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HomeMy WebLinkAbout2005 CAFR Part 2 COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 The accounting policies of the County of Hawaii(the County)conform to U.S.generally accepted accounting principles(GAAP)as applicable to local governmental units. The following notes to the basic financial statements are an integral part of the County's Comprehensive Annual Financial Report. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Financial Reporting Entity The County has implemented Governmental Accounting Standards Board Statement No.14, The Financial Reporting Entity, (GASB Statement No. 14). All organizations,activities or functions that meet the criteria in GASB Statement No. 14 for inclusion in the reporting entity are included from the County's basic financial statements. Primary Government The County operates under the Mayor-Council form of government under a charter that became effective on January 2, 1969,and was amended in 1979, 1982, 1990 and 2000. The County's operations are organized by the following functions: general government;public safety;highways and streets;sanitation;health,education and welfare; culture and recreation;pension and retirement contributions;health fund;miscellaneous; capital outlay;and debt service. The State of Hawaii(State)assumes full responsibility for several major functions usually performed by local governments, including education, welfare,health and judicial functions. There are no separate city,county or township governments nor any school districts,special districts,authorities or public corporations with overlapping authority. GASB Statement No. 14 defines component units as legally separate organizations for which the elected officials of the primary government are financially accountable. "Financial accountability"is the level of accountability that exists if a primary government appoints a voting majority of an organization's governing board and is either able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to,or impose specific financial burdens on,the primary government. A primary government has the ability to impose its will on an organization if it can significantly influence the programs,projects,activities or level of services performed or provided by the organization. An organization has a financial benefit or burden relationship with the primary government if any one of three conditions exist: (1)The primary government is legally entitled to or can otherwise access the organization's resources;(2)The primary government is legally obligated or has otherwise assumed the obligation to finance the deficits of,or provide financial support to,the organization;or(3)The primary government is obligated in some manner for the debt of the organization. -44- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 As required by GAAP as set forth in GASB Statement No. 14,these basic financial statements present the County of Hawaii(the primary government)and its component unit, the Department of Water Supply. This component unit is included in the County's reporting entity because of its financial relationship with the County. Discretely Presented Component Unit The component unit column in the basic financial statements includes the financial data of the Department of Water Supply(Department),a legally independent agency of the County that is accounted for as an enterprise fund. It is reported in a separate column to emphasize that it is legally separate from the County. The members of the Water Commission,the governing body of the Department,are appointed by the Mayor of the County and confirmed by the County Council. The Department is granted corporate powers by state statute and the County Charter. Although the County does not have the authority to approve or modify the Department's operational and capital budgets,the County has issued bonds on the Department's behalf that are general obligations of the County. Because the County is obligated to repay these bonds in the event of default by the Department,the County is financially accountable for the debts of the Department. See Note 14 for component unit disclosures for the Department. Complete financial statements of the Department can be obtained from the Department of Water Supply,345 Kekuanaoa Street, Suite 20,Hilo,Hawaii 96720. Basic Financial Statements The basic financial statements include both government-wide(based on the County as a whole)and fund financial statements.Both the government-wide and fund financial statements(within the basic financial statements)categorize primary activities as either governmental or business-type. In the government-wide statement of net assets,both the governmental and business-type activities columns(a)are presented on a consolidated basis by column,(b)and are reflected,on a full accrual,economic resource basis,which incorporates long-term assets and receivables as well as long-term debt and obligations. The government-wide statement of activities reflects both the gross and net costs per functional category(general government,public safety,highways and streets,etc.)which are otherwise being supported by general government revenues(property taxes,certain intergovernmental revenues,etc.). The statement of activities reduces gross expenses (including depreciation)by related program revenues,operating and capital grants. The program revenues must be directly associated with the function(general government,public safety,highways and streets,etc.)or a business-type activity. The operating grants include operating-specific and discretionary(either operating or capital)grants while the capital grants column reflects capital-specific grants. The net cost(by function or business-type activity)is normally covered by general revenues. The government-wide focus is more on the sustainability of the County as an entity and the change in aggregate financial position resulting from the activities of the fiscal period. -45 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 The fund financial statements'emphasis is on the major funds in either the governmental or business-type categories. Nonmajor funds(by category)are summarized into a single column. The governmental funds in the fund financial statements are presented on a current financial resource and modified accrual basis of accounting. This is the manner in which these funds are normally budgeted. This presentation is deemed most appropriate to(a)demonstrate legal and covenant compliance,(b)demonstrate the source and use of liquid resources,and(c) demonstrate how the County's actual experience conforms to the budget fiscal plan. Since the governmental fund statements are presented on a different measurement focus and basis of accounting than the government-wide statements' governmental column,a reconciliation is presented on the page following each statement,which briefly explains the adjustments necessary to transform the fund based financial statements into the governmental column of the government-wide presentation. The County's fiduciary funds are presented in the fund financial statements by type(private purpose and agency). Since by definition these assets are being held for the benefit of a third party(private parties,state government,etc.)and cannot by used to address activities or obligations of the government,these funds are not incorporated into the government-wide statements. Government-wide and fund financial statements—The government-wide financial statements(i.e.,the statement of net assets and the statement of changes in net assets)report information on all of the nonfiduciary activities of the primary government and its component unit. For the most part,the effect of interfund activity has been removed from these statements. Governmental activities,which normally are supported by taxes and intergovernmental revenues,are reported separately from business-type activities,which rely to a significant extent on fees and charges for support. Likewise,the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include(a)charges to customers or applicants who purchase,use,or directly benefit from goods,services,or privileges provided by a given function or segment and(b)grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate financial statements are provided for governmental funds,proprietary funds,and fiduciary funds,even though the latter are excluded from the government-wide financial -46- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. Activities in funds—The financial transactions of the County are recorded in individual funds. Each fund is accounted for by providing a separate set of self-balancing accounts that comprises its assets,liabilities,reserves,fund equity,revenues and expenditures/expenses. The various funds are reported by generic classification within the financial statements. GASB Statement No.34 sets forth minimum criteria(percentage of the assets,liabilities, revenues or expenditures/expenses of either fund category or the governmental and enterprise combined)for the determination of major funds. The nonmajor funds are combined in a column in the fund financial statements and detailed in the combining section. The County reports the following major governmental funds: General Fund-The general fund is the general operating fund of the County. It is used to account for all activities of the general government,except those required to be accounted for in other funds. Sewer Fund—Used to account for costs of operating the County's various sewerage