The Utilities Board of the City of Ozark, Alabama
FINANCIAL STATEMENTS
For The Year Ended September 30, 2016
The Utilities Board of the City of Ozark, Alabama Table of Contents September 30, 2016 REPORT Independent Auditors’ Report FINANCIAL STATEMENTS Management’s Discussion and Analysis (MD&A) Statement of Net Position Statement of Revenues, Expenses, and Changes in Net Position Statement of Cash Flows Notes to Financial Statements Required Supplementary Information: Schedule of Funding Progress for the Retiree Health Plan Schedule of Changes in Net Pension Liability Schedule of Employer Contributions Other Supplementary Information: Schedules of Bond Amortization Requirements Schedules of Operating Revenues ‐ Water and Sewer Schedules of Operating Expenses ‐ Water Schedules of Operating Expenses ‐ Sewer Independent Auditors’ Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards
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4
8
10
12
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32 33 34
35 37 38 39
40
INDEPENDENT AUDITORS' REPORT To the Board of Directors of The Utilities Board of the City of Ozark, Alabama Report on the Financial Statements We have audited the accompanying financial statements of the Utilities Board of the City of Ozark, Alabama (the “Board”) as of and for the year ended September 30, 2016, and the related notes to the financial statements, which collectively comprise the Board's basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. ‐ 1 ‐
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Board, as of September 30, 2016, and the respective changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 4 through 7, schedule of funding progress on page 32, schedule of changes in net pension liability on page 33, and schedule of employer contributions on page 34 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Board’s basic financial statements. The schedules of bond amortization requirements (pages 35 and 36), schedules of operating revenues – water and sewer (page 38), schedules of operating expenses – water (page 38), and schedules of operating expenses – sewer (page 39) are presented for purposes of additional analysis and are not a required part of the basic financial statements. The schedules of bond amortization requirements, schedules of operating revenues – water and sewer, schedules of operating expenses – water, and schedules of operating expenses – sewer have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 9, 2017, on our consideration of the Board's internal control over financial reporting and on our ‐ 2 ‐
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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board's internal control over financial reporting and compliance.
CARR, RIGGS & INGRAM, L.L.C. Enterprise, Alabama January 9, 2017
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MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) Our discussion and analysis of the financial performance of The Utilities Board of The City of Ozark, Alabama (the “Board”) provides an overview of the Board’s financial activities for the year ended September 30, 2016. This discussion should be read in conjunction with the Board’s financial statements. Financial Highlights The following are the financial highlights for the Board for the year ending September 30, 2016: The Board’s total assets increased by $188,881. This increase was primarily due to expenditures related to completion of capital and maintenance related projects. Total operating revenues increased from prior year revenues by $51,722. Operating revenue exceeded operating expenses by $378,755. Operating expenses increased by $76,308 from the previous reporting period primarily from an increase in maintenance and materials. Revenue to debt coverage for fiscal year 2016 was 1.47 which meets the bond covenants of 1.25. Overview of the Financial Statements This discussion and analysis are intended to serve as an introduction to the Board’s basic financial statements. The Board’s basic financial statements are comprised of 1) the statement of net position, 2) the statement of revenues, expenses, and changes in net position, 3) the statement of cash flows, and 4) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Financial Statements. The statement of net position presents information on all of the Board’s assets, deferred outflows, liabilities, and deferred inflows, with the difference between assets and deferred outflows and liabilities and deferred inflows reported as net position. Over time, increases or decreases in net position may serve as useful indicators of whether the financial position of the Board is improving or deteriorating. The statements of revenues, expenses, and changes in net position show the business‐type activity of the Board (water and sewer) and provide information regarding income and expenses, both operating and non‐operating, that affect net position. While income and direct expenses of the water system and the sewer system are shown separately, there are no external requirements to account for the activities separately. It is management’s decision to report income and direct expenses separately in order to provide support for rates and charged services rendered. Notes to the Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. The notes to the financial statement can be found on pages 13 through 31 of this report. Other Information. In addition to the basic financial statements and accompanying notes, this report also presents certain supplementary information that may be beneficial to the reader. ‐ 4 ‐
Condensed Statements of Net Position A comparison of condensed statements of net position information follows: September 30, September 30, 2016 2015
Assets Current assets Capital assets, net Other assets
$ 3,907,241 24,191,698 3,496,366
$ 3,692,220 24,462,074 3,252,130
Total assets
31,406,424
188,881
1,015,311
$ 215,021 (270,376) 244,236
31,595,305
Deferred outflows of resources
Variance
876,037
139,274
Liabilities Current liabilities Long‐term liabilities
946,513 817,267 129,246 19,195,530 18,437,965 757,565
Total liabilities
20,142,043
Deferred inflows of resources
19,255,232
48,620
886,811
86,098
(37,478)
Net Position $ 12,419,953 $ 12,941,131 $ (521,178) Condensed Statements of Revenues, Expenses and Changes in Net Position A comparison of condensed statements of revenues, expenses, and changes in net position follows:
September 30, September 30, 2016 2015
Operating revenues Operating expenses Non‐operating revenues (expenses)
$ 4,221,132 $ 4,169,410 $ 51,722 3,842,377 3,766,069 76,308 (899,933) (731,706) (168,227)
Variance
Change in net position $ (521,178) $ (328,365) $ (192,813) Financial Analysis As noted earlier, over time the change in net position may serve as a useful indicator of a utility’s financial position. In the case of the Board, assets and deferred outflows exceeded liabilities and deferred inflows by $12,419,953 at the close of the most recent fiscal year, which is a decrease of $521,178 over the past year. By far, the largest portion of the Board’s net position reflects its investment in capital assets (e.g., land, buildings, plants, distribution and collection lines, machinery, and equipment) net of related outstanding debt used to acquire those assets. ‐ 5 ‐
The Board uses these capital assets to provide services to the citizens of Ozark; consequently, these assets are not available for future spending. Although the Board’s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from user charges and other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Under the indentures of the various water and sewer revenue bonds, the Board is required to charge water and sewer tapping fees, as well as sewer usage fees, based on metered water use, for sewer service if the sewer is available to the customer. Funds restricted for debt service represent amounts deposited monthly into a restricted bank account for the current year’s payments of principal and interest. Certain funds are restricted as a Debt Service reserve requirement. These funds were reserved as a lump sum at the inception of the bonds. Amounts restricted for bond construction are held in restricted accounts for capital projects paid from the proceeds of various bond issues. All excess funds over and above what is needed for operations are available for pay‐as‐you‐go projects. Capital Asset and Debt Administration Capital Assets. The largest portion of the Board’s net position reflects a net investment in capital assets of $7,458,651 or 24% of total assets. This investment in capital assets includes land, buildings and system improvements, machinery and equipment, distribution and collection lines, and plants. Long‐term Debt. At the end of the 2016 fiscal year the Board had total bonded debt outstanding of $16,733,047 (including the current portion and net of discount/premium), an increase of $663,852 from the previous year primarily due to refunding of the Series 2007 bonds and issuance of the Series 2016 bonds. Next Year’s Budget and Rates These factors were considered in preparing the Board’s FY‐2017 Budget: The revenue projection was based on actual revenues for the past two years. There was a 4% increase in the cost of employee health insurance benefits. A 4.5% increase in salaries for all full‐time employees. Electricity and fuel costs were calculated with a 1% increase over the past fiscal year. The Board is in the fourth year of an annual water tank maintenance contract for seven tanks at an annual cost of $72,358. Utilizing approximately $10,000 for economic development. Capital improvements planned include approximately $2,000,000 remaining from the 2013 and 2016 bond issues. This leaves approximately $1,100,000 remaining for future projects. ‐ 6 ‐
Budget revenues are always impacted by the weather. Water sales increase during dry years and decrease during wet years. However, usage rate increases can reduce customer water usage. Long‐ range revenue versus expense projections indicates a need for an annual water and sewer rate increase per year, and the Board has voted to do so. Effective November 1, 2016, a 3% increase in the Usage Rate for both water and sewer and a 3% increase in the water and sewer Base Charge went into effect, which should increase the annual revenue by approximately $200,000, or $2.52 per month per customer. As a result of this planning, the Board now has the financial ability to complete some capital improvement projects phased out over several years instead of taking on more long‐term debt. The Board is currently in compliance with all federal and state environmental regulations and has made a commitment to ensure that the Board’s financial resources will not be detrimental to maintaining that compliance. There were permit violations at the Southside Wastewater Treatment Facility during fiscal year 2014 – 15 during the $2.1 million renovation of the 30‐year old facility that resulted in sanctions from the Alabama Department of Environmental Management (“ADEM”). The Board paid a fine of $8,350 to ADEM in 2016 for the violations. The Consent Order with ADEM will end in April of 2017 if the Board remains in compliance with all regulations. The Board is currently, and has been, in compliance with all regulations since May of 2015. Request for Information This financial report is designed to provide a general overview of the Board’s finances for all those with an interest. Questions concerning any of the information in this report or requests for additional information should be addressed to the General Manager, Post Office Box 1125, Ozark, Alabama 36361.
