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HomeMy WebLinkAboutResolution - 2004-R0396 - Resolution Accpeting The Revised 2003 CAFR Report - 08_16_2004Resolution No. 2004-RO396 August 16, 2004 Item No. 45A RESOLUTION WHEREAS, the City Council of the City of Lubbock accepted the Comprehensive Annual Financial Report (CAFR) of the City of Lubbock, Texas for the fiscal year ended September 30, 2003 at the council meeting on July 15, 2004 excepting only the Management's Discussion and Analysis; and WHEREAS, the Management's Discussion and Analysis has been rewritten for purposes of clarity and accuracy, staffed through the City of Lubbock Audit Committee, and is being resubmitted for acceptance by the City Council; NOW,THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK: THAT the City Council of the City of Lubbock accepts the revised Management's Discussion and Analysis and directs its inclusion in the Comprehensive Annual Financial Report (CAFR) of the City of Lubbock, Texas for the fiscal year ended September 30, 2003. Passed by the City Council this 16th day of Aug6st , , 2004. MCWVGAL, MAYOR ATTEST: Rebecca Garza, City Secretary APPROVED AS TO CONTENT: Lee Ann Dumbauld CFO/ Assistant City Manager APPROVED AS TO FORM: Anita E. Burgess, City Attorne ke/ccdocs/MD&A.res August 10, 2004 Resolution No. 2004-RO396 City of Lubbock, Texas August 16, 2004 Management's Discussion and Analysis Item No. 45A For the Year Ended September 30, 2003 As management of the City of Lubbock, Texas (City), we offer readers this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30, 2003. As described in NOTE III (M) Restatements (Unaudited) found on pages 84-87 of this report, the City's financial position was impacted by significant changes in the reporting entity and prior period adjustments. All fiscal year 2002 data included in management's discussion and analysis has been restated to incorporate these changes. We encourage the readers of these financial statements to consider the information included in our transmittal letter and in the other sections of the CAFR (e.g., combining statements and the statistical section) in conjunction with this discussion and analysis. All amounts, unless otherwise indicated, are expressed in thousands of dollars. Financial Highlights These financial highlights summarize the City's financial position and operations as presented in more detail in the rest of the Basic Financial Statements (BFS), as listed in the accompanying Table of Contents. • The assets of the City exceeded its liabilities at September 30, 2003 by $549 million (net assets). Of this amount, $51 million (unrestricted net assets) may be used to meet the government's ongoing obligations to citizens and creditors. • The City's total net assets decreased by $5 million as a result of operations during the fiscal year. • The ending unreserved fund balance for the General Fund was $8.4 million or approximately 10.0% of total General Fund expenditures. • All of the City's governmental funds reported combined ending fund balances of $50.3 million. Of this total amount, $10.6 million is available for spending at the City's discretion • The Electric Fund's total fund equity decreased by $3.9 million from $92.4 million to $88.5 million. It had a $6.3 million operating loss, and contributed $586,688 to unrestricted net assets after a $9.6 million transfer from the General Fund. A full discussion of the Electric Fund follows later in this MD&A. Overview of the Financial Statements Basic Financial Statements. The MD&A is intended to serve as an introduction to the City'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. This report also contains other supplementary information in addition to the Basic Financial Statements. Government -Wide Financial Statements (GWFS). The GWFS, shown on pages 27- 29 of this report, contain the statement of net assets and the statement of activities, described below: City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 The statement of net assets presents information on all of the City's assets and liabilities (including capital assets and short and long-term liabilities), with the difference between the two reported as net assets using the accrual basis. Over time, increases or decreases in net assets serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The statement of activities presents a comparison between direct expenses and program revenues for each of the City's fiinctions/programs (referred to hereinafter as "activities"). Direct expenses are those that are specifically associated with an activity and are therefore clearly identifiable with that activity. Program revenues include charges paid by the recipient of the goods or services offered by the program, and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not directly related to a specific activity are presented as general revenues. The comparison of direct expenses with revenues from activities identifies the extent to which each activity is self-financing or draws from any City generated general revenues. The governmental activities (activities that are principally supported by taxes and intergovernmental revenues) of the City include administration/community services, electric (street lighting), financial services, fire, general government, human resources, police, streets, and public works. The business -type activities (activities intended to recover all of their costs through user fees and charges) of the City include Electric, Water, Sewer, Solid Waste, Stormwater, Transit, Airport, and Golf. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs (accrual basis), regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). Component Units. The GWFS include not only the City itself (known as the primary government), but also two legally separate entities (known as component units) for economic development (Market Lubbock Economic Development Corporation dba Market Lubbock, Inc.), and arts and cultural activities (Civic Lubbock, Inc.), for which the City is financially accountable. Financial information for these component units is reported seperately in the GWFS in order to differentiate them from the primary government's financial information. Neither of these component units are considered to be major. Fund Financial Statements (FFS). AfvW 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, as with other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance -related legal requirements. The focus of the FFS is on major funds. Major funds are those that meet minimum criteria (a percentage of assets, liabilities, revenue, or expenditures/expenses of fund category and of the governmental and enterprise funds combined), or those that the City chooses to report as major given its qualitative significance. Nonmajor funds are aggregated and shown in a single column, in the appropriate financial statements (combining schedules of nnmajor City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 funds are included in the CAFR following the RSn. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds: Governmental FFS. Governmental funds are used to account for essentially the same functions reported as governmental activities in the GWFS. However, unlike the GWFS, governmental FFS focus on near -term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government's near -term financing requirements. Because the focus of governmental funds is narrower than that of the GWFS (modified accrual versus accrual basis of accounting, and current financial resources versus economic resources, respectively), it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the GWFS. By doing so, readers may better understand the long-term impact of the government's near -term financing decisions. Reconciliations are provided for both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances to facilitate the comparison between governmental funds and governmental activities. The City maintains 29 individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund only, which is considered to be a major fund. Data from the other governmental funds are combined into a single, aggregated presentation. The City adopts an annual appropriated budget for its General Fund. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with this budget, which is presented in the FFS following the statement of changes in revenues, expenditures, and changes in fund balances. The governmental FFS can be found on pages 3 1-3 5 of this report. Proprietary FFS The City maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business -type activities in the GWFS. Enterprise FFS provide the same type of information as the GWFS, only in more detail. The City uses enterprise funds to account for its Electric, Water, Sewer, Solid Waste, West Texas Municipal Power Agency, Stormwater, Transit, Airport, and Golf activities, of which the first six activities are considered to be major funds by the City and are presented seperately, the latter three activities are considered nonmajor funds by the City and combined into a single aggregated presentation. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City's various functions. The City uses internal service funds to account for its fleet of vehicles, management information systems, risk management, print shop and central warehouse activities among others. The services provided by the internal service funds benefit both governmental and business -type activities, and accordingly, they have been included City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 within governmental activities and business -type activities, as appropriate, in the GWFS. All internal service funds are combined into a single, aggregated presentation in the proprietary FFS. Reconciliations are provided for both the proprietary fund statement of net assets and