systems. Financing is provided by charges to users for sewer services. Capital Projects Fund—Used to account for the costs of constructing County capital improvements financed with general obligation bond proceeds,federal and state grants, and general and special revenue fund revenues. The capital projects fund is used to account for financial resources to be used for the acquisition or construction of major general government capital facilities and infrastructure(other than those financed by proprietary funds and trust funds)when separate project centers are needed to control costs. The County reports the following major proprietary funds: Kulaimano Elderly Housing Project—Used to account for the operation of a rental housing project for low-income senior citizens located north of Hilo. Ouli Ekahi Affordable Housing Project—Used to account for the operation of a 33-unit single-family affordable rental housing project located in Waimea. The County reports the following fiduciary funds: Private-Purpose Trust Fund—Used to account for funds received from geothermal developers to mitigate the effects of geothermal energy development. Also used to -47- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 account for investment income on funds received from import businesses at the port of Hilo and the related expenditures to promote health and safety on the Island of Hawaii. Agency Funds—Used to account for assets held by the County for other governmental units and individuals. The agency funds are custodial in nature and do not involve measurement of results of operations. The County has the following agency funds: • State Weight Tax Fund • Improvement District No. 17 Fund • Improvement District No. 18 Fund • Improvement District Revolving Fund • Improvement District Bond and Interest Redemption Fund • Performance and Refundable Deposits Fund • Payroll Clearance Fund • Flexible Spending Account • Lapsed Warrants Fund • Non-Profit License Plates Fund • Organ and Tissue Education Fund Basis of Accounting Basis of accounting refers to the period in which revenues and expenditures(or expenses)are recognized in the accounts and reported in the basic financial statements. Basis of accounting relates to the timing of the measurements made,regardless of the measurement focus applied. The government-wide financial statements and the proprietary,fiduciary and component unit fund financial statements are presented on an accrual basis of accounting. The governmental funds in the fund financial statements are presented on a modified accrual basis. Accrual Basis-Revenues are recognized when earned and expenses are recognized when the related obligation is incurred. Modified Accrual Basis-Revenues are recorded when susceptible to accrual(that is,both measurable and available). "Measurable"means the amounts are determinable. "Available" means the amounts are collectible within the current period or soon enough thereafter(within 60 days)to be used to pay liabilities of the current period. Licenses and permits,charges for current services,fines and forfeitures,penalties and miscellaneous revenues are recorded as revenues when received in cash because they are generally not measurable until actually received. State Revolving Fund loan proceeds are considered available when collected. -48 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 In applying the susceptible to accrual concept to intergovernmental revenues,the legal and contractual requirements of the numerous individual programs are used as guidance. There are essentially two types of these revenues. In one,monies must be expended on the specific purpose or project before any amounts will be paid to the County;therefore,revenues are recognized based upon the expenditures recorded. Most construction grants and many operating grants fall into this category. In the other,monies are virtually unrestricted as to purpose of expenditure and are usually revocable only for failure to comply with prescribed compliance requirements. These resources are reflected as revenues at the time of receipt or earlier if the susceptible to accrual criteria are met. The County reports unearned revenue in its fund financial statements(see Note 7). Unearned revenues arise when potential revenue does not meet both the"measurable"and"available" criteria for recognition in the current period. In subsequent periods,when both revenue recognition criteria are met,the liability for unearned revenue is removed from the combined balance sheet and revenue is recognized. Expenditures are recognized under the modified accrual basis of accounting in the accounting period in which the fund liability is incurred. Exceptions to this general rule include:(a) accumulated compensated absences and claims and judgments which are recognized as expenditures when paid;(b)liabilities related to municipal solid waste landfill closure and postclosure care costs;and(c)principal and interest on general long-term debt which are recognized as expenditures when due. In accordance with GASB Statement No.20,Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the County applies all applicable GASB pronouncements as well as the following pronouncements issued on or before November 30, 1989,unless those pronouncements conflict with or contradict GASB pronouncements;Financial Accounting Standards Board statements and interpretations,Accounting Principles Board opinions,and Accounting Research Bulletins of the Committee on Accounting Procedures. Encumbrances The general,special revenue,and capital projects follow encumbrance accounting under which purchase orders,contracts and other commitments are recorded as a reserve of fund balance and provide authority for the carryover of appropriations to the subsequent year in order to complete these transactions. Encumbrances outstanding at year end are reported as reservations of fund balances and do not constitute expenditures or liabilities because the commitments will be honored during the subsequent year. -49- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Unexpended Allotments Allotment accounting is employed in the general and capital projects funds to reserve appropriations to complete capital projects that were funded during a given fiscal period. Unexpended allotments represent reserves of capital projects appropriations that are available to complete such projects in future fiscal periods. Cash and Investments Cash and cash equivalents include cash on hand,amounts in demand deposits and short-term investments with a maturity date of three months or less from the date acquired by the County. Investments consist of time certificates of deposit at financial institutions and bank repurchase agreements with original maturities exceeding three months. Included are participating interest-earning investment contracts(repurchase agreements)that have remaining maturities at the time of purchase of one year or less,as well as nonparticipating interest-earning investment contracts(time certificates of deposit and repurchase agreements). Both categories of investments are stated at amortized cost(see Note 3). Investments also consist of equity securities in the fiduciary fund financial statements. These investments are stated at fair value. Real Property Taxes The County's real property taxes are levied July 1 each year on assessed valuation as of January 1. The taxes become a lien on the property assessed as of the levy date. Taxes are due and payable in two equal annual installments on August 20 and February 20. Accordingly,real property taxes receivable as of June 30 are delinquent. Each delinquent installment bears interest at 1%per month and penalties of up to 10%of the amount due. Assessments are based on 100%of estimated fair market values. Inventories Inventories consist of materials and supplies and are reported as expenditures at the time of purchase(purchase method). Police and fire department inventories are stated using the first in,first out(FIFO)method. Other inventories are stated at average cost. Liquor Control Section 281 of the Hawaii Revised Statutes requires that liquor license revenues collected be used only for costs and expenses directly relating to operational and administrative costs actually incurred by the liquor commission collecting such fees. The unexpended fees at June 30,2005 of$736,877 are reflected as a reserve of general fund balance. - 50- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Capital Assets Capital assets,which include property,plant,equipment,and infrastructure assets(e.g.,roads, bridges,curbs and gutters,streets and sidewalks,drainage systems, lighting systems,and similar items),are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. Capital assets are defined by the government as assets with an initial, individual cost of more than$1,000 and an estimated useful life in excess of two years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the life of the asset are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed. Capital assets of the primary government is depreciated using the straight line method over the following estimated useful lives of the assets: Assets Years Infrastructure 20 to 100 years Buildings and improvements 50 to 100 years Equipment 5 to 40 years Depreciation is recorded in one enterprise fund,the Kulaimano Elderly Housing Project. It is computed using the straight-line method over the following estimated useful lives of the assets: Buildings 50 years Furnishings and equipment 5 to 10 years Ground and site improvements 20 