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The Utilities Board of the City of Ozark, Alabama Statement of Net Position September 30,
2016
Assets Current assets Cash and cash equivalents Investments Accounts receivable Inventories Prepaid expenses Accrued interest Total current assets Restricted assets Construction funds Bonds and interest funds Restricted for customer deposits
$ 2,209,550 910,177 683,174 83,768 17,347 3,225 3,907,241 2,984,807 80,305 229,970
Total restricted assets
3,295,082
Capital assets Land Construction in progress Buildings Utility plant Water distribution system Sewer system Equipment Waste water treatment facility
148,601 646,505 676,405 114,833 15,713,578 17,190,634 837,671 9,601,562
Total capital assets Accumulated depreciation Total capital assets, net of accumulated depreciation Other assets Unamortized bond insurance Total assets
44,929,789 (20,738,091) 24,191,698 201,284 31,595,305
Deferred Outflows of Resources Deferred outflows related to pension Deferred charge on refunding Total deferred outflows of resources
241,507 773,804 1,015,311 ‐Continued‐
See accompanying notes to the financial statements. ‐ 8 ‐
The Utilities Board of the City of Ozark, Alabama Statement of Net Position (Continued) September 30,
2016
Liabilities Current liabilities Accounts payable Accrued wages Compensated absences Payroll withholdings payable Utility taxes payable Note payable Total current liabilities Liabilities payable from restricted assets Interest payable Bonds payable Total current liabilities from restricted assets Long‐term debt Bonds payable, net Note payable Net pension liability Other post employment benefits Customer deposits Total long‐term debt Total liabilities
$ 221,706 40,167 158,349 3,179 13,702 30,656 467,759
43,754 435,000 478,754
16,298,047 451,339 1,715,345 500,384 230,415 19,195,530 20,142,043
Deferred Inflows of Resources Deferred inflows related to pension Net Position Net investment in capital assets Restricted for debt service Restricted for customer deposits Restricted for construction projects Unrestricted Total net position
See accompanying notes to the financial statements. ‐ 9 ‐
48,620
7,458,651 80,305 229,970 2,984,807 1,666,220 $ 12,419,953
The Utilities Board of the City of Ozark, Alabama Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended September 30, 2016
Operating Revenues Charges for service Tapping fees Service charges New service connections Penalties Other revenues Total operating revenues Operating Expenses Amortization Building and equipment repair Chemicals Computer expense Depreciation Dues and subscriptions Economic development Electric, power, and gas Employee and community relations Garbage collection expense Insurance Insurance ‐ employees Legal and professional Maintenance materials Mileage Miscellaneous Monitor and testing Office expense Payroll taxes Postal and freight Retirement Salaries Small tools Taxes Telephone Travel Vehicle expense Worthless accounts Total operating expenses
Water
Sewer
Total
$ 2,464,675 6,225 43,982 ‐ 57,769 16,640
$ 1,567,140 3,900 23,241 210 31,107 6,243
$ 4,031,815 10,125 67,223 210 88,876 22,883
2,589,291
1,631,841
4,221,132
5,258 68,829 15,854 7,839 385,953 2,103 6,500 284,286 14,605 ‐ 44,191 120,294 21,979 19,218 3,266 748 57,717 19,765 38,197 11,436 76,936 540,564 737 166,136 16,764 1,684 35,151 4,204
2,831 49,073 60,523 4,371 638,117 1,132 3,500 166,259 9,120 6,660 23,795 98,179 23,607 77,338 1,758 6,022 35,077 10,913 34,896 6,428 72,277 490,453 1,055 ‐ 10,907 570 33,602 3,700
8,089 117,902 76,377 12,210 1,024,070 3,235 10,000 450,545 23,725 6,660 67,986 218,473 45,586 96,556 5,024 6,770 92,794 30,678 73,093 17,864 149,213 1,031,017 1,792 166,136 27,671 2,254 68,753 7,904
1,970,214
1,872,163
3,842,377 ‐Continued‐
See accompanying notes to the financial statements. ‐ 10 ‐
The Utilities Board of the City of Ozark, Alabama Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended September 30, 2016 (Continued) Water Operating income (loss)
Sewer
Total
619,077 (240,322) 378,755
Nonoperating Revenues (Expenses) Interest income Bond expense Interest expense Total nonoperating revenues (expenses) Change in Net Position
6,091 (2,730) (588,316)
3,279 9,370 (1,470) (4,200) (316,787) (905,103)
(584,955) (314,978) (899,933) 34,122 (555,300) (521,178)
Net Position ‐ Beginning Net Position ‐ Ending
12,941,131 $ 12,419,953
See accompanying notes to the financial statements. ‐ 11 ‐
The Utilities Board of the City of Ozark, Alabama Statement of Cash Flows For the year ended September 30, Cash Flows From Operating Activities Receipts from customers and users Payments to suppliers Payments to and on behalf of employees Other receipts and payments, net Net cash provided by operating activities Cash Flows From Capital and Related Financing Activities Principal payments on long‐term debt Principal payments on revenue bonds Net proceeds from revenue bonds Bond agent fees and issuance costs Interest paid Purchase of property, plant and equipment Net cash used in capital and related financing activities Cash Flows From Investing Activities Interest received
2016 $ 4,203,886 (1,120,254) (1,432,898) (143,154) 1,507,580 (13,694) (6,410,000) 7,306,664 (76,700) (660,218) (907,000) (760,948) 9,370
Net Increase in Cash and Cash Equivalents
756,002
Cash and Cash Equivalents ‐ Beginning
4,748,630
Cash and Cash Equivalents ‐ Ending
$ 5,504,632
Reconciliation of Cash and Cash Equivalents to the Statement of Net Position: Cash and cash equivalents ‐ current assets Cash and cash equivalents ‐ noncurrent assets
$ 2,209,550 3,295,082
Cash and cash equivalents ‐ end of year
$ 5,504,632
Reconciliation of Operating Income to Net Cash Provided by Operating Activities: Operating income $ 378,755 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 1,032,159 Bad debt expense 7,904 Changes in operating assets and liabilities: Decrease in accounts receivable 5,637 Increase in inventories (1,354) Increase in prepaid expenses (11,015) Increase in deferred outflows related to pension (103,681) Increase in accounts payable 10,444 Increase in accrued expenses 16,840 Increase in net pension liability 144,816 Decrease in deferred inflows related to pension (37,478) Increase in other post retirement benefit obligations 55,962 Increase in customer deposits 8,591 Net cash provided by operating activities
See accompanying notes to the financial statements. ‐ 12 ‐
$ 1,507,580
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Utilities Board of the City of Ozark, Alabama (the “Board”) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP”) and reporting guidelines established by the Governmental Accounting Standards Board (“GASB”). The following notes to the financial statements are an integral part of the Board’s financial statements. Reporting Entity The Board is the primary government with oversight responsibility and control over activities related to the supply of water and sewer services for the City of Ozark, Alabama. The Board’s Board of Directors has decision‐making authority, the power to set rates, arrange financing, designate management, significantly influence operations, and primary accountability for fiscal matters. As such, the Board is considered a primary reporting entity, and its accounting and reporting policies conform to GAAP. Basis of Accounting The Board is reported as a proprietary fund and uses the economic resources measurement focus and accrual basis of accounting. The accrual basis of accounts recognizes revenues when earned and expenses when incurred. 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 Board’s enterprise fund are charges to customers for sales and services. The Board also recognizes as operating revenue the portion of tap fees intended to recover the cost of connecting new customers to the system. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. Cash and Cash Equivalents The Board’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. Investments The Board's investments consist of certificates of deposits with original maturities of more than three months from the date of acquisition. ‐ 13 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Accounts Receivable
Provisions for credit losses are charged to income in amounts sufficient to maintain the allowance at a level considered adequate to cover current losses, as deemed necessary by management. Bad debt expense was $7,904 for the year ended September 30, 2016 and there was no allowance for doubtful accounts as all outstanding account balances were deemed collectible.
