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HomeMy WebLinkAbout2007 CAFR Part 1 COMPREHENSIVE ANNUAL FINANCIAL REPORT Fiscal Year Ended June 30, 2007 I ��►♦ NA MOB' OF COUNTY OF HAWAII Hilo, Hawaii Harry Kim Mayor Dixie Kaetsu Managing Director Prepared by The Department of Finance William Takaba Director of Finance COUNTY OF HAWAII Comprehensive Annual Financial Report For the Fiscal Year Ended June 30,2007 Table of Contents Page INTRODUCTORY SECTION Letter of Transmittal I GFOA Certificate of Achievement 7 Organization Chart 8 List of Elected Officials 9 List of Principal Officials 10 FINANCIAL SECTION Independent Auditors'Report l l Management's Discussion and Analysis 13 Basic Financial Statements: Government-wide Financial Statements: Statement of Net Assets 24 Statement of Activities 26 Fund Financial Statements: Balance Sheet-Governmental Funds 28 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets 29 Statement of Revenues,Expenditures, and Changes in Fund Balances- Governmental Funds 30 Reconciliation of the Change in Fund Balances of Governmental Funds to the Statement of Activities 32 Statement of Revenues,Expenditures and Changes in Fund Balance- Budget and Actual(Budgetary Basis)-General Fund 34 Statement of Net Assets-Proprietary Funds 38 Statement of Revenues,Expenditures,and Changes in Fund Net Assets- Proprietary Funds 39 Statement of Cash Flows-Proprietary Funds 40 Statement of Fiduciary Net Assets-Fiduciary Funds 41 Statement of Changes in Fiduciary Net Assets-Fiduciary Funds 42 Notes to the Basic Financial Statements 43 FINANCIAL SECTION (Continued) Page Combining and Individual Nonmajor Fund Statements and Schedules: Combining Balance Sheet-Nonmajor Governmental Funds 82 Combining Statement of Revenues,Expenditures,and Changes in Fund Balances-Nonmajor Governmental Funds 86 Schedules of Revenues,Expenditures,and Changes in Fund Balances- Budget and Actual(Budgetary Basis): Highway Fund 89 Sewer Fund 90 Solid Waste Fund 91 Cemetery Fund 92 Parking Meter Fund 93 Vehicle Disposal Fund 94 Bikeway Fund 95 Workforce Investment Act Fund 96 Golf Course Fund 97 Geothermal Relocation Revolving Fund 98 Beautification Fund 99 Hawaii County Housing Agency 100 Park Dedication Fund 101 Combining Balance Sheet-Agency Funds 102 Combining Statement of Changes in Assets and Liabilities-Agency Funds 104 Combining Statement of Net Assets-Private Purpose Trusts 108 Combining Statement of Changes in Net Assets-Private Purpose Trusts 109 STATISTICAL SECTION Table 1 -Net Assets by Component 111 Table 2-Changes in Net Assets 112 Table 3 -Fund Balances,Governmental Funds 113 Table 4-Changes in Fund Balance,Governmental Funds 114 Table 5-Real Property Assessed Values by Classification and Tax Rates 115 Table 6-Principal Taxpayers 119 Table 7-Property Tax Levies and Collections 120 Table 8-Ratios of Outstanding Debt by Type 121 Table 9-Ratios of General Bonded Debt Outstanding 122 Table 10-Legal Debt Margin Information 123 Table I I -Demographic and Economic Statistics 124 Table 12-Principal Employers,County of Hawaii 125 Table 13 -Full-Time Equivalent County Government Employees by Function 126 Table 14-Operating Indicators by Function 127 Table IS-Capital Asset Statistics by Functions 128 INTRODUCTORY SECTION OF M Harry Kim }� yak William Takaba Mayor Director Nancy E.Crawford •i�`•: Deputy Director rf oi'NPj1 County of Hawaii Finance Department 25 Aupuni Street, Room 118 • Hilo,Hawaii 96720 (808)961-8234 • Fax(808)961-8248 December 28, 2007 The Honorable Mayor and Members of the Council County of Hawaii 25 Aupuni Street Hilo,Hawaii 96720 We transmit herewith the Comprehensive Annual Financial Report for the County of Hawaii, State of Hawaii,for the fiscal year July 1, 2006 to June 30,2007. This report was prepared by the County's Department of Finance. The accuracy of the financial statements and the completeness and fairness of their presentation are the responsibility of the County government. We believe the enclosed data are complete and accurate in all material respects and are reported in a manner designed to present fairly the financial position and results of operations of the various funds of the County. All disclosures necessary to convey the maximum understanding of the County's financial activities have been included. Management's discussion and analysis is also included to aid users of the financial statements. This report presents the financial position of the County of Hawaii at June 30,2007 and results of operations for the fiscal year then ended. The report is divided into three sections: • The Introductory Section includes this transmittal letter,a Certificate of Achievement for Excellence in Financial Reporting,the County of Hawai`i's organization chart and lists of elected and principal officials. • The Financial Section contains management's discussion and analysis,the basic financial statements,related notes,the combining and individual fund budgetary financial statements, and the independent auditors'report. • The Statistical Section includes selected financial and demographic information,generally presented on a multi-year basis. This report includes all funds of the County of Hawaii,including its component unit,the Department of Water Supply,established by the County Charter as a semi-autonomous body of - 1 - the County government. This component unit is included in the County's reporting entity because of its financial relationship with the County. The County provides the full range of municipal services. These include police and fire protection;emergency medical care;public prosecutor; culture and recreation;sanitation; social services;water; planning and zoning;construction and maintenance of highways,streets and infrastructure;real property assessment and tax collection; and general administrative services. However,the County does not provide such other traditional services as public education, hospitals and courts. These services are provided by the State government. The