to 50 years Long-term Obligations The County reports long-term debt of governmental funds at face value on the government- wide statement of net assets. Certain other governmental fund obligations not expected to be financed with current available resources are also reported on the government-wide statement of net assets. Long-term debt and other obligations financed by the proprietary funds are reported as liabilities in those funds. - 51 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Compensated Absences Employees earn vacation credit at the rate of one and three-quarter working days for each month of service. Up to ninety 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. There is no statutory limit to the amount of compensatory time off an employee can accumulate. Both compensatory time off and vacation credits are converted to pay upon termination of employment. The amounts expected to be liquidated with expendable available resources are accrued in the appropriate funds and the amounts payable from future resources are recorded in the government-wide statement of net assets along with the estimated liability for FICA taxes and employers' retirement contributions on those amounts. All accumulated unpaid vacation and compensatory time off at June 30,2005 are expected to be liquidated with future expendable resources. In prior years,the following funds have been used to liquidate this liability for compensated absences: General Fund,Highway Fund,Sewer Fund,Solid Waste Fund, Vehicle Disposal Fund,Golf Course Fund and the Housing Agency. Sick leave accumulates without limit. 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 30,2005 totaled$53,682,000 for the primary government. Leases Leases transferring substantially all of the risks and benefits of ownership are recorded as capital leases;other leases are operating leases(see Note 8). Capital leases are recorded as capital asset additions at their estimated fair market value at the inception of the lease and the related present value of the future minimum lease obligations is recorded as long-term debt. Operating lease expenditures and expenses are recognized when the lease obligation is paid. Retirement Plan Contributions The County's contribution to the Employees'Retirement System of the State of Hawaii is based upon an actuarial computation and includes the normal cost plus the level annual payment required to amortize the unfunded actuarial accrued liability over a remaining period of twenty-six years from July 1,2003.The County's policy is to fund its actuarially determined required contribution annually(see Note 13). -52 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Operating Revenues and Expenses Revenues and expenses are distinguished between operating and nonoperating items for the proprietary funds. Operating revenues generally result from providing services in connection with the proprietary funds'principal ongoing operations. The principal operating revenues of the proprietary funds are fees charged to residents for rent and rental subsidies received from the federal government. Operating expenses include the costs associated with providing housing for tenants,such as utilities, lease rent,and maintenance and repairs;administrative expenses,and depreciation on capital assets. All revenues and expenses not meeting these definitions are reported as nonoperating revenues and expenses. Use of Estimates The preparation of the basic financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,as well as disclosure of contingent assets and liabilities at the date of the financial statements,and the reported amounts of revenues,expenditures,and other financing sources and uses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain 2004 amounts have been reclassified to conform to the 2005 financial statement presentations. Such reclassifications had no effect on previously reported change in net assets. Recently Adopted Governmental Accounting Pronouncements For the fiscal year ended June 30,2005,the County implemented GASB Statement No.40, Deposit and Investment Risk Disclosures—an Amendment of GASB Statement No. 3. This statement addresses common deposit and investments risks related to credit risks, concentration of credit risk, interest rate risk,and foreign currency risk. As an element of interest rate risk,this statement requires certain disclosures of investments that have fair values that are highly sensitive to changes in interest rates. Deposit and investment policies related to the risks identified in this statement also are required to be disclosed. Implementation of GASB Statement No.40 did not have an impact on the County's financial statements as of and for the year ended June 30,2005 but required additional disclosures related to deposits and investment risks(see Note 3). - 53 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 2. STEWARDSHIP,COMPLIANCE AND ACCOUNTABILITY Annual Budget The County follows these procedures in establishing its operating and capital budgets: • On or before March 1,the Mayor submits to the County Council proposed operating and capital projects budgets for the fiscal year commencing the following July 1. The operating budget includes proposed expenditures for the general fund and special revenue funds,and the means of financing them. A project-length budget is submitted to the County Council for the capital projects fund. • The Mayor submits to the County Council amendments to the proposed operating and capital budgets within ten working days after the close of the state legislature,but not later than May 5. • The County Council conducts public hearings on the proposed operating and capital budgets after March 1 but prior to the first reading on the budget bills,which must be after May 5. • On or before June 30,the County Council adopts the budgets. The legal level of budgetary control is the department level because the Mayor can transfer funds from any unencumbered appropriation to another within a department or agency without Council approval. During the year,the budget may be amended by action of the Council,except for appropriations required by law and appropriations for debt service,which may not be decreased or deleted. Supplemental appropriations were made during the 2004-2005 fiscal year to recognize revenue from sources not anticipated at the time of the original budget and to establish the authorization for such funds to be expended. Such supplemental appropriations totaled$18.2 million in the general fund and$5.9 million in the special revenue funds. • Appropriations for the operating budget lapse at the end of the fiscal year to the extent that they have not been expended or encumbered. Appropriations for capital expenditures that are not encumbered lapse at the end of two fiscal years following the fiscal year that the appropriation was made. • Formal budgetary integration is employed as a management control device during the year for the general fund,special revenue funds,and capital projects fund. Formal budgetary integration is not employed for debt service funds because effective budgetary control is alternatively achieved through general obligation bond indenture provisions. • The accompanying statement of revenues,expenditures and changes in fund balances— budget and actual(budgetary basis)—general fund presents a comparison of the legally adopted budget with actual data on a budgetary basis. Accounting principles applied for -54- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 purposes of developing data on a budgetary basis differ significantly from those used to present financial statements in conformity with GAAP. On the budgetary basis, intergovernmental revenues are recognized when awarded by the granting agency, encumbrances and unexpended allotments are treated as expenditures,accounts payable are not accrued,and all leases are treated as operating leases. In preparing the financial statements on a GAAP basis,accounts payable are accrued and treated as a reduction of encumbrances for balance sheet presentation. Budget to GAAP Reconciliation The following is a summary of the adjustments necessary to convert fund balances of the County's general fund and sewer fund from a GAAP basis to a budgetary basis at June 30, 2005: General Fund Sewer Fund Ending fund balance—GAAP basis $23,978,072 $7,583,340 Encumbrance adjustments: Beginning encumbrances and unexpended allotments 3,890,862 2,474,199 Ending encumbrances and unexpended allotments (5,378,176) (2,064,210) Other adjustments (819,925) 100) Ending fund balance—Non-GAAP budgetary basis 17_99322 3. CASH AND INVESTMENTS The Director of Finance is responsible for the safekeeping of all monies paid to the County. The Director of Finance invests any monies of the County which in the Director's judgment are in excess of the amounts necessary for meeting the day to day operating needs of the County. Legally authorized investments include obligations of or guaranteed by the U.S. government,obligations of the State,federally-insured savings and checking accounts,time certificates of deposit and repurchase agreements with federally-insured financial institutions. Cash The County maintains approximately 18 bank accounts for various purposes at locations throughout the state. Bank deposits are under the custody of the Director of Finance. For financial statement reporting purposes,cash and short-term investments consist of cash,time certificate of deposit,and money market accounts. Cash and short-term investments also include