Inventories
Inventories are stated at the lower of cost or market, with cost being determined by the first‐in, first‐out method. The Board uses the consumption method of accounting for inventory.
Restricted Assets
Certain proceeds of the Board’s revenue bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the statement of net position because they are maintained in separate bank accounts and their use is limited by applicable bond covenants. At September 30, 2016, all restricted assets were in the form of cash.
Generally, it is the Board’s policy to use restricted assets before unrestricted assets when both are available to fund specific expenditures.
Capital Assets
All proprietary funds are accounted for on a cost of services or “capital maintenance” measurement focus. This means all assets and liabilities (whether current or non‐current) associated with their activity are included in their statements of net position.
The Board maintains a $2,500 capitalization threshold for property, plant and equipment. Capital assets are recorded at historical cost or estimated historical cost if purchased or constructed. Depreciation is computed using the straight line method over the estimated useful life of the assets, ranging from five to fifty years. Improvements that extend the useful life of the assets are capitalized and depreciated over the remaining useful life of the asset. Unamortized Bond Insurance Unamortized debt expense related to bond insurance is amortized by using the outstanding principal method over the life of the related debt and is reported as unamortized bond insurance on the statement of net position. Other bond issuance costs are expensed as incurred. Unbilled Revenues Unbilled revenues are recognized at the end of each fiscal year and combined with accounts receivable for financial statement reporting. Unbilled revenues are based on the usage incurred in September and billed, during October following the close of the fiscal year. ‐ 14 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Compensated Absences It is the Board's policy to allow employees to carry over 240 hours of vacation leave annually. Employees terminating employment will be paid for all carried over vacation leave up to 240 hours and any additional vacation leave accrued during the year of separation. Employees who retire after twenty‐five years of continuous service are entitled to be paid for all accumulated sick leave not to exceed 728 hours at retirement. Liabilities and expenses for compensated absences are reported in the statement of net position and statement of revenues, expenses, and changes in net position, respectively. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position sometimes reports a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period and will be recognized as an outflow of resources (expense/expenditure) in a subsequent period. The Board has two items reported in this category, deferred charge on debt refunding and deferred outflows related to pension. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. A deferred outflow related to pension results from pension contributions related to normal and accrued employer liability (net of any refunds or error service payments) subsequent to the measurement date, in accordance with GASB Statement No. 71. In addition to liabilities, the statement of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (revenue) until that time. The Board has one item that qualifies for reporting in this category, the deferred inflows related to pension. A deferred inflow related to pension results from the net difference between projected and actual earnings on plan investments, in accordance with GASB Statement No. 71, and is amortized over five years beginning with the year in which the difference occurred. Net Position The Board’s net position is divided into three components: Net investment in capital assets – This component of net position consists of the historical cost of capital assets, net of accumulated depreciation, and is reduced by the outstanding balances of any bonds, notes or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Deferred outflows of resources and deferred inflows of resources that are attributable to the acquisition, construction, or improvement of those assets or related debt should also be included in this component of net position. ‐ 15 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restricted – This component of net position consists of assets that are restricted by debt covenants, contributors, contractual provisions, or enabling legislation, reduced by liabilities and deferred inflows of resources related to those assets. The Board’s restricted net position as reported in the statement of net position consists of cash and investments. Unrestricted ‐ This component of net position is the net amount of the assets, deferred outflows or resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted components of net position. Estimates Management uses estimates and assumptions in preparing these financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Impact of Recently Issued Accounting Pronouncements Recently Issued and Adopted The accounting policies of the Board are based upon GAAP as prescribed by the GASB. Effective October 1, 2015 the Board adopted the following GASB Statements: GASB Statement No. 72, Fair Value Measurement and Application (“GASB 72”), addresses accounting and financial reporting issues related to fair value measurements. GASB 72 will be effective for the Board beginning with its year ending September 30, 2016. This Statement provides guidance for determining a fair value measurement for financial reporting purposes and the related disclosures. This Statement requires a government to use valuation techniques that are appropriate under the circumstances and for which sufficient data are available to measure fair value. This Statement establishes a hierarchy of inputs to valuation techniques used to measure fair value. This Statement also requires disclosures to be made about fair value measurements, the level of fair value hierarchy, and valuation techniques. GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 (“GASB 73”), extends the approach to accounting and financial reporting established in Statement 68 to all pensions. It establishes requirements for defined contribution pensions that are not within the scope of Statement 68. Requirements of this Statement for pension plans that are within the scopes of Statement No. 67 or Statement 68, are effective for fiscal years beginning after June 15, 2015. Thus, these requirements of GASB 73 will be effective for the Board beginning with its year ending September 30, 2016. GASB 73 clarifies the application of certain provisions of Statements 67 and 68 with regard to: (1) Information that is required to be presented as notes, (2) Accounting and financial reporting for separately financed specific liabilities, and (3) Timing of employer recognition of revenue. ‐ 16 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (“GASB 76”), supersedes GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. GASB 76 will be effective for the Board beginning with its year ending September 30, 2016. Recently Issued Other accounting standards that the Board is currently reviewing for applicability and potential impact on the financial statements include: GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (“GASB 74”), replaces GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and GASB Statement No. 57, OPEB (Other Postemployment Benefits) Measurement by Agent Employers and Agent Multiple‐Employer Plans. GASB 74 will be effective for fiscal years beginning after June 15, 2016. Included are requirements for defined contribution OPEB plans that replace the requirements for those OPEB plans in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, as amended, Statement 43, and Statement No. 50, Pension Disclosures. GASB 74 also includes requirements to address financial reporting for assets accumulated for purposes of providing defined benefit OPEB through OPEB plans that are not administered through trusts that meet the specified criteria. GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (“GASB 75”), replaces the requirements of Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple‐Employer Plans, for OPEB. GASB 75 will be effective for fiscal years beginning after June 15, 2017. This Statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expense/expenditures. In addition, this Statement details the recognition and disclosure requirements for employers with payables to defined benefit OPEB plans that are administered through trusts that meet the specified criteria and for employers whose employees are provided with defined contribution OPEB. GASB Statement No. 77, Tax Abatement Disclosures (“GASB 77”), requires governments that enter into tax abatement