt can be found in the notes to the financial statements. See Table 14 for personal income and population data. These ratios are calculated using personal income and population for the prior calendar year. Personal income data provided on Table 14 is for the County of Galveston. Data was not available specific to the City of Friendswood and therefore is not included on this table. N/A - Information is not available. Governmental Activities Business-Type Activities 83 Table 10 City of Friendswood Ratios of Net General Bonded Debt Outstanding Last Ten Fiscal Years (Unaudited) Percentage of General Less Debt Net Actual Taxable Fiscal Assessed Obligation Service General Value of Per Year Population Value Bonds Funds Bonded Debt Property Capita 2002 33,500 1,781,055,331$ 1,915,518$ 109,799$ 1,805,719$ 0.10%54$ 2003 33,800 1,931,616,411 10,375,891 254,568 10,121,323 0.52%299 2004 34,152 2,178,774,357 10,059,865 829,701 9,230,164 0.42%270 2005 34,272 2,283,727,325 17,590,000 1,395,767 16,194,233 0.71%473 2006 34,306 2,399,756,708 17,150,000 1,595,397 15,554,603 0.65%453 2007 34,759 2,639,712,510 16,660,000 1,813,320 14,846,680 0.56%427 2008 35,500 2,795,494,847 16,065,000 2,104,376 13,960,624 0.50%393 2009 37,653 2,336,817,177 15,445,000 2,355,024 13,089,976 0.56%348 2010 38,057 2,392,752,133 14,800,000 594,422 14,205,578 0.59%373 2011 37,247 2,420,309,913 22,885,000 308,231 22,576,769 0.93%606 Note:Details regarding the City's outstanding debt can be found in the notes to the financial statements. General Bonded Debt Outstanding 84 Table 11 City of Friendswood Direct and Overlapping Governmental Activities Debt As of September 30, 2011 (Unaudited) Estimated Estimated Share of Debt Percentage Overlapping Governmental Unit Outstanding Applicable Debt Debt repaid with property taxes Friendswood Independent School District 113,589,978$ 100.00%113,589,978$ Clear Creek Independent School District 665,840,613 3.437%22,884,942 Galveston County 297,854,000 7.68%22,885,016 Harris County 3,338,619,000 0.548%18,285,616 Subtotal, overlapping debt 177,645,552 City direct debt 23,595,023 Total direct and overlapping debt 201,240,575$ Sources: Information was obtained from either the governmental unit's website or the finance department of the governmental unit. Notes: Overlapping governments are those that coincide, at least in part, with the geographic boundaries of the City. This schedule estimates the portion of the outstanding debt of those overlapping governments that is borne by the residents and businesses of the City of Friendswood. The City’s share of the debt of the overlapping governments is based on the ratio of the assessed value of the City’s own property to that of each of the other governments. This process recognizes that, when considering the City's ability to issue and repay long-term debt, the entire debt burden borne by the residents and businesses should be taken into account. However, this does not imply that every taxpayer is a resident--and therefore responsible for repaying the debt--of each overlapping government. 85 Table 12 City of Friendswood Legal Debt Margin Information (Unaudited) As a City Council-City Manager form of government, the City of Friendswood is not limited by law in the amount of debt it may issue. The City's charter states: "In keeping with the Constitution of the State of Texas and not contrary thereto, the City of Friendswood shall have the power to borrow money on the credit of the City for any public purpose not now or hereafter prohibited by the Constitution and laws of the State of Texas, and shall have the right to issue all tax bonds, revenue bonds, funding and refunding bonds, time warrants and other evidence of indebtedness as now authorized or as may hereafter be authorized to be issued by cities and towns by the laws of the State of Texas." Article 11, Section 5 of the State of Texas Constitution states in part: "but no tax for any purpose shall ever be lawful for any one year, which shall exceed two and one-half percent of the taxable property of such city" The tax rate for fiscal year ended September 30, 2011, is $.5851 per $100 of assessed valuation with assessed valuation being 100% of market value. 