County of Hawaii consists of the island of Hawaii,4,028 square miles in size. It is twice as large as the combined area of all the other inhabited islands in the Hawaiian Archipelago. Since there is no other local or municipal government within the County,there are no overlapping taxes and no overlapping debt. The County of Hawaii has an elected mayor and a nine-member council. Economic Condition and Outlook The island of Hawaii,commonly known as the Big Island,is located 214 miles from Honolulu, the state capital;2,200 miles from the west coast of the continental United States;and 4,000 miles from Japan. The city of Hilo on the east side of the island serves as the county seat as well as the transportation and financial center for the Big Island. Hilo's infrastructure includes Hilo Harbor,a deep-water port,and Hilo International Airport,which is capable of handling fully- loaded wide-bodied aircraft. Kailua-Kona and South Kohala,major tourist destination areas on the west side of the Big Island, are served by flights from the United States mainland,Japan and Canada through the Kona International Airport. Scheduled freight services are available between the islands by air and sea transport. Communities on the island are linked by a network of State and County maintained streets and highways. The Big Island is the most diversified of the neighbor island economies. As a result it is buffered when any one industry lags. Currently,the Big Island is enjoying its best economic times in recent years. The west side growth is fueled by surging visitors numbers and record construction activity,while the east side economic activity is led by the University of Hawaii at Hilo and other government construction projects. Continued increasing population has contributed to a growing labor force that numbered 86,250 in June 2007. The expanding economy has matched the growth in available work force and unemployment continues to follow a downward trend,with an average 2.8 percent for 2006. Total and per capita personal income have been steadily increasing. Tourism— Tourism is the major industry on the island. In addition to the mild climate and natural beauty it shares with other areas in the state,the County features the Hawaii Volcanoes National Park. A popular attraction,the park is the most visited site in the state,handling over 2 million visitors annually. Total visitors to Hawaii increased slightly compared to the prior year, with 1,597,056 arrivals in 2006. A developing source for bringing tourists to the island of -2- Hawaii is the cruise ship industry. Cruise ship visitors for the first half of 2007 nearly doubled over the same period in 2006. Scientific Research and Development— Due largely to its unique geographic characteristics which has attracted scientists in fields of astronomy,meteorology,volcanology,and agriculture/aquaculture,Hawaii County has benefited economically by the significant investments made in scientific research. The total astronomy related capital investment on Mauna Kea exceeds$600 million and combined annual budgets are about$60 million,while direct employment is over 500. The Hawaiian Volcano Observatory in Hawaii Volcanoes National Park and the Natural Energy Laboratory of Hawaii Authority at Keahole,Kona are also major contributors to international research and the local economy. Agriculture— Forestry, nut and fruit orchards, and floral and vegetable farms have successfully replaced lands where sugar once grew. Demand for Kona coffee is improving and macadamia nut prices remain strong. Papaya remains the largest orchard crop. Agriculture makes a substantial contribution to the County's economy and produces a variety of goods for export as well as for local consumption. Major Initiatives For the Year During the year,the County focused on public works,planning,and other issues affecting the quality of life in the County. Public Works—Preliminary and construction work continued on several West Hawaii road projects including Kuakini Highway and various connector roads. Construction of intersection curb cuts and facilities upgrades to meet Americans with Disabilities Act(ADA)requirements is an on-going project. Construction was completed on the Scotty White Bridge and several other smaller projects. In addition,the County is investigating using Community Facility Districts to help speed up construction of roadways by developers in West Hawaii. Planning—The Planning Department continued the Community Development Plan(CDP) process for the districts of North and South Kona,and Puna. The CDP process began for North and South Kohala in an effort that has become the most comprehensive planning process in the State of Hawaii. Open Space—The Public Access,Open Space and Natural Resources Preservation fund was established last year. The fund can be used for acquiring land for public outdoor recreation and education,preservation of historic or culturally important land areas,protection of natural resources,preservation of forests,beaches,coastal areas,natural beauty and agricultural lands or for the protection of watershed lands to preserve water quality and water supply. In the current year,the voters approved an ordinance to transfer two percent of real property tax collections to this fund each year. -3 - For the Future Public Safety—Expansion and upgrade of Fire and Police facilities around the island are being planned and site selection is in process. Public Works —The County is working on developing a West Hawaii Civic Center. This facility will improve access to government for the Kona residents. Additionally,the County is working on several major road projects to enhance traffic in West Hawaii. Environmental Management—As the Hilo landfill approaches full capacity,the County will be looking at solid waste technology alternatives to divert waste from the Hilo landfill to enable the County to close that facility. It is anticipated that an alternative will be decided upon in the next year. The County is