agreements to disclose: (1) Brief descriptive information concerning the agreement; (2) The gross dollar amount of taxes abated during the period; and 3) Commitments made by government, other than to abate taxes, that are part of the tax abatement agreement. GASB 77 will be effective for fiscal years beginning after December 15, 2015. ‐ 17 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) GASB Statement No. 78, Pensions Provided Through Certain Multiple‐Employer Defined Benefit Pension Plans (“GASB 78”), amends the scope and applicability of GASB Statement No. 68. It excludes pensions provided to employees of state or local governmental employers through a cost‐sharing multiple‐employer defined benefit pension plan that (1) is not a state or local government pension plan, (2) is used to provide defined benefit pensions both to employees of state or local governmental employers and to employees of employers that are not state or local government employers, and (3) has no predominate state or local government employer. This Statement establishes requirements for recognition and measurement of pension expense, expenditures, and liabilities; note disclosure; and required supplementary information for pensions that have the characteristics described above. GASB 78 will be effective for fiscal years beginning after December 15, 2015. GASB Statement No. 79, Certain External Investment Pools and Pool Participants (“GASB 79”), addresses accounting and financial reporting for certain external investment pools and pool participants. It establishes criteria for an external investment pool to qualify for making the election to measure all of its investments at amortized cost for financial reporting purposes. GASB 79 establishes additional note disclosure requirements for qualifying external investment pools that measure all of their investments at amortized costs for financial reporting purposes and for governments that participate in those pools. GASB 79 will be effective for fiscal years beginning after June 15, 2015. GASB Statement No. 80, Blending Requirements for Certain Component Units, an amendment of GASB Statement No. 14 (“GASB 80”), amends the blending requirements for the financial statement presentation of component units of all state and local governments. GASB 80 will be effective for fiscal years beginning after June 15, 2016. GASB Statement No. 81, Irrevocable Split‐Interest Agreements (“GASB 81”), requires that a government that receives resources pursuant to an irrevocable split‐interest agreement recognize assets, liabilities, and deferred inflows of resources at the inception of the agreement. GASB 81 will be effective for the fiscal years beginning after December 15, 2016. GASB Statement No. 82, Pension Issues, an amendment of GASB Statements No. 67, No. 68, and No. 73 (“GASB 82”), addresses issues regarding (1) the presentation of payroll‐related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (Plan member) contribution requirements. GASB 82 will be effective for fiscal years beginning after June 15, 2016. ‐ 18 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 2 – DEPOSITS AND INVESTMENTS Custodial Risk The custodial credit risk for deposits is the risk that, in the event of a bank failure, the Board will not be able to recover deposits or collateral securities that are in the possession of an outside party. The Board's deposits at year‐end were entirely covered by federal depository insurance or by the Security for Alabama Funds Enhancement (“SAFE”) Program. The SAFE Program was established by the Alabama Legislature and is governed by the provisions contained in the Code of Alabama 1975, Sections 41‐14A‐1 through 41‐14A‐14. Under the SAFE Program all public funds are protected through a collateral pool administered by the Alabama State Treasurer’s Office. Under this program, financial institutions holding deposits of public funds must pledge securities as collateral against those deposits. In the event of failure of a financial institution, securities pledged by that financial institution would be liquidated by the State Treasurer to replace the public deposits not covered by the Federal Depository Insurance Corporation (FDIC). If the securities pledged fail to produce adequate funds, every institution participating in the pool would share the liability for the remaining balance. Credit and Interest Rate Risk Concentration of credit risk is the risk of loss attributable to the quantity of the government’s investments in a single issuer. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Board has limited its interest rate risk by investing in money market funds which are required to maintain an average dollar‐weighted portfolio maturity of 90 days or less and certificates of deposits held at local banks with an original maturity of one year or less. NOTE 3 – RECEIVABLES Receivables consist of the following: September 30, 2016 Accounts receivable $ 197,521 Unbilled revenue 485,653 Receivables $ 683,174 ‐ 19 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 4 – CAPITAL ASSETS Capital asset activity for the year ended September 30, 2016 was as follows: Beginning Ending Balance Balance 10/1/15 Increases Decreases 9/30/16 Capital assets, not being depreciated: Land $ 148,601 $ ‐ $ ‐ $ 148,601 Construction in progress 293,817 429,342 (76,654) 646,505 Total capital assets, not being depreciated $ 442,418 $ 429,342 $ (76,654) $ 795,106 Capital assets, being depreciated: Buildings $ 661,168 $ 15,237 $ ‐ $ 676,405 Utility plant 114,833 ‐ ‐ 114,833 Water distribution system 15,576,300 137,278 ‐ 15,713,578 Sewer system 17,071,546 119,088 ‐ 17,190,634 Waste water treatment facility 9,498,817 102,745 ‐ 9,601,562 Equipment 811,013 26,658 ‐ 837,671 Total capital assets, being depreciated 43,733,677 401,006 ‐ 44,134,683 Total accumulated depreciation (19,714,021) (1,024,070) ‐ (20,738,091) Total capital assets, being depreciated, net $ 24,019,656 $ (623,064) $ ‐ $ 23,396,592 Depreciation expense was charged to functions/departments of the Board as follows:
Water Sewer
$ 385,953 638,117 $ 1,024,070
Construction in progress as of September 30, 2016 includes several ongoing projects. The sewer system improvement project is the most significant and is expected to be completed by the end of December 2017. The total contract amount related to the project is approximately $1,312,000; estimated costs remaining under the construction commitment are expected to be approximately $909,000.
‐ 20 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 5 – LONG‐TERM DEBT
The changes in long‐term liabilities of the Board for the year ended September 30, 2016 were as follows: Beginning Ending Balance Balance Due Within 10/1/15 Additions Reductions 9/30/16 One Year
Revenue bonds payable Unamortized premium (discount) Note payable
$ 16,475,000 $ 6,795,000 $ (6,410,000) $ 16,860,000 $ 435,000 (126,953) (405,805) 193,594 85,258 495,689 ‐ (13,694) 481,995 30,656
Total
$ 16,564,884 $ 6,988,594 $ (6,338,436) $ 17,215,042 $ 465,656
Bonds Payable
2013 Bonds – On February 1, 2013, the Board issued $10,640,000 of Series 2013 bonds. As a result, the 2003 and 2006 series bonds are considered defeased and the Board has removed the liability from its accounts. The outstanding principal on the defeased bonds was repaid during FY16, and there was no remaining outstanding principal balance as of September 30, 2016. The carrying difference between the reacquisition price (funds required to refund the old debt) and the net carrying amount of the old debt is carried as deferred refunding cost and is amortized over the remaining life of the old bond issue (as it was shorter than the life of the new debt) on the straight line basis. The amount deferred on the reacquisition was $467,992. The total amount amortized for the year ended September 30, 2016 was $49,368 and was reported as part of interest expense. The remaining deferred refunding cost at September 30, 2016 was $286,978. The remainder of the Series 2013 bonds that were not used to defease the Series 2003 and 2006 bonds will be used for capital improvement projects. The interest rate on the bond varies from year to year and ranges from 1.5% to 3.75% and the debt service requirements to maturity of these bonds are as follows:
Year Ending September 30,
Principal
2017 2018 2019 2020 2021 2022‐2026 2027‐2031
$ 135,000 110,000 110,000 40,000 35,000 220,000 300,000
‐ 21 ‐
Interest
$ 357,406 355,381 353,731 350,844 349,794 1,732,962 1,694,025
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 5 – LONG‐TERM DEBT (Continued) Year Ending September 30, 2032‐2036 2037‐2041 2042‐2043
Principal 3,335,000 3,980,000 1,800,000 $ 10,065,000
Interest 1,441,375 796,125 101,813 $ 7,533,456
Principal and interest paid for the year ended September 30, 2016 was $530,806 for the Series 2013 bonds. Bond discount expense on the 2013 bonds for the year ended September 30, 2016 was $11,826.
