NOTES TO BASIC
FINANCIAL STATEMENTS
For
the Year Ended
The Town of
Cary, North Carolina (the "Town") is located in the central part of
the State and has a
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The basic
financial statements of the Town have been prepared in conformity with
accounting principles generally accepted in the
The Town
implemented GASB 34, Basic Financial
Statements and Management’s Discussion and Analysis for State and Local
Governments, in fiscal year 2002. Although not required until later, the
Town also implemented infrastructure retroactive reporting in fiscal year
2002. In fiscal year 2002, the Town also
implemented GASB 37, Basic Financial
Statements and Management’s Discussion and Analysis for State and Local
Governments: Omnibus, which is an amendment to previous GASB statements and
includes additional guidance on the Management Discussion and Analysis
requirement. In addition to these, the
Town implemented GASB 38, Certain Financial
Statement Note Disclosures, in fiscal year 2002, which modified certain
disclosure requirements and GASB 40, Deposit
and Investment Risk Disclosures, in fiscal year 2005, which changed
information presented in the Deposit and Investment note to the
In fiscal year
2005, the Town chose to early implement GASB 44, Economic Condition – Statistical Section, which enhances the
currently existing statistical section.
This is required and in effect in fiscal year 2006 for entities that
prepare a statistical section as a part of their financial statement
compilation.
Implementation
of GASB 42, Accounting and Financial
Reporting for Impairment of Capital Assets and for Insurance Recoveries,
GASB 46, Net Assets Restricted by Enabling
Legislation and GASB 47, Accounting
for Termination Benefits began in fiscal year 2006. However, none of these statements had an
effect on the Town in the current fiscal year.
The Town is
currently preparing for implementation of GASB 43, Financial Reporting for Postemployment Benefit Plans Other Than
Pension Plans and GASB 45, Accounting
and Financial Reporting by Employers for Postemployment Benefits Other Than
Pensions, which require additional disclosures and impose additional
accounting regulations regarding the accounting and reporting of other postemployment benefits.
The Town will be required to implement these in fiscal year 2008.
A. REPORTING ENTITY
The Town of
B. ENTITY-WIDE AND
FUND FINANCIAL STATEMENTS
The entity-wide financial statements (i.e., the statement of net assets and the statement of changes in net assets) report information for all of the nonfiduciary activities of the Town. Eliminations have been made to minimize the double counting of internal activities. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely, to a significant extent, on customer demand based fees and charges for support.
The statement
of activities demonstrates the degree to which the direct expenses of a given
function are offset by program revenues.
Direct expenses are those that
are clearly identifiable with a specific function. Program revenues include
1) charges to customers or applicants who purchase, use, or directly benefit
from goods, services, or privileges provided by a given function or segment and
2) grants and contributions that are restricted to meeting the operational or
capital requirements of a particular function or segment. Taxes and other items not properly included
among program revenues are reported instead as general revenues.
The accounts of the Town are organized and operated on the basis of funds. A fund is an independent fiscal and accounting entity with a self-balancing set of accounts comprised of assets, liabilities, fund equity, revenues, and expenditures or expenses, as applicable. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance related legal and contractual provisions. The minimum number of funds is maintained consistent with legal and managerial requirements. Funds are defined as major or non-major in the basic financial statements according to GASB reporting standards, which categorize funds based on relative size and materiality.
Proprietary
fund operating revenues, such as charges for services, result from exchange
transactions associated with the principal activity of the fund. Exchange transactions are those in which each
party receives and gives up essentially equal values. Non-operating revenues, such as investment
earnings, result from non-exchange transactions or ancillary activities.
Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the entity-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. The Town has several non-major governmental funds, however, they are all reported as separate columns in the fund financial statements. There are no non-major business-type funds.
C. MEASUREMENT
FOCUS, BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION
In accordance
with North Carolina General Statutes, all funds of the Town are maintained
during the year using the modified accrual basis of accounting.
The
entity-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and
fiduciary fund financial statements.
Revenues are recorded when earned and expenses are recorded when a
liability is incurred, regardless of the timing of related cash flows. Non-exchange transactions, in which the Town
gives (or receives) value without directly receiving (or giving) equal value in
exchange, include property taxes, grants and donations. Property taxes are recorded on an accrual
basis and are recognized as revenues in the year for which they are
levied. Grants and similar items are
recognized as revenue as soon as all eligibility requirements imposed by the
provider have been met.
