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HomeMy WebLinkAbout2012-016 Water and Wastewater Revenue Refunding Bonds - Issuance and SaleCITY OF YAKIMA, WASHINGTON WATER AND SEWER REVENUE REFUNDING BONDS, 2012 AN ORDINANCE of the City of Yakima, Washington, authorizing the issuance and sale of water and sewer revenue refunding bonds of the City in the principal amount of not to exceed $10,000,000 in one or more series to refund certain outstanding water and sewer bonds of the City; and delegating authority to the City Manager or Director of Finance and Budget of the City to approve the final terms of the bonds. Prepared by: Foster Pepper PLLC Seattle, Washington 51151313.7 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS 3 Section 1.1 Definitions 3 ARTICLE II Section 2 ARTICLE III Section 3 Section 3 Section 3 Section 3 Section 3 Section 3 ARTICLE IV Section 4 Section 4 Section 4 Section 4 Section 4 Section 4 Section 4 Section 4 ARTICLE V Section 5 Section 5 ARTICLE VI Section 6 Section 6 Section 6 Section 6 Section 6 Section 6 ARTICLE VII Section 7 Section 7 Section 7 Section 7 Section 7 Section 7 Section 7 Section 7 51151313.7 FINDINGS 13 .1 Parity Conditions 13 ISSUANCE OF 2012 BONDS 13 .1 Issuance of the 2012 Bonds 13 .2 Registration, Exchange and Payments 14 .3 Payment of 2012 Bonds 16 .4 Execution and Authentication of Bonds 17 .5 Lost or Destroyed Bonds 17 .6 Form of 2012 Bonds 18 REDEMPTION OF 2012 BONDS 18 .1 Redemption Prior to Maturity 18 .2 Partial Redemptions 18 .3 Open Market Purchase 18 .4 Selection of 2012 Bonds for Redemption 18 .5 Cancellation of 2012 Bonds 19 .6 Notice of Redemption 19 .7 Effect of Redemption 20 .8 Failure to Redeem 2012 Bonds 20 SALE OF BONDS; OFFICIAL STATEMENT 20 .1 Sale of Bonds 20 .2 Official Statement 22 FUNDS AND ACCOUNTS; DEFEASANCE 23 .1 Revenue Fund; Priority of Payments 23 .2 Bond Fund 24 .3 Refunding or Defeasance 30 .4 Refunding of the Refunded Bonds 31 .5 Call for Redemption of the Refunded Bonds 34 .6 City Findings with Respect to Refunding 35 PARTICULAR COVENANTS OF THE CITY 35 .1 Rate Covenant 35 .2 Maintenance and Operation 36 .3 Sale or Disposition of the System 37 .4 Liens or Encumbrances 38 .5 Insurance 38 .6 Books and Accounts 39 .7 Additions and Improvements 39 .8 Tax Covenants 40 -1- ARTICLE VIII Section 8 Section 8 ARTICLE IX Section 9 Section 9 Section 9 Section 9 Section 9 Section 9 Section 9. Section 9. ADDITIONAL BONDS 41 .1 Additional Bonds 41 .2 Pledge Effected by Ordinance 45 DEFAULTS AND REMEDIES 46 .1 Events of Default 46 .2 Formation of Bondowners Committee 48 .3 Books of City Open to Inspection 48 .4 Suits at Law or in Equity 49 .5 Direction of Actions of Bondowners Committee by Majority Owners 51 .6 Suits by Individual Bondowners 51 7 Waivers of Default 52 8 Remedies Granted in Ordinance Not Exclusive 52 ARTICLE X BONDOWNERS MEETINGS Section 10.1 Section 10.2 Section 10.3 Section 10.4 Section 10.5 Section 10.6 ARTICLE XI Section 11.1 Section 11.2 Section 11.3 Section 11.4 Section 11.5 Section 11.6 Call of Bondowners Meetings Notice to Bondowners Proxies; Proof of Ownership of Parity Bonds Execution of Instruments by Bondowners Appointment of Officers at Bondowners Meetings Quorum at Bondowners Meetings 53 53 53 54 54 55 56 AMENDMENTS TO ORDINANCE 56 Amendments 56 Obtaining Approval of Amendments at Bondowners Meeting 58 Alternate Method of Obtaining Approval of Amendments 59 Amendment of Ordinance in Any Respect by Approval of All Bondowners 61 Exclusion of Bonds Owned by City 61 Endorsement of Amendment on Bonds 61 ARTICLE XII MISCELLANEOUS 62 Section 12.1 Undertaking to Provide Ongoing Disclosure 62 Section 12.2 Severability 66 Section 12.3 General Authorization 66 Section 12.4 Prior Acts 66 Section 12.5 Effective Date 66 Exhibit A Form of the 2012 Bonds -2- 51151313.7 ORDINANCE NO. 2012-16 AN ORDINANCE of the City of Yakima, Washington, authorizing the issuance and sale of water and sewer revenue refunding bonds of the City in the principal amount of not to exceed $10,000,000 in one or more series to refund certain outstanding water and sewer bonds of the City; and delegating authority to the City Manager or Director of Finance and Budget of the City to approve the final terms of the bonds. WHEREAS, the City of Yakima, Washington (the "City") now owns, operates and maintains a water supply and distribution system and a sewerage collection and disposal system, which water and sewerage systems have been combined for purposes of financing in the manner provided by law (the "System"); and WHEREAS, the City has issued its Water and Sewer Revenue Bonds, 2003 Series A (the "2003A Bonds"), its Water and Sewer Revenue Bonds, 2003 Series B (the "2003B Bonds," and, together with the 2003A Bonds, the "2003 Bonds") and its Water and Sewer Revenue and Refunding Bonds, 2008 (the "2008 Bonds," and, collectively with the 2003 Bonds, the "Outstanding Parity Bonds"); and WHEREAS, each of the ordinances authorizing the Outstanding Parity Bonds provides that bonds may be issued on a parity with the lien on Gross Revenues of the System of such Outstanding Parity Bonds; and WHEREAS, pursuant to Ordinance No. 2003-64 and Resolution No. R-2003-150, the City heretofore issued its 2003B Bonds for the purpose of financing various projects and capital improvements involving the City's wastewater treatment plant, including de -watering biosolids, solids thickening, secondary clarification, construction of a new pump station, construction of a new emergency power generator and the replacement of blower and various electronic systems and to repay an interfund loan that was made to improve the plant and enable the City to close the spray field, and by those proceedings reserved the right to redeem the 2003B Bonds prior to -1- 51151313.7 their maturity on November 1, 2013, at a price of par plus accrued interest to the date fixed for redemption; and WHEREAS, there are presently outstanding $10,155,000 par value of 2003B Bonds maturing on November 1 of each of the years 2014, 2017, 2019, 2021 and 2023, and bearing various interest rates from 4.00% to 5.00% (the "Refunded Bonds"); and WHEREAS, it appears to the Council that the Refunded Bonds may be refunded by the issuance and sale of the revenue refunding bonds authorized herein (the "Bonds") so that a savings will be effected by the difference between the principal and interest cost over the life of the Bonds and the principal and interest cost over the life of the Refunded Bonds but for such refunding, which refunding will be effected by carrying out the Refunding Plan (as hereinafter defined); and WHEREAS, to effect that refunding in the manner that will be most advantageous to the City it is found advisable that certain Acquired Obligations (hereinafter defined) bearing interest and maturing at such time or times as necessary to accomplish the refunding as aforesaid may be purchased out of a portion of the proceeds of the Bonds; and WHEREAS, the Council hereby finds that it is in the best interests of the City that the 2012 Bonds be offered in one or more series as further provided in the bond purchase contract for the 2012 Bonds; and WHEREAS, to carry out the Refunding Plan, the City will issue its Water and Sewer Revenue Refunding Bonds, 2012, in the aggregate principal amount of not to exceed $10,000,000; NOW, THEREFORE, BE IT ORDAINED BY the City of Yakima, Washington, as follows: -2- 51151313.7 ARTICLE I DEFINITIONS Section 1.1 Definitions. As used in this ordinance: "Accreted Value" means with respect to any Capital Appreciation Bonds (A) as of any Valuation Date, the amount set forth for such date in any ordinance authorizing such Capital Appreciation Bonds and (B) as of any date other than a Valuation Date, the sum of (1) the Accreted Value on the preceding Valuation Date and (2) the product of (a) a fraction, the numerator of which is the number of days having elapsed from the preceding Valuation Date and the denominator of which is the number of days from such preceding Valuation Date to the next succeeding Valuation Date, calculated based on the assumption that Accreted Value accrues during any semiannual period in equal daily amounts on the basis of a year of 12 30 -day months, times (b) the difference between the Accreted Values for such Valuation Dates. "Additional Bonds" means any revenue bonds, revenue warrants or other revenue obligations that may be issued in the future on a parity of lien with the 2003 Bonds, the 2008 Bonds, the 2012 Bonds and any other Parity Bonds. "Annual Debt Service" means for any specified Fiscal Year: (1) with respect to any Outstanding Fixed Rate Bonds, an amount equal to (A) the principal amount of such Fixed Rate Bonds due or subject to mandatory redemption during such period and for which no sinking fund installments have been established, (B) the amount of any payments required to be made during such period into any sinking fund established for the payment of any such Fixed Rate Bonds, plus (C) all interest payable during such period on any such Fixed Rate Bonds Outstanding and with respect to Fixed Rate Bonds with mandatory sinking fund requirements, calculated on the assumption that mandatory sinking fund -3- 51151313.7 installments will be applied to the redemption or retirement of such Fixed Rate Bonds on the date specified in the ordinance authorizing such Fixed Rate Bonds; and (2) with respect to any Outstanding Capital Appreciation Bonds, the principal amount thereof shall be equal to the Accreted Value thereof maturing or scheduled for payment in such period, and no other interest shall be included; (3) with respect to Outstanding Variable Rate Bonds, the principal for any period and interest on such Variable Rate Bonds during such period computed on the assumption that the amount of Variable Rate Bonds Outstanding as of the date of such computation would be amortized (i) in accordance with the mandatory redemption provisions, if any, set forth in the ordinance authorizing the issuance of such Variable Rate Bonds, or if mandatory redemption provisions are not provided, during a period commencing on the date of computation and ending on the date 30 years after the date of issuance, (ii) at an interest rate equal to the yield to maturity set forth in the Revenue Bond Index (40 -year Bond) published in the edition of The Bond Buyer (or comparable publication or such other similar index selected by the City in good faith) selected by the City and published within ten days prior to the date of calculation or (iii) to provide for essentially level annual debt service of principal and interest over such period; and for the purpose of calculating the principal and interest on Variable Rate Bonds in any Fiscal Year, such Variable Rate Bonds shall be assumed to mature on the stated maturity date or mandatory redemption date thereof. With the consent of the appropriate percentage of owners of the outstanding Parity Bonds, the City may pass a supplemental ordinance supplementing this ordinance for the purpose of providing that in calculating the Annual Debt Service, the City may exclude the direct payment the City is expected to receive in respect of any Future Parity Bonds for which the -4- 51151313.7 federal government will provide the City with a direct payment of a portion of the interest from the interest portion of Annual Debt Service. The owners of the 2012 Bonds by taking and holding the same shall be deemed to have consented to the adoption by the City of such supplemental ordinance. "Acquired Obligations" means those United States Treasury Certificates of Indebtedness, Notes, and Bonds --State and Local Government Series and other direct, noncallable obligations of the United States of America purchased to accomplish the refunding of the Refunded Bonds as authorized by this ordinance. "Assessment Income" means the principal of and interest on special assessments levied in any local improvement district or utility local improvement district which are pledged to be paid into the Bond Fund. In the case of assessments payable in installments, Assessment Income shall be allocated to the years in which it would be received if the unpaid balance of each assessment roll were paid in the remaining number of installments with interest on the declining balance at the times and at the rate provided in the ordinance confirming the assessment roll. "Assessments" means any special assessments which may be levied in any local improvement district or utility local improvement district of the City created for the acquisition, construction or installation of additions and improvements to or extensions of the System, including any installment of assessments and any interest or penalties which may be due thereon, if such assessments are pledged to be paid into the Bond Fund. The word "Assessments" shall include any installments of assessments and any interest or penalties which may be due thereon. "Average Annual Debt Service" means the amount determined by dividing (a) the sum of all interest and principal to be paid on outstanding Bonds from the date of determination to the last maturity date of such Bonds, by (b) the number of Fiscal Years or calendar years from and -5- 51151313.7 including the Fiscal Year or calendar year in which the determination is made to the last Fiscal Year or calendar year in which the sum of (i) the principal amount of Serial Bonds maturing in such Fiscal Year plus (ii) the Sinking Fund Requirement for such Fiscal Year, exceeds 4% of the principal amount of Bonds outstanding as of the date of determination. "Bond Fund" means the Water and Sewer Revenue Bond Fund created by Ordinance No. 3380. "Bond Registrar" means the fiscal agency of the State of Washington in New York, New York, for the purposes of registering and authenticating the 2012 Bonds, maintaining the Bond Register, effecting transfer of ownership of the 2012 Bonds and paying interest on and principal of the 2012 Bonds. "Capital Appreciation Bonds" means any Parity Bonds hereafter issued as to which interest is payable only at the maturity or prior redemption of such Bonds. For the purposes of (i) receiving payment of the redemption price, if any, of a Capital Appreciation Bond that is redeemed prior to maturity, or (ii) computing the principal amount of Parity Bonds held by the owner of a Capital Appreciation Bond in giving to the City or the Bond Registrar any notice, consent, request, or demand for any purpose whatsoever, the principal amount of a Capital Appreciation Bond shall be deemed to be its Accreted Value. "City" means the City of Yakima, Washington, a municipal corporation duly organized and existing under and by virtue of the laws of the State of Washington. "City Manager" means the City Manager, Acting City Manager or any other City official who succeeds to the duties now delegated to that office, or the designee of such officer. -6- 51151313.7 "Code" means the Internal Revenue Code of 1986, as amended, as the same may be amended from time to time, and the regulations promulgated thereunder. "Commission" means the Securities and Exchange Commission. "Costs of Maintenance and Operation" means all normal operating expenses, current maintenance expenses, expenses of reasonable upkeep and repairs, insurance and administrative expenses and reasonable pro -rata budget charges for services provided to the System by City departments, but excluding depreciation, payments for debt service or into reserve accounts, costs of capital additions to or replacements of the System, municipal taxes, or payments to the City in lieu of taxes. "Council" means the legislative body of the City as the same shall be duly and regularly constituted from time to time. "Coverage Requirement" means (a) for any period during which Assessments may be paid without becoming delinquent, the product of 1.25 times Annual Debt Service on all Parity Bonds then Outstanding minus the aggregate principal amount of nondelinquent Assessment Income paid or to be paid into the Bond Fund in such year or (b) for any other period, the product of 1.25 times Annual Debt Service on all Parity Bonds then Outstanding. "DTC" means The Depository Trust Company, New York, New York. "Director of Finance and Budget" means the Director of Finance and Budget, Acting Director of Finance and Budget or any other City official who succeeds to the duties now delegated to that office, or the designee of such officer. "Fiscal Year" means the Fiscal Year used by the City at any time. At the time of the adoption of this ordinance, the Fiscal Year is the 12 -month period beginning January 1 of each year. -7- 51151313.7 "Fixed Rate Bonds" means those Parity Bonds other than Capital Appreciation Bonds issued under an ordinance in which the rate of interest on such Fixed Rate Bonds is fixed and determinable through their final maturity or for a specified period of time. If so provided in the ordinance authorizing their issuance, Fixed Rate Bonds may bear a fixed and determinable interest rate for only a portion of their term. "Government Obligations" has the meaning given in RCW 39.53 as now or hereafter amended. "Gross Revenues" means all earnings, revenue and money received by the City from or on account of the operation of the System from any source whatsoever. "Interest Commencement Date" means, with respect to any Capital Appreciation Bonds, the date specified in any ordinance authorizing such Capital Appreciation Bonds (which date must be prior to the maturity date for such Capital Appreciation Bonds) after which interest accruing on such Capital Appreciation Bonds shall be payable semiannually, with the first such payment date being the applicable interest payment date immediately succeeding such Interest Commencement Date. "Letter of Representations" means the Blanket Issuer Letter of Representations from the City to DTC. "Maximum Interest Rate" means, with respect to any particular Variable Rate Bond, a numerical rate of interest, which shall be set forth in any ordinance authorizing such Bond, that shall be the maximum rate of interest such Bond may at any time bear. "MSRB" means the Municipal Securities Rulemaking Board or any successors to its functions. -8- 51151313.7 "Net Revenues" means the Gross Revenues of the System less the Costs of Maintenance and Operation. "Outstanding" means, in connection with any Parity Bonds, as of the time in question, all such bonds issued except bonds theretofore paid and cancelled or having matured or been called for redemption, payment has been provided therefore, or bonds that have been defeased in accordance with their authorizing ordinance and state law. "Parity Bonds" means any Outstanding revenue bonds, revenue warrants or other revenue obligations issued by the City that have a lien upon the Gross Revenues of the System to pay and secure the payment of the principal thereof and interest thereon equal to the lien created upon the Gross Revenues of the System to pay and secure payment of the principal of and interest on the 2012 Bonds. Parity Bonds includes the 2003 Bonds, the 2008 Bonds and the 2012 Bonds. "Permitted Investments" means any legal investments for funds of the City. "Professional Utility Consultant" means the independent person(s) or firm(s) selected by the City having a favorable reputation for skill and experience with facilities of comparable size and character to the System in such of the following as are relevant to the purposes for which they are retained: (a) engineering and operations and (b) the design of rates. "Qualified Insurance" means any noncancellable municipal bond insurance policy or surety bond issued by any insurance company licensed to conduct an insurance business in any state of the United States (or by a service corporation acting on behalf of one or more such insurance companies), which insurance company or companies, as of the time of issuance of such policy or surety bond, are rated in one of the two highest rating categories by Moody's Investors Service, Inc. or Standard & Poor's Ratings Service or their comparably recognized business successors. -9- 51151313 7 "Rate Stabilization Account" means the account authorized to be created by Section 6.1. "Rating Agency" means, as of any date, Moody's Investors Service, Inc., Standard & Poor's Ratings Service or any other nationally recognized securities rating agency. "Refunded Bonds" means all or a portion of the outstanding 2003B Bonds, issued pursuant to Ordinance No. 2003-64 and Resolution No. R-2003-150, the refunding of which has been provided for by this ordinance. "Refunding Plan" means: (a) the placement of sufficient proceeds of the Bonds which, with other money of the City, if necessary, will acquire the Acquired Obligations to be deposited, with cash, if necessary, with the Refunding Trustee; (b) the payment of the principal of and interest on the Refunded Bonds when due up to and including November 1, 2013, and the call, payment, and redemption on November 1, 2013, of all of the then - outstanding Refunded Bonds at a price of par; and (c) the payment of the costs of issuing the Bonds and the costs of carrying out the foregoing elements of the Refunding Plan. "Refunding Trust Agreement" means a Refunding Trust Agreement between the City and the Refunding Trustee. "Refunding Trustee" means the trustee or escrow agent designated by the City pursuant to the Refunding Trust Agreement, or any successor trustee or escrow agent. "Reserve Fund" means the Reserve Fund created for the Parity Bonds. "Reserve Fund Requirement" means the lesser of (i) the maximum Annual Debt Service on all Outstanding Parity Bonds; (ii) 125% of the Average Annual Debt Service on all Outstanding Parity Bonds; or (iii) 10% of the stated principal amount of such series of Parity Bonds. -10- 51151313.7 "Revenue Fund" means the Water and Sewer Operating Funds of the City heretofore established. "Rule" means the Commission's Rule 15c2-12 under the Securities and Exchange Act of 1934, as the same may be amended from time to time. "Serial Bonds" means Parity Bonds other than Term Bonds. "Sinking Fund Requirement" means, for any Fiscal Year, the principal amount and premium, if any, of Term Bonds required to be purchased, redeemed or paid at maturity for such Fiscal Year as established by the ordinance or resolution authorizing the issuance of such Term Bonds. "System" means the combined water and sewerage system of the City as it now exists, and as it may be later added to, extended and improved for as long as any Parity Bonds remain Outstanding. "2003 Bonds" means the 2003A Bonds and the 2003B Bonds. "2003A Bonds" means the City's Water and Sewer Revenue Bonds, 2003 Series A, issued pursuant to Ordinance No. 2003-64 and currently Outstanding in the principal amount of $1,835,000. "2003B Bonds" means the City's Water and Sewer Revenue Bonds, 2003 Series B, issued pursuant to Ordinance No. 2003-64 and currently Outstanding in the principal amount of $10,155,000. "2008 Bonds" means the City's Water and Sewer Revenue and Refunding Bonds, 2008, issued pursuant to Ordinance No. 2008-19 and currently Outstanding in the principal amount of $6,155,000. -11- 51151313.7 "2012 Bonds" means the City's Water and Sewer Revenue Refunding Bonds, 2012, in one or more series in the aggregate principal amount of not to exceed $10,000,000 authorized by this ordinance. "Term Bonds" means Parity Bonds of any principal maturity that are subject to mandatory redemption or for which mandatory sinking fund payments are required. "Undertaking" means the continuing disclosure agreement set forth in Section 12.1 of this ordinance. "Valuation Date" means with respect to any Capital Appreciation Bonds the date or dates set forth in any ordinance authorizing such Capital Appreciation Bonds on which specific Accreted Values are assigned to the Capital Appreciation Bonds. "Variable Interest Rate" means a variable interest rate or rates to be borne by Parity Bonds or any one or more maturities within an issue of Parity Bonds. The method of computing such variable interest rate shall be specified in the ordinance authorizing such Parity Bonds. Such variable interest rate shall be subject to a Maximum Interest Rate and there may be an initial rate specified, in each case as provided in such ordinance, or a stated interest rate that may be changed from time to time as provided in such ordinance. Such ordinance shall also specify either (i) the particular period or periods of time or manner of determining such period or periods of time for which each value of such Variable Interest Rate shall remain in effect or (ii) the time or times upon which any change in such Variable Interest Rate shall become effective. "Variable Rate Bonds" for any period of time means Parity Bonds which during such period bear a Variable Interest Rate; provided that Parity Bonds the interest rate on which shall have been fixed for the remainder of the term thereof shall no longer be Variable Rate Bonds. -12- 51151313 7 ARTICLE II FINDINGS Section 2.1 Parity Conditions. The Council hereby finds as required by Sections 7.1 of Ordinances No. 2003-64 and 2008-19 as follows: (a) The 2012 Bonds will be issued for the purpose of refunding outstanding bonds resulting in a debt service savings. (b) At the times of the issuance of the 2012 Bonds there will be no deficiency in the Bond Fund. (c) The City will have on deposit in the Reserve Fund an amount equal to the Reserve Fund Requirement. (d) It is expected that the issuance of the 2012 Bonds will not require an increase of more than $5,000 in any year for principal and interest on the 2012 Bonds, or the City will have on file a parity certificate of the City Director of Finance and Budget as required by Section 7.1(a) of Ordinance No. 2003-64. ARTICLE III ISSUANCE OF 2012 BONDS Section 3.1 Issuance of the 2012 Bonds. The City shall issue the 2012 Bonds in the aggregate principal amount of not to exceed $10,000,000 in one or more series for the purpose of providing the funds necessary to carry out the Refunding Plan, to fund the Reserve Fund Requirement and to pay the expenses incidental to the issuance of the 2012 Bonds. The 2012 Bonds shall be designated the "City of Yakima Water and Sewer Revenue Refunding Bonds, 2012," may be issued in one or more series, shall be in fully registered form, shall be in the denomination of $5,000 each, or any integral multiple thereof, provided that no Bond shall represent more than one maturity, shall be dated such date, bear interest at the rates -13- 51151313 7 per annum, and be payable in the amounts and dates as shall be determined pursuant to Section 5.1 hereof. The 2012 Bonds shall be obligations only of the Bond Fund and shall be payable and secured as provided herein. The 2012 Bonds shall not be general obligations of the City. Section 3.2 Registration, Exchange and Payments. (a) Registration of Bonds. The 2012 Bonds shall be issued only in registered form as to both principal and interest and shall be recorded on the Bond Register. (b) Bond Registrar. The Bond Registrar shall keep, or cause to be kept, sufficient books for the registration and transfer of the 2012 Bonds, which shall be open to inspection by the City at all times. The Bond Register shall contain the name and mailing address of the Registered Owner of each 2012 Bond and the principal amount and number of each of the 2012 Bonds held by each Registered Owner. The Bond Registrar is authorized, on behalf of the City, to authenticate and deliver 2012 Bonds transferred or exchanged in accordance with the provisions of the 2012 Bonds and this ordinance, to serve as the City's paying agent for the 2012 Bonds and to carry out all of the Bond Registrar's powers and duties under this ordinance. The Bond Registrar shall be responsible for its representations contained in the Bond Registrar's Certificate of Authentication on the 2012 Bonds. The Bond Registrar may become either a Registered or Beneficial Owner of 2012 Bonds with the same rights it would have if it were not the Bond Registrar and, to the extent permitted by law, may act as depository for and permit any of its officers or directors to act as members of, or in any other capacity with respect to, any committee formed to protect the rights of Beneficial Owners. -14- 51151313 7 Any 2012 Bonds surrendered to the Bond Registrar may be exchanged for 2012 Bonds in any Authorized Denomination of an equal aggregate principal amount and of the same interest rate and maturity. The 2012 Bonds may be transferred only if endorsed in the manner provided thereon and surrendered to the Bond Registrar. Any exchange or transfer shall be without cost to the owner or transferee. The Bond Registrar shall not be obligated to exchange or transfer any 2012 Bond during the 15 days preceding any principal payment or redemption date. (c) DTC and the Book Entry System. The 2012 Bonds initially shall be registered in the name of Cede & Co., as the nominee of DTC. The 2012 Bonds so registered shall be held in fully immobilized form by DTC as depository in accordance with the provisions of the Letter of Representations. Neither the City nor the Bond Registrar shall have any responsibility or obligation to DTC participants or the persons for whom they act as nominees with respect to the 2012 Bonds regarding accuracy of any records maintained by DTC or DTC participants of any amount in respect of principal of or interest on the 2012 Bonds, or any notice which is permitted or required to be given to Registered Owners hereunder (except such notice as is required to be given by the Bond Registrar to DTC). For as long as any 2012 Bonds are held in fully immobilized form, DTC, its nominee or its successor depository shall be deemed to be the Registered Owner for all purposes hereunder and all references to registered owners, bondowners, bondholders or the like shall mean DTC or its nominee and, except for the purpose of the City's undertaking herein to provide continuing disclosure, shall not mean the Beneficial Owners. Registered ownership of such 2012 Bonds, or any portions thereof, may not thereafter be transferred except: (i) to any successor of DTC or its nominee, if that successor shall be qualified under any applicable laws to provide the services proposed to be provided by it; (ii) to any substitute depository appointed by the City or such -15- 51151313.7 substitute depository's successor; or (iii) to any person if the 2012 Bonds are no longer held in immobilized form. Upon the resignation of DTC or its successor (or any substitute depository or its successor) from its functions as depository, or a determination by the City that it no longer wishes to continue the system of book entry transfers through DTC or its successor (or any substitute depository or its successor), the City may appoint a substitute depository. Any such substitute depository shall be qualified under any applicable laws to provide the services proposed to be provided by it. If (i) DTC or its successor (or substitute depository or its successor) resigns from its functions as depository, and no substitute depository can be obtained or (ii) the City determines that the 2012 Bonds are to be in certificated form, the ownership of 2012 Bonds may be transferred to any person as provided herein and the 2012 Bonds no longer shall be held in fully immobilized form. Section 3.3. Payment of 2012 Bonds. Both principal of and interest on the 2012 Bonds shall be payable in lawful money of the United States of America. For as long as the 2012 Bonds are registered in the name of DTC or its nominee, payment of principal of and interest on the 2012 Bonds shall be made in the manner set forth in the Letter of Representations. If the 2012 Bonds cease to be in book -entry -only form, interest on the 2012 Bonds shall be paid by checks or drafts of the Bond Registrar mailed on the interest payment date to the Registered Owners at the addresses appearing on the Bond Register on the 15th day of the month preceding the interest payment date or by electronic transfer on the interest payment date. The City shall not be required to make electronic transfers except to a Registered Owner of 2012 Bonds pursuant to a request in writing and at the sole expense of that Registered Owner at least 10 days -16- 51151313 7 before an interest payment date. Principal of the 2012 Bonds shall be payable upon presentation and surrender of the 2012 Bonds by the Registered Owners to the Bond Registrar. Section 3.4. Execution and Authentication of Bonds. The 2012 Bonds shall be signed on behalf of the City with the manual or facsimile signature of the Mayor, shall be attested by the manual or facsimile signature of the City Clerk and shall have the corporate seal of the City impressed or a facsimile thereof imprinted thereon. Only such 2012 Bonds as shall bear thereon a Certificate of Authentication in the form hereinbefore recited and manually executed by the Bond Registrar shall be valid or obligatory for any purpose or entitled to the benefits of this ordinance. Such Certificate of Authentication shall be conclusive evidence that the 2012 Bonds so authenticated have been duly executed, authenticated and delivered hereunder and are entitled to the benefits of this ordinance. In case either of the officers who shall have executed the 2012 Bonds shall cease to be such officer or officers of the City before the 2012 Bonds so signed shall have been authenticated or delivered by the Bond Registrar, or issued by the City, such 2012 Bonds may nevertheless be authenticated, delivered and issued and upon such authentication, delivery and issuance, shall be as binding upon the City as though those who signed the same had continued to be such officers of the City. Any 2012 Bond may also be signed and attested on behalf of the City by such persons as at the actual date of execution of such 2012 Bond shall be the proper officers of the City although at the original date of such Bond any such person shall not have been such officer of the City. Section 3.5 Lost or Destroyed Bonds. In case any of the 2012 Bonds shall be lost, stolen or destroyed, the Bond Registrar may authenticate and deliver a new bond or bonds of like amount, date, tenor and effect to the registered owner or nominee thereof upon payment to the -17- 51151313.7 City for the expenses and charges in connection therewith and upon his or her filing with the Bond Registrar evidence satisfactory to the Bond Registrar that such 2012 Bond or 2012 Bonds were actually lost, stolen or destroyed and of his ownership thereof, and upon furnishing the City with indemnity satisfactory to them both. Section 3.6 Form of 2012 Bonds. The 2012 Bonds shall be substantially in the form of Exhibit A hereto. ARTICLE IV REDEMPTION OF 2012 BONDS Section 4.1 Redemption Prior to Maturity. The City Manager or Director of Finance and Budget may designate certain maturities of the 2012 Bonds as being subject to redemption at the option of the City prior to their respective maturities and may approve the designation of certain maturities of the 2012 Bonds as Term Bonds. Section 4.2 Partial Redemptions. Portions of the principal amount of any 2012 Bond, in any Authorized Denomination, subject to redemption may be redeemed. If less than all of the principal amount of any 2012 Bond is redeemed, upon surrender of that 2012 Bond to the Bond Registrar, there shall be issued to the Registered Owner, without charge, a new 2012 Bond (or 2012 Bonds, at the option of the Registered Owner) of the same maturity and interest rate in any authorized denomination in the aggregate principal amount remaining unredeemed. Section 4.3 Open Market Purchase. The City reserves the right and option to purchase any or all of the 2012 Bonds in the open market at any time at any price acceptable to the City plus accrued interest to the date of purchase. Section 4.4 Selection of 2012 Bonds for Redemption. If fewer than all of the outstanding 2012 Bonds within a maturity are to be redeemed prior to maturity, selection of 2012 Bonds for redemption shall be randomly within a maturity in such manner as the Bond Registrar -18- 51151313 7 shall determine. Notwithstanding the foregoing, for as long as the 2012 Bonds are registered in the name of DTC or its nominee, selection of 2012 Bonds for redemption shall be in accordance with the Letter of Representations. Section 4.5 Cancellation of 2012 Bonds. All 2012 Bonds purchased or redeemed under this section shall be canceled. Section 4.6 Notice of Redemption. While the 2012 Bonds are held by DTC in book - entry only form, any notice of redemption shall be given at the time, to the entity and in the manner required by DTC in accordance with the Letter of Representations, and the Bond Registrar shall not be required to give any other notice of redemption. If the 2012 Bonds cease to be in book -entry only form, unless waived by any Registered Owner of the 2012 Bonds to be redeemed, the City shall cause notice of any intended redemption of 2012 Bonds to be given by the Bond Registrar not less than 20 nor more than 60 days prior to the date fixed for redemption by first-class mail, postage prepaid, to the Registered Owner of any 2012 Bond to be redeemed at the address appearing on the Bond Register at the time the Bond Registrar prepares the notice, and the requirements of this sentence shall be deemed to have been fulfilled when notice has been mailed as so provided, whether or not it is actually received by the Registered or Beneficial Owner of any 2012 Bond. In the case of an optional redemption, the notice may state that the City retains the right to rescind the redemption notice and the related optional redemption of 2012 Bonds by giving a notice of rescission to the affected Registered Owners at any time prior to the scheduled optional redemption date. Any notice of optional redemption that is so rescinded shall be of no effect, and the 2012 Bonds for which the notice of optional redemption has been rescinded shall remain outstanding. -19- 51151313.7 In addition, the redemption notice shall be mailed or sent electronically within the same period to the MSRB, consistent with the Undertaking, to any nationally recognized rating agency which at the time maintains a rating on the 2012 Bonds at the request of the City, and to such other persons and with such additional information as the Director of Finance and Budget shall determine, but these additional mailings shall not be a condition precedent to the redemption of 2012 Bonds. Section 4.7 Effect of Redemption. Interest on 2012 Bonds called for redemption shall cease to accrue on the date fixed for redemption, except in the case of a rescinded optional redemption as described above, or unless the 2012 Bond or 2012 Bonds called are not redeemed when presented pursuant to the call. Section 4.8 Failure to Redeem 2012 Bonds. If any 2012 Bond is not redeemed when properly presented at its maturity date or date set for redemption, the City shall be obligated to pay interest on that 2012 Bond at the same rate provided in the 2012 Bond from and after its maturity or date set for redemption until that 2012 Bond, both principal and interest, is paid in full or until sufficient money for its payment in full is on deposit in the Bond Fund and the 2012 Bond has been called for payment by giving notice of that call to the Registered Owner. ARTICLE V SALE OF BONDS; OFFICIAL STATEMENT Section 5.1. Sale of Bonds. The Council has determined that it is in the best interest of the City to delegate to the City Manager or Director of Finance and Budget the authority to approve the number of series, the series designation, final principal amounts, date of the 2012 Bonds, denominations, interest rates, payment dates, redemption provisions, and maturity dates for the 2012 Bonds, and determination of the Refunded Bonds, in the manner provided herein, provided that: -20- 51151313.7 (a) The aggregate principal amount of the 2012 Bonds does not exceed $10,000,000; (b) One or more rates of interest may be fixed for the Bonds, which rate or rates must be in multiples of 1/8t" or 1/20th of 1% or both, and no rate of interest for any maturity of the Bonds may exceed 6.00%; (c) The true interest cost to the City for the 2012 Bonds does not exceed 3.50%; (d) The aggregate purchase price for the Bonds shall not be less than 95% or more than 120% of the aggregate stated principal amount of the Bonds; (e) The Bonds shall be issued subject to optional and mandatory redemption provisions, including designation of Term Bonds, if any; (0 There is a minimum net present value savings of 3.00% of the principal amount of the Refunded Bonds; (g) The 2012 Bonds shall be dated as of the date of their delivery, which date and time for the issuance and delivery of the 2012 Bonds is not later than June 1, 2013; and (h) Interest shall be payable at fixed rates semiannually, principal shall be payable annually and the final maturity shall not be later than November 1, 2023. In determining the number of series, the series designation, final principal amounts, date of the 2012 Bonds, denominations, interest rates, payment dates, redemption provisions, and maturity dates for the 2012 Bonds, and determination of the Refunded Bonds, the City Manager or Director of Finance and Budget, in consultation with other City officials and staff and advisors, shall take into account those factors that, in his or her judgment, will result in the lowest true interest cost on the 2012 Bonds to their maturity, including, but not limited to current -21- 51151313 7 financial market conditions and current interest rates for obligations comparable to the 2012 Bonds. The 2012 Bonds shall be sold by negotiated sale to Seattle -Northwest Securities Corporation (the "Underwriter"). Subject to the terms and conditions set forth in this Section 5.1, the City Manager or Director of Finance and Budget is hereby authorized to execute a purchase contract to be presented by the Underwriter (the "Bond Purchase Contract") on behalf of the City upon his or her determination that the conditions of this Section 5.1 have been met. The 2012 Bonds will be printed at City expense and will be delivered to the Underwriter in accordance with the Bond Purchase Contract, with the approving legal opinion of Foster Pepper PLLC, municipal bond counsel of Seattle, Washington, regarding the 2012 Bonds. Section 5.2. Official Statement. For the sole purpose of the Underwriter's compliance with paragraph (b)(1) of Rule 15c2-12, the City authorizes the City Manager or Director of Finance and Budget to "deem final" a preliminary official statement as of its date, except for the omission of information permitted to be omitted by Rule 15c2-12 and ratifies the distribution by the Underwriter of that preliminary official statement to potential purchasers of the 2012 Bonds. In addition, the City authorizes and approves the preparation, execution by the City Manager or Director of Finance and Budget and delivery to the Underwriter of a final official statement for the 2012 Bonds, in the form of the preliminary official statement, with such modifications and amendments thereto as shall be deemed necessary or desirable by the City. The City authorizes the City Manager or Director of Finance and Budget to approve the distribution by the Underwriter of that final official statement to potential purchasers and purchasers of the 2012 Bonds. -22- 51151313 7 ARTICLE VI FUNDS AND ACCOUNTS; DEFEASANCE Section 6.1 Revenue Fund; Priority of Payments. The City hereby obligates and binds itself to set aside and pay into the Water and Sewer Operating Funds (the "Revenue Fund") as collected the Gross Revenues of the System. The Gross Revenues of the System shall be held in the Revenue Fund separate and apart from all other funds and accounts of the City and used only for the following purposes and in the following order of priority: First, to pay the Costs of Maintenance and Operation of the System; Second, to pay the interest on the Parity Bonds; Third, to pay the principal of and any sinking fund payments for the Parity Bonds; Fourth, to make all payments required to be made into the Reserve Fund; Fifth, to make all payments required to be made into any other revenue bond redemption fund or debt service account or reserve account created to pay and secure the payment of the principal of and interest on any revenue bonds of the City having a lien upon the Gross Revenues of the System junior and inferior to the lien thereon for the payment of the principal of and interest on the Parity Bonds; Sixth, to retire by redemption or purchase in the open market any outstanding revenue bonds of the City, to make necessary additions, improvements and repairs to or extensions and replacements of the System, or for any other lawful City purposes. The City may create a Rate Stabilization Account in the Revenue Fund. Any credits from the Revenue Fund to the Rate Stabilization Account and any credits to the Revenue Fund from the Rate Stabilization Account made pursuant to Section 6.1 hereof, shall be made prior to closing the books and accounts of the City for each Fiscal Year. Money in the Rate Stabilization Account may be used for any lawful purpose. Money in the Rate Stabilization Account may be -23- 51151313.7 used from time to time to make up any deficiencies in the Bond Fund, and such money in the Rate Stabilization Account may be pledged as additional payments to the Bond Fund to the extent required for any such deficiencies. The City may, at any time, deposit Gross Revenues of the System in and withdraw Gross Revenues of the System from the Rate Stabilization Account. Nothing contained in this Section 6.1 shall be construed to require the deposit into the Revenue Fund of any of the revenues, income, receipts or other money of the City derived through the ownership or operation of any separate utility system hereafter created or established from funds other than the proceeds of Bonds. Section 6.2 Bond Fund. (a) There has been created a special fund of the City designated the Water and Sewer Revenue Bond Fund (the "Bond Fund"), which shall be used solely for the purpose of paying the principal, premium, if any, and interest on the Parity Bonds, of retiring the Parity Bonds prior to maturity in the manner herein provided, and of paying any reimbursement obligation with respect to a letter of credit or other credit enhancement device providing additional security for any Variable Rate Bonds. Each month (or in the case of Variable Rate Bonds, at the times provided in subsection (i) of this Section 6.2(a)), after applying amounts as required in Section 6.1, the City shall withdraw from the Revenue Fund and (to the extent not otherwise provided) transfer to the Bond Fund, amounts as follows and in the following order of priority: first, into the Interest Account; second, into the Serial Bond Principal Account and Term Bond Principal Account; and third, into the Reserve Fund. (i) Interest Account. The City has created a separate account in the Bond Fund, to be known as the "Interest Account" to provide for the payment of interest on the -24- 51151313 7 Parity Bonds as the same becomes due and payable. Upon the issuance of the 2012 Bonds, all accrued interest on the 2012 Bonds, if any, shall be paid into the Interest Account. In the case of all Parity Bonds other than Variable Rate Bonds, the City shall transfer to the Interest Account amounts sufficient to pay when due the installment of interest next falling due on all Parity Bonds. In the case of Variable Rate Bonds, not later than on the last day of the month immediately succeeding the month of closing of such bonds and on or before the last day of each succeeding month, the City shall transfer to the Interest Account an amount equal to the interest on such Variable Rate Bonds estimated to become due and payable on the due date. If on any date on which an installment of interest on Variable Rate Bonds falls due there are insufficient amounts in the Interest Account to make such interest payment, the City shall withdraw from the Revenue Fund and transfer to the Interest Account an amount that when added to other money therein will equal the amount of interest falling due and payable on such interest payment date. In making the credits required by this subsection (a)(i), any amounts credited to the Interest Account representing accrued interest received on the sale of 2012 Bonds or other Parity Bonds, interest capitalized from the proceeds of any Parity Bonds and any other transfers and credits otherwise made or required to be made to the Interest Account shall be taken into consideration and allowance made with respect to the full amount of such transfers and credits. (ii) Serial Bond Principal Account. The City has created a separate account in the Bond Fund known as the "Serial Bond Principal Account" to provide for the payment of the principal of Serial Bonds as the same shall mature and become due and payable. The City shall transfer to the Serial Bond Principal Account amounts sufficient to pay when due the installment of principal next falling due on the Serial Bonds. -25- 51151313 7 (iii) Term Bond Principal Account. (A) The City shall create and establish a separate account in the Bond Fund to be known as the "Term Bond Principal Account" in order to meet the specified Sinking Fund Requirements of Term Bonds and to otherwise retire 2012 Bonds, if any, and other Parity Bonds prior to maturity. The City shall transfer to the Term Bond Principal Account amounts sufficient to pay when due the Sinking Fund Requirement next falling due on all Term Bonds. (B) The City shall apply the money paid into the Bond Fund for credit to the Term Bond Principal Account to the redemption of Term Bonds on the next ensuing Sinking Fund Requirement due date (or may so apply such money prior to such Sinking Fund Requirement due date), pursuant to the terms of the ordinance authorizing the issuance thereof. The City may also apply the money paid into the Bond Fund for credit to the Term Bond Principal Account for the purpose of retiring Term Bonds by the purchase of such Term Bonds at a purchase price (including any brokerage charge) not in excess of the principal amount thereof. The City shall apply such money to the redemption or purchase of Term Bonds in an amount such that the aggregate principal amount of Term Bonds so purchased or redeemed is at least equal to such next ensuing Sinking Fund Requirement. Any such purchase of Term Bonds by the City may be made with or without tenders of Term Bonds in such manner as the City shall, in its discretion, deem to be in its best interest. (iv) Reserve Fund. (A) The City has created a separate fund to be known as the "Reserve Fund" to provide a reserve for the payment of the principal, premium, if any, and interest on the Parity Bonds. The City hereby covenants that on the date of issuance of the 2012 -26- 51151313.7 Bonds the City will have on deposit in the Reserve Fund an amount equal to the Reserve Fund Requirement. Each ordinance providing for the issuance of Additional Bonds shall provide for payments into the Reserve Fund from any other money lawfully available therefor (in which event, in providing for deposits and credits required by the foregoing provisions of this paragraph (A), allowance shall be made for any such amounts so paid into such fund) in amounts that within not less than five years of equal monthly payments will provide for deposit of the Reserve Fund Requirement or may provide for the City to obtain Qualified Insurance or a Qualified Letter of Credit for specific amounts required pursuant to this section to be paid into the Reserve Fund, such amounts so covered by Qualified Insurance or a Qualified Letter of Credit shall be credited against the amounts required to be maintained in the Reserve Fund by this section to the extent that such payments and credits to be made are insured by an insurance company, or guaranteed by a letter of credit from a bank. Such Qualified Letter of Credit or Qualified Insurance shall not be cancelable on less than five years notice. In the event of any cancellation, the Reserve Fund shall be funded in accordance with this paragraph, as if the Parity Bonds which remain Outstanding had been issued on the date of such notice of cancellation. (B) Money in the Bond Fund and Reserve Fund may, at the option of the City, be invested and reinvested as permitted by law in Permitted Investments maturing, or which are retirable at the option of the owner, prior to the date needed or prior to the maturity date of the final installment of principal of the Parity Bonds payable out of the Bond Fund and Reserve Fund. Earnings on investments in the Bond Fund and Reserve Fund shall be transferred to the Revenue Fund, except that earnings on investments in the Reserve Fund shall first be applied to remedy any deficiency in such account. -27- 51151313.7 (C) For the purpose of determining the amount credited to the Reserve