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HomeMy WebLinkAbout2017-COH - DWS Financial Statements and Supplementary Information With Independent Auditor's ReportCOUNTY OF HAWAII DEPARTMENT OF WATER SUPPLY (A component unit of the County of Hawaii, State of Hawaii) FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION WITH INDEPENDENT AUDITOR'S REPORT Fiscal Year Ended June 30, 2017 ILI � N&K CPAs, Inc. ACCOUNTANTS ICONSULTANTS AMERICAN SAVINGS BANK TOWER 11001 BISHOP STREET, SUITE 17001 HONOLULU, HAWAII 96813-3696 T (808) 524-2255 F (808) 523-2090 1 nkcpa.com COUNTY OF HAWAII DEPARTMENT OF WATER SUPPLY (A component unit of the County of Hawaii, State of Hawaii) TABLE OF CONTENTS Page INDEPENDENT AUDITOR'S REPORT 4 - 6 MANAGEMENT'S DISCUSSION AND ANALYSIS 7-10 FINANCIAL STATEMENTS Statement of Net Position 11 - 12 Statement of Revenues, Expenses, and Changes in Net Position 13 Statement of Cash Flows 14-15 Notes to Financial Statements 16-39 REQUIRED SUPPLEMENTARY INFORMATION OTHER THAN MANAGEMENT'S DISCUSSION AND ANALYSIS Schedule of Funding Progress - EUTF 41 Schedule of the Department's Proportionate Share of the Net Pension Liability 42 Schedule of Employer Pension Contributions 43 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 44-45 2 COUNTY OF HAWAII DEPARTMENT OF WATER SUPPLY (A component unit of the County of Hawaii, State of Hawaii) TABLE OF CONTENTS Page SCHEDULE OF FINDINGS AND RESPONSES 46-49 CORRECTIVE ACTION PLAN 51 -52 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS - STATUS REPORT 53 Cl N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS INDEPENDENT AUDITOR'S REPORT To the Water Board County of Hawaii, Department of Water Supply Report on the Financial Statements AMERICAN SAVINGS BANK TOWER 1001 BISHOP STREET, SUITE 1700 HONOLULU, HAWAII 96813-3696 T (808) 524-2255 F (808) 523-2090 We have audited the accompanying financial statements of the County of Hawaii, Department of Water Supply (Department), a component unit of the County of Hawaii, State of Hawaii, as of and for the fiscal year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise the Department'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 an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the 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 12 N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Department as of June 30, 2017, and the changes in its financial position and its cash flows for the fiscal year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matters As discussed in Note B, the financial statements of the Department are intended to present the financial position, the changes in financial position, and cash flows of only that portion of the business -type activities of the County of Hawai'i that is attributable to the transactions of the Department. They do not purport to, and do not, present fairly the financial position of the County of Hawai'i as of June 30, 2017, the changes in its financial position, or its cash flows for the fiscal year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Adjustment to Prior Period Financial Statements As discussed in Note J to the basic financial statements, certain errors resulting in overstatement of amounts previously reported for customers' deposits as of June 30, 2016, were discovered by management of the Department during the current fiscal year. Accordingly, an adjustment has been made to the 2016 financial statements to correct the error. Our opinion has not been modified with respect to this matter. Adoption of New Accounting Principle As discussed in Note I to the basic financial statements, the Department adopted new accounting guidance that clarifies standards for accounting and financial reporting for pensions that are provided to the employees of state and local governmental employers. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 7 through 10, schedule of funding progress - EUTF on page 39, schedule of the Department's proportionate share of the N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS net pension liability on page 40, and the schedule of employer pension contributions on page 41 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 27, 2017 on our consideration of the Department's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely 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 effectiveness of the Department's 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 Department's internal control over financial reporting and compliance. Honolulu, Hawaii December 27, 2017 0 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) MANAGEMENT'S DISCUSSION AND ANALYSIS June 30, 2017 The Department of Water Supply, County of Hawaii (Department) operates as a semiautonomous agency charged with the responsibility of operating and maintaining the County of Hawai`i's public water systems. The Department is a utility enterprise and presents its financial statements using the economic resources measurement focus and the full accrual basis of accounting. This discussion and analysis is designed to assist the reader in focusing on the significant financial issues and activities and to identify any significant changes in financial position. Readers are encouraged to consider the information presented here in conjunction with the financial statements taken as a whole. Financial Statements The financial statements are designed to provide readers with a broad overview of the Department's finances in a manner similar to a private sector business. The statement of net position presents information on all of the Department's assets, deferred outflows of resources, liabilities, and deferred inflows of resources, with the residual amount reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the Department is improving or deteriorating. Net position increases when revenues exceed expenses. Increases in assets and deferred outflows of resources, without a corresponding increase in liabilities and deferred inflows of resources, result in increased net position, which indicate an improved financial position. In the case of the Department, assets plus deferred outflows of resources exceeded liabilities plus deferred inflows of resources by $248.9 million, at the close of the most recent fiscal year. This represents an increase of $1.5 million, or 0.62% more than the previous year. At June 30, 2017, $236.2 million of the Department's net position was invested in capital assets (net of related debt), and $12.7 million was unrestricted. The statement of revenues, expenses and changes in net position present information showing how the Department's net position changed during the fiscal year. All components of the changes in net position are reported as soon as the underlying event occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in the statement for some items that will result in cash flows in future fiscal periods. Notes to Financial Statements The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the financial statements. Other Information In addition to the financial statements and accompanying notes, this report also presents certain required supplementary information concerning the Department's participation in the Employees' Retirement System of the State of Hawaii (ERS) and the Employer -Union Health Benefits Trust Fund of the State of Hawaii (EUTF). 7 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) June 30, 2017 Condensed Financial Information The following are summaries from the Department's financial statements as of and for the fiscal years ended June 30, 2017 and 2016. STATEMENTS OF NET POSITION Assets Capital assets, net Other assets Total assets Deferred outflows of resources Deferred outflows of resources Total deferred outflows of resources Total assets and deferred outflows of resources Liabilities Long-term debt Other liabilities Total liabilities Deferred inflows of resources Deferred inflows of resources Total deferred inflows of resources Net position Net investment in capital assets Unrestricted Total net position Total liabilities, deferred inflows of resources and net position A 2017 2016 (as restated) $ 300,890,633 $ 293,085,729 JV V,JV I,LL I 11, 855, 347 11, 855, 347 V V L, V I J, V T,VVV,I VV $ 372,836,568 $ 357,370,303 $ 65,547,911 55, 864, 983 121,412,894 2,525,446 2,525,446 236,230,947 12,667,281 $ 59,935,476 45, 759, 207 105, 694, 683 3,860,488 3,860,488 234, 059,105 13, 756, 027 $ 372,836,568 $ 357,370,303 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) June 30, 2017 Condensed Financial Information (Continued) STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION 2017 Changes in net position Operating revenues - water sales $ 46,488,237 Operating expenses (53,553,221) Operating loss (7,064,984) Nonoperating revenues 1,087,084 Nonoperating expenses (2,249,216) Loss before contributions (8,227,116) Contributions in aid of construction 9,310,212 Change in net position 1,083,096 Net position beginning of fiscal year 247,815,132 Net position end of fiscal year $ 248,898,228 Financial Analysis 2016 (as restated) $ 47,212,469 (49, 276, 999) (2,064,530) 1,081,733 (2,043,058) (3,025,855) 17, 008, 622 13, 982, 767 233, 832, 365 $ 247,815,132 Capital assets, net increased by $7.8 million, or 2.66%, in the fiscal year ended June 30, 2017 (FY2017), due primarily to increases in distribution reservoirs of $4.0 million, electrical pumping equipment of $1.8 million, distribution mains of $0.9 million, and construction work in progress of $13.0 million, offset by depreciation of $14.9 million. Other assets increased by $0.7 million, or 1.10%, in FY2017, due primarily to an increase in cash, cash equivalents, and investments of $7.1 million, offset by a reduction in intergovernmental receivables of $6.7 million. Deferred outflows of resources increased by $7.0 million, or 144.40%, in FY2017, due primarily to changes in actuarial assumptions of $5.0 million, and net differences between projected and actual pension investment earnings of $1.8 million. Long-term debt increased by $5.6 million, or 9.36%, in FY2017, due primarily to receipt of State of Hawaii revolving fund loan proceeds of $12.0 million, offset by loan repayments of $4.5 million and loan forgiveness of $1.7 million. Other liabilities increased $9.7 million, or 20.90%, in FY2017, due primarily to a $10.3 million increase in net pension liability. Net position increased by $1.5 million, or 0.62%, in FY2017, due primarily to the results of operations. Operating revenues decreased by $0.7 million, or 1.53%, in FY2017, due primarily to a $2.7 million decrease in power cost charge revenue, offset by a $1.0 million increase in consumption revenue, a $0.6 million increase in standby revenue, and energy projects revenue of $0.4 million. 