also working closely with the State Department of Health to extend the life of the Hilo landfill. Human Resources—With numerous Countywide vacancies,and a tight labor market,new "jobs"marketing strategies were developed to reach different segments of the population. These new strategies will continue to be utilized as we continue to work against a very tight labor market. Other Financial Information Internal Control The management of the County is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the County are protected from loss,theft or misuse and to ensure that adequate accounting data are compiled to allow for preparation of financial statements in conformity with generally accepted accounting principles. The internal control structure is designed to provide reasonable,but not absolute,assurance that these objectives are met. The concept of reasonable assurance recognizes that(1)the cost of a control should not exceed the benefits likely to be derived; and(2)the valuation of costs and benefits requires estimates and judgments by management. Budgetary Control The County maintains budgetary controls to ensure that legal provisions of the annual budget are complied with and that expenditures do not exceed budgeted amounts. Activities of the general fund and special revenue funds are included in the annual appropriated operating budget. Project-length financial plans are adopted for the capital projects fund. Budgetary control is established at the department level. Formal budgetary integration is employed as a management control device for the general fund, special revenue funds, and the capital projects fund. Budgetary control for the debt service fund is achieved through general obligation bond indenture provisions. The basis of accounting used for the budgets of the general and special revenue funds differs from generally accepted accounting principles. Intergovernmental revenues are recognized when -4- awarded by the granting agency,encumbrances and unexpended allotments are treated as expenditures for purposes of determining legal compliance with the annual budget,all leases are treated as operating leases,and accounts payable are not accrued. The County also maintains an encumbrance accounting system as one technique of accomplishing budgetary control. Encumbrances outstanding at fiscal year end are reported as reservations of fund balances and do not constitute expenditures or liabilities because they will be honored during the following year. As demonstrated by the statements and schedules included in the financial section of this report,the County continues to meet its responsibility for sound financial management. Pension Plan All full-time employees of the County participate in the Employees' Retirement System of the State of Hawaii,a cost-sharing,multiple-employer defined benefit public employee retirement system. Cash Management Cash temporarily idle during the year was invested in demand deposits,certificates of deposit and repurchase agreements. The average yield on investment was 4.15%. The County's policy is to minimize credit and market risks while maintaining a competitive yield on its portfolio. Accordingly,with the exception of$174,256 held by a rental management agent,deposits were either insured by federal depository insurance, collateralized,or secured by irrevocable letters of credit. All collateral on deposit was held for safe keeping with a County- designated agent in the County's name. Risk Management The County maintains insurance coverage for privately owned police vehicles as well as for other purposes. The County is substantially self-insured for its vehicles as well as for all other perils including workers' compensation and general liability. Other Information Independent Audit The Hawaii County Charter requires an annual audit by independent certified public accountants. KPMG LLP was selected by the County Council to perform the audit. Employee Union Contracts County employees are members of eight different bargaining units. All of the bargaining units have contracts that run through June 30,2007. -5 - Certificate of Achievement The Government Finance Officers Association of the United States and Canada(GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the County of Hawaii for its Comprehensive Annual Financial Report for the fiscal year ended June 30,2006. This was the nineteenth consecutive year that the government has achieved this prestigious award. In order to be awarded a Certificate of Achievement,a government must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe our current Comprehensive Annual Financial Report continues to meet the Certificate of Achievement Program's requirements,and we are submitting it to the GFOA to determine its eligibility for another certificate. Acknowledgments The preparation of this report on a timely basis was made possible by the efficient and dedicated services of the entire staff of the Department of Finance and fiscal personnel in other departments. I am grateful for their help in preparing this report. I also thank the Mayor and the members of the County Council for their interest and support in assuring the continuing sound financial condition of the County of Hawaii. WILLIAM TAKABA Director of Finance -6- Certificate of Achievement for Excellence in Financial Reporting Presented to County of Hawaii Hawaii For its Comprehensive Annual Financial Report for the Fiscal Year Ended June 30,2006 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports(CAFRs)achieve the highest standards in government accounting and financial reporting. ED OF in s On CAN10" President sous ams+ Executive Director - 7- County of Hawaii Organization Chart County Electorate County Council Mayor Prosecuting Attorney County Clerk Office of Mana egeme_nt: Managing irector Departments and agencies Agencies under Departments under under direct supervision administrative supervision commissions and of the Mayor and/or of the Mayor: administrative