Fund, obligations in which money in the Reserve Fund shall have been invested shall be valued at the market value thereof. The term "market value" shall mean, in the case of securities that are not then currently redeemable at the option of the owner, the current bid quotation for such securities, as reported in any nationally circulated financial journal, and the current redemption value in the case of securities that are then redeemable at the option of the owner. For obligations that mature within six months, the market value shall be the par value thereof. The valuation shall include accrued interest thereon. The valuation of the amount in the Reserve Fund shall be made by the City as of the close of business on each December 31 (or on the next preceding business day if December 31 does not fall on a business day) and after any withdrawal and may be made on each June 30 (or on the next preceding business day if June 30 does not fall on a business day). (D) If the amount in the Reserve Fund shall be less than the Reserve Fund Requirement, the City shall transfer from the Revenue Fund, for credit to the Reserve Fund no later than the 25th day of the sixth succeeding calendar months the amount necessary to restore the Reserve Fund to the Reserve Fund Requirement. Prior to such time, such transfer shall come from money in the Revenue Fund first available after making the current specified payments into the Interest Account and Principal Accounts. If the amount in the Reserve Fund shall be greater than the Reserve Fund Requirement, only then may the City withdraw at any time prior to the next date of valuation from the Reserve Fund the difference between the amount in the Reserve Fund and the Reserve Fund Requirement and deposit such difference in the Revenue Fund. -28- 51151313 7 (b) Money in the Interest Account, the Serial Bond Principal Account and the Term Bond Principal Account shall be transmitted to the Bond Registrar in amounts sufficient to meet the next maturing installments of principal, interest and premium, if any, at or prior to the time upon which any interest, principal or premium, if any, is to become due. In the event there shall be a deficiency in the Interest Account, the Serial Bond Principal Account or the Term Bond Principal Account for such purpose, the City shall make up any such deficiency from the Reserve Fund by the withdrawal of cash therefrom for that purpose, and, if necessary, by sale or redemption of any authorized investments in such amount as will provide cash in the Reserve Fund sufficient to make up any such deficiency. If a deficiency still exists immediately prior to an interest payment date and after the withdrawal of cash, the City shall then draw from any Qualified Letter of Credit or Qualified Insurance. Such draw shall be made at such times and under such conditions as the agreement for such Reserve Fund credit facility shall provide. (c) Whenever and so long as amounts on deposit in the Bond Fund, including the Reserve Fund, are sufficient to provide money to pay the Parity Bonds then Outstanding, including such interest as may thereafter become due thereon and any premiums upon redemption, no payments need be made into the Bond Fund pursuant to this ordinance. (d) Money transferred from the Bond Fund to the Bond Registrar for the Parity Bonds and the interest thereon shall be held in trust for the owners of such Parity Bonds. Until so set aside for the retirement of principal, payment of sinking fund installments, payment of interest and premium, if any, as aforesaid, money in the Bond Fund shall be held in trust for the benefit of the owners of the Parity Bonds then Outstanding and payable equally and ratably and without preference or distinction as between different installments or maturities. -29- 51151313.7 (e) The amounts so pledged to be paid into the Bond Fund and the Reserve Fund are hereby declared to be a prior lien and charge upon the Gross Revenues of the System superior to all other charges of any kind or nature whatsoever (including any transfer of money to other funds of the City and taxes or payments in lieu of taxes) except the Costs of Maintenance and Operation, and is equal in priority to the lien and charge which may hereafter be made to pay and secure the payment of the principal of and interest on any Additional Bonds. (f) The Council hereby finds that in fixing the amounts to be paid into the Bond Fund and the Reserve Fund out of the Gross Revenues of the System, it has exercised due regard for the Costs of Maintenance and Operation and for the amounts required to pay and secure the payment of the principal of and interest on the currently Outstanding Parity Bonds, and has not obligated the City to set aside and pay into such Fund and Account a greater amount of such Gross Revenues than in its judgment will be available over and above the Costs of Maintenance and Operation and the principal of and interest on the currently Outstanding Parity Bonds. Section 6.3 Refunding or Defeasance. The City may issue refunding bonds pursuant to the laws of the State or use money available from any other lawful source to pay when due the principal of and interest on the 2012 Bonds, or any portion thereof included in a refunding or defeasance plan, and to redeem and retire, refund or defease all such then -outstanding 2012 Bonds (hereinafter collectively called the "defeased 2012 Bonds") and to pay the costs of the refunding or defeasance. If money and/or "government obligations" (as defined in chapter 39.53 RCW, as now or hereafter amended) maturing at a time or times and bearing interest in amounts (together with money, if necessary) sufficient to redeem and retire, refund or defease the defeased 2012 Bonds in accordance with their terms are set aside in a special trust fund or -30- 51151313 7 escrow account irrevocably pledged to that redemption, retirement or defeasance of defeased 2012 Bonds (hereinafter called the "trust account"), then all right and interest of the Owners of the defeased 2012 Bonds in the covenants of this ordinance and in the funds and accounts obligated to the payment of the defeased 2012 Bonds shall cease and become void. The Owners of defeased 2012 Bonds shall have the right to receive payment of the principal of and interest on the defeased 2012 Bonds from the trust account. The City shall include in the refunding or defeasance plan such provisions as the City deems necessary for the random selection of any defeased 2012 Bonds that constitute less than all of a particular maturity of the 2012 Bonds, for notice of the defeasance to be given to the owners of the defeased 2012 Bonds and to such other persons as the City shall determine, and for any required replacement of 2012 Bond certificates for defeased 2012 Bonds. The defeased 2012 Bonds shall be deemed no longer Outstanding, and the City may apply any money in any other fund or account established for the payment or redemption of the defeased 2012 Bonds to any lawful purposes as it shall determine. If the 2012 Bonds are registered in the name of DTC or its nominee, notice of any defeasance of 2012 Bonds shall be given to DTC in the manner prescribed in the Letter of Representations for notices of redemption of 2012 Bonds. Section 6.4 Refunding of the Refunded Bonds. (a) Appointment of Refunding Trustee. The City Manager or Director of Finance and Budget is authorized to appoint a Refunding Trustee in connection with the Bonds. (b) Use of Bond Proceeds; Acquisition of Acquired Obligations. All of the proceeds of the sale of the Bonds shall be deposited immediately upon the receipt thereof with the Refunding Trustee and used to discharge the obligations of the City relating to the Refunded Bonds under Ordinance No. 2003-64 and Resolution No. R-2003-150 by providing for the -31- 51151313.7 payment of the amounts required to be paid by the Refunding Plan. To the extent practicable, such obligations shall be discharged fully by the Refunding Trustee's simultaneous purchase of Acquired Obligations, bearing such interest and maturing as to principal and interest in such amounts and at such times so as to provide, together with a beginning cash balance, if necessary, for the payment of the amount required to be paid by the Refunding Plan. The Acquired Obligations are listed and more particularly described in the Refunding Trust Agreement between the City and the Refunding Trustee, but are subject to substitution as set forth below. Any Bond proceeds or other money deposited with the Refunding Trustee not needed to purchase the Acquired Obligations and provide a beginning cash balance, if any, and pay the costs of issuance of the Bonds shall be returned to the City and deposited in the Bond Fund to pay interest on the Bonds on the first interest payment date. (c) Substitution of Acquired Obligations. Prior to the purchase of any Acquired Obligations by the Refunding Trustee, the City reserves .the right to substitute other direct, noncallable obligations of the United States of America ("Substitute Obligations") for any of the Acquired Obligations and to use any savings created thereby for any lawful City purpose if, (a) in the opinion of the City's bond counsel, the interest on the Bonds and the Refunded Bonds will remain excluded from gross income for federal income tax purposes under Sections 103, 148, and 149(d) of the Code, and (b) such substitution shall not impair the timely payment of the amounts required to be paid by the Refunding Plan, as verified by a nationally recognized independent certified public accounting firm. After the purchase of the Acquired Obligations by the Refunding Trustee, the City reserves the right to substitute therefor cash or Substitute Obligations subject to the conditions that such money or securities held by the Refunding Trustee shall be sufficient to carry out the -32- 51151313.7 Refunding Plan, that such substitution will not cause the Bonds or the Refunded Bonds to be arbitrage bonds within the meaning of Section 148 of the Code and regulations thereunder in effect on the date of such substitution and applicable to obligations issued on the issue dates of the Bonds and the Refunded Bonds, as applicable, and that the City obtain, at its expense: (1) a verification by a nationally recognized independent certified public accounting firm acceptable to the Refunding Trustee confirming that the payments of principal of and interest on the substitute securities, if paid when due, and any other money held by the Refunding Trustee will be sufficient to carry out the Refunding Plan; and (2) an opinion from nationally recognized bond counsel to the City, to the effect that the disposition and substitution or purchase of such securities, under the statutes, rules, and regulations then in force and applicable to the Bonds, will not cause the interest on the Bonds or the Refunded Bonds to be included in gross income for federal income tax purposes and that such disposition and substitution or purchase is in compliance with the statutes and regulations applicable to the Bonds. Any surplus money resulting from the sale, transfer, other disposition, or redemption of the Acquired Obligations and the substitutions therefor shall be released from the trust estate and transferred to the City to be used for any lawful City purpose. (d) Administration of Refunding Plan. The Refunding Trustee is authorized and directed to purchase the Acquired Obligations (or substitute obligations) and to make the payments required to be made by the Refunding Plan from the Acquired Obligations (or substitute obligations) and money deposited with the Refunding Trustee pursuant to this ordinance. All Acquired Obligations (or Substitute Obligations) and the money deposited with the Refunding Trustee and any income therefrom shall be held irrevocably, invested and applied in accordance with the provisions of Ordinance No. 2003-64 and Resolution No. R-2003-150, -33- 51151313.7 this ordinance, chapter 39.53 RCW and other applicable statutes of the State of Washington and the Refunding Trust Agreement. All necessary and proper fees, compensation, and expenses of the Refunding Trustee for the Bonds and all other costs incidental to the setting up of the escrow to accomplish the refunding of the Refunded Bonds and costs related to the issuance and delivery of the Bonds, including bond printing, verification fees, bond counsel's fees, and other related expenses, shall be paid out of the proceeds of the Bonds. (e) Authorization for Refunding Trust Agreement. To carry out the Refunding Plan provided for by this ordinance, the City Manager or Director of Finance and Budget of the City is authorized and directed to execute and deliver to the Refunding Trustee a Refunding Trust Agreement setting forth the duties, obligations and responsibilities of the Refunding Trustee in connection with the payment, redemption, and retirement of the Refunded Bonds as provided herein and stating that the provisions for payment of the fees, compensation, and expenses of such Refunding Trustee set forth therein are satisfactory to it. Prior to executing the Refunding Trust Agreement, the City Manager or Director of Finance and Budget of the City is authorized to make such changes therein that do not change the substance and purpose thereof or that assure that the escrow provided therein and the Bonds are in compliance with the requirements of federal law governing the exclusion of interest on the Bonds from gross income for federal income tax purposes. Section 6.5 Call for Redemption of the Refunded Bonds. The City calls for redemption on November 1, 2013, all of the Refunded Bonds at par plus accrued interest. Such call for redemption shall be irrevocable after the delivery of the Bonds to the Underwriter thereof. The date on which the Refunded Bonds are herein called for redemption is the first date on which those bonds may be called. -34- 51151313.7 The proper City officials are authorized and directed to give or cause to be given such notices as required, at the times and in the manner required, pursuant to Ordinance No. 2003-64 and Resolution No. R-2003-150 in order to effect the redemption prior to their maturity of the Refunded Bonds. Section 6.6 City Findings with Respect to Refunding. The City Council finds that the issuance and sale of the Bonds at this time will effect a savings to the City and is in the best interest of the City and its ratepayers and in the public interest. In making such finding, the City Council has given consideration to the fixed maturities of the Bonds and the Refunded Bonds, the costs of issuance of the Bonds and the known earned income from the investment of the proceeds of the issuance and sale of the Bonds pending payment and redemption of the Refunded Bonds. The City Council further finds that the money to be deposited with the Refunding Trustee for the Refunded Bonds in accordance with Section 6.4 of this ordinance will discharge and satisfy the obligations of the City under Ordinance No. 2003-64 and Resolution No. R-2003-150 with respect to the Refunded Bonds, and the pledges, charges, trusts, covenants, and agreements of the City therein made or provided for as to the Refunded Bonds, and that the Refunded Bonds shall no longer be deemed to be outstanding under such ordinance immediately upon the deposit of such money with the Refunding Trustee. ARTICLE VII PARTICULAR COVENANTS OF THE CITY So long as any Parity Bonds remain Outstanding, the City covenants and agrees with the owners of all Parity Bonds as follows: Section 7.1 Rate Covenant. The City shall establish, maintain and collect rates and charges for the use of the services and facilities of and all commodities sold, furnished or -35- 51151313 7 supplied by the System, which shall be fair and nondiscriminatory and shall adjust such rates and charges from time to time so that: (a) The Gross Revenues collected (together with Assessments collected) will at all times be sufficient (a) to pay the Costs of Maintenance and Operation of the System, (b) to pay the principal of, premium, if any, and interest on the Parity Bonds, as and when the same shall become due and payable, (c) to make adequate provision for the payment of any Term Bonds, (d) to make when due all payments which the City is obligated to make into the Reserve Fund and all other payments which the City is obligated to make pursuant to this ordinance, and (e) to pay all taxes, assessments or other governmental charges lawfully imposed on the System or the revenue therefrom or payments in lieu thereof and any and all other amounts which the City may now or hereafter become obligated to pay from the Gross Revenues by law or contract; and (b) The Net Revenues in each Fiscal Year will be at least equal to the Coverage Requirement calculated as of December 31 of the preceding calendar year. For the purpose of meeting this requirement if the City creates a Rate Stabilization Account pursuant to Section 6.1, (i) there may be added to Net Revenues for any Fiscal Year such amount, not greater than the Annual Debt Service for such Fiscal Year, withdrawn from the Rate Stabilization Account and deposited in the Revenue Fund, and (ii) there must be subtracted from Net Revenues for any Fiscal Year such amounts as are withdrawn from the Revenue Fund and deposited into the Rate Stabilization Account for such Fiscal Year. Section 7.2 Maintenance and Operation. The City shall at all times maintain, preserve and keep the properties of the System in good repair, working order and condition and will from time to time make all necessary and proper repairs, renewals, replacements, extensions and -36- 51151313 7 betterments thereto, so that at all times the business carried on in connection therewith will be properly and advantageously conducted, and the City, will at all times operate or cause to be operated the properties of the System and the business in connection therewith in an efficient manner and at a reasonable cost. Section 7.3 Sale or Disposition of the System. The City will not sell or otherwise dispose of the System in its entirety unless simultaneously with such sale or other disposition, provision is made for the payment into the Bond Fund of cash or "Government Obligations," as now or hereafter defined in chapter 39.53 RCW, as amended, or its successor statute, if any, sufficient together with interest to be earned thereon to pay the principal of and interest on the then Outstanding Parity Bonds, nor will it sell or otherwise dispose of any part of the useful operating properties of the System unless such facilities are replaced or provision is made for payment into the Bond Fund of the greater of: (a) An amount which will be in the same proportion to the net amount of Parity Bonds then Outstanding (defined as the total amount of the Parity Bonds less the amount of cash and investments in the Bond Fund and accounts therein) that the Net Revenues from the portion of the System sold or disposed of for the preceding year bears to the total Net Revenues for such period; or (b) An amount which will be in the same proportion to the net principal amount of Parity Bonds then Outstanding that the book value of the part of the System sold or disposed of bears to the book value of the entire System immediately prior to such sale or disposition. The proceeds of any such sale or disposition of a portion of the properties of the System (to the extent required above) shall be paid into the Bond Fund. -37- 51151313 7 Notwithstanding any other provision of this subsection, the City may sell or otherwise dispose of any of the works, plant, properties and facilities of the System or any real or personal property comprising a part of the same which shall have become unserviceable, inadequate, obsolete or unfit to be used in the operation of the System, or no longer necessary, material to or useful in such operation, without making any deposit into the Bond Fund. Section 7.4 Liens or Encumbrances. The City will not at any time create or permit to accrue or to exist any lien or other encumbrance or indebtedness upon the System or the Gross Revenues or any part thereof, prior or superior to the lien thereon for the payment of the Parity Bonds, and will pay and discharge, or cause to be paid and discharged, any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the Revenues of the System, or any part thereof, or upon any funds in the hands of the City, prior to or superior to the lien of the Parity Bonds, or which might impair the security of the Parity Bonds. Section 7.5 Insurance. The City shall, to the extent insurance coverage is available at reasonable cost with responsible insurers, keep, or cause to be kept, the System and the operation thereof insured, with policies payable to the City, against the risks of direct physical loss, damage to or destruction of the System, or any part thereof, and against accidents, casualties or negligence, including liability insurance and employer's liability, at least to the extent that similar insurance is usually carried by utilities operating like properties as determined by the City Manager or City's risk manager. A program of self insurance against certain risks or as to part of the potential liability for certain risks may be included as part of the City's insurance coverage plan. -38- 51151313 7 In the event of any loss or damage to the properties of the System covered by insurance, the City will (a) with respect to each such loss, promptly repair and reconstruct to the extent necessary to the proper conduct of the operations of the System the lost or damage portion thereof and shall apply the proceeds of any insurance policy or policies covering such loss or damage for that purpose to the extent required therefor, unless in the case of loss or damage involving an amount less than or equal to 2% of the value of net utility plant of the System or more, such repair and reconstruction shall not be recommended by the City Manager, and (b) if the City shall not use the entire proceeds of such insurance to repair or reconstruct such lost or damaged property, such insurance proceeds thereof not so used shall be paid into the Revenue Fund, and if greater than 2% of the value of the net utility plant of the System for any one loss or damage, shall be used to purchase or redeem bonds or to acquire or construct extensions, betterments and improvements to the System. Section 7.6 Books and Accounts. The City shall keep proper books of account in accordance with any applicable rules and regulations prescribed by the State of Washington. The City shall prepare, and any owner or holder of Parity Bonds may, upon written request, obtain copies of, balance sheets and profit and loss statements showing in reasonable detail the financial condition of the System as of the close of each year, and the income and expenses of such year, including the amounts paid into the Revenue Fund, the Bond Fund, and into any special funds or accounts created pursuant to the provisions of this ordinance, and the amounts expended for maintenance, renewals, replacements, and capital additions to the System. Section 7.7 Additions and Improvements. The City will not expend any of the revenues derived by it from the operation of the System or the proceeds of any indebtedness payable from the Revenues of the System for any extensions, betterments or improvements to the -39- 51151313.7 System which are not legally required or economically sound, and which will not properly and advantageously contribute to the conduct of the business of the System in an efficient manner; provided, that to the extent permitted by law, the City may provide commodities, services or facilities free of charge or at a reduced charge in order to carry out a plan adopted by the Council for conservation of water or to benefit elderly, handicapped or poor persons. Section 7.8 Tax Covenants. The City shall comply with the provisions of this section unless, in the written opinion of Bond Counsel to the City, such compliance is not required in order to maintain the exemption of the interest on the 2012 Bonds from federal income taxation. The City hereby covenants that it will not make any use of the proceeds of sale of the 2012 Bonds or any other funds of the City which may be deemed to be proceeds of such 2012 Bonds pursuant to Section 148 of the Code and the applicable regulations thereunder that will cause the 2012 Bonds to be "arbitrage bonds" within the meaning of said section and said regulations. The City will comply with the requirements of Section 148 of the Code (or any successor provision thereof applicable to the 2012, Bonds) and the applicable regulations thereunder throughout the term of the 2012 Bonds. The City further covenants that it will not take any action or permit any action to be taken that would cause the 2012 Bonds to constitute "private activity bonds" under Section 141 of the Code. The City will pay any rebate amount to the United States of America at the times and in the amounts necessary to meet the requirements of the Code to maintain the federal income tax exemption of the interest payments on the 2012 Bonds, in accordance with the Federal Tax Certificate. -40- 51151313.7 The 2012 Bonds shall be designated as "qualified tax-exempt obligations" for the purposes of Section 265(b)(3) of the Code, if the following conditions are met: (1) the Director of Finance and Budget is able to determine and certify that the 2012 Bonds are not "private activity bonds" within the meaning of Section 141 of the Code; (2) the reasonably anticipated amount of tax-exempt obligations (other than private activity bonds and other obligations not required to be included in such calculation) which the City and any entity subordinate to the City (including any entity that the City controls, that derives its authority to issue tax-exempt obligations from the City, or that issues tax-exempt obligations on behalf of the City) will issue during ,the calendar year in which the 2012 Bonds are issued will not exceed $10,000,000; and (3) the amount of tax-exempt obligations, including the 2012 Bonds, so designated by the City as "qualified tax-exempt obligations" for the purposes of Section 265(b)(3) of the Code during the calendar year in which the 2012 Bonds are issued does not exceed $10,000,000. The Director of Finance and Budget is authorized and directed to adopt and implement on behalf of the City procedures to facilitate compliance by the City with the covenants in this Section 7.8 and the applicable requirements of the Code that must be satisfied after the issue date to maintain the tax exemption for interest on the tax-exempt bonds, including the 2012 Bonds, after the issue date. ARTICLE VIII ADDITIONAL BONDS Section 8.1 Additional Bonds. Parity Bonds may be issued payable from the Bond Fund on a parity with the 2003 Bonds, the 2008 Bonds and the 2012 Bonds and secured by an equal charge and lien on the Gross Revenues pledged to the Bond Fund: First, for the purpose of acquiring, constructing and installing additions and improvements to and extensions of, acquiring necessary equipment for or making necessary -41- 51151313.7 repairs, replacements or other capital improvements to the System and other lawful purposes related to the System, or Second, for the purpose of refunding, or purchasing and retiring prior to their maturity, any outstanding Bonds or other revenue obligations of the System. (a) The City may issue such Additional Bonds upon compliance with the following conditions: (i) At the time of the issuance of such Additional Bonds, there shall be no deficiency in the Bond Fund. (ii) In each ordinance authorizing such Additional Bonds, provision shall be made for payments into the Reserve Fund in accordance with Section 6.2(a)(iv) of this ordinance. (iii) At the time of the issuance of such Additional Bonds, the City shall have on file a certificate from a Professional Utility Consultant, or the City Director of Finance and Budget or other financial officer of the City, showing that the Adjusted Net Revenue received during any consecutive 12 -month period for which financial statements are available within the 24 months preceding the date of delivery of such Additional Bonds are sufficient to meet the Coverage Requirement in each calendar year or Fiscal Year thereafter on the then - Outstanding Parity Bonds and the Additional Bonds to be issued. The Adjusted Net Revenues shall be the Net Revenues for a period of any 12 consecutive months out of the 24 months immediately preceding the date of delivery of such proposed Additional Bonds, as adjusted to take into consideration changes in Net Revenues estimated to occur under one or more of the following conditions for each year after such delivery for so long as any Bonds, including the Additional Bonds proposed to be issued, shall be outstanding: -42- 51151313 7 (A) Any increase or decrease in Net Revenues that would result if any change in rates and charges adopted by the Council prior to the date of such certificate and subsequent to the beginning of such 12 -month period, had been in force during the full 12 -month period; (B) The additional Net Revenues from any rate increases that have been approved by ordinance of the Council but that are not then in effect; (C) Any increase or decrease in Net Revenues estimated by a Professional Utility Consultant, or the City Director of Finance and Budget or other financial officer of the City to result from any additions, betterments and improvements to and extensions of any facilities of the System that (i) became fully operational during such 12 -month period, (ii) were under construction at the time of such certificate, or (iii) will be constructed from the proceeds of the Additional Bonds to be issued; (D) The additional Net Revenues that would have been received if any customers added to the System during such 12 -month period were customers for the entire period. (E) The additional Net Revenues that may be derived by the City from any users of the System with whom the City has entered into a contract for utility services to be furnished, which revenues have not otherwise been included in Net Revenues. The Professional Utility Consultant or the Director of Finance and Budget or other financial officer of the City shall base his/her certification upon, and his/her certificate shall have attached thereto, financial statements of the System audited by the State Examiner (unless such an audit is not available for a 12 -month period within the preceding 24 months) and certified by -43- 51151313.7 the chief financial officer of the City, showing income and expenses for the period upon which the same is based. The certificate of a Professional Utility Consultant or the City Director of Finance and Budget or other financial officer of the City shall be conclusive and the only evidence required to show compliance with the provisions and requirements of this subsection. Notwithstanding the foregoing, if Additional Bonds are to be issued for the purpose of refunding at or prior to their maturity any, part or all of the then Outstanding Bonds and the issuance of such refunding Additional Bonds results' in a debt service savings and does not require an increase of more than $5,000 in any year for principal and interest on such refunding Additional Bonds, the certificate required by subsection (a)(3) of this section need not be obtained. (b) Nothing herein contained shall, prevent the City from issuing revenue bonds or other obligations which are a charge upon the Gross Revenues of the System junior or inferior to the payments required by this ordinance to be made out of such Gross Revenues into the Bond Fund and accounts therein to pay and secure the payment of any Outstanding Bonds. (c) Nothing herein contained shall', prevent the City from issuing revenue bonds to refund maturing Bonds for the payment of which money is not otherwise available. (d) Notwithstanding any other provision of this ordinance, for so long as the 2012 Bonds are Outstanding, no bonds may be issued subsequent to the issuance of the 2012 Bonds with a lien and charge on the Gross Revenues superior to the lien and charge of the 2012 Bonds. -44- 51151313.7 Section 8.2 Pledge Effected by Ordinance. (a) The 2012 Bonds are special limited obligations of the City payable from and secured solely by Gross Revenues, subject to the prior payment of Costs of Maintenance and Operation of the System and other money and assets specifically pledged hereunder for the payment thereof There are hereby pledged as security for the payment of the principal, premium, if any, and interest on the 2012 Bonds in accordance with the terms of this ordinance, subject only to the provisions of this ordinance restricting or permitting the application thereof for the purposes and on the terms and conditions set forth in this ordinance, (i) the proceeds of the sale of the 2012 Bonds to the extent held in the funds established by this ordinance, (ii) the Gross Revenues, and (iii) the money and assets, if any, credited to the Revenue Fund, the Bond Fund and the Reserve Fund, and the income therefrom. The Gross Revenues and other money and assets hereby pledged shall immediately be subject to the lien of this pledge without any physical delivery thereof or further act, and the lien of this pledge shall be valid and binding as against all parties having claims of any kind in tort, contract or otherwise against the City regardless of whether such parties have notice thereof. (b) The 2003 Bonds, the 2008 Bonds, the 2012 Bonds and any Additional Bonds shall be equally and ratably payable and secured hereunder without priority by reason of date of adoption of this ordinance providing for their issuance or by reason of their series, number or date of sale, issuance, execution or delivery, and by the liens, pledges, charges, trusts, assignments and covenants made herein, except as otherwise expressly provided or permitted in this ordinance and except as to insurance that may be obtained by the City to insure the repayment of one or more series or maturities within a series. -45- 51151313.7 (c) The 2003 Bonds, the 2008 Bonds, the 2012 Bonds and any Additional Bonds shall not in any manner or to any extent constitute general obligations of the City or of the State of Washington, or of any political subdivision of the State of Washington, or a charge upon any general fund or upon any money or other property of the City or of the State of Washington, or of any political subdivision of the State of Washington, not specifically pledged thereto by this ordinance, nor shall the full faith and credit of the City or of the State of Washington, or of any political subdivision of the State of Washington, be pledged to the payment of principal, premium, if any, or interest thereon. ARTICLE IX DEFAULTS AND REMEDIES Section 9.1 Events of Default. This ordinance and each ordinance adopted pursuant to Article XI are hereinafter in this Article IX and in Article X referred to collectively as "the Ordinance." The City hereby covenants and agrees with the purchasers and owners from time to time of any Parity Bonds, in order to protect and safeguard the covenants and obligations undertaken by the City securing any Parity Bonds, that the following shall constitute "Events of Default": (a) If default shall be made in the due and punctual payments of the principal of, interest on and premium, if any, on any of the Parity Bonds when the same shall become due and payable, on a payment date, at maturity or by proceedings for redemption or otherwise; (b) If the City shall default in the observance and performance of any other of the covenants, conditions and agreements on the part of the City contained in the Ordinance and such default or defaults shall have continued for a period of 90 days after the City shall have received from the Bondowners Committee or from the owners of not less than 20% in principal -46- 51151313 7 amount of the Parity Bonds outstanding, a written notice specifying, and demanding the cure of, such default; (c) If the City shall (except as herein permitted) sell, transfer, assign or convey any properties constituting the System or interests therein, or any part or parts thereof, or shall make any agreement for such sale or transfer (except as expressly authorized by Section 7.3 hereof); (d) If an order, judgment or decree shall be entered by a court of competent jurisdiction (a) appointing a receiver, trustee or liquidator for the whole or any substantial part of the System, (b) approving a petition filed against the City seeking the bankruptcy, arrangement or reorganization of the City under any applicable law of the United States or the State of Washington, or (c) assuming custody or control of the whole or any substantial part of the System under the provisions of any other law for the relief or aid of debtors and such order, judgment or decree shall not be vacated or set aside or stayed (or, in case custody or control is assumed by such order, such custody or control shall not be otherwise terminated), within 60 days from the date of entry of such order, judgment or decree; (e) If the City shall (a) admit in writing its inability to pay the debts of the System generally as they become due, (b) file a petition in bankruptcy or seeking a composition of indebtedness under any state or federal bankruptcy or insolvency law, (c) make an assignment for the benefit of its creditors, (d) consent to the appointment of a receiver of the whole or any substantial part of the System, or (e) consent to the assumption by any court of competent jurisdiction under the provisions of any other law for the relief or aid of debtors of custody or control of the whole or any substantial part of the System. -47- 51151313.7 Section 9.2 Formation of Bondowners Committee. During the continuance of an Event of Default, the owners of Parity Bonds representing 20% in principal amount of the Parity Bonds then Outstanding may call a bondholders meeting for the purpose of electing a committee (the "Bondowners Committee") to act on behalf of all Parity Bondowners (the `Bondowners"). Such meeting shall be called and the proceedings thereof shall be conducted in the manner provided in Article X hereof. At such meeting the Bondowners present in person or by proxy may, by a majority of the votes cast, elect one or more persons, who may or may not be Bondowners, to the Bondowners Committee, which shall act as trustee for all registered owners of Parity Bonds outstanding, and the Bondowners Committee as such trustee may have and exercise all the rights and powers provided for in this ordinance to be exercised by the Bondowners Committee. The Bondowners present in person or by proxy at said meeting, or at any adjourned meeting thereof, shall prescribe the manner in which the successors of the persons elected to the Bondowners Committee at such Bondowners meeting shall be elected or appointed, and may prescribe rules and regulations governing the exercise by the Bondowners Committee of the powers conferred upon it herein, and may provide for the termination of the existence of the Bondowners Committee. The members of the Bondowners Committee elected by the Bondowners in the manner herein provided, and their successors, as a committee are hereby declared to be trustees for the owners of all the Parity Bonds then Outstanding, and are empowered to exercise in the name of the Bondowners Committee as trustee, all the rights and powers hereinafter conferred on the Bondowners Committee. Section 9.3 Books of City Open to Inspection. The City covenants that if an Event of Default shall have happened and shall not have been remedied, the books of record and account -48- 51151313 7 of the City and all other records relating to the System shall at all times during regular business hours be subject to the inspection and use of the Bondowners Committee and any person holding at least 20% of the principal amount of Parity Bonds Outstanding and of their respective agents and attorneys. The City covenants that if an Event of Default shall happen and shall not have been remedied, the City will continue to account, as a trustee of an express trust, for all Gross Revenues and other money, securities and funds pledged under this ordinance. Section 9.4 Suits at Law or in Equity. If an Event of Default shall happen and shall not have been remedied, then and in every such case, the Bondowners Committee by its agents and attorneys, shall be entitled and empowered to proceed forthwith to take such needful steps and institute such suits, actions and proceedings at law or in equity for the collection of all sums in connection with the Parity Bonds and to protect and enforce the rights of Bondowners under this ordinance for the specific performance of any covenant herein contained or in aid of the execution of any power herein granted, or for an accounting against the City as trustee of an express trust, or in the enforcement of any other legal or equitable right as the Bondowners Committee, being advised by counsel, shall deem most effectual to enforce any of the rights of the owners of the Parity Bonds. Any action, suit or other proceedings instituted by the Bondowners Committee hereunder shall be brought in its name as trustee for the Bondowners and all such rights of action upon or under any of the Parity Bonds or the provisions of this ordinance may be enforced by the Bondowners Committee without the possession of any of the Parity Bonds, and without the production of the same at any trial or proceedings relative thereto except where otherwise required by law, and the respective owners of said Parity Bonds, by taking and holding the same, -49- 51151313.7 shall be conclusively deemed irrevocably to appoint the Bondowners Committee the true and lawful trustee for the respective owners of said bonds, with authority to institute any such action, suit or proceeding; to receive as trustee and deposit in trust any sums becoming distributable for the receipt of such money, and to do all acts with respect thereto that the Bondowner might have done in person, provided, however, that nothing herein contained shall be deemed to authorize or empower the Bondowners Committee to consent to, accept or adopt, on behalf of any Bondowner, any plan of reorganization or adjustment affecting the Parity Bonds or the City or any right of any owner thereof, or to authorize or empower the Bondowners Committee to vote the claims of the owners thereof in any receivership, insolvency, liquidation, bankruptcy, reorganization or other proceeding to which the City shall be a party, and provided further, however, that any Bondowner or Bondowners may by mutual agreement transfer title to the Parity Bonds held by him or them to the Bondowners Committee, or may by agreement with other Bondowners create or organize a separate trustee or bondowners committee and may confer or organize a separate trustee or bondowners committee and may confer upon the Bondowners Committee or such separate trustee or bondholders committee and may confer or organize a separate trustee or bondowners committee and may confer upon the Bondowners Committee or such separate trustee or bondholders committee, such powers and duties and such agreement or agreements shall provide, and the provisions of this ordinance shall not be construed as a limitation on the powers and duties which consenting Bondowners may by agreement confer on the Bondowners Committee or such separate trustee or bondholders committee. The Bondowners Committee shall have full powers of substitution and delegation in respect to any of the powers hereby granted. -50- 51151313.7 Section 9.5 Direction of Actions of Bondowners Committee by Majority Owners. The owners of not less than a majority in principal amount of the Parity Bonds at the time Outstanding, may direct the time, method and place of conducting any proceeding for any remedy available to the Bondowners Committee, or exercising any trust or power conferred upon the Bondowners Committee, provided that the Bondowners Committee shall be provided with reasonable scrutiny and indemnity and shall have the right to decline to follow any such direction only (i) if the Bondowners Committee shall be advised by counsel that the action or proceeding so directed may not lawfully be taken; or (ii) if the Bondowners Committee in good faith shall determine that the action or proceeding so directed would involve the Bondowners Committee in personal liability or that the action or proceeding so directed would be unjustly prejudicial to the owners of Parity Bonds not parties to such direction. Section 9.6 Suits by Individual Bondowners. No owner of any one or more of the Parity Bonds shall have any right to institute any action, suit or proceeding at law or in equity for the enforcement of any provision of the Ordinance or the execution of any trust under the Ordinance or for any remedy under the Ordinance, unless an Event of Default shall have happened and be continuing, and unless no Bondowners Committee has been created as herein provided, but any remedy herein authorized to be exercised by the Bondowners Committee, may be exercised individually by any Bondowner, in his own name and on his own behalf or for the benefit of all Bondowners, in the event no Bondowners Committee has been created, or with the consent of the Bondowners Committee, if such Bondowners Committee has been created; provided, however, that nothing in the Ordinance or in the Parity Bonds shall affect or impair the obligation of the City, which is absolute and unconditional, to pay at the respective dates of maturity and places therein expressed the principal of and premium, if any, and interest on the -51- 51151313.7 Parity Bonds to the respective owners thereof, or affect or impair the rights of action, which are also absolute and unconditional, of any owner to enforce the payment of his Parity Bonds, or to reduce to judgment his claim against the City for the payment of the principal and interest on his Parity Bonds, without reference to, or consent of, the Bondowners Committee or any other owner of the Parity Bonds. Section 9.7 Waivers of Default. No delay or omission of the Bondowners Committee or of any Bondowner to exercise any right or power arising upon the happening of an Event of Default shall impair any right or power or shall be construed to be a waiver of any such Event of Default or to be an acquiescence therein; and every power and remedy given by this Article to the Bondowners Committee or to the Bondowners may be exercised from time to time and as often as may be deemed expedient by the Bondowners Committee or by such owners. The Bondowners Committee or the owners of not less than 50% in principal amount of the Parity Bonds at the time Outstanding, or their attorneys -in -fact duly authorized, may on behalf of the owners of all of the Parity Bonds waive any past default under the Ordinance and its consequences; except a default in the payment of the principal of and premium, if any, and interest on any of the Parity Bonds. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Section 9.8 Remedies Granted in Ordinance Not Exclusive. No remedy by the terms of the Ordinance conferred upon or reserved to the Bondowners Committee or the Bondowners is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Ordinance or existing at law or in equity or by statute on or after the date of adoption of the Ordinance. -52- 51151313.7 ARTICLE X BONDOWNERS MEETINGS Section 10.1 Call of Bondowners Meetings. The City, the Bondowners Committee or the owners of not less than 20% in principal amount of the Parity Bonds then outstanding may at any time call a meeting of the owners of the Parity Bonds. Every such meeting shall be held at such place in the City of Yakima, or in the City of Seattle, as may be specified in the notice calling such meeting. Written notice of such meeting, stating the place and time of the meeting and in general terms the business to be transacted, shall be mailed to the Bondowners by the City, the Bondowners Committee or the Bondowners calling such meeting not less than 30 nor more than 60 days before such meeting, and shall be published at least once a week for four successive calendar weeks on any day of the week, the date of first publication to be not less than 30 or more than 60 days preceding the meeting; provided, however, that the mailing of such notice shall in no case be a condition precedent to the validity of any action taken at any such meeting. The expenses of publication of such notice shall be paid or reimbursed by the City. Any meeting of Bondowners shall, however, be valid without notice if the owners of all Parity Bonds then Outstanding are present in person or by proxy or if notice is waived before or within 30 days after the meeting by those not so present. Section 10.2 Notice to Bondowners. Except as otherwise provided in the Ordinance, any provision in this ordinance for the mailing of a notice or other paper to Bondowners shall be fully complied with if it is mailed postage prepaid to each registered owner of any of the Parity Bonds then outstanding at his/her address, if any, appearing upon the Bond Register, and any provision in this ordinance contained for publication of a notice or other matter shall require the publication thereof in The Bond Buyer in the City of New York, State of New York (or in lieu of publication in The Bond Buyer, in a daily newspaper printed in the English language and -53- 51151313.7 customarily published on each business day and of general circulation in the Borough of Manhattan, the City of New York, State of New York), and also in a daily newspaper printed in the English language and customarily published on each business day and of general circulation in the City of Seattle, State of Washington. Section 10.3 Proxies; Proof of Ownership of Parity Bonds. Attendance and voting by Bondowners at such meetings may be in person or by proxy. Owners of Parity Bonds, by an instrument in writing under their hands, may appoint any person or persons, with full power of substitution, as their proxy to vote at any meeting for them. Any registered owner of Parity Bonds shall be entitled in person or by proxy to attend and vote at such meeting as owner of the Parity Bonds registered or certified in his/her name without producing such Parity Bonds, and such persons and their proxies shall, if required, produce such proof of personal identity as shall be satisfactory to the secretary of the meeting. All proxies presented at such meeting shall be delivered to the inspectors of votes and filed with the secretary of the meeting. All other persons seeking to attend or vote in such meeting must produce the Parity Bonds claimed to be owned or represented at such meeting. The vote at any such meeting of the owner of any Parity Bond entitled to vote thereat shall be binding upon such owner and upon every such subsequent owner of such Parity Bond (whether or not such subsequent owner has notice thereof). Section 10.4 Execution of Instruments by Bondowners. Any request, direction, consent or other instrument in writing required or permitted by this ordinance to be signed or executed by Bondowners may be in any number of concurrent instruments of similar tenor, and may be signed or executed by such Bondowners in person or by agent appointed by an instrument in writing. Proof of the execution of any such instrument shall be sufficient for any purpose of this -54- 51151313.7 ordinance if the fact and date of the execution by any person of any such instrument may be proved by either (a) an acknowledgment executed by a notary public or other officer empowered to take acknowledgments of deeds to be recorded in the particular jurisdiction, or (b) an affidavit of a witness to such execution sworn to before such a notary public or other officer. Where such execution is by an officer of a corporation or association or a member of a partnership on behalf of such corporation, association or partnership, such acknowledgment or affidavit shall also constitute sufficient proof of his/her authority. The foregoing shall not be construed as limiting the City to such proof, it being intended that the City may accept any other evidence of the matters herein stated which it may deem sufficient. Any request or consent of any Bondowner shall bind every future owner of the same Parity Bond in respect of anything done by the City in pursuance of such request, direction or consent. The right of a proxy for a Bondowner to act may be approved (subject to the City's right to require additional proof) by a written proxy executed by such Bondowner as aforesaid. Section 10.5 Appointment of Officers at Bondowners Meetings. Persons named by the City or elected by the owners of a majority in principal amount of the Parity Bonds represented at the meeting in person or by proxy in the event the City is not represented at such meeting, shall act as temporary chairperson and temporary secretary of any meeting of Bondowners. A permanent chairperson and a permanent secretary of such meeting shall be elected by the owners of a majority in principal amount of the Parity Bonds represented at such meeting in person or by proxy. The permanent Chairperson of the meeting shall appoint two inspectors of votes who shall count all votes cast at such meeting, except votes on the election of chairperson and -55- 51151313 7 secretary as aforesaid, and who shall make and file with the secretary of the meeting and with the City their verified report of all such votes cast at the meeting. Section 10.6 Quorum at Bondowners Meetings. The owners of not less than the principal amount of the Parity Bonds required for any action to be taken at such meeting must be present at such meeting in person or by proxy in order to constitute a quorum for the transaction of business, less than a quorum, however, having power to adjourn from time to time without any other notice than the announcement thereof at the meeting; provided, however, that, if such meeting is adjourned by less than a quorum for more than ten days, notice thereof shall be published by the City at least five days prior to the adjourned date of the meeting. ARTICLE XI AMENDMENTS TO ORDINANCE Section 11.1 Amendments. (a) The Council from time to time and at any time may pass an ordinance or ordinances amending this ordinance, which ordinance or ordinances thereafter shall become a part of this ordinance, for any one or more or all of the following purposes: (1) To add to the covenants and agreements of the City in this ordinance, other covenants and agreements thereafter to be observed, which shall not adversely affect the interests of the owners of any Parity Bonds, or to surrender any right or power herein reserved. (2) To make such provisions for the purpose of curing any ambiguities or of curing, correcting or supplementing any defective provision contained in this ordinance or any ordinance authorizing Additional Bonds in regard to matters or questions arising under such ordinances as the Council may deem necessary or desirable and not inconsistent with such -56- 51151313.7 ordinances and which shall not adversely affect, in any material respect, the interest of the owners of Parity Bonds. Any such amending ordinance may be adopted without the consent of the owners of any Parity Bonds outstanding, notwithstanding subsection (b) of this section. (b) With the consent of the owners of not less than 65% in aggregate principal amount of the Parity Bond at the time Outstanding, the Council may pass an ordinance or ordinances supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this ordinance or of any amending ordinance; provided, however, that no such amending ordinance shall: (1) Extend the fixed maturity of any Parity Bonds, or reduce the rate of interest thereon, or extend the time of payment of interest from their due date, or reduce the amount of the principal thereof, or reduce any premium payable on the redemption thereof, without the consent of the owner of each bond so affected; or (2) Reduce the aforesaid percentage of Bondowners required to approve any such amending ordinance, without the consent of the owners of all of the Parity Bonds then Outstanding. It shall not be necessary for the consent of Bondowners under this subsection (b) to approve the particular form of any proposed supplemental ordinance, but it shall be sufficient if such consent shall approve the substance thereof. (c) Upon the adoption of any ordinance pursuant to the provisions of this section, this ordinance shall be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations of the City under this ordinance and all owners of Parity Bonds outstanding hereunder shall thereafter be determined, exercised and enforced -57- 51151313 7 thereunder, subject in all respects to such modification and amendments, and all terms and conditions of any such supplemental ordinance shall be deemed to be part of the terms and conditions of this ordinance for any and all purposes. (d) Parity Bonds executed and delivered after the execution of any amending ordinance passed pursuant to the provisions of this section may have a notation as to any matter provided for in such amending ordinance, and if such supplemental ordinance shall so provide, new bonds so modified as to conform, in the opinion of the Council, to any modification of this ordinance contained in any such supplemental ordinance, may be prepared and delivered without cost to the owners of any affected Parity Bonds then outstanding, upon surrender for cancellation of such bonds with all unmatured coupons and all matured coupons not fully paid, in equal aggregate principal amounts. Section 11.2 Obtaining Approval of Amendments at Bondowners Meeting. The City may at any time adopt an ordinance amending the provisions of this ordinance to the extent that such amendment is permitted by the provisions of this Article XI, to take effect when and as provided in this section. At any time thereafter such ordinance may be submitted by the City for approval to a meeting of the bondowner duly convened and held in accordance with the provisions of this ordinance. A record in duplicate of the proceedings of each meeting of the Bondowners shall be prepared by the permanent secretary of the meeting and shall have attached thereto the original reports of the inspectors of votes and affidavits by a person or persons having knowledge of the facts, showing a copy of the notice of the meeting and setting forth the facts with respect to the mailing and publication thereof under the provisions of this ordinance. Such a record shall be signed and verified by the affidavits of the permanent chairperson and the permanent secretary of the meeting, and one duplicate thereof shall be delivered to the City. Any -58- 51151313 7 record so signed and verified shall be proof of the matter therein stated. If the ordinance of the City making such amendment shall be approved by a resolution duly adopted at such meeting of bondowners by the affirmative vote of the owners of the required percentages of Parity Bonds, a notice stating that a resolution approving such amendment has been so adopted shall be mailed by the City to each bondholder who has requested such notice (but failure so to mail copies of such notice shall not affect the validity of such resolution) and shall be published at lest once in the manner provided in Section 10.2 hereof. Proof of such mailing and publication by the affidavit or affidavits of a person or persons having knowledge of the facts shall be filed with the City. Such ordinance of the City making such amendment shall be deemed conclusively to be binding upon the City, the paying agents, and the owners of all Parity Bonds at the expiration of 30 days after the publication of the notice provided for in this section, except in the event of a final decree of a court of competent jurisdiction setting aside such ordinance or annulling the action taken thereby in a legal action or equitable proceeding for such purpose commenced within such period; provided that the City and any paying agents during such 30 day period and any such further period during which such action or proceeding may be pending shall be entitled in their absolute discretion to take such action, or to refrain from taking such action, with respect to such ordinance as they may deem expedient. Nothing in this ordinance contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Bondowners or of any right conferred hereunder to make such a call, any hindrance or delay in the exercise of any rights conferred upon or reserved to the paying agents or the Bondowners under any of the provisions of this ordinance. Section 11.3 Alternate Method of Obtaining Approval of Amendments. The City may at any time adopt an ordinance amending the provisions of this ordinance, or of any Parity -59- 51151313 7 Bonds, to the extent that such amendment is permitted by the provisions of this Article, to take effect when and as provided in this section. Upon adoption of such ordinance, a request that Bondowners consent thereto shall be mailed by the City to the Bondowners and notice that the City is requesting Bondowners to consent to such amendment shall be published at least once in the manner provided in Section 10.2 hereof. Such ordinance shall not be effective unless and until there shall have been filed with the City the written consents of the percentages of owners of outstanding Bonds specified herein and a notice shall have been published as hereinafter in this section provided. Each such consent shall be effective only if accompanied by proof of ownership of the Parity Bond for which such consent is given. A certificate or certificates of the Clerk of the City that he/she has examined such proof and that such proof is sufficient shall be conclusive that the consents have been given by the owners of the Parity Bonds described in such certificate or certificates. Any such consent shall be binding upon the owner of the Parity Bonds giving such consent and on every subsequent owner of such Parity Bonds (whether or not such subsequent owner has notice thereof). A notice stating that the ordinance has been consented to by the owners of the required percentages of Bonds and will be effective as provided in this section, may be given to the Bondowners by mailing such notice to the bondholders, and shall be given by publishing the same at least once in the manner provided in Section 10.2 hereof. A record, consisting of the papers required by this section to be filed with the City shall be proof of the matters therein stated, and this ordinance shall be deemed conclusively to be binding upon the City and the owners of all Parity Bonds at the expiration of 30 days after the notice last provided for in this section, except in the event of a final decree of a court of competent jurisdiction setting aide such consent or annulling the action taken thereby in a legal action or equitable proceeding for such purpose commenced within such period. -60- 51151313.7 Section 11.4 Amendment of Ordinance in Any Respect by Approval of All Bondowners. Notwithstanding anything contained in the foregoing provisions of this Article, the rights and obligations of the City and of the owners of the Parity Bonds, and the terms and provisions of the Parity Bonds and of this ordinance, may be amended in any respect with the consent of the City, by the affirmative vote of the owners of all said Bonds then Outstanding at a meeting of Bondowners called and held as hereinabove provided, or upon the adoption of an ordinance by the City and the consent of the owners of all the Parity Bonds then Outstanding, such consent to be given as provided in Section 11.3 except that no notice to bondowners either by mailing or publication shall be required, and the amendment shall be effective immediately upon such unanimous vote or written consent of all of the Bondowners. Section 11.5 Exclusion of Bonds Owned by City. Parity Bonds owned or held by or for the account of the City shall not be deemed Outstanding for the purpose of any vote or consent or other action or any calculation of Outstanding Bonds in this ordinance provided for, and shall not be entitled to vote or consent or take any other action in this ordinance provided for. Section 11.6 Endorsement of Amendment on Bonds. Parity Bonds delivered after the effective date of any action amending this ordinance may bear a notation by endorsement or otherwise as to such action, and in that case upon demand of the owner of any Parity Bond Ouistanding at such effective date and presentation of his/her Parity Bond for that purpose at the principal office of the paying agents, suitable notation shall be made on such Parity Bond by the paying agent as to any such action. If the City shall so determine, new Parity Bonds so modified as in the opinion of the City and its counsel to conform to such action shall be prepared, delivered and upon demand of the owner of any Parity Bond then outstanding shall be exchanged -61- 51151313 7 without cost to such Bondowner for Parity Bonds then outstanding hereunder, upon surrender of such Bonds with any unmatured coupons pertaining thereto. ARTICLE XII MISCELLANEOUS Section 12.1 Undertaking to Provide Ongoing Disclosure. To meet the requirements of paragraph (b)(5) of Rule 15c2-12, as applicable to a participating underwriter for the 2012 Bonds, the City makes the following written Undertaking for the benefit of holders of the 2012 Bonds: (a) Undertaking to Provide Annual Financial Information and Notice of Listed Events. The City undertakes to provide or cause to be provided, either directly or through a designated agent, to the MSRB, in an electronic format as prescribed by the MSRB, accompanied by identifying information as prescribed by the MSRB: (1) Annual financial information and operating data of the type included in the final official statement for the 2012 Bonds and described in subsection (2) of this section ("annual financial information"); (2) Timely notice (not in excess of 10 business days after the occurrence of the event) of the occurrence of any of the following events with respect to the 2012 Bonds: (A) principal and interest payment delinquencies; (B) non-payment related defaults, if material; (C) unscheduled draws on debt service reserves reflecting financial difficulties; (D) unscheduled draws on credit enhancements reflecting financial difficulties; (E) substitution of credit or liquidity providers, or their failure to perform; (F) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notice of Proposed Issue (IRS Form 5701 — TEB) or other material notices or determinations with respect to the tax status of the 2012 Bonds; (G) modifications to rights of -62- 51151313.7 holders of the 2012 Bonds, if material; (H) bond calls (other than scheduled mandatory redemptions of Term Bonds), if material, and tender offers; (I) defeasances; (J) release, substitution, or sale of property securing repayment of the 2012 Bonds, if material; (K) rating changes; (L) bankruptcy, insolvency, receivership or similar event of the City, as such "Bankruptcy Events" are defined in Rule 15c2-12; (M) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (N) appointment of a successor or additional trustee or the change of name of a trustee, if material. (3) Timely notice of a failure by the City to provide required annual financial information on or before the date specified in subsection (b) of this section. (b) Type of Annual Financial Information Undertaken to be Provided. The annual financial information that the City undertakes to provide in subsection (1) of this section: (1) Shall consist of (A) annual financial statements showing ending retained earnings for the System prepared in accordance with the Budget Accounting and Reporting System prescribed by the Washington State Auditor pursuant to RCW 43.09.200 (or any successor statute) and generally of the type included in the official statement for the 2012 Bonds under the heading "Water and Sewer Operating Statement"; (B) principal amount of Bonds of the System; (C) debt service coverage for Outstanding Bonds; (D) rates for the System; and (E) number of customers of the System. (2) Shall be provided not later than the last day of the ninth month after the end of each fiscal year of the City (currently, a fiscal year ending December 31), as such -63- 51151313.7 fiscal year may be changed as required or permitted by State law, commencing with the City's fiscal year ending December 31, 2012; and (3) May be provided in a single or multiple documents, and may be incorporated by specific reference to documents available to the public on the Internet website of the MSRB or filed with the SEC. (c) Amendment of Undertaking. The Undertaking is subject to amendment after the primary offering of the 2012 Bonds without the consent of any holder of any 2012 Bond, or of any broker, dealer, municipal securities dealer, participating underwriter, rating agency or the MSRB, under the circumstances and in the manner permitted by Rule 15c2-12. The City will give notice to the MSRB of the substance (or provide a copy) of any amendment to the Undertaking and a brief statement of the reasons for the amendment. If the amendment changes the type of annual financial information to be provided, the annual financial information containing the amended financial information will include a narrative explanation of the effect of that change on the type of information to be provided. (d) Beneficiaries. The Undertaking evidenced by this section shall inure to the benefit of the City and any Beneficial Owner of 2012 Bonds, and shall not inure to the benefit of or create any rights in any other person. (e) Termination of Undertaking. The City's obligations under this Undertaking shall terminate upon the legal defeasance of all of the 2012 Bonds. In addition, the City's obligations under this Undertaking shall terminate if those provisions of Rule 15c2-12 which require the City to comply with this Undertaking become legally inapplicable in respect of the 2012 Bonds for any reason, as confirmed by an opinion of nationally recognized bond -64- 51151313 7 counsel or other counsel familiar with federal securities laws delivered to the City, and the City provides timely notice of such termination to the MSRB. (f) Remedy for Failure to Comply with Undertaking. As soon as practicable after the City learns of any failure to comply with the Undertaking, the City will proceed with due diligence to cause such noncompliance to be corrected. No failure by the City or other obligated person to comply with the Undertaking shall constitute a default in respect of the 2012 Bonds. The sole remedy of any Beneficial Owner of a 2012 Bond shall be to take such actions as that Beneficial Owner deems necessary, including seeking an order of specific performance from an appropriate court, to compel the City or other obligated person to comply with the Undertaking. (g) Designation of Official Responsible to Administer Undertaking. The Director of Finance and Budget of the City (or such other officer of the City who may in the future perform the duties of that office) or his or her designee is authorized and directed in his or her discretion to take such further actions as may be necessary, appropriate or convenient to carry out the Undertaking of the City in respect of the 2012 Bonds set forth in this section and in accordance with Rule 15c2-12, including, without limitation, the following actions: (1) Preparing and filing the annual financial information undertaken to be provided; (2) Determining whether any event specified in subsection (a) has occurred, assessing its materiality, where necessary, with respect to the 2012 Bonds, and preparing and disseminating any required notice of its occurrence; (3) Determining whether any person other than the City is an "obligated person" within the meaning of Rule 15c2-12 with respect to the 2012 Bonds, and -65- 51151313 7 obtaining from such person an undertaking to provide any annual financial information and notice of listed events for that person in accordance with Rule 15c2-12; (4) Selecting, engaging and compensating designated agents and consultants, including but not limited to financial advisors and legal counsel, to assist and advise the City in carrying out the Undertaking; and (5) Effecting any necessary amendment of the Undertaking. Section 12.2 Severability. If any one or more of the covenants or agreements provided in this ordinance to be performed on the part of the City shall be declared by any court of competent jurisdiction to be contrary to law, then such covenant or covenants, agreement or agreements, shall be null and void and shall be deemed separable from the remaining covenants and agreements in this ordinance and shall in no way affect the validity of the other provisions of this ordinance or of any Parity Bonds. Section 12.3 General Authorization. The Mayor, City Manager and Director of Finance and Budget, and each of the other appropriate officers, agents and representatives of the City are each hereby authorized and directed to take such steps, to do such other acts and things, and to execute such letters, certificates, agreements, papers, financing statements, assignments or instruments as in their judgment may be necessary, appropriate or desirable in order to carry out the terms and provisions of, and complete the transactions contemplated by this ordinance. Section 12.4 Prior Acts. All acts taken pursuant to the authority of this ordinance but prior to its effective date are hereby ratified and confirmed. Section 12.5 Effective Date. This ordinance shall be effective 30 days after its passage, approval and publication as provided by law. -66- 51151313 7 PASSED by the Council of the City of Yakima at a regular meeting thereof, held this 17th day of April, 2012. ATTEST Sonya Claaee, City Clerk CITY OF YAKIMA, WASHINGTON VAKlMq * EAL. APPROVED AS TO FORM: First Reading: April 3, 2012 Publication Date: April 20, 2012 Effective Date: May 20, 2012 -67- 51151313 7 Micah Cawle/, Mayor EXHIBIT A UNITED STATES OF AMERICA NO. $ STATE OF WASHINGTON CITY OF YAKIMA WATER AND SEWER REVENUE REFUNDING BOND, 2012 INTEREST RATE: % MATURITY DATE: REGISTERED OWNER: PRINCIPAL AMOUNT: CUSIP NO.: The City of Yakima, Washington (the "City"), hereby acknowledges itself to owe and for value received promises to pay to the Registered Owner identified above, or registered assigns, on the Maturity Date identified above, the Principal Amount indicated above and to pay interest from , 2012, until payment of this bond at the Interest Rate set forth above, payable on 1, 2012, and semiannually thereafter on the first days of each succeeding and . Both principal of and interest on this bond are payable in lawful money of the United States of America. For so long as the bonds of this issue are held in fully immobilized form, payments of principal and interest thereon shall be made as provided in accordance with the operational arrangements of DTC referred to in the Blanket Issuer Letter of Representations from the City to The Depository Trust Company. In the event that the bonds of this issue are no longer held in fully immobilized form, interest on this bond shall be paid by check or draft mailed to the Registered Owner at the address appearing on the Bond Register on the 15th day of the month preceding the interest payment date, and principal of this bond shall be payable upon presentation and surrender of this bond by the Registered Owner at the principal office at the principal office of the fiscal agency of the State of Washington in New York, New York (the "Bond Registrar"); provided, however, that if so requested in writing by the Registered Owner of at least $1,000,000 principal amount of bonds, interest will be paid by wire transfer on the date due to an account with a bank located within the United States. This bond is one of an authorized issue of bonds of like date and tenor, except as to number, amount, rate of interest and date of maturity, in the aggregate principal amount of $ (the "Bonds"), and is issued pursuant to Ordinance No. 2012-, passed by the City Council on , 2012 (the "Bond Ordinance"), to refund certain outstanding water and sewer bonds of the City, to fund the reserve requirement and pay costs of issuance of the Bonds. Capitalized terms used in this bond and not otherwise defined shall have the meanings given them in the Bond Ordinance. The Bonds are subject to optional [and mandatory] redemption as set forth in the Bond Ordinance. A-1 51151313.7 The City has [not] designated the Bonds of this issue as "qualified tax-exempt obligations" for purchase by financial institutions. The Bonds are payable solely from the special fund of the City known as the Water and Sewer Revenue Bond Fund" (the "Bond Fund"). The City has irrevocably obligated and bound itself to pay into the Bond Fund out of Revenue of the System or from such other money as may be provided for such purpose certain amounts necessary to pay and secure the payment of the principal and interest on such bonds. The City has pledged to set aside from the Revenue Fund out of the Revenue of the System and to pay into the Bond Fund the various amounts required by the Bond Ordinance to be paid into and maintained in such Fund within the times provided by the Bond Ordinance. To the extent more particularly provided by the Bond Ordinance, the amounts so pledged to be paid from the Revenue Fund out of Gross Revenues into the Bond Fund shall be a lien and charge thereon equal in rank to the lien and charge upon Gross Revenues of the amounts required to pay and secure the payment of the City's Outstanding Parity Bonds, and any Additional Bonds hereafter issued and superior to all other liens and charges of any kind or nature, except the Costs of Maintenance and Operation of the System. The City has further bound itself to maintain the System in good repair, working order and condition, to operate the same in an efficient manner and at a reasonable cost, and to establish, maintain and collect rates and charges in each calendar year that will make available, for the payment of the principal of and interest on Outstanding Bonds, Net Revenue in an amount that will be equal to the Coverage Requirement. The pledge of Gross Revenues and other obligations of the City under the Bond Ordinance may be discharged at or prior to the maturity or redemption of the bonds of this issue upon the making of provision for the payment thereof on the terms and conditions set forth in the Bond Ordinance. This Bond is a special limited obligation of the City and is not an obligation of the State of Washington or any political subdivision thereof other than the City, and neither the full faith and credit nor the taxing power of the City or the State of Washington is pledged to the payment of this Bond. This Bond shall not be valid or become obligatory for any purpose or be entitled to any security or benefit under the Bond Ordinance until the Certificate of Authentication has been manually signed by the Bond Registrar. This Bond is transferable only on the records maintained by the Bond Registrar for that purpose upon the surrender of this Bond by the Registered Owner or his/her duly authorized agent and only if endorsed in the manner provided hereon, and a new fully registered Bond of like principal amount, maturity and interest rate shall be issued to the transferee in exchange. Such exchange or transfer shall be without cost to the Registered Owner or transferee. The City and Bond Registrar may deem the person in whose name this Bond is registered to be the absolute owner for the purpose of receiving payment of the principal of and interest on this Bond and for all other purposes. A-2 51151313.7 The Bond Registrar is not required to issue, register, transfer or exchange any Bonds during a period beginning at the opening of business on the 15th day of the month next preceding any interest payment date and ending at the close of business on the interest payment date, or, in the case of any proposed redemption of the Bonds, after the mailing of notice of the call of such Bonds for redemption. It is hereby certified that all acts, conditions and things required by the Constitution and statutes of the State of Washington and the Charter and ordinances of the City to exist, to have happened, been done and performed precedent to and in the issuance of this Bond have happened, been done and performed and that the issuance of this bond and the bonds of this series does not violate any constitutional, statutory or other limitation upon the amount of bonded indebtedness that the City may incur. The City has caused this Bond to be executed by the manual or facsimile signature of the Mayor and to be attested by the manual or facsimile signature of the Clerk, and has caused the seal of the City to be impressed or imprinted on this bond, as of this R3 day of i , 2012. CITY OF YAKIMA, WASHINGTON By MCpJ1 Mayo The Bond Registrar's Certificate of Authentication on the Bonds shall be in substantially the following form: CERTIFICATE OF AUTHENTICATION This is one of the Water and Sewer Revenue Refunding Bonds, 2012, of the City of Yakima, Washington, dated , 2012, described in the Bond Ordinance. WASHINGTON STATE FISCAL AGENCY, as Bond Registrar By Authorized Signatory A-3 51151313 7 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER OF TRANSFEREE (Please print or typewrite name and address, including zip code, of transferee) the within bond and does hereby irrevocably constitute and appoint as attorney-in-fact to transfer said bond on the books kept for registration thereof with full power of substitution in the premises. DATED: SIGNATURE GUARANTEED: NOTICE: Signature(s) must be guaranteed pursuant to law. 51151313 7 NOTE: The signature on this Assignment must correspond with the name of the Registered Owner as it appears upon the face of the within bond in every particular, without alteration or enlargement or any change whatever A-4 TAX EXEMPTION AND NONARBITRAGE CERTIFICATE CONCERNING $9,400,000 WATER AND SEWER REVENUE REFUNDING BONDS, 2012 OF THE CITY OF YAKIMA, WASHINGTON I, Cindy J. Epperson, on behalf of the City of Yakima, Washington (the "City"), certify as follows: 1. General. 1.1 Responsible Officer. I am the Director of Finance and Budget of the City and, as such, am an officer of the City responsible for issuing the City's $9,400,000 par value Water and Sewer Revenue Refunding Bonds, 2012 (the "Bonds"), dated May 31, 2012, and delivered and paid for on the same date as the date of this certificate (the "issue date"). 1.2 Purpose of Certificate. This certificate is executed to establish the facts, estimates, and circumstances in existence on the issue date and the bona fide reasonable expectations of the City on the issue date as to future events in connection with the Bonds for the purposes of the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and applicable Treasury Regulations under Sections 103, 141, and 148-150 of the Code. 1.3 Reasonable Basis for Expectations. To the best of my knowledge, information, and belief, this certificate accurately summarizes the facts, estimates, and circumstances in existence on the issue date, and the expectations of the City on the issue date about future events in connection with the Bonds are reasonable 1.4 Defined Terms. Capitalized words used but not otherwise defined in this certificate have the meaning set forth in Ordinance No. 2012-16 of the City (the "Bond Ordinance"). 2. Purpose of Issuing the Bonds. 2.1 Governmental Purpose. The City is a local government unit of the State of Washington, and the Bonds are being issued for the purpose of providing the funds necessary to advance refund the City's outstanding Water and Sewer Revenue Bonds, 2003 Series B (the "Refunding") and to pay the costs of issuance and sale of the Bonds, as provided by the "Bond Ordinance. The proceeds of the Water and Sewer Revenue Bonds, 2003 Series B (referred to as the "prior issue") were used to finance various projects and capital improvements involving the City's wastewater treatment plant, including de -watering biosolids, solids thickening, secondary clarification, construction of a new pump station, construction of a new emergency power generator and the replacement of blower and various electronic systems and to repay an interfund loan made to improve the plant and enable the City to close a spray field (the "Refinanced Improvements"). 51217541.1 2.2 No Impermissible Private Business Use. No more than 10% ($1,035,780) of the proceeds of the Bonds (or of a corresponding portion of the Refinanced Improvements) will be used for any private business use. No more than 5% ($517,890) of the proceeds of the Bonds (or of a corresponding portion of the Refinanced Improvements) will be used either for any private business use that is unrelated to the governmental purpose of the Bonds or for any private business use that is related to a governmental purpose of the Bonds but exceeds the amount of proceeds of the Bonds that are expected to be used for that governmental purpose. No more than 5% of the proceeds of the Bonds will be used directly or indirectly to make or finance loans to any person other than a governmental unit, except a loan, if any, which enables the borrower to finance a governmental tax or assessment of general application for a specific essential. governmental function, or that constitutes a nonpurpose investment within the meaning of Section 148 of the Code. 3. Source and Disbursement of Proceeds. 3.1 Purchaser and Purchase Price of the Bonds. The Bonds will be sold to Seattle - Northwest Securities Corporation of Seattle, Washington (the "Purchaser"), at a price of par plus an original issue premium of $957,803.45, less an underwriter's discount of $58,186, for a total purchase price of $10,299,617.45. 3.2 Funds into Which Proceeds From the Issuance and Sale of the Bonds Will Be Deposited. The City expects that the sale proceeds to be derived by the City from the issuance and sale of the Bonds will be deposited with U.S. Bank National •Association, as refunding trustee (the "Refunding Trustee") and used to establish a refunding escrow and pay the administrative cost of the Refunding and the costs of issuing, selling, and delivering the Bonds. 4. The Refunding. 4.1 Use of Proceeds and Other Funds. Of the sale proceeds of the Bonds deposited with. the Refunding Trustee, $10,258,156.70 and $619,778.30 transferred from the Reserve Fund allocable to the prior issue and other water and sewer revenue bonds of the City, will be used on the issue date to acquire United States Treasury Certificates of Indebtedness, Notes, and Bonds -- State and Local Government Series (the "Acquired Obligations"), which will be held by the Refunding Trustee, along with an initial cash balance of $0.80 (consisting of $0.75 of Bond proceeds and $0.05 transferred from the Reserve Fund), in the refunding escrow established to accomplish the Refunding. The remaining sale proceeds of the Bonds deposited with the Refunding Trustee will be used to pay the costs of issuance of the Bonds. Proceeds of the Bonds and other amounts deposited in the refunding escrow are allocated to expenditures to pay principal, interest, and redemption prices of the prior issue so that the expenditures of proceeds do not occur faster than ratably with expenditures of the other amounts. Other than amounts transferred to the Refunding Trustee from the Reserve Fund allocable to the prior issue, the there are no other proceeds of the prior issue held in a fund that was expected to be used to carry out the governmental purposes of the prior issue. -2- 51217541.1 4.2 Purpose and Effect of the Refunding. (a) Interest Cost Savings. The purpose of the Refunding is to accomplish an interest cost savings to the City of $2,087,588.89 with a net present value of $1,233,531.73, as represented by the difference between debt service on the Bonds and debt service on the prior issue discounted to the issue date using the yield on the Bonds as the discount rate and after deducting the contribution of $619,778.35 to the to the refunding escrow from the Reserve Fund. (b) Permitted Advance Refunding. The issuance of the Bonds represents only the first advance refunding of an issue issued after 1985 to provide tax exempt new money financing for the Refinanced Improvements. (c) Required Redemption of Prior Issue. The date on which the prior issue will be called for redemption pursuant to the Refunding is the first date on which that issue may be called for redemption. 5. Payment of Bonds. 5.1 Debt Service Structure. The Bonds are revenue bonds of the City and are serial in form. Principal of the Bonds is payable annually on November 1, 2012 and of each year from 2014 through 2023, inclusive. Interest on the Bonds is payable semiannually on each May 1 and November 1, commencing on November 1, 2012. The Bonds maturing on or after November 1, 2022, are subject to call for early redemption on or after May 1, 2022, on the dates and at the redemption prices stated in the Bond Ordinance. 5.2 Source of Payment. The Bonds are payable from revenues deposited in the Interest Account, Serial Bond Principal Account and the Term Bond Principal Account of the Bond Fund. Those funds deposited in the Interest Account, Serial Bond Principal Account and the Term Bond Principal Account of the Bond Fund will be used within 13 months of their deposit in that account for payment of principal of or interest on the Bonds. The deposits into the Interest Account, Serial Bond Principal Account and the Term Bond Principal Account relating to the Bonds will be used primarily to achieve a proper matching of revenue of the City and debt service on the Bonds within each bond year. It is expected that the money in the Interest Account, Serial Bond Principal Account and the Term Bond Principal Account relating to the Bonds will be depleted at least once a year, except for a reasonable carryover amount not expected to exceed the greater of one year's earnings on that fund or 1/12 of the annual debt service on the Bonds. 5.3 Reserve for the Bonds. (a) Source of Reserve. The Bond Ordinance requires the City to maintain a reserve for the Outstanding Parity Bonds, including the Bonds, in the Reserve Fund of the Bond Fund in an amount equal to the lesser of (i) the maximum Annual Debt Service on all Outstanding Parity Bonds, including the Bonds; (ii) 125% of the Average Annual Debt Service on all Outstanding Parity Bonds, including the Bonds; or (iii) 10% of the stated principal amount of such series of Parity Bonds (the "Reserve Fund Requirement"). This Reserve Fund Requirement for all Outstanding Parity Bonds, including the Bonds, is an amount equal to -3- 51217541.1 $1,712,496 and the City currently has such amount on deposit in the Reserve Fund. No proceeds of the Bonds will be deposited in the Reserve Fund. The amount of the Reserve Fund so allocated to all Outstanding Parity Bonds, including the Bonds, is $1,712,496, which is an amount that does not exceed the least of (a) 10% of the proceeds, i.e., the issue price, of each issue of the Outstanding Parity Bonds, including the Bonds, (b) maximum annual debt service on the Outstanding Parity Bonds, including the Bonds ($1,822,656), and (c) 125% of average annual debt service on the Outstanding Parity Bonds, including the Bonds ($1,712,496), and constitutes a reasonably required reserve for the Outstanding Parity Bonds, including the Bonds. (b) Allocation of Reserve. For the purposes of Section 148(d)(1) of the Code and Treasury Regulations Section 1.148-6(e), the Reserve Fund serves as a common reserve fund for the Bonds and other outstanding water and sewer revenue issues of the City. On the issue date, the cash and investments held in the Reserve Fund will consist of $1,712,496 of proceeds of the City's outstanding water and sewer revenue bonds. The total amount of the Reserve Fund is allocated among the outstanding water and sewer revenue issues secured by the Reserve Fund by allocating proceeds (including transferred proceeds, if any) of any issue exclusively to the issue that financed or refinanced those amounts. Based upon that allocation method, the total amount of the Reserve Fund is allocated among the outstanding water and sewer issues of the City secured thereby as follows: Proceeds contributed Reserve Fund Outstanding Issue to Reserve Fund Allocation Water and Sewer Revenue Bonds, 2003 Series A Water and Sewer Revenue and Refunding Bonds, 2008 $ 343,116 910,597 $ 468,676 1,243,820 $ 1,253,713 $ 1,712,496 5.4 Absence of Other Sinking Funds. Except for the Principal and Interest Account and the allocable portion of the Reserve Fund of the Bond Fund, the City has not created or established and does not expect to create or establish any reserve fund, sinking fund or other similar fund that is reasonably expected to be used directly or indirectly to pay debt service on the Bonds or any pledged fund with respect to which there is reasonable assurance that money will be available in that fund to pay debt service on the Bonds even if the City were to encounter financial difficulties. 6. Restrictions on Investing Proceeds of the Bonds in Higher Yielding Investments. 6.1 Calculation of Yield on Bonds. The yield on the Bonds has been calculated as that yield which when used in computing the present worth of all payments of principal of and interest on the Bonds produces an amount equal to the issue price of the Bonds. The "issue price" of the Bonds is the initial offering price (including original issue discount or premium, if any) at which a substantial amount (at least 10%) of each maturity of the Bonds have been sold to the public (not including bond houses, brokers, or other intermediaries). Based on the -4- 51217541.1 Certificate of Purchaser attached hereto as Exhibit A, the yield on the Bonds has been calculated to be 2.014464%. In determining this yield, no adjustments were made for Purchaser's discount or other costs of issuance of the Bonds. However, pursuant to the special yield calculation rule provided by Treasury Regulations Section 1.148-4(b)(3)(ii)(B), for the purposes of determining the yield on the Bonds, those Bonds maturing in 2022 and 2023 were treated as redeemed at par on May 1, 2022, because such redemptions would produce the lowest yield on the Bonds. 6.2 Calculation of Yield on Acquired Obligations. The yield on the Acquired Obligations has been calculated (using the same method and frequency intervals used in calculating the yield on the Bonds) as that yield which when used in computing the present worth of all payments of principal of and interest on the Acquired Obligations produces an amount equal to the purchase price of the Acquired Obligations. The purchase price of the Acquired Obligations is their subscription price paid on the issue date to the Division of Special Investments of the United States Bureau of Public Debt, which subscription price is deemed to be the fair market value of the Acquired Obligations pursuant to Treasury Regulations § 1.148- 5(d)(6)(i). As so determined, the yield on the Acquired Obligations is 0.198892%, 1.815572% less than the yield on the Bonds. 6.3 Restrictions on Investment of Proceeds in Higher Yielding Investments. (a) Proceeds in Refunding Escrow. The applicable temporary period for investing proceeds of the Bonds held in the refunding escrow is 30 days after the issue date, but the City elects to waive this temporary period, and those proceeds (including investment proceeds) will not be invested at a yield higher than the yield on the Bonds. Amounts held in the refunding escrow that are not proceeds of the Bonds but instead are transferred from the Reserve Fund allocable to the prior issue or from a bona fide debt service fund for the prior issue will not be invested at a yield higher than the yield on the prior issue whose debt service those amounts are allocated to pay pursuant to the Refunding. (b) Proceeds Used for Costs of Issuance. Proceeds of the Bonds to be used to pay costs of issuance of the Bonds will be spent for that purpose on the issue date and not be invested. (c) Reserve Fund Amounts. Amounts held in the Reserve Fund and earnings thereon may be invested in higher yielding investments so long as the amount of such investments (valued at market value) so allocated to the Bonds does not exceed the least of 10% of the proceeds of the Outstanding Parity Bonds, maximum annual debt service on the Outstanding Parity Bonds and 125% average annual debt service on the Outstanding Parity Bonds, which is a reasonably required reserve as described in Section 5.3. (d) Interest Account, Serial Bond Principal Account and Term Bond Principal Account. Amounts treated as replacement proceeds of the Bonds because they are held in the Interest Account, Serial Bond Principal Account and Term Bond Principal Account may be invested in higher yielding investments for a temporary period not exceeding 13 months from the date of their deposit in the Interest Account, Serial Bond Principal Account and Term Bond Principal Account. -5- 51217541.1 (e) Investment Earnings. Investment proceeds of the Bonds (other than investment earnings on Acquired Obligations in the refunding escrow) for which no other temporary period is available may be invested in higher yielding investments for a temporary period of one year from the date of receipt of those investment earnings. (f) Restricted Yield Investments. Proceeds (and amounts treated as replacement proceeds) of the Bonds that may not be invested in higher yielding investments will be invested only in (i) obligations purchased at fair market value in bona fide, arm's- length transactions in an established market for those obligations and having yields not materially higher than the yield on the Bonds when calculated using the same frequency interval of compounding interest as used for the Bonds, (ii) obligations the interest on which is excluded from gross income under Section 103 of the Code that are not private activity bonds under Section 141 of the Code (or obligations treated as tax-exempt obligations under Section 103 of the Code, e.g., obligations issued by certain qualified regulated investment companies that invest, to the extent practicable, all of their assets in tax-exempt governmental bonds and meet certain other conditions), and Demand Deposit Securities issued by the United States Treasury pursuant to the State and Local Government Series program, or (iii) other United States Treasury Obligations—State and Local Government Series having yields not materially higher than the yield on the Bonds. 7. Compliance with Arbitrage Rebate Requirement or Conditions for Exception From Arbitrage Rebate Requirement. 7.1 General Arbitrage Rebate Compliance. The Bonds are subject to the rebate requirement imposed by Section 148(f) of the Code, and therefore the City, in the manner and to the extent required by that Section, will calculate and rebate to the United States any investment earnings on gross proceeds of the Bonds that are in excess of the amounts that would have been earned if those gross proceeds had been invested at the yield on the Bonds, plus any income attributable to such excess earnings. Investment earnings on amounts held in the Principal and Interest Account will not be taken into account for this purpose at any time, even if the amount earned is $100,000 or more in a bond year, because the Bonds bear interest at fixed rates (i.e., rates that do not vary during the term of the Bonds) and have an average maturity of at least 5 years. If the City for any reason fails to comply with the rebate requirement to the extent applicable to the Bonds, the City, to the extent permitted and required by Section 148(f)(7) of the Code, will pay any penalty that may be necessary to preserve the tax exemption for interest on the Bonds. However, it is not expected that any rebate amount will become payable in respect of the Bonds because, as described in Section 6.2, the proceeds of the Bonds held in the refunding escrow to carry out the Refunding will be irrevocably invested in Acquired Obligations at a yield substantially lower than the yield on the Bonds, and proceeds used for issuance costs of the Bonds will be spent for that purpose on the issue date. 8. Bonds Meet Other Arbitrage Requirements. 8.1 No Other Governmental Obligations Part of This Issue. There are no other obligations of the City that are being sold at substantially the same time (less than 15 days apart) as the Bonds pursuant to the same plan of financing and that are reasonably expected to be paid from substantially the same source of funds. -6- 51217541.1 8.2 No Replacement of Funds Invested in Higher Yielding Investments. No portion of the proceeds of the Bonds will be used directly or indirectly to replace funds of the City invested in higher yielding investments. 8.3 No Abusive Arbitrage Device. The primary, bona fide governmental purpose of issuing the Bonds is to finance the costs of the Refunding. No action is being taken or will be taken in connection with the issuance of the Bonds that has the effect of (i) enabling the City to exploit the difference between tax-exempt and taxable interest rates to obtain a material financial advantage by investing any portion of the gross proceeds of the Bonds over any period of time, and (ii) overburdening the tax-exempt bond market as a result of issuing more Bonds, issuing the Bonds earlier, or allowing the Bonds to remain outstanding longer than is otherwise reasonably necessary to finance the costs of the Refunding. 8.4 No Intent to Earn Impermissible Arbitrage Profit. The City will not take any intentional action to earn any impermissible arbitrage profit from the investment of gross proceeds of the Bonds. 9. Bonds Meet Other Requirements for Tax Exemption. 9.1 Bonds in Registered Form. The Bonds are issued only in registered form. 9.2 No Federal Guaranty. Except as otherwise permitted by the Code, payment of the principal of or interest on the Bonds is not guaranteed in whole or in part by the United States or any agency or instrumentality thereof. 9.3 Information Return to Be Filed. The City will cause a Form 8038-G Information Return respecting the Bonds to be timely filed with the Internal Revenue Service. 9.4 Bonds Not Hedge Bonds. On the date of issue of the prior issue (or, if any prior issue also was part of a refunding issue, on the date of issue of the original new money obligations being refunded with proceeds of the Bonds --the "original new money obligations"), the City reasonably expected that (i) at least 85% of the spendable proceeds of the prior issue or original new money obligations would be used to carry out the governmental purposes of the prior issue or original new money obligations within the 3 -year period beginning on their date of issue, and (ii) not more than 50% of the proceeds of the prior issue or original new money obligations would be invested in nonpurpose investments having a substantially guaranteed yield for 4 years or more. 9.5 Post -Issuance Compliance Procedures. The Director of Finance and Budget behalf of the City adopts and will implement in respect of the Bonds the "Post -Issuance Compliance Procedures for Tax -Exempt Bonds" attached hereto as Exhibit B to facilitate compliance by the City with the applicable requirements of the Code that must be satisfied after the issue date to maintain the tax exemption for interest on the Bonds after the issue date. 10. Bonds Tax -Exempt and Not Arbitrage Bonds. The City expects that bond counsel to the City will rely upon the foregoing facts, estimates and circumstances in existence on the issue date and the reasonable expectations of the -7- 51217541.1 City as to future events respecting the Bonds to enable them to conclude that it is not expected that proceeds of the Bonds will be used in any manner that would cause the Bonds to be arbitrage bonds and to provide their opinion that the Bonds are governmental obligations the interest on which is excluded from gross income for federal income tax purposes under Section 103 of the Code. DATED May 31, 2012. 51217541.1 CITY OF YAKIMA, WASHINGTON By: -8- Cindy J. Epperson Director of Finance and Budget EXHIBIT A CERTIFICATE OF PURCHASER SEATTLE -NORTHWEST SECURITIES CORPORATION, Seattle, Washington (the "Purchaser"), purchaser of the $9,400,000 par value Water and Sewer Revenue Refunding Bonds, 2012 (the "Bonds"), of the City of Yakima, Washington (the "City"), certify --the following facts for purpose of calculating the yield on the Bonds: 1. Authorized Representative. The undersigned is the duly authorized representative of the Purchaser. 2. Bona Fide Public Offering. The Purchaser made a bona fide public offering of the Bonds to the public ("public buyers"), excluding bond houses, brokers, and similar persons acting in the capacity of underwriters or wholesalers, at the prices shown on the inside cover of the Official Statement for the Bonds dated April 30, 2012 (the "sale date"). 3. Reasonable Expectations. On the sale date, based upon our assessment of market conditions, investor demand, sale and offering prices for ° comparable bonds, and the recent behavior of interest rates, the Purchaser reasonably expected that a substantial portion (at least 10% of the Bonds of each maturity) would be sold to public buyers at the respective reoffering prices. 4. "Issue Price" of Bonds. Based upon the Purchaser's records reflecting its public offering of the Bonds, a substantial portion (at least 10%) of the Bonds of each maturity have been sold to public buyers at the following reoffering prices expressed as a percentage of par: Maturity Years Amounts Reoffering Prices 2012 $ 45,000. 