9 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) June 30, 2017 Financial Analysis (Continued) Operating expenses increased by $4.3 million, or 8.69%, in FY2017, due primarily to a $2.1 million increase in general and administrative expenses, a $1.3 million increase in depreciation expense, and a $1.0 million increase in transmission and distribution expenses. Contributions in aid of construction decreased by $7.7 million, or 45.26%, in FY2017, due primarily to a $7.2 million decrease in dedicated projects accepted and placed into service. Capital Assets and Debt Administration As of June 30, 2017 and 2016, the Department had $300.9 million and $293.1 million, respectively, invested in capital assets, and $65.5 million and $59.9 million, respectively, of long-term debt outstanding. During 2017, major capital asset additions included: • $4.4 million for the Kaloko Heights reservoir and distribution main. During 2016, major capital asset additions included: • $10.4 million for the Palani well development. • $2.5 million for UH Hilo water infrastructure improvements. • $1.9 million of the Olaa well and reservoir. More detailed information about the Department's capital assets is provided in Note D to the financial statements. At June 30, 2017 and 2016, the Department had outstanding $29.9 million and $32.3 million, respectively, in County of Hawaii general obligation bonds for public improvements and $33.8 million and $25.5 million, respectively, in State of Hawaii revolving fund loans. As of June 30, 2017, the Department, through the County of Hawaii, maintained an "AA-" rating from Standard & Poor's, an "Aa2" rating from Moody's and an "AA-" rating from Fitch for general obligation debt. Currently Known Facts, Decisions, or Conditions Effective July 1, 2017, water rates increased by approximately 5.0%. 10 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) STATEMENT OF NET POSITION June 30, 2017 ASSETS Current assets Cash and cash equivalents I nvestments Interest receivable Trade receivables, less allowance for doubtful accounts of $1,088,000 Intergovernmental receivables Other receivables Inventories of materials and supplies Prepaid expenses and other Total current assets Restricted cash I nvestments Capital assets Utility plant in service Less accumulated depreciation Land and rights Preliminary survey and investigation charges Construction work in progress Net capital assets Total assets DEFERRED OUTFLOWS OF RESOURCES Deferred outflows of resources related to pensions Total deferred outflows of resources Total assets and deferred outflows of resources $ 24,522,616 5,000,000 198,560 6,708,488 765,463 259,256 1,540,784 207,196 39,202, 363 888,225 gn nnn nnn 498, 316, 252 (237,640,279) 260,675,973 4,898,583 5,337,002 29,979,075 Rnn Ran FRR 360,981,221 11,855, 347 11,855, 347 $ 372,836,568 The accompanying notes are an integral part of these financial statements. 11 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) STATEMENT OF NET POSITION (Continued) June 30, 2017 LIABILITIES Current liabilities Accounts and construction contracts payable, including retainages Long-term debt, current portion Accrued compensation Customers' deposits, current portion Accrued vacation, current portion Accrued interest payable Accrued workers' compensation Total current liabilities Accrued workers' compensation, noncurrent Accrued vacation, noncurrent Unearned revenue Customers' deposits, noncurrent Net pension liability Long-term debt, noncurrent Total liabilities DEFERRED INFLOWS OF RESOURCES Deferred inflows of resources related to pensions Unamortized gain on advanced refunding Total deferred inflows of resources NET POSITION Net investment in capital assets Unrestricted Total net position Total liabilities, deferred inflows of resources and net position $ 3,638,562 3,964,472 1,352,376 165,350 555,054 690,864 130,417 10,497,095 452,583 1,126,928 1,583,953 16, 921, 289 29, 247, 607 61,583,439 121,412,894 2,442,214 83,232 2,525,446 236,230,947 12,667,281 248,898,228 $ 372,836,568 The accompanying notes are an integral part of these financial statements. 12 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION Fiscal Year Ended June 30, 2017 OPERATING REVENUES Water sales OPERATING EXPENSES Power and pumping Depreciation General and administrative Transmission and distribution Maintenance and repairs Purification Customers' accounting and collecting Total operating expenses Operating loss NONOPERATING REVENUES Interest income Other Total nonoperating revenues NONOPERATING EXPENSES Interest expense on long-term debt Loss on disposal of capital assets Other Total nonoperating expenses Loss before contributions CONTRIBUTIONS IN AID OF CONSTRUCTION Change in net position Net position at beginning of fiscal year, as previously reported Restatement adjustment: cumulative effect of implementation of new accounting standard Prior period adjustment Net position at beginning of fiscal year, as restated Net position at end of fiscal year The accompanying notes are an integral part of these financial statements. 13 $ 46,488,237 18,412,830 14,881,565 9,716,855 6,001,051 1,629,468 1,576,818 1,334,634 53,553,221 (7,064,984) 428,771 658,313 1,087,084 (1,804,577) (234, 747) (209,892) (2,249,216) (8,227,116) 9,310,212 1,083,096 247,783,630 (417,718) 449,220 247,815,132 $ 248,898,228 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) STATEMENT OF CASH FLOWS Fiscal Year Ended June 30, 2017 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash payments to suppliers for goods and services Cash payments to employees for services Net cash provided by operating activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal paid on long-term debt Debt proceeds Interest paid on long-term debt Proceeds on sale of assets Acquisition and construction of capital assets Contributions in aid of construction Net cash used in capital and related financing activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments Proceeds from sale and maturities of investments Interest received Net cash used in investing activities Net decrease in cash and cash equivalents CASH AND CASH EQUIVALENTS - BEGINNING OF FISCAL YEAR CASH AND CASH EQUIVALENTS - END OF FISCAL YEAR Restricted - end of fiscal year Unrestricted - end of fiscal year The accompanying notes are an integral part of these financial statements. 14 $ 46,430,112 (22,090,011) (14,766,125) 9,573,976 (4,508,562) 11,978,695 (2,079,520) 27,500 (9,529,033) 1,400,532 (2,710,388) (17,000,000) 2,000,000 262,200 (14,737,800) (7,874,212) 33,285,053 25,410,841 888,225 $ 24,522,616 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) STATEMENT OF CASH FLOWS (Continued) Fiscal Year Ended June 30, 2017 RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating loss $ (7,064,984) Depreciation 14,881,565 Provision for doubtful accounts 102,937 Change in assets, deferred outflows of resources, liabilities and deferred inflows of resources Trade and other receivables (77,501) Inventories of materials and supplies (88,655) Prepaid expenses and other (18,984) Deferred outflows of resources related to pensions (7,004,639) Accounts and construction contracts payable, including retainages (412,952) Customers' deposits (83,561) Other accrued liabilities 361,456 Net pension liability 10,307,542 Deferred inflows of resources related to pensions (1,328,248) Net cash provided by operating activities $ 9,573,976 SUPPLEMENTAL DISCLOSURE OF NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES Contributions of capital assets that are recorded as contributions in aid of construction $ 6,253,422 Amortization of unamortized gain on advanced refunding $ 6,794 Amortization of bond premium $ 201,440 Principal forgiveness of long-term debt $ 1,656,258 The accompanying notes are an integral part of these financial statements. 15 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE A - NATURE OF ACTIVITIES The Department of Water Supply, County of Hawaii (Department) is administered by the Water Board, which consists of nine members who serve staggered terms of five years in length. Board members are appointed by the Mayor of the County of Hawaii, State of Hawaii (County) and are confirmed by the County Council, as required by the County Charter. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Financial Statement Presentation - The Department is a component unit of the County (primary government). The accompanying financial statements present only the financial position and activities of the Department and do not purport to, and do not present the financial position of the County, the changes in its financial position, or, where applicable, its cash flows. (2) Measurement Focus and Basis of Accounting - The Department's financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. (3) Cash and Cash Equivalents - For purposes of the statement of cash flows, the Department considers all highly liquid investments with a maturity of three months or less or money market funds with a weighted average maturity of three months or less when purchased to be cash equivalents. (4) Investments - Investments in time certificates of deposits are carried at cost, which approximates fair value. (5) Trade Receivables - Trade receivables are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Department's best estimate of the amount of probable credit losses in the Department's existing trade receivables. The Department determines the allowance based on historical write-off experience. The Department reviews its allowance for doubtful accounts monthly. Past -due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. (6) Inventories of Materials and Supplies - Materials and supplies are stated at cost on an average cost basis. (7) Restricted Assets - Unspent bond proceeds that are restricted for purchases of water system improvements are recorded as restricted assets. EUT County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (8) Capital Assets - Capital assets in service as of January 1, 1950, date of inception of the Department, were recorded at the cost of the assets acquired by the County for its water system from January 1, 1924 to December 31, 1949, less accumulated depreciation to December 31, 1949 as determined by the Department. Assets purchased prior to 1924 and property acquired by gift or grant prior to 1950 are not included in capital assets. Additions to capital assets since January 1, 1950 are stated at cost and include contributions by governmental agencies, private subdividers, and customers at their cost or estimated cost. The capitalization threshold of assets is $400 with estimated useful lives greater than one year. Construction costs include amounts for contract work, engineering supervision, and other direct costs and overhead costs. Construction period interest is capitalized on capital assets constructed with tax-exempt debt and amounted to $6,975 for the fiscal year ended June 30, 2017. Preliminary survey and investigation charges represent expenditures incurred to determine the feasibility of potential water system sites for future development. Maintenance and repairs and minor replacements are charged to operations. Major replacements, renewals, and betterments are capitalized to capital asset accounts. Depreciation is computed using the straight-line method over the following estimated useful lives: Distribution mains and accessories 40 years Structures and improvements 40 to 50 years Electric and hydraulic pumping equipment 10 years Services 25 years Transmission mains and accessories, hydrants and purification system 40 years Meters 10 years Transportation, communication, tools and office equipment and furniture 5 years Other equipment 5 to 10 years Other fire protection plant 25 years Annual depreciation rates are applied to costs of the various classes of depreciable assets on the group basis or, as to transportation equipment, to the cost of individual units of property. Gains or losses resulting from the sale, retirement, or disposal of capital assets in service are charged or credited to operations in the year realized. 