Governmental
fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are
both measurable and available. Revenues
are considered to be available when
they are collectible within the current period or soon enough thereafter to pay
liabilities of the current period. For
this purpose, the Town considers revenues to be available if they are collected
within 90 days of the end of the current fiscal period, except for property
taxes. Expenditures are generally 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 judgements, are
recorded only when payment is due.
General capital asset acquisitions are reported as expenditures in
governmental funds. Proceeds from
general long-term debt and acquisitions under capital leases are reported as
other financing sources.
At June 30,
taxes receivable are materially past due and are not considered to be an
available resource to finance the operations of the current year.
Sales taxes,
collected and held by the State at year-end on behalf of the Town, are
recognized as revenue. Intergovernmental
revenues and sales and services are not subject to accrual because they are
generally not measurable until received in cash. Grant revenues, which are unearned at
year-end, are recorded as unearned revenues.
Under the terms of the grant agreements, the Town funds certain programs
in combination of specific cost-reimbursement grants, categorical block grants
and general revenues. Thus, when program
expenses are incurred, there are both restricted and unrestricted net assets
available to finance the program.
Excluding debt funding, it is the Town’s policy to first apply
cost-reimbursement grant resources to such programs, followed by categorical block
grants and then by general revenues. In
the event that debt proceeds are included, the Town will spend debt proceeds
first unless there is an agreement tying specific expenditures to grant
proceeds. When both restricted and
unrestricted resources are available for use, it is the Town’s policy to use
restricted resources first, then unrestricted resources, as they are needed.
As permitted
by accounting principles generally accepted in the
The
preparation of financial statements in conformity with accounting principles
generally accepted in the
The Town
reports the following major governmental funds:
General Fund - The General
Fund is the general operating fund of the Town.
It is used to account for all financial resources except those required
to be accounted for in another fund. The
primary revenue sources are ad valorem taxes, various other taxes and licenses
and State-shared revenues. The primary
expenditures are for public safety, streets and highways, sanitation,
recycling, parks and recreation, general government services, and debt service
for the payment of general long-term principal, interest and related costs.
Capital Project Fund - The Capital
Project Fund is used to account for financial resources to be used for the
acquisition and/or construction of major capital facilities (other than those
financed by proprietary funds) and infrastructure. The Town has five sub-funds within the
Capital Project Fund: Street Projects, Parks and Recreation Projects, Fire Projects,
General Governmental Projects, and General Capital Reserve.
Special Revenue Funds – The Town operated
four special revenue funds during fiscal year 2006. The Amphitheatre Special Revenue Fund is used
to account for the operations of the Koka Booth Amphitheatre at
The Town
reports the following major enterprise fund:
Utility System - An
enterprise fund is used to account for operations and maintenance of the water
and sewer system which includes operation of two wastewater treatment
facilities and the jointly owned Cary/Apex Water Treatment Plant. This fund also covers acquisition and/or
construction of major utility capital facilities and infrastructure, as well as
the debt service for the payment of utility long-term debt principal, interest
and related costs. The fund is comprised
of four sub-funds: Utility System Operations, Water Projects, Sewer Projects
and Utility Capital Reserve. This is the
Town’s only enterprise fund.
Additionally,
the Town reports the following fund types:
Internal Service Funds - The Town
has two Internal Service Funds. The
Garage Fund is used to account for the financing of fleet services provided by the
Public Works/Utilities Department and charged to other departments of the Town
on a cost-reimbursement basis. The
primary activity is governmental and all balances are allocated accordingly for
the entity-wide financial statements.
The Health Insurance Fund is used to account for employee health and
dental claims expense incurred by the Town related to the decision to
self-insure for these employee benefits.
This fund also collects premiums to cover claims expense for employee
elected spouse and family coverage. The
primary activity is also governmental.
Pension Trust Fund - A pension
trust fund is used to account for activities related to the Law Enforcement
Separation allowance, which accumulates resources for pension benefit payments
to qualified police retirees.
As a general rule, the effect of interfund activity has been
eliminated from the entity-wide financial statements. Exceptions to this general rule are reimbursements
to the General Fund and other charges between the Town’s utility system
function and various other functions of the Town. Elimination of these charges would distort
the direct costs and program revenues reported for the various functions
concerned.
Amounts reported as program revenues include 1) charges to
customers or applicants for goods, services or privileges provided, 2)
operating grants and contributions and 3) capital grants and
contributions. Internally dedicated
resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes.
D.