86 Table 13 City of Friendswood Pledged-Revenue Coverage Last Ten Fiscal Years (Unaudited) Utility Less:Net Fiscal Service Operating Available Debt Service Year Charges Expenses Revenue Principal Interest Coverage 2002 7,506,333$ 3,797,453$ 3,708,880$ 25,000$ 850,874$ 4.23$ 2003 7,275,746 4,401,694 2,874,052 25,000 772,351 3.60 2004 7,203,736 4,238,810 2,964,926 25,000 769,936 3.73 2005 8,390,761 4,769,885 3,620,876 140,000 766,788 3.99 2006 8,392,277 4,660,868 3,731,409 160,000 445,351 6.16 2007 8,021,040 4,338,819 3,682,221 150,000 1,441,234 2.31 2008 8,624,546 5,143,516 3,481,030 160,000 1,416,465 2.21 2009 12,028,895 5,249,388 6,779,507 215,000 1,986,015 3.08 2010 9,854,083 5,184,330 4,669,753 215,000 1,904,689 2.20 2011 12,726,936 5,410,497 7,316,439 1,440,000 1,640,437 2.38 Notes:Details regarding the City's outstanding debt can be found in the notes to the financial statements. Operating expenses do not include interest, depreciation or amortization expenses. Waterworks and Sewer Revenue Bonds 87 Table 14 City of Friendswood Demographic and Economic Statistics Last Ten Calendar Years (Unaudited) Per Personal Capita Calendar Estimated Income Personal Unemployment Year Population (thousands)Income Rate 2002 33,500 7,964,860,000$ 30,537$ 3.4% 2003 33,800 8,356,254,000 31,313 3.8% 2004 34,152 8,719,688,000 32,055 3.5% 2005 34,272 9,192,246,000 33,146 3.9% 2006 34,306 10,144,967,000 36,284 3.0% 2007 34,759 10,913,785,000 38,553 3.4% 2008 35,500 11,744,572,000 40,711 4.9% 2009 37,653 11,937,436,000 41,621 6.2% 2010 38,057 - - 7.1% 2011 37,247 - - 6.8% Sources:Population information was provided from past financial reports. Unemployment rates were obtained from the U. S. Department of Labor Bureau of Labor Statistics website or the Texas Workforce Commission website. Personal Income and Per Capita Personal Income were obtained from the U.S. Bureau of Economic Analysis website. Note:Personal Income and Per Capita Personal Income numbers are for Galveston County; 2010 and 2011 numbers were not available. 88 Table 15 City of Friendswood Principal Employers Current Year and Five Years Ago (Unaudited) Percentage Percentage Estimated of Total City Estimated of Total City Employer Employees Workforce Employees Workforce Friendswood ISD 676 26.57%675 34.84% HEB 350 13.76%275 14.19% Kroger 305 11.99%234 12.07% City of Friendswood 233 9.16%222 11.46% Clear Creek ISD 201 7.90%2 - 0.00%1 Friendship Haven Nursing Home 140 5.50%135 6.97% Friendswood Healthcare (Autumn Hills) 91 3.58%90 4.64% McDonalds 89 3.50%33 1.70% Emeritus 70 2.75%- 0.00% U.S. Post Office 57 2.24%70 3.61% UTMB 52 2.04%- 0.00%1 Timber Creek Golf Club 45 1.77%41 2.12% Melange 43 1.69%- 0.00% Sonic 42 1.65%49 2.53% Madre's Mexican Restaurant 41 1.61%- 0.00% Luna's Mexican Restaurant 40 1.57%40 2.06% Perry & Sons Market and Grille 35 1.38%- 0.00%1 Village on the Park 34 1.34%34 1.75% Gary Greene Realtors - 0.00%40 2.06% Total 2,544 100.00%1,938 100.00% Source: City Economic Development Division Note: Principal Employer data was not available for fiscal year 2001 - 2005. 1 Data was not available for fiscal year 2006. 2 Includes Wedgewood Elementary and Brookside Intermediate. 2011 2006 89 Table 16 City of Friendswood Full-time Equivalent City Government Employees by Function/Program Last Ten Fiscal Years (Unaudited) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Function/Program General Government: City Manager 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50 City Secretary 4.00 4.00 4.00 4.00 4.00 5.00 5.00 5.00 5.00 5.00 Administrative Services 20.64 21.70 22.72 24.44 25.81 26.19 27.20 27.20 27.20 27.20 Public Safety: Police 62.94 65.06 67.40 70.07 72.06 81.41 83.90 79.40 79.40 80.40 Fire marshall and fire 12.50 12.58 12.85 12.85 4.50 6.11 6.10 6.10 6.10 6.10 Public Works:17.00 - - - - - - - 19.00 19.00 Community Development:15.00 - - - - - - - 17.70 17.70 Community Development and Public Works:- 34.00 34.00 34.00 35.00 36.00 36.00 36.70 - - Community Services:30.42 30.43 30.43 30.43 31.01 32.18 32.20 32.20 18.95 