17 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (9) Compensated Absences - Employees earn vacation credits at the rate of one and three-quarter working days for each month of service. Up to 90 days of vacation leave credits can be accumulated per employee. In addition, employees who work overtime can elect to take compensatory time off instead of overtime pay. The time off is earned at the rate of one and a half hours for each hour of overtime worked. Both compensatory time off and vacation credits are converted to pay upon termination of employment. Sick leave can be taken only in the event of illness and is not convertible to pay upon termination of employment. Accumulated sick leave at June 30, 2017 amounted to $6,218,937. (10) Pensions - For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions and pension expense, information about the fiduciary net position of the Employees' Retirement System of the State of Hawaii (ERS) and additions to/deductions from the ERS's fiduciary net position have been determined on the same basis as they are reported by the ERS. For this purpose, employer and member contributions are recognized in the period in which the contributions are legally due and benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with benefit terms. Investments are reported at fair value. (11) Net Position - Net position represents the difference between assets and deferred outflows of resources less liabilities and deferred inflows of resources. Net position is classified in the following components: net investment in capital assets and unrestricted net position. Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by outstanding debt related to the acquisition or construction of those assets, less unspent bond proceeds. Unrestricted net position consists of all other net position not categorized as invested in capital assets. When both restricted and unrestricted resources are available for use, generally, it is management's policy to use restricted resources first, then unrestricted resources, as they are needed. (12) Operating Revenues and Expenses - Revenues and expenses are distinguished between operating and nonoperating items. Operating revenues generally result from providing services in connection with the Department's principal ongoing operations. The principal operating revenues of the Department are fees charged to customers for providing water services. Operating expenses include the costs associated with providing water services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting these definitions are reported as nonoperating revenues and expenses. W County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (13) Contributions in Aid of Construction - Contributions in aid of construction represent cash or capital assets received by the Department to aid in the construction of infrastructure assets. Contributions in aid of construction are recognized when they are accepted by the Water Board and when all applicable eligibility requirements have been met. (14) Use of Estimates - The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets, deferred outflows of resources, liabilities, deferred inflows of resources and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of capital assets, valuation allowances for trade receivables, valuation of noncash contributions in aid of construction, accrued workers' compensation, pensions and postretirement healthcare and life insurance benefits. Actual results could differ from those estimates. (15) Deferred Amounts on Advanced Refundings - For advanced refunding resulting in defeasance of debt, the difference between the reacquisition price and the carrying amount of the old debt is deferred. This amount is amortized as a component of interest expense using the bonds outstanding method over the remaining life of the old debt or the life of the new, whichever is shorter. The amount deferred is reported as a deferred inflow or outflow of resources. (16) Deferred Outflows of Resources and Deferred Inflows of Resources - Deferred outflows of resources represent a consumption of net position that applies to a future period and will not be recognized as an outflow of resources (expense) until that time. Deferred inflows of resources represent an acquisition of net position that applies to a future period and will not be recognized as an inflow of resources (revenue) until that time. (17) New Accounting Pronouncements - The Government Accounting Standards Board (the "GASB") issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. The Statement replaces GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple -Employer Plans. The Statement will require the liability of employers for defined benefit OPEB to be measured as the portion of the present value of projected benefit payments to be provided to current active and inactive employees that is attributed to those employees' past periods of service, less the amount of the OPEB plan's fiduciary net position. The requirements of this Statement are effective for fiscal years beginning after June 15, 2017. Management has not yet determined the effect this Statement will have on the Department's financial statements, but anticipate that it will materially impact the Department's financial statements. 19 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The GASB issued Statement No. 82, Pension Issues an amendment of GASB Statements No. 67, No. 68, and No. 73. This Statement 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. The requirements of this Statement are effective for reporting periods beginning after June 15, 2016, except for the requirements of this Statement for the selection of assumptions in a circumstance in which an employer's pension liability is measured as of a date other than the employer's most recent fiscal year-end. In that circumstance, the requirements for the selection of assumptions are effective for that employer in the first reporting period in which the measurement date of the pension liability is on or after June 15, 2017. Management has adopted the applicable requirements of the new standards as presented in the Department's financial statements. The GASB issued Statement No. 83, Certain Asset Retirement Obligations. This Statement addresses accounting and financial reporting for certain asset retirement obligations ("AROs"). An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability based on the guidance in this Statement. The requirements of this Statement are effective for reporting periods beginning after June 15, 2018. Management has not yet determined the effect this Statement will have on the Department's financial statements. The GASB issued Statement No. 85, Omnibus 2017. This Statement addresses a variety of topics including issues related to blending component units, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits [OPEB]). The requirements of this Statement are effective for reporting periods beginning after June 15, 2017. Management has not yet determined the effect this Statement will have on the Department's financial statements. The GASB issued Statement No. 87, Leases. This Statement requires the recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under this Statement, a lessee is required to recognize a lease liability and an intangible right -to -use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources. The requirements of this Statement are effective for reporting periods beginning after December 15, 2019. Management has not yet determined the effect this Statement will have on the Department's financial statements. 20 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE C - DEPOSITS AND INVESTMENTS At June 30, 2017, the carrying amount of deposits (cash, time certificates of deposit, and money market funds) was $50,410,841, with corresponding bank balances of $51,709,283. These amounts were fully insured or collateralized with securities held by the County's agent in the County's name. The Hawaii Revised Statutes (HRS) authorizes the County Director of Finance to invest Department moneys that are in excess of the amounts necessary for meeting immediate requirements. The primary objective of the County's investment policy is to safeguard the principal. The secondary objective is to meet the liquidity needs of the Department. The third objective is to return an acceptable yield. In accordance with the HRS, the County's investment policy permits investments in obligations of or guaranteed by the U.S. government, obligations of the State of Hawaii, federally insured savings and checking accounts, time certificates of deposit, and repurchase agreements with federally insured financial institutions. Investments in time certificates of deposits totaled $25,000,000 at June 30, 2017. Custodial Credit Risk - Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, the Department will not be able to recover deposits or will not be able to recover collateral securities that are in possession of an outside party. The Department's policy requires deposits to be maintained at financial institutions that are members of the Federal Deposit Insurance Corporation and for deposits in excess of insured amounts to be collateralized with securities in accordance with the HRS. Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, the Department will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Department's policy provides a list of authorized counterparties as well as minimum requirements that counterparties must demonstrate in order to be utilized by the Department. Interest Rate Risk - Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Department manages its exposure to interest rate risk is by purchasing a combination of short-term and mid-term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or nearing maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. The Department monitors the interest rate risk inherent in its portfolio by measuring the weighted average maturity of its portfolio. Credit Risk and Concentration of Credit Risk - Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. Concentration of credit risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer. The Department's policy limits investment options to those authorized in the HRS and requires the diversification of assets as to issuer. 