2016 Bonds – On June 29, 2016, the Board issued $6,795,000 of Series 2016 bonds. As a result, the 2007 Series bonds are considered defeased and the Board has removed the liability from its accounts. The outstanding principal on the defeased bonds was repaid in September 2016. The remainder of the Series 2013 bonds that were not used to defease the Series 2007 bonds will be used for capital improvement projects.
The carrying difference between the reacquisition price (funds required to refund the old debt) and the net carrying amount of the old debt is carried as deferred refunding cost and will be amortized over the remaining life of the new bond issue (as it was shorter than the remaining life of the old debt) on the straight line basis. The amount deferred on the reacquisition was $495,080. The total amount amortized for the year ended September 30, 2016 was $8,251 and was reported as part of interest expense. The remaining deferred refunding cost at September 30, 2016 was $486,823. Although the advance refunding resulted in the recognition of an accounting loss of $495,080, the Board reduced its aggregate debt service payments by approximately $425,000 over the next 15 years. The difference between the net present value of the net cash flows of the old and new debt resulted in an economic loss of approximately $286,000.
The interest rate on the bond varies from year to year and ranges from 2.0% to 3.0% and the debt service requirements to maturity of these bonds are as follows: Year Ending September 30, 2017 2018 2019 2020 2021 2022‐2026 2027‐2031
Principal $ 300,000 330,000 335,000 415,000 430,000 2,360,000 2,625,000
Interest $ 167,638 161,638 155,038 148,338 135,888 477,688 179,219
$ 6,795,000 $ 1,425,447
‐ 22 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 5 – LONG‐TERM DEBT (Continued) Interest paid for the year ended September 30, 2016 was $28,871 for the Series 2016 bonds, and no principal was due or paid. Bond premium amortization on the 2016 bonds for the year ended September 30, 2016 was $3,227. Note Payable Included in long‐term debt is a note payable due to the City of Ozark, Alabama. The note is due in monthly installments through February 2026 with interest ranging from 3.35% to 5%. During 2016, the Board remitted payments to the City of Ozark for $37,483, which includes $13,694 principal and $23,789 interest. Refer to Note 10, Related Party Transactions, for additional information. NOTE 6 – UTILITY REVENUES PLEDGED The Board has pledged future revenues derived from the operation of the Board's combined activities remaining after the cost of operating and maintaining to repay the Series 2016 and Series 2013 bonds. Proceeds from the bonds are being used to upgrade the utility systems. The bonds are payable through 2043. The total principal and interest remaining on the bonds is discussed above in Note 5, Long‐Term Debt. Net operating income for the year ended September 30, 2016 was $378,755. Interest and principal debt service for the bonds noted is $960,044 for the year ended September 30, 2017. NOTE 7 – EMPLOYEE RETIREMENT PLAN Summary of Significant Accounting Policies for the Pension Plan Pensions. The Employees’ Retirement System of Alabama (the “Plan”) financial statements are prepared using the economic resources measurement focus and accrual basis of accounting. Contributions are recognized as revenues when earned, pursuant to the plan requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the Plan. Expenses are recognized when the corresponding liability is incurred, regardless of when the payment is made. Investments are reported at fair value. Financial statements are prepared in accordance with requirements of the GASB. Under these requirements, the Plan is considered a component unit of the State of Alabama and is included in the State’s Comprehensive Annual Financial Report. General Information about the Pension Plan Plan description. The Employees’ Retirement System of Alabama (“ERS”), an agency multiple‐ employer plan, was established October 1, 1945 under the provisions of Act 515 of the Legislature of 1945 for the purpose of providing retirement allowances and other specified benefits for state employees, State Police, and on an elective basis, to all cities, counties, towns and quasi‐public organizations. The responsibility for the general administration and operating of ERS is vested in its ‐ 23 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 7 – EMPLOYEE RETIREMENT PLAN (Continued)
Board of Control. The ERS Board of Control consists of 13 trustees. The Plan is administered by the Retirement Systems of Alabama (“RSA”). Title 36‐Chapter 27 of the Code of Alabama grants the authority to establish and amend the benefit terms to the ERS Board of Control. The Plan issues a publicly available financial report that can be obtained at www.rsa‐al.gov.
The ERS Board of Control consists of 13 trustees as follows:
1) 2) 3) 4) 5)
The Governor, ex officio. The State Treasurer, ex officio. The State Personnel Director, ex officio. The State Director of Finance, ex officio. Three vested members of ERS appointed by the Governor for a term of four years, no two of whom are from the same department of state government nor from any department of which an ex officio trustee is the head. 6) Six members of ERS who are elected by members from the same category of ERS for a term of four years as follows: a. Two retired members with one from the ranks of retired state employees and one from the ranks of retired employees of a city, county or a public agency each of whom is an active beneficiary of ERS. b. Two vested active state employees. c. Two vested active employees of an employer participating in ERS pursuant to §36‐27‐6.
Benefits provided. State law establishes retirement benefits as well as death and disability benefits and any ad hoc increase in postretirement benefits for the ERS. Benefits for ERS members vest after 10 years of creditable service. State employees who retire after age 60 (52 for State Police) with 10 years or more of creditable service or with 25 years of service (regardless of age) are entitled to an annual retirement benefit, payable monthly for life. Local employees who retire after age 60 with 10 years or more of creditable service or with 25 or 30 years of service (regardless of age), depending on the particular entity’s election, are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, members of the ERS (except State Police) are allowed 2.0125% of their average final compensation (highest 3 of the last 10 years) for each year of service. State Police are allowed 2.875% for each year of State Police service in computing the formula method.