BUDGETARY DATA
The Town’s budgets are adopted as required by the North
Carolina General Statutes. An annual
budget is adopted for the General Fund, the Capital Reserve Fund (a sub-fund of
the Capital Project Fund), the Amphitheatre Special Revenue Fund, the Transit
Special Revenue Fund, the 911 Special Revenue Fund, the Health Insurance
Internal Service Fund, the Garage Internal Service Fund, the Pension Trust Fund
for Law Enforcement Separation Allowance and the Utility System Operations Fund
and Utility Capital Reserve Fund (both of which are sub-funds of the Utility
System Enterprise Fund). All annual
appropriations lapse at the fiscal year-end.
However, based on Town ordinance, funds for unpaid purchase orders or
delayed projects may be rolled over to the subsequent year. Multi-year project ordinances are adopted for
the Parks, Street, Fire and General Governmental Project Funds (all sub-funds
of the Capital Project Fund), for the Water and Sewer Project Funds (both
sub-funds of the Utility Systems Enterprise Fund) and for the Community
Development Block Grant Special Revenue Fund.
All budgets are prepared using the modified accrual basis of
accounting. Expenditures may not legally
exceed appropriations at a functional level for all annually budgeted funds and
a project-type level for the multi-year project funds. Amendments are required for any revisions
that alter the total functional or project-type budget and must be approved by
Town Council. The Town internally
manages expenditures on a line item and departmental basis and, although not
legally required, budget amendments may occur between line items and between
departments of the same function. All
internal budget amendments must be approved by the Finance and Budget
departments and some amendments are also forwarded to the Town Manager for
additional approval. During the year
numerous budget amendments to the original budget were necessary. The original budget ordinance was adopted by
July 1 of the fiscal year in accordance with State law.
E. ASSETS,
LIABILITIES AND NET ASSETS OR EQUITY
1. Deposits and
investments
The deposits
of the Town are secured as required by North Carolina General Statute
("G.S.") 159-31.
The Town may establish official depositories with any bank or
savings and loan association whose principal office is located in
G.S. 159-30(c)
authorizes the Town to invest in obligations of the U.S. Treasury; obligations
of any agency of the United States of America, provided the payment of interest
and principal of such obligations is fully guaranteed by the United States;
obligations of the State of North Carolina; bonds and notes of any North
Carolina local government or public authority; obligations of certain
non-guaranteed federal agencies; certain high quality issues of commercial
paper and bankers' acceptances; and the North Carolina Capital Management Trust
(NCCMT), a SEC registered mutual fund dedicated to serving North Carolina
public units.
The Town’s
investments with a maturity of more than one year at acquisition and non-money
market investments are reported at fair value as determined by quoted market
prices and in accordance with GASB Statement 31, Accounting and Financial Reporting for Certain Investments and External
Investment Pools. The securities of
the NCCMT Cash Portfolio, an SEC-registered (2a-7)
money market mutual fund, are valued at fair value, which is the NCCMT’s share
price. The Town both intends and has the
ability to hold all securities to maturity.
In accordance
with State law, the Town has invested in securities which are callable and
which provide for periodic interest rate increases in specific increments until
maturity. These investments are reported
at fair value as determined by quoted market prices.
The Town pools
most moneys from all funds, except the Pension Trust Fund to facilitate
disbursement and investment and maximize investment income. Exceptions of non-pooled funds include, but
are not limited to, unspent bond proceeds and escrowed funds restricted for
specific purposes. For purposes of the
Statement of Cash Flows, the Town's proprietary funds consider equity in pooled
cash and investments to be cash equivalents as they are essentially demand
deposit accounts. Investment income is
allocated based on each fund’s monthly balance in relation to the total pooled
cash balance.
2.
Receivables and payables
According to
the North Carolina General Statutes, ad valorem taxes levied on July 1, the
beginning of the fiscal year, are due September 1, but interest and penalties
do not accrue until the following January 6, the lien date. Property taxes on certain registered motor
vehicles are assessed and collected throughout the year. The taxes levied for fiscal year 2006 are
based on the assessed values as of
Within the
fund financials ad valorem taxes receivable are not accrued as revenue because
the amount is not considered "available." At June 30, taxes receivable are
significantly past due and are not considered to be an available resource to
finance the operations of the subsequent year.
Accounting principles generally accepted in the
An allowance
for doubtful accounts is maintained on the ad valorem taxes receivable as described
above. The Town also maintains an
allowance for doubtful accounts for sanitation receivable, utility service
accounts receivable and other miscellaneous receivables.