21 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE D - CAPITAL ASSETS The following summarizes the Department's capital assets at June 30, 2017: The following is a summary of changes in capital assets during the fiscal year ended June 30, 2017: Balance July 1, 2016 Utility plant in service $ Amount Utility plant in service (224,115,993) Distribution mains and accessories $ 142,970,741 Structures and improvements 185,285,037 Electric and hydraulic pumping equipment 61,354,139 Services 31,705,374 Transmission mains and accessories 36,563,861 Hydrants 9,262,074 Meters 10,951,269 Purification system 7,026,753 Transportation equipment 4,519,779 Communication equipment 3,176,286 Office equipment and furniture 2,455,489 Tools and work equipment 1,552,210 Other equipment 1,473,653 Other fire protection plant 19,587 Total utility plant in service 498,316,252 Less accumulated depreciation (237,640,279) 260,675,973 Land and rights 4,898,583 Preliminary survey and investigation charges 5,337,002 Construction work in progress 29,979,075 Net capital assets $ 300,890,633 The following is a summary of changes in capital assets during the fiscal year ended June 30, 2017: Balance July 1, 2016 Utility plant in service $ 490,527,519 Less accumulated depreciation (224,115,993) $ 9,408,260 266,411,526 Land and rights 4,869,383 Preliminary survey and (262,248) investigation charges 4,820,471 Construction work in progress 16,984,349 $ 293,085,729 22 Balance June 30, 2017 $ 498,316,252 (237,640,279) 260, 675, 973 4,898,583 5,337,002 29, 979, 075 $ 300, 890, 633 Retirements/ Additions Transfers $ 9,408,260 $ (1,619,527) (14,881,565) 1,357,279 (5,473,305) (262,248) 29,200 -- 734,480 (217,949) 16,958,2443,9( 63,518) $ 12,248,619 $ (4,443,715) 22 Balance June 30, 2017 $ 498,316,252 (237,640,279) 260, 675, 973 4,898,583 5,337,002 29, 979, 075 $ 300, 890, 633 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE E - LONG-TERM OBLIGATIONS At June 30, 2017, long-term debt consisted of the following: Public improvement refunding bonds ($13,497,500 issued), 2016 Series B, payable to the County, interest at 3% to 5%, due in semiannual installments through 2026 Public improvement refunding bonds ($6,353,750 issued), 2016 Series E, payable to the County, interest at 2% to 5%, due in semiannual installments through 2029 Public improvement refunding bonds ($5,752,612 issued), 2007 Series C, payable to the County, interest at 4% to 5%, due in semiannual installments through 2021 Public improvement bonds ($9,585,706 issued), 2010 Series A, payable to the County, interest at 4% to 5%, due in semiannual installments through 2020 Public improvement bonds ($6,107,099 issued), 2010 Series B, payable to the County, interest at 3.33% to 6.1%, due in semiannual installments through 2030 Public improvement bonds ($259,200 issued), 2004 Series, payable to the County, interest at 4.5%, due in semiannual installments through 2039 Public improvement bonds ($147,000 issued), 2008 Series A, payable to the County, interest at 4.125%, due in semiannual installments through 2043 State Revolving Fund loans ($62,707,013 loaned) payable to the State of Hawaii, interest up to 1.37%, due in semiannual installments through 2037 Total long-term debt Add: Unamortized premium Less: Current portion Noncurrent portion 23 Amount $ 13,497,500 6,353,750 2,935,432 1,392,500 5,340,000 212,583 129,793 33,756,825 63,618,383 1,929,528 65,547,911 (3,964,472) $ 61,583,439 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE E - LONG-TERM OBLIGATIONS (Continued) The public improvement bonds consist of long-term obligations to the County that reflect the Department's proportionate share of general obligation bonds that were issued by the County, in part, for the purpose of improving the public water system. The following is a summary of changes in long-term debt during the fiscal year ended June 30, 2017: Amount Beginning balance $ 57,804,507 Additions 11,978,695 Retirements (4,508,562) Forgiveness (1,656,257) Ending balance $ 63,618,383 At June 30, 2017, future principal and interest payments for long-term debt are scheduled as follows: Year Ending June 30, Principal 2018 $ 3,964,472 2019 4,744,774 2020 4,920,787 2021 5,028,479 2022 5,142,560 2023-2027 21,971,330 2028-2032 11,790,844 2033-2037 5,443,816 2038-2042 603,508 2043 7,813 Interest $ 1,983,860 1,836,847 1,667,775 1,475,968 1,276,872 3,921,372 1,072,178 248,471 13,010 322 Total $ 5,948,332 6,581,621 6,588,562 6,504,447 6,419,432 25,892,702 12,863,022 5,692,287 616,518 8,135 $ 63,618,383 $ 13,496,675 $ 77,115,058 In February 2016, the County issued general obligation refunding bonds which consisted of $26,995,000 of 2016 Series B, $44,835,000 of 2016 Series C bonds, $28,860,000 of 2016 Series D bonds and $25,415,000 of 2016 Series E bonds. The proceeds of the issuance were used to defease and advance refund the County's 2006 Series A, 2007 Series A, 2008 Series A and 2010 Series A bonds which had interest rates ranging from 4.00% to 6.00%. The County's proportionate share of the net proceeds from all refunding bonds was $128,919,923 (including a premium of $23,176,079 and after payment of $509,906 in underwriting fees and other issuance costs) were used to purchase U.S. government 24 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE E - LONG-TERM OBLIGATIONS (Continued) securities, which were deposited in an irrevocable trust administered by an escrow agent to provide for the future debt service payment on the refunded bonds. As a result, the 2006 Series A, 2007 Series A, 2008 Series A, and 2010 Series A were considered defeased and were removed from the County's financial statements in 2016. The Department has a 50% proportionate share of the 2016 Series B refunding bonds and the 2006 Series A bonds. The Department also has a 25% proportionate share of the 2016 Series E refunding bonds and 2010 Series A bonds. The Department's proportionate share of the net proceeds from the 2016 Series B and 2016 Series E refunding bonds was $21,778,750 which was used to advance refund the Department's proportionate share of the 2006 Series A bonds and 2010 Series A bonds amounting to $15,425,000 and $6,220,000, respectively. These bonds were defeased and removed from the Department's 2016 financial statements. The Department's total debt service requirement over the next ten to thirteen years will decrease by $3,002,238 as a result of the refunding and the net economic gain (difference between the present values of the debt service payments on the old and new debt) was $2,647,988. At June 30, 2017, the Department's proportionate share of defeased bonds was $6,220,000. Other Long-term Obligations - The following is a summary of other long-term obligations transactions for the fiscal year ended June 30, 2017: Balance July 1, 2016 Deductions Balance Due Within (as restated) Additions and Payments June 30, 2017 One Year Accrued workers' compensation $ 362,000 $ 347,621 $ (126,621) $ 583,000 $ 130,417 Accrued vacation 1,676,081 747,130 (741,229) 1,681,982 555,054 Customers' deposits 17,170,200 936,050 (1,019,611) 17,086,639 165,350 Total $ 19,208,281 $ 2,030,801 $ (1,887,461) $ 19,351,621 $ 850,821 NOTE F - EMPLOYEE BENEFITS Pension Plan Plan Description - Generally, all full-time employees of the State and counties are required to be members of the ERS, a cost-sharing multiple -employer defined benefit pension plan that administers the State's pension benefits program. Benefits, eligibility, and contribution requirements are governed by HRS Chapter 88 and can be amended through legislation. The ERS issues publicly available annual financial reports that can be obtained at ERS' website: http://ers.ehawaii.gov/. Benefits Provided - The ERS Pension Trust is comprised of three pension classes for membership purposes and considered to be a single plan for accounting purposes since all assets of the ERS may legally be used to pay the benefits of any of the ERS members or beneficiaries. The ERS provides retirement, disability and death benefits with three 25 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) membership classes known as the noncontributory, contributory and hybrid retirement classes. The three classes provide a monthly retirement allowance equal to the benefit multiplier (generally 1.25% or 2%) multiplied by the average final compensation multiplied by years of credited service. Average final compensation for members hired prior to July 1, 2012 is an average of the highest salaries during any three years of credited service, excluding any salary paid in lieu of vacation for members hired January 1, 1971 or later and the average of the highest salaries during any five years of credited service including any salary paid in lieu of vacation for members hired prior to January 1, 1971. For members hired after June 30, 2012, average final compensation is an average of the highest salaries during any five years of credited service excluding any salary paid in lieu of vacation. Each retiree's original retirement allowance is increased on each July 1 beginning the calendar year after retirement. Retirees first hired as members prior to July 1, 2012 receive a 2.5% increase each year of their original retirement allowance without a ceiling. Retirees first hired as members after June 30, 2012 receive a 1.5% increase each year of their original retirement allowance without a ceiling. The annual increase is not compounded. The following summarizes the provisions relevant to the largest employee groups of the respective membership class. Retirement benefits for certain groups, such as police officers, firefighters, some investigators, sewer workers, judges, and elected officials, vary from general employees. Noncontributory Class Retirement Benefits - General employees' retirement benefits are determined as 1.25% of average final compensation multiplied by the years of credited service. Employees with ten years of credited service are eligible to retire at age 62. Employees with 30 years of credited service are eligible to retire at age 55. Disability Benefits - Members are eligible for service -related disability benefits regardless of length of service and receive a lifetime pension of 35% of their average final compensation. Ten years of credited service is required for ordinary disability. Ordinary disability benefits are determined in the same manner as retirement benefits but are payable immediately, without an actuarial reduction, and at a minimum of 12.5% of average final compensation. Death Benefits - For service -connected deaths, the surviving spouse/reciprocal beneficiary receives a monthly benefit of 30% of the average final compensation until remarriage or re-entry into a new reciprocal beneficiary relationship. Additional benefits are payable to surviving dependent children up to age 18. If there is no spouse/reciprocal beneficiary or dependent children, no benefit is payable. Ordinary death benefits are available to employees who were active at time of death with at least ten years of credited service. The surviving spouse/reciprocal beneficiary (until remarriage/re-entry into a new reciprocal beneficiary relationship) and dependent children (up to age 18) receive a benefit equal to a percentage of the member's accrued KET County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) maximum allowance unreduced for age or, if the member was eligible for retirement at the time of death, the surviving spouse/reciprocal beneficiary receives 100% Joint and Survivor lifetime pension and the dependent children receive a percentage of