Act 377 of the Legislature of 2012 established a new tier of benefits (Tier 2) for members hired on or after January 1, 2013. Tier 2 ERS members are eligible for retirement after age 62 (56 for State Police) with 10 years or more of creditable service and are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, Tier 2 members of the ERS (except State Police) are allowed 1.65% of their average final compensation (highest 5 of the last 10 years) for each year of service. State Police are allowed 2.375% for each year of State Police service in computing the formula method. ‐ 24 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 7 – EMPLOYEE RETIREMENT PLAN (Continued) Members are eligible for disability retirement if they have 10 years of credible service, are currently in‐service, and determined by the RSA Medical Board to be permanently incapacitated from further performance of duty. Preretirement death benefits are calculated and paid to the beneficiary on the member’s age, service credit, employment status and eligibility for retirement. The ERS serves approximately 876 local participating employers. These participating employers include 294 cities, 65 counties, and 517 other public entities. The ERS membership includes approximately 84,393 participants. As of September 30, 2015, membership consisted of:
Retirees and beneficiaries currently receiving benefits Terminated employees entitled to but not yet receiving benefits Terminated employees not entitled to a benefit Active members
22,211 1,353 5,451 55,378
Total 84,393 Contributions. Covered members of the ERS contributed 5% of earnable compensation to the ERS as required by statute until September 30, 2011. From October 1, 2011 to September 30, 2012, covered members of the ERS were required by a statute to contribute 7.25% of earnable compensation. Effective October 1, 2012, covered members of the ERS are required by statute to contribute 7.50% of earnable compensation. Certified law enforcement, correctional officers, and firefighters of the ERS contributed 6% of earnable compensation as required by statute until September 30, 2011. From October 1, 2011 to September 30, 2012, certified law enforcement, correctional officers, and firefighters of the ERS were required by statute to contribute 8.25% of earnable compensation. Effective October 1, 2012, certified law enforcement, correctional officers, and firefighters of the ERS are required by statute to contribute 8.50% of earnable compensation. State Police of the ERS contribute 10% of earnable compensation. ERS local participating employers are not required by statute to increase contribution rates for their members. Tier 2 covered members of the ERS contribute 6% of earnable compensation to the ERS as required by statute. Tier 2 certified law enforcement, correctional officers, and firefighters of the ERS are required by statute to contribute 7% of earnable compensation. Tier 2 State Police members of the ERS contribute 10% of earnable compensation. These contributions rates are the same for Tier 2 covered members of ERS local participating employers. The ERS establishes rates based upon an actuarially determined rate recommended by an independent actuary. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with additional amounts to finance any unfunded accrued liability, the pre‐retirement death benefit and administrative expenses of the Plan. For the year ended September 30, 2016, the Board’s active employee contribution rate was 5% of covered employee payroll for normal Tier 1 employees and 6% of covered employee payroll for normal Tier 2 employees, and the Board’s average contribution rate to fund the normal and accrued liability costs was 14.04% of pensionable payroll for Tier 1 employees and 11.54% for Tier 2 employees. ‐ 25 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 7 – EMPLOYEE RETIREMENT PLAN (Continued) The Board’s contractually required contribution rate for the year ended September 30, 2016 was 14.99% of pensionable pay for Tier 1 employees, and 12.49% of pensionable pay for Tier 2 employees. These required contribution rates are based upon the actuarial valuation dated September 30, 2013, a percent of annual pensionable payroll, and actuarially determined as an amount that, when combined with member contributions, is expected to finance the costs of benefits earned by members during the year, with an additional amount to finance any unfunded accrued liability. Total employer contributions to the pension plan from the Board were $141,946 for the year ended September 30, 2016. Net Pension Liability The Board’s net pension liability was measured as of September 30, 2015, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as September 30, 2014 rolled forward to September 30, 2015 using standard roll‐forward techniques as shown in the following table:
Expected
Actual
$ 4,581,218 $
4,526,414
Total pension liability As of September 30, 2014 (a) Entry age normal cost for October 1, 2014 – September 30, 2015 (b) Actual benefit payments and refunds for October 1, 2014 – September 30, 2015 (c)
66,397
(184,891)
66,397 (184,891)
Total pension liability as of September 30, 2015 [(a) x (1.08)] + (b) – [(c) x (1.04)] Difference between expected and actual experience (gain)/loss
$ 4,821,826 $
$
4,762,637 (59,189)
Actuarial assumptions. The total pension liability in the September 30, 2014 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 3.00% Salary increases 3.75% ‐ 7.25% Investment rate of return* 8.00% * Net of pension plan investment expense Mortality rates for ERS were based on the RP‐2000 Combined Mortality Table Projected with Scale AA to 2015 set forward three years for males and two years for females. The rates of mortality for the period after disability retirement are according to the sex distinct RP‐2000 Disability Mortality Table. ‐ 26 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 7 – EMPLOYEE RETIREMENT PLAN (Continued)
The actuarial assumptions used in the September 30, 2014 valuation were based on the results of an investigation of the economic and demographic experience for the ERS based upon participant data as of September 30, 2010. The Board of Control accepted and approved these changes on January 27, 2012, which became effective at the beginning of fiscal year 2012.
The long‐term expected rate of return on pension plan investments was determined using a log‐ normal distribution analysis in which best‐estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long‐term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of geometric real rates of return for each major asset class are summarized in the following table: Long‐Term Target Expected Rate Allocation of Return*
Fixed income Domestic large cap equity Domestic mid cap equity Domestic small cap equity International developed equity Emerging market equity Real estate Cash equivalents
25.00% 34.00% 8.00% 3.00% 15.00% 3.00% 10.00% 2.00%
100.00%
5.00% 9.00% 12.00% 15.00% 11.00% 16.00% 7.50% 1.50%
Total
*includes assumed rate of inflation of 2.50%.
Discount rate. The discount rate used to measure the total pension liability was the long‐term rate of return, 8%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the rates currently in effect and that employer contributions will be made in accordance with the funding policy adopted by the ERS Board of Control. Based on those assumptions, components of the pension plan’s fiduciary net position were projected to be available to make all projected future benefit payments of current plan members. Therefore, the long‐term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the net pension liability to changes in the discount rate. The following table presents the Board’s net pension liability calculated using the discount rate of 8%, as well as what the Board’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1‐percentage point lower (7%) or 1‐percentage point higher (9%) than the current rate: ‐ 27 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 7 – EMPLOYEE RETIREMENT PLAN (Continued) 1% Decrease Current Rate 1% Increase (7.00%) (8.00%) (9.00%)
Board’s net pension liability
$ 2,196,994 $ 1,715,345 $ 1,303,555
Pension plan fiduciary net position. Detailed information about the pension plan’s fiduciary net position is available in the separately issued RSA Comprehensive Annual Report for the fiscal year ended September 30, 2015. The supporting actuarial information is included in the GASB Statement No. 68 Report for the ERS prepared as of September 30, 2015. The auditor’s report dated October 17, 2016 on the Schedule of Changes in Fiduciary Net Position by Employer and accompanying notes is also available. The additional financial and actuarial information is available at www.rsa‐al.gov. Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions
For the year ended September 30, 2016, the Board recognized pension expense of $145,603. At September 30, 2016, the Board reported deferred outflows of resources and deferred inflows of resources related to pensions of the following sources: Deferred Deferred Outflows of Inflows of Resources Resources
Differences between expected and actual experience Changes of assumptions Net difference between projected and actual earnings on pension plan investments Employer contributions subsequent to the measurement date
$
‐ $ 48,620 ‐ ‐
99,561
‐
141,946
‐
Total $ 241,507 $ 48,620 Amounts reported as deferred outflows of resources and deferred inflows of resources to pensions will be recognized in pension expense as follows:
Year ended September 30:
2017 2018 2019 2020 2021
‐ 28 ‐
$
8,939 8,939 8,941 30,466 (6,344)
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 8 – OTHER POSTEMPLOYMENT BENEFITS
In addition to the pension benefits described in Note 7, Employee Retirement Plan, the Board provides postretirement health care benefits to all eligible employees. Eligible employees are retired employees who had at least 25 years of continuous service or retired employees age 60 and above with 10 years of continuous service. The OPEB include health, prescription drug, and dental benefits. The plan does not issue stand‐alone financial statements. The Board is not required by law or contractual agreements to provide funding to the OPEB other than pay‐as‐you go amounts necessary to provide current benefits to retirees.