The General
Fund loaned the CDBG Special Revenue Fund $2,000 in fiscal year 2006. This loan is for cash flow purposes until
grant funds are received and is expected to be paid in early fiscal year
2007. There were no other
lending/borrowing arrangements
between funds during fiscal year 2006.
However, for the entity-wide financial statements, residual balances
outstanding between the governmental activities and business-type activities
are reported as due to or due from other activities.
3. Inventories and prepaid items
Inventory is determined by physical count and valued at cost using the first-in, first-out method. Inventory in the governmental fund types consists of expendable supplies held for consumption and retail items held for resale.
For consumable items, the cost thereof has been recorded in inventory at the time items were purchased. Expenditure occurs when items are issued from inventory. These inventories are accounted for in the central warehouse, which is managed by the Purchasing Division in the Finance Department. Total inventory is reported in the General Fund and Garage Internal Service Fund, which is considered a governmental activity in the entity-wide statement of net assets. The Town also holds several inventories intended for retail resale. However, these are considered immaterial and inventory items are expensed as purchases are made and revenues are recorded when items are sold.
Certain payments to vendors reflect
costs applicable to future accounting periods and are reported as prepaid items
in both entity-wide and fund financial statements and are expensed as balances
are used.
4. Restricted assets
Certain cash balances, which are managed as a part of pooled cash, are restricted by purpose and source. Cash balances in the Utility Systems Fund and General Fund related to customer deposits are not available for appropriations or expenditures. These balances are segregated on the Statement of Net Assets and classified as restricted. Other cash balances in the major funds (Utility System Enterprise Fund and Capital Project Fund) are restricted for unspent debt proceeds and unspent grant funding, and are only available for designated projects as described in the individual official statements, grant agreements and as approved by Council.
5. Capital assets
Capital
assets, which include land, buildings, equipment, vehicles and infrastructure
assets (e.g., water & sewer lines, water tanks, roads, sidewalks and
similar items), are reported in the applicable governmental or business-type
activities columns in the entity-wide financial statements. Capital assets (not including general
infrastructure) are defined by the Town as assets with an initial, individual
cost of more than $5,000 and an estimated useful life in excess of two
years. General infrastructure assets are
defined by the Town as assets with an initial cost of more than $50,000. Assets are recorded at historical cost or
estimated historical cost if purchased or constructed. Donated capital assets are recorded at
estimated fair market value at the date of donation.
Governmental
infrastructure assets (roads, sidewalks, bridges, etc) acquired prior to
Major outlays
for capital assets and improvements are capitalized as projects are
constructed. Interest incurred during
the construction phase of capital assets of business-type activities is
included as part of the capitalized value of the assets constructed. The total interest expense paid by the Town
during the current fiscal year was over $4.5 million in the Utility Systems
Fund. Of this amount, $949,059 was added
to utility construction-in-progress related to numerous debt funded utility
construction projects.
Capital assets
of the Town are depreciated using the straight-line method over the following
estimated useful lives:
|
|
Capital asset |
Life |
|
|
|
Automobiles and Light Trucks |
3-5 years |
|
|
|
Heavy Trucks |
6-10 years |
|
|
|
Office Furniture and Equipment |
5-10 years |
|
|
|
Maintenance and Construction Equipment |
5-10 years |
|
|
|
Utility System |
50 years |
|
|
|
Buildings |
50 years |
|
|
|
Streets, sidewalks and bridges |
50 years |
|
|
|
Other infrastructure |
25-50 years |
|
6. Compensated absences
The vacation
policy of the Town provides for the accumulation of up to thirty days earned
vacation leave, with such leave being fully vested when earned. Also, unlimited
compensatory time for non-exempt employees which, if not taken, is paid to the
employee upon termination of employment.
All vacation leave is accrued when incurred in the entity-wide and
proprietary fund financial statements.
Vacation leave accrued over the 30 day limit is converted to sick leave
annually.
The Town's
sick leave policy provides for an unlimited accumulation of earned sick
leave. Sick leave does not vest, but any
unused sick leave accumulated at the time of retirement may be used in the
determination of length of service for retirement benefit purposes. Since the Town has no obligation for the
accumulated sick leave until it is actually taken, no liability for sick leave
has been recorded.
7. Long-term obligations
In the
entity-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 are
deferred and amortized over the life of the bonds using 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.
8. Fund equity
Net assets in
entity-wide and proprietary fund financial statements are classified as
investment in capital assets, net of related debt; restricted; or
unrestricted. Restricted net assets
represent constraints on resources that are either externally imposed by
creditors, grantors, contributors, or laws or regulations of other governments
or imposed by law through State statute.