supervision Managing Director: of the Mayor: Corporation Counsel Civil Defense Civil Service Finance Office of Aging Police Planning Mass Transportation Liquor Control Environmental Management Housing& Community Fire Research&Development Development Water Supply Public Works (semi-autonomous) Parks&Recreation Data Systems - 8 - County of Hawaii Elected Officials Administrative Officers (Term: 2004-2008) Harry Kim Mayor Jay T. Kimura Prosecuting Attorney County Council (Term: 2006-2008) Pete Hoffmann Chair K. Angel Pilago Vice Chair Brenda Ford Member Stacy K.Higa Member Donald Ikeda Member Bob Jacobson Member Emily I.Naeole Member Dominic Yagong Member J Yoshimoto Member -9- Principal Officials June 30, 2007 County Clerk Casey Jarman Legislative Auditor Colleen Schrandt Managing Director Dixie Kaetsu Deputy Managing Director Barbara J.Kossow Corporation Counsel Lincoln Ashida Director of Finance William Takaba Planning Director Christopher Yuen Director of Personnel Michael R. Ben Director of Research and Development Jane Testa Chief of Police Lawrence K.Mahuna Fire Chief Darryl Oliveira Director of Public Works Bruce McClure Director of Environmental Management Bobby Jean Leithead-Todd Director of Parks and Recreation Patricia Engelhard Manager,Department of Water Supply Milton Pavao Civil Defense Administrator Troy M.Kindred Director of Liquor Control Janice A. Pakele Transit Operations Administrator Thomas Brown Executive on Aging Alan Parker Administrator, Office of Housing and Community Development Edwin S. Taira - 10- FINANCIAL SECTION L^" KPMG LLP PO Box 4150 Honolulu.HI 96812-4150 Independent Auditors'Report To the Chair and Members of the County Council County of Hawaii State of Hawaii: We have audited the accompanying financial statements of the governmental activities,the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the County of Hawaii, State of Hawaii(the County)as of and for the year ended June 30, 2007,which collectively comprise the County's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the County's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the County's internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the discretely presented component unit, each major fund,and the aggregate remaining fund information of the County as of June 30, 2007, and the respective changes in financial position and, where applicable, cash flows thereof, and the respective budgetary comparisons for the general fund for the year then ended in conformity with U.S. generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued our report dated December 28, 2007, on our consideration of the County's internal control over financial reporting and on our tests of its compliance with certain provisions of laws,regulations,contracts,and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. — ll— KPMG LLP,a U.S.limited liability partnership.is the U.S. member firm of KPMG Intemationei,a Swiss cooperative. The management's discussion and analysis on pages 13 through 22 is not a required part of the basic financial statements, but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information.However,we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the County's basic financial statements. The introductory section,the combining and individual nonmajor fund financial statements and schedules,and the statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and schedules have been subjected to the auditing procedures applied in the audit of basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.The introductory section and the statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements and,accordingly,we express no opinion on them. M�(C5 LL-P Honolulu,Hawaii December 28,2007 - 12- MANAGEMENT'S DISCUSSION AND ANALYSIS This section of the County of Hawai`i's(the County)Comprehensive Annual Financial Report presents a narrative overview and analysis of the financial activities of the County for the fiscal year ended June 30,2007. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal. FINANCIAL HIGHLIGHTS • The assets of the County exceeded its liabilities at the end of the fiscal year by$472.1 million (net assets). This amount includes$22.0 million in unrestricted net assets,an increase of $12.3 million from the prior year. • The government's total net assets increased by$30.3 million during the fiscal year. • As of the close of the current fiscal year,the County's governmental funds reported combined ending fund balances of$287.2 million,an increase of$80.2 million from the prior year. Approximately 52 percent of this total amount, $149.5 million,is available for spending at the government's discretion(unreserved fund balance). • At the end of the current fiscal year,unreserved fund balance for the general fund was$29.0 million,or 15 percent of total general fund expenditures. • The County's total current and other assets increased by$91.1 million(39 percent)during the current fiscal year. The key factors in this increase were the net increase in cash and investments($96.6 million)offset by the decrease in receivables($6.2 million). OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the County's basic financial statements. The County's basic financial statements comprise three components: (1) Government-wide financial statements,(2)Fund financial statements,and(3)Notes to the basic financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the County's finances,in a manner similar to a private-sector business. The statement of net assets presents information on all of the County's assets and liabilities, with the difference between the two reported as net assets. Over time,increases or decreases in net assets may serve as a useful indicator of whether or not the financial position of the County is improving or deteriorating. The statement of activities presents information showing how the County's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs,regardless of the timing of related cash