repurchase agreements and U.S.government securities with original maturities of three months or less. The carrying amount of the County's unrestricted and restricted deposits(cash,time certificates of deposit,and money market accounts)as of June 30,2005 was$151,398,086 - 55 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 and$546,440,respectively,for the primary government and$6,440,157 and$637,000, respectively,for the fiduciary funds. Information relating to bank balance,insurance and collateral of cash deposits is determined on a countywide basis. Total bank balances of deposits for the primary government and fiduciary funds amounted to$175,111,723 at June 30,2005. Of that amount,$174,909,413 represent bank balances covered by federal deposit insurance or by collateral held by the County's fiscal agents in the name of the County. The remaining bank balances of$202,310 represent deposits held by a management agent and were uncollateralized. Accordingly,these deposits were exposed to custodial credit risk. Custodial credit risk is the risk that in the even of a bank failure,the County's deposits may not be returned to it. For demand or checking accounts and time certificates of deposit,the County requires,in accordance with State statutes,that the depository banks pledge collateral based on the available bank balances to limit its exposure to custodial credit risk. All securities pledged as collateral are held by the County's fiscal agents in the name of the County. The County also requires that no more than 60%of the County's total funds available for deposit may be deposited in any one financial institution, in accordance with State statutes. Investments The County holds investments both for its own benefit and on behalf of some of the Fiduciary Funds. The County's investments of funds not required for immediate payments are predominately comprised of repurchase agreements,while equity securities are held by the fiduciary fund. The County's investments and maturities at June 30,2005 are as follows: Maturity(in years) Fair Value Less than 1 1 —5 Investments—Primary Government: Certificates of deposit $15,445,079 $15,445,079 $ -- Repurchase agreements 2,753,528 -- 2,753,528 $18.198.607 $15,455,079 2.753.528 Investments—Fiduciary Funds: Equity securities $974,41S Interest Rate Risk: As a means of limiting its exposure to fair value losses arising from rising interest rates,the County's investment policy generally limits maturities on investments to not more than five years from the date of investment. Credit Risk: The County's investment policy limits investments in state and U.S.Treasury securities,time certificates of deposit,U.S.government or agency obligations,repurchase - 56- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 agreements,commercial paper,bankers' acceptances,and money market funds,or other securities maintaining a Triple-A rating. Custodial Risk: For an investment,custodial risk is the risk that, in the event of failure of the counterparty,the County will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The County's investments are held by its fiscal agent and the securities held by the fiduciary fund are held by the County. In addition,the County requires the institutions to set aside in safekeeping,certain types of securities to collateralize repurchase agreements. Concentration of Credit Risk: The County's investment policy contains no limitations on the amount that can be invested in any one issuer beyond that stipulated by the Hawaii Revised Statutes. Restricted Cash and Cash Equivalents and Investments Cash and cash equivalents and investments classified as restricted assets amounted to $1,183,440 at June 30,2005 consist of the following: Primary government $ 546,440 Fiduciary funds 637.000 1 1 44 The County entered into a capital lease to purchase a new financial accounting computer system. Upon execution of the lease documents,the leasing company deposited into an escrow account in the County's name the full lease proceeds. As progress billings are received for the new system,the County will authorize withdrawals from this escrow account to pay the bills. The balance in this account at June 30,2005 was$320,147. Tenant security deposits received by the County for the Kulaimano Elderly Housing Project and the Ouli Ekahi Affordable Housing Project are recorded as restricted assets. Such funds amounted to$9,290 and$20,250,respectively,at June 30,2005. Restricted amounts set aside by the Kulaimano Elderly Housing Project under its loan agreement with the Farmers Home Administration totaled$182,123 at June 30,2005.This amount is restricted for debt service,or for other purposes with prior approval from the Farmers Home Administration. An operating reserve fund was established by the Ouli Ekahi Affordable Housing Project pursuant to an agreement with the developer of the project. This restricted reserve amounted to$14,630 at June 30,2005. The Improvement District No. 17 Fund has restricted$637,000 as a bond reserve at June 30,2005 to comply with the requirements of its Kaloko Subdivision bond issuance. - 57- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 4. RECEIVABLES Receivables as of June 30,2005,for the County's individual major funds and nonmajor funds in the aggregate,including the applicable allowances for uncollectible accounts,are as follows: Governmental activities: Capital Nonmajor General Sewer Projects Governmental Fund Fund Fund Funds Total Receivables: Real property taxes $6,490,197 $ -- $ -- $ -- $ 6,490,197 Accounts receivable: Sewer -- 3,253,509 -- -- 3,253,509 Solid waste -- -- -- 1,364,338 1,364,338 Capital Projects -- -- 829,000 -- 829,000 Intergovernmental 6,238,297 -- 9,658.347 423,541 16.320,185 Gross receivables 12,728,494 3,253,509 10,487,347 1,787,879 28,257,229 Less: allowance for uncollectibles -- (1,076,035) -- 4� 34,894) (1,510,929) Net total receivables 12.728.494 2 1 474 10.487.347 $ -35 $26.746.300 Business-type activities: Enterprise Funds Receivables: Accounts receivable: Rent $45,767 Other 2,621 Gross receivables 48,388 Less: allowance for uncollectibles Net total receivables 4 38 During the fiscal year,the County issued$3,887,493 in general obligation bonds on behalf of Improvement District No. 18,an agency fund. At year end,the outstanding balance of $3,887,493 is reflected in the government-wide statement of net assets as a receivable(see Note 10). -58 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 5. INTERFUND RECEIVABLES AND PAYABLES Interfund receivables and payables consist of the following at June 30,2005: Receivable Fund Payable Fund Amount General fund Sewer fund $ 165,761 Capital projects fund 11,903 Other governmental funds 1,126,443 1,304,107 Sewer fund General fund 75,712 Other governmental funds 88 75,800 Capital projects fund General fund 19,000 Other governmental funds 177,984 196,984 Other governmental funds General fund 92,154 Capital projects fund 9,680 Other governmental funds 32,297 134,131 Total 1 711 22 Sewer fund Enterprise funds 4Q The above interfund balances result from the time lag between the dates that interf ind goods and services are provided or reimbursable expenditures occur,transactions are recorded,and payment between funds are made. Transfers for the fiscal year ended June 30,2005 consisted of the following: Transfers out: Nonmajor General Governmental Fund Funds Total Transfers in: Capital projects fund $2,610,165 $5,447,938 $ 8,058,103 Non major governmental funds 34,061,322 -- 34,061,322 36,671,487 5.447,938 42.119,425 The interfund transfers noted above include transfers from the general fund to provide support for various County programs and to provide resources for the payment of debt - 59- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 services. In addition,some of the nonmajor governmental funds have made transfers to the capital projects fund for the construction of various projects. 6. CAPITAL ASSETS Capital asset activity for the year ended June 30,2005 for the County was as follows: Balance Balance June 30, June 30, 2004 Additions Retirements 2005 Governmental activities: Capital assets not being depreciated: Land $ 19,610,464 $ -- $ (49,725) $ 19,560,739 Construction in progress 60,202,498 19.581,664 (3,658,992) 76,125,170 Total capital assets not being depreciated 79,812,962 19,581,664 (3,708,717) 95,685,909 Capital assets being depreciated: Buildings and improvements 257,402,551 1,600,609 -- 259,003,160 Machinery and equipment 65,267,793 6,717,030 (1,587,872) 70,396,951 Infrastructure 233,319.758 15,249,495 248,569,253 Total capital assets being depreciated 555,990,102 23,567,134 (1.587,872) 577,969.364 Less accumulated depreciation for: Buildings and improvements (38,659,798) (3,489,919) -- (42,149,717) Machinery and equipment (38,732,618) (4,359,403) 1,298,395 (41,793,626) Infrastructure (82,669,122) (9,755.070) - _(92,424,192) Total accumulated depreciation (160,061,538) (17,604,392) 1,298,395 (176,367,535) Total capital assets, being depreciated, net 395,928,564 5,962,742 (289.477) 401,601,829 Governmental activities capital assets,net 475.741.526 25.544.406 ($3.998.1941 497287.738 -60- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Balance Balance June 30, June 30, 2004 Additions Retirements 2005 Business-type activities: Capital assets not being depreciated: Land 753,877 $ -- $ -- $ 753,877 Capital assets being depreciated: Buildings 1,136,008 -- -- 1,136,008 Ground and site improvements 261,000 -- -- 261,000 Furnishings and equipment 90,624 11,050 (8,342) 93,332 Total