the member's accrued maximum allowance unreduced for age. Contributory Class for Members Hired prior to July 1, 2012 Retirement Benefits - General employees' retirement benefits are determined as 2% of average final compensation multiplied by the years of credited service. General employees with five years of credited service are eligible to retire at age 55. Police officers and firefighters' retirement benefits are determined using the benefit multiplier of 2.5% for qualified service, up to a maximum of 80% of average final compensation. Police officers and firefighters with five years of credited service are eligible to retire at age 55. Police officers and firefighters with 25 years of credited service are eligible to retire at any age, provided the last five years is service credited in these occupations. Disability Benefits - Members are eligible for service -related disability benefits regardless of length of service and receive a one-time payment of the member's contributions and accrued interest plus a lifetime pension of 50% of their average final compensation. Ten years of credited service is required for ordinary disability. Ordinary disability benefits are determined as 1.75% of average final compensation multiplied by the years of credited service but are payable immediately, without an actuarial reduction, and at a minimum of 30% of average final compensation. Death Benefits - For service -connected deaths, the surviving spouse/reciprocal beneficiary receives a lump -sum payment of the member's contributions and accrued interest plus a monthly benefit of 50% of the average final compensation until remarriage or re-entry into a new reciprocal beneficiary relationship. If there is no surviving spouse/reciprocal beneficiary, surviving children (up to age 18) or dependent parents are eligible for the monthly benefit. If there is no spouse/reciprocal beneficiary or dependent children/parents, the ordinary death benefit is payable to the designated beneficiary. Ordinary death benefits are available to employees who were active at time of death with at least one year of service. Ordinary death benefits consist of a lump -sum payment of the member's contributions and accrued interest plus a percentage of the salary earned in the 12 months preceding death, or 50% Joint and Survivor lifetime pension if the member was not eligible for retirement at the time of death but was credited with at least ten years of service and designated one beneficiary, or 100% Joint and Survivor lifetime pension if the member was eligible for retirement at the time of death and designated one beneficiary. Contributory Class for Members Hired After June 30, 2012 Retirement Benefits - General employees' retirement benefits are determined as 1.75% of average final compensation multiplied by the years of credited service. General employees with ten years of credited service are eligible to retire at age 60. Judges and 27 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) elected officers' retirement benefits are determined as 3.0% of average final compensation multiplied by the years of credited service up to a maximum of 75%. Judges and elected officers with ten years of credited service are eligible to retire at age 60. Police officers and firefighters' retirement benefits are determined using the benefit multiplier of 2.25% for qualified service, up to a maximum of 80% of average final compensation. Police officers and firefighters with ten years of credited service are eligible to retire at age 60. Police officers and firefighters with 25 years of credited service are eligible to retire at age 55, provided the last five years is service credited in these occupations. Disability and Death Benefits - Members are eligible for service -related disability benefits regardless of length of service and receive a lifetime pension of 50% of their average final compensation plus refund of contributions and accrued interest. Ten years of credited service is required for ordinary disability. Ordinary disability benefits are 3% of average final compensation for each year of service for judges and elected officers and 1.75% of average final compensation for each year of service for police officers and firefighters and are payable immediately, without an actuarial reduction, at a minimum of 30% of average final compensation. Death benefits for contributory members hired after June 30, 2012 are generally the same as those for contributory members hired June 30, 2012 and prior. Hybrid Class for Members Hired Prior to July 1, 2012 Retirement Benefits - General employees' retirement benefits are determined as 2% of average final compensation multiplied by the years of credited service. General employees with five years of credited service are eligible to retire at age 62. General employees with 30 years of credited service are eligible to retire at age 55. Disability Benefits - Members are eligible for service -related disability benefits regardless of length of service and receive a lifetime pension of 35% of their average final compensation plus refund of their contributions and accrued interest. Ten years of credited service is required for ordinary disability. Ordinary disability benefits are determined in the same manner as retirement benefits but are payable immediately, without an actuarial reduction, and at a minimum of 25% of average final compensation. Death Benefits - For service -connected deaths, the designated surviving spouse/reciprocal beneficiary receives a lump -sum payment of the member's contributions and accrued interest plus a monthly benefit of 50% of the average final compensation until remarriage or re-entry into a new reciprocal beneficiary relationship. If there is no surviving spouse/reciprocal beneficiary, surviving dependent children (up to age 18) or dependent parents are eligible for the monthly benefit. If there is no spouse/reciprocal beneficiary or dependent children/parents, the ordinary death benefit is payable to the designated beneficiary. W.* County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) Ordinary death benefits are available to employees who were active at time of death with at least five years of service. Ordinary death benefits consist of a lump -sum payment of the member's contributions and accrued interest plus a percentage multiplied by 150%, or 50% Joint and Survivor lifetime pension if the member was not eligible for retirement at the time of death but was credited with at least ten years of service and designated one beneficiary, or 100% Joint and Survivor lifetime pension if the member was eligible for retirement at the time of death and designated one beneficiary. Hybrid Class for Members Hired After June 30, 2012 Retirement Benefits - General employees' retirement benefits are determined as 1.75% of average final compensation multiplied by the years of credited service. General employees with ten years of credited service are eligible to retire at age 65. Employees with 30 years of credited service are eligible to retire at age 60. Sewer workers, water safety officers, and emergency medical technicians may retire with 25 years of credited service at age 55. Disability and Death Benefits - Provisions for disability and death benefits generally remain the same except for ordinary death benefits. Ordinary death benefits are available to employees who were active at time of death with at least ten years of service. Ordinary death benefits consist of a lump -sum payment of the member's contributions and accrued interest, or 50% Joint and Survivor lifetime pension if the member was not eligible for retirement at the time of death but was credited with at least ten years of service and designated one beneficiary, or 100% Joint and Survivor lifetime pension if the member was eligible for retirement at the time of death and designated one beneficiary. Contributions - Contributions are governed by HRS Chapter 88 and may be amended through legislation. The employer rate is set by statute based on the recommendations of the ERS actuary resulting from an experience study conducted every five years. Since July 1, 2005, the employer contribution rate is a fixed percentage of compensation, including the normal cost plus amounts required to pay for the unfunded actuarial accrued liabilities. The contribution rates for fiscal year 2017 were 25.00% for police officers and firefighters and 17.00% for all other employees. Contributions to the pension plan from the Department were $1,603,278 for the fiscal year ended June 30, 2017. On May 18, 2017, the Governor signed into law Act 17 SLH 2017. Per Act 17, future employer contributions from the State and counties are expected to increase pursuant to a phased -in contribution rate increase over four years beginning July 1, 2017. The rate for police officers and firefighters increases to 28.00% on July 1, 2017; 31.00% on July 1, 2018; 36.00% on July 1, 2019; and 41.00% on July 1, 2020 and the rate for all other employees' increases to 18.00% on July 1, 2017; 19.00% on July 1, 2018; 22.00% on July 1, 2019; and 24.00% on July 1, 2020. 29 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) The employer is required to make all contributions for noncontributory members. Contributory members hired prior to July 1, 2012 are required to contribute 7.8% of their salary, except for police officers and firefighters who are required to contribute 12.2% of their salary. Contributory members hired after June 30, 2012 are required to contribute 9.8% of their salary, except for police officers and firefighters who are required to contribute 14.2% of their salary. Hybrid members hired prior to July 1, 2012 are required to contribute 6.0% of their salary. Hybrid members hired after June 30, 2012 are required to contribute 8.0% of their salary. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions - At June 30, 2017, the Department reported a liability of $29,247,607 for its proportionate share of the net pension liability. The net pension liability was measured as of June 30, 2016, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The Department's proportion of the net pension liability was based on a projection of the Department's long-term share of contributions to the pension plan relative to projected contributions of all participants, actuarially determined. At June 30, 2016, the Department's proportion was 0.22%, which didn't change from its proportion measured as of June 30, 2015. For the fiscal year ended June 30, 2017, the Department recognized pension expense of $3,696,028. At June 30, 2017, the Department reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Differences between expected and actual experience Changes in assumptions Net difference between projected and actual earnings on pension plan investments Changes in proportion and differences between Department contributions and proportionate share of contributions Department contributions subsequent to the measurement date Total 30 Deferred Deferred Outflows of Inflows of Resources Resources 582,442 $ 423,337 5,493,487 -- 1,789,236 -- 2,386,904 2,018,877 1,603,278 -- $ 11,855,347 $ 2,442,214 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) The $1,603,278 reported as deferred outflows of resources related to pensions resulting from the Department's contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the fiscal year ended June 30, 2018. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Year Ending June 30, Amount 2017 $ 1,667,202 2018 1,667,203 2019 2,015,569 2020 1,497,749 2021 962,132 $ 7,809,855 Actuarial Assumptions - The following actuarial assumptions were used in the actuarial valuation as of June 30, 2016: Inflation 2.50% Payroll growth rate 3.50% Irnestment rate of return, including inflation 7.00% Salary increases, including inflation Police and fire employees 5.00% to 7.00% General employees 3.50% to 6.50% Teachers 3.75% to 5.75% Post-retirement mortality rates are based on the 2016 Public Retirees of Hawaii mortality table. Mortality rates used in the actuarial valuation as of June 30, 2016 were based on the following: Active members - Multiples of the RP 2014 mortality table for active employees. Healthy retirees - Client -specific mortality tables developed using the actual mortality experience of non -disabled retirees in the ERS, with adjustments for continuous mortality improvements in the future using a fully generational approach and Scale BB. Disabled retirees - Client -specific mortality tables for healthy retirees, set forward five years to reflect impaired mortality, with adjustments for continuous mortality improvements in the future using a fully generational approach and Scale BB. 31 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) The actuarial assumptions used in the actuarial valuation as of June 30, 2016 were based on the results of an actuarial experience study for the five-year period ended June 30, 2015. The major changes to assumptions resulting from the 2015 actuarial experience study were (1) a decrease in the investment return assumption from 7.65% to 7.00% and (2) the mortality assumptions were modified to assume longer life expectancies as well as to reflect continuous mortality improvement. ERS updates their experience studies every five years. The long-term expected rate of return on pension plan investments was determined using a "top down approach" of the Bespoke Client -Constrained Simulation -based Optimization Model (a statistical technique known as "re -sampling with a replacement" that directly keys in on specific plan -level risk factors as stipulated by the ERS Board) 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 allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: Long -Term Expected Target Arithmetic Asset Class Allocation Rate of Return Broad growth 63.00% 8.35% Crisis risk offset 20.00% 5.50% Real return 10.00% 6.15% Principal protection 7.00% 2.20% 100.00% * The real estate, private equity and real return targets will be the percentage actually invested up to 7.00%, 7.00% and 5.00%, respectively, of the total fund. Changes in the real estate, private equity and real return targets will be offset by an equal percentage change in the large cap domestic equity target. Discount Rate - The discount rate used to measure the net pension liability was 7.00%, a decrease from the 7.65% rate used at the prior measurement date. The projection of cash flows used to determine the discount rate assumed that employee contributions will be made at the current contribution rate and that contributions from the Department will be made at statutorily required rates, actuarially determined. Based on those assumptions, the pension plan's fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all period of projected benefit payments to determine the total pension liability. 32 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) Sensitivity of the Department's Proportionate Share of the Net Pension Liability to Changes in the Discount Rate - The following presents the Department's proportionate share of the net pension liability calculated using the discount rate of 7.00%, as well as what the Department's proportionate share of the net pension liability would be if it were calculated using a discount rate that is one percentage point lower (6.00%) or one percentage point higher (8.00%) than the current rate: 1% Decrease Discount Rate 1% Increase (6.00%) (7.00%) (8.00%) Department's proportionate share of the net pension liability $ 37,400,588 $ 29,247,607 $ 22,501,284 Pension Plan Fiduciary Net Position - The pension plan's fiduciary net position is determined on the same basis used by the pension plan. The ERS financial statements are prepared using the accrual basis of accounting under which expenses are recorded when the liability is incurred, and revenues are recorded in the accounting period in which they are earned and become measurable. Employer and member contributions are recognized in the period in which the contributions are due. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan. Investment purchases and sales are recorded as of their trade date. Administrative expenses are financed exclusively with investment income. There were no significant changes after the report measurement date. Detailed information about the pension plan's fiduciary net position is available in the separately issued ERS financial report. ERS' complete financial statements are available at: http://www.ers.ehawaii.gov. Payables to the Pension Plan - At June 30, 2017, the amount payable to the ERS was $134,225. Deferred Compensation Plan The Department participates in a deferred compensation plan established by the State of Hawaii in accordance with Internal Revenue Code Section 457. The plan is available to all the Department employees, and permits employees to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. All plan assets are held in a trust fund to protect them from claims of general creditors and from diversion to any uses other than paying benefits to participants and beneficiaries. The Department has no responsibility for loss due to the investment or failure of investment of funds and assets in the plans, but does have the duty of due care that would be required of an ordinary prudent investor. 33 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) Post -Employment Health Care and Life Insurance Benefits Plan Description - The Department provides certain health care and life insurance benefits to all qualified employees. Pursuant to Act 88, SLH 2001, the Department contributes to the EUTF, an agent multiple -employer defined benefit plan that replaced the Hawaii Public Employees Health Fund effective July 1, 2003. The EUTF was established to provide a single delivery system of health benefits for state and county workers, retirees and their dependents. The EUTF issues an annual financial report that is available to the public. The report may be obtained by writing to the EUTF at P.O. Box 2121, Honolulu, Hawaii 96805- 2121. For employees hired before July 1, 1996, the Department pays the entire base monthly contribution for employees retiring with ten years or more of credited service, and 50% of the base monthly contribution for employees retiring with fewer than ten years of credited service. A retiree can elect a family plan to cover dependents. For employees hired after June 30, 1996 but before July 1, 2001, and who retire with less than ten years of service, the Department makes no contributions. For those retiring with at least ten years but fewer than 15 years of service, the Department pays 50% of the base monthly contribution. For employees retiring with at least 15 years but fewer than 25 years of service, the Department pays 75% of the base monthly contribution. For employees retiring with at least 25 years of service, the Department pays 100% of the base monthly contribution. Retirees in this category can elect a family plan to cover dependents. For employees hired on or after July 1, 2001, and who retire with less than ten years of service, the Department makes no contributions. For those retiring with at least ten years but fewer than 15 years of service, the Department pays 50% of the base monthly contribution. For those retiring with at least 15 years but fewer than 25 years of service, the Department pays 75% of the base monthly contribution. For employees retiring with at least 25 years of service, the Department pays 100% of the base monthly contribution. Only single plan coverage is provided for retirees in this category. Retirees can elect family coverage but must pay the difference. Cost - Effective July 1, 2006, the Department implemented GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pensions. Statement No 43 establishes accounting and financial reporting standards for plans that provide other postemployment benefits (OPEB) other than pensions. Statement No. 43 requires defined benefit OPEB plans that are administered as trust or equivalent arrangements to prepare a statement of plan assets and a statement of changes in plan assets. The reporting of active and retiree (including their respective beneficiaries) healthcare benefits provided through the same plan should separate those benefits for accounting purposes between active and retiree healthcare benefits. Accordingly, the Department reports the retiree healthcare benefits as OPEB in conformity with Statement No. 43 and the active employee healthcare benefits as risk financing in conformity with GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, as amended. 34 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) The Department is required by GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, to obtain an actuarial valuation every other year. Therefore, an actuarial valuation was performed as of July 1, 2015. The Department's base contribution levels to EUTF are established by statutes and the retiree is responsible to pay the difference if the base contribution is less than the cost of the monthly premium. Prior to fiscal year 2014, the Department's base contribution levels were tied to the pay-as- you-go amounts necessary to provide current benefits to retirees. In fiscal year 2017, the Department contributed $914,500 in addition to amounts necessary to provide current benefits to retirees. The Department's annual OPEB cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters in Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities over a period not to exceed 30 years. The following table presents the annual OPEB cost, contributions made, the net OPEB asset, and the funding status for the fiscal year ended June 30, 2017: Amount Annual required contribution/annual OPEB cost $ 1,867,000 Contributions made (1,867,239) Increase in net OPEB asset 239 Net OPEB asset at beginning of fiscal year 146 Net OPEB asset at end of fiscal year $ 385 The schedule of funding progress based on the actuarial valuation date of July 1, 2015 is as follows: Actuarial accrued liability (AAL) Funded OPEB plan assets Unfunded actuarial accrued liability (UAAL) Funded ratio Covered payroll UAAL as percentage of covered payroll 35 $ 28,683,000 (11,524,000) $ 17,159, 000 40.2% $ 9,278,000 184.9% County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) The Department's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for