100.623% 2014 590,000 103.109 2015 565,000 103.589 2015 300,000 106.944 2016 85,000 103.649 2017 900,000 108.371 2018 930,000 108.377 2019 955,000 114.909 2020 1,000,000 114.669 2021 1,035,000 114.045 2022 1,075,000 113.194 2023 1,120,000 112.166 DATED as of May 31,'2012. siarnm_.1 SEATTLE -NORTHWEST SECURITIES CORPORATION By A e Lindsay A. Sovde, Senior Vice President EXHIBIT B POST -ISSUANCE COMPLIANCE PROCEDURES FOR TAX-EXEMPT BONDS 1. Purpose. The purpose of these post -issuance compliance procedures ("Compliance Procedures") for tax-exempt bonds and other obligations (sometimes collectively referred to herein as "bonds" or "tax-exempt bonds") issued by the City of Yakima, Washington (the "City") for which federal tax exemption is provided by the Internal Revenue Code of 1986, as amended (the "Code"), is to facilitate compliance by the City with the applicable requirements of the Code that must be satisfied after the issue date of the bonds to maintain the tax exemption for the bonds after the issue date. 2. Responsibility for Monitoring Post -Issuance Tax Compliance. The City Council of the City has the overall, final responsibility for monitoring whether the City is in compliance with post -issuance federal tax requirements for the City's tax-exempt bonds. However, the City Council has delegated the primary operating responsibility to monitor the City's compliance with post -issuance federal tax requirements for the City's bonds. The City Council also has authorized and directed the Director of Finance and Budget of the City to adopt and implement on behalf of the City these Compliance Procedures. 3 Arbitrage Yield Restriction and Rebate Requirements. The Director of Finance and Budget will maintain or cause to be maintained records of: (a) purchases and sales of investments made with bond proceeds (including amounts treated as "gross proceeds" of bonds under section 148 of the Code) and receipts of earnings on those investments; (b) expenditures made with bond proceeds (including investment earnings on bond proceeds) in a timely and diligent manner for the governmental purposes of the bonds, such as for the costs of purchasing, constructing and/or renovating property and facilities; (c) information showing, where applicable for a particular calendar year, that the City was eligible to be treated as a "small issuer" in respect of bonds issued in that calendar year because the City did not reasonably expect to issue more than $5,000,000 of tax-exempt bonds in that calendar year; (d) calculations that will be sufficient to demonstrate to the Internal Revenue Service ("IRS") upon an audit of a bond issue that, where applicable, the City has complied with an available spending exception to the arbitrage rebate requirement in respect of that bond issue; (e) calculations that will be sufficient to demonstrate to the IRS upon an audit of a bond issue for which no exception to the arbitrage rebate requirement was applicable, that the rebate amount, if any, that was payable to the United States of America in respect of 51217465.1 investments made with gross proceeds of that bond issue was calculated and timely paid with Form 8038-T timely filed with the IRS; and (f) information and records showing that investments held in yield -restricted advance refunding or defeasance escrows for bonds, and investments made with unspent bond proceeds after the expiration of the applicable temporary period, were not invested in higher - yielding investments. 4. Restrictions on Private Business Use and Private Loans. The Director of Finance and Budget will adopt procedures calculated to educate and inform the principal operating officials of those departments, including utility departments, if any, of the City (the "users") for which land, buildings, facilities and equipment ("property") are financed with proceeds of tax- exempt bonds about the restrictions on private business use that apply to that property after the bonds have been issued, and of the restriction on the use of proceeds of tax-exempt bonds to make or finance any loan to any person other than a state or local government unit. In particular, following the issuance of bonds for the financing of property, the Director of Finance and Budget shall provide to the users of the property a copy of these Compliance Procedures and other appropriate written guidance advising that: (a) "private business use" means use by any person other than a state or local government unit, including business corporations, partnerships, limited liability companies, associations, nonprofit corporations, natural persons engaged in trade or business activity, and the United States of America and any federal agency, as a result of ownership of the property or use of the property under a lease, management or service contract (except for certain "qualified" management or service contracts), output contract for the purchase of electricity or water, privately sponsored research contract (except for certain "qualified" research contracts), "naming rights" contract, "public-private partnership" arrangement, or any similar use arrangement that provides special legal entitlements for the use of the bond -financed property; (b) under section 141 of the Code, no more than 10% of the proceeds of any tax-exempt bond issue (including the property financed with the bonds) may be used for private business use, of which no more than 5% of the proceeds of the tax-exempt bond issue (including the property financed with the bonds) may be used for any "unrelated" private business use—that is, generally, a private business use that is not functionally related to the governmental purposes of the bonds; and no more than the lesser of $5,000,000 or 5% of the proceeds of a tax-exempt bond issue may be used to make or finance a loan to any person other than a state or local government unit; (c) before entering into any special use arrangement with a nongovernmental person that involves the use of bond -financed property, the user must consult with the Director of Finance and Budget, provide the Director of Finance and Budget with a description of the proposed nongovernmental use arrangement, and determine whether that use arrangement, if put into effect, will be consistent with the restrictions on private business use of the bond -financed property; 2 51217465 1 (d) in connection with the evaluation of any proposed nongovernmental use arrangement, the Director of Finance and Budget should consult with nationally recognized bond counsel to the City as may be necessary to obtain federal tax advice on whether that use arrangement, if put into effect, will be consistent with the restrictions on private business use of the bond -financed property, and, if not, whether any "remedial action" permitted under section 141 of the Code may be taken by the City as a means of enabling that use arrangement to be put into effect without adversely affecting the tax-exempt status of the bonds that financed the property; and (e) the Director of Finance and Budget and the user of the property shall maintain records of such nongovernmental uses, if any, of bond -financed property, including copies of the pertinent leases, contracts or other documentation, and the related determination that those nongovernmental uses are not inconsistent with the tax-exempt status of the bonds that financed the property. 5. Records to be Maintained for Tax -Exempt Bonds. It is the policy of the City that, unless otherwise permitted by future IRS regulations or other guidance, written records (which may be in electronic form) will be maintained with respect to each bond issue for as long as those bonds remain outstanding, plus three years. For this purpose, the bonds include refunding bonds that refund the original bonds and thereby refinance the property that was financed by the original bonds. The records to be maintained are to include: (a) the official Transcript of Proceedings for the original issuance of the bonds; (b) records showing how the bond proceeds were invested, as described in 3(a) above; (c) records showing how the bond proceeds were spent, as described in 3(b) and 4(c) above, including purchase contracts, construction contracts, progress payment requests, invoices, cancelled checks, payment of bond issuance costs, and records of "allocations" of bond proceeds to make reimbursement for project expenditures made before the bonds were actually issued; (d) information, records and calculations showing that, with respect to each bond issue, the City was eligible for the "small issuer" exception or one of the spending exceptions to the arbitrage rebate requirement or, if not, that the rebate amount, if any, that was payable to the United States of America in respect of investments made with gross proceeds of that bond issue was calculated and timely paid with Form 8038-T timely filed with the IRS, as described in 3(c), (d) and (e) above; and (e) records showing that special use arrangements, if any, affecting bond - financed property made by the City with nongovernmental persons, if any, are consistent with applicable restrictions on private business use of property financed with proceeds of tax-exempt 3 51217465.1 bonds and restrictions on the use of proceeds of tax-exempt bonds to make or finance loans to any person other than a state or local government unit, as described in 4 above. The basic purpose of the foregoing record retention policy for the City's tax-exempt bonds is to enable the City to readily demonstrate to the IRS upon an audit of any tax-exempt bond issue that the City has fully complied with all federal tax requirements that must be satisfied after the issue date of the bonds so that those bonds continue to be tax-exempt under the Code. 6. Identification and Remediation of Potential Violations of Federal Tax Requirements for Tax -Exempt Bonds. (a) So long as any of the City's tax-exempt bond issues remain outstanding, the Director of Finance and Budget will periodically consult with the users of the City's bond - financed property to review and determine whether current use arrangements involving that property continue to comply with applicable federal tax requirements as described in these Compliance Procedures. This may be accomplished, for example, by periodically meeting with users, providing questionnaires to users about current use arrangements, or adopting other protocols reasonably calculated to ensure compliance with applicable federal tax requirements on a continuing basis. This periodic review may be scheduled, for example, at or before the times that the City is required to file with the Municipal Securities Rulemaking Board the annual financial information and operating data pursuant to the City's undertaking to provide continuing disclosure with respect to outstanding bond issues. (b) If at any time during the life of an issue of tax-exempt bonds, the City discovers that a violation of federal tax requirements applicable to that issue may have occurred, the Director of Finance and Budget will consult with bond counsel to determine whether any such violation actually has occurred and, if so, take prompt action to accomplish an available remedial action under applicable Internal Revenue Service regulations or to enter into a closing agreement with the Internal Revenue Service under the Voluntary Closing Agreement Program described under Notice 2008-31 or other future published guidance. 7. Education Policy With Respect to Federal Tax Requirements for Tax -Exempt Bonds. It is the policy of the City that the Director of Finance and Budget and his or her staff, as well as the principal operating officials of those departments of the City for which property is financed with proceeds of tax-exempt bonds should be provided with education and training on federal tax requirements applicable to tax-exempt bonds. The City recognizes that such education and training is vital as a means of helping to ensure that the City remains in compliance with those federal tax requirements in respect of its bonds. The City therefore will enable and encourage those personnel to attend and participate in educational and training programs offered by, among others, the Washington Municipal Treasurers Association and the Washington Finance Officers Association with regard to the federal tax requirements applicable to tax-exempt bonds. 4 51217465.1 Washington State Auditor's Office Financial Statements and Federal Single Audit Report City of Yakima Yakima County Audit Period January 1, 2010 through December 31, 2010 Issue Date September 26, 2011 Report No. 1006424 Washington State Auditor Brian Sonntag September 26, 2011 Council City of Yakima Yakima, Washington Report on Financial Statements and Federal Single Audit Please find attached our report on the City of Yakima's financial statements and compliance with federal laws and regulations. We are issuing this report in order to provide information on the City's financial condition. Sincerely, BRIAN SONNTAG, CGFM STATE AUDITOR Insurance Building, P.O. Box 40021 • Olympia, Washington 98504-0021 • (360) 902-0370 • TDD Relay (800) 833-6388 FAX (360) 753-0646 • http://www.sao.wa.gov Table of Contents City of Yakima Yakima County January 1, 2010 through December 31, 2010 Federal Summary 1 Schedule of Federal Audit Findings and Questioned Costs 3 Schedule of Prior Federal Audit Findings 14 Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards 15 Independent Auditor's Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 17 Independent Auditor's Report on Financial Statements 20 Financial Section 22 Federal Summary City of Yakima Yakima County January 1, 2010 through December 31, 2010 The results of our audit of the City of Yakima are summarized below in accordance with U.S. Office of Management and Budget Circular A-133. FINANCIAL STATEMENTS An unqualified opinion was issued on the financial statements of the governmental activities, the business -type activities, each major fund and the aggregate remaining fund information. Internal Control Over Financial Reporting: • Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over financial reporting that we consider to be significant deficiencies. • Material Weaknesses: We identified no deficiencies that we consider to be material weaknesses. We noted no instances of noncompliance that were material to the financial statements of the City. FEDERAL AWARDS Internal Control Over Major Programs: • Significant Deficiencies: We identified deficiencies in the design or operation of internal control over major federal programs that we consider to be significant deficiencies. • Material Weaknesses: We identified deficiencies that we consider to be material weaknesses. We issued an unqualified opinion on the City's compliance with requirements applicable to each of its major federal programs, with the exception of the Public Safety Partnership and Community Policing Grants Program, ARRA Edward Byrne Memorial Justice Assistance Grant, ARRA Energy Efficiency and Conservation Block Grant and ARRA Public Safety Partnership and Community Policing Grants Program on which we issued a qualified opinion on compliance with applicable requirements. We reported findings that are required to be disclosed under section 510(a) of OMB Circular A-133. Washington State Auditor's Office 1 Identification of Major Programs: The following were major programs during the period under audit: CFDA No. 14.218 14.253 14.228 16.710 16.710 16.804 20.507 20.507 81.128 Program Title Community Development Block Grant - Entitlement Grants ARRA - Community Development Block Grant Cluster - Entitlement Grants (Recovery Act) ARRA - Community Development Block Grants - State's Program (Recovery Act) Public Safety Partnership and Community Policing Grants ARRA - Public Safety Partnership and Community Policing Grants (Recovery Act ARRA - Edward Byrne Memorial Justice Assistance Grant (Recovery Act) Transit Cluster - Federal Transit Formula Grants ARRA - Transit Cluster - Federal Transit Formula Grants (Recovery Act) ARRA - Energy Efficiency and Conservation Block Grant (Recovery Act) The dollar threshold used to distinguish between Type A and Type B programs, as prescribed by OMB Circular A-133, was $452,802. The City did not qualify as a low-risk auditee under OMB Circular A-133. Washington State Auditor's Office 2 Schedule of Federal Audit Findings and Questioned Costs City of Yakima Yakima County January 1, 2010 through December 31, 2010 1. The City of Yakima does not have adequate internal controls in place to ensure compliance with the Federal Davis Bacon and Suspension and Debarment requirements. CFDA Number and Title: Federal Grantor Name: Federal Award/Contract Number: Pass-through Entity Name: Pass-through Award/Contract Number: Questioned Cost Amount: Description of Condition 81.128 ARRA — Energy Efficiency and Conservation Block Grant U.S. Department of Energy DE-SC0003043 NA NA $0 During 2010, the City spent $387,011 in Energy Efficiency and Conservation Block Grant funding it received from the US Department of Energy for building upgrades, purchase of recycling containers and to replace street lights. Recipients of this grant must have internal controls in place to ensure compliance with federal requirements. We found the following control deficiencies and noncompliance: Davis Bacon Act Laborers working on federally -funded construction projects must be paid prevailing wages prescribed by the U.S. Department of Labor. The City included the required federal prevailing wage rate information in the project manual with a clause that the general contractor and subcontractors are required to submit weekly certified payrolls with each pay request. However, we noted the City did not collect weekly certified payroll reports from contractors and subcontractors as required by federal regulations. The amount paid to laborers was $34,790, or nine percent, of the grant total of $387,011. Suspension and Debarment Recipients of federal grants are prohibited from contracting with or making subawards to parties that are suspended or debarred from doing business with the federal government. For vendor contracts of $25,000 or more and all subawards, the City must ensure the vendor or subrecipient is not suspended or debarred. This can be accomplished by obtaining a written certification from the vendor or subrecipient stating that its organization has not been suspended or debarred. Alternatively, the City may Washington State Auditor's Office 3 check for suspended or debarred parties by reviewing the federal Excluded Parties List issued by the U.S. General Services Administration. This requirement must be met prior to making the first payment to the vendor. The City paid one vendor $115,417 with Energy Efficiency and Conservation Block Grant funding prior to verifying the vendor was not suspended or debarred. In addition, the grantee must inform the primary contractor or subrecipient of the requirement to check the suspension and debarment status of any covered transactions they enter into with subcontractors or subrecipients. The City did not communicate this requirement to one of it's general contractors paid $93,752 in federal funds. Cause of Condition Davis Bacon Act The City does not have a process in place to ensure certified weekly payrolls are submitted for all federally funded projects. Suspension and Debarment The City does not have a process to ensure all departments are checking for suspension and debarment prior to entering into a contract or making purchases. Effect of Condition and Questioned Costs Davis Bacon Act Without adequate internal controls over Davis Bacon requirements, the City cannot ensure contractors and subcontractors pay the proper prevailing wages. This could result in underpayment to laborers working on future projects. We obtained the certified payroll reports from the contractor and subcontractors for the period in question. We determined the laborers were paid prevailing wages; therefore we are not questioning costs. Suspension and Debarment Without adequate internal controls in place over suspension and debarment, the City cannot ensure contractors or subcontractors are not suspended or debarred from participating in federal programs. This could result in a request from the granting agency for repayment of federal funds and jeopardize future federal funding. We found the City did verify the general contractor was not suspended or debarred on October 15, 2010. Therefore, we are not questioning these costs. Washington State Auditor's Office 4 Recommendation We recommend the City: • Establish controls to ensure the City collects weekly certified payroll reports from all contractors and subcontractors as required by federal regulations. • Provide training to employees who are responsible for using federal grant funds to ensure they have adequate knowledge of the grants and their compliance requirements. • Establish a process to ensure all departments are checking for suspension and debarment prior to entering into a contract or making purchases. City's Response The City appreciates the partnership we maintain with the Washington State Auditor's Office. The City believes that it does have adequate systems in place with regards to the verification of weekly certified payrolls. Our Engineering Contract Specialist maintains an extensive checklist of compliance requirements for contracts managed by the Engineering Division, including verification of certified payrolls. In this specific circumstance, the contract included the requirement, and the external architect verbally agreed to collect the required documents. Even though the vendor maintained these reports in accordance with the contract and federal Davis Bacon regulations, neither the architect nor the City obtained these required documents. This appears to be an isolated incident, and not a systemic breakdown of the control. This is being communicated to the Engineering Division as a reminder to maintain adequate documentation in accordance with Davis Bacon regulations. In regards to the suspension and debarment issue, the Divisions that regularly administer federal grants are fully aware of the suspension and debarment rules. In this particular instance, the payment was originated in a different City division. We widely distributed this finding to all operating divisions, and communicated the importance of adhering to this requirement. Unfortunately, this finding is being repeated for the 2010 audit, again with a City division that does not regularly administer grant funding. Even though none of these instances of non-compliance resulted in questioned costs, we take seriously the federal grant requirements, and will continue to educate City staff on applicable rules. Auditor's Remarks We thank the City for its cooperation and assistance during the audit and acknowledge its commitment to improving the conditions described. We will review the status of these issues during our next audit. Applicable laws and Regulations U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non -Profit Organizations, Section 300, states in part: The auditee shall: Washington State Auditor's Office 5 (b) Maintain internal control over Federal programs that provides reasonable assurance that the auditee is managing Federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a material effect on each of its Federal programs. (c) Comply with laws, regulations, and the provisions of contracts or grant agreements related to each of its Federal programs. Title 29, Code of Federal Regulations, Section 3.3, states in part: (b) Each contractor or subcontractor engaged in the construction, prosecution, completion, or repair of any public building or public work, or building or work financed in whole or in part by loans or grants from the United States, shall furnish each week a statement with respect to the wages paid each of its employees engaged on work covered by this part 3 and part 5 of this title during the preceding weekly payroll period. This statement shall be executed by the contractor or subcontractor or by an authorized officer or employee of the contractor or subcontractor who supervises the payment of wages, and shall be on the back of Form WH 347, "Payroll (For Contractors Optional Use)" or on any form with identical wording. Copies of Form WH 347 may be obtained from the Government contracting or sponsoring agency or from the Wage and Hour Division Web site at http://www.dol.gov/esa/whd/forms/wh347instr.htm or its successor site. Title 2, Code of Federal Regulations, Section 180.200 - What is a covered transaction? A covered transaction is a nonprocurement or procurement transaction that is subject to the prohibitions of this part. It may be a transaction at— (a) The primary tier, between a Federal agency and a person (see appendix to this part); or (b) A lower tier, between a participant in a covered transaction and another person. Title 2, Code of Federal Regulations, Section 180.970 - Nonprocurement transaction, states: (a) Nonprocurement transaction means any transaction, regardless of type (except procurement contracts), including, but not limited to the following: (1) Grants. (2) Cooperative agreements. (3) Scholarships. (4) Fellowships. (5) Contracts of assistance. (6) Loans. (7) Loan guarantees. Washington State Auditor's Office 6 (8) Subsidies. (9) Insurances. (10) Payments for specified uses. (11) Donation agreements. (b) A nonprocurement transaction at any tier does not require the transfer of Federal funds. Title 2, Code of Federal Regulations, Section 180.220 - Are any procurement contracts included as covered transactions? (b) Specifically, a contract for goods or services is a covered transaction if any of the following applies: (1) The contract is awarded by a participant in a nonprocurement transaction that is covered under Sec. 180.210, and the amount of the contract is expected to equal or exceed $25,000. Title 2, Code of Federal Regulations, Section 180.300 — What must I do before I enter into a covered transaction with another person at the next lower tier? When you enter into a covered transaction with another person at the next lower tier, you must verify that the person with whom you intend to do business is not excluded or disqualified. You do this by: (a) Checking the EPLS; or (b) Collecting a certification from that person if allowed by this rule; or (c) Adding a clause or condition to the covered transaction with that person Washington State Auditor's Office 7 Schedule of Federal Audit Findings and Questioned Costs City of Yakima Yakima County January 1, 2010 through December 31, 2010 2. The City of Yakima did not ensure recipients of its federal funding were not suspended or debarred from participating in federal programs or maintain appropriate time and effort records to support payroll costs charged to the programs. CFDA Number and Title: Federal Grantor Name: Federal Award/Contract Number: Pass-through Entity Name: Pass-through Award/Contract Number: Questioned Cost Amount: Description of Condition 16.710 ARRA - Public Safety Partnership and Community Policing Grants 16.804 ARRA - Edward Byrne Memorial Justice Assistance Grant U.S. Department of Justice 2009-CKWX0186; 2008-CKWX0543; 2009RKWX0902 and ARRA 2009 -SB -B9-1257 NA NA $0 During 2010, the City spent $735,547 in federal Public Safety Partnership and Community Policing (COPS) grant funds for community policing and communication systems. The City also spent $282,233 in federal Edward Byrne Memorial Justice Assistance Grant funds for regional crime -prevention programs. Recipients of federal grants must have internal controls to ensure they comply with federal requirements. We found the following control deficiencies and noncompliance: Suspension and Debarment Federal grant recipients are prohibited from contracting with or making sub -awards to parties that are suspended or debarred from doing business with the federal government. If a vendor certifies in writing that it has not been suspended or debarred, the grantee may rely on that certification. Alternatively, the grantee may check for suspended or debarred parties by reviewing the federal Excluded Parties List System issued by the U.S. General Services Administration. Recipients must meet this requirement prior to the first payment to the vendor. The City paid vendors $59,798 with COPS grant funding and $74,000 with Byrne grant funding but did not verify the vendors were not suspended or debarred. Washington State Auditor's Office 8 Allowable Costs/Cost Principles The objective of the COPS Hiring Grant is to pay for training, salaries and benefits for full-time, entry-level, new or rehired additional, career law enforcement officers for deployment into community -oriented policing. During 2010 the City spent $293,529 in federally funded payroll costs under this program. Employees' salaries and benefits charged to federal grants are to be supported by adequate time and effort documentation. Depending on the number and type of activities an employee works on, documentation can be provided in the form of a semiannual certification or a monthly personnel activity report, such as a time sheet. We found the City did not have adequate internal controls to ensure time and effort documentation was maintained for seven officers hired with COPS grant funding. Cause of Condition Suspension and Debarment We issued findings over internal controls weaknesses related to suspension and debarment requirements in the last two audits. While the City has taken measures at the departments affected, the City needs to establish monitoring controls to ensure compliance with the requirement city-wide. The City still does not have a process to ensure all departments are checking for suspension and debarment prior to entering into a contract or making purchases. One vendor funded by both grants was procurred through a state contract. The City did not know it had a responsibility to verify vendors paid through state contracts were not suspended or debarred. Allowable Costs/Cost Principles Some departments of the City do not frequently administer federal grants and are not familiar with all of the requirements. The City did not monitor all of its departments to ensure each had adequate internal controls to meet time and effort requirements. Effect of Condition Suspension and Debarment Without adequate internal controls, the City cannot ensure that vendors paid with federal funding are not suspended or debarred from participating in federal programs. This could result in repayment to the grantor agency and could jeopardize future awards. We verified the vendors paid with grant funds were not suspended or debarred; therefore, we are not questioning the costs. Allowable Costs/Cost Principles Without proper time and effort records, the City was unable to substantiate the accuracy of payroll costs charged to the grant in the manner required by the federal grantor. We were able to view other documentation to determine the charges were accurate and are not questioning these costs. Washington State Auditor's Office 9 Recommendation We recommend the City: • Establish procedures to verify the suspension and debarment status of all vendors with contracts that exceed $25,000 prior to payment and retain records to support this verification. • Establish adequate internal controls to ensure time and effort records are maintained in compliance with federal requirements. • Ensure employees involved in the management of federal programs receive sufficient training related to the federal requirements. City's Response In regards to the suspension and debarment issue, the Divisions that regularly administer federal grants are fully aware of the suspension and debarment rules. In this particular instance, the payment was originated in a different City division. We widely distributed this finding to all operating divisions, and communicated the importance of adhering to this requirement. Unfortunately, this finding is being repeated for the 2010 audit, again with a City division that does not regularly administer grant funding. The City understands the requirements of maintaining time and effort records. In the particular circumstance of the COPS Hiring Grant, a separate operating fund was established so that the payroll expenses related to the seven officers authorized by the grant would be accounted for separately. The Police Department command staff did approve the time records that charged the officers to this funding source. In addition, the Department of Justice COPS office requires an online quarterly report of sworn -officer FTEs, which was certified and submitted within the required timelines. However, it appears that this approval did not technically meet the certification rule. The City will ensure that applicable certification procedures are in place for grants with payroll expenses. Even though none of these instances of non-compliance resulted in questioned costs, we take seriously the federal grant requirements, and will continue to educate City staff on applicable rules. Auditor's Remarks We thank the City for its cooperation and assistance during the audit and acknowledge its commitment to improving the conditions described. We will review the status of these issues during our next audit. Applicable laws and Regulations U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non -Profit Organizations, Section 300, states in part: The auditee shall: Washington State Auditor's Office 10 (b) Maintain internal control over Federal programs that provides reasonable assurance that the auditee is managing Federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a material effect on each of its Federal programs. (c) Comply with laws, regulations, and the provisions of contracts or grant agreements related to each of its Federal programs. Title 2, Code of Federal Regulations, Section 180.200 - What is a covered transaction? A covered transaction is a nonprocurement or procurement transaction that is subject to the prohibitions of this part. It may be a transaction at— (a) The primary tier, between a Federal agency and a person (see appendix to this part); or (b) A lower tier, between a participant in a covered transaction and another person. Title 2, Code of Federal Regulations, Section 180.220 - Are any procurement contracts included as covered transactions? (b) Specifically, a contract for goods or services is a covered transaction if any of the following applies: (1) The contract is awarded by a participant in a nonprocurement transaction that is covered under Sec. 180.210, and the amount of the contract is expected to equal or exceed $25,000. Title 2, Code of Federal Regulations, Section 180.970 - Nonprocurement transaction, states: (a) Nonprocurement transaction means any transaction, regardless of type (except procurement contracts), including, but not limited to the following: (1) Grants. (2) Cooperative agreements. (3) Scholarships. (4) Fellowships. (5) Contracts of assistance. (6) Loans. (7) Loan guarantees. (8) Subsidies. (9) Insurances. (10) Payments for specified uses. (11) Donation agreements. (b) A nonprocurement transaction at any tier does not require the transfer of Federal funds. Washington State Auditor's Office 11 Title 2, Code of Federal Regulations, Section 180.300 — What must I do before I enter into a covered transaction with another person at the next lower tier? When you enter into a covered transaction with another person at the next lower tier, you must verify that the person with whom you intend to do business is not excluded or disqualified. You do this by: (a) Checking the EPLS; or (b) Collecting a certification from that person if allowed by this rule; or (c) Adding a clause or condition to the covered transaction with that person U.S. Office of Management and Budget Circular A-87, Cost Principles for State, Local and Indian Tribal Governments (2 CFR Part 225), states in part: Appendix A, Section C(1) To be allowable under Federal awards, costs must meet the following general criteria: b. Be allocable to Federal awards under the provisions of 2 CFR part 225. d. Conform to any limitations or exclusions set forth in these principles, Federal laws, terms and conditions of the Federal award, or other governing regulations as to types or amounts of cost items. j. Be adequately documented. Appendix B, Section 8(h) (1) Charges to Federal awards for salaries and wages, whether treated as direct or indirect costs, will be based on payrolls documented in accordance with generally accepted practice of the governmental unit and approved by a responsible official(s) of the governmental unit. (2) No further documentation is required for the salaries and wages of employees who work in a single indirect cost activity. (3) Where employees are expected to work solely on a single Federal award or cost objective, charges for their salaries and wages will be supported by periodic certifications that the employees worked solely on that program for the period covered by the certification. These certifications will be prepared at least semiannually and will be signed by the employee or supervisory official having first hand knowledge of the work performed by the employee. Washington State Auditor's Office 12 (4) Where employees work on multiple activities or cost objectives, a distribution of their salaries or wages will be supported by personnel activity reports or equivalent documentation which meets the standards in subsection 8.h.(5) of this appendix unless a statistical sampling system (see subsection 8.h.(6) of this appendix) or other substitute system has been approved by the cognizant Federal agency. Such documentary support will be required where employees work on (a) More than one Federal award, (b) A Federal award and a non -Federal award (c) An indirect cost activity and a direct cost activity, (d) Two or more indirect activities which are allocated using different allocation bases, or (e) An unallowable activity and a direct or indirect cost activity. Washington State Auditor's Office 13 Schedule of Prior Federal Audit Findings City of Yakima Yakima County January 1, 2010 through December 31, 2010 This schedule presents the status of federal findings reported in prior audit periods. The status listed below is the representation of the City of Yakima. The State Auditor's Office has reviewed the status as presented by the City. Audit Period: January 1, 2009 through January 31, 2009 Report Reference No: 1004264 Finding Reference No: 1 CFDA Number: 14.218 Federal Program Name and Granting Agency: Community Development Block Grant/Entitlement Grants, U.S. Department of Housing and Urban Development Pass -Through Agency Name: NA Finding Caption: The City's internal controls are inadequate to ensure compliance with federal suspension and debarment requirements. Background: In 2009, the City spent $1,367,251 in Community Development Block Grant program funds, $200,000 of which was disbursed to a for-profit agency for economic development purposes. The City did not ensure the for-profit agency was not suspended or debarred. Status of Corrective Action: (check one) is considered no longer valid • Fully Corrected X Partially Corrected • No Corrective Action Taken • Finding Corrective Action Taken: The Divisions that regularly administer federal grants are fully aware of the suspension and debarment rules. In this particular instance, the contract was originated in a different City division. We widely distributed this finding to all operating divisions, and communicated the importance of adhering to this requirement. Unfortunately, we are of the understanding that this finding is being repeated for the 2010 audit, again with a City division that does not regularly administer grant funding. Even though none of these instances of noncompliance resulted in questioned costs, we take seriously the federal grant requirements, and will continue to educate City staff on applicable rules. Washington State Auditor's Office 14 Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards City of Yakima Yakima County January 1, 2010 through December 31, 2010 Council City of Yakima Yakima, Washington We have audited the financial statements of the governmental activities, the business -type activities, each major fund and the aggregate remaining fund information of the City of Yakima, Yakima County, Washington, as of and for the year ended December 31, 2010, which collectively comprise the City's basic financial statements, and have issued our report thereon dated September 13, 2011. The prior year summarized comparative information has been derived from the City's 2009 basic financial statements that we issued our report thereon dated September 16, 2010. 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. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit, we considered the City's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Washington State Auditor's Office 15 COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended for the information and use of management, the Council, federal awarding agencies and pass-through entities. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. BRIAN SONNTAG, CGFM STATE AUDITOR September 13, 2011 Washington State Auditor's Office 16 Independent Auditor's Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 City of Yakima Yakima County January 1, 2010 through December 31, 2010 Council City of Yakima Yakima, Washington COMPLIANCE We have audited the compliance of the City of Yakima, Yakima County, Washington, with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2010. The City's major federal programs are identified in the Federal Summary. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of the City's management. Our responsibility is to express an opinion on the City's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non -Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the City's compliance with those requirements. As described in Findings 1 and 2 in the accompanying Schedule of Federal Audit Findings and Questioned Costs, the City did not comply with requirements regarding allowable costs/cost principles and procurement and suspension and debarment that are applicable to the Public Safety Partnership and Community Policing Grants Program, ARRA Edward Byrne Memorial Justice Assistance Grant, ARRA Energy Efficiency and Conservation Block Grant and ARRA Washington State Auditor's Office 17 Public Safety Partnership and Community Policing Grants Program programs. Compliance with such requirements is necessary, in our opinion, for the City to comply with requirements applicable to the program. In our opinion, except for the noncompliance described in the preceding paragraph, the City complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2010. INTERNAL CONTROL OVER COMPLIANCE The management of the City is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the City's internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over compliance. Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses and other deficiencies that we consider to be significant deficiencies. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. We consider the deficiencies in internal control over compliance described in the accompanying Schedule of Federal Audit Findings and Questioned Costs as Findings 1 and 2 to be material weaknesses. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. We consider the deficiencies in internal control over compliance described in the accompanying Schedule of Federal Audit Findings and Questioned Costs as Findings 1 and 2 to be significant deficiencies. The City's response to the finding identified in our audit is described in the accompanying Schedule of Federal Audit Findings and Questioned Costs. We did not audit the City's response and, accordingly, we express no opinion on it. Washington State Auditor's Office 18 This report is intended for the information of management, the Council, federal awarding agencies and pass-through entities. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. BRIAN SONNTAG, CGFM STATE AUDITOR September 13, 2011 Washington State Auditor's Office 19 Independent Auditor's Report on Financial Statements City of Yakima Yakima County January 1, 2010 through December 31, 2010 Council City of Yakima Yakima, Washington We have audited the accompanying financial statements of the governmental activities, the business -type activities, each major fund and the aggregate remaining fund information of the City of Yakima, Yakima County, Washington, as of and for the year ended December 31, 2010, which collectively comprise the City's basic financial statements as listed on page 22. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. The prior year summarized comparative information has been derived from the City of Yakima's 2009 basic financial statements and, in our report dated September 16, 2010, we expressed unqualified opinions on the respective financial statements of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, each major fund and the aggregate remaining fund information of the City of Yakima, as of December 31, 2010, and the respective changes in financial position and, where applicable, cash flows thereof, and the respective budgetary comparison for the General Fund and Community Development Fund, for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report on our consideration of the City'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 Washington State Auditor's Office 20 integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The management's discussion and analysis on pages 23 through 38, pension trust fund on page 107 and information on postemployment benefits other than pensions on pages 108 through 109 are not a required part of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. 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 performed for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non -Profit Organizations. This schedule is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. BRIAN SONNTAG, CGFM STATE AUDITOR September 13, 2011 Washington State Auditor's Office 21 Financial Section City of Yakima Yakima County January 1, 2010 through December 31, 2010 REQUIRED SUPPLEMENTAL INFORMATION Management's Discussion and Analysis - 2010 BASIC FINANCIAL STATEMENTS Statement of Net Assets — 2010 Statement of Activities — 2010 Balance Sheet — Governmental Funds — 2010 Statement of Revenues, Expenditures and Changes in Fund Balances — Governmental Funds — 2010 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities — 2010 Statement of Revenues, Expenditures and Changes in Fund Balances — Budget and Actual - General Fund — 2010 Statement of Revenues, Expenditures and Changes in Fund Balances — Budget and Actual — Community Development Fund - 2010 Statement of Net Assets — Proprietary Funds — 2010 Statement of Revenues, Expenses and Changes in Net Assets — Proprietary Funds — 2010 Statement of Cash Flows — Proprietary Funds — 2010 Statement of Net Assets — Fiduciary Funds — 2010 Statement of Changes in Fiduciary Net Assets — Fiduciary Funds — 2010 Notes to the Financial Statements — 2010 REQUIRED SUPPLEMENTAL INFORMATION Schedule of Employer Contributions — 2010 Schedule of Funding Progress Other Post Employment Benefits (OPEB) — 2010 SUPPLEMENTAL INFORMATION Schedule of Expenditures of Federal Awards — 2010 Notes to the Schedule of Expenditures of Federal Awards — 2010 Washington State Auditor's Office 22 MANAGEMENT'S DISCUSSION AND ANALYSIS The City of Yakima's discussion and analysis offers readers of the City's financial statements a narrative overview and analysis of the City's financial activities for the fiscal year ended December 31, 2010. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal and in the financial statements and notes to the financial statements (which immediately follow this discussion). FINANCIAL HIGHLIGHTS ➢ The total assets of the City of Yakima exceeded its liabilities at December 31, 2010, by $281.2 million. Net assets invested in capital (net of depreciation and related debt) account for 85.2% of this amount, with a value of $239.4 million. Of the remaining net assets, $30.0 million may be used to meet the government's ongoing obligations to citizens and creditors, without legal restriction. ➢ The City's total net assets increased by $15.2 million. Most of the increase was the result of capital grants and donations. > As of December 31, 2010, the City of Yakima's governmental activities reported combined ending net assets of $157.4 million, an increase of $7.4 million in comparison with the prior year. Of that amount, $137.5 million was invested in capital assets, $9.3 million was legally restricted for specific projects or programs, and $10.5 million was available for spending at the government's discretion. > Unreserved fund balance for the General Fund was $8.7 million dollars at December 31, 2010. This balance represents 18.0% of total General Fund expenditures and transfers out. ➢ The City of Yakima's total long-term debt at December 31, 2010, was $80.4 million (about $45.4 million in Governmental activities and $35.0 million in business type activities), with a remaining capacity for non -voted General Obligation debt at $57.7 million, or 68.7% of the legal limit. Total debt decreased by $0.7 million during the current fiscal year. There was no new long-term bonded debt issued in 2010. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the City of Yakima's basic financial statements. The basic financial statements are comprised of three components: 1) Government -wide financial statements, 2) Fund financial statements, and 3) Notes to the financial statements. Government -Wide Financial Statements There are two government -wide financial statements, the statement of net assets and the statement of activities, which are designed to provide readers with a broad overview of the City of Yakima's finances in a manner similar to a private sector business. Both of the government -wide financial statements distinguish functions of the City of Yakima that are principally supported by taxes and intergovernmental revenues (referred to as "governmental activities") from functions that are intended to recover all or a significant portion of their costs through user fees and charges (referred to as "business type activities"). The governmental activities of the City of Yakima include a full range of local governmental services provided to the public, such as public safety (police, municipal court, fire, and building); public improvements (streets, traffic signals); parks and recreation; community development; and general administrative services. The business type activities of the City of Yakima include sanitation (solid waste disposal, wastewater treatment, and stormwater management); potable and irrigation water systems; and transit. The Statement of Net Assets presents information on all of the City of Yakima's assets and liabilities, with the difference between the two reported as net assets. This statement serves a purpose similar to that of the balance sheet of a private sector business. Over time, increases or decreases in net assets may serve as a Washington State Auditor's Office 23 useful indicator of changes in the City's financial position. However, this is just one indicator of financial health of the City. Other indicators include the condition of the City's infrastructure systems (roads, drainage systems, bridges, etc.), changes in property tax base, and general economic conditions within the City. The Statement of Activities (Changes in Net Assets) presents information showing how the government's net assets changed during 2010. Because it separates program revenue (revenue generated by specific programs through charges for services, grants, and contributions) from general revenue (revenue provided by taxes and other sources not tied to a particular program), it shows to what extent each program has to rely on taxes for funding. All changes in net assets are reported using the accrual basis of accounting which requires that revenue be reported when earned and expenses be reported when the goods and services are received, regardless of the timing of the cash flow. Items such as uncollected taxes, unpaid vendor invoices for items received in 2010, and earned but unused vacation leave will be included in the statement of activities as revenue and expense, even though the cash associated with these items may not be received or distributed in 2010. Fund Financial Statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City of Yakima, 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 City of Yakima can be divided into three categories: Governmental Funds, Proprietary Funds, and Fiduciary Funds. Governmental Funds are used to account for most, if not all, of a government's tax supported activities. Proprietary Funds are used to account for a government's business type activities, where all or part of the costs of activities are supported by fees and charges that are paid directly by those who benefit from the activities. Fiduciary Funds are used to account for resources that are held by the government as a trustee or agent for parties outside of the government. The resources of fiduciary funds cannot be used to support the government's own programs. Governmental Funds The Governmental Fund Balance Sheet and the Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balances present separate columns of financial data for the General Fund and the Community Development Fund, which are considered to be major funds, based on criteria established by GASB Statement #34. Data from the remaining governmental funds are combined into a single, aggregated presentation. The governmental fund financial statements can be found immediately following the government -wide financial statements. Individual fund data for each of the nonmajor governmental funds is provided in the form of combining statements, outside of the basic financial statements. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government -wide financial statements. However, unlike government -wide financial statements which use accrual accounting, governmental fund financial statements focus on near-term inflows and outflows of spendable resources and on balances of spendable resources available at the end of the fiscal year. Such information is useful in evaluating a government's near-term financing requirements in comparison to near-term resources available. Because the focus of governmental fund financial statements is narrower than that of government -wide financial statements, it is useful to compare 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 reconciliation to the governmental activities column in the government - wide statements, in order to facilitate this comparison. Washington State Auditor's Office 24 The City maintains budgetary controls over its operating funds. The objective of budgetary controls is to ensure compliance with legal provisions embodied in the annual appropriated budget. Budgets for governmental funds are established in accordance with state law and are adopted on a fund level. Capital outlays are approved on an item by item basis or project basis. A budgetary comparison statement is provided for the General Fund and all special revenue funds to demonstrate compliance with the budget. Proprietary Funds There are two types of proprietary funds: Enterprise and Internal Service. Enterprise Funds are used to report the same functions presented as business type activities in the government -wide financial statements. The City uses enterprise funds to account for its Solid Waste (Refuse); Wastewater; Domestic Water; Irrigation; Stormwater; and Transit functions. Internal Service Funds (the second type of proprietary funds) accumulate and allocate costs internally among the City's various functions. The revenues and expenses of the internal service funds that are duplicated in other funds through allocations are eliminated in the government -wide statements, with the remaining balances included in the governmental activities column. Proprietary fund statements follow the governmental fund statements in this report. They provide the same type of information as the government -wide financial statements, only in more detail, since both apply the accrual basis of accounting. In comparing the Proprietary Fund Statement of Net Assets to the business type column on the Government -Wide Statement of Net Assets, you will notice that the total net assets agree and, therefore, need no reconciliation. In comparing the total assets and total liabilities between the two statements, you will notice slightly different amounts. This is because the "internal balances" line on the government -wide statement combines the "due from other funds" (asset) and the "due to other funds" (liabilities) from the proprietary fund statement in a single line in the asset section of the government -wide statement. Individual fund data for each of the nonmajor proprietary funds is provided in the form of combining statements. The proprietary fund combining statements follow the governmental fund combining statements in this report. Fiduciary Funds Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government -wide financial statement because the resources of those funds are not available to support the City of Yakima's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The City of Yakima has one fiduciary fund for Firefighter pensions. The basic fiduciary fund financial statements can be found following the proprietary fund financial statements, in the Basic Financial Statements section. Notes to the Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government -wide and fund financial statements. The notes to the financial statements can be found immediately following the basic financial statements in this report. GOVERNMENT -WIDE FINANCIAL ANALYSIS Statement of Net Assets As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. The City of Yakima's net assets total $281.2 million at December 31, 2010. The following table reflects the condensed Government -Wide Statement of Net Assets with comparative totals for 2009. Washington State Auditor's Office 25 NET ASSETS — Governmental Activities — — Business -Type Activities — Total 2010 2009 2010 2009 2010 2009 Assets Current and Other Assets $49,153,425 $54,394,590 $28,674,087 $27,065,008 $77,827,512 $81,459,598 Capital Assets 165,244,394 152,292,682 134,443,885 130,030,526 299,688,279 282,323,208 Total Assets 214,397,819 206,687,272 163,117,972 157,095,534 377,515,791 363,782,806 Liabilities Payables and Other Liabilities 11,597,096 12,721,629 4,341,118 4,014,908 15,938,214 16,736,537 Long-term Liabilities Outstanding 45,384,807 43,982,181 35,033,323 37,104,946 80,418,130 81,087,127 Total Liabilities 56,981,903 56,703,810 39,374,441 41,119,854 96,356,344 97,823,664 Net Assets Inv in Cap Assets, Net of Rel Debt 137,521,058 125,768,431 101,913,144 98,161,351 239,434,202 223,929,782 Restricted 9,349,620 9,287,543 2,369,728 2,365,700 11,719,348 11,653,243 Unrestricted 10,545,238 14,927,488 19,460,659 15,448,629 30,005,897 30,376,117 Total Net Assets $157,415,916 $149,983,462 $123,743,531 $115,975,680 $281,159,447 $265,959,142 The City of Yakima's total assets stand at $377.5 million as of December 31, 2010. Of this amount, $299.7 million is accounted for by capital assets, which includes some infrastructure and construction in progress. Out of $165.2 million in capital assets reported in Governmental activities at December 31, 2010, $77.9 million (47.1%) is accounted for by infrastructure acquisitions (including the right-of-way land associated with these projects and land under the road). Of the remaining City assets, approximately $56.9 million was accounted for in cash, cash equivalents, and investments, $15.3 million in accounts receivable, $4.9 million in notes receivable, and $0.7 million spread among miscellaneous assets. At December 31, 2010, the City had outstanding liabilities of $96.4 million, with $80.5 million in long-term liabilities. Of the long-term liabilities, $5.4 million was due within a year, with the remainder due over an extended period of time. Refer to the notes to the financial statements (Note 7) for a more in depth discussion of long-term debt. "Payables and Other Liabilities" for total Governmental and Business type activities total $15.9 million, and include $10.3 million in accounts payable, $5.3 million in accrued liabilities and $0.3 million in liabilities payable from restricted assets. The largest portion of the City's net assets (85.2%) reflects its investment in capital, less any outstanding related debt used to acquire those assets. The City's capital assets, which are used to provide services to citizens, are investments in capital and are not available for future spending. Although the City's investment in 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. Approximately 4.2% of the City's net assets are subject to external restrictions on how they may be used (restricted by the Revised Code of the State of Washington or by contractual agreements with parties outside of the primary government). The remaining balance of $30.0 million (unrestricted net assets) represents the amount that may be used to meet the City's ongoing obligations. At December 31, 2010, the City of Yakima reports positive balances in all three categories of net assets, for the government as a whole, as well as for governmental activities and business type activities. Washington State Auditor's Office 26 The Statement of Activities (Changes in Net Assets) The City of Yakima's total net assets is increased by $15.2 million in 2010. Net assets for governmental activities increased by $7.4 million while business type activities increased by $7.8 million. Total revenues for the City of Yakima were $125.8 million in 2010. Governmental activities provided $79.9 million (63.5%), while business type activities added $45.9 million (36.5%). Expenses for the year totaled $109.7 million, with governmental activities accounting for $75.5 million or 68.8% and business type activities accounting for $34.2 million or 31.2%. Key elements in changes in net assets are shown in the following table. CHANGES IN NET ASSETS — Governmental Activities — — Business -Type Activities 2010 2009 2010 2009 2010 Total 2009 Revenues Program Revenues Charges for Services $7,808,718 $6,923,789 $34,002,188 $32,976,726 $41,810,906 $39,900,515 Operating Grants and Cont's 7,981,365 6,455,741 2,409,765 2,020,408 10,391,130 8,476,149 Capital Grants and Cont's 15,490,414 5,090,266 4,992,877 1,659,026 20,483,291 6,749,292 General Revenues Property Tax 14,534,753 14,261,201 0 0 14,534,753 14,261,201 Sales Tax 17,920,306 17,810,213 4,485,313 4,489,747 22,405,619 22,299,960 Other Taxes 12,241,209 12,710,131 0 0 12,241,209 12,710,131 State Entitlements 3,589,122 3,738,559 0 0 3,589,122 3,738,559 Other 338,922 626,352 21,320 116,404 360,242 742,756 Total Revenues 79,904,809 67,616,252 45,911,463 41,262,311 125,816,272 108,878,563 Expenses General Government 8,512,171 8,656,161 0 0 8,512,171 8,656,161 Security of Persons and Property 40,087,908 40,008,664 0 0 40,087,908 40,008,664 Physical Environment 828,164 1,189,908 0 0 828,164 1,189,908 Transportation 11,603,969 11,108,811 0 0 11,603,969 11,108,811 Economic Environment 5,669,859 4,821,392 0 0 5,669,859 4,821,392 Mental & Physical Health 87,223 86,217 0 0 87,223 86,217 Cultural & Recreational Env 7,471,397 7,020,665 0 0 7,471,397 7,020,665 Interest on Long -Term i7pbt 1,216,777 1,004,163 0 0 1,216,777 1,004,163 Transit 0 0 8,364,910 7,928,658 8,364,910 7,928,658 Refuse 0 0 4,362,112 4,217,711 4,362,112 4,217,711 Wastewater 0 0 12,813,119 12,297,172 12,813,119 12,297,172 Water 0 0 5,654,159 5,748,350 5,654,159 5,748,350 Irrigation 0 0 1,810,985 1,732,812 1,810,985 1,732,812 Stormwater 0 0 1,239,620 1,028,178 1,239,620 1,028,178 Total Expenses 75,477,468 73,895,981 34,244,905 32,952,881 109,722,373 106,848,862 Increases in Net Assets Before Non-operating Sources (Uses) 4,427,341 (6,279,729) 11,666,558 8,309,430 16,093,899 2,029,701 Gain/loss on Sale of Capital Assets (922,304) (2,217,530) (6,034) (17,282) (928,338) (2,234,812) Transfers 3,927,408 4,188,083 (3,892,673) (4,201,083) 34,735 (13,000) Change in Net Assets 7,432,445 (4,309,176) 7,767,851 4,091,065 15,200,296 (218,111) Net Assets - Beginning 149,983,462 154,292,637 115,975,677 111,884,612 265,959,139 266,177,249 Net Assets - Ending $157,415,907 $149,983,461 $123,743,528 $115,975,677 $281,159,435 $265,959,138 Washington State Auditor's Office 27 Governmental Activities Within governmental activities, tax revenue accounted for 55.9% of total revenue sources, with grants and contributions accounting for 29.4%. The remaining 14.7% of revenue was provided by charges for services, interest income, and miscellaneous revenues. (Note: the revenue indicators in the following charts do not include one-time only financing sources, such as proceeds from new debt or the sale of assets.) Governmental activities increased net assets by $7.4 million or 5.0%. Significant fluctuations in revenue are as follows: > Operating Grants & Contributions increased $1.5 million from 2009 to 2010. The City was successful in obtaining American Recovery and Reinvestment Act (ARRA) grants for neighborhood stability, policing and energy conservation programs. > Capital Grants & Contributions increased by $10.4 million — more than triple the prior year. A major railroad grade separation project that is building a new underpass moved from the planning stages into construction in 2010, accounting for about $6.0 million of this increase. Infrastructure obtained by annexation amounted to about $2.1 million as a capital contribution. A grant for downtown revitalization added $1.0 million. Other capital grants and developer donations make up the balance of the increase. All other revenue categories were relatively flat as would be expected in the sluggish economy. The largest program expenses consist of Security of Persons and Property (public safety), Transportation, and General Government, respectively. These programs accounted for 79.8% of total governmental expenses. For the most part, changes in expenses were the result of the implementation of cost containment measures in response to the revenue reductions caused by the national recession. The major exceptions to this rule are generally tied to the increase in grants noted above. Additional explanations follow: > Security of Persons and Property demonstrated an increase of $0.1 million or 0.2% primarily because of increased depreciation on grant funded equipment. This category remains City Council's highest budget priority, and therefore, experienced the fewest cutbacks. > Economic Environment increased by about $0.8 million, primarily because of the ARRA grants. > Cultural and Recreational Environment increased by $0.5 million primarily due to a major replacement of minor equipment for the convention center, such as tables, chairs, room dividers, etc. Following are graphs which illustrate revenue by source and expenditures by program for governmental funds in 2010. Washington State Auditor's Office 28 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 REVENUES BY SOURCE - GOVERNMENTAL ACTIVITIES Capital Grants and Contributions 19.4% State Entitlements 4.5% Other Revenues 0.4% Property Tax 182% Opera ting Grants and Contributions 10.0% Charges for Services 9.8% Other Taxes 15.3% Sales Tax 22A% EXPENSES AND PROGRAM REVENUES - GOVERNMENTAL ACTIVITIES • Expenses M Program Revenues Li General Security of Physical Transportation Economic Mental & Cultural & Interest on Government Persons and Environment Environment Physical Recreational Long -Term Property Health Environment Debt Business Type Activities Of the $45.9 million in business type revenues, 74.1% was provided by charges for services, with the remaining amount provided by grants, contributions, transit sales tax and interest income. Overall, business type revenues demonstrated an increase of $4.6 million or 11.3% over 2009. Washington State Auditor's Office 29 Business type revenues experienced the following fluctuations: Charges for Services increased by $1.0 million or 3.0%. The Water, Irrigation, and Refuse utilities had rate increases for 2010 of 5.5%, 3.0%, and 3.0% respectively. 2008 was the first year of implementation of a federally mandated Stormwater / surface water program. A rate increase of 14% (from $35 to $40 per ERU) was approved for 2010 as this program continued to be developed. Transit received an ARRA grant of $2.0 to purchase new buses. When added to an increase in Wastewater development contributions of about $1.3 million, the category of Capital Grants and Contributions increased by $3.3 million or 201.0%. Of the $34.2 million in business type expenses, 37.4% are associated with the Wastewater program and 24.4% with Transit, domestic water programs represent about 16.5% Refuse 12.7%, Irrigation 5.3% and Stormwater 3.6%. Generally, changes in expenses are in line with rate increases and additional depreciation on donated assets. The following charts depict the expenses and program revenues, with a breakdown of revenues by source for the business type activities. REVENUES BY SOURCE — BUSINESS TYPE ACTIVITIES Charges for Services 74.1% Operating Grants and Contributions 5.2% Capital Grants and Contributions 10.9% Unrestricted Investment Earnings 0.05% Sales Tax 9.8% Washington State Auditor's Office 30 EXPENSES AND PROGRAM REVENUES - BUSINESS TYPE ACTIVITIES 20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 i! Expenses n Program Revenues r Transit Refuse Wastewater Water Irrigation 5tormwater Charges for services represent the majority 74.1% of revenue in these funds. The only fund that does not rely heavily on charges for service is the Transit fund, which is subsidized by a voter approved local option sales tax of 0.3% and a federal operating grant. FINANCIAL ANALYSIS OF THE CITY'S FUNDS As noted earlier, the City of Yakima uses fund accounting to ensure and demonstrate compliance with finance related legal and regulatory requirements. Following is a financial analysis of the City's governmental and proprietary funds. Governmental Funds Analysis The General Fund and the Community Development Fund (which administers the City's Community Development Block Grants) are the City's major funds (as defined in GASB #34) in 2010. Together these funds account for 54.1% of total governmental fund assets and 39.9% of total governmental fund balances. The focus of the City of Yakima's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. 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 December 31, 2010, the City's governmental funds reported combined fund balances of $22.6 million. Of this total amount, about $20.7 million (91.7%) is unreserved and available for spending within these funds. Reserved fund balance of $1.9 million is not available for new spending because it was previously committed to: pay debt service ($0.7 million); generate income to pay for the perpetual care of the municipal cemetery ($0.6 million); liquidate contracts and purchase orders of the prior period ($0.5 million) and for a variety of other restricted purposes ($0.1 million). The General Fund is the chief operating fund of the City of Yakima. At the end of the 2010 fiscal year, unreserved fund balance of the General Fund was $8.3 million, while total fund balance is about $8.7 million. Unreserved fund balance is about 18.0% of total general fund expenditures (which represents about a 22 month reserve). Total assets in the General Fund amounted to $14.9 million, accounting for 39.7% of total governmental fund assets. The fund balance of the City of Yakima's General Fund is decreased by $0.2 million during the current fiscal year. In response to the national recession that limited revenues in 2009, City Management implemented cost containment measures that reduced General Fund program expenses for 2010, so that the fund balance was virtually balanced. Washington State Auditor's Office 31 The General Fund accounts for 57.2% of all governmental fund revenue and 49.9% of all expenditures. The Community Development fund has a decrease of ($93,424) in fund balance. This fund balance fluctuates slightly from year to year depending on the timing of the receipt and spending of program income. Other governmental funds ended with a net decrease in fund balances of ($4,647,110). While most funds had modest changes in fund balance, much of this decrease (about $4.3 million) can be attributed to the substantial completion of the Capitol Theatre Expansion using proceeds of a General Obligation bond issued in 2009. Enterprise Funds Analysis Transit, Wastewater, Domestic (potable) Water, and Irrigation Water are considered major funds in the City's 2010 (GASB 34) Financial Statements while Refuse and Stormwater are nonmajor funds. As of December 31, 2010, the City's enterprise funds (internal service fund balances are treated entirely as governmental activities) reported combined net assets of $123.7 million, with $61.4 million or approximately 49.6% being contributed by the Wastewater fund. Of the $123.7 million, about $101.9 million (82.4%) of net assets is accounted for by investment in capital assets, net of related debt, $2.4 million is restricted for debt service and $19.5 million is unrestricted. The Notes to the Financial Statements (Note 9) present segment information that is grouped according to revenue bond requirements for these business type activities. GENERAL FUND BUDGETARY HIGHLIGHTS General Fund Changes in Budget The following table shows the 2010 General Fund Adopted (original) Budget, the amended (final) Budget, Actual revenue and expenditure amounts, and the variance of Actuals compared to the Final budget. Washington State Auditor's Office 32 CHANGE IN GENERAL FUND BALANCE Revenues Taxes and Special Assessments Licenses and Permits Intergovernmental Revenues Charges for Services Fines and Forfeits Interest Other Revenues Total Revenues Expenditures Current General Government Security of Persons and Property Physical Environment Economic Environment Mental & Physical Health Cultural & Recreational Environment Capital Outlay General Government Security of Persons and Property Debt Service Principal Retirement Interest Total Expenditures Excess (Deficiency) of Revenues Over (Under) Expenditures Other Financing Sources (Uses) Proceeds from Capital Lease Financing Transfers In Transfers (Out) Intergovernmental Agreements Comp. for Loss of Gen. Capital Assets Variance with Final Budget - Budgeted Amounts - Actual Positive Original Final Amounts (Negative) $37,737,000 $37,737,000 $37,801,077 $64,077 689,000 689,000 768,469 79,469 2,946,408 2,967,279 2,813,157 (154,122) 4,914,680 4,914,680 4,917,224 2,544 1,736,900 1,736,900 1,658,467 (78,433) 435,000 435,000 403,183 (31,817) 59,450 76,294 (64,261) (140,555) $48,518,438 $48,556,153 $48,297,316 ($258,837) $11,881,694 $12,010,235 $11,253,487 $756,748 33,290,796 33,321,920 32,576,171 745,749 1,318,886 1,323,886 1,250,939 72,947 826,484 834,849 784,452 50,397 88,021 88,021 87,223 798 8,167 8,167 8,167 0 15,001 15,001 61,052 (46,051) 0 164,610 0 164,610 37,374 37,374 43,770 (6,396) 11,944 11,944 13,624 (1,680) $47,478,367 $47,816,007 $46,078,885 $1,737,122 $1,040,071 $740,146 $2,218,431 $1,478,285 $0 $0 $51,000 $51,000 40,000 40,000 40,000 0 (2,402,275) (2,402,275) (2,412,206) (9,931) (39,095) (39,095) (39,095) 0 1,000 1,000 0 (1,000) Total Other Financing Sources (Uses) ($2,400,370) ($2,400,370) ($2,360,301) $40,069 Net Change in Fund Balances ($1,360,299) ($1,660,224) ($141,870) $1,518,354 Fund Balances - January 1 Change in Reserve for Inventory Fund Balances - December 31 $4,328,549 0 $4,328,549 $8,842,208 0 9,929 $4,513,659 9,929 $2,968,250 $2,668,325 $8,710,267 $6,041,942 During the year, the 2010 General Fund budget was increased from $47.5 million to $47.8 million, or by about $0.3 million. The increases in appropriations are summarized as follows: > $304,925 in outstanding encumbrances / commitments which were rebudgeted from the prior year. > $32,715 for miscellaneous items such as donations for public safety education supplies and overtime for Fire Department. Washington State Auditor's Office 33 Most of these budget adjustments were to be funded from the General Fund reserves and / or corresponding reductions in other expenditures. General Fund Budget to Actual Total General Fund revenues were budgeted at about $48.5 million. Actual revenue of $48.3 million resulted in a negative variance of $0.3 million, a loss of 0.5% under the amended budget. The recession put downward pressure on sales taxes, new construction / development fees, and interest earnings starting in 2009. The 2010 budget was developed assuming these revenues would stay depressed, and actual results closely matched the estimates. The two areas where revenues were below the budget were intergovernmental revenues under budget by $154,000 because the city dropped out of a state -shared revenue funding formula, and other revenues under budget by $140,000 because of a retroactive tax refund requested by a utility. General Fund expenditures, including other financing uses, totaled $48.5 million compared to the final budget of $50.2 million — resulting in a positive variance of $1.7 million or 3.4%. Most of this variance is in the category of General Government, and is the result primarily of a mid -year cost containment plan that held position vacancies, and required a 5 day furlough on non -emergency personnel. The primary driver of the cost containment measures in Security of Persons and Property was a significant reduction in jail costs which was the result of a cooperative effort among the Police, Prosecution, Indigent Defense and Municipal Court divisions to reduce prisoner days. The General Fund budget is typically built assuming positive variances in both revenue and expenditures. Revenue is conservatively estimated, while expenditure estimates utilize highest probable costs. Historically, actual amounts have been close to "break even", with actual revenues slightly exceeding expenditures. In 2010 revenues did not exceed the conservative estimates, so that mid -year adjustments were required in order to minimize the use of reserves. This resulted in a net decrease in fund balance of about $0.1 million (about .3% of the total General Fund budget). CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets The City of Yakima's total investment in capital assets, including construction in progress, for its governmental and business type activities as of December 31, 2010, amounts to almost $299.7 million (net of accumulated depreciation). This investment in capital assets includes land, buildings, system improvements, machinery and equipment, park facilities, infrastructure, and construction in progress on buildings and systems. Major capital asset events during the 2010 fiscal year included the following: > A variety of projects for street expansion / repair were ongoing during the year. $5.2 million was added to infrastructure in 2010, both by acquisition by annexation and project completion. The 2011 budget includes over $14.0 million in planned projects, funded primarily by state and federal grants and loans, matched by fuel tax and real estate excise tax. The major project in 2010 and continuing into 2011 is a railroad grade separation project. > In the area of Cultural & Recreational Environment, major capital investments include the Capitol Theatre expansion, funded by a Limited Tax General Obligation bond issued in 2009. About $4.4 million was spent on Capitol Theatre expansion in 2010. > Vehicles, street equipment, and trucks were added to the fleet as either additional equipment or replacements during the year, at a cost of $1.4 million. Washington State Auditor's Office 34 > In the area of Public Safety, the Fire Department replaced a ladder truck and remodeled a station, at a cost of $1.5 million. The Police Department obtained grants to begin implementation of a regional integrated public safety computer system, spending about $0.5 million in 2010. Another $0.5 million to continue this project is budgeted in 2011. > Wastewater capital improvements include: Over $2.0 million was spent on final SCADA tip out / Dystor / Daft Retrofit projects for 2010. The 2011 budget includes over $13 million for facility improvements, including: industrial waste anaerobic processor — $4.0 million, power distribution upgrade — $1.5 million, biogas and biosolids enhancements — $6.5 million. These projects will be funded by the issuance of revenue bonds later in 2011 and intergovernmental loans. A large debt issue will be paid off in 2011, freeing up over $0.5 million annually for debt service. A rate study is being prepared which will include the additional debt service requirements. In addition to the plant improvements, about $4.8 million is budgeted for interceptor and trunk line extensions and an allocation for an automated meter reading system (shared with the Water utility), funded by capital reserves and current capital transfers from the operating fund. > The Domestic Water Treatment plant capital program spent about $0.4 million in 2010. The 2011 budget includes $1.5 million for a new well project at Gardner Park (partly funded by a state Public Works Trust Fund Loan); $2.0 million for automated meter reading; and $0.2 million for water main replacement and designs for lagoons (all funded by capital reserves and current capital transfers from the operating fund). > In 2003, the City Council approved the rebuild of the irrigation delivery system, which was estimated to cost approximately $14 million and be completed over an eight-year period. Three out of four phases have been completed. About $2.5 million was spent on system rebuild projects in 2010. The 2011 budget includes about $2 million for project continuation, funded by a revenue bond or other capital borrowing which would be repaid using current capital rates. CAPITAL ASSETS (NET OF DEPRECIATION) — Governmental Activities — — Business -Type Activities Total 2010 2009 2010 2009 2010 2009 Capital Assets Land $14,119,276 $12,858,062 $2,163,373 $2,163,373 $16,282,649 $15,021,435 Building 31,481,171 31,541,005 37,877,088 39,769,182 69,358,259 71,310,187 Impr Other Than Building 6,443,378 6,990,394 65,145,812 61,106,382 71,589,190 68,096,776 Machinery and Equipment 13,146,449 12,149,183 19,092,034 13,304,029 32,238,483 25,453,212 Infrastructure 73,289,266 68,109,569 0 0 73,289,266 68,109,569 Intangibles 0 0 115,659 115,659 115,659 115,659 Construction in Progress 26,764,854 20,644,469 10,049,919 13,571,901 36,814,773 34,216,370 Total Capital Assets $165,244,394 $152,292,682 $134,443,885 $130,030,526 $299,688,279 $282,323,208 Additional information on the City of Yakima's capital assets can be found in Note 4 of this report. Long -Term Debt On December 31, 2010, the City of Yakima had total bonded debt outstanding of almost $49.3 million. Of this amount, $24.9 million is classified as governmental activity and backed by the full faith and credit of the City. The remaining $24.4 million represents bonds secured solely by specific revenue sources (i.e. revenue bonds). The City of Yakima's total bonded debt had a net decrease of $3.8 million during 2010. The City participates in a loan program administered by the State's Department of Community Development, which is included as Intergovernmental loans in the long-term debt schedules. Infrastructure improvements, such as street, bridge, water, or sewage projects, are eligible to compete for loan awards. This type of funding is Washington State Auditor's Office 35 preferred because the interest rates for new loans range from 0.5% to 1.5% based on the percentage of local match available for the project. (Le. the higher the match, the lower the interest rate). In 2010, the City borrowed $2.4 million for Water, Wastewater, and Railroad Grade Separation projects utilizing this State program. The City's remaining capacity for non -voted debt on December 31, 2010, was approximately $57.7 million in comparison to the total legal limit of $84.0 million. The City has a general guideline of retaining 50% of its non -voted capacity for emergencies. The City of Yakima was upgraded in 2008 to an "A+" rating from Standard & Poor's for general obligation debt. A summary of the City's bonded debt follows. Additional information on the City's long-term debt can be found in Note 7. General Obligation Bonds Revenue Bonds Intergovernmental Loans Special Assessment Debt Unfunded Pension/OPEB Liabil Compensated Absences Other Debt Total Outstanding Debt OUTSTANDING DEBT — Governmental Activities — — Business -Type Activities 2010 2009 2010 2009 Total 2010 2009 $24,880,686 0 2,774,138 819,461 10,285,595 6,320,190 304,737 $26,978,811 0 1,500,908 256,500 8,835,001 6,156,097 254,864 $0 24,375,000 10,399,880 0 0 0 258,452 $0 26,080,000 10,756,643 0 0 0 268,315 $24,880,686 24,375,000 13,174,018 819,461 10,285,595 6,320,190 563,189 $26,978,811 26,080,000 12,257,551 256,500 8,835,001 6,156,097 523,179 $45,384,807 $43,982,181 $35,033,332 $37,104,958 $80,418,139 $81,087,139 ECONOMIC FACTORS There are a number of factors that have a fiscal impact on various revenues of the City, including voter approved initiatives over the last few years, as well as changes in State and Federal regulations. Following is a list of significant factors, which have an impact on the City's revenues. The City is committed to the continued application of sound fiscal management practices to ensure balanced budgets are maintained and critical core services are provided to our citizens. > In 2001 state voters approved Initiative 747, which capped property tax levy growth each year at a maximum of 1%, plus any additions for annexations and new construction. This initiative represents a severe restriction on local government revenue growth, which makes budget balancing more difficult because actual inflation rates have grown at an average of 3 times the 1% limitation. > The Downtown area is in transition from a retail center to a central business district. The City is actively participating in several projects to upgrade the downtown as follows: • The City has been awarded State and Federal grants of about $9.6 million for infrastructure and pedestrian improvements in the downtown core; construction began in mid 2006. Phase IV was substantially completed in 2010. • The City owned Capitol Theatre, located in the center of the downtown area, is nearing the end of a major upgrade / expansion project. In 2007, the state legislature approved a sales tax credit for performing arts centers of .025%, which started flowing to the Yakima Regional Public Facilities District in the spring of 2008. A phased capital plan has been developed which includes the LTGO debt of about $7.0 million issued by the City in 2009 and serviced by the tax credit. > The unemployment rate (11% as of March, 2011) in the County continues to be higher than the state and national average. The County's predominant industry is agriculture and food related. This industry has a history of high unemployment rates, seasonal employment, and low median income (Yakima is about 73% of the state average). However, the agriculture based local economy has not been as negatively affected in this severe national recession as many other cities around the state and Washington State Auditor's Office 36 country. Historically, the City's unemployment rate has run 3 - 3.5% above the national, but that gap has shrunk during the recent recession above. All employment categories, with the exception of "Leisure and Hospitality" experienced a slight increase from March of 2010. > Efforts to diversify our economic base include expansion of the current community college to offer four-year degree programs through major state institutions, including Washington State University and University of Washington. Additionally, a new medical school has finished construction in the urban area, and began instruction in late 2008. > The City is continuing to annex property within the Urban Growth Boundary that is being hooked up to sewer services, although the City is experiencing a slowdown in this activity as most of the sewered properties are within the City limits. > During the process of issuing bonds in 2008, Standard and Poor's (S & P) reviewed the credit rating for the Wastewater/Water utility and General Obligation bonds, and both received an upgrade. The credit rating of the Wastewater/Water utility went up two steps—from single A (A) to double A minus (AA-) with a stable outlook. The analyst's press release indicates that this upgrade is primarily due to the combination of: • Strong fiscal management and financial performance, including net revenues sufficient to cover debt service by more than three times during the last five years; and • Governing body's policy of setting multi-year rate increases based on long-term capital and operational needs > In 2009 Standard and Poor's also increased the City's General Obligation credit rating one notch from A to A+ with a stable outlook. S & P's rationale and perceived credit strengths for the City included: • Long-standing economic role as a service and manufacturing center for a surrounding agricultural region; • Track record of very strong available General Fund balances; and • Good financial policies and practices, including a minimum General Fund balance threshold and the use of a financial forecasting model. > According to S & P, the City's perceived credit weaknesses were: • Merely adequate median household effective buying income (EBI) and historically high unemployment rates, and • Limited revenue flexibility under state law. > The next major economic development initiative that the City is embarking on is a competitive state redevelopment / tax increment program called Local Infrastructure Financing Tool (LIFT), as set forth in RCW 39.102. The redevelopment area consists of 556 acres adjacent to Interstate 82, formerly used as a sawmill and plywood plant. The City received an award of up to $1 million per year for 25 years from the state to support required infrastructure improvements to service the new mixed use proposed development. 2009 was designated as the "base year", and the City will receive the state's increase of both sales and property taxes as they are realized. The project is currently in a planning stage. The 2011 budget is balanced for all funds, within guidelines established by city management, to accomplish municipal service levels and priorities set by City Council. The City of Yakima has established a consistent track record of living within our means. Over the past three years, as the economy has faltered and tax revenues have declined, the City has made reductions in General Government programs, services and staff levels in order to maintain a balance between revenues and expenditures. From 2009 through 2010, the City has reduced spending by over $5.6 million and eliminated 30 full time positions in the General Government (i.e. tax -supported) budget. Most City employees' salaries have been frozen several times in recent years and Washington State Auditor's Office 37 furloughs were implemented in 2010 for about 225 employees. For the 2011 budget, the major revenues were estimated assuming the continued flattening of the economy. To date, we have seen some improvement in sales taxes although other areas such as interest earnings are below budget. Overall budget results are performing as expected. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the City of Yakima's finances for all those with an interest in the government's finances. This report, along with the City's published budget documents are posted on the City's website at www.ci.yakima.wa.us. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to: City of Yakima - Finance Director, 129 North Second Street, Yakima, WA 98901. Washington State Auditor's Office 38 CITY of )rltiiIurr STATEMENT OF NET ASSETS December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 1 Governmental Business Type Total Activities Activities 2010 2009 Assets Cash and Cash Equivalents $18,392,076 $5,647,665 $24,039,741 $32,334,049 Investments at Amortized Cost 13,323,916 17,005,167 30,329,083 28,804,428 Receivables (Net) 8,651,517 2,887,104 11,538,621 10,088,793 Due from Other Government Units 3,362,671 386,969 3,749,640 1,821,339 Notes Receivable 4,856,785 0 4,856,785 4,892,537 Inventories 353,770 213,245 567,015 788,837 Unamortized Debt Issue Cost 0 164,209 164,209 179,785 Restricted Assets: Cash and Cash Equivalents 202,070 2,369,728 2,571,798 2,539,210 Fiscal Agent 10,620 0 10,620 10,620 Capital Assets (Net of Accumulated Depreciation) Land 14,119,276 2,163,373 16,282,649 15,021,435 Buildings 31,481,171 37,877,088 69,358,259 71,310,187 Improvements Other Than Buildings 6,443,378 65,145,812 71,589,190 68,096,776 Machinery & Equipment 13,146,449 19,092,034 32,238,483 25,453,212 Construction in Process 26,764,854 10,049,919 36,814,773 34,216,370 Intangibles 0 115,659 115,659 115,659 Infrastructure 73,289,266 0 73,289,266 68,109,569 Total Capital Assets 165,244,394 134,443,885 299,688,279 282,323,208 Total Assets $214,397,819 $163,117,972 $377,515,791 $363,782,806 Liabilities Accounts Payable and Other Current Liabilities $8,000,195 $2,309,116 $10,309,311 $10,991,439 Accrued Liabilities 3,229,831 2,032,002 5,261,833 5,495,949 Due to Other Government Units 77,065 0 77,065 75,639 Liabilities Payable from Restricted Assets 290,005 0 290,005 173,510 Noncurrent Liabilities Special Assessment Debt w/Gov't Commitment 819,461 0 819,461 256,500 Due Within One Year 2,565,793 2,806,304 5,372,097 5,454,625 Due in More than One Year 41,999,553 32,227,019 74,226,572 75,376,002 Total Liabilities 56,981,903 39,374,441 96,356,344 97,823,664 Net Assets Invested in Capital Assets, Net of Related Debt 137,521,058 101,913,144 239,434,202 223,929,782 Restricted Debt Service 655,506 2,369,728 3,025,234 3,008,919 Capital Projects 1,705,766 0 1,705,766 2,241,478 Other Purposes 1,308,110 0 1,308,110 1,211,422 Notes Receivable 5,680,238 0 5,680,238 5,191,424 Unrestricted 10,545,238 19,460,659 30,005,897 30,376,117 Total Net Assets $157,415,916 $123,743,531 $281,159,447 $265,959,142 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 39 CITY OF id.411.111! STATEMENT OF ACTIVITIES For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 1 Functions/Programs Expenses Program Revenues Charges for Services Operating Grants & Cont's Capital Grants & Cont's Govt Activities Net (Expense) Revenue and Changes in Net Assets Business Type Activities 2010 2009 Total Governmental Activities General Government $8,512,171 Sec of Persons & Property 40,087,908 Physical Environment 828,164 Transportation 11,603,969 Economic Environment 5,669,859 Mental & Physical Health 87,223 Cultural & Recreational Env 7,471,397 Interest on Long -Term Debt 1,216,777 $3,749 2,182,650 1,544,311 259,009 1,719,358 $0 4,711,155 0 0 3,151,755 0 0 2,099,641 118,455 0 0 $0 ($8,508,422) 678,786 (32,515,317) 455,325 1,171,472 12,249,799 904,839 965,802 167,056 0 (87,223) 1,140,702 (4,112,599) 0 (1,216,777) $0 ($8,508,422) ($8,643,643) 0 (32,515,317) (32,882,361) 0 1,171,472 (526,905) 0 904,839 (6,662,837) 0 167,056 (1,099,976) 0 (87,223) (86,217) 0 (4,112,599) (4,520,083) 0 (1,216,777) (1,004,163) Total Governmental Activities 75,477,468 Business Type Activities Transit 8,364,910 Refuse 4,362,112 Wastewater 12,813,119 Water 5,654,159 Irrigation 1,810,985 Stormwater 1,239,620 7,808,718 7,981,365 15,490,414 (44,196,971) 934,833 4,880,696 16,441,799 7,058,159 2,710,887 1,975,814 1,886,709 0 371,596 10,986 0 140,474 2,428,488 0 2,062,204 347,420 0 154,765 0 (44,196,971) (55,426,185) 0 (3,114,880) 0 518,584 0 6,062,480 0 1,762,406 0 899,902 0 1,031,433 (3,114,880) 518,584 6,062,480 1,762,406 899,902 1,031,433 (4,763,099) 461,729 4,447,078 1,846,811 913,580 797,180 Total Business Type Activities 34,244,905 34,002,188 2,409,765 4,992,877 0 7,159,925 7,159,925 3,703,279 Total $109,722,373 $41,810,906 $10,391,130 $20,483,291 (44,196,971) 7,159,925 (37,037,046) (51,722,906) General Revenues Taxes Property Taxes Sales and Use Taxes Franchise and Utility Taxes Excise Taxes Penalties and Interest State Entitlements Unrestricted Investment Earnings Miscellaneous Gain/Loss on Sale of Capital Assets Transfers Total General Revenues, Transfers, Special Item, and Extraordinary Item Change in Net Assets Net Assets - Beginning Net Assets - Ending 14,534,753 0 14,534,753 14,261,201 17,920,306 4,485,313 22,405,619 22,299,960 9,959,504 0 9,959,504 10,292,854 2,280,725 0 2,280,725 2,412,122 980 0 980 5,155 3,589,122 0 3,589,122 3,738,559 403,183 21,320 424,503 656,308 (64,261) 0 (64,261) 86,448 (922,304) (6,034) (928,338) (2,234,812) 3,927,408 (3,892,673) 34,735 (13,000) 51,629,416 607,926 52,237,342 51,504,795 7,432,445 7,767,851 15,200,296 (218,111) 149,983,462 115,975,677 265,959,139 266,177,249 $157,415,907 $123,743,528 $281,159,435 $265,959,138 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 40 CITY of )rltiiIurr BALANCE SHEET GOVERNMENTAL FUNDS December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 2 #000 #124 Other Total General Community Governmental Governmental Funds Fund Development Funds 2010 2009 Assets Cash & Equity in Pooled Investments $990,765 $226,301 $13,014,603 $14,231,669 $21,876,520 Deposits w/ Fiscal Agent/Trustee 202,070 0 0 202,070 173,510 Receivables Taxes 4,745,805 0 250,704 4,996,509 4,611,448 Accounts 1,550,315 532 344,474 1,895,321 1,761,921 Special Assessments 0 0 37,583 37,583 13,971 LIDAssessments- Delinquent 0 0 23,657 23,657 24,669 LIDAssessments- Deferred 0 0 799,796 799,796 274,218 Notes/Contracts 0 4,851,529 5,256 4,856,785 4,892,537 Interest/Penalties 90,976 0 0 90,976 100,694 Due from Other Funds 25,485 0 0 25,485 136,212 Due from Other Government Units 148,322 321,359 2,768,554 3,238,235 1,668,308 Inventories 66,928 0 0 66,928 56,999 Investments, at Amortized Cost 7,101,198 0 3,076 7,104,274 7,157,118 Total Assets $14,921,864 $5,399,721 $17,247,703 $37,569,288 $42,748,125 Liabilities & Fund Balances Liabilities Warrants/Accounts Payable $626,141 $179,406 $1,318,013 $2,123,560 $2,904,809 Wages/Benefits Payable 3,594,074 66,039 854,148 4,514,261 4,520,623 Contracts Payable 0 18,868 103,981 122,849 114,240 Due to Other Funds 0 0 25,485 25,485 136,212 Due to Other Government Units 69,040 0 8,025 77,065 75,639 Deposits Payable 149,047 0 386,119 535,166 555,949 Deferred Revenue 1,571,225 4,851,529 904,707 7,327,461 6,841,233 Custodial Accounts 202,070 0 87,935 290,005 173,510 Total Liabilities 6,211,597 5,115,842 3,688,413 15,015,852 15,322,215 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 41 CITY of )11.4Iplt! BALANCE SHEET GOVERNMENTAL FUNDS December 31, 2010 With comparative totals for December 31, 2009 Page 2 of 2 #000 #124 Other Total General Community Governmental Governmental Funds Fund Development Funds 2010 2009 Fund Balances Reserved Inventory 66,928 0 0 66,928 56,999 Encumbrances 378,640 0 158,145 536,785 1,491,576 Continuing Appropriations 0 0 0 0 517,880 Debt Service 0 0 655,506 655,506 643,219 Endowment 0 0 592,099 592,099 578,511 Parking and Business Improvement 0 0 29,441 29,441 11,053 Unreserved General Fund 8,264,699 0 0 8,264,699 8,485,984 Special Revenue Funds 0 283,879 5,413,280 5,697,159 6,968,244 Capital Projects Funds 0 0 6,710,819 6,710,819 8,672,444 Total Fund Balances 8,710,267 283,879 13,559,290 $22,553,436 $27,425,910 Total Liabilities and Fund Balances $14,921,864 $5,399,721 $17,247,703 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 156,467,981 143,501,016 Other long-term assets are not available to pay for current -period expenditures and, therefore, are deferred in the funds. 7,327,461 6,841,233 Internal service funds are used by management to charge the costs of services to individual funds. The assets and liabilities of the internal service funds are included in government activities in the statement of net assets. 16,583,521 16,340,115 Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. (45,384,807) (43,982,181) Accrued interest payable on General Obligation Debt (131,677) (142,631) Net assets of governmental activities $157,415,915 $149,983,462 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 42 CITY of )rltiiIurr STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 2 #000 #124 Other Total General Community Governmental Governmental Funds Fund Development Funds 2010 2009 Revenues Taxes and Special Assessments $37,801,077 $0 $10,472,541 $48,273,618 $48,256,304 Licenses and Permits 768,469 0 0 768,469 711,834 Intergovernmental Revenues 2,813,157 3,129,867 17,851,773 23,794,797 15,061,730 Charges for Services 4,917,224 850,086 1,457,771 7,225,081 6,418,701 Fines and Forfeits 1,658,467 0 34,310 1,692,777 1,631,593 Interest 403,183 30,293 97,239 530,715 753,172 Other Revenues (64,261) 1,100 2,219,017 2,155,856 1,834,372 Total Revenues 48,297,316 4,011,346 32,132,651 84,441,313 74,667,706 Expenditures Current General Government 11,253,487 0 340,208 11,593,695 11,626,375 Security of Persons and Property 32,576,171 0 5,166,272 37,742,443 37,906,916 Physical Environment 1,250,939 0 245,460 1,496,399 1,652,817 Transportation 0 0 5,713,383 5,713,383 5,395,000 Economic Environment 784,452 3,697,053 1,176,968 5,658,473 4,778,389 Mental & Physical Health 87,223 0 0 87,223 86,217 Cultural & Recreational Environment 8,167 0 6,571,609 6,579,776 6,061,995 Capital Outlay General Government 61,052 0 793,518 854,570 507,653 Security of Persons and Property 0 0 1,944,940 1,944,940 1,054,601 Physical Environment 0 0 229,746 229,746 851,145 Transportation 0 401,717 9,253,183 9,654,900 4,396,229 Economic Environment 0 6,000 985,499 991,499 218,874 Cultural & Recreational Environment 0 0 5,635,982 5,635,982 3,613,463 Debt Service Principal Retirement 43,770 0 2,872,122 2,915,892 2,632,860 Interest 13,624 0 1,214,107 1,227,731 978,956 Total Expenditures 46,078,885 4,104,770 42,142,997 92,326,652 81,761,490 Excess (Deficiency) of Revenues Over (Under) Expenditures $2,218,431 ($93,424) ($10,010,346) ($7,885,339) ($7,093,784) The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 43 CITY of id.411.111! STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 2 of 2 #000 #124 Other Total General Community Governmental Governmental Funds Fund Development Funds 2010 2009 Other Financing Sources (Uses) Proceeds from Capital Lease Financing $51,000 $0 $98,288 $149,288 $0 Proceeds from L.T. Debt - G.O. Bonds 0 0 0 0 7,003,898 Proceeds from Intergovernmental Loans 0 0 1,690,451 1,690,451 600,000 Other Note Proceeds 0 0 864,092 864,092 0 Transfers In 40,000 0 5,258,714 5,298,714 6,139,059 Transfers (Out) (2,412,206) 0 (2,536,449) (4,948,655) (5,425,735) Intergovernmental Agreements (39,095) 0 (58,427) (97,522) (39,095) Sale of Capital Assets 0 0 0 0 10,125 Comp. for Loss of Gen. Capital Assets 0 0 46,567 46,567 81,575 Total Other Financing Sources (Uses) (2,360,301) 0 5,363,236 3,002,935 8,369,827 Net Change in Fund Balances (141,870) (93,424) (4,647,110) (4,882,404) 1,276,043 Fund Balances - January 1 8,842,208 377,303 18,206,400 27,425,911 26,156,511 Change in Reserve for Inventory 9,929 0 0 9,929 (6,643) Fund Balances - December 31 $8,710,267 $283,879 $13,559,290 $22,553,436 $27,425,911 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's_ Office 44 CITY of )11.4Iplt! RECONCILIATION OF THE STATEMENT OF REVENELIES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 1 2010 2009 Net change in fund balances as shown on Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance: ($4,882,404) $1,276,043 Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. 11,092,748 2,659,664 The net effect of various miscellaneous transactions involving capital assets (i.e., sales, trade-ins, donations and physical inventory adjustments) is to increase net assets. 1,874,212 (1,947,677) Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 486,228 194,806 The issuance of long-term debt (e.g, bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. 212,061 (5,002,138) Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds (compensated absences, OPEB, inventory). (1,593,804) (1,691,632) Internal service funds are used by management to charge the costs of services to individual funds. The net revenue (expenses) of certain internal service funds is reported with governmental activities. 