18.95 Library - - - - - - - - 14.72 14.72 Water:9.00 9.00 9.00 9.00 9.00 9.00 9.00 10.30 10.30 10.30 Sewer:6.00 6.00 7.00 7.00 8.00 8.00 8.00 9.00 9.00 9.00 Total City Employees:183.00 188.27 192.90 197.29 194.88 209.39 212.90 211.40 212.87 213.87 Source: City of Friendswood Budget Documents Notes: Beginning with fiscal year 2006, the fulltime equivalent for Fire Marshal and Fire include only the Fire Marshal Department. The City has a contract with the Friendswood Volunteer Fire Department and there are no employees paid directly by the City. In 2002, public works and community development were two separate departments. From 2003 to 2009, the departments were combined. In 2010 and 2011, they are shown as two separate departments. Beginning in fiscal year 2010, the fulltime equivalent for Library is shown separate from Community Services. In previous years, the fulltime equivalent is included with Community Services. Full-time Equivalent Employees as of September 30 90 Table 17 City of Friendswood Operating Indicators by Function/Program Last Ten Fiscal Years (Unaudited) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Function/Program General Government: Building permits issued 1,266 1,048 851 1,129 882 975 872 1,189 984 1,222 Building inspections conducted 12,554 10,841 10,051 12,641 12,264 11,135 11,472 6,673 8,744 9,514 Police: Physical arrests 625 752 1,189 1,041 1,804 1,923 1,868 1,794 2,002 1,962 Parking violations 34 74 45 22 30 34 46 33 27 82 Traffic violations 6,387 9,754 11,196 12,053 12,623 11,374 7,897 7,821 7,000 7,291 Fire Marshall: Inspections 383 1,065 812 731 668 1,300 1,312 1,653 1,509 1,444 Fire: Emergency responses 2,264 2,285 2,395 2,453 2,497 2,723 2,794 2,950 2,737 2,818 Fires extinguished 84 79 82 93 75 74 118 102 110 108 Parks and Recreation: Recreation participants NA NA NA NA NA NA 7,547 12,283 13,792 13,894 Facility reservations NA NA NA NA NA 1,115 1,065 1,727 1,451 503 Library: Volumes in collection 87,639 88,185 88,737 90,163 92,633 93,028 96,100 94,512 99,880 97,622 Total volumes borrowed 279,850 290,044 280,520 281,060 300,241 308,718 323,323 350,892 356,787 349,223 Water: New connections 242 270 388 208 209 289 202 46 160 173 Water main breaks - 10 54 76 105 44 73 73 64 516 Average daily consumption 4,008 4,172 3,957 4,094 3,886 3,472 4,217 4,209 3,408 6,406 (thousands of gallons) Peak daily consumption 10,081 11,491 10,718 9,935 7,030 6,358 11,004 7,187 7,606 13,698 Sewer: Average daily sewage treatment 3,050 3,332 3,258 3,081 3,064 3,425 3,120 2,950 3,465 2,787 (thousands of gallons) Maximum daily flow 13,913 10,180 8,563 10,587 10,484 10,484 7,520 9,537 11,393 10,833 (thousands of gallons) Source: Various City departments and prior year CAFRs NA - Information is not available. Fiscal Year Fiscal Year 91 Table 18 City of Friendswood Capital Asset Statistics by Function/Program Last Ten Fiscal Years (Unaudited) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Function/Program Police Stations 1 1 1 1 1 1 1 1 1 1 Patrol units 14 15 15 16 18 28 27 24 26 26 Fire Stations 3 3 3 3 3 3 3 4 4 4 Public Works Streets - paved (miles)105 105 157 157 179 150 159 160 161 162 Streets - unpaved (miles)1 1 4 4 1 0 2 2 2 2 Traffic signals 0 0 3 3 3 3 3 3 3 3 Parks and Recreation Acreage 189 189 189 189 189 189 189 189 189 189 Public Safety:Parks 8 8 8 8 8 8 8 8 8 8 Swimming pool 1 1 1 1 1 1 1 1 1 1 Tennis courts 4 4 4 4 4 4 4 4 4 4 Library 1 1 1 1 1 1 1 1 1 1 Water Water mains (miles)157 160 160 165 179 180 180 181 183 184 Fire hydrants 1,250 1,250 1,250 1,250 1,250 1,275 1,275 1,275 1,305 1,324 Connections 10,330 10,600 10,988 11,196 11,405 11,748 11,982 12,057 12,231 12,476 Storage capacity 5,993 5,993 5,993 5,993 5,993 5,993 5,993 5,993 5,993 7,500 (thousands of gallons) Sewer Sanitary sewers (miles)155 160 160 165 153 155 155 156 158 159 Connections 9,658 10,240 10,331 10,537 10,682 10,902 11,115 11,256 11,404 11,563 Storm sewers (miles)85 86 92 92 92 95 95 96 98 99 Treatment capacity 4,850 4,850 4,850 4,850 4,850 4,850 4,850 4,850 4,850 4,850 (thousands of gallons) Source: Various City departments and prior year CAFRs Fiscal Year