capital assets being depreciated 1,487,632 11,050 (8,342) 1,490,340 Less accumulated depreciation for: Buildings (609,359) (24,615) -- (633,974) Ground and site improvements (163,384) (3,755) -- (167,139) Furnishings and equipment (78,407) (5,725) 8,113 (76,019) Total accumulated depreciation (851,150) (34,095) 8,113 (877,132) Total capital assets, being depreciated, net 636,482 (23,045) 229 613,208 Business-type activities capital assets,net 1.390.359 23 45 (2291 6 8 -61 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Depreciation expense was charged to functions/programs of the primary government as follows: Governmental activities: General government $ 1,424,873 Public safety 1,538,261 Highways and streets 10,588,047 Sanitation 2,880,958 Health,education and welfare 173,537 Culture and recreation 998.716 Total depreciation expense—governmental activities 17.604.392 Business-type activities: Kulaimano Elderly Housing Project $34,095 Total depreciation expense—business-type activities 4 Q 7. UNEARNED REVENUE Unearned revenue consists of the following at June 30,2005: Capital Other Total General Sewer Projects Governmental Governmental Fund Fund Fund Funds Funds Real property taxes $7,703,927 $ -- $ -- $ -- $ 7,703,927 Liquor control revenue 174,815 -- -- -- 174,815 Sewer revenue -- 2,177,474 -- -- 2,177,474 Solid waste revenue -- -- -- 929,443 929,443 Intergovernmental 1,916,984 -- 3,846,681 34,473 5,798,138 Total presented in fund financial statements 9,795,726 2,177,474 3,846,681 963,916 16,783,797 Less adjustments for accrual of revenues (6,490,197) (2,177,474) -- (929,443) (9,597,114) Total government- wide financial statements 0 2 $ -- 4 6 1 4 4 7.186.683 Enterprise Funds Unearned rental income 430 -62- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 8. LEASES The County leases machinery and equipment under noncancellable leases expiring at various dates through April 2010 which meet the criteria for capitalization. These capital leases are financed from general fund resources. The estimated value of the leased machinery and equipment at the inception of the capital leases and accumulated depreciation,amounting to$8,294,845 and$2,965,484,respectively, and the related present value of the remaining obligations under the capital leases amounting to$3,642,928 at June 30,2005 are included in capital assets and long-term debt,respectively. The County also leases land,office facilities and other equipment under noncancellable operating leases expiring through July 2020. Expenditures for such operating leases were $738,489 for the fiscal year ended June 30,2005. The future minimum obligations under capital and operating leases at June 30,2005 are as follows: Governmental Activities- Capital Operating Leases Leases Year Ending June 30: 2006 $1,243,199 $479,909 2007 1,064,352 293,529 2008 937,025 162,782 2009 438,269 83,536 2010 236,840 72,361 2011 -2015 -- 337,803 2016-2020 L800 Total minimum lease payments 3,919,686 1 4 20 Less amount representing interest (276,758) Obligations under capital leases $3,642,22B -63 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 9. SOLID WASTE LANDFILL CLOSURE AND POSTCLOSURE CARE COSTS Hilo Landfill The County owns and operates a landfill located in the city of Hilo. State and federal laws require the County to place covers on certain landfill sites and to monitor and maintain the sites for thirty years after the facility is closed. Although the closure and postclosure care costs will be paid near and after the date that the landfill stops accepting waste,the County recognizes a portion of the closure and postclosure care costs in each operating period. The liability for these costs is included in the government-wide statement of net assets. The amount recognized each year is based on the landfill capacity used as of the balance sheet date. At June 30,2005,the County recognized a liability of$13,330,000, based on the use of 97%of the estimated capacity of the landfill. During the fiscal year ended June 30,2005,$34,875 was spent on closure of the landfill. The remaining$380,791 in estimated cost of closure and postclosure care will be recognized as the remaining estimated capacity is used. These amounts are based on what it would cost to perform the required closure and postclosure care in 2005. Actual costs at that time may be higher due to inflation,changes in technology,or changes in regulations. The County's permit to operate the landfill expired October 9, 1998. The County filed for an extension which was approved by the state until permitted capacity is reached. In accordance with state statute,the County is allowed to continue operations provided that the County acts consistently with the permit previously granted and the extension application,plans, specifications and all other information contained therein. Kealakehe In October 1993,the County closed its Kealakehe landfill in Kona. Under state and federal requirements,the County would have to monitor and maintain this site for ten years from the closure date. However,the County anticipates monitoring and maintaining the site for thirty years because there is presently a subterranean fire which requires active management. The estimated cost of closure and postclosure is$15,250,000,based on what it would cost to perform the required closure and postclosure care in 2005. Actual costs may be higher due to inflation,changes in technology,or changes in regulations. Through June 30,2005,$6,737,687 was spent on closure and postclosure care of the landfill. The remaining estimated liability of$8,512,000 is included in the government-wide statement of net assets. During the year ended June 30,2005,a total of$124,982 was spent on this landfill. This amount was for the management of the subterranean fire. The County is providing financial assurance for postclosure care and remediation through self insurance as explained below. Pu'uanahulu In May 1993,the County contracted with a private company to construct and operate a new landfill on County land at Pu'uanahulu in West Hawaii. The present contract calls for County employees to perform the daily operations of the landfill,and for the private company to retain the overall management as well as perform all construction work on the landfill cells. Under the terms of the contract,the County has no responsibility for -64- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 remediation,closure or postclosure care. Accordingly,no liability for this landfill is included in the County's financial statements. Financial Assurance For fiscal year 2005,the County has provided for financial resources that will be available to provide for closure,postclosure care and remediation or containment of environmental hazards at the above landfills. The Environmental Protection Agency's financial assurance rules include a local government financial test consisting of a financial component,a public notice component,and a recordkeeping component. Local goverments are required to satisfy each of the three components to pass the annual test. Management believes that the County has satisfied each of the components of the local government financial assurance requirements. 10. LONG-TERM DEBT General Obligation Bonds The County issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. These bonds have been issued by the County for the primary government,component unit activities(see Note 14)and an improvement district. The following is a summary of general obligation bond transactions reported in the government-wide statement of net assets for the County for the fiscal year ended June 30, 2005: Bonds Issue Bond Balance Bond Balance Due within Authorized Amount June 30,2004 Issues Retirements June 30,2005 one year 1977 Series A $ 500,000 $ 202,000 $ $ 202,000 $ -- $ 1993 Ref&PI 86,770,000 43,525,000 3,870,000 39,655,000 4,090,000 1996 Series A 30,000,000 22,650,000 21,145,000 1,505,000 1,505,000 1997 Series A 4,000,000 3,006,000 3,006,000 1999 Series A 30,000,000 27,700,000 1,240,000 26,460,000 1,300,000 1999 Refunding 18,940,000 7,775,000 2,475,000 5,300,000 2,590,000 2001 Series A 23,000,000 15,000,000 554,348 14,445,652 573,913 2001 Series A PI 1,800,000 1,740,300 1,740,300 2003 Series A 36,310,000 36,310,000 36,310,000 2004 Series A 30,000,000 30,000,000 30,000,000 2004 Ref Ser B 19,545,000 19,545,000 19,545,000 2004 Ref Ser C 5,050,140 5,050,140 5,050,140 447,364 2004 PI Ser A 2,776,400 2,776,400 2,776,400 2004 PI Ser B 920,000 920,000 920,000 2004 PI Ser C 191.093 191,093 191,093 289,802,633 157,908,300 58,482,633 34,232,648 182,158,285 10,506,277 Add unamortized premium 2,658,425 968,275 1,606,219 92,766 2,481,728 132,921 Less deferred amount on refunding (1,294,0021 (1294.002) (64,700) (1.229302) (129.400) $291,167.056 $158.876.575 $5$,794.850 34.260.714 $183 410 711 $10 509 798 -65 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 General obligation bonds payable reported on the government-wide statement of net assets at June 30,2005 are comprised of the following individual issues: Public improvement and/or refunding bonds: 1993 Refunding&PI at 5.4%to 5.6%,due through 2013 $ 39,655,000 1996 Series A at 4.6%,due through 2006 1,505,000 1999 Series A at 5.125%to 6.0%,due through 2019 26,460,000 1999 Refunding at 4.75%to 4.875%,due through 2007 5,300,000 2001 Series A at 4.0%to 5.5%,due through 2021 14,445,652 2003 Series A at 2.0%to 5.125%,due through 2024 36,310,000 2004 Series A at 3.0%to 5.25%,due through 2024 30,000,000 2004 Refunding Series B at 3.5%to 5.0%,due through 2015 19,545,000 2004 