In the
governmental fund financial statements, reservations of fund balance represent
amounts that are not available for appropriation or are legally restricted by
outside parties for use for a specific purpose.
Designations of fund balance represent tentative management plans that
are subject to change.
State law
[G.S. 159-13(b)(16)] restricts appropriation of fund balance for the subsequent
year’s budget to an amount not to exceed the sum of cash and investments minus
the sum of liabilities, encumbrances and deferred revenues arising from cash
receipts as those amounts stand at the close of the fiscal year preceding the
budget year.
The
governmental fund types classify fund balances as follows:
Reserved
Reserved for Inventories - portion of fund balance
segregated for inventory of supplies because it is not an expendable or
available resource.
Reserved by State Statute - portion of fund balance not
available for appropriation after consideration of other reservations of fund
balance. G.S. 159-13(b)(16) restricts
appropriation of fund balance or fund equity to an amount not to exceed the sum
of cash and investments minus the sum of liabilities, encumbrances and deferred
revenues arising from cash receipts as these amounts stand at the close of the
fiscal year preceding the budget year.
Reserved for Encumbrances - portion of
fund balance available for appropriation to pay for commitments relating to
unperformed contracts and purchase orders.
Reserved for Streets – Powell Bill - portion of
fund balance available for appropriation but legally segregated for street
expenditures. It represents the balance
of the total unexpended Powell Bill funds which is an annual grant received by
the Town from the N. C. Department of Transportation.
Reserved for Restricted 911 Funds - fund
balance available for appropriation but legally restricted for qualified 911
expenditures.
Unreserved
Designated for Self-Insurance - portion of
total fund balance available for appropriation, which has been designated for
self-insurance expenses related to small claims and workers’ compensation.
Designated for Affordable Housing
Program
- portion of total fund balance available for appropriation, which has been
designated for affordable housing, including designations for mortgage loans to
citizens and employees.
Designated for Capital Projects - portion of
total fund balance available for appropriation, which has been designated for
governmental capital projects through approved multi-year project budget
ordinances.
Designated for Subsequent Year’s
Expenditures - portion of total fund balance available for
appropriation, which has been appropriated in the fiscal year 2006 annual
operating budget.
Undesignated - portion of total fund balance
available for appropriation which is uncommitted at year-end.
Unreserved, reported in non-major - portion of
governmental fund balance that is in special revenue funds, which may carry
certain restrictions based on the revenue source.
9.
Comparative
data/reclassifications
Comparative total data for the prior year have been presented in the fund financial statements for the annually budgeted governmental and proprietary funds in order to provide an understanding of the changes in the financial position and operations of these funds. Certain amounts presented in the prior year data have been reclassified in order to be consistent with the current year’s presentation.
NOTE 2 – STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY
Expenditures
in the Transit Special Revenue Fund exceeded the approved budget by $5,679. This overage was due to unexpected increased
expenses in June 2006, which included significant increases in gas prices that
directly effected the monthly payment made to First Transit, the Town’s contracted
transit operator. The final invoice from
First Transit was not received until after
NOTE 3 - DEPOSITS AND INVESTMENTS
Deposits
All of the Town’s
deposits are either insured or collateralized by using one of two methods. Under the Dedicated Method, all deposits that
exceed the federal depository insurance coverage level are collateralized with
securities held by the Town’s agent in the Town’s name. Under the Pooling Method, which is a
collateral pool, all uninsured deposits are collateralized with securities held
by the State Treasurer's agent in the name of the State Treasurer. Since the State Treasurer is acting in a
fiduciary capacity for the Town, these deposits are considered to be held by
the Town’s agent in the Town’s name. The
amount of the pledged collateral is based on an approved averaging method for
non-interest bearing deposits and the actual current balance for
interest-bearing deposits. Depositories
using the Pooling Method report to the State Treasurer the adequacy of their
pooled collateral covering uninsured deposits.
The State Treasurer does not confirm this information with the Town or
the escrow agent. Because of the
inability to measure the exact amounts of collateral pledged for the Town under
the Pooling Method, the potential exists for under-collateralization, and this
risk may increase in periods of high cash flows. However, the State Treasurer of North
Carolina enforces strict standards of financial stability for each depository
that collateralizes public deposits under the Pooling Method. The Town has no
policy regarding custodial credit risk for deposits.
At
Investments
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