243,406 201,758 Change in net assets, as reflected on the Statement of Activities $7,432,447 ($4,309,176) The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 45 CITY OF id.411.111! STATEMENT OF REVENUES, EXPENDITURES & CHANGES IN FUND BALANCES -- BUDGET & ACTUAL -- GENERAL FUND For the Year Ended December 31, 2010 Page 1 of 1 Revenues Taxes and Special Assessments Licenses and Permits Intergovernmental Revenues Charges for Services Fines and Forfeits Interest Other Revenues Total Revenues Expenditures Current General Government Security of Persons and Property Physical Environment Economic Environment Mental & Physical Health Cultural & Recreational Environment Capital Outlay General Government Security of Persons and Property Debt Service Principal Retirement Interest Total Expenditures Excess (Deficiency) of Revenues Over (Under) Expenditures Other Financing Sources (Uses) Proceeds from Capital Lease Financing Transfers In Transfers (Out) Intergovernmental Agreements Comp. for Loss of Gen. Capital Assets Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances - January 1 Change in Reserve for Inventory Fund Balances - December 31 Variance with Final Budget - Budgeted Amounts - Actual Positive Original Final Amounts (Negative) $37,737,000 689,000 2,946,408 4,914,680 1,736,900 435,000 59,450 $37,737,000 689,000 2,967,279 4,914,680 1,736,900 435,000 76,294 48,518,438 48,556,153 $37,801,077 $64,077 768,469 79,469 2,813,157 (154,122) 4,917,224 2,544 1,658,467 (78,433) 403,183 (31,817) (64,261) (140,555) 48,297,316 (258,837) 11,881,694 12,010,235 11,253,487 33,290,796 33,321,920 32,576,171 1,318,886 1,323,886 1,250,939 826,484 834,849 784,452 88,021 88,021 87,223 8,167 8,167 8,167 15,001 15,001 61,052 0 164,610 0 37,374 37,374 43,770 11,944 11,944 13,624 756,748 745,749 72,947 50,397 798 0 (46,051) 164,610 (6,396) (1,680) 47,478,367 47,816,007 46,078,885 1,737,122 $1,040,071 $740,146 $2,218,431 $1,478,285 $0 $0 $51,000 $51,000 40,000 40,000 40,000 0 (2,402,275) (2,402,275) (2,412,206) (39,095) (39,095) (39,095) 0 1,000 1,000 0 (9,931) (1,000) (2,400,370) (2,400,370) (2,360,301) 40,069 (1,360,299) (1,660,224) (141,870) 1,518,354 4,328,549 4,328,549 8,842,208 4,513,659 0 0 9,929 9,929 $2,968,250 $2,668,325 $8,710,267 $6,041,942 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 46 CITY of )rltiiIurr STATEMENT OF REVENUES, EXPENDITURES & CHANGES IN FUND BALANCES -- BUDGET & ACTUAL -- COMMUNITY DEVELOPMENT FUND For the Year Ended December 31, 2010 Page 1 of 1 Variance with Final Budget — Budgeted Amounts — Actual Positive Original Final Amounts (Negative) Revenues Intergovernmental Revenues $2,835,296 $5,043,432 $3,129,867 ($1,913,565) Charges for Services 476,000 476,000 850,086 374,086 Interest 28,150 28,150 30,293 2,143 Other Revenues 1,500 1,500 1,100 (400) Total Revenues 3,340,946 5,549,082 4,011,346 (1,537,736) Expenditures Current Economic Environment 3,497,430 5,205,566 3,697,053 1,508,513 Capital outlay Transportation 0 500,000 401,717 98,283 Economic Environment 0 0 6,000 (6,000) Total Expenditures 3,497,430 5,705,566 4,104,770 1,600,796 Excess (Deficiency) of Revenues Over (Under) Expenditures ($156,484) ($156,484) ($93,424) $63,060 Net Change in Fund Balances ($156,484) ($156,484) ($93,424) $63,060 Fund Balances - January 1 550,848 550,848 377,303 (173,545) Fund Balances - December 31 $394,364 $394,364 $283,879 ($110,485) The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 47 CITY of )rltiiIurr STATEMENT OF NET ASSETS PROPRIETARY FUNDS December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 4 Business -Type Activities - Enterprise Funds #462 & #364 #973 #974 Transit Wastewater Water Assets Current Assets Cash & Equity in Pooled Investments $647,619 $1,980,138 $1,563,141 Deposits w/ Fiscal Agent/Trustee 0 0 0 Receivables: Accounts/Taxes (Net) 800,916 1,503,384 68,928 Interest/Penalties 0 0 0 Other Receivables 0 3,000 0 Due from Other Government Units 357,729 0 0 Inventories 0 0 213,245 Investments, at Amortized Cost 1,500,000 9,005,167 4,500,000 Total Current Assets 3,306,264 12,491,689 6,345,314 Noncurrent Assets Restricted Assets Cash 0 1,972,583 361,709 Land 1,307,989 583,270 173,614 Buildings 7,363,248 66,428,118 8,548,449 Other Improvements 171,664 46,491,764 41,343,959 Machinery & Equipment 10,992,966 15,888,613 2,841,858 Accumulated Depreciation (8,455,178) (60,587,519) (22,811,715) Construction in Progress 723,739 4,749,142 1,846,543 Intangibles 0 0 221,830 Unamortized Debt Issue Costs 0 111,125 15,484 Total Noncurrent Assets 12,104,428 75,637,096 32,541,731 Total Assets $15,410,692 $88,128,785 $38,887,045 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 48 CITY of id.411.111! STATEMENT OF NET ASSETS PROPRIETARY FUNDS December 31, 2010 With comparative totals for December 31, 2009 Page 2 of 4 Business -Type Activities - Enterprise Funds Governmental Activities Other #975 Enterprise Total Funds 2010 2009 Irrigation Internal Service Funds $508,791 $947,976 $5,647,665 $5,208,649 $4,160,407 0 0 0 0 10,620 228,470 282,406 2,884,104 2,552,853 807,675 0 0 0 8,972 0 0 0 3,000 7,500 0 0 29,240 386,969 27,801 124,436 0 0 213,245 207,500 286,842 1,000,000 1,000,000 17,005,167 16,506,248 6,219,642 1,737,261 2,259,622 26,140,150 24,519,523 11,609,622 35,436 0 2,369,728 2,365,700 0 98,500 0 2,163,373 2,163,373 0 418,531 0 82,758,346 82,769,342 37,397 15,827,986 739,610 104,574,983 98,484,321 127,096 73,816 22,839 29,820,092 23,026,774 21,673,387 (3,254,126) (36,125) (95,144,663) (90,207,017) (13,061,468) 2,705,517 24,980 10,049,921 13,571,900 0 0 0 221,830 221,830 0 37,600 0 164,209 179,785 0 15,943,260 751,304 136,977,819 132,576,008 8,776,412 $17,680,521 $3,010,926 $163,117,969 $157,095,531 $20,386,034 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 49 CITY OF )rltiiIurr STATEMENT OF NET ASSETS PROPRIETARY FUNDS December 31, 2010 With comparative totals for December 31, 2009 Page 3 of 4 Business -Type Activities - Enterprise Funds #462 & #364 #973 #974 Transit Wastewater Water Liabilities Current Liabilities Warrants/Accounts Payable $93,351 $297,957 $87,965 Wages/Benefits Payable 345,052 464,380 211,293 Compensated Absences Payable 355,976 610,983 194,978 Claims and Judgments Payable 0 0 0 Accrued Payables 0 157,764 20,445 Deposits Payable 6,100 189,323 74,241 Current Portion Long-term Debt 0 771,455 269,849 Restricted Payables Current Portion LT Debt 0 1,436,688 213,312 Total Current Liabilities 800,479 3,928,550 1,072,083 Noncurrent Liabilities: Bonds Payable 0 16,760,000 1,385,001 Unamortized Bond Discount/Premium 0 364,043 60,938 Deferred Amount On Debt Refunding 0 (39,029) (39,703) Loans Payable - Long Term 0 5,683,590 3,695,221 Total Noncurrent Liabilities 0 22,768,604 5,101,457 Total Liabilities 800,479 26,697,154 6,173,540 Net Assets Invested in Capital Assets, Net of Related Debt (as restated) 12,104,428 51,115,002 26,574,959 Restricted for Debt Service 0 1,972,583 361,709 Unrestricted 2,505,785 8,344,046 5,776,837 Total Net Assets $14,610,213 $61,431,631 $32,713,505 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 50 CITY of irltiirurr STATEMENT OF NET ASSETS PROPRIETARY FUNDS December 31, 2010 With comparative totals for December 31, 2009 Page 4 of 4 Business -Type Activities - Enterprise Funds Governmental Activities Other #975 Enterprise Total Funds 2010 2009 Irrigation Internal Service Funds $460,765 $98,259 $1,038,297 $974,175 $510,996 59,773 190,321 1,270,819 1,197,417 316,212 60,868 224,557 1,447,362 1,377,553 278,734 0 0 0 0 2,696,571 68,418 0 246,627 257,424 0 0 68,349 338,013 208,339 0 0 0 1,041,304 1,064,843 0 115,000 0 1,765,000 1,705,000 764,824 581,486 7,147,422 6,784,751 0 3,802,513 4,465,000 0 22,610,001 24,375,000 0 (108,042) 0 316,939 360,495 0 0 0 (78,732) (127,215) 0 0 0 9,378,811 9,726,823 0 4,356,958 0 32,227,019 34,335,103 0 5,121,782 581,486 39,374,441 41,119,854 3,802,513 11,367,448 751,304 101,913,141 98,161,348 8,776,412 35,436 0 2,369,728 2,365,700 0 1,155,855 1,678,136 19,460,659 15,448,629 7,807,109 $12,558,739 $2,429,440 $123,743,528 $115,975,677 $16,583,521 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 51 CITY of )rltiiIurr STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND NET ASSETS -- PROPRIETARY FUNDS For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 2 Business -Type Activities - Enterprise Funds #462 & #364 #973 #974 Transit Wastewater Water Operating Revenues Charges for Services $934,833 $16,422,039 $6,991,486 Charges for Insurance 0 0 0 Employer Contributions 0 0 0 Employee Contributions 0 0 0 Other Operating Revenues 0 19,760 66,673 Total Operating Revenues 934,833 16,441,799 7,058,159 Operating Expenses Operations and Maintenance 6,437,679 6,903,965 2,109,466 Administration/Overhead 864,177 1,468,340 1,790,044 Taxes 0 2,862,802 1,489,170 Depreciation/Amortization 1,063,054 3,026,976 1,143,352 Other Benefits 0 0 0 Total Operating Expenses 8,364,910 14,262,083 6,532,032 Operating Income (Loss) (7,430,077) 2,179,716 526,127 Non -Operating Revenues (Expenses) Operating Grants and Subsidies 6,372,022 0 0 Interest Revenue 7,515 5,613 3,664 Other Non -Operating Revenues 44,232 371,596 10,986 Interest Expenses 0 (697,078) (96,480) Amortization of Bond Payment Discount 0 (9,969) (2,870) Gain (Loss) on Capital Assets Disposition (21,057) 17,128 (2,105) Non -Operating Revenue Net of Expenses 6,402,712 (312,710) (86,805) Income (Loss) Before Contributions and Transfers (1,027,365) 1,867,006 439,322 Capital Contributions 2,384,256 2,062,204 347,420 Transfers In 0 232,939 0 Transfers (Out) 0 (42,516) (171,997) Change in Net Assets 1,356,891 4,119,633 614,745 Total Net Assets - January 1 Total Net Assets - December 31 13,253,322 57,311,998 32,098,760 $14,610,213 $61,431,631 $32,713,505 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 52 CITY of id.411.111! STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND NET ASSETS -- PROPRIETARY FUNDS For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 2 of 2 Business -Type Activities - Enterprise Funds Governmental Activities Other Internal #975 Enterprise Total Service Irrigation Funds 2010 2009 Funds $2,707,544 $6,853,007 $33,908,909 $32,953,808 $6,128,723 0 0 0 0 2,620,092 0 0 0 0 9,628,571 0 0 0 0 1,631,456 3,343 3,503 93,279 22,918 1,135 2,710,887 6,856,510 34,002,188 32,976,726 20,009,977 1,110,741 5,275,810 21,837,661 20,853,524 6,945,274 217,678 673,172 5,013,411 5,106,355 2,716,006 50,757 81,025 4,483,754 4,317,145 0 217,616 15,840 5,466,838 5,049,990 1,401,377 0 0 0 0 9,932,305 1,596,792 6,045,847 36,801,664 35,327,014 20,994,962 1,114,095 810,663 (2,799,476) (2,350,288) (984,985) 0 140,474 6,512,496 6,474,678 0 4,528 0 21,320 100,232 267,756 0 0 426,814 51,649 952,175 (206,528) 0 (1,000,086) (1,080,122) 0 (7,665) 0 (20,504) (20,504) 0 0 0 (6,034) (17,282) (12,900) (209,665) 140,474 5,934,006 5,508,651 1,207,031 904,430 951,137 3,134,530 3,158,363 222,046 0 154,765 4,948,645 1,659,026 21,360 0 0 232,939 417,939 0 (93,750) (240,000) (548,263) (1,144,263) 0 810,680 865,902 7,767,851 4,091,065 243,406 11,748,059 1,563,538 115,975,677 111,884,612 $12,558,739 $2,429,440 $123,743,528 $115,975,677 16,340,115 $16,583,521 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 53 CITY of id.411.111! STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 4 Business -Type Activities - Enterprise Funds #462 & #364 #973 #974 Transit Wastewater Water Cash Flows from Operating Activities Cash Received from Customers $934,833 $16,361,146 $6,820,172 Contributions Received - Employer and Employee Cash Paid to Suppliers for Goods and Services (3,648,324) (4,359,388) (2,138,007) Cash Paid for Salaries and Benefits (3,610,751) (4,644,005) (2,270,396) Other Operating Revenues Collected 0 19,760 66,673 Cash Paid to Claimants and Beneficiaries Cash Paid in Lieu of Taxes 0 (2,156,011) (977,223) Net Cash Provided by Operating Activities (6,324,242) 5,221,502 1,501,219 Cash Flows from Noncapital Financing Activities Sales Tax Received Operating Grants Received Net Cash Provided by Noncapital Financing Activities 4,487,856 1,940,038 6,427,894 0 0 0 0 0 0 Cash Flows from Capital Financing Activities Proceeds from Public Works Trust/SIED Loan/Revenue Bonds 0 115,350 564,300 Cash Received for Debt Service from Other Governments 0 365,895 0 Cash Received from Disposal of Capital Assets 12,492 17,128 0 Cash Contributions in Aid of Construction 44,232 844,344 238,400 Principal Paid on Revenue Bonds 0 (1,383,749) (206,250) Principal Paid on Public Works Trust/SIEDLoan 0 (776,921) (274,281) Capital Expenditures Paid (2,201,087) (3,123,278) (812,170) Interest and Other Debt Service Paid 0 (706,092) (97,107) Capital Grants Received 2,001,000 0 0 Other Non -Operating Capital Revenue 0 5,701 0 Transfer In 0 232,939 0 Transfer Out 0 (42,516) (171,997) Net Cash Used for Capital Financing Activities (143,363) (4,451,199) (759,105) The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 54 CITY of irltiirurr STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 2 of 4 Business -Type Activities - Enterprise Funds Governmental Activities Other Internal #975 Enterprise Total Service Irrigation Funds 2010 2009 Funds $2,685,816 $6,921,811 $33,723,778 $33,223,551 $6,287,190 13,697,659 (709,427) (3,630,490) (14,485,636) (15,346,402) (7,152,996) (651,395) (1,906,354) (13,082,901) (12,502,537) (2,259,888) 3,343 0 89,776 22,918 0 (10,374,920) 0 (444,115) (3,577,349) (3,474,759) 0 1,328,337 940,852 2,667,668 1,922,771 197,045 0 0 0 111,234 4,599,090 6,524,082 0 0 1,940,038 0 898,188 111,234 6,539,128 6,524,082 898,188 0 0 679,650 1,130,740 0 0 0 365,895 18,790 0 0 0 29,620 3,527 22,696 0 0 1,126,976 1,127,752 0 (115,000) 0 (1,704,999) (1,644,999) 0 0 0 (1,051,202) (980,994) 0 (2,143,314) (141,709) (8,421,558) (8,855,541) (1,395,578) (207,684) 0 (1,010,883) (1,090,348) 0 0 0 2,001,000 551,191 0 0 0 5,701 16,687 0 0 0 232,939 417,939 0 (93,750) (240,000) (548,263) (1,144,263) 0 (2,559,748) (381,709) (8,295,124) (10,449,519) (1,372,882) The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 55 CITY of id.411.111! STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 3 of 4 Business -Type Activities -Enterprise Funds #462 & #364 #973 #974 Transit Wastewater Water Cash Flows from Investing Activities Proceeds from Sale of Investment Securities 0 0 0 Interest Received on Investments 7,515 5,613 3,664 Purchase of Investment Securities 0 (498,919) (500,000) Net Cash Provided by Investing Activities 7,515 (493,306) (496,336) Net Increase (Decrease) in Cash and Cash Equivalents (32,196) 276,997 245,778 Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year 679,816 3,675,724 1,679,072 $647,620 $3,952,721 $1,924,850 Cash at the End of the Year Operating Fund Cash $647,619 $1,980,138 $1,563,141 Revenue Bond Reserve Account Cash 0 1,867,834 347,486 Revenue Bond Redemption Account Cash 0 104,749 14,223 Total Cash at the End of the Year $647,619 $3,952,721 $1,924,850 Reconciliation of Net Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities Net Operating Income (Loss) ($7,430,077) $2,179,716 $526,127 Adjustments to Reconcile Operating Income (Loss) to Net Cash Provided by Operating Activities: Depreciation 1,063,054 3,026,976 1,143,352 Change in Assets and Liabilities: (Increase) Decrease in Accounts Receivable 0 (147,092) (230,232) Increase (Decrease) in Allowance for Uncollectibles 0 86,199 58,918 (Increase) Decrease in Inventory 0 0 (5,745) Increase (Decrease) in Warrants/Accounts Payable 14,955 20,202 2,365 Increase (Decrease) in Wages/Benefits Payable 15,594 32,694 1,824 Increase (Decrease) in Compensated Absences Payable 12,232 22,807 4,610 Increase (Decrease) in Claims and Judgments Payable 0 0 0 Total Adjustments 1,105,835 3,041,786 975,092 Net Cash Provided by Operating Activities ($6,324,242) $5,221,502 $1,501,219 Schedule of Noncash Capital and Related Financing Activities Capital Assets Acquired by Noncash Contributions $0 $1,217,870 $109,020 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 56 CITY of id.411.111! STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended December 31, 2010 With comparative totals for December 31, 2009 Page 4 of 4 Business -Type Activities - Enterprise Funds Governmental Activities Other Internal #975 Enterprise Total Service Irrigation Funds 2010 2009 Funds 1,000,000 0 1,000,000 6,000,996 13,500 0 30,292 100,232 0 (500,000) (1,498,919) (10,500,000) 1,013,500 (500,000) (468,627) (4,398,772) (217,911) 170,377 443,045 (6,401,438) 762,138 777,599 7,574,349 13,975,787 $544,227 $947,976 $8,017,394 $7,574,349 3,641,062 267,756 (4,719,642) (810,824) (1,088,473) 5,248,880 $4,160,407 $508,791 $947,976 $5,647,665 $5,208,649 $4,160,407 0 0 2,215,320 2,211,720 0 35,436 0 154,408 153,980 0 $544,227 $947,976 $8,017,393 $7,574,349 $4,160,407 $1,114,095 $810,663 ($2,799,476) ($2,350,288) ($984,985) 217,616 15,840 5,466,838 5,049,990 1,401,377 (23,384) 65,301 (335,407) 272,897 (25,128) 1,656 0 146,773 (3,154) 0 0 0 (5,745) (6,361) 237,496 470 13,482 51,474 (1,159,032) (119,398) 6,832 16,458 73,402 71,779 108,140 11,052 19,108 69,809 46,940 22,158 0 0 0 0 (442,615) 214,242 130,189 5,467,144 4,273,059 1,182,030 $1,328,337 $940,852 $2,667,668 $1,922,771 $197,045 $0 $154,765 $1,481,655 $164,255 $21,360 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 57 CITY of )11.4Iplt! STATEMENT OF NET ASSETS FIDUCIARY FUNDS December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 1 Assets Cash & Equity in Pooled Investments Liabilities Warrants/Accounts Payable Net Assets Held in Trust for Pension Benefits and Other Purposes — Firemen's Relief and Pension — 2010 2009 $777,662 $746,911 3,313 988 $774,349 $745,923 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 58 CITY of id.411.111! STATEMENT OF CHANGES IN FUND NET ASSETS FIDUCIARY FUNDS December 31, 2010 With comparative totals for December 31, 2009 Page 1 of 1 — Firemen's Relief and Pension — 2010 2009 Additions Employer Contributions $1,573,935 $1,482,075 Interest Revenue 2,000 3,000 Total Additions 1,575,935 1,485,075 Deductions Administration/Overhead 40,808 71,911 Pension Benefits 721,576 771,018 Other Benefits 785,125 724,854 Total Deductions 1,547,509 1,567,783 Change in Net Assets 28,426 (82,708) Total Net Assets, January 1 Total Net Assets, December 31 745,923 828,631 $774,349 $745,923 The Notes to the Financial Statements, found in the Basic Financial Section, are an integral part of this statement. Washington State Auditor's Office 59 NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2010 NOTE I -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the City of Yakima, Washington, conform to Generally Accepted Accounting Principles (GAAP) as applicable to governmental units. The City has adopted the pronouncements of the Governmental Accounting Standards Board (GASB) which is the accepted standard setting body for establishing governmental accounting and financial reporting principles nationally. The following is a summary of the more significant policies. The policies should be reviewed as an integral part of the financial statements and are presented to assist the reader in interpreting the financial statements and other data in this report. REPORTING ENTITY The City of Yakima was incorporated in 1886 and operates under a Council/Manager form of government with a full-time City Manager. The City of Yakima provides a full range of municipal services, which include: police, fire, engineering, parks, cemetery, street, and administrative services. Included in the City's Enterprise Fund financial reports are: water, irrigation, sanitary wastewater, solid waste, stormwater and transit. The Yakima Air Terminal is operated under a joint venture agreement with Yakima County (see Note 10). The City's financial statements include all funds, agencies and boards which are financially accountable to the City. Financial accountability is manifest when the primary government appoints the majority of an organization's governing body and is able to impose its will on that organization or there is a potential for the organization to provide specific financial burdens on the primary government. The primary government may be financially accountable if an organization is fiscally dependent on the primary government regardless of whether the organization has a separately elected governing board, a governing board appointed by a higher level of government, or a jointly appointed board. An organization is fiscally dependent if it is unable to determine its budget without another government having the substantive authority to approve or modify the budget, to levy taxes or set rates or charges without substantive approval by another government, or to issue bonded debt without substantive approval by another government. Applying these criteria, the primary government consists solely of the legal entity of the City. Related Organization — The City's officials are also responsible for appointing the members of the boards of another organization, but the City's accountability for this organization does not extend beyond making the appointments. Yakima Housing Authority — The Yakima Housing Authority was created by Resolution No. D-1575, in 1971, and, under certain conditions, can be dissolved by the City. Yet, it is an independent entity with distinct governmental character and organization. The City of Yakima created the Housing Authority per Washington State Revised Code Chapter 35.82 which provides that liabilities incurred by the Housing Authority will be satisfied from its assets, and that no person shall have any right of action against the City on account of its debts, obligations, and liabilities, except for a Contingent Loan Agreement dated October 1, 1998, for a single bond issue of $2.6 million. Yakima Regional Public Facilities District — Although a separate legal entity, the City has elected to account for the operations of the Public Facilities District, as a blended component unit, in two Nonmajor Special Washington State Auditor's Office 60 Revenue Funds. The cities of Yakima, Selah and Union Gap originally formed a Public Facilities District (PFD) for the purpose of expanding the Yakima Convention Center and in 2008 added expansion of the Capitol Theatre. The City appoints a majority of the board members and must approve the annual budget. The financial agreement stipulates that all revenue derived by the PFD (primarily two separate state sales tax credits) be transferred to the City and the City will use these funds for the applicable project debt service and operations, and reimbursement of administrative costs of the PFD. GOVERNMENT -WIDE AND FUND FINANCIAL STATEMENTS The government -wide financial statements consist of the statement of net assets and the statement of activities. These statements report information on all of the nonfiduciary activities of the primary government. 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. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. The City's policy is to allocate indirect costs to individual functions, if they are non -tax supported. Program revenues include: 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment; 2) fines and forfeitures; and 3) 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 fund financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government -wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, & FINANCIAL STATEMENT PRESENTATION The government -wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and fiduciary fund financial statements. Under this measurement focus, revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. All governmental fund financial statements are reported using the "current financial resources" measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the City considers revenues to be available if they are collected within sixty days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Certain charges for service, sales based taxes, and interest associated within the current period are considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the Washington State Auditor's Office 61 portion of special assessment receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. Grants are considered measurable and available to the extent that expenditures have been made. Other intergovernmental revenues are considered measurable and available when earned. Other revenues such as state shared revenue, licenses, fines and fees are not considered susceptible to accrual since they are not generally measurable until received. Expenditures are generally recognized when the related fund liability is incurred, as under accrual accounting. All other revenue items are considered to be measurable and available only when cash is received by the City. The City of Yakima reports the following major governmental funds: > The General Fund is the City's primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. > The Community Development Fund accounts for the Office of Neighborhood Development, which is the focus of the City's effort to improve economic opportunities and housing conditions in Yakima. Federal Housing and Urban Development grants are the major revenue source for this program. The City reports the following enterprise funds as major funds: > The Transit Fund accounts for the operation of the City Transit System, funded primarily by 0.3% sales tax, federal grants and fares. > The Water and Wastewater Funds account for the provision of water and wastewater services to the residents of the City and other outside utility agreements. > The Irrigation Utility Fund is responsible for the operation, maintenance and reconstruction of the existing irrigation system. Additionally, the government reports the following fund types: > Internal Service Funds account for fleet management services, liability insurance, employee benefit reserves, and public works administration services provided to other departments or agencies of the government, or to other governments, on a cost reimbursement basis. > Pension Trust Funds are used to account for the operations of trust established for employee retirement benefits. They are accounted for in essentially the same manner as proprietary funds because of the need for determining the periodic income of the trust. Private sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government -wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Boards. Governments also have the option of the following subsequent private sector guidance for their business type activities and enterprise funds, subject to this same limitation. The City has elected not to follow subsequent private sector guidance. As a general rule the effect of interfund activity has been eliminated from the government -wide financial statements. Exceptions to this general rule are charges between the City's utility functions and various other functions of the government. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Amounts reported as program revenues include: 1) charges to customers or applicants for goods, services, or privileges provided; 2) operating grants and contributions; and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. Washington State Auditor's Office 62 Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with proprietary funds' principal ongoing operations. The principal operating revenues of the water, wastewater, refuse, stormwater and irrigation enterprise funds and of the government's internal service funds are charges to customers for sales and services. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. ASSETS, LIABILITIES AND EQUITIES Cash and Investments Cash and investments are managed under the guidance of the City's Investment Policy modified by Resolution No. R-2009-50 of the City Council. The policy was based on the Model Investment Policy prepared by the Association of Public Treasurers of the United States and Canada and applies to all financial assets of the City of Yakima. Investments are made using the "prudent person" standard with primary objectives being safety of principal, liquidity enabling the City to meet all operating requirements and a return on investment objective of attaining a market rate of return through budgetary and economic cycles. > Investments of City funds except those of the Firemen's Relief and Pension Fund are limited to: • Investment deposits, including certificates of deposit with qualified public depositories as defined in Chapter 39.58 Revised Code of Washington. • Certificates, notes or bonds of the United States, or other obligations of the United States, or its agencies, or of any corporation wholly owned by the government of the United States (such as the Government National Mortgage Association). • Obligations of government sponsored corporations which are eligible as collateral for advances to member banks as determined by the Board of Governors of the Federal Reserve System. (These include but are not limited to Federal Home Loan Bank notes and bonds, Federal Farm Credit Bank consolidated notes and bonds, Federal National Mortgage Association notes, debentures, and guaranteed certificates of participation). • Bankers Acceptances and Commercial Paper purchased on the secondary market. • Washington State Local Government Investment Pool. • General obligation bonds of any state or local government in the United States and revenue bonds from jurisdictions in Washington state having a long-term credit rating of no less than A3 as rated by Moody's or A- by Standard and Poor's. > Repurchase and reverse repurchase agreements are excluded as eligible investments. > Resources of the Firemen's Relief and Pension Fund may be invested in high quality corporate bonds in addition to instruments listed above. > The City purchases investments from SEC registered security broker- dealers and banks having offices within Washington State. The City's Treasury Services Officer, under the direction of the Director of Finance and Budget, invests or deposits all temporary cash. These investments and time deposits do not result in reductions to the cash balances of the various funds and are considered to be cash equivalents to the funds under the definition promulgated in GASB Statement #31, which states that investments purchased within thirty days of maturity are considered to be cash equivalents. These amounts are reported on the Combined Balance Sheet as part of "Cash and Cash Equivalents." Washington State Auditor's Office 63 Receivables Taxes receivable consists of property and other taxes including related interest and penalties (See Note 4 — Receivables). Accrued interest receivable consists of amounts earned on investments, notes, and contracts as of year-end. Special assessments are recorded when levied. Special assessments receivable consists of current and delinquent assessments. Deferred assessments consist of unbilled special assessments that are liens against the property benefited. Customer accounts receivable consists of amounts due from private individuals or organizations for goods and services. Notes and contracts receivable consists of amounts owed on open account from private individuals or organizations for goods and services rendered. The major component of the notes receivable category is in the Community Development fund and represents a revolving home ownership assistance program. Amounts Due To and From Other Funds; Interfund Loans and Advances Receivable These accounts include all interfund receivables and payables. A separate schedule of interfund loans receivable and payable is furnished in Note 4 — Interfund Receivables. Long-term interfund loans are separately identified as "Advances" — at December 31, 2010, there were no interfund advances. Amounts Due To and From Other Governmental Units These accounts include amounts due to or from other governments for grants, entitlements, temporary loans, taxes and charges for services, except amounts billed for utility usage which is included in customer receivables. Inventories Inventories in governmental funds consist of expendable supplies held for consumption. The cost is recorded as an expenditure at the time individual inventory items are purchased. The reserve for inventory is equal to the ending amount of inventory to indicate that a portion of the fund balance is not available for future expenditure. Inventories in the General Fund, Enterprise Funds and Internal Service Funds are valued at cost on a moving average method. Restricted Assets and Liabilities These accounts contain resources for debt service reserve/redemption in the enterprise funds. The current portion of related liabilities is shown as Payables from Restricted Assets. Specific debt service reserve requirements are described in Note 7. Capital Assets (See Note 4 — Capital Assets) Capital assets, which include property, plant, equipment, and infrastructure assets (i.e., roads, bridges, sidewalks, and similar items), are reported in the applicable governmental or business type columns in the government -wide financial statements. Capital assets are defined by the City as assets with an initial, individual cost of more than $5,000 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. Infrastructure assets are long lived assets that normally are stationary in nature and can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure include roads, bridges, drainage systems, water and wastewater systems, and lighting systems. Washington State Auditor's Office 64 When capital assets are purchased, they are capitalized and depreciated in the government -wide financial statements and the proprietary fund statements. Capital assets are recorded as expenditures of the current period in the governmental fund financial statements. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of the capital assets of business type activities is included as part of the capitalized value of the assets constructed. Property, plant, and equipment of the City is depreciated using the straight line method over the following estimated useful lives: Buildings 25 - 40 Years Improvements Other than Buildings 7 - 50 Years Utility Plant 33 - 50 Years Equipment 2 - 25 Years Intangibles (Organization Costs and Goodwill) 75 -100 Years Infrastructure 15 - 50 Years Custodial Accounts These accounts reflect the liability for net monetary assets being held by the City in its trustee or agency capacity. Accrued Liabilities Other accrued liabilities include primarily interest payable on long-term debt, Public Works Trust Loans and small miscellaneous payables not classified in other categories in Enterprise Funds. Deferred Revenues This account includes amounts recognized as receivables but not as revenue in governmental funds because the revenue recognition criteria have not been met. (See Note 1— Measurement Focus) Noncurrent Liabilities Noncurrent liabilities include long-term debt, compensated absences and the cumulative unfinanced liability related to post employment benefits. For additional information on long-term debt see Note 7. Long -Term Obligations — In the government -wide financial statements, and proprietary fund types in the fund financial statements, long-term obligations are reported as liabilities in the applicable governmental activities, business type activities, or proprietary fund type statement of net assets. Bond premiums and discounts, as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The bond proceeds, net of premiums, discounts and issuance costs are reported as "other financing sources". Compensated Absences — Contracts with employees call for the accumulation of vacation and sick leave. At termination of employment, employees may receive cash payment for all accumulated vacation up to a certain number of hours and a percentage of sick leave, depending on employee group. The payment is based on current wage at termination. Washington State Auditor's Office 65 The amounts of unpaid vacation and sick leave accumulated by City employees are accrued as expenses when incurred in proprietary funds, which use the accrual basis of accounting. In the governmental funds, only the amounts that normally would be liquidated with expendable available financial resources are accrued as current year expenditures. The City uses the last -in, first -out method of recognizing the hours used of compensated absences. Employees are charged for the last day of vacation or sick leave earned when the leave is used. Thus, unless it is anticipated that compensated absences will be used in excess of a normal year's accumulation, no additional expenditures are accrued. Therefore, the entire unpaid liability for the governmental funds is a reconciling item between the fund and government -wide presentations. Fund Equity Fund equity is recognized as fund balance in governmental fund types and as net assets in proprietary fund types. Certain fund equity may be reserved for a specific future use or to denote unavailability for current operations. Designations of fund balance represent tentative management plans that are subject to change. Unless otherwise noted, fund balances and retained earnings (deficits) are unreserved and undesignated. NOTE 2 -- RECONCILL4TION OF GOVERNMENT -WIDE & FUND FINANCIAL STATEMENTS EXPLANATION OF CERTAIN DIFFERENCES BETWEEN THE GOVERNMENTAL FUND BALANCE SHEET The governmental fund balance sheet includes reconciliation between fund balance — total government funds and net assets — governmental activities as reported in the government -wide statement of net assets. One element of that reconciliation explains that "long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported in the funds." The details of this $45,384,807 difference are as follows: Bonds Payable $24,880,686 Intergovernmental Loans 2,774,138 Contractual Agreements - Yakima County 172,271 Special Assessments - Note 819,461 Lease Purchase Agreements 132,466 Unfinanced Pension/OPEB Liability 10,285,595 Compensated Absences 6,320,190 Note Adjustments to reduce fund balance - Total Govemmental funds to arrive at net assets - governmental activities $45,384,807 EXPLANATION OF CERTAIN DIFFERENCES BETWEEN THE GOVERNMENTAL FUND STATEMENTS The governmental fund statement of revenues, expenditures, and changes in fund balances includes reconciliation between net changes in fund balances — total governmental funds and changes in net assets of governmental activities as reported in the government -wide statement of activities. One element of that reconciliation explains that "Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense." The details of this $11,092,748 difference are as follows: Washington State Auditor's Office 66 Capital Outlay Depreciation Expense $19,311,637 (8,218,889) Net adjustment to increase net changes in fund balances - total governmental funds to arrive ai changes in net assets of governmental activities $11,092,748 Another element of that reconciliation states that "The net effect of various miscellaneous transactions involving capital assets (Le., sales, trade-ins, donations and physical inventory adjustments) is to increase net assets." The details of this $1,874,212 difference are as follows: In the statement of activities, only gain on the sale of capital assets is reported. However, in the governmental funds, the proceeds from the sale increase financial resources. Thus, the change in net assets differs from the change in the fund balance by the cost of the capital assets sold. (968,871) Donations of capital assets increase net assets in the statement of activities, but do not appear in the governmental funds because they are not financial resources. 2,843,083 Net adjustment to increase/(decrease) net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities $1,874,212 Another element of that reconciliation states that "The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long- term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets." The details of this $212,061 difference are as follows: Debt Issued Intergovernmental Loan ($1,690,451) Special Assessment Notes (864,093) Lease Purchase Agreements (149,288) Principal Repayments General Obligation Debt 2,098,125 Intergovernmental Loans 417,221 Contractual Agreement - Yakima County 72,535 Special Assessment Notes 301,132 Lease Purchase Agreements 26,880 Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities $212,061 Another element of that reconciliation states that "Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds." The details of this ($1,593,804) difference are as follows: Washington State Auditor's Office 67 Compensated Absences Change in Unfunded Pension Liability Change in Other Post Employment Benefit Liability Change in Reserve for Inventory Accrued Interest Payable ($164,093) 59,869 (1,510,463) 9,929 10,954 Net adjustment to decrease net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities ($1,593,804) NOTE 3 -- STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY BUDGETS AND BUDGETARY ACCOUNTING Scope of Budget The City Council annually approves the City's operating budget. The operating budget is designed to allocate annually available resources among the City's services and programs and to provide for associated financing decisions. Annual appropriated budgets are adopted on the modified accrual basis of accounting. For governmental funds, there are no differences between budgetary basis and generally accepted accounting principles. Budgetary accounts are integrated in fund ledgers for all budgeted funds, but the financial statements include budgetary comparisons for the General Fund and Special Revenue Funds only. Budgets for debt service and capital projects are adopted at the level of the individual debt issue or project and for fiscal periods that correspond to the lines of debt issues or projects. Budgetary comparisons for proprietary funds, although not legally required, may be requested from the Department of Finance and Budget. Annual appropriated budgets are adopted at the fund level. Subsidiary revenue and expenditure ledgers are used to compare the budgeted amounts with actual revenues and expenditures. As a management control device, the subsidiary ledgers monitor expenditures for individual functions and activities by object class. Appropriations for general and special revenue funds lapse at year end. Procedures for Adopting the Original Budget The City's budget procedures are mandated by Washington State Law. The steps in the budget process are as follows: 1. Prior to November 1, the City Manager submits a proposed budget to the City Council. This budget is based on priorities established by the Council and estimates provided by City departments during the preceding months and balanced with revenue estimates. 2. The Council conducts public hearings on the proposed budget in November to obtain taxpayer comments. 3. During mid-December, the budget is legally enacted through passage of an ordinance. Amending the Budget The City Manager is authorized to transfer budgeted appropriations between departments within any fund; however, any revisions that alter the total expenditures of a fund, or that affect the number of permanently authorized employee positions, salary ranges, or other conditions of employment must be approved by the City Council. Washington State Auditor's Office 68 When the City Council determines that it is in the best interest of the City to increase or decrease the appropriation for a particular fund, it may do so by an ordinance approved by a one more than simple majority of those council members present after holding two public hearings. The budget amounts shown in the financial statements represent the original adopted budget and all supplemental appropriations. City-wide, supplemental appropriations totaled $12.3 million. The principal amendments were to reappropriate 2010 outstanding encumbrances in the amount of $4.7 million and nonlapsing appropriations for various projects in capital funds (Arterial Street, Capital Theatre Construction, Public Works Trust Construction, REET 2 Capital Fund, and Wastewater Facilities) in the amount of $6.5 million. Encumbrances Encumbrance accounting, under which purchase orders, contracts, and other commitments for the expenditure of funds are recorded in order to reserve that portion of the applicable appropriation, is employed as an extension of formal budgetary integration in the governmental funds. Encumbrances are reported as reservations of fund balances since they do not constitute expenditures or liabilities. The City reappropriates outstanding encumbrances in the subsequent year. FUND EQUITY Deficit Fund Equities Temporary deficits of the Local Improvement Construction Fund arise because long-term financing has not been issued. During the construction phase, the Local Improvement District issues warrants, which accrue interest and are held as an investment internally, shown on the balance sheet as Warrants Payable, result in a deficit fund balance. When the LID is completed, bonds or notes are issued and the Warrants Outstanding are redeemed, eliminating the deficit. Designated Fund Balances This category is used to set aside governmental fund balances when city management has plans or tentative commitments to expend resources for certain purposes in future periods. Further legal action will be required to authorize the actual expenditures. Special Revenue Funds have a designated fund balance of $381,765 for the Capitol Theatre Reserve Fund for modifications to the Capitol Theatre. The Capital Project Funds have a designated fund balance of $895,506 for replacement of equipment and other capital improvements. Reserved Fund Balance in Permanent Funds The reserve of $592,099 in the Cemetery Trust Fund represents a portion of the amounts paid for cemetery plots. Provisions of these sales require $120 of the sales price be held in trust and that the income on the investment of these amounts be used to maintain the plots. The Reserve for Endowments represents an endowment for cemetery beautification. The provisions of the endowment stipulate that income from the endowment be used only for grounds improvements. Fiduciary Fund Net Assets The Firemen's Relief and Pension Fund has Net Assets held in Trust for Pension Benefits and other purposes of $774,349 which represents the accumulated contributions made by the government through property taxes (see Note 4) plus interest earnings and state fire insurance premium tax proceeds. Washington State Auditor's Office 69 NOTE 4 -- DETAILED NOTES ON ALL FUNDS DEPOSITS AND INVESTMENTS In its 2005 Notes to the Financial Statements, the City of Yakima implemented GASB Statement No. 40, Deposit and Investment Risk Disclosures — an amendment of GASB Statement No. 3, issued in March 2003. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2004. This statement addresses common deposit and investment risks related to credit risk, 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. The City holds no such investments as of the Statement of Net Assets date. As required by state law, all deposits and investments of the City's funds are direct or indirect obligations of the U.S. Government, high quality Municipal Bonds, Bankers' Acceptances, high quality Commercial Paper or deposits with Washington State banks and savings and loan institutions or the Washington State Local Government Investment Pool. Investments of trust funds are not subject to the preceding limitations. Deposits The City of Yakima maintains deposit relationships with several Washington State commercial banks and savings and loan institutions. The Public Deposit Protection Commission of the State of Washington (PDPC) covers all deposits not covered by the Federal Depository Insurance Corporation (FDIC). The PDPC is a statutory authority established under RCW 39.58. It constitutes a multiple financial institution collateral pool that insures public deposits. In such a pool, a group of financial institutions holding public funds pledge collateral to a common pool. The PDPC provides protection by maintaining strict standards as to the amount of public deposits financial institutions can accept, and by monitoring the financial condition of all public depositories and optimizing collateralization requirements. The City's agent in the name of the City holds all deposits. The City of Yakima had the following bank balances on hand on December 31, 2010: Banks and Savings and Loan Institution Petty Cash and Other Imprest Funds Local Government Investment Pool (LGIP) $9,176,239 14,955 18,562,076 Total $27,753,270 Custodial Credit Risk: Deposits — The custodial credit risk for deposits is the risk that, in the event of a depository financial institution failure, the City's deposits with banks and savings and loan associations may not be recovered. Because of the PDPC, the City's deposits are not subject to this risk. The LGIP is an unrated 2a7 like pool, as defined by GASB 31. Accordingly, participants' balances in the LGIP are not subject to interest rate risk, as the weighted average maturity of the portfolio will not exceed 90 days. Per GASB 40 guidelines, the balances are also not subject to custodial credit risk. The credit risk of the LGIP is limited as most investments are either obligations of the US government, government sponsored enterprises, or insured demand deposit accounts and certificates of deposit. Investments or deposits held by the LGIP are all classified as category 1 risk level investments. They are either insured or held by a third - party custody provider in the LGIP's name. Washington State Auditor's Office 70 Foreign Currency Risk: Deposits — Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of an investment or a deposit. The City of Yakima does not participate in making deposits or investments that are exposed to this type of risk. Investments As of December 31, 2010, the City of Yakima had the following investments: INVESTMENT PORTFOLIO Investment Types Weighted Average Carrying Fair Final Value Value Maturity Federal Agency Coupon Securities $8,655 $8,600 4,990 Federal Agency Callable Securities 29,503,928 29,268,953 1,229 Local Assessment Notes 816,500 816,500 n/a Total Portfolio $30,329,083 $30,094,053 Note — Investments are reported at Carrying Value on the Statement of Net Assets as the difference between Carrying Value and Fair Value is considered immaterial. Interest Rate Risk In accordance with its adopted investment policy, the City manages its exposure to declines in fair value due to rising interest rates by limiting the weighted average maturity of its cash and security portfolio as a whole to not more than 2.5 years, and has a five-year maximum investment limitation. When cash and the LGIP are included in the weighted average days to final maturity calculation of 1,229, the average drops to under two years. Additionally, the City does not use derivatives, pass through obligations or other extremely interest rate sensitive instruments in its portfolio. Weighted average maturity on callable securities is calculated using the final maturity date rather than the call date for conservatism. INVESTMENT MANAGEMENT Carrying Fair Less Than 1 1-2 2 -5 Investment Types Value Value Year Years Years Federal Agency Coupon Securities $8,655 $8,600 n/a n/a n/a Federal Agency Callable Securities 29,503,928 29,268,953 $1,045,000 $1,000,000 $27,458,928 Local Assessment Notes (1) 816,500 816,500 n/a n/a n/a Total Portfolio $30,329,083 $30,094,053 $1,045,000 $1,000,000 $27,458,928 (1) Represents 10 -year LID Notes the City is holding. All other investments in this category are under five-year final maturity. Callable securities are stated at their final maturity. Washington State Auditor's Office 71 Credit Risk State law, under RCW sections 35.39 and 39.59, limits investments that a Washington class 1 City may hold to: (1) Direct and Indirect obligations of the US Government, (2) high quality Municipal Bonds of Washington State or Cities and Towns within the State, (3) high quality General Obligation bonds of another State or City, by Washington Administrative Code permission, not in the RCW's, (4) Bankers Acceptances and high quality Commercial Paper as long as they hold one of the 2 highest Credit ratings issued by at least two nationally recognized rating agencies, and the (4) State Treasurer's LGIP. The LGIP is a 2a7 like pool, and investments in the pool are reported at the share price of 100% of dollars invested. The City's own adopted Investment Policy adheres to the RCW's and also allows for investment in high quality Commercial Paper, Banker's Acceptances and the LGIP (see Deposit Note for information on the LGIP). Custodial Credit Risk The City's investment Policy does not include Repurchase, Reverse — Repurchase agreements or securities lending as allowable investment activity; therefore no custodial credit risk exists. All investments are held in the City's name by a third party custodian through a Trust Agreement, and are considered Category 1 investments, with the exception of the LGIP and LID Notes (see Deposit note for custodial risk details). PROPERTY TAXES The County Treasurer acts as an agent to collect property taxes levied within the county for all taxing authorities. Collections are distributed after the end of each month, on the tenth day of the following month. PROPERTY TAX CALENDAR January 1 Taxes are levied and become an enforceable lien against properties. February 14 Tax bills are mailed. April 30 First of two equal installment payments is due. May 31 Assessed value of property is established for next year's levy at 100% of market value. October 31 Second installment is due. During the year, property tax revenues are recognized when cash is collected. At year-end, property tax revenues are recognized for collections in the hands of the County Treasurer at December 31st. No allowance for uncollectible taxes is established because delinquent taxes are considered fully collectable. The City is permitted by law to levy up to $3.60 per $1,000 of assessed valuation for general government services, less a maximum levy of $.50/$1,000 for the Library District, beginning in 2007. This amount may be reduced for either of the following reasons: > The Washington State Constitution limits total regular property tax levies to one -percent of assessed valuation or $10 per $1,000 of value. If the tax levies of all districts exceed this amount, each is proportionately reduced until the total is at or below the one percent limit. > Washington State law, RCW 84.55.010, limits the total dollar amount of regular property taxes that may be levied annually to 101% of the highest levy in the three previous years (excluding new construction, annexations and state assessed property). Special levies approved by the voters are not subject to the above limitations. For 2010, the City's regular tax levy was 2.9348 per $1,000 on a total assessed valuation of $5.4 billion, for a total regular levy of $15,816,280. Included in the City's regular levy is an authorization to levy for the Firemen's Relief and Pension Fund (see Note 5). This levy is subject to the same limitations as the levy for general government services. The Firemen's Relief and Pension portion of the regular tax levy for 2010 was $.2788 per $1,000, or $1,502,765. Additionally, special levies for General Obligation Bond obligations totaled $297,000. Washington State Auditor's Office 72 RECEIVABLES Receivables as of year-end for the City's individual major funds, nonmajor, internal service and agency funds in the aggregate, including applicable allowance for uncollectible accounts, are shown in the following chart. ACCOUNTS RECEIVABLE Special Due from Interest & Taxes Accounts Assm'ts Other Gov'ts Penalties Other Total General Fund $4,745,805 $1,550,315 $0 $148,322 $90,976 $0 $6,535,418 Com & Econ Dev 0 4,852,061 0 321,359 0 0 5,173,420 Non -Major Gov't 250,704 349,730 861,036 2,768,554 0 0 4,230,024 Transit 800,916 0 0 357,729 0 0 1,158,645 Refuse 0 219,576 0 0 0 0 219,576 Wastewater 0 1,503,384 0 0 0 3,000 1,506,384 Water 0 68,928 0 0 0 0 68,928 Irrigation 0 228,470 0 0 0 0 228,470 Stormwater 0 62,830 0 29,240 0 0 92,070 Internal Service Funds 0 807,675 0 124,436 0 0 932,111 Total $5,797,425 $9,642,969 $861,036 $3,749,640 $90,976 $3,000 $20,145,046 Revenues of the Water, Wastewater, Refuse and Irrigation funds are reported net of uncollectible amounts. Total uncollectible amounts related to revenues of the current period of approximately 1% of billed revenue are as follows: Refuse $49,355 Wastewater 151,444 Water 70,559 Irrigation 27,159 Stormwater 19,933 Total $318,450 Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned, of which the City has none in 2010. At the end of the current fiscal year, the various components of deferred revenue and unearned revenue reported in the governmental funds were as follows: Washington State Auditor's Office 73 DEFERRED REVENUES Unavailable General Fund Court Receivables $1,419,353 WA State Office Public Defense 150,000 Miscellaneous 1,872 Community Economic Development - Homeownership Programs 4,851,529 Special Revenue Funds Parks & Recreation - Pool & Field Rentals 3,689 Streets - Sidewalk Repairs 3,950 Community Relations - Equipment Reimbursement 1,600 Arterial Street - Debt Service Assessment 5,256 Cemetery - Lot Sales 37,865 Public Safety Communications - Site Lease 3,179 Parking & Business Impr - Assessment Levied on Businesses 35,728 Front St Bus Impr - Assessment Levied on Businesses in 1,855 Debt Service Funds LID Fund - Special Assessments Not Yet Due 799,796 Capital Project Funds Central Business Downtown - Parking Permits 918 Parks & Recreation Capital - Private Contributions 10,871 Total deferred/unearned revenue for Governmental Funds $7,327,461 INTERFUND RECEIVABLES, PAYABLES AND TRANSFERS Classification of Interfund Transactions Interfund transactions are classified as follows: 1. Transactions that would be treated as revenues, expenditures or expenses if they involved external organizations, such as buying goods and services, are similarly treated when they involve other funds of the City. 2. Transfers to support the operations of other funds are recorded as "Transfers" and classified with "Other Financing Sources or Uses." 3. Contributions to the capital of enterprise or internal service funds (transfers between those funds and the general capital assets account group), transfer to establish or reduce working capital in other funds, and transfers of remaining balances when funds are closed are classified as transfers and reported as nonoperating revenues. 