Refunding Series C at 2.0%to 3.7%,due through 2014 5,050,140 2004 PI Series A at 4.75%,due through 2039 2,776,400 2004 PI Series B at 4.375%,due through 2039 920,000 2004 PI Series C at 3.0%,due through 2010 191,093 Total general obligation bonds payable $182,158,28a Annual debt service requirements to maturity for the above general obligation bonds are as follows: Governmental Activities Fiscal year ending June 30: Principal Interest 2006 $ 10,506,277 $ 8,812,122 2007 12,555,883 8,332,715 2008 11,424,440 7,734,343 2009 11,844,481 7,214,488 2010 12,496,183 6,646,458 2011-2015 59,114,665 23,833,827 2016-2020 36,887,564 11,581,408 2021 —2025 24,906,272 3,345,928 2026—2030 606,429 472,912 2031 —2035 761,424 314,301 2036—2040 954.667 115,126 Total 182.158.285 78.403.628 Refunded Bonds 2004 Series B In fiscal year 2005,the County issued$19,545,000 in refunding bonds as the 2004 Series B general obligation bond issue. The refunding bonds have a true interest cost of 3.51%and were issued to advance refund the$19,705,000 outstanding balance of the 1996 Series A general obligation bond issue. - 66 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 The bonds refunded bore interest at rates ranging from 4.70%to 5.20%. The par amount of $19,545,000 plus a premium of $1,418,651 and a payment of$102,114 from the debt service fund,minus$173,736 in underwriting fees,insurance,and other issuance costs resulted in net proceeds of $20,892,029. The net proceeds were used to purchase U.S.government securities,which were deposited in an irrevocable trust administered by an escrow agent and provided full payment on the outstanding 1996 Series A refunded bonds on February 1,2006. The bonds were considered defeased and are not included in the government-wide statement of net assets. The County's total debt service requirements over the next twelve years will decrease by $1,417,104 as a result of the refunding,and the net economic gain(difference between the present values on the old and new debt)after taking into account all allocable costs of issuance of the bonds was$826,306. 2004 Series C Also in fiscal year 20.05,the County issued$5,050,140 in refunding bonds as the 2004 Series C general obligation bond issue. The refunding bonds have a true interest cost of 3.37%and were issued to current refund the 1977 Series A and 1997 Series A issues for a total of$3,619,000 and advance refund the$1,677,700 outstanding balance of the 2001 Series A Public Improvement Bonds. The bonds refunded bore interest at rates ranging from 4.85%to 5.00%. The net proceeds of $4,992,673 were used to purchase U.S.government securities. Those securities were deposited in an irrevocable trust administered by an escrow agent and provided payoffs on the 1977 Series A and 1997 Series A bonds on October 12,2004 and will provide full payment on the outstanding 2001 Series A Public;Improvements bonds on August 1,2006.The bonds were considered defeased and are nct included in the government-wide statement of net assets. The County's total debt service requirements over the next eleven years will decrease by $891,837 as a result of the refunding„and the net present value savings was$380,218. As of June 30,2005,bonds outstanding considered defeased amounted to$22,303,705. Bond Premiums During the year,a bond premium of$1,606,219 was received from the 2004 Series A general obligation bonds. At June 30,2005,total unamortized bond premiums were$2,481,728 which is being amortized over the remaining life of the respective bond issues. - 67- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Bonds Authorized and Unissued The County Council has authorized the issuance of$47 million in general obligation bonds to finance specified capital improvement projects. At June 30,2005, $17 million were not yet issued. Subsequent Events On February 23,2006,the County issued$50 million in general obligation bonds(2006 Series A). The interest rates range from 4.0%to 5.0%and are due through 2026. Of the bonds issued,$25 million is for the Department of Water Supply(the Department),the County's component unit. The payments for these bonds will be reimbursed to the County by the Department. The bonds were authorized in January 2006. State Revolving Fund Loans The County has obtained loans to assist in financing mandated wastewater projects from the State Water Pollution Control Revolving Fund(SRF). The purpose of this revolving fund is to provide low-interest, long-term loans and other financial assistance to the four counties in the state to finance construction of wastewater projects. The County has fifteen projects approved for funding with these loans. The schedule below shows the County's SRF transactions for the fiscal year ended June 30,2005: Loans Approved Loan Balance Loan Balance Due within Authorized Amount June 30,2004 Additions Retirements June 30,2005 one year Hilo WWTP $12,724,311 $6,584,:170 $ $ 661,425 $5,922,745 $ 677,961 Waiakea Mill 1,300,000 735,643 65,663 669,980 67,304 WaiakeaHslts 459,321 238,644 - 23,973 214,671 24,573 Waiakea Hslts Il 5,024,266 4,192,631 231,730 3,960,901 237,836 Ainako A&B 2,239,174 1,307,418 112,733 1,194,685 115,067 Kalanianaole 1,499,944 1,000,842 74,108 926,734 76,362 Kalanianaole RH 5,000,000 1,504,078 1,504,078 73,549 Alii Drive A&B 3,210,243 1,871,634 164,599 1,707,035 169,207 Alii Drive C&D 3,780,000 2,410,806 187,918 2,222,888 191,810 AM Drive E&F 2,112,654 1,502,:126 105,476 1,397,050 108,686 Waiaha Bay 3,697,893 2,418,1133 181,113 2,237,020 186,182 Kealakehe 1,300,071 734,303 65,543 668,760 67,181 Holualoa Bay 3,080,000 2,200,130 147,270 2,052,860 151,751 PaukaaCCS 2,143,448 1,758,:118 98,857 1,659,261 101,142 Pahoehoe Z817,76 760 2,542,_175 120,539 2,421,836 123,717 29.497_:{7� 1 7 $2.240"947 � 2 2 - 68 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 The loans bear interest at 2.06%to 3.02%,exclusive of a 1.00%loan fee,and require payments through fiscal year 2025. Debt service to maturity for disbursements to date on these projects are as follows: Governmental Activities Fiscal year ending June 30: Principal Interest 2006 $2,372,328 $1,013,579 2007 2,421,420 959,150 2008 2,483,831 891,327 2009 2,547,994 821,614 2010 2,613,720 750,194 2011-2015 11,931,117 2,442,385 2016-2020 3,813,445 453,652 2021—2025 576,649 37,404 Total 28.760.504 305 Other General Long-term Obligations The following is a summary of other general long-term obligations transactions for the fiscal year ended June 30,2005: Balance; Deductions Balance Due within June 30,2004 Additions &Payments June 30,2005 one year Governmental activities: Compensated absences $20,942,288 $9,518,036 ($7,887,069) $22,573,255 $5,783,235 Claims and judgments (see Note 12) 20,029,000 11,433,825 (4,860,536) 26,602,289 5,270,695 Capital lease obligations (see Note 8) 3,547,085 1,368,928 (1,273,085) 3,642,928 1,118,589 Landfill closure costs (see Note 9) 21,515,000 487,000 (160,000) 21,842,000 149,610 Total 0 3 373 22.807.789 ($14.180.6901 74.660.472 12.322.129 Fund Balances-Debt Service Funds The fund balance in the debt service funds at June 30,2005 includes$14,429,594 which is available for principal payments on general obligation bonds and$612,164 which is reserved for the payment of interest on the bonds. Enterprise Fund Notes Payable The Kulaimano Elderly Housing Project is indebted to the U.S.Department of Agriculture, Farmers Home Administration on two notes payable with balances aggregating$1,041,285 at June 30,2005. The notes,which mature in September 2029,are repayable in monthly -69- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 installments of$7,826 including interest and are collateralized by substantially all of the project's property and equipment. Although the stated annual rate of interest on the notes is 9%,such rate is reduced to 7%for as long as the Project has a U.S.Department of Housing and Urban Development Section 8 Housing Assistance Payment contract in effect for all or part of the units within the Project. The following is a summary of enterprise fund notes payable transactions for the fiscal year ended June 30,2005: Balance at June 30,2004 $1,065,417 Deductions (24,132) Balance at June 30,2005 1,041,285 Less current portion (21,899 Note payable,net of current portion 1 1 6 The following is a summary of the annual maturities for the enterprise fund notes payable: Business-type Activities Fiscal year ending June 30: Principal Interest 2006 $ 21,899 $ 72,013 2007 23,279 70,633 2008 24,962 68,950 2009 26,767 67,145 2010 28,702 65,210 2011-2015 177,797 291,763 2016-2020 252,050 217,510 2021—2025 357,312 112,248 2026-2030 128.517 7.172 Total 1.041.285 44 Special Assessment Bonds The County has outstanding special assessment bonds for one improvement district. In 1991, the County issued$14 million of special assessment bonds for Improvement DistrictNo. 