flows. Thus,revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods,such as revenues pertaining to uncollected taxes and expenses pertaining to earned but unused vacation and sick leave. Both of the government-wide financial statements distinguish functions of the County that are principally supported by taxes and intergovernmental revenues(governmental activities)from - 13 - other functions that are intended to recover all or a significant portion of their costs through user fees and charges(business-type activities). The governmental activities of the County include public safety,highways and streets,health,education and welfare,culture and recreation, sanitation and general government. The business-type activities of the County include rental housing for senior citizens and families. The government-wide financial statements include not only the County itself(known as the primary government),but also the Department of Water Supply,a legally separate entity that the County is financially accountable for. Financial information for this component unit is reported separately from the financial information presented for the primary government itself. Fund Financial Statements The fund financial statements are designed to report information about groupings of related accounts which are used to maintain control over resources that have been segregated for specific activities or objectives. The County,like other state and local governments,uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the County can be divided into the following three categories: governmental funds, proprietary funds,and fiduciary funds. Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements— i.e.,most of the County's basic services are reported in governmental funds. These statements,however, focus on(1)how cash and other financial assets can readily be converted to available resources and(2)the balances left at year-end that are available for spending. Such information may be useful in determining what financial resources are available in the near future to finance the County's programs. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so,readers may better understand the long-term impact of the government's near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues,expenditures,and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The County maintains several individual governmental funds organized according to their type(general,special revenue,debt service,and capital projects). Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues,expenditures,and changes in fund balances for the general fund and capital projects fund,which are considered to be major funds. Data from the remaining governmental funds are combined into a single,aggregated presentation. Individual fund data for each of the non-major governmental funds is provided in the form of combining statements elsewhere in this report. The County adopts an annual appropriated budget for its general fund and special revenue funds. A budgetary comparison statement has been provided for these funds to demonstrate compliance with this budget. The budgetary comparison statement for the general fund is located in the basic financial statements,whereas the budgetary comparison statements for the nonmajor special revenue funds are presented elsewhere in this report. - 14- Proprietary funds. Proprietary funds are generally used to account for services for which the County charges outside customers. Proprietary funds provide the same type of information as shown in the government-wide financial statements,only in more detail. The County maintains only one type of proprietary funds,enterprise funds. Enterprise funds are used to report the same functions presented as business-type activities in the government- wide financial statements. The County uses enterprise funds to account for the operations of the Kulaimano Elderly Housing Project and the Ouli Ekahi Affordable Housing Project. Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the County. The Geothermal Asset Fund,Shippers' Wharf Trust Fund and the agency funds are reported under the fiduciary funds. Since the resources of these funds are not available to support the County's own programs,they are not reflected in the government-wide financial statements. The accounting used for fiduciary funds is much like that used for proprietary funds. Notes to the Basic Financial Statements The notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. Other Suoolementary Information In addition to the basic financial statements and accompanying notes,this report also presents supplementary information,including the combining statements referred to earlier in connection with nonmajor governmental funds and budget comparison statements for the nonmajor special revenue funds. This supplementary information is presented immediately following the notes to the basic financial statements. GOVERNMENT-WIDE FINANCIAL ANALYSIS Condensed Schedule of Net Assets June 30,2007 and 2006 Primary Government Governmental Activities Business-type Activities Total 2007 M 2007 2006 2007 2006 Assets: Current and other assets $324,854,922 $233,765,854 $1,272,461 $1,382,097 $326,127,383 $235,147,951 Capital assets,net 545,921,770 516,600,592 1,306,263 1,336,920 547,228,033 517,937,512 Total assets $870,776,692 $750,366,446 $2,578,724 $2,719,017 $873,355,416 $753,085,463 Liabilities: Long-term liabilities outstanding 371,342,710 292,196,562 995,854 1,019,386 372,338,564 293,215,948 Other liabilities 28,437,233 17,685,089 451,873 385,869 28,889,106 18,070,958 Total liabilities S 399,779,943 $309,881,651 $1,447,727 $1,405,255 $401,227,670 $311,286,906 Net assets: Invested in capital assets,net of related debt 394,789,635 386,861,296 310,409 317,534 395,100,044 387,178,830 Restricted 54,857,023 44,737,588 183,832 182,797 55,040,855 44,920,385 Unrestricted 21,350,091 8,885,911 636,756 813,431 21,986,847 9,699,342 Total net assets S 470,996,749 $440,484,795 $1,130,997 $1,313,762 S 472,127,746 $441,798,557 - 15 - Analysis of Net Assets As noted earlier,net assets may serve over time as a useful indicator of a government's financial position. In the case of the County,assets exceeded liabilities by$472.1 million at the close of the most recent fiscal year. By far the largest portion of the County's net assets(84 percent)reflects its investment in capital assets(e.g.,land,buildings,infrastructure,and equipment),less any related debt used to acquire those assets that is still outstanding. The County uses these capital assets to provide services to citizens;consequently,these assets are not available for future spending. Although the County's investment in its capital assets is reported net of related debt,it should be noted that the resources needed to repay this debt must be provided from other sources,since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the County's net assets(12 percent)represents resources that are subject to external restrictions on how they may be used. At the end of the current fiscal year,the County is able to report positive balances in all three categories of net assets,both for the government as a whole,as well as for its separate governmental and business-type activities. The government's net assets increased by$30.3 million during the current fiscal year. Approximately$31.4 million of the increase is due to increases in real property tax valuations and collections. The offsetting decrease represents the degree to which increases in ongoing expenses have outstripped similar increases in ongoing revenues. The government's current and other assets increased by$91.0 million during the current fiscal year. Approximately$96.6 million of the increase is due to an increase in cash and investments, which is offset by a$6.2 million decrease in receivables. The increase in cash and investments is primarily due to the issuance of bonds($85 million). The government's capital assets increased by$29.3 million due to the large amount of capital improvement projects done by the County during the current fiscal year. See further discussion of the increase in capital assets on page 21. The government's long-term liabilities outstanding increased by$79.1 million due to the new general obligation bonds issued during the current year,offset by principal payments and decreases in other long-term liabilities. See further discussion of the increase in long-term debt outstanding on page 22. The government's other liabilities increased by$10.8 million primarily due to increases in unearned revenue relating to intergovernmental grants($5.6 million),accounts payable and accrued liabilities($4.0 million)and interest due on long-term debt($1.8 million)offset by smaller decreases in other accounts. - 16 - Condensed Schedule of Changes in Net Assets For the Fiscal Years Ended June 30,2007 and 2006 Primary Government Governmental Activities Business-type Activities Total 2007 2006 2007 2006 2007 2006 Revenues: Program revenues: Charges for services $ 40,532,366 $ 38,977,264 S 345,802 S 338,141 $ 40,878,168 $ 39,315,405 Operating grants and contributions 38,068,138 38,252,889 134,211 141,019 38,202,349 38,393,908 Capital grants and contributions 7,805,986 14,801,828 - - 7,805,986 14,801,828 General revenues: Property taxes 183,611,050 152,182,806 183,611,050 152,182,806 Other taxes 24,387,670 21,997,764 24,387,670 21,997,764 Grants and contributions,unrestricted 18,999,596 18,510,262 - 18,999,596 18,510,262 Investment earnings 9,727,911 4,976,178 35,551 22,874 9,763,462 4,999,052 Miscellaneous 3,063,413 2,110,854 - - 3,063,413 2,110,854 Total revenues 326,196,130 291,809,845 515,564 502,034 326,711,694 292,311,879 Expenses: General government 46,349,904 38,264,132 - - 46,349,904 38,264,132 Public safety 118,010,316 106,067,466 118,010,316 106,067,466 Highways and streets 28,185,968 24,783,476 28,185,968 24,783,476 Health,education and welfare 23,203,874 20,181,685 698,329 547,201 23,902,203 20,728,886 Culture and recreation 26,948,501 19,464,962 - - 26,948,501 19,464,962 Sanitation 42,682,281 27,265,515 42,682,281 27,265,515 Interest on long-term debt 10,303,332 10,168,710 10,303,332 10,168,710 Total expenses 295,684,176 246,195,946 698,329 547,201 296,382,505 246,743,147 Increase(decrease)in net assets 30,511,954 45,613,899 (182,765) (45,167) 30,329,189 45,568,732 Net assets at beginning of year 440,484,795 394,870,896 1,313,762 1,358,929 441,798,557 396,229,825 Net assets at end of year $470,996,749 S 440,484,795 $ 1,130,997 S 1,313,762 $472,127,746 $441,798,557 Analysis of Changes in Net Assets Governmental activities. Governmental activities increased the County's net assets by$30.5 million or substantially all of the total growth in net assets of the County. Total revenues increased by$34.4 million(12 percent). The County's property taxes increased by$31.4 million(21 percent)during the year. Most of this increase is attributable to the increase in assessed values. Investment earnings increased by$4.8 million(95 percent). Total expenses increased by$49.5 million(20 percent). This increase was primarily due to increases in all of the expense categories. Part of the increase is the result of negotiated pay raises and related benefits. Much of the increase in all areas is due to the increased cost of employee benefits,particularly employee retirement and health insurance costs. Increases are also due to an increase in capital project expenditures for this fiscal year. For the most part,other fluctuations in expenses closely paralleled inflation and growth in demand for services. - 17 - Expenses and Program Revenues-Governmental Activities Year Ended June 30,2007 140.000,000 - .. 