4. Loans between funds are classified as interfund loans receivable and payable or as advances to and from other funds on the combined balance sheet depending on the time period for which the loan was made. Interfund loans do not affect total fund equity, but advances to other funds are offset by a reservation of fund equity. As of December 31, 2010, there were no advances to / from any funds. Interfund Loans and Receivables The following table depicts the temporary cash overdrafts in individual funds as of December 31, 2010 - caused by timing of cash flow related to grant reimbursements. Washington State Auditor's Office 74 INTERFUND LOANS Due From Other Due To Other Funds Funds General Fund $25,485 $0 Special Revenue Funds Trolley 0 401 Recovery Grants Program 0 25,084 $25,485 $25,485 Interfund Transfers Interfund transfers represent subsidies and contributions provided to other funds with no corresponding debt or promise to repay. General Fund transfers are primarily used to: 1) allocate the portion of utility taxes that are designated to support Parks and Recreation and Law and Justice Capital programs; 2) support the Public Safety dispatch operation with a portion of the telephone tax; and 3) contribute to the Contingency Fund. The Internal Service transfer in represents capital contributions from other funds to purchase new vehicle additions to the rolling stock fleet. Other transfers generally represent debt service and capital project funding. The following table depicts interfund operating transfer activity during 2010. OPERATING TRANSFERS Transfer In General Non Major Transfer out Fund Gov't Wastewater Total General Fund $0 $2,412,206 $0 $2,412,206 Non -Major Governmental 40,000 2,498,459 0 2,538,459 Wastewater 0 42,516 0 42,516 Water Operating Fund 0 139,058 32,939 171,997 Irrigation 0 93,750 0 93,750 Stormwater 0 40,000 200,000 240,000 Internal Services 0 34,735 0 34,735 Total $40,000 $5,260,724 $232,939 $5,533,663 Washington State Auditor's Office 75 CAPITAL ASSETS CAPITAL ASSET ACTIVITY Balance Balance 1/1/10 Additions Adjustments Deletions 12/31/10 Governmental Activities Capital Assets - Not Depreciated Land $12,858,062 $1,261,214 $0 $0 $14,119,276 Construction in Progress 20,644,469 16,826,232 (9,773,440) (932,407) 26,764,854 Total Capital Assets - Not Depreciated 33,502,531 18,087,446 (9,773,440) (932,407) 40,884,130 Capital Assets - Depreciated Buildings & Structures 47,679,455 451,366 615,373 (6,030) 48,740,164 Other Improvements 12,093,636 0 63,954 (46,056) 12,111,534 Equipment & Machinery 10,128,675 1,530,440 0 (219,511) 11,439,604 Infrastructure 204,515,738 1,936,185 9,094,113 0 215,546,036 Capitalized Leases 681,928 149,288 0 0 831,216 Total Capital Assets - Depreciated 275,099,432 4,067,279 9,773,440 (271,597) 288,668,554 Less Accumulated Depreciation Buildings & Structures (16,155,421) (1,123,575) 0 4,884 (17,274,112) Other Improvements (5,208,764) (610,977) 0 37,079 (5,782,662) Equipment & Machinery (6,715,192) (599,799) 0 193,170 (7,121,821) Infrastructure (136,406,169) (5,850,601) 0 0 (142,256,770) Capitalized Leases (615,401) (33,937) 0 0 (649,338) Total Accumulated Depreciation (165,100,947) (8,218,889) 0 235,133 (173,084,703) Total Capital Assets - Depreciated Net 109,998,485 (4,151,610) 9,773,440 (36,464) 115,583,851 Gov't Activities Capital Assets - Net 143,501,016 13,935,836 0 (968,871) 156,467,981 Internal Service Funds - Governmental Activities Capital Assets - Depreciated Buildings 37,397 0 0 0 37,397 Other Improvements 112,131 14,965 0 0 127,096 Machinery 20,517,112 1,408,418 0 (252,143) 21,673,387 Total Capital Assets - Depreciated 20,666,640 1,423,383 0 (252,143) 21,837,880 Less Accumulated Depreciation Buildings (20,426) (1,852) 0 0 (22,278) Other Improvements (6,609) (5,981) 0 0 (12,590) Machinery (11,847,939) (1,393,544) 0 214,884 (13,026,599) Total Accumulated Depreciation (11,874,974) (1,401,377) 0 214,884 (13,061,467) Total Capital Assets - Depreciated Net 8,791,666 22,006 0 (37,259) 8,776,413 Total Capital Assets - Gov't Activities $152,292,682 $13,957,842 $0 ($1,006,130) $165,244,394 Washington State Auditor's Office 76 Balance Balance 1/1/10 Additions Adjustments Deletions 12/31/10 Business Type Activities Capital Assets - Not Depreciated Land $2,163,373 $0 $0 $0 $2,163,373 Construction in Progress 13,571,901 5,842,913 (9,310,285) (54,610) 10,049,919 Total Capital Assets - Not Depreciated 15,735,274 5,842,913 (9,310,285) (54,610) 12,213,292 Capital Assets - Depreciated Buildings & Structures 82,769,341 0 58,823 (69,817) 82,758,347 Other Improvements 98,484,321 1,985,432 4,105,231 0 104,574,984 Equipment & Machinery 23,026,773 2,142,117 5,146,231 (495,030) 29,820,091 Intangibles 221,830 0 0 0 221,830 Total Capital Assets - Depreciated 204,502,265 4,127,549 9,310,285 (564,847) 217,375,252 Less Accumulated Depreciation Buildings & Structures (42,999,705) (1,951,371) 0 69,817 (44,881,259) Other Improvements (37,378,392) (2,050,780) 0 0 (39,429,172) Equipment & Machinery (9,722,745) (1,464,688) 0 459,376 (10,728,057) Intangibles (106,171) 0 0 0 (106,171) Total Accumulated Depreciation (90,207,013) (5,466,839) 0 529,193 (95,144,659) Total Capital Assets - Depreciated Net 114,295,252 (1,339,290) 9,310,285 (35,654) 122,230,593 Total Capital Assets - Business Activities $130,030,526 $4,503,623 $0 ($90,264) $134,443,885 NOTE - The 2010 adjustment column represents construction works in progress that were completed and dassified into the appropriate capital asset category. Depreciation expense was charged to functions/programs as follows: General Government $201,297 Security of Persons and Property 894,712 Physical Environment 10,322 Transportation 5,910,182 Economic Environment 89,931 Cultural & Recreational Environment 1,112,445 Capital Assets held by the City's internal service funds are charged to the various functions based on their usage of the assets 1,401,377 Total Depreciation - Governmental Activities $9,620,266 Transit $1,063,054 Wastewater 3,026,976 Water 1,143,352 Irrigation 217,616 Stormwater 15,840 Total Depreciation - Business -Type Activities $5,466,838 Washington State Auditor's Office 77 COMMITMENTS Construction Commitments The City has active construction projects as of December 31, 2010. The major street project is the construction of a railroad underpass on Lincoln Avenue. Other projects include improvements to the Wastewater facility and collection system and the rebuilding of the Irrigation system. CURRENT CONSTRUCTION PROJECTS Project Street Construction Wastewater Treatment Plant and Mains Irrigation System Design & Rebuild Total Contract Spent to Amount Date $18,621,474 $10,865,523 4,488,597 4,212,443 4,049,605 2,685,831 Remaining Commitment $7,755,951 276,154 1,363,774 $27,159,676 $17,763,797 $9,395,879 Street construction is being financed by gas tax; federal, state or local grants; and low interest state agency loans. Wastewater improvements are being financed by State Public Works Trust Fund loans and wastewater utility revenues / capital reserves. Irrigation improvements are funded by irrigation capital rates / reserves. NOTE 5 -- PENSION PLANS Substantially all City full-time and qualifying part-time employees participate in one of the following statewide retirement systems administered by the Washington State Department of Retirement Systems, under cost sharing multiple employer public employee defined benefit and defined contribution retirement plans. The Department of Retirement Systems (DRS), a department within the primary government of the State of Washington, issues a publicly available Comprehensive Annual Financial Report (CAFR) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be downloaded from the DRS website at www.drs.wa.gov, or by writing to: Department of Retirement Systems Communications Unit P.O. Box 48380 Olympia, WA 98504-8380 The following disclosures are made pursuant to GASB Statement 27, Accounting for Pensions by State and Local Government Employers, and No. 50, Pension Disclosures, an Amendment of GASB Statements No. 25 and No. 27. PUBLIC EMPLOYEES' RETIREMENT SYSTEM (PERS) PLANS 1, 2 & 3 Plan Description PERS is a cost sharing multiple employer retirement system comprised of three separate plans for membership purposes: Plans 1 and 2 are defined benefit plans and Plan 3 is a defined benefit plan with a defined contribution component. Washington State Auditor's Office 78 Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals, and Superior courts (other than judges currently in a judicial retirement system); employees of legislative committees; community and technical colleges, college and university employees not participating in national higher education retirement programs; judges of district and municipal courts; and employees of local governments. PERS participants who joined the system by September 30, 1977, are Plan 1 members. Those who joined on or after October 1, 1977, and by either February 28, 2002 for state and higher education employees, or August 31, 2002, for local government employees, are Plan 2 members unless they exercise an option to transfer their membership to Plan 3. PERS participants joining the system on or after March 1, 2002 for state and higher education employees, or September 1, 2002, for local government employees have the irrevocable option of choosing membership in either PERS Plan 2 or PERS Plan 3. The option must be exercised within ninety days of employment. An employee is reported in Plan 2 until a choice is made. Employees who fail to choose within ninety days default to PERS Plan 3. Notwithstanding, PERS Plan 2 and Plan 3 members may opt out of plan membership if terminally ill, with less than five years to live. PERS Plan 1 and Plan 2 defined benefit retirement benefits are financed from a combination of investment earnings and employer and employee contributions. PERS retirement benefit provisions are established in state statute and may be amended only by the State Legislature. PERS Plan 1 members are vested after the completion of five years of eligible service. Plan 1 members are eligible for retirement at any age after thirty years of service, or at the age of 60 with 5 years of service, or at the age of 55 with 25 years of service. The monthly benefit is 2 percent of the average final compensation (AFC) per year of service. (AFC is based on the monthly average of the 24 consecutive highest paid service credit months.) The retirements benefit may not exceed 60 percent of AFC. The monthly benefit is subject to a minimum for PERS Plan 1 retirees who have 25 years of service and have been retired 20 years, or who have 20 years of service and have been retired 25 years. Plan 1 members retiring from inactive status prior to the age of 65 may receive actuarially reduced benefits. If a survivor option is chosen, the benefit is further reduced. A cost of living allowance (COLA) is granted at age 66 based upon years of service times the COLA amount, which is increased 3 percent annually. Plan 1 members may also elect to receive an optional COLA that provides an automatic annual adjustment based on the Consumer Price Index. The adjustment is capped at three percent annually. To offset the cost of this annual adjustment, the benefit is reduced. PERS Plan 1 provides duty and non -duty disability benefits. Duty disability retirement benefits for disablement prior to the age of 60 consist of a temporary life annuity payable to the age of 60. The allowance amount is $350 a month, or two-thirds of the monthly AFC, whichever is less. The benefit is reduced by any workers' compensation benefit and is payable as long as the member remains disabled or until the member attains the age of 60. A member with five years of covered employment is eligible for non -duty disability retirement. Prior to the age of 55, the allowance amount is 2 percent of the AFC for each year of service reduced by 2 percent for each year that the member's age is less than 55. The total benefit is limited to 60 percent of the AFC and is actuarially reduced to reflect the choice of a survivor option. A cost -of living allowance is granted at age 66 based upon years of service times the COLA amount (based on the consumer Price Index), capped at 3 percent annually. To offset the cost of this annual adjustment, the benefit is reduced. PERS Plan 1 members can receive credit for military service while actively serving in the military, if such credit makes them eligible to retire. Members can also purchase up to 24 months of service credit lost because of an on-the-job injury. PERS Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members are eligible for normal retirement at the age of 65 with five years of service. The monthly benefit is 2 percent of the AFC per year of service. (AFC is the monthly average of the 60 consecutive highest-paid service months.) Washington State Auditor's Office 79 PERS Plan 2 members who have at least 20 years of service credit and are 55 years of age or older are eligible for early retirement with a reduced benefit. The benefit is reduced by an early retirement factor (ERF) that varies according to age, for each year before age 65. PERS Plan 2 members who have 30 or more years of service credit and are at least 55 years old can retire under one of two provisions: • With a benefit that is reduced by 3 percent for each year before age 65. • With a benefit that has a smaller (or no) reduction (depending on age) that imposes stricter return -to - work rules. PERS Plan 2 retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option. There is no cap on years of service credit; and a cost -of -living allowance is granted (based on the Consumer Price Index), capped at 3 percent annually. The surviving spouse or eligible child or children of a PERS Plan 2 member who dies after leaving eligible employment having earned ten years of service credit may request a refund of the member's accumulated contributions. Effective July 22, 2007, said refund (adjusted as needed for specified legal reductions) is increased from 100 percent to 200 percent of the accumulated contributions if the member's death occurs in the uniformed service to the United States while participating in Operation Enduring Freedom or Persian Gulf, Operation Iraqi Freedom. PERS Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component and member contributions finance a defined contribution component. The defined benefit portion provides a monthly benefit that is 1 percent of the AFC per year of service. (AFC is the monthly average of the 60 consecutive highest-paid service months.) Effective June 7, 2006, PERS Plan 3 members are vested in the defined benefit portion of their plan after ten years of service; or after five years of service, if twelve months of that service are earned after age 44; or after five service credit years earned in PERS Plan 2 prior to June 1, 2003. Plan 3 members are immediately vested in the defined contribution portion of their plan. PERS Plan 2 members are vested after the completion of five years of eligible service. Vested Plan 3 members are eligible for normal retirement at age 65, or they may retire early with the following conditions and benefits: • If they have at least ten service credit years and are 55 years old, the benefit is reduced by an ERF that varies with age, for each year before age 65. • If they have 30 service credit years and are at least 55 years old, they have the choice of a benefit that is reduced by 3 percent for each year before age 65; or a benefit with a smaller (or no) reduction factor (depending on age) that imposes stricter return -to -work rules. PERS Plan 3 defined benefit retirement benefits are also actuarially reduced to reflect the choice, if made, of a survivor option. There is no cap on years of service credit and Plan 3 provides the same cost -of -living allowance as Plan 2. PERS Plan 3 defined contribution retirement benefits are solely dependent upon the results of investment activities. The defined contribution portion can be distributed in accordance with an option selected by the member, either as a lump sum or pursuant to other options authorized by the Director of the Department of Retirement Systems. Washington State Auditor's Office 80 PERS Plan 2 and Plan 3 provide disability benefits. There is no minimum amount of service credit required for eligibility. The Plan 2 monthly benefit amount is 2 percent of the AFC per year of service. For Plan 3, the monthly benefit amount is 1 percent of the AFC per year of service. These disability benefit amounts are actuarially reduced for each year that the member's age is less than 65, and to reflect the choice of a survivor option. There is no cap on years of service credit, and a cost -of -living allowance is granted (based on the Consumer Price Index) capped at 3 percent annually. PERS Plan 2 and Plan 3 members may have up to ten years of interruptive military service credit; five years at no cost and five years that may be purchased by paying the required contributions. Effective July 24, 2005, a member who becomes totally incapacitated for continued employment while serving the uniformed services, or a surviving spouse or eligible children, may apply for interruptive military service credit. Additionally, PERS Plan 2 and Plan 3 members can also purchase up to 24 months of service credit lost because of an on- the-job injury. PERS members may also purchase up to five years of additional service credit once eligible for retirement. This credit can only be purchased at the time of retirement and can be used only to provide the member with a monthly annuity that is paid in addition to the member's retirement benefit. Beneficiaries of a PERS Plan 2 or Plan 3 member with ten years of service who is killed in the course of employment receive retirement benefits without actuarial reduction, if the member was not at normal retirement age at death. This provision applies to any member killed in the course of employment, on or after June 10, 2004, if found eligible by the Department of Labor and Industries. A one-time duty -related death benefit is provided to the estate (or duly designated nominee) of a PERS member who dies in the line of service as a result of injuries sustained in the course of employment, or if the death resulted from an occupational disease or infection that arose naturally and proximately out of said member's covered employment, if found eligible by the Department of Labor and Industries. Judicial Benefit Multiplier Beginning January 1, 2007 through December 31, 2007, judicial members of PERS were given the choice to participate in the Judicial Benefit Multiplier Program (JBM) enacted in 2006. Justices and judges in PERS Plan 1 and 2 were able to make a one-time irrevocable election to pay increased contributions that would fund a retirement benefit with a 3.5 percent multiplier. The benefit would be capped at 75 percent of AFC. Judges in PERS Plan 3 could elect a 1.6 percent of pay per year of service benefit, capped at 37.5 percent of average compensation. Members who chose to participate in JBM would: accrue service credit at the higher multiplier beginning with the date of their election; be subject to the benefit cap of 75 percent of AFC, pay higher contributions; stop contributing to the Judicial Retirement Account (JRA); and be given the option to increase the multiplier on past judicial service. Members who did not choose to participate would: continue to accrue service credit at the regular multiplier; continue to participate in JRA, if applicable; never be a participant in the JBM Program; and continue to pay contributions at the regular PERS rate. Newly elected or appointed justices and judges who chose to become PERS members on or after January 1, 2007, or who had not previously opted into PERS membership, were required to participate in the JBM Program. Members required into the JBM program would: return to prior PERS Plan if membership had previously been established; be mandated into Plan 2 and not have a Plan 3 transfer choice, if a new PERS member; accrue the higher multiplier for all judicial service; not contribute to JRA; and not have the option to increase the multiplier for past judicial service. Washington State Auditor's Office 81 There are 1,189 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans of June 30, 2009: Retirees and Beneficiaries Receiving Benefits 74,857 Terminated Plan Members Entitled to But Not Yet Receiving Benefits 28,074 Active Plan Members Vested 105,339 Active Plan Members Non -vested 53,896 Total 262,166 Funding Policy Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates, Plan 2 employer and employee contribution rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at 6 percent for state agencies and local government unit employees, and at 7.5 percent for state government elected officials. The employer and employee contribution rates for Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. All employers are required to contribute at the level established by the Legislature. Under PERS Plan 3, employer contributions finance the defined benefit portion of the plan and member contributions finance the defined contribution portion. The Director of the Department of Retirement Systems sets Plan 3 employee contribution rates. Six rate options are available ranging from 5 percent to 15 percent; two of the options are graduated rates dependent on the employee's age. As a result of the implementation of the Judicial Benefit Multiplier Program in January 2007, a second tier of employer and employee rates was developed to fund, along with investment earnings, the increased retirement benefits of those justices and judges that participate in the program. The methods used to determine the contribution requirements are established under state statute in accordance with Chapters 41.40 and 41.45 RCW. The required contribution rates expressed as a percentage of current -year covered payroll, as of December 31, 2010, are as follows: MEMBERS PERS Plan 1 PERS Plan 2 PERS Plan 3 Employer Contributions (1) 5.31% (2) 5.31% (2) 5.31% (3) Employee Contributions 6.00% (4) 3.9%(4) (5) (1) The employer rates include the employer administrative expense fee currently set at 0.16%. (2) The employer rate for state elected officials is 7.89% for Plan 1 and 5.31% for Plan 2 and Plan 3. (3) Plan 3 defined benefit portion only. (4) The employee rate for state elected officials is 7.50% for Plan 1 and 3.90% for Plan 2. (5) Variable from 5.0% minimum to 15.0% maximum based on rate selected by the PERS 3 member. Both the city and the employees made the required contributions. The city required contributions for the years ended December 31 were as follows: CITY CONTRIBUTIONS PERS Plan 1 PERS Plan 2 PERS Plan 3 2010 Contributions $88,319 $1,098,305 $213,590 2009 Contributions 114,667 1,438,351 261,602 2008 Contributions 133,956 1,087,755 171,842 Washington State Auditor's Office 82 LAW ENFORCEMENT OFFICERS' AND FIRE FIGHTERS' RETIREMENT SYSTEM (LEOFF) PLANS 1 AND 2 Plan Description LEOFF is a cost-sharing multiple -employer retirement system comprised of two separate defined benefit plans. LEOFF members who joined the system by September 30, 1977 are Plan 1 members. Those who joined on or after October 1, 1977 are Plan 2 members. Membership in the system includes all full-time, fully compensated, local law enforcement commissioned officers, firefighters and, as of July 24, 2005, those emergency medical technicians who were given the option and chose LEOFF Plan 2 membership. LEOFF membership is comprised primarily of non -state employees, with Department of Fish and Wildlife enforcement officers, who were first included prospectively effective July 27, 2003, being an exception. Effective July 1, 2003, the LEOFF Plan 2 Retirement Board was established by Initiative 790 to provide governance of LEOFF Plan 2. The Board's duties include adopting contribution rates and recommending policy changes to the Legislature for the LEOFF Plan 2 retirement plan. LEOFF defined benefit retirement benefits are financed from a combination of investment earnings, employer and employee contributions, and a special funding situation in which the state pays through state legislative appropriations. LEOFF retirement benefit provisions are established in Chapter 41.26 RCW and may be amended only by the State Legislature. LEOFF Plan 1 members are vested after the completion of five years of eligible service. Plan 1 members are eligible for retirement with five years of service at the age of 50. The benefit per year of service calculated as a percent of final average salary (FAS) is as follows: BENEFIT PERCENTAGE Term of Service Twenty or More Years Ten Years, Less than Twenty Years Five Years, Less than Ten Years Percent of Final Avg 2.0% 1.5% 1.0% The FAS is the basic monthly salary received at the time of retirement, provided a member has held the same position or rank for 12 months preceding the date of retirement. Otherwise, it is the average of the highest consecutive 24 months' salary within the last 10 years of service. A cost -of -living allowance is granted (based on the Consumer Price Index). LEOFF Plan 1 provides death and disability benefits. Death benefits for survivors of Plan 1 members on active duty consist of the following: (1) If eligible spouse, 50 percent of the FAS, plus 5 percent of FAS for each eligible surviving child, with a limitation on the combined allowances of 60 percent of the FAS; or (2) If no eligible spouse, eligible children receive 30 percent of FAS for the first child plus 10 percent for each additional child, subject to a 60 percent limitation of FAS, divided equally. A one-time duty -related death benefit is provided to the estate (or duly designated nominee) of a LEOFF Plan 1 member who dies as a result of injuries or illness sustained in the course of employment, if found eligible by the Department of Labor and Industries. The LEOFF Plan 1 disability allowance is 50 percent of the FAS plus 5 percent for each child up to a maximum of 60 percent. Upon recovery from disability before the age of 50, a member is restored to service with full credit for service while disabled. Upon recovery after the age of 50, the benefit continues as the greater of the member's disability allowance or service retirement allowance. Washington State Auditor's Office 83 LEOFF Plan 1 members may purchase up to five years of additional service credit once eligible for retirement. This credit can only be purchased at the time of retirement and can be used only to provide the member with a monthly annuity that is paid in addition to the member's allowance. LEOFF Plan 2 members are vested after the completion of five years of eligible service. Plan 2 members may retire at the age of 50 with 20 years of service, or at the age of 53 with five years of service, with an allowance of 2 percent of the FAS per year of service. (FAS is based on the highest consecutive 60 months.) Plan 2 members who retire prior to the age of 53 receive reduced benefits. Benefits are actuarially reduced for each year that the benefit commences prior to age 53 and to reflect the choice of a survivor option. If the member has at least 20 years of service and is age 50, the reduction is 3 percent for each year prior to age 53. A cost -of - living allowance is granted (based on the Consumer Price Index), capped at 3 percent annually. LEOFF Plan 2 provides disability benefits. There is no minimum amount of service credit required for eligibility. The Plan 2 allowance amount is 2 percent of the FAS for each year of service. Benefits are actuarially reduced for each year that the member's age is less than 53, unless the disability is duty -related, and to reflect the choice of a survivor option. If the member has at least 20 years of service and is age 50, the reduction is 3 percent for each year prior to age 53. A catastrophic disability benefit equal to 70 percent of their FAS, subject to offsets for workers' compensation and Social Security disability benefits received, is also available to those LEOFF Plan 2 members who are severely disabled in the line of duty and incapable of future substantial gainful employment in any capacity. Effective June 2010, benefits to LEOFF Plan 2 members who are catastrophically disabled include payment of eligible health care insurance premiums. Members of LEOFF Plan 2 who leave service because of a line of duty disability are allowed to withdraw 150 percent of accumulated member contributions. This withdrawal benefit is not subject to federal income tax. Alternatively, members of LEOFF Plan 2 who leave service because of a line of duty disability may be eligible to receive a retirement allowance of at least 10 percent of FAS and 2 percent per year of service beyond five years. The first 10 percent of the FAS is not subject to federal income tax. LEOFF Plan 2 retirees may return to work in an eligible position covered by another retirement system, choose membership in that system and suspend their pension benefits, or not choose membership and continue receiving pension benefits without interruption. LEOFF Plan 2 members who apply for retirement may purchase up to five years of additional service credit. The cost of this credit is the actuarial equivalent of the resulting increase in the member's benefit. LEOFF Plan 2 members can purchase service credit for military service that interrupts employment. Additionally, LEOFF Plan 2 members who become totally incapacitated for continued employment while serving in the uniformed services may apply for interruptive military service credit. Should any such member die during this active duty, the member's surviving spouse or eligible child(ren) may purchase service credit on behalf of the deceased member. LEOFF Plan 2 members may also purchase up to 24 consecutive months of service credit for each period of temporary duty disability Beneficiaries of a LEOFF Plan 2 member who is killed in the course of employment receive retirement benefits without actuarial reduction, if found eligible by the Director of the Department of Labor and Industries. Benefits to eligible surviving spouses and dependent children of LEOFF Plan 2 members killed in the course of employment include the payment of on-going health care insurance premiums paid to the Washington state Health Care Authority. Washington State Auditor's Office 84 A one-time duty -related death benefit is provided to the estate (or duly designated nominee) of a LEOFF Plan 2 member who dies as a result of injuries or illness sustained in the course of employment, if found eligible by the Department of Labor and Industries. There are 372 participating employers in LEOFF. Membership in LEOFF consisted of the following as of the latest actuarial valuation date for the plans of June 30, 2009: Retirees and Beneficiaries Receiving Benefits 9,454 Terminated Plan Members Entitled to But Not Yet Receiving Benefits 674 Active Plan Members Vested 13,363 Active Plan Members Non -vested 3,944 Total 27,435 Funding Policy Starting on July 1, 2000, LEOFF Plan 1 employers and employees contribute zero percent as long as the plan remains fully funded. Employer and employee contribution rates are developed by the Office of the State Actuary to fully fund the plan. LEOFF Plan 2 employers and employees are required to pay at the level adopted by the LEOFF Plan 2 Retirement Board. All employers are required to contribute at the level required by state law. The Legislature, by means of a special funding arrangement, appropriated money from the state General Fund to supplement the current service liability and fund the prior service costs of LEOFF Plan 2 in accordance with the requirements of the Pension Funding Council and the LEOFF Plan 2 Retirement Board. However, this special funding situation is not mandated by the state constitution and this funding requirement could be returned to the employers by a change of statute. The required contribution rates expressed as a percentage of current -year covered payroll, as of December 31, 2010, are as follows: CONTRIBUTION RATES LEOFF Plan 1 LEOFF Plan 2 Employer Contributions (1) 0.16% 5.24%(2) Employee Contributions 0.00% 8.46% State Contributions N/A 338% (1) The employer rates include the employer administrative expense fee currently set at 0.16%. (2) The employer rate for ports and universities is 8.62%. Both the city and the employees made the required contributions. The city required contributions for the years ended December 31 were as follows: CITY CONTRIBUTIONS LEOFF Plan 1 LEOFF Plan 2 2010 Contributions $621 $1,012,134 2009 Contributions 629 1,002,165 2008 Contributions 618 916,053 OTHER RETIREMENT SYSTEMS — VOLUNTEER FIREFIGHTERS' RELIEF AND PENSION FUND The Volunteer Firefighters' Relief and Pension Fund System is a cost sharing multiple employer retirement system which was created by the Legislature in 1945 under Chapter 41.16 RCW. It provides pension, disability and survivor benefits. Membership in the system requires service with a fire department of an Washington State Auditor's Office 85 electing municipality of Washington State except those covered by LEOFF. The system is funded through member contributions of $30 per year, employer contributions of $30 per year, forty -percent of the Fire Insurance Premium Tax, and earnings from the investment of moneys by the Washington State Investment Board. However, members may elect to withdraw their contribution upon termination. FIREMEN'S PENSION The City has a single employer, defined benefit pension plan for Firefighters employed prior to March 1, 1970, and governed by Washington State Law RCW 41.26. Under the terms of the governing law, the pension member is entitled to payment from the City's pension plan for those benefits in excess of those calculated under the LEOFF plan. The City's Firemen's Pension Fund is a closed group. No new members are permitted. Employees attaining the age of fifty who have completed 25 or more years of service are entitled to annual benefits of fifty -percent of their salary plus an additional two -percent for each year of service in excess of 25 years, up to a maximum of sixty -percent of salary. The pension plan also provides death and disability pension benefits plus sick benefits for eligible active and retired employees. If the employee terminates his employment with the Fire Department and is not eligible for any other benefit under the Firemen's Pension, the employee is entitled to the following: > Return of accumulated contributions less any benefits paid. > When a Firefighter would have had 25 years of service, 2% of salary for each year of service. Firefighters are no longer required to contribute to the Firemen's Pension. The City is required to contribute the amount necessary to fund the Firemen's Pension, using the aggregate projected benefit method. Under state law, partial funding of the Firemen's Pension Fund may be provided by an annual tax levy of up to $.45 per $1,000 of assessed valuation of all taxable property of the City. The Firemen's Pension Fund also receives a proportionate share of the 25 percent of the tax on fire insurance premiums set aside by the state for all paid firemen in the state. Additional funding is provided by investment interest earnings. During the year ended December 31, 2010, there were no plan amendments. Contributions Required and Contributions Made The City's funding policy is to provide for periodic employer contributions at actuarially determined rates that, expressed as percentages of annual covered payroll, are designed to accumulate sufficient assets to pay benefits when due. The required contributions are determined using an aggregate projected benefit funding method with the annual cost increasing six -percent per year over the period ending December 31, 2017. Under this method, the normal cost is a portion of the actuarial present value of benefits allocated to a valuation year. The actuarial accrued liability is equal to the actuarial value of assets. (Thus, there is no unfunded actuarial accrued liability under this method.) Significant actuarial assumptions used to compute contribution requirements were the same as those used to compute the standardized measure of the pension benefit obligation. POLICE PENSION The City has a single employer, defined benefit pension plan for Police Officers employed prior to March 1, 1970, and governed by Washington State Law RCW 41.20 and 41.26. Under the governing law, the pension member is entitled to payment from the City's pension plan for those benefits in excess of those calculated under the LEOFF plan. The City also covers four members who were ineligible under the State Law Enforcement Officers and Firefighters (LEOFF) Program. Washington State Auditor's Office 86 The City's Police Pension Fund is a closed group. No new members are permitted. Employees who have completed 25 years or more of service are entitled to annual benefits of 50% of their salary plus an additional 2% for each year of service in excess of 25 years — up to a maximum of 60% of salary. The plan provides death and disability pension benefits plus sick benefits for eligible active and retired employees. If the employee terminates his employment with the Police Department and is not eligible for any other benefit under the Police Pension, the employee is entitled to the following: > Return of 75% of contributions made after June 8, 1955, less any benefits paid. > When Police Officer would have had 25 years of service, 2% of salary for each year of service. Plan members are no longer required to contribute to the Police Pension. The City is operating on a pay as you go basis. During the year ended December 31, 2010, there were no plan amendments. Contributions Required and Contributions Made The Police Pension is a department within the General Fund. The City engaged Milliman U.S.A., Consultant & Actuaries, to perform the pension's actuarial study. They issued a valuation dated January 1, 2008. The valuation provided actuarially determined rates to accumulate sufficient assets to pay benefits when due rather than the current pay as you go basis. The required contributions are determined using an aggregate projected benefit method with the annual cost increasing six -percent per year over the period ending December 31, 2017. Fire Pension SUMMARY OF FIREMEN'S PENSION AND POLICE PENSION SCHEDULE OF FUNDING PROGRESS (Rounded To Thousands) Unfunded UAAL as a Actuarial Actuarial Actuarial Percentage Valuation Value of Accrued Accrued Funded Covered of Covered Date Assets Liabilities Liabilities Ratio Payroll Payroll 01/01/1998 $70 $10,455 $10,385 1.00% $270 3846.30% 01/01/2003 658 8,520 7,862 8.00% 0 0.00% 01/01/2008 646 9,935 9,289 7.00% 0 0.00% Police Pension 01/01/1998 0 8,277 8,277 0.00% 264 3135.23% 01/01/2003 0 8,154 8,154 0.00% 0 0.00% 01/01/2008 0 9,002 9,002 0.00% 0 0.00% NOTE 6 -- SELF-INSURANCE FUNDS The City maintains Reserve Funds to provide for self insurance coverage in the areas of Unemployment Compensation, Medical/Dental coverage, and Workers' Compensation. In addition, the City maintains a Risk Management Fund to provide for property, liability, and other coverage. UNEMPLOYMENT COMPENSATION In 1978, the City of Yakima established an Unemployment Compensation Reserve Fund to provide unemployment compensation coverage for its employees, and thereby elected to participate with the State of Washington State Auditor's Office 87 Washington in a cost reimbursement instead of monthly premium program. In doing so, the City retained its right to appeal awards and determinations made by the State Department of Employment Security. The City has contracted with Talx Corporation UCeXpress to represent the City in appeal hearings and to provide audits of state awards. The State of Washington invoices the City on a quarterly basis for reimbursement of claims which represent payment of unemployment compensation and related administrative costs. Resources accrue to the Unemployment Compensation Reserve Fund through monthly charges made to each Operating Fund based on employee earnings. Normal accrual rates have been between .5 and .75 percent of gross payroll, while costs under the monthly premium program would have been approximately three -percent of payroll. The City has achieved considerable savings. Interfund premiums are based primarily upon the insured funds claims experience and are reported as quasi external interfund transactions, a total for 2010 of $149,699. Incurred but not reported claims of $33,438 have been accrued as a liability. SELF-INSURED MEDICAL / DENTAL PROGRAM The City, in August, 1979, self insured its medical and dental programs for all eligible employees (temporary employees and employees hired to work less than half time are not eligible to participate in the plan). The City's Human Resources Office administers the self insured program and claims payment services are provided by Healthcare Management Administrators, Inc. Each Operating Fund is charged an accrual amount per covered employee which would otherwise have been paid to an insurance carrier. These amounts are determined by the City based upon recommendations made by Emspring (formerly Fisher Consulting). Factors considered by the broker include the amount of claims paid the previous year, increases over prior years, claims administration costs, projected insurance industry inflation rates and the status of the Fund's Reserve. Interfund premiums to the Employee Health Benefit Reserve Fund for 2010 were $8,255,464. Incurred but not reported claims of $1,370,556 have been accrued as a liability. In order to avoid catastrophic losses, the City reinsures the program by purchasing insurance known as "stop loss insurance." Two types of "stop loss" insurance are purchased: 1) individual stop loss; and, 2) aggregate stop loss, with both provided through Sunlife Insurance Co. Under the individual stop loss insurance, the City pays the first $175,000 of claims for an individual employee or dependent. Any charges accrued by an individual in excess of $175,000 in a calendar year are thereafter reimbursed by Sunlife, up to a lifetime maximum benefit of $1 million per person. This limit was raised to $225,000 for the 2011 claim year. The aggregate stop loss is designed to protect the City from multiple large claims which may not reach the individual stop loss attachment point ($175,000). The aggregate stop loss attachment point is calculated by determining the projected amount of claims for the year and adding an additional 25% of that amount (125% of projected claims). WORKERS' COMPENSATION PROGRAM The City self-insured its workers' compensation program for all employees except those covered by the LEOFF 1 Retirement System in July, 1984. This workers' compensation program provides coverage identical to the state administered workers' compensation program; however, the City pays only the direct injury related costs and certain administrative fees. The program is administered by the City's Human Resources Office with claims administration and safety services provided by Intermountain Claims, Inc. Each Operating Fund is charged an appropriate accrual amount, per employee, based on rate requirements prescribed by the State of Washington. Each year the Reserve Fund is reviewed to determine a contribution rate which provides for an appropriate reserve. Interfund premiums to the Workers' Compensation Fund for 2010 were $1,155,106. Based on the claims manager's estimate, the City has accrued incurred but not reported claims of $739,577 at December 31, 2010. Washington State Auditor's Office 88 In order to avoid catastrophic losses, the City "reinsures" the program by purchasing insurance known as "stop loss" insurance. This insurance is provided through Wells Fargo Insurance Services under a policy purchased from Safety National Casualty Corporation. Under the individual stop loss coverage, the City pays the first $550,000 of a claim and the insurance company pays (a) the balance up to $1 million for an individual claim or (b) the balance up to a maximum of $25 million for multiple claims arising from a single incident. RISK MANAGEMENT PROGRAM The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters. The Risk Management Fund was established in 1986 to account for its risk management program. Resources accrue to the fund through interfund premiums to operating funds for appropriate insurance coverage and the replenishment and building of reserves for potential liability claims. City contributions to the Risk Management Reserve Fund for 2010 were $2,462,760. The fund provides for administration, legal services, and claims adjustment and for the purchase of property, general liability, and other insurance coverage. Liabilities of the fund are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that has been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines, and damage awards. Accordingly, claims are reevaluated periodically to consider recent claim settlement trends, inflation, and other economic or social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims. Estimated recoveries, for example from subrogation, are another component of the claims liability estimate. Based on these factors, the claims manager's estimate of claims liability at December 31, 2010, is $553,000 . Property Insurance Coverage The City of Yakima purchases property insurance and boiler and machinery insurance from Affiliated FM Insurance Company covering loss or damage to City owned property from various perils including earthquake and flood. The policy is subject to a $100,000,000 limit per occurrence and a $100,000 per occurrence deductible. The policy number from 1/10/10 to 1/10/11 was PB739. Cities Insurance Association of Washington The City of Yakima became an associate member of the Cities Insurance Association of Washington (CIAW) effective December 14, 2005, and became a member of CIAW effective September 1, 2010. Chapter 48.62 RCW authorizes the governing body of any one or more governmental entities to form together into or join a pool or organization for the joint purchasing of insurance, and / or joint self-insuring, and / or joint hiring or contracting for risk management services to the same extent that they may individually purchase insurance, self -insure, or hire or contract for risk management services. An agreement to form a pooling arrangement was made pursuant to the provisions of Chapter 39.34 RCW, the Interlocal Cooperation Act. The pool was formed on September 1, 1988, when 32 cities in the State of Washington joined together by signing an Interlocal Governmental Agreement to pool their self-insured losses and jointly purchase insurance and administrative services. The pool allows members to jointly purchase insurance coverage and provide related services, such as administration, risk management, claims administration, etc. Coverage for Public Officials Liability is on a "claims made" basis. All other coverages are on an "occurrence basis". The pool provides the following forms of group purchased insurance coverage for its members: property, general liability, law enforcement liability, automobile liability, employment practices liability, boiler and machinery, bonds of various types, and public officials' liability. Washington State Auditor's Office 89 The City of Yakima participates in the liability coverages provided by the CIAW. The insurance policy period through CIAW is from September 1st to September 1st of each year. For the policy period 9/01/2009 to 9/01/2010, the City of Yakima has general liability, public officials liability and automobile liability coverage, subject to a deductible amount of $100,000, through an associate membership in the Cities Insurance Association of Washington with Munich Reinsurance America, Inc., and Torus Specialty Insurance Company, policy no. CIAW091034514. For the policy period 9/01/2010 to 9/01/2011, the City of Yakima has general liability, public officials liability and automobile liability coverage, subject to a program retention of $100,000 per occurrence and a member deductible of $99,000, as a member in the Cities Insurance Association of Washington, with Munich Reinsurance America, Inc., and Torus Specialty Insurance Company, policy no. CIAW101134514. The per occurrence and aggregate limits of liability of the general liability coverage through CIAW are $15,000,000 per occurrence with $25,000,000 aggregate for general liability. Since joining CIAW on December 14, 2005, the City of Yakima has not had any settlements that exceeded its insurance coverage through CIAW. Claims are submitted by the City with Canfield, which has been contracted by CIAW to perform pool administration, claims adjustment and administration and loss prevention for the pool. The Board of Directors of CIAW has contracted with Canfield to perform day