17, Kaloko Subdivision,to finance a roadway and water system. In 2001,the County refunded the remaining bonds outstanding of$6,370,000. The bonds mature annually through 2011 and bear interest at 7.375%. Total special assessment bonds payable were$5,070,000 at June 30,2005. These are not general obligation bonds and the County is not obligated in any manner for the repayment of these bonds. The bonds are secured!by a first lien on the land benefited by the improvements, and are to be repaid from the annual assessments levied against the owners of the land. The County acts as an agent for the property owners within the improvement districts to collect assessments receivable,forward payments to bond-paying agents at appropriate dates and,if - 70- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 required,administer foreclosure proceedings. Accordingly,these bonds are not reflected on the County's government-wide statement of net assets. The following is a summary of special assessment bond transactions for Improvement District No. 17,Kaloko Subdivision,for the:fiscal year ended June 30,2005: Balance at June 30,2004 $5,610,000 Deductions (540,000) Balance at June 30,2005 5 070 000 The following is a summary of the annual maturities for the special assessment bonds: Year ending June 30: Principal Interest 2006 $ 580,000 $ 352,525 2007 620,000 308,275 2008 670,000 260,706 2009 715,000 209,634 2010 770,000 154,875 2011-2012 1,715,000 128,879 Total 5.070.000 1 4 4 4 The County has issued general obligation bonds on behalf of Improvement District No. 18 for water improvements(see Note 4). The Improvement District is responsible for the payment of the debt service on these bonds,but tlae County remains liable because they are general obligations of the County. The bonds mature annually through 2039 and bear interest at 3.0% to 4.75%. Total general obligation bonds payable included in the government-wide statement of net assets were$3,887,493 at June 30,2005. The bonds are secured by a first lien on the land benefited by the improvements,and are to be repaid from the annual assessments levied against the owners of the land.The County acts as an agent for the property owners within the improvement districts to collect assessments receivable,forward payments to bond-paying agents at appropriate dates and,if required, administer foreclosure proceedings. The following is a summary of bond transactions for Improvement District No. 18, Coastview/Wonderview Water Improvements,for the fiscal year ended June 30,2005: Balance at June 30,2004 $ -- Additions 3,887,493 Deductions Balance at June 30,2005 $3.,887.493 - 71 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 The following is a summary of the annual maturities for the improvement district general obligation bonds: Year ending June 30: Principal Interest 2006 $ -- $ 88,931 2007 82,556 176,239 2008 85,802 172,927 2009 89,181 169,478 2010 92,699 165,888 2011 -2015 346,986 780,462 2016-2020 384,7.37 699,770 2021 —2025 483,013 599,204 2026—2030 606,428 472,912 2031—2035 761,424 314,302 2036—2040 954,667 115,128 Total $3,887,491 241 11. COMMITMENTS AND CONTINGENCIES Contractual commitments— Contractual commitments for capital projects,expenses,and supplies at June 30,2005,except in the enterprise funds,are reflected in the balance sheets as fund balance reserved for encumbrances. Contractual commitments for the enterprise funds were immaterial. Intergovernmental revenues— The County has received federal and state grants for specific purposes that are subject to review and audit by grantor agencies. Such audits could lead to requests for reimbursement to the grantor agency for expenditures disallowed under terms of the grant. In the opinion of management of the County,disallowed costs,if any,would not be material. Claims— Numerous claims and lawsuits have been filed against the County in the normal course of its operations. A liability for probable losses is included on the government-wide statement of net assets(see Note 12). Although the outcome of the various claims and lawsuits is not presently determinable,in the opinion of the County's attorneys,the resolution of such matters will not have a material adverse affect on the financial condition of the County. ADA compliance—The County has entered into two stipulated agreements approved by the federal court to implement provisions of the Americans with Disabilities Act(ADA). With respect to the first stipulated agreernent relating to curb cuts,the County,with the help of a consultant, surveyed 669 intersections,then ranked them in order of priority. A transition - 72 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 plan,along with a funding commitment,was approved by the County Council. The total cost of all curb cuts was estimated to be$6.2 million. The cost of the first phase of the plan was $3 million,to be used in high priority areas such as government facilities,schools,and hospitals. The remaining cost will cover curb cuts at parks and in low-density single family residential areas. All corrective action was to be completed by July 2005,with an estimated 682 ramps to be completed. Funding allocated so far for this effort is$5.9 million. Since the proposed timetable proved to be too ambitious,the parties amended the agreement to require contracting by July 2005,rather than completion by that date. Pursuant to the April 2005 Stipulation of the Parties and Order of the Court,all curb ramps for 2005 and most curb ramps for 2004 were deferred. There were 50 curb ramps constructed in 2005. There are 295 curb ramps to be completed by the end of December 2006;all ramps have been designed. The second stipulated agreement relates to the Department of Parks and Recreation(the Parks Department). The agreement required the Parks Department to establish practices,policies and procedures regarding its programs,and prepare a transition plan by the middle of the year 2000. The self-evaluation and transition plan for programs,practices and procedures has been completed and approved by the County Council. The cost impact of implementation is not material because the necessary modifications are primarily procedural. This is an ongoing effort. The second part of this stipulated agreement is the reevaluation of all County facilities,which was completed and accepted by the County Council on June 30,2000. Approximately 240 County facilities were surveyed as part of this effort. The tentative completion date of all necessary repairs and renovations is 12 years from the date the County Council accepted the self-evaluation. The original estimated cost of the facilities repairs was $14.8 million,which will be spent over the 12 year period. Funding allocated so far for facilities repairs is$11.2 million,with another$4 million of federal funding anticipated through community development block grants over the next 3 years. Since 2000,the Department of Parks and Recreation has requested$2 to$3 million a year for the different park facilities'ADA projects,and recently,the Department of Public Works has requested an additional$2 million a year for the other County ADA facilities' project. Parties are currently working on a plan to ensure implementation of the Transition Plan with the assistance of an ADA Specialist,and to obtain extension on the deadlines for completion. 12. RISK MANAGEMENT The County is exposed to various risks of losses related to torts;theft of,damage to,and destruction of assets;errors and omissions;injuries to employees;and natural disasters. The County maintains fire and commercial multiple peril insurance on County facilities,flood insurance on selected structures,medical malpractice insurance for emergency medical technicians, general liability insurance for water safety officers,aviation liability for helicopter operations,automobile coverage on transit buses,and no-fault insurance coverage for privately owned police vehicles. There was no reduction in insurance coverage during the year from coverage in the prior year. During the past three fiscal years,the amount of settlements in cases covered by insurance have not exceeded the insurance coverage. The -73 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 County is substantially self-insured for its vehicles as well as for all other perils including workers'compensation and general liability. Liabilities are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. These losses include an estimate of claims that have been incurred but not reported(IBNR). Claim liabilities,including IBNR,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 applicat:�on of historical experience to outstanding claims. Estimates of IBNR are based on historical experience. The liability for claims and judgments is reported on the government-wide statement of net assets. At June 30,2005,the amount of this liability was$26,602,289. This is the County's best estimate based on available information. Changes in the reported liability since June 30,2003 are given below. General Workers' Total Liabili Compensation Liabilily Balance at June 30,2003 $6,670,511 $11,902,820 $18,573,331 Incurred claims(including IBNR;i* 2,759,512 4,795,010 7,554,522 Claim payments (2,591,639) (3,507,214) (6,098,853) Balance at June 30,2004 $6,838,384 $13,190,616 $20,029,000 Incurred claims(including IBNRl* 4,669,502 6,764,323 11,433,825 Claim payments (1,544,734) (3,315,802) (4,860,536) Balance at June 30,2005 $16,639,137 $26,602.289 *Net of new claims liability and old claims resolved at less than previous estimate. 