120,000,000 ■Expenses Program revenues i 100,000,000 i 80,000,000 w 60,000,000 40,000,000 20,000,000 ti General Public safety Highways and Health, Culture and Sanitation Interest on government streets education and recreation long-tern debt welfare Revenues by Source-Governmental Activities Year Ended June 30,2007 Investment earnings Miscellaneous 3% 1% Grants and contributions not restricted to specific Charges for services programs 12% 6% Other taxes 7% Operating grants and contributions 12% Capital grants and contributions 2% Property taxes 57% _ 18 _ The charts above illustrate the County's governmental expenses and revenues by function,and its revenues by source. As shown,public safety is the largest function in expense(40 percent), followed by general government(16 percent)and sanitation(14 percent). General revenues such as property and other taxes are not shown by program,but are effectively used to support program activities countywide. For governmental activities overall,without regard to programs, property taxes are the largest single source of funds(57 percent),followed by charges for services (12 percent)and operating grants and contributions(12 percent). Business-type activities. Business-type activities decreased the County's net assets by$182,765. Expenses for health,education and welfare account for all of the$698,329 of expenses. Charges for services were$345,802,operating grants and contributions were$134,211 and investment earnings were$35,551. Expenses increased$151,128(28 percent)due to increases in repairs and maintenance($99,843)and lease expenses($39,028). FINANCIAL ANALYSIS OF THE COUNTY'S FUNDS As noted earlier,the County uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of the County's governmental funds is to provide information on near-term inflows,outflows,and balances of spendable resources. Such information is useful in assessing the County's financing requirements. In particular,unreserved fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year,the County's governmental funds reported combined ending fund balances of$287.2 million,an increase of$80.2 million in comparison with prior year. Approximately 52 percent of this total amount($149.5 million)constitutes unreserved fund balance,which is available for spending at the government's discretion. The remainder of the fund balance is reserved to indicate that it is not available for new spending because it has already been committed 1)to liquidate contracts and purchase orders for last fiscal year($71.9 million), 2)to pay debt service($18.8 million),or 3)for a variety of other restricted purposes($47.0 million). The general fund is the chief operating fund of the County. At the end of the current fiscal year, unreserved fund balance of the general fund was$29.0 million,while total fund balance reached $44.6 million. As a measure of the general fund's liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represents 15 percent of total general fund expenditures,while total fund balance represents 23 percent of that same amount. The fund balance of the County's general fund increased by$9.6 million during the current fiscal year. Key factors in this increase are as follows: • An increase of$28.2 million(18 percent)in property tax revenue due to increasing property values. • An increase of$5.0 million(100 percent)in investment earnings due to an increase in interest rates and the amount available to invest. • An increase of$6.5 million(21 percent)in general government expenditures due primarily to increases in expenditures for the legislative branch($1.1 million),research and development - 19- ($1.2 million),building maintenance($1.5 million)and engineering($1.2 million). Increases were noted in flood mapping as well as in salaries and wages due to negotiated pay increases and an increase in the number of positions. • An increase of$8.8 million(11 percent)in public safety expenditures due primarily to increases in expenditures for police($2.9 million),fire($4.8 million)and prosecuting attorney($0.7 million). Increases were noted in many of the grant-funded programs as well as in salaries and wages due to negotiated pay increases. • An increase of$2.3 million(16 percent)in culture and recreation expenditures due primarily to increases in expenditures for the new West Hawaii golf program($0.7 million)and park maintenance($1.0 million). In addition to the new West Hawaii golf program,increases were noted in salaries and wages due to negotiated pay increases. The fund balance of the County's capital projects fund increased by$64.8 million during the current fiscal year. The increase is primarily due to the fund's main revenue sources of intergovernmental revenue($2.7 million),transfers in($15.4 million), state revolving fund loan proceeds($6.3 million)and bond proceeds($85.0 million)combining to exceed capital expenditures($48.0 million)for the current fiscal year. The debt service funds,included in other governmental funds,have combined total fund balances of$18.8 million,all of which is reserved for the payment of debt service. The net increase in the combined fund balances during the current year in the debt service funds was$2.0 million(12 percent). Proprietary funds The County's proprietary funds provide the same type of information found in the government-wide financial statements,but in more detail. Unrestricted net assets of the Kulaimano Elderly Housing Project(Kulaimano)at the end of the year amounted to$763,983,and the unrestricted net deficit of the Ouli Ekahi Affordable Housing Project(Ouli Ekahi)amounted to$127,227. The net assets for Kulaimano decreased by$102,235 and the net assets for Ouli Ekahi decreased by$80,530. Other factors concerning the finances of these two funds have already been addressed in the discussion of the County's business-type activities. GENERAL FUND BUDGETARY HIGHLIGHTS Differences between the original budget and the final amended budget were primarily the result of an$11.1 million increase in appropriations and an$9.3 million increase in transfers out and can be briefly summarized as follows: • $11.1 million in increases due to the appropriation of higher than expected fund balance to be used in the year's operations. • $8.8 million in increases due to the appropriations for capital