to day administration of the pool. Copies of the CIAW pool's annual report may be obtained by writing to 451 Diamond Drive, Ephrata, WA 98823. Washington State Transit Insurance Pool The City of Yakima Transit Division is insured for liability insurance through the Washington State Transit Insurance Pool (WSTIP). The City of Yakima Transit Division joined WSTIP on September 1, 2005. From 1/1/2010 to 1/1/2011, the City of Yakima Transit Division has liability coverage, which is not subject to a deductible amount (no deductible), under coverage document no. WSTIP 2010 GL - YT, and public official liability coverage, subject to a deductible amount of $5,000, under coverage document no. WSTIP POL 2010 - YT, with the Washington State Transit Insurance Pool ("WSTIP"), Olympia, Washington. The per occurrence and aggregate limits of liability of the liability coverage through WSTIP are $12,000,000. Since joining WSTIP on September 1, 2005, the City of Yakima Transit Division has not presented any claims to WSTIP that exceeded its coverage limits through WSTIP. WSTIP is a 25 -member self insurance program with public transit members who provide transit services and is located in Olympia, Washington. WSTIP supplies Yakima Transit auto liability, general liability, and public officials' liability coverage. The Washington State Transit Insurance Pool was formed by Interlocal Agreement on January 1, 1989, pursuant to Chapters 48.61 and 39.34 RCW. The purpose for forming WSTIP was to provide member Transit Systems programs of joint self insurance, joint purchasing of insurance and joint contracting for hiring of personnel to provide risk management, claims handling and administrative services. Transit authorities joining the Pool must remain members for a minimum of 36 months; a member may withdraw from the Pool after that time by giving 12 months notice. The Pool underwriting and rate setting policies have been established after consultation with actuaries. The Pool members are subject to a supplemental assessment in the event of deficiencies. If the assets of the Pool were to be exhausted, members would be responsible for the Pool's liabilities. WSTIP is regulated by the Washington State Risk Manager and audited yearly by the Washington State Auditor. Yakima Transit has not presented any claims to WSTIP in the last three years that exceeded its current coverage limits through WSTIP. Washington State Auditor's Office 90 Risk Coverage Period Coverage Auto Liability 1/1/10 - 12/31/10 $12,000,000 per occurrence with a $0 deductible General Liability 1/1/10 - 12/31/10 $12,000,000 per occurrence with a $0 deductible Public Officials 1/1/10 - 12/31/10 $12,000,000 per claim / aggregate with a $5,000 deductible Coverage for public official liability is on a "claims made" basis. All other coverage's are on an "occurrence" basis. Changes in the balance of claims liability during 2010 follows: 2010 2009 Unpaid Claims, January 1 $976,000 $976,000 Incurred Claims (incl IBNR's) 417,766 784,631 Claim Payments (incl direct legal cost (840,766) (784,631) Unpaid Claims, December 31 $553,000 $976,000 NOTE 7 -- LONG-TERM DEBT AND CAPITAL LEASES The State law provides that debt cannot be incurred in excess of the following percentages of the value of the taxable property of the City. LEGAL DEBT PERCENTAGE I. General Purpose Without a Vote (includes capital leases) With a Vote II. Utilities Purpose III. Open Space and Parks Facilities Total Legal Limit 1.5% 1.0% Limit by Cumulative Section Limit 2.5% 2.5% 2.5% 5.0% 2.5% 7.5% 7.5% The basic percentages for Section I are the maximum levels of indebtedness those sections may incur. However, utility or parks indebtedness may each exceed 2.50% and reduce the general indebtedness margin. The percentages are applied to the taxable assessed value (regular levies) of about $5.4 billion, resulting in the debt limits, as of December 31, 2010, for the City as follows: DEBT LIMITS Without a Vote With a Vote General General Utilities Open Space Purpose Purpose 5.0% & Parks 7.5% Legal Limit $83,989,177 $139,981,961 $279,963,922 $419,945,883 Net Outstanding Indebtedness 26,251,968 27,127,844 27,127,844 27,127,844 Margin Available $57,737,209 $112,854,117 $252,836,078 $392,818,039 (1) Indebtedness is the outstanding debt less cash, investments, and tax receivables available to redeem debt. Washington State Auditor's Office 91 There have been no material violations of finance related legal or contractual provisions in any of the funds of the City. All bonded debt of the City is tax-exempt. We believe the City to be in compliance with applicable IRS & SEC regulations. The accompanying schedule of long term debt provides a listing of the outstanding debt of the City and summarizes the City's debt transactions for 2010. LONG-TERM LIABILITIES Amounts Balance Payments/ Balance Due Within 1/1/2010 Additions Retirements 12/31/2010 One Year Governmental Activities General Obligation Debt Bonds $26,978,811 $0 $2,098,125 $24,880,686 $2,157,419 Intergovernmental Loans 1,500,908 1,690,451 417,221 2,774,138 302,428 Contractual Agreement - Yakima Co 244,806 0 72,535 172,271 64,514 Special Assessment: Notes 256,500 864,093 301,132 819,461 98,013 Lease Purchase Agreements 10,058 149,288 26,880 132,466 41,432 Unfunded Pension/OPEB Liability 8,835,001 1,450,594 0 10,285,595 0 Vacation/Sick Leave Accrual 6,156,097 164,093 0 6,320,190 0 Total General Long -Term Debt $43,982,181 $4,318,519 $2,915,893 $45,384,807 $2,663,806 Business Type Activities Revenue Debt Payable Revenue Bonds $26,080,000 $0 $1,705,000 $24,375,000 $1,765,000 Intergovernmental Loans 10,756,643 679,650 1,036,413 10,399,880 1,064,843 SIED Loans - Yakima County 35,036 0 14,789 20,247 9,847 Unam Dbt Iss Cost/Prem/Disc/Def Amt 233,279 0 (4,926) 238,205 0 Total Revenue Debt $37,104,958 $679,650 $2,751,276 $35,033,332 $2,839,690 Total Long Term Debt $81,087,139 $4,998,169 $5,667,169 $80,418,139 $5,503,496 GENERAL OBLIGATION DEBT General obligation bonds consist of serial and term bonds, to be retired through the fiscal year ending December 31, 2032. The City levies a special property tax; collects motel / hotel taxes, Business License fees, utility taxes; and receives State sales tax credits and gas tax for the principal and interest payments due within a fiscal year and provides the amounts in the respective Debt Service Fund. Washington State Auditor's Office 92 Special Property Tax Levy 2004 Fire Improvement Bonds Ref 1995 Regular Property Tax Levy 2005 Parks Capital Projects 2008 Fire Ladder Truck Total Regular Property Tax Levy GENERAL OBLIGATION BONDS Average Date of Annual Final Original Outstanding Debt Maturity Interest Rate Issue 12/31/10 Service 12/01/14 2.0% - 3.5% $2,300,000 $1,080,000 $294,063 12/01/15 4.0% - 4.5% 755,000 415,000 94,285 12/01/21 325% - 4.0% 760,000 655,000 74,074 1,515,000 1,070,000 Regular Property Tax Levy/Real Excise Tax 2007 River Road Street Project Bond 05/01/17 4.0%-5.0% 1,765,000 1,315,000 220,361 2007 Fire Station West Valley Rehab Bond 05/01/22 4.0%-5.0% 815,000 690,000 73,284 2007 Downtown Revitalization Project Bond 05/01/22 4.0%-4.5% 1,490,000 1,260,000 133,706 2008 Third Ave/Mead Walnut St Project Bond 12/01/19 325% - 4.0% 2,190,000 1,810,000 240,565 Total Regular Property Tax Levy/Real Excise Tax 6,260,000 5,075,000 Motel/Hotel Tax 2004 Conv Center Expansion Bonds Ref 1996 11/01/19 2.0% - 42% 4,175,000 3,125,000 418,224 Public Facilities District(State Sales Tax Credit) 2002 Conv Center Addition - not refunded 06/01/12 3.0%-5.0% 6,735,000 460,000 239,969 2007 Conv Center Addition Refunding 2002 05/01/26 4.0% _5.0% 4,910,000 4,880,000 427,391 2009 Capitol Theatre Expansion 12/01/32 3.0% - 6.6% 7,035,000 6,680,000 551,204 Total Public Facilities District 18,680,000 12,020,000 Business Licenses & Real Estate Excise Tax 2003 Sundome Expansion 12/01/23 2.34%-4.72% 1,430,528 1,055,686 148,441 Utility Tax 2003 Criminal Justice/I-82 Bonds ref 1994 12/01/13 4.35%-5.25% 4,155,000 1,455,000 515,025 $38,515,536 $24,880,686 REVENUE BONDS Water / Wastewater / Irrigation revenue bonds consist of serial and term bonds, to be retired through the fiscal year ending December 31, 2034. The principal and interest for the water / wastewater parity revenue bonds are provided by the results of operations. Principal and interest on Irrigation System Bonds are provided by capital rates. Washington State Auditor's Office 93 UTILITY REVENUE BONDS Date of Final Original Outstanding Average Maturity Interest Rate Issue 12/31/10 Annual Debt 2003 Wastewater Revenue Bonds 11/01/2023 2.0%-5.0% $17,545,000 $12,740,000 $1,347,327 2004 Irrigation Revenue Bonds 09/01/2034 2.0%-4.8% 5,215,000 4,580,000 320,108 2008 Water/Wastewater Revenue 11/01/2011 4.0-5.0% 1,516,049 525,000 544,707 2008 Water Revenue Bonds (ref of 1998) 11/01/2018 4.0-5.0% 1,883,951 1,555,000 235,074 2008 Wastewater Revenue Bonds 11/01/2027 4.0-5.0% 5,440,000 4,975,000 413,317 $31,600,000 $24,375,000 The following Schedule sets forth revenue debt service requirements to maturity (in thousands) and depicts both bond and intergovernmental loans and contracts. REVENUE DEBT SERVICE Notes and Bonded Debt Interest Contracts Interest 2011 $1,765 1,097 $1,041 $60 2012 1,285 1,031 1,041 52 2013 1,335 983 980 44 2014 1,395 930 809 38 2015 1,440 876 768 32 2016-2020 7,790 3,304 2,966 111 2021-2025 6,295 1,420 2,376 41 2026-2030 1,930 492 419 3 2031-2034 1,140 140 0 0 $24,375 $10,273 $10,400 $381 At December 31, 2010, the City had $2,369,728 in reserved net assets for debt service for the enterprise funds. These are in compliance with reserve requirements as contained in the various indentures. INTERGOVERNMENTAL LOANS AND CONTRACTUAL AGREEMENTS The City participated in a program administered by the State's Department of Community Development on behalf of the Public Works Board. The program provides financial assistance for general government activities, such as street / bridge improvements, or proprietary activities, such as water or sewage projects. The City has 17 loans through the Washington State Loan Programs as described in the following chart. Washington State Auditor's Office 94 PUBLIC WORKS TRUST FUND LOANS Maturity Maximum Outstanding Interest Date Authorized 12/31/2010 General Long -Term Debt Real Estate Transfer Tax PW -5-91-280-071 - Fruitvale Canal Wasteway 3.0% 07/01/11 $1,188,000 $60,668 Arterial Street Gas Tax PW -5-90-280-050 - Tieton Drive, 5th Avenue to 16th Avenue 3.0% 07/01/10 803,157 0 PW -5-91-280-070 - N. 1st Avenue, Yakima Avenue to "I" Street 1.0% 07/01/11 1,155,000 49,971 PW -5-95-791-052 - Fair Avenue Improvements 1.0% 07/01/15 1,000,000 266,254 PW -00-691-062 - Downtown Yakima Rehabilitation Project 1.0% 06/10/10 1,180,000 0 PC08-951-052 - RR Grade Separations -Lincoln Ave/MLK Jr Blvd 0.5% 07/01/28 3,000,000 2,028,947 General Fund Sales Tax CERB loan #C95-107 - Utilities -Madison Ave. and 8th, "J" St and 8th 6.0% 07/01/16 425,448 177,847 Sub -Total General Long -Term Debt $2,583,687 Revenue Debt Wastewater Operating Revenue PW -5-92-280-046 - Wastewater Collection System Improvements 1.0% 07/01/12 $1,120,000 $123,462 PW -5-93-280-054 - Wastewater Facility Rehabilitation 1.0% 07/01/13 3,221,708 511,517 PW -5-94-784-049 - Wastewater Collection System Improvements 1.0% 07/01/14 1,481,000 163,596 PW -5-95-791-053 - Headworks/Digester Rehabilitation 1.0% 07/01/15 3,030,558 816,873 PW -5-95-791-054 - Wastewater Improvements King Street Collector 1.0% 07/01/15 209,367 58,426 PW -01-691-071 - Fruitvale Neighborhood WW/Water Project Ph I 0.5% 07/01/21 1,466,250 853,875 PW -05-691-064 - River Road Wastewater Improvement 0.5% 07/01/25 2,307,000 1,863,687 PW -07-962-019 - Ultra Violet Disinfection 0.5% 07/01/27 2,300,000 2,063,611 L1000030-0 - Grade Separation Stormwater Drainage 3.0% 06/01/30 1,214,000 190,451 Water Operating Revenue: PW -03-027 - Naches River Water Treatment Plt Impr 0.5% 07/01/23 2,694,000 1,751,425 SRF -04-65104-037 - Naches River Water Treatment Filter Rehab 0.5% 10/01/25 966,772 696,517 PCO8-951-051 - New Water Well 0.5% 07/01/21 2,257,200 1,496,880 Sub -Total Revenue Debt $10,590,320 Total Intergovernmental Loans $13,174,007 The Public Works Trust Fund loans have a term not to exceed twenty years and require 1/19th of the original principal plus interest to be paid each July 1st. These are subordinate to utility systems' parity debt and do not require a full faith and credit pledge. The City has entered into contractual agreements with Yakima County for Supporting Investments in Economic Development (SIED) Loans for several different infrastructure projects, the detail of which follows: Washington State Auditor's Office 95 CONTRACTUAL AGREEMENTS Maturity Original Outstanding Funding Source Issue Date Date Issue 12/31/2010 Contracted Assessment 2001 Issue 06/01/11 $44,000 $5,256 Contracted Assessment 2006 Issue 06/01/12 64,500 20,247 Contracted Assessment 2006 Issue 06/01/11 50,000 22,631 Contracted Assessment 2008 Issue 06/01/12 27,500 11,595 Contracted Assessment 2008 Issue 06/01/12 214,000 132,787 $400,000 $192,516 The following schedule sets forth the general obligation debt and intergovernmental loans and contracts, debt service requirements including interest, to maturity (in thousands). GENERAL OBLIGATION DEBT SERVICE Bonded Notes and Debt Interest Contracts Interest 2011 $2,157 $1,079 $302 $24 2012 2,222 1,014 193 20 2013 2,304 943 195 17 2014 1,855 868 196 15 2015 1,637 802 198 12 2016-2020 7,195 3,120 597 33 2021-2025 4,180 1,824 564 17 2026-2030 2,405 714 339 3 2031-2032 925 92 0 0 $24,880 $10,456 $2,584 $141 At December 31, 2010, the City had $550,376 available in debt service funds to service the General Obligation Bonds and notes. There are a number of other limitations and restrictions contained in the various bond indentures. The City is in compliance with all significant limitations and restrictions. SPECIAL ASSESSMENT DEBT WITH GOVERNMENTAL COMMITMENT Debt service requirements for special assessment notes are met by assessments levied against property owners. Special assessment debts are notes that are due as moneys become available from payments on individual assessments. Special assessment debts currently outstanding are as follows: Washington State Auditor's Office 96 LID #1056; 12/17/2015 Wastewater South 7th, 8th, & 9th Avenue Installment Note, 8.75% Interest $67,000 LID#1057; 05/01/2016 Wastewater North 84th Avenue & Hawthorne Drive - Inst Note, 9.25% Interest 77,500 LID#1058; 05/01/2016 Wastewater North 90th Avenue, 94th Place, Yakima Ave - Inst Note, 9.25% Interest 63,000 LID #1060; 06/01/2020 Wastewater North 85th Avenue & Kail Drive- Installment Note, 5.50% Interest 202,961 LID #1061; 04/15/2020 Wastewater 409,000 Simpson Lane - Installment Note, 5.50% Interest $819,461 Debt service requirements for special assessment notes / bonds are met by assessments levied against property owners. Pursuant to RCW 35.54, the City maintains a Local Improvement Guarantee Fund for the purpose of guaranteeing, to the extent of the fund, the payments of its LID bonds. The fund balance at December 31, 2010, of the LID Guarantee Fund totaled $79,986 . LEASE PURCHASE AGREEMENTS General Capital Assets As part of the City's capital equipment budgeting program, selected items are obtained via lease purchase and municipal lease / deferred purchase plans. Since the leases are financing agreements which transfer ownership to the City at the end of the lease term, the City records the present value of future lease payments as a capital outlay expenditure and as an offset to other financial sources in the year that the asset is received. The present value of payments due in future periods is shown as a liability in the financial statements and the cost of the asset is recorded in the financial statements. A summary of the leased equipment is detailed below: Telephone System Upgrade Two High Speed Laser Printer / Copier Total $90,704 41,763 $132,467 The following is a schedule of the future minimum lease payments under the above capital lease and the present value of net minimum lease payments at December 31, 2010, for the fiscal year listed: Due in 2011 $46,565 Due in 2012 46,419 Due in 2013 37,691 Due in 2014 11,507 Total Minimum Lease Payments $142,182 Less: Amount Representing Interest 9,715 Present Value of Minimum Lease Payments $132,467 UNFUNDED POST EMPLOYMENT BENEFIT LIABILITIES The City maintains two single employer defined benefit pension plans, Firemen's Pension and Police Pension, which are closed systems covering Firemen and Police Officers hired prior to March 1, 1970. Both plans had their first annual actuarial valuation as of March 31, 1989. The required contributions identified in this and subsequent studies were the basis for recording the unfunded pension liability since 1989, with the most recent study performed as of January 1, 2008. Washington State Auditor's Office 97 Starting in 2008, the City implemented GASB 45 for Other Post Employment Benefits (OPEB), and initial actuarial evaluations were performed as of January 1, 2008. By State statute, the City is required to provide healthcare benefits for certain retired police officers and firefighters. The City's self-insured medical plan allows retirees and the eligible dependents to self -pay premiums using the same rate as active employees, until they reach age 65, thereby creating an "implicit rate subsidy". All three of the programs are pay as you go. OUTSTANDING LIABILITIES Balance Balance 1/1/10 Additions 12/31/10 Police Pension $5,374,353 ($59,869) $5,314,484 OPEB Fire - Medical 1,306,631 554,432 1,861,063 OPEB Police - Medical 1,139,235 496,482 1,635,717 OPEB Non-Leoff - Medical 1,014,782 459,549 1,474,331 Total $8,835,001 $1,450,594 $10,285,595 Both the Police Pension and Police OPEB are paid out of a department in the General Fund. The Fire OPEB are paid through the Firemen's pension trust fund. The non-LEOFF retiree benefits are being paid annually through the Employees Health Benefit Reserve fund. The unfunded pension liability will be adjusted annually by comparing actual expenditures for benefits to the actuarially determined contribution. The Firemen's Pension is a trust fund and has as its funding sources a portion of local property taxes, a state tax on fire insurance premiums, and interest income. This fund has an unfunded pension liability of $2,113,207 at December 31, 2010. See Note 5 for additional information on the pension funds, and Note 11 for additional information on Other Post Employment Benefits. NOTE 8 -- CONTINGENCIES The City participates in a number of federal and state assisted programs. These grants are subject to audit by the grantors or their representatives. Such audits could result in requests for reimbursement to grantor agencies for expenditures disallowed under the terms of the grants. City management believes that such disallowances, if any, will be immaterial. SECTION 108 LOAN PROGRAM In 2003, the City was authorized to administer a Housing and Urban Development (HUD) Section 108 Loan program. HUD has authorized the City to lend up to a maximum of $6.945 million in two separate loan pools ($4 million in 2003 and $2.945 million in 2005). These federal loans are available for the purpose of funding property rehabilitation for economic development activities that will create new jobs within the target area. As of December 31, 2010, the City has approved all its authorized maximum Section 108 loans of $6.945 million. The nature of this program is the City approves qualified projects for the loan within HUD guidelines and acts as a conduit for HUD funds. The loan proceeds flow directly to the ultimate Corporate Borrower. Payments flow from the Corporate Borrower to the City's Custodian and then to HUD. The loans are on an amortization schedule from 10 years to 25 years. The HUD contract specifically provides that the loans are not full faith and credit obligations of the City, but instead, future Community Development Block Grant (CDBG) allocations are pledged on these loans. The City has entered into agreements to collateralize their position within HUD underwriting guidelines. In 2005, one of the loans was defeased and another defeased in 2009. Additionally, the City has been awarded a $1 million Economic Development Initiative (EDI) grant from HUD as a Washington State Auditor's Office 98 protection in case of a default. As of December 31, 2010, one of the loans was past due and the EDI grant was used to pay a portion of the principal and interest due. (The EDI grant can be utilized for past due payments). POTENTIAL LITIGATION On February 15, 2005, Congdon Orchards, Inc. and Congdon Development Company, LLC (Congdon) filed a damage claim with the City alleging Congdon has been wrongfully damaged by Yakima's breaches of contract, negligence, tortious conduct, breaches of duties, errors and omissions, and other wrongful conduct. Congdon alleged its damages exceeded $21 million and continue. The City entered into letter agreements extending a 2005 tolling agreement, and the tolling agreement will now expire on October 1, 2011. Congdon has not filed a lawsuit, and it is not known whether it will do so. The City believes the chances of recovery are low. Because of its activities, the City is subject to certain pending legal actions which arise in the ordinary course of business. The City believes, based on the information presently known, that the ultimate liability for any such legal actions will not be material to the financial position of the City. NOTE 9 -- SEGMENT INFORMATION WATER AND WASTEWATER UTILITIES For the purposes of revenue bond debt issuance, the water and wastewater utilities are combined in a single segment (i.e., the System). Therefore, investors in the revenue bonds rely on the revenue generated by both activities for repayment. In 2004, the City issued the first $5 million of $10 million revenue bonds authorized for the Irrigation system. An additional $3.5 million is planned to be issued in 2011. Investors in these revenue bonds rely solely on the revenue generated from the irrigation utility for repayment. Summary financial information for the System and irrigation utility follows. SYSTEM INFORMATION Water / Wastewater Irrigation Condensed Statement of Net Assets Assets Current Assets $18,837,003 $1,737,261 Restricted Assets 2,334,292 35,436 Capital Assets 105,844,535 15,907,824 Total Assets 127,015,830 17,680,521 Liabilities Current Liabilities 5,000,633 764,824 Noncurrent Liabilities 27,870,061 4,356,958 Total Liabilities 32,870,694 5,121,782 Net Assets Invested in Capital Assets, Net of Related Debt 77,689,961 11,367,448 Restricted 2,334,292 35,436 Unrestricted 14,120,883 1,155,855 Total Net Assets $94,145,136 $12,558,739 Washington State Auditor's Office 99 Condensed Statement of Revenues, Expenses and Changes in Net Assets Operating Revenues Charges for Services $23,413,525 $2,707,544 Other Operating Revenues 86,433 3,343 Total Operating Revenues 23,499,958 2,710,887 Operating Expenses Operations and Maintenance 16,623,787 1,379,176 Depreciation 4,170,328 217,616 Total Operating Expenses 20,794,115 1,596,792 Operating Income (Loss) 2,705,843 1,114,095 Non -Operating Revenues (Expenses) Miscellaneous Interest (Net) (797,120) (209,665) Other Non -Operating (Net) 397,605 0 Total Non -Operating Revenues (Expenses) (399,515) (209,665) Income (Loss) Before Contributions and Transfers 2,306,328 904,430 Capital Contributions 2,409,624 0 Operating Transfers (Net) 18,426 (93,750) Change in Net Assets 4,734,378 810,680 Total Net Assets - January 1 Total Net Assets - December 31 89,410,758 11,748,059 $94,145,136 $12,558,739 Condensed Statement of Cash Flows Net cash Provided (Used) Operating Activities $6,722,721 $1,328,337 Capital and Related Financing Activities (5,210,304) (2,559,748) Investing Activities (989,642) 1,013,500 Net Increase (Decrease) 522,775 (217,911) Beginning Cash and Cash Equivalents Ending Cash and Cash Equivalents 5,354,796 762,138 $5,877,571 $544,227 NOTE 10 — JOINT VENTURES YAKIMA AIR TERMINAL The City and the County of Yakima entered into a joint venture for operation of the Yakima Air Terminal on July 1,1982. The Yakima Air Terminal Board is comprised of five individuals: two appointed by the City, two by the County, and one selected by the four appointees. Annually, the governing bodies of the City and County each designate one of its members as an advisory ex -officio member of the Air Terminal Board. The City and the County contribute equally to the joint venture and own jointly, in equal shares, all properties or facilities; however, annual profits and losses are retained by the Airport. The Yakima Air Terminal is presently self-sustaining. We have considered disclosure requirements promulgated in GASB 39 Washington State Auditor's Office 100 and have elected to continue to disclose the joint venture in a manner consistent with prior years. We feel the effects of the joint venture on the combined Financial Statements taken as a whole is immaterial. The Air Terminal budget is approved, amended and / or supplemented by joint resolution of the City and County. Real property acquisition and sale in excess of $50,000 must be approved by both the City and County. Issuance of bonds for Airport purposes by the City or County requires both parties' approval. Unaudited financial data for the year ended December 31, 2010, the most recent available, is as follows: YAKIMA AIR TERMINAL FINANCIAL DATA Assets Current Assets $671,558 Property, Plant and Equipment, Net 12,387,504 Intangible Assets, Net 1,327,781 Construction in Progress 214,190 Total Assets $14,601,033 Liabilities Current Liabilities Other Liabilities -Long Term Debt Total Liabilities $485,292 86,059 $571,351 Net Assets Invested in Capital Assets, Net of Related Debt $13,908,731 Restricted Net Assets 98,029 Unrestricted Net Assets 22,922 Total Net Assets $14,029,682 Revenues, Expenses and Changes in Fund Net Assets Operating Revenues $1,099,963 Operating Expenses Operations / Maintenance $1,234,975 Depreciation 922,509 Total Operating Expenses $2,157,484 Operating Income (Loss) ($1,057,521) Non -Operating Revenues (Expenses) Misc. Interest Revenue $981 Interest on Debt ($2,250) Operating Subsidies 3,344,140 Total Non -Operating Revenues (Expenses) $3,342,871 Net Income (Loss) $2,285,350 Assets Not Recorded for Prior Years $118,494 Increase (Decrease) in Net Assets $2,403,844 Total Net Assets, January 1 $11,625,838 Total Net Assets, December 31 $14,029,682 Washington State Auditor's Office 101 Complete financial statements for the Airport can be obtained from the Yakima Air Terminal at 2400 West Washington Avenue, Yakima, WA, 98903. NOTE 11 -- OTHER POSTEMPLOYMENT BENEFIT PLANS BENEFITS OTHER THAN PENSION BENEFIT In addition to providing pension benefits, the City provides certain health care (100% of medically necessary costs) and life insurance benefits for retired employees under the City's Firemen's and Police Pensions as prescribed by state statutes. Current employees under these two pensions become eligible for those benefits if they reach normal retirement age while working for the City. The cost of retiree health care insurance and life insurance benefits is recognized as an expenditure as claims are paid. Both plans are being funded 100% by the City on a pay as you go basis. For 2010, the costs totaled $785,124 for the Firemen's Pension which has a total of 72 participants currently eligible to receive benefits and $779,481 for the Police Pension which has a total of 67 participants currently eligible to receive benefits. In 2008 the City engaged Milliman USA Consultants and Actuaries to perform an actuarial valuation of other postemployment benefits (OPEB) obligations for LEOFF I Fire / Police and Non-LEOFF I employees, in accordance with GASB 45. LEOFF I EMPLOYEES Under RCW law, retiree medical, hospital, and nursing care, as long as a disability exists, are covered for any active firefighter hired prior to March 1, 1970. For any retired officer hired prior to March 1, 1970, retiree medical, hospital, and nursing care are covered at the discretion of the Retirement Board. Members retired prior to 1961 for reasons other than duty disability are not eligible for retiree medical benefits during retirement. Under LEOFF Law, the necessary hospital, retiree medical, and nursing care expenses not payable by Workers' Compensation, Social Security, etc. are covered for any active or retired LEOFF 1 member. Effective January 1, 2007, the City began reimbursing dental costs up to an annual maximum of $500 for LEOFF I Fire / Police employees. Eligibility Employees are eligible to receive lifetime retiree medical benefits upon service retirement after age 50 with at least five years of service. If they are not eligible to retire when leaving LEOFF, but have 20 years of service credit, they are eligible for retiree medical benefits when pension benefits commence. Employees also receive lifetime benefits upon disability. Retiree Premiums Funding Policy — Funding for LEOFF retiree healthcare costs is provided entirely by the City as required by RCW. The City's funding policy is based upon pay as you go financing requirements. Annual OPEB Cost and Net OPEB Obligation — The City's annual other postemployment benefit (OPEB) cost is calculated based upon the annual required contribution (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that if paid on an ongoing basis is projected to cover the normal cost each year and amortize any unfunded actuarial liabilities over a period of thirty years as of January 1, 2010. The following table shows the components of the City's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the City's net OPEB. The net Fire and Police OPEB obligation of $3,495,780 is included as a noncurrent liability on the Statement of Net Assets. Washington State Auditor's Office 102 NET OPEB OBLIGATION Fire Police 12/31/10 12/31/10 Annual Required Contribution (ARC) Annual Normal Cost $42,839 $45,860 Amortization of UAAL 1,276,274 1,208,621 Interest 46,169 43,907 ARC at EOY 1,365,282 1,298,388 Interest on net OPEB Obligation 45,732 39,873 Adjustment to ARC (71,458) (62,303) Annual OPEB Cost 1,339,556 1,275,958 Employer Contributions (785,124) (779,481) Change in Net OPEB Obligation 554,432 496,477 Net Beginning OPEB Obligation 1,306,631 1,139,235 Net OPEB Obligation $1,861,063 $1,635,712 Funded Status and Funding Progress - As of January 1, 2008, the most recent actuarial valuation date, the plan was 0% funded. The accrued liability for benefits was $47,302,000 and the actuarial value of the assets was $0 resulting in a UAAL of $47,302,000. SCHEDULE OF FUNDING PROGRESS Unfunded Actuarial UAAL as a Actuarial Actuarial Accrued % of Fiscal Value of Accrued Liability Covered Covered Year Assets Liability (UAAL) Fund Ratio Payroll Payroll Police 12/31/08 $0 $23,007,000 $23,007,000 0.0% n/a n/a Fire 12/31/08 0 $24,295,000 $24,295,000 0.0% n/a n/a The City's annual OPEB cost, the percentage of OPEB cost contributed to the plan, and the net OPEB obligation for 2010 were as follows: Police Fire OPEB CONTRIBUTIONS - GASB 45 Annual Percent Net Valuation OPEB of OPEB OPEB Date Cost Contributed Obligation 12/31/08 $1,298,388 55.6% $577,126 12/31/09 1,298,388 55.9% 1,139,235 12/31/10 1,298,388 60.0% 1,635,712 12/31/08 1,365,282 50.3% 678,235 12/31/09 1,365,282 53.1% 1,306,631 12/31/10 1,365,282 57.5% 1,861,063 Washington State Auditor's Office 103 NON-LEOFF I EMPLOYEES The City of Yakima provides to its retirees employer-provided subsidies associated with postemployment medical benefits. Retirees eligible to receive pension benefit payments along with their qualifying dependents are eligible to remain on the medical insurance plan up to Medicare eligible age 65, by self -paying the entire composite premium rates which blend both active and inactive (Le. retired) member claims history. Eligibility City members are eligible for retiree medical benefits after becoming eligible for retirement pension benefits (either reduced or full pension benefits). Spouses of retired members of Plan 1 of LEOFF are also eligible for benefits. Also, dependent children of retirees under the age of 25 are eligible for benefits. Only people under age 65 are eligible for benefits. Former members who are entitled to a deferred vested pension benefit are eligible to receive medical benefits after pension benefit commencement. Spouses under age 65 of covered members are eligible for medical benefits after the members' benefits terminate due to death or obtaining age 65. Medical Benefits Upon retirement, members are permitted to receive medical benefits. Retirees pay $531.02 per month for pre -65 Medical coverage for 2010. If a retiree chooses to cover his spouse and / or eligible family an amount of $466.74 per month for pre -65 Medical coverage will be paid in 2010. Funding Policy The funding policy is based upon the pay as you go financing requirements. Annual OPEB Cost and Net OPEB Obligation The City's annual other postemployment benefit (OPEB) cost is calculated based upon the annual required contribution (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize any unfunded actuarial liabilities over a period of thirty years as of January 1, 2010. The following table shows the components of the City's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the City's net OPEB. ANNUAL OPEB COST AND NET OPEB OBLIGATION Non-Leoff 12/31/10 Annual Required Contribution (ARC) Annual Normal Cost $473,260 Amortization of UAAL 367,909 Interest 29,441 ARC at EOY 870,610 Interest on net OPEB Obligation 35,517 Adjustment to ARC (55,497) Annual OPEB Cost 850,630 Employer Contributions (391,081) Change in Net OPEB Obligation 459,549 Net Beginning OPEB Obligation 1,014,782 Net OPEB Obligation $1,474,331 Washington State Auditor's Office 104 The City's annual OPEB cost, the percentage of OPEB cost contributed to the plan, and the net OPEB obligation for 2010 were as follows: EMPLOYER CONTRIBUTIONS — NON-LEOFF (Amount Expressed in Thousands) Fiscal Annual Percent Net Year OPEB of OPEB OPEB Ended Cost Contributed Obligation 12/31/08 $870,610 39.6% $525,878 12/31/09 870,610 42.7% 1,014,782 12/31/10 870,610 45.0% 1,474,331 Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities, consistent with the long-term perspective of the calculations. In the January 1, 2008 actuarial valuation, the Entry Age Normal actuarial cost method was used. The actuarial assumptions used included a 3.5% discount rate, which is based upon the long-term investment yield on the investments that are expected to be used to finance the payment of benefits. Medical trend assumptions range from 9.5% for 2009 dropping gradually to 5% in 2017 and beyond. The UAAL is being amortized on a closed basis at the assumed discount rate. The remaining amortization period at January 1, 2008 was 30 years. Funded Status and Funding Progress As of January 1, 2008, the most recent actuarial valuation date, the plan was 0.0% funded. The accrued liability for benefits was $7.0 million, and the actuarial value of assets was $0, resulting in a UAAL of $7.0 million. SCHEDULE OF FUNDING PROGRESS (Amount Expressed in Thousands) Unfunded Actuarial UAAL as a Actuarial Actuarial Accrued % of Fiscal Value of Accrued Liability Covered Covered Year Assets Liability (UAAL) Fund Ratio Payroll Payroll Non-Leoff 12/31/08 $0 $7,003,000 $7,003,000 0.0% n/a n/a Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Washington State Auditor's Office 105 NOTE 12 -- OTHER DISCLOSUIRES SUBSEQUENT EVENTS Management has determined that no events have occurred subsequent to December 31, 2010 through the date of this report that would require adjustment to, or disclosure in, the financial statements. Washington State Auditor's Office 106 REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF EMPLOYER CONTRIBUTIONS December 31, 2010 POLICE PENSION Medical Actual Benefit Annual Fiscal Employer Payments Net Required Percentage Year Contributions and Admin Employer Contribution of ARC Ending Taxes Expenses Contribution (ARC) Contributed 12/31/01 $933,831 $442,878 $490,953 $671,522 73.1% 12/31/02 991,009 478,769 512,240 671,522 76.3% 12/31/03 1,133,242 561,692 571,550 657,086 87.0% 12/30/04 1,287,904 702,241 585,663 657,086 89.1% 12/31/05 1,204,159 644,225 559,934 657,086 85.2% 12/31/06 1,235,437 701,306 534,131 657,086 81.3% 12/31/07 1,384,894 765,907 618,987 657,086 94.2% 12/31/08 1,279,173 723,381 555,792 546,180 101.8% 12/31/09 1,316,310 742,965 573,345 546,180 105.0% 12/31/10 1,368,431 783,984 584,447 546,180 107.0% FIRE PENSION Actual Employer Medical Contributions Benefit Annual Fiscal Taxes & Fire Payments Net Required Percentage Year Insurance and Admin Employer Contribution of ARC Ending Premiums Expenses Contribution (ARC) Contributed 12/31/01 $1,332,816 $481,554 $851,262 $836,095 101.8% 12/31/02 1,325,372 530,732 794,640 836,095 95.0% 12/31/03 1,406,347 639,871 766,476 633,545 121.0% 12/30/04 1,425,048 769,426 655,622 633,545 103.5% 12/31/05 1,460,423 706,947 753,476 633,545 118.9% 12/31/06 1,558,187 815,278 742,909 633,545 117.3% 12/31/07 1,603,774 814,394 789,380 633,545 124.6% 12/31/08 1,627,553 732,318 895,235 563,583 158.8% 12/31/09 1,487,075 796,765 690,310 563,583 122.5% 12/31/10 1,575,935 825,933 750,002 563,583 133.1% Washington State Auditor's Office 107 REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF FUNDING PROGRESS OTHER POST EMPOYMENT BENEFITS (OPER) (Dollar Amounts in Thousands) December 31, 2010 Unfunded Actuarial Actuarial Actuarial Accrued UAAL as a % Fiscal Value of Accrued Liability Covered of Covered Year Assets Liability (UAAL) Fund Ratio Payroll Payroll Police 12/31/08 $0 $23,007 $23,007 0.0% n/a n/a Fire 12/31/08 0 24,295 24,295 0.0% n/a n/a Non-Leoff 12/31/08 0 7,003 7,003 0.0% n/a n/a Washington State Auditor's Office 108 POLICE OPEB Actual Annual Employer Medical Net Required Percentage Contributions Benefit Employer Contribution of ARC Taxes Payments Contribution (ARC) Contributed 12/31/08 $721,262 $721,262 $721,262 $1,298,388 55.6% 12/31/09 725,561 725,561 725,561 1,298,388 55.9% 12/31/10 779,481 779,481 779,481 1,298,388 60.0% FIRE OPEB Actual Annual Employer Medical Required Percentage Contributions Benefit Employer Contribution of ARC Taxes Payments Contribution (ARC) Contributed 12/31/08 $687,047 $687,047 $687,047 $1,365,282 50.3% 12/31/09 724,291 724,291 724,291 1,365,282 53.1% 12/31/10 785,124 785,124 785,124 1,365,282 57.5% NON-LEOFF OPEB Actual Annual Employer Medical Required Percentage Contributions Benefit Employer Contribution of ARC Taxes Payments Contribution (ARC) Contributed 12/31/08 $344,732 $344,732 $344,732 $870,610 39.6% 12/31/09 371,940 371,940 371,940 870,610 42.7% 12/31/10 391,940 391,940 391,940 870,610 45.0% Washington State Auditor's Office 109 CITY OF )11-X II/li SCHEDULE 16 EXPENDITLIR.ES OF FEDERAL AWARDS For the Year Ended December 31, 2010 Page 1 of 2 Grantor / Pass -Through Grantor CFDA Program Title No. Other I.D. Number U. S. Department of Housing & Urban Development Community Development Block Grant Community Development Block Grant Community Development Block Grant Sub -Total Community Development Block Grants Home Investment Partnerships Program Home Investment Partnerships Program Home Investment Partnerships Program Sub -Total Home Investment Partnerships Programs ARRA Community Development Block Grant Passed -through Washington State Department of Commerce CDBG Neighborhood Stabilization Program Total Department of Housing and Urban Development U. S. Department of Justice Edward Byrne Memorial State and Local State Criminal Alien Assistant Program Bullet Proof Vest Partnership Program CFDA 16.710 Public Safety Partnership & Community Policing Grants Public Safety Partnership & Community Policing Grants ARRA Public Safety Partnership & Community Policing Sub -Total CFDA 16.710 Edward Byrne Memorial Justice Assistance Grant ARRA Edward Byrne Memorial Justice Assistance Grant Total U.S. Department of Justice U. S. Department of Transportation Passed -through Washington State Department of Transportation Highway Planning & Construction Railroad Grade Separation Transportation Model Fair Ave / Nob Hill Trolley Restoration William Douglas Trail / 6th Ave William Douglas Trail / Bridge Coolidge Road Widening Nob Hill Blvd. Overpass ARRA Highway Planning & Construction -Nob Hill Sub -Total Passed -through WSDOT 14218 B 10 -MC -53-0008 14218 B 09 -MC -53-0008 14218 CDBG Program Income 14239 M10-MC53-0203 14239 M09-MC53-0203 14239 Home Program Income 14253 14228 B -09 -MY -53-008 08-F6401-027 16.580 2008 -DD -BX -0482 16.606 2009 -AP -BX -0439 16.607 16.710 16.710 16.710 2009-CKW X0186 2008-CKW X0543 2009RKWX0902 16.738 2009 -DJ -BX -0499 16.804 ARRA 2009 -SB -B9-1257 20205 20205 20205 20205 20205 20205 20205 20205 20205 STPX-000S (062) STPUS-9930(015) STPUS-4566(007) STPE-1485(019) STPE-1485(020) STPE-1485(020) CM -4560(001) BHM4566(008) ARRA-4566(009) From Pass - Through Awards $597,067 From Direct Awards Note $135,918 6 1,100,782 6 115,315 3 1,352,015 204,594 776,290 757,276 3 1,738,160 306,460 6 597,067 3,396,635 3,558,861 21,888 4,132 148,498 325,486 8,754 73,378 797,067 89,963 5,028,027 109,957 22,630 13,163 304,454 137,564 293,529 7 735,547 66,047 6 282,233 6,7 1,229,577 2 2 2 2 2 2 2 2 2,7 Washington State Auditor's Office 110 CITYOF /44/40/1! SCHEDULE 16 EXPENDITLIR.ES OF FEDERAL AWARDS For the Year Ended December 31, 2010 Page 2 of 2 Grantor / Pass -Through Grantor Program Title CFDA No. Other I.D. Number Federal Transit Administration Federal Transit - Formula Grant ARRA Federal Transit - Formula Grant Federal Transit - Formula Grant Capital Assistance Program for Elderly Persons and Persons with Disablilties Job Access - Reverse Commute Sub -Total Federal Transit Administration Total U.S. Department of Transportation U. S. Department of Energy ARRA Energy Efficiency and Conservation Block Grant U. S. Department of Health and Human Services Passed -through Yakima County CFDA 93.043 Special Programs for the Aging / Disease Prevention Special Programs for the Aging / Disease Prevention Sub -Total CFDA 93.043 Special Programs for the Aging / Grants for Sup Svcs Sub -Total Passed -through Yakima County Passed -through DSHS Division of Child Support (DCS) Healthy Marriage Promo & Responsible Fatherhood Total U.S. Department Health Passed -through Corporation for National and Community Service Passed -through WA State Employment Security AmeriCorps Recovery Homeland Security Passed -through Yakima County - Emergency Management CFDA 97.067 Homeland Security Grant Homeland Security Grant Sub -Total CFDA 97.067 Staffing for Adequate Fire & Emergency Response (SAFER) Total Homeland Security Total Federal Assistance Direct & Pass -Through Awards 20.507 WA -90X452-01 20.507 WA -96-X016-00 20.507 WA -95-X036 20.513 GCA6233 20.516 GCA6232 81.128 ARRA-DE-SC0003043 93.043 0969-54703 93.043 0969-54703 93.044 0969-54703 93.086 0664-94430 94.006 K987 97.067 YVOEM 10-001 97.067 YVOEM 10-001 97.083 EMW-2005-FF-00188 From Pass - Through Awards $50,000 96,000 105,176 From Direct Awards Note $1,923,409 2,001,000 7 251,176 3,924,409 5,279,203 3,924,409 420 33,904 34,324 7,968 42,292 73,694 115,986 54,523 35,605 46,384 81,989 81,989 387,011 7 27,000 27,000 $6,128,768 $8,964,632 $15,093,400 Washington State Auditor_'s Office 111 CITY of )11.4Iplt! SCHEDULE 16 NOTES TO THE SCHEDULE OF EXPENDITURES For the Year Ended December 31, 2010 Page 1 of 2 Note 1- Basis of Accounting The Schedule of Expenditures of Federal Award is prepared on the same basis of accounting as the City of Yakima financial statements. The City of Yakima uses modified accrual system for all governmental funds: full accrual system for proprietary, nonexpendable and pension trust funds. Note 2 - Program Costs The amounts shown as current year expenditures represent only the federal portion of program costs. Actual program costs, including the City of Yakima's portion may be more than shown. Note 3 - Program Income The City of Yakima has a loan program for low income housing. Under this federal grant, repayments to the City of Yakima are considered program revenues (income) and loans of such funds to eligible recipients are considered expenditures. Note 4 - Federal Loans In 2003, the City of Yakima was authorized to administer a Section 108 Loan program. There were no new loans in 2010. Since the City is only contingently liable, this amount is not included in the Schedule of Long -Term Debt. See Note 8 - Contingencies in the Basic Financial Statements section for details of the entire program. Note 5 - Noncash Awards Not Applicable. Note 6 - Amount Paid to Subrecipients The City of Yakima paid the following amounts to subrecipients: CDBG-14.218 $77,733 ARRA-14.253 $47,267 ARRA-16.738 $25,913 ARRA-16.804 $97,968 Note 7 - American Recovery and Reinvestment Act (ARRA) of 2009 Expenditures for this program were funded by ARRA. Washington State Auditor's Office 112 ABOUT THE STATE AUDITORS OFFICE The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four-year terms. Our mission is to work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Chief of Staff Deputy Chief of Staff Chief Policy Advisor Director of Audit Director of Performance Audit Director of Special Investigations Director for Legal Affairs Director of Quality Assurance Local Government Liaison Communications Director Public Records Officer Main number Toll-free Citizen Hotline Website Subscription Service (SAO FACTS DOC - Rev 09/11) Brian Sonntag, CGFM Ted Rutt Doug Cochran Jerry Pugnetti Chuck Pfeil, CPA Larisa Benson Jim Brittain, CPA Jan Jutte, CPA, CGFM Ivan Dansereau Mike Murphy Mindy Chambers Mary Leider (360) 902-0370 (866) 902-3900 .sao.wa.aov https://www.sao.wa.gov/EN/News/Subscriptions/ BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDA STATEMENT Item No. 144 - For Meeting of: April 17, 2012 ITEM TITLE: SUBMITTED BY: CONTACT PERSON/TELEPHONE: Ordinance authorizing the issuance and sale of water and wastewater revenue refunding bonds in the principal amount of not to exceed $10,000,000 in one or more series to refund (refinance) certain outstanding water and wastewater bonds of the City; and delegating authority to the City Manager or Director of Finance and Budget of the City to approve the final terms of the bonds (second reading). Cindy Epperson, Acting Director of Finance and Budget Cindy Epperson, Acting Finance Director, 576-6644 Tara Lewis, Financial Services Officer, 576-6639 Scott Schafer, Wastewater Manager, 249-6815 SUMMARY EXPLANATION: Background In 2003 the City issued Water / Wastewater bonds in two series, A and B, totaling $17,545,000. The Series A bonds will be fully paid off on November 1, 2014. The Series B bonds were issued to finance certain capital improvements to the Wastewater Treatment Plant, and had a final scheduled maturity of November 1, 2023. The enclosed bond ordinance for Council consideration would refund (refinance) the Series B bonds prior to their maturity on the first call date of November 1, 2013 in order to take advantage of market conditions that have lowered interest rates such that significant savings may be achieved. Savings The potential savings estimated at current market conditions is approximately $1.1 million over the life of the bonds or approximately 11% net present value. The reduction in debt service will generate cash flow savings of approximately $200,000 per year from 2014 to 2023. Although the Series B bonds have a principal balance of $10,155,000, the maximum bond issue amount being requested is $10 million. (It is desirable to keep the total amount of bonds issued in any calendar year at or under $10 million so that the bonds will be "qualified tax-exempt obligations" which lowers interest rates on the issue because interest earned by the bond purchasers will be exempt from federal income taxation.) Therefore, to refund the entire outstanding balance and cover issuance costs, the City will be required to provide a cash contribution at the time of closing, currently estimated to be approximately $500,000:.. The Wastewater operations fund has sufficient cash and appropriation on hand to cover this contribution --the bond payment and/or capital transfers will be reduced by the amount of the required contribution. Delegates Authority The form and covenants of the proposed bonds are described in the bond ordinance, for Council review and consideration. Other specific details - such as the actual interest rates, the final structure of the bonds, etc., will not be known until the bonds are placed in the market. Council's approval of this bond ordinance will delegate authority to staff to approve the final terms and conditions of the bond sale, within the parameters set in the ordinance and upon their best judgment. A change in state law allows such authority to be delegated to staff so that the City can act quickly to take advantage of market shifts and to avoid the cumbersome process of pricing the bonds on a scheduled City Council meeting date. (Please refer to Article V of the Bond Ordinance.) Once the bond pricing is concluded and a purchase contract is executed, the specific terms and conditions will be known and provided to Council as an information item at the regular business meeting on May 15, 2012. Preliminary Official Statement When publicly traded securities are offered for sale, SEC regulations require details of the City finances and security for bond payments be issued to potential investors, along with many details regarding the bond terms and conditions. Staff, in conjunction with the City's Bond Counsel, Foster Pepper PLLC, and our underwriters, Seattle Northwest Securities, is in the process of preparing this document (referred to as the Preliminary Official Statement or POS). We anticipate completion of the draft POS by the middle of April. Once staff has deemed the Official Statement to be in final form it will be distributed to potential investors and the Council. The most recent schedule of events relating to this bond issue is attached. Summary: Current market conditions allow the City to take advantage of lower interest rates to refund (refinance) the 2003 Series B bonds at a significant savings even after issuance costs. The current average rate of interest on the 2003 Series B bonds is almost 5%. The estimated rate for the new bonds is approximately 3.88%. Annual cash flow savings will reduce the debt service from the current budgeted amounts thereby allowing more cash to be put towards Wastewater system improvements and reducing the size of potential future debt issuances. This bond issue will have no impact on Wastewater rates since it is entirely to refund debt already priced into the rate structure. It should be noted that the municipal bond market has recently experienced significant volatility; therefore, all of the numbers related to this bond sale are estimates only, and are subject to change. Resolution Contract: Contract Term: Insurance Required? No Funding Source: Ordinance X Mail to: Amount: Other Event Schedule (specify) Expiration Date: Phone: APPROVED FOR SUBMITTAL: City Manager STAFF RECOMMENDATION: Read Ordinance by title only at the April 3, 2012 meeting. Pass Ordinance after the second reading at the April 17, 2012 meeting. BOARD/COMMISSION RECOMMENDATION: ATTACHMENTS: Click to download E Ordinance water and sewer bonds 0 Calendar of Bond Refunding Events ISNW Staff: Council: SNW: BC: Date 1420 Fifth Avenue Suite 4300 Seattle, Washington 98101 City of Yakima, Washington Water and Sewer Revenue Refunding Bonds, 2012 Schedule of Events (As of March 19, 2012) City Staff City Council [Council meets 1st & 3rd Tuesday of each month @ 6 p.m.] Seattle -Northwest Securities Corporation (Underwriter) Foster Pepper PLLC (Bond Counsel) Event Completed Completed Completed Completed Completed Completed In progress March 23 March 27 March 28 April 3 April 3 April 6 April 11 Week of Apr. 16 April 17 April 18 April 23 April 24 April 27 April 30 May 17 May 31 Send data requirements sheet to City for update of Preliminary Official Statement ("POS") Distribute 1st draft Bond Ordinance for review Comments due on 1st draft Bond Ordinance Complete data requirements for POS Distribute 2nd draft Bond Ordinance for review Distribute 1st draft POS for review Comments due on 2nd draft Bond Ordinance Comments due for 1st draft POS Bond Ordinance due for Council packets Distribute 2nd draft POS for review Mail information to S&P First reading of Bond Ordinance Comments due on 2" draft POS Distribute 3rd draft POS for review Conference call with S&P Bond Ordinance passed by Council Comments due on 3rd draft POS Mail POS to potential investors Rating report due Review market conditions Bond Pricing and sign Bond Purchase Agreement Bond ordinance will mature Bond Closing and delivery of bond proceeds Participants BC BC Staff, SNW, BC Staff BC BC Staff, SNW, BC Staff, SNW, BC BC BC SNW Staff, Council Staff, SNW, BC BC Staff, SNW Staff, Council Staff, SNW, BC SNW Staff, SNW Staff, SNW Staff, SNW, BC