fiscal year 2017 and the preceding years were as follows: Percentage of Annual Annual OPEB Cost Net OPEB Fiscal Year Ended OPEB Cost Contributed Asset June 30, 2017 $ 1,867,000 100.0% $ 385 June 30, 2016 $ 1,914,000 100.0% $ 146 June 30, 2015 $ 1,850,000 99.8% $ 1,101 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality and the healthcare cost trend. Actuarially determined amounts are subject to continual revisions as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, is designed to present multiyear trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. On July 3, 2013, the Governor signed into law Act 268, SLH 2013. Act 268 requires the EUTF to establish and administer separate trust accounts for each public employer for the purpose of receiving irrevocable employer contributions to prefund post -employment health and other benefit costs for retirees and their beneficiaries. It establishes the Hawaii EUTF Trust Fund Task Force to examine further steps to address the unfunded liability and requires all public employers to make annual required public employer contributions effective fiscal year 2014. Commencing fiscal year 2019, the annual public employer contribution shall be equal to the annual required contribution, as determined by an actuary retained by the EUTF board. In any fiscal year, should an employer's contribution be less than the annual required public employer contribution, the difference shall be transferred to the appropriate trust account from a portion of all general excise tax revenues, for the State, or transient accommodations tax revenues, for the counties. MET County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE F - EMPLOYEE BENEFITS (Continued) Actuarial Methods and Assumptions - Projections of benefits for financial reporting purposes are based on the plan 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 plan members to that point. 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. Significant methods and assumptions were as follows: Actuarial valuation date Actuarial cost method Amortization method Remaining amortization period Asset valuation method Actuarial assumptions Investment rate of return Projected salary increase Healthcare inflation rates PPO HMO Dental Vision Medicare Part B July 1, 2015 Entry age normal Level percent, closed 20.9 years Market 7.00% 3.50% 9.00% initial, 5.00% after 8 years 7.00% initial, 5.00% after 8 years 4.00% 3.00% 3.00% initial, 5.00% after 2 years NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES Risk Management - The Department is exposed to various risks of loss from torts; theft of, damage to, and destruction of assets; employee injuries and illnesses; and natural disasters. The Department maintains property, auto liability, and general liability insurance policies. The Department remains self-insured for workers' compensation liability. Liabilities are recorded when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Claim liabilities are based on the estimated ultimate cost of settling the claims, and include incremental costs for the hiring of special counsel and expert witnesses. Claims liabilities are estimated by a case-by-case review of all claims and the application of historical experience to outstanding claims. Construction Contracts - The Department is obligated under construction contracts for the utility plant and other projects. Such commitments approximated $19,594,317 at June 30, 2017. Litigation - The Department is involved in various legal proceedings arising in the ordinary course of business. The Department provides for losses that, in the opinion of management, are both probable of being incurred and that can be reasonably estimated. In management's opinion, losses, if any, would not materially affect the Department's financial position or results of operations. 37 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE H - RELATED PARTY TRANSACTIONS Long-term Debt - As discussed in Note E, the County has issued general obligation bonds on the Department's behalf for improvements to the water system. The Department is liable to the County for its proportionate share of the debt service requirements. In connection with these general obligation bond issues, long-term debt payable to the County totaled $29,861,558 at June 30, 2017. Accrued interest payable to the County totaled $549,002 at June 30, 2017. Operating Lease - The Department leases office space in its Hilo office to the County. The term of the lease is for ten years, starting on October 1, 2013, with an option to extend for an additional ten years. The County is also obligated to pay for common area maintenance expense. Thereafter and for the duration of the lease term, annual lease rent from the County, including common area maintenance will be approximately $236,000, subject to annual adjustments to the monthly common area maintenance charge. Payments received from the County in connection with this lease approximated $236,000 during the fiscal year ended June 30, 2017. As of June 30, 2017, future minimum lease rental income was as follows: Year Ending June 30, Amount 2018 $ 236,000 2019 236,000 2020 236,000 2021 236,000 2022 236,000 Thereafter 295,000 $ 1,475,000 Other - Amounts due to the County totaled approximately $217,000 as of June 30, 2017 and is included in accounts payable. The County provides the Department with various administrative services including treasury, legal, audit, and workers' compensation administration. The cost for these services are generally invoiced and reimbursed on an annual basis. NOTE I - ADOPTION OF NEW ACCOUNTING PRINCIPLE The Department has adopted certain requirements of GASB Statement No. 82, Pension Issues an amendment of GASB Statements No. 67, No. 68, and No. 73 (GASBS 82), which are effective for reporting periods beginning after June 15, 2016. The adoption of GASBS 82 resulted in the reclassification of payments made by the Department to satisfy employee (plan member) contribution requirements that were previously deferred in the period for which the contributions were assessed and recorded as expenses in the subsequent fiscal year. For the fiscal year ended June 30, 2016, the effect of the change reduced beginning net position and deferred outflows of resources by $414,312. For the fiscal year ended June 30, 2016, the effect of the change decreased the change in net position by $3,406. W; County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) NOTES TO FINANCIAL STATEMENTS June 30, 2017 NOTE J - PRIOR PERIOD ADJUSTMENT The Department records a customer deposit liability for payments received for water commitments. Revenue is recognized once service connections are made to the water system. The financial statements for the fiscal year ended June 30, 2016 included several outstanding customer deposit balances for which service connections were made prior to the fiscal year ended June 30, 2016 where no service connection income was recognized. Therefore, an adjustment was made to decrease customers' deposits and increase beginning net position by $449,220 for the fiscal year ended June 30, 2016. 39 REQUIRED SUPPLEMENTARY INFORMATION OTHER THAN MANAGEMENT'S DISCUSSION AND ANALYSIS M County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) SCHEDULE OF FUNDING PROGRESS - EUTF June 30, 2017 41 Unfunded UAAL as a Actuarial Percentage Actuarial Accrued of Annual Actuarial Actuarial Accrued Liability Funded Annual Covered Valuation Value of Liability (UAAL) Ratio Covered Payroll Date Assets (a) (AAL) (b) (b -a) (alb) Payroll (c) ((b-a)/c) July 1, 2015 $ 11,524,000 $ 28,683,000 $ 17,159,000 40.2% $ 9,278,000 184.9% July 1, 2013 $ 7,471,000 $ 25,166,000 $ 17,695,000 29.7% $ 8,310,000 212.9% July 1, 2011 $ 4,479,000 $ 24,492,000 $ 20,013,000 18.3% $ 7,995,000 250.3% 41 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) SCHEDULE OF THE DEPARTMENT'S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Last 10 Fiscal Years* * This schedule is intended to present information for 10 years, as of the measurement date of the collective net pension liability for each respective fiscal year. Additional years will be built prospectively as information becomes available. W Proportionate Plan Share of the Fiduciary Department's Department's Net Pension Net Position Proportionate Proportionate Liability as a °/nage Measurement of the Share of the Department's as a °/nage of the Total Period Net Pension Net Pension Covered of Covered Pension Ended Liability (%) Liability ($) Payroll Payroll Liability June 30, 2016 0.22% $ 29,247,607 $ 9,046,930 323.3% 51.28% June 30, 2015 0.22% $ 18,940,065 $ 9,012,196 210.2% 62.42% June 30, 2014 0.26% $ 20,526,993 $ 8,272,307 248.1% 63.92% June 30, 2013 0.21% $ 18,469,400 $ 7,640,477 241.7% 57.96% * This schedule is intended to present information for 10 years, as of the measurement date of the collective net pension liability for each respective fiscal year. Additional years will be built prospectively as information becomes available. W County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) SCHEDULE OF EMPLOYER PENSION CONTRIBUTIONS Last Ten Fiscal Years 43 Actual Contributions Department as a °/nage Fiscal Statutorily Contributions Contribution Department's of Year Required Recognized Deficiency Covered Covered Ended Contribution by the Plan (Excess) Payroll Payroll June 30, 2017 $ 1,603,278 $ 1,603,278 $ -- $ 9,358,187 17.13% June 30, 2016 $ 1,553,128 $ 1,553,128 $ -- $ 9,046,930 17.17% June 30, 2015 $ 1,520,994 $ 1,520,994 $ -- $ 9,012,196 16.88% June 30, 2014 $ 1,664,580 $ 1,664,580 $ -- $ 8,272,307 20.12% June 30, 2013 $ 1,214,933 $ 1,214,933 $ -- $ 7,640,477 15.90% June 30, 2012 $ 1,210,106 $ 1,210,106 $ -- $ 7,849,473 15.42% June 30, 2011 $ 1,197,031 $ 1,197,031 $ -- $ 7,726,278 15.49% June 30, 2010 $ 1,417,853 $ 1,417,853 $ -- $ 9,076,143 15.62% June 30, 2009 $ 1,383,338 $ 1,383,338 $ -- $ 8,878,193 15.58% June 30, 2008 $ 1,183,202 $ 1,183,202 $ -- $ 8,339,974 14.19% 43 N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS AMERICAN SAVINGS BANK TOWER 1001 BISHOP STREET, SUITE 1700 HONOLULU, HAWAII 96813-3696 T (808) 524-2255 F (808) 523-2090 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITOR'S REPORT To the Water Board County of Hawaii, Department of Water Supply 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 County of Hawaii, Department of Water Supply (Department), a component unit of the County of Hawaii, State of Hawaii, as of and for the fiscal year ended June 30, 2017, and the related notes to the financial statements, and have issued our report thereon dated December 27, 2017. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Department's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Department's internal control. Accordingly, we do not express an opinion on the effectiveness of the Department'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. N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit, we did not identify any deficiencies in internal control that we consider to be material weaknesses. We did identify certain deficiencies in internal control, described in the accompanying schedule of findings and responses as items 2017-001, 2017-002, and 2017-003, that we consider to be significant deficiencies. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Department'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. Department's Response to Findings The Department's response to the findings identified in our audit are described in the Corrective Action Plan. The Department's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. 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. Honolulu, Hawaii December 27, 2017 45 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) SCHEDULE OF FINDINGS AND RESPONSES Fiscal Year Ended June 30, 2017 Ref. No. Description 2017-001 Improve Internal Controls Over Accounting for Significant Nonroutine Transactions Criteria: Accounting for nonroutine transactions may require the application of accounting principles that an entity's personnel may not be familiar with. Management should identify these types of transactions and determine the proper accounting treatment in accordance with accounting principles generally accepted in the United States of America (GAAP). Management should perform timely reviews of nonroutine transactions that are posted to the entity's accounting system to ensure that the transactions are properly recorded. Condition: During our testing of contributions in aid of construction, we noted the Department had not accounted for an intergovernmental grant award in accordance with GAAP. Cause: Although an approved project worksheet (PW) under a FEMA grant was obtained, expenditures were not yet incurred and therefore, the criteria for revenue recognition was not met. Management presumed that grant revenue could be recognized solely upon PW approval. There was an apparent misunderstanding as to whether an approved PW and the incurrence of expenditures were both together necessary to recognize revenue. Effect: Federal grant revenue was recognized prior to the incurrence of grant expenditures. Therefore, an adjustment was necessary to decrease intergovernmental receivables and contributions in aid of construction by $780,991 as of and for the fiscal year ended June 30, 2017. Recommendation: Management should identify significant, nonroutine accounting transactions and ensure that a process is established whereby management -level fiscal personnel are actively involved in both the determination of the proper accounting treatment and the timely review of the transactions posted to the Department's accounting system. Views of Responsible Officials and Planned Corrective Action: The Department agrees with the finding and recommendation. See Corrective Action Plan. MET County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) SCHEDULE OF FINDINGS AND RESPONSES (Continued) Fiscal Year Ended June 30, 2017 2017-002 Improve Monitoring Over the Status of Service Connection Customer Deposits Criteria: Customers seeking a service connection to the water system first make a deposit with the Department. These deposits are recorded as a liability on the Department's financial statements. During the fiscal year in which the service connection is made, the liability should be reversed and service connection income recognized. Condition: During the fiscal year ended June 30, 2017, management performed a review of long outstanding customer deposit balances that were pending service connections to the water system as of June 30, 2016. Through research performed by management, it was determined that several service connections were made prior to the fiscal year ended June 30, 2016. Management reversed out several liability balances and recognized service connection income during the fiscal year ended June 30, 2017. Cause: Management was unaware of the status of service connections related to outstanding customer deposit balances. Effect: An adjustment was necessary to decrease other income and increase beginning net position by $449,220 as of and for the fiscal year ended June 30, 2017. Recommendation: Management should monitor the service connection status related to customer deposits to ensure that the customers' deposits balance and service connection income is property stated. Views of Responsible Officials and Planned Corrective Action: The Department agrees with the finding and recommendation. See Corrective Action Plan. 47 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) SCHEDULE OF FINDINGS AND RESPONSES (Continued) Fiscal Year Ended June 30, 2017 2017-003 Strengthen Controls Over Logical Access in the Financial Accounting Software Criteria: Appropriate segregation of duties and the principle of least privilege should be considered when designing and implementing logical access controls in computer applications. As a general rule, in order to facilitate adequate segregation of duties, employees should only be provided with access to those systems and specific information that is needed to perform their normal, assigned duties. When it is not practical to limit the access provided to users, compensating controls should be designed and implemented that can operate at a level of precision that would enable management to detect unauthorized user activity in a timely manner. Condition: Administrator privileges in the Department's financial accounting software are provided to key personnel in the Department's finance department. These privileges provide access to all functions in the Department's accounting software. Management believes these privileges are necessary to maximize the flexibility needed to quickly respond to unanticipated information technology issues. However, administrator privileges may not be necessary for these users to perform their typical, day-to-day work functions. There are no compensating controls in place to monitor the activity of the users provided with administrator privileges in a timely manner. Cause: The financial accounting software used by the Department has the capability to generate an audit trail or log of activity that could be used as a tool to monitor the system activity of users with administrator privileges. However, this audit trail is not reviewed by management. Effect: When personnel are given privileges in the financial accounting software beyond those necessary to perform their typical, day-to-day work functions, a breakdown in segregation of duties can occur. If there are no compensating controls in place to mitigate this risk, there is a possibility that misstatements of the Department's financial statements may not be prevented or detected on a timely basis. Recommendation: Management, with oversight from the board of directors, should reevaluate the permissions granted to all employees who have access to the Department's financial accounting software to ensure that incompatible duties are appropriately segregated and that employees are only provided with access to functions that are necessary to perform their normal, assigned duties. If it is not practical to limit the access provided to certain users, management should design and implement compensating controls that have the requisite level of precision needed to mitigate the risks related to the potential lack of segregation of duties. MR County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) SCHEDULE OF FINDINGS AND RESPONSES (Continued) Fiscal Year Ended June 30, 2017 2017-003 Strengthen Controls Over Logical Access in the Financial Accounting Software (Continued) Views of Responsible Officials and Planned Corrective Action: The Department agrees with the finding and recommendation. See Corrective Action Plan. i • CORRECTIVE ACTION PLAN 50 DEPARTMENT OF WATER SUPPLY COUNTY OF HAWAI`l 345 KEKOANAa'A STREET, SMITE 20 HILO, HAWAtl 96720 TELEPHONE (808) 961.8050 • FAX (808) 961-8657 December 27, 2017 Mr. Chad K. Funasaki, CPA, CGMA N&K CPAs Inc. American Savings Bank Tower, Suite 1700 1001 Bishop Street Honolulu, HI 96813 Dear Mr. Funasaki: Subject: N&K CPAs Independent Auditor's Report, Schedule of Findings and Responses, Fiscal Year Ended, June 30, 2017 N&K CPAs Independent Auditor's Report of the Department of Water Supply (DWS) has been reviewed. The findings included in your report will be addressed in accordance with your recommendations as follows: 2017-001 Improve Internal Controls Over Accounting for Significant Nonroutine Transactions Management's Response: The Department intends to implement the auditor's recommendation to ensure proper accounting treatment of non -routine transactions. 2017-002 Imorove Monitoring Over the Status of Service Connection Customer Deposits Management's Response: The Department intends to implement the auditor's recommendation. Management will review the current accounting system and workflow and implement necessary improvements to ensure monthly accounting of outstanding service connections. 2017-003 Strengthen Controls Over Logical Access in the Financial AccountingSoftware Management's Response: Management has reviewed the setup for access by Users in the Department's financial system and changes will be implemented to achieve adequate segregation of duties and compensating controls. Administrator privileges will be removed from Finance Division personnel and assigned to personnel in the Department's Information Systems section. Access to the Department's financial system will be Water, Our Most Precious &source ... Y\g WaiA 7,ane ... The Repanment of Water Supply is an Equal Opportunity provider and empbyer. 51 Mr. Chad K. Funasaki, CPA, CDMA Page 2 December 27, 2017 changed to limit access to functions that are necessary to perform each user's normal assigned duties. The log of activity/audit trail which includes information on each user's activities within the financial accounting software will be generated by the financial system's software administrator for review by management in order to implement compensating controls. We appreciate your recommendations and look forward to working with you in the near future. CG:dmj Sincerely yours, W4 4 Keith Okamoto, P.E. Manager -Chief Engineer 52 County of Hawaii Department of Water Supply (A component unit of the County of Hawaii, State of Hawaii) SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS - STATUS REPORT Fiscal Year Ended June 30, 2017 This section contains the current status of our prior audit recommendation. The recommendation is referenced to the page of the previous audit report for the fiscal year ended June 30, 2016, dated December 23, 2016. Reference Number Recommendation Current Status 2016-001 Improve Internal Controls Over Cash Collections Management should consider implementing preventive Accomplished. Management has updated controls to combine with current implemented detective and implemented preventive controls by controls. assigning the final review of the reconciliation of daily cash collections and nightly deposits to the bank to different personnel within the Department. 2016-002 Properly Account for Contract Retainage Management should review current contract listings and Accomplished. Management reviews ensure that retainage withheld are properly recorded on contract listings to ensure contract retainage the financial records of the Department. is being properly recorded in the Department's financial statements. 53