Actuarial Valuation as of September 30, 2014 Summary of Employer Census Data Number of active members Annual compensation Number of DROP members Annual compensation Number of retired members and beneficiaries Employer Contribution Rates Normal cost Accrued liability
$ $
18 825,535 2 109,243 5
3.94% 3.85%
Total 7.79% Funded Status and Funding Progress As of September 30, 2014, the most recent actuarial valuation date, the actuarial accrued liability for benefits was $974,051, and the actuarial value of present assets was $0, resulting in an unfunded actuarial accrued liability of $974,051. The covered payroll (annual payroll of active participating employees) was $934,778 for fiscal year 2014 and the ratio of the unfunded actuarial accrued liability to the covered payroll was 104.20%. Annual OPEB Cost and Net OPEB Obligation The Board’s annual OPEB cost (expense) is calculated based on the annual required contribution (“ARC”), an amount actuarially determined in accordance with parameters of GASB Statement No. 45, Accounting and Financial Reporting by Employers of Postemployment Benefits Other Than Pensions. The ARC, which represents a level of funding that is paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a period not to exceed 30 years. The following table shows the Board’s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the Board’s net OPEB obligation for postemployment health care benefits. Description Amount
Normal cost (service cost for one year) Amortization of unfunded actuarial accrued liability
$
36,804 35,990
72,794 15,510 (14,327)
Annual required contribution Plus interest on net OPEB obligation Less net OPEB obligation amortization ‐ 29 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 8 – OTHER POSTEMPLOYMENT BENEFITS (Continued)
Annual OPEB cost Contribution toward the OPEB cost in fiscal year 2016
73,977 (18,015)
55,962 444,422
Increase in Net OPEB obligation Net OPEB obligation, beginning of year
Net OPEB obligation, end of year
$ 500,384 Actuarial Method and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan provisions, as understood by the employer and participating members, and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and participating members. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short‐term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long‐term perspective of the calculations. The Board’s OPEB actuarial valuation using information as of September 30, 2014 employed the projected unit credit actuarial cost method to estimate the unfunded actuarial accrued liability as of September 30, 2014, and to estimate the Board’s 2016 annual required contribution. Although the OPEB liability is currently unfunded, the actuarial assumption included a 4% rate of return on invested assets. The actuarial assumptions also included a medical cost trend of 7.50% ‐ 5.00% for Pre‐Medicare retirees, 5.75% ‐ 5.00% for Post‐Medicare retirees, and an inflation component of 3.25%. NOTE 9 – INTEREST COST The amount of interest cost incurred for the Board was $905,103, all of which was charged to non‐ operating expenses. NOTE 10 – RELATED PARTY TRANSACTIONS The City of Ozark, Alabama is a related organization to the Board because the City of Ozark, Alabama appoints a voting majority of the Board’s Board of Directors, but is not financially accountable. On November 22, 2005, the City of Ozark, Alabama and the Board entered into a formal agreement in which the Board reimburses the City of Ozark, Alabama for use of a portion of the Municipal Complex to be applied to the 2002 Bond Issue. The Board agreed to be responsible for 18% of the bonded indebtedness created by the City of Ozark, Alabama to finance the construction of the Municipal Complex. Each party is designated certain areas of exclusive use, as well as areas of common use. Each party is responsible for the repair and maintenance of those certain areas assigned for exclusive use to each party. Repair and maintenance for the roof or exterior walls is to be divided 82% to the City of Ozark, Alabama and 18% to the Board, the same as the Bond Issue. ‐ 30 ‐
The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 10 – RELATED PARTY TRANSACTIONS (Continued) Included in debt is a note payable due to the City of Ozark, Alabama. The note is due in monthly installments through February 2026 with interest ranging from 3.35% to 5%. During 2015, the Board remitted payments to the City of Ozark, Alabama for $37,483, which includes $13,694 principal and $23,789 interest. The Board also remits several payments to the City of Ozark, Alabama each month. A portion of garbage collections fees, as well as 3% of gross receipts are remitted. NOTE 11 – SURETY BONDS On February 1, 2013 the Board entered into surety bonds with Assured Guaranty Municipal Corporation (“AGM”). Under the surety bond dated February 1, 2013, AGM guarantees payment of principal and interest of the Series 2013 bonds should the Board fail to make a required payment. On June 29, 2016, the Board again entered into a supplemental surety bond related to the Series 2013 bonds, as prescribed in the reserve requirements set forth in the bond documents related to the Series 2016 bonds. Also on June 29, 2016, the Board entered into surety bonds with AGM. Under these surety bonds dated June 29, 2016, AGM guarantees payment of principal and interest of the Series 2016 bonds should the Board fail to make a required payment. NOTE 12 – SUBSEQUENT EVENTS The Board has evaluated subsequent events between September 30, 2016 and January 9, 2017, the date the financial statements were available to be issued, and there are none to disclose.
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The Utilities Board of the City of Ozark, Alabama Required Supplementary Information Schedule of Funding Progress for the Retiree Health Plan Actuarial Valuation Date
Actuarial Value of Assets (a)
Actuarial Accrued Liability Unfunded (AAL) AAL Entry Age (UAAL) (b)* (b‐a) 9/30/07 $ ‐0‐ $ 1,213,129 $ 1,213,129 9/30/11 $ ‐0‐ $ 1,140,030 $ 1,140,030 9/30/14** $ ‐0‐ $ 974,051 $ 974,051
Funded Ratio (a/b) 0.00% 0.00% 0.00%
UAAL as a % of Covered Covered Payroll Payroll (c) ((b‐a)/c) $ 674,194 179.94% $ 879,320 129.65% $ 934,778 104.20%
**Includes the updated actuarial assumptions and plan design based on the introduction of a new tier of membership for those hired on or after January 1, 2013.
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The Utilities Board of the City of Ozark, Alabama Required Supplementary Information Schedule of Changes in Net Pension Liability September 30,
2015
Total Pension Liability Service cost Interest Changes of benefit terms Differences between expected and actual experience Changes of assumptions Benefit payments, including refunds of employee contributions Net change in total pension liability
2014
$ 66,397 $ 69,765 359,102 341,159 ‐ ‐ (59,189) ‐ ‐ ‐ (184,891) (188,383) 181,419 222,541
Total pension liability ‐ beginning
4,581,218 4,358,677
Total pension liability ‐ ending (a)
$ 4,762,637 $ 4,581,218
Plan Fiduciary Net Position Contributions ‐ employer Contributions ‐ member Net investment income Benefit payments, including refunds of employee contributions Transfers among employers Net change in plan fiduciary net position
$ 137,826 47,945 35,723 (184,891) ‐
$ 134,259 46,597 322,944 (188,383) ‐
36,603 315,417
Plan net position ‐ beginning
3,010,689 2,695,272
Plan net position ‐ ending (b)
$ 3,047,292 $ 3,010,689
Net pension liability (asset) ‐ ending (a) ‐ (b)
$ 1,715,345 $ 1,570,529
Plan fiduciary net position as a percentage of the total pension liability Covered‐employee payroll*
63.98%
65.72%
$ 985,124 $ 962,667
Net pension liability (asset) as a percentage of covered‐employee payroll
174.12%
163.14%
*Employer's covered‐payroll during the measurement period is the total payroll paid to covered employees (not just pensionable payroll). For FY 2016, the measurement period is October 1, 2014 ‐ September 30, 2015.
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The Utilities Board of the City of Ozark, Alabama Required Supplementary Information Schedule of Employer Contributions September 30, Actuarially determined contribution* Contributions in relation to the actuarially determined contribution*
2016
2015
$ 141,946
$ 137,826
141,946 137,826
Contribution deficiency (excess)
$ ‐
Covered‐employee payroll**
$ 1,006,860 $ 985,124
Contributions as a percentage of covered‐ employee payroll
14.10%
$ ‐
13.99%
*Amount of employer contributions related to normal and accrued liability components of employer rate net of any refunds or error service payments. For FY2016, the fiscal year is the twelve month period beginning 10/1/2015 and ending 9/30/2016. **Employer's covered‐payroll during fiscal year is the total payroll paid to covered employees (not just pensionable payroll). For FY 2016, the fiscal year is the twelve month period beginning 10/1/2015 and ending 9/30/2016.