and operating grants and contributions. • $7.2 million increase in transfer out to the capital projects fund to help cover costs relating to damages from our October 2006 earthquake and$1.6 million increase in transfer to public access,open space,and natural resources preservation fund due to an ordinance passed by the voters in November 2006 to transfer two percent of real property taxes collected to this fund. Differences between the final budget and the actual(budgetary basis)resulted in$1.8 million less revenues than expected and$20.4 million less expenditures than appropriated. This is primarily due to the following factors: -20- • $2.2 million negative variance in taxes and assessments revenue resulting from collections being less than expected. • $5.8 million positive variance in interest and penalties revenue resulting from higher earnings on cash and investments than expected. • $4.3 million negative variance in intergovernmental revenue,including$2.0 million in federal grants and$2.3 million in state grants. • $4.9 million positive variance in general government expenditures caused by an overall effort by each department to hold the line on expenditures. • $5.8 million positive variance in public safety expenditures primarily created by vacant positions in the police department,as well as an increased effort to control costs during the budget year. • $4.9 million positive variance in health fund expenditures,due primarily to lower than expected costs and the fund not billing a portion of the post-retirement benefits costs as anticipated. CAPITAL ASSET AND DEBT ADMINISTRATION Capital assets. The County's investment in capital assets for its governmental and business-type activities as of June 30,2007 amounts to$547.2 million(net of accumulated depreciation). This investment in capital assets includes land,buildings and improvements,equipment, and infrastructure assets, which consists of primarily roads and bridges. The total increase in the County's investment in capital assets for the current fiscal year was six percent. Major capital asset events during the current fiscal year included the following: • Construction continued on Kuakini Highway Improvements;construction in progress as of the end of the current fiscal year had reached$11.0 million. • Construction continued on the Prosecuting Attorney's Office in Aupuni Center;construction in progress as of the end of the current fiscal year had reached$4.1 million. • Construction began on the Mamalahoa Highway Improvements;construction in progress as of the end of the current fiscal year had reached$4.6 million. • Construction began on several park projects;construction in progress as of the end of the current fiscal year had reached$4.1 million. • Construction was completed on the Scotty White Bridge;construction in progress of$1.7 million was transferred to infrastructure. Capital Assets (net of depreciation) As of June 30,2007 and 2006 Primary Government Governmental Activities Business-type Activities Total 2007 2006 2007 2006 2007 2006 Land $ 22,999,168 $ 22,737,854 $ 753,877 $ 753,877 $ 23,753,045 $ 23,491,731 Infrastructure assets 157,241,475 155,377,804 - 157,241,475 155,377,804 Ground and site improvements - - 86,352 90,107 86,352 90,107 Buildings and improvements 219,677,063 219,887,751 452,804 477,419 220,129,867 220,365,170 Equipment 36,237,623 31,854,863 13,230 15,517 36,250,853 31,870,380 Construction work in progress 109,766,441 _ 86,742,320 109,766,441 86,742,320 Total $545,921,770 $516,600,592 $1,306,263 $1,336,920 $547,228,033 $517,937,512 -21 - Additional information on the County's capital assets can be found in note 6 to the basic financial statements. Long-term debt. Long-term debt is comprised of bonds of$269,281,339 and State Revolving Fund loans of$30,246,751. At the end of the current fiscal year,the County had total bonded debt outstanding of$269.3 million. This entire amount was comprised of general obligation bonds which are backed by the full faith and credit of the County. The County's total bonded debt increased by$72.6 million(37 percent)during the current fiscal year. The key factors in this increase were new debt($85.0 million)and normal principal reduction. The County maintains an"A+"rating from Standard&Poor's,an"A1"rating from Moody's and an"A+"rating from Fitch for general obligation debt. State statutes limit the amount of general obligation debt the County may issue to 15 percent of the total assessed value of all county real property as established for tax purposes on the last tax assessment rolls. The current debt limitation for the County is$3,406,144,000,which is in excess of the County's outstanding general obligation debt. Currently the County's outstanding debt represents eight percent of our debt limitation. At the end of the current fiscal year,the County also had loans outstanding from the State Water Pollution Control Revolving Fund amounting to$30.2 million and notes payable to the U.S. Department of Agriculture,Farmers Home Administration amounting to$1.0 million. Additional information on the County's long-term debt can be found in note 10 to the basic financial statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES • The unemployment rate for the County is 2.8 percent,which is down from the prior year rate of 3.2 percent. • The number of visitors to the County for the most recent calendar year was 1,597,056,up seven percent from the previous year's count of 1,487,747. Both of these factors were considered in preparing the County's budget for the 2008 fiscal year. At the end of the current fiscal year,unreserved fund balance in the general fund was$29.0 million. The County has appropriated$19.0 million of this amount for spending in the 2008 fiscal year budget. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the County's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Director of Finance,County of Hawaii,25 Aupuni Street,Room 118,Hilo,Hawaii 96720. -22- BASIC FINANCIAL STATEMENTS -23 -