13. EMPLOYEE BENEFIT PLANS Pension Plan Plan description All full-time employees of the County participate in the Employees' Retirement System of the State of H.awai`i(System),a cost-sharing multiple-employer defined benefit pension plan. The System was established by Chapter 88 of the Hawaii Revised Statutes(HRS)and is governed by a Board of Trustees. All contributions,benefits and eligibility requirements are established by Chapter 88,HRS,and can be amended by legislative action. The System regards the County,including its component unit,as one employer. Therefore, separate information for the primary government and its component unit is not available. All information given below on the pension plan is for the reporting entity as a whole,including both the primary government and its component unit. -74- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 All of the County's full-time employees are eligible to participate in the System. The System consists of a contributory retirement plan and a noncontributory retirement plan. Eligible employees,in service and a member of the existing contributory plan on June 30, 1984,were given an option to remain in the existing plan or join the noncontributory plan,effective January 1, 1985. All new eligible employees hired after June 30, 1984 generally become members of the noncontributory plan. Both plans provide death and disability benefits and a cost of living adjustment. In the contributory plan,employees generally may elect normal retirement at age 55 with 5 or 10 years of credited service or elect early retirement at any age with 25 years of credited service. Such employees are generally entitled to retirement benefits,payable monthly for life,of 2%or 2'/z%of their average final salary,as defined,for each year of credited service with certain limitations. Benefits fully vest on reaching five years of service;retirement benefits are reduced for early retirement. In the noncontributory plan,employees may elect normal retirement at age 62 with 10 years of credited service or at age 55 with 30 years of credited service,or elect early retirement at age 55 with 20 years of credited service. Such employees are entitled to retirement benefits,payable monthly for life, of 1.25%of their average final salary,as defined,for each year of credited service. Benefits fully vest on reaching ten years of service;retirement benefits are reduced for early retirement. The System issues a Comprehensive,Annual Financial Report that may be obtained by writing to the Employees' Retirement System of the State of Hawaii,201 Merchant Street, Suite 1400,Honolulu,Hawaii 96813. Funding policy All funding requirements are established by Chapter 88,HRS,and can be amended by the state legislature. Covered contributory plan employees are required to contribute 7.8%or 12.2%of their salary to the plan;the County is required to contribute the remaining amounts necessary to pay contributory plan benefits when due. The County is also required to contribute all amounts necessary to pay noncontributory benefits when due. The County's contribution requirements are actuarially determined based on actuarial assumptions established by Chapter 88,HRS. The County's contributions to the System for the fiscal years ended June 30,2003,2004 and 2005 were$4,212,000, $7,394,683 and$10,487,763, respectively,equal to the required contributions for each year. Post-Retirement Benefits In addition to providing the pension benefits described above,the County is required by state statute to contribute to the Hawaii Employer-Union Health Benefits Trust Fund(the EUTF), a statewide program which provides health and group life insurance for all retired and active County employees,their dependents and their beneficiaries. The state and other counties also participate in the fund. For employees hired prior to July 1, 1996 who retire with at least ten years of credited service,the County is required to pay 100%of the premiums of the medical, adult dental,prescription drug,vision,and group life insurance plans elected by the retiree. For employees hired prior to July 1, 1996 who retire with less than ten years of credited - 75 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 service,the County is required to pay half of the monthly premium cost of the above plans. For employees hired July 1, 1996 or after,the amount of the premium cost the County is required to pay varies depending on the employee's years of service at the time of retirement. Currently,the County has 1,060 former employees who have retired with at least ten years of credited service and are receiving the.full benefit. One additional employee has retired with less than ten years of service and has half of his medical premiums paid by the County. For each retiree and retiree's spouse eligible for Medicare,the County also pays$78.00 per month as reimbursement of their Medicare premiums. The County's contribution is recorded as an expenditure when paid. The amount of the contribution is limited by state statute to the actual cost of benefit coverage. During the fiscal year ended June 30,2005,the County's contribution to the Health Fund for retired employees totaled$6.5 million. Deferred Compensation Plan County employees are permitted to participate in a deferred compensation plan of the State of Hawaii,adopted pursuant to Internal Revenue Code(IRC)section 457. The plan permits eligible employees to defer a portion of their salary until future years by contributing to a fund managed by a plan administrator. The deferred compensation amounts are 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 County 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. Therefore,in accordance with GASB Statement No.32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans,deferred compensation plan assets are not reported in the accompanying basic financial statements. 14. COMPONENT UNIT DISCLOSURES Deposits and Investments At June 30,2005,cash,time certificates of deposit,money market funds,and repurchase agreements of$39,294,698,with bank balances of$41,795,164,were held by the County on behalf of the Department. These balances were fully insured or collateralized with securities held by the County's agent in the County's name. -76- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 The deposits and investments include investments received by the Department that are refundable or restricted as to use,and is recorded as a restricted asset. Such funds amounted to$11,914,168 at June 30,2005. At June 30,2005,the Department's investment portfolio consists primarily of time certificates of deposit held by the County on behalf of the Department. Capital Assets The Department began operations as of January 1, 1950. At that date,the utility plant in service was transferred to the Department from the County at the cost of the utility plant assets acquired by the County for its water system from January 1, 1924 to December 31, 1949, less accumulated depreciation.Acquisitions prior to 1924 and acquisitions by gift or grant prior to 1950 are not included in utility plant. Additions to utility plant since January 1, 1950 are stated at original cost and include contributions by governmental agencies,private subdividers and customers at their cost or estimated cost. Construction costs include amounts for contract work,engineering supervision and other direct and indirect costs. Construction period interest is capitalized on utility plan constructed with tax-exempt debt. Depreciation on the Department utility plant assets in service is computed using the straight- line method over the estimated usefial lives of the assets as follows: Structures and improvements 40 to 50 years Machinery and equipment 5 to 20 years Water systems 10 to 40 years The capital assets of the Department at June 30,2005 were as follows: Utility plant in service $269,379,520 Less: accumulated depreciation (123,642,024) 145,737,496 Land and rights 787,657 Construction in progress 40,640,738 Net capital assets 187.165.891 -77- COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Long-term Debt The County has issued general obligation bonds on behalf of the Department. The Department is responsible for the payment of the debt service on these bonds,but the County remains liable because they are general obligations of the County. The Department has recorded a liability for these general obligation bonds,which amounted to$14,657,708 at June 30,2005. General obligation bonds payable issued on behalf of the Department and other long-term debt at June 30,2005 are comprised of the following: Public improvement bonds: 1993 Series A at 5.05%to 5,6%,due through 2013 $5,570,000 1998 Series A at 4.5%,due through 2033 699,300 2001 Series A at 4.0%to 5.5%,due through 2021 7,704,348 2004 Series D at 4.5%,due through 2039 259,200 Total public improvement:bonds 14,232,848 Public improvement refunding bonds: 2004 Series at 5.0%,due through 2015 424,860 State revolving fund loan, interest at 1.01%to 1.37%, due through 2022 2,905,354 Total 17.563.062 At June 30,2005,future principal payments for long-term debt are scheduled as follows: Fiscal year ending June 30: 2006 $ 1,091,000 2007 1,142,000 2008 1,195,000 2009 1,241,000 2010 1,311,000 2011 -2015 5,665,000 2016-2020 3,765,000 2021 —2025 1,707,000 2026—2030 215,000 2031 —2035 177,000 2036—2039 54,062 Total 17.563.062 - 78 - COUNTY OF HAWAII Notes to the Basic Financial Statements June 30,2005 Contributions in Aid of Construction Effective July 1,2000,the Department adopted GASB Statement No.33,which requires the Department to recognize contributions in aid of construction as nonoperating revenues. Contributions in aid of construction were previously recognized as contributed capital. The Department recognized$11,612,284 of contributions in aid of construction as nonoperating revenues for the fiscal year ended June 30,2005. Commitments and Contingent Liabilities Claims and judgments— The Department is self-insured for workers' compensation and other perils. The liability at June 30,2005 for workers' compensation claims of$272,000 was estimated based on a combination of case-by-case review 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$23,234,000 at June 30,2005. -79- This page intentionally left blank. - 80-