Notes to Schedule Actuarially determined contribution rates are calculated as of September 30, three years prior to the end of the fiscal year in which contributions are reported. Contributions for fiscal year 2016 were based on the September 30, 2013 actuarial valuation. Methods and assumptions used to determine contribution rates: Actuarial cost method Entry Age Amortization method Level percent closed Remaining amortization period 28 years Asset valuation method Five year smoothed market Inflation 3.00% Salary increases 3.75 – 7.25%, including inflation Investment rate of return 8.00%, net of pension plan investment expense, including inflation
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The Utilities Board of the City of Ozark, Alabama Schedules of Bond Amortization Requirements Series 2016 Water and Sewer Revenue Bonds September 30, 2016 Debt service requirements for the 2016 Series Bonds issued June 29, 2016 with interest and principal payable March 1 and September 1 maturing on September 30, 2031 are as follows: Paying Agent: Bank of New York Year Interest Ending Rate Principal Interest Total 9/30/17 2.000% $ 300,000 $ 167,638 $ 467,638 9/30/18 2.000% 330,000 161,638 491,638 9/30/19 2.000% 335,000 155,038 490,038 9/30/20 3.000% 415,000 148,338 563,338 9/30/21 3.000% 430,000 135,888 565,888 9/30/22 3.000% 440,000 122,988 562,988 9/30/23 3.000% 460,000 109,788 569,788 9/30/24 3.000% 475,000 95,988 570,988 9/30/25 3.000% 485,000 81,738 566,738 67,188 567,188 9/30/26 2.000% 500,000 9/30/27 2.000% 510,000 57,188 567,188 9/30/28 2.000% 515,000 46,988 561,988 9/30/29 2.125% 525,000 36,688 561,688 9/30/30 2.375% 535,000 25,531 560,531 9/30/31 2.375% 540,000 12,822 552,822 Total $ 6,795,000 $ 1,425,447 $ 8,220,447
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The Utilities Board of the City of Ozark, Alabama Schedules of Bond Amortization Requirements Series 2013 Water and Sewer Revenue Bonds September 30, 2016 Debt service requirements for the 2013 Series Bonds dated February 1, 2013 with interest payable on March 1 and September 1, maturing on September 1, 2043 are as follows: Paying Agent: Bank of New York Year Interest Ending Rate Principal Interest Total 9/30/17 2.000% $ 135,000 $ 357,406 $ 492,406 9/30/18 110,000 465,381 2.000% 355,381 353,731 9/30/19 110,000 463,731 1.500% 350,844 9/30/20 40,000 390,844 1.500% 349,794 9/30/21 35,000 384,794 1.500% 348,875 9/30/22 40,000 388,875 1.500% 347,825 9/30/23 40,000 387,825 2.625% 346,775 9/30/24 40,000 386,775 2.625% 345,525 9/30/25 50,000 395,525 2.625% 343,963 9/30/26 50,000 393,963 2.625% 397,400 342,400 9/30/27 55,000 2.625% 395,681 340,681 9/30/28 55,000 2.625% 398,963 338,963 9/30/29 60,000 3.125% 402,088 337,088 9/30/30 65,000 3.125% 399,894 334,894 9/30/31 65,000 3.125% 952,700 332,700 9/30/32 620,000 3.375% 956,775 311,775 9/30/33 645,000 3.375% 3.375% 954,200 289,200 9/30/34 665,000 3.375% 955,925 265,925 9/30/35 690,000 3.500% 956,775 241,775 9/30/36 715,000 3.500% 956,750 216,750 9/30/37 740,000 3.500% 954,000 189,000 9/30/38 765,000 3.750% 955,313 160,313 9/30/39 795,000 3.750% 955,500 130,500 9/30/40 825,000 3.750% 954,563 99,563 9/30/41 855,000 3.750% 952,500 67,500 9/30/42 885,000 3.750% 949,310 34,310 9/30/43 915,000 Total $ 10,065,000 $ 7,533,456 $ 17,598,456
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The Utilities Board of the City of Ozark, Alabama Schedules of Operating Revenues ‐ Water and Sewer For the years ended September 30, Water Charges for service Unbilled revenue Tapping fees Service charges Penalties Other revenues Total water Sewer Charges for service Unbilled revenue Tapping fees Service charges New service connections Penalties Other revenues Total sewer Total
2016
2015
Increase (Decrease)
$ 2,218,356 246,319 6,225 43,982 57,769 16,640
$ 2,185,327 229,828 26,978 43,974 58,906 18,388
$ 33,029 16,491 (20,753) 8 (1,137) (1,748)
2,589,291
2,563,401
25,890
1,327,806 239,334 3,900 23,241 210 31,107 6,243
1,384,658 143,009 7,150 23,234 196 31,713 16,049
(56,852) 96,325 (3,250) 7 14 (606) (9,806)
1,631,841
1,606,009
25,832
$ 4,221,132
$ 4,169,410
$ 51,722
See accompanying notes to the financial statements. ‐ 37 ‐
The Utilities Board of the City of Ozark, Alabama Schedules of Operating Expenses ‐ Water 2016
2015
Increase (Decrease)
Operating Expenses Amortization Building and equipment repair Chemicals Computer expense Depreciation Dues and subscriptions Economic development Electric, power, and gas Employee and community relations Insurance Insurance ‐ employees Legal and professional Maintenance materials Mileage Miscellaneous Monitor and testing Office expense Payroll taxes Postal and freight Rent expense Retirement Salaries Small tools Taxes Telephone Travel Vehicle expense Worthless accounts
$ 5,258 68,829 15,854 7,839 385,953 2,103 6,500 284,286 14,605 44,191 120,294 21,979 19,218 3,266 748 57,717 19,765 38,197 11,436 ‐ 76,936 540,564 737 166,136 16,764 1,684 35,151 4,204
$ 4,965 99,638 16,889 7,040 383,799 2,069 ‐ 276,356 13,318 42,129 118,064 23,790 96,875 3,282 148 47,098 16,434 37,128 11,528 848 67,249 507,846 1,891 161,076 15,347 497 53,642 3,169
$ 293 (30,809) (1,035) 799 2,154 34 6,500 7,930 1,287 2,062 2,230 (1,811) (77,657) (16) 600 10,619 3,331 1,069 (92) (848) 9,687 32,718 (1,154) 5,060 1,417 1,187 (18,491) 1,035
Total operating expenses ‐ water
$ 1,970,214
$ 2,012,115
$ (41,901)
For the years ended September 30,
See accompanying notes to the financial statements. ‐ 38 ‐
The Utilities Board of the City of Ozark, Alabama Schedules of Operating Expenses ‐ Sewer 2016
2015
Increase (Decrease)
Operating Expenses Amortization Building and equipment repair Chemicals Computer expense Depreciation Dues and subscriptions Economic development Electric, power, and gas Employee and community relations Garbage collection expense Insurance Insurance ‐ employees Legal and professional Maintenance materials Mileage Miscellaneous Monitor and testing Office expense Payroll taxes Postal and freight Rent expense Retirement Salaries Small tools Telephone Travel Vehicle expense Worthless accounts
$ 2,831 49,073 60,523 4,371 638,117 1,132 3,500 166,259 9,120 6,660 23,795 98,179 23,607 77,338 1,758 6,022 35,077 10,913 34,896 6,428 ‐ 72,277 490,453 1,055 10,907 570 33,602 3,700
$ 2,673 53,229 38,636 4,167 598,126 1,174 ‐ 138,832 8,024 6,660 22,685 95,000 24,065 76,467 1,767 1,161 31,146 13,970 34,517 6,208 263 63,570 474,724 935 10,061 268 39,650 5,976
$ 158 (4,156) 21,887 204 39,991 (42) 3,500 27,427 1,096 ‐ 1,110 3,179 (458) 871 (9) 4,861 3,931 (3,057) 379 220 (263) 8,707 15,729 120 846 302 (6,048) (2,276)
Total operating expenses ‐ sewer
$ 1,872,163
$ 1,753,954
$ 118,209
For the years ended September 30,
See accompanying notes to the financial statements. ‐ 39 ‐
INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors of The Utilities Board of the City of Ozark, Alabama We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Utilities Board of the City of Ozark, Alabama (the “Board”), as of and for the year ended September 30, 2016, and the related notes to the financial statements, which collectively comprise the Board's basic financial statements and have issued our report thereon dated January 9, 2017. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Board’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Board’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Board’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. ‐ 40 ‐
Compliance and Other Matters As part of obtaining reasonable assurance about whether the Board’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.
CARR, RIGGS & INGRAM, LLC Certified Public Accountants January 9, 2017
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