the proprietary fund statement of revenues, expenses, and changes in fund net assets to facilitate the comparison between enterprise funds and business -type activities. The proprietary FFS can be found on pages 3647 of this report. Fiduciary FFS Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the GWFS because the resources of those funds are not available to support the City's own programs. The City presents an agency fund as its only fiduciary fund in the financial statements. The fiduciary FFS can be found on page 48 of this report. Notes to Basic Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the GWFS and FFS. The Notes to Basic Financial Statements can be found on pages 51-91 of this report. Required Supplementary Information Other Than MD&A. The City has presented required supplementary information relating to its progress in funding its obligation to provide pension benefits to its employees in the notes to the BFS. Government -Wide Financial Analysis As noted earlier, net assets serve as a useful indicator of a government's financial position. For the City, assets exceeded liabilities by $549 million (net assets) at the close of fiscal year 2003. This compares to assets exceeding liabilities by $554 million (net assets) at the end of fiscal year 2002. As a result of operations, total net assets decreased by $5 mullion during fiscal year 2002-2003. By far the largest portion of the City's net assets (821/6) reflects its investment in capital assets (e.g., land, buildings, infrastructure, machinery, and equipment), less any related debt used to acquire those assets that is still outstanding at the close of the fiscal year. The City uses these capital assets to provide services to citizens; consequently, these assets 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. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 City of Lubbock Net Assets September 30, 2003 (in 000'S) Governmental Business -Type Activities Activities Total 2003 2002 2003 2002 2003 2002 Current and other assets S 78,784 S 79,380 S 188,077 S 150,513 S 266,861 S 229,995 Capital assets 121,735 117,285 617,465 603,279 739,200 720,564 Total assets 200,519 196,665 905,542 753,794 1,006,061 950,459 Current liabilities 25,697 15,416 37,774 24,201 63,471 39,617 Noncurrent liabilities 73,138 71,106 320,024 285,493 393,162 356,599 Total liabilities 98,835 86,522 357,798 309,694 456,633 396,216 Net assets: Invested in capital assets, net of related debt 78,475 78,256 371,427 404,035 449,902 482,291 Restricted 4,391 17,456 43,389 5,748 47,780 23,204 Unrestricted 18,818 14,430 32,928 34,317 51,746 48,747 Total net assets $ 101,684 $ 110,142 $ 447,744 S 444,100 $ 549,428 S 554,242 Approximately $47.8 million or 8.6%, of the City's net assets represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets, $51.7 million, may be used to meet the government's ongoing obligations to citizens and creditors. At the end of the current fiscal year, the City is able to report positive balances in all three categories of net assets, for the City as a whole as well as for its separate governmental activities, and business -type activities. The City's governmental activities experienced a decrease in net assets $8.5 million, while net assets decreased by $5.8 million during the prior fiscal year. The City's business -type activities experienced an increase in net assets of $3.6 million during the current fiscal year as compared to an increase of $1.4 million during the prior fiscal year. A $9.3 million transfer from the General Fund to the Electric Fund explains much of these changes in net assets. Also an increase of $4.4 million in capital contributions and grants aided this increase. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 Changes in Net Assets Details of the following summarized information can be found on pages 28-29 of this report. City of Lrbbock Cbangea in Net Assets Fer the Year i SepWwbw 30 (M 000's) Basmeas- Covenanental Type Aedvi d sl Acdvitim Totals Revemm 2003 2002 2003 2002 2003 2002 tar services $ 13,888 $ 9,369 $ 178,536 $ 180,288 S 192,424 $ 189,657 Operating grads 8t coMNAiM 12,137 7,007 5,219 4,721 17,356 11,728 Captal grants 8t oonfn'butions Cenral Reveries: - - 7,909 4,825 7,909 4,825 property taxes 42,303 40,408 - - 42,303 40,408 Sales taxis 29,092 28,903 - - 29,092 28,903 Other taxes 3,712 3,681 - - 3,712 3,681 Franchise flees 6,613 6,998 - - 6,613 6,998 Ckants/001ftibutiow wt resuicted to specific prograM - (25) 259 3,303 259 3,278 Other 3,834 6,227 2,737 2,696 6,571 8,923 Total revenues 111,579 102,568 194,660 195,833 306,239 298,401 EqXnKC Adr uisfnitive/Conmwdy Services 21,793 32,483 - - 21,793 32,483 IIaaric 2,373 2,585 - - 2,373 2,585 Financial Senvices 1,965 1,908 - - 1,965 1,908 Fire 20,207 18,664 - - 20,207 18,664 General Governnat 21,009 23,436 - - 21,009 23,436 Huxuan Resources 786 883 - - 786 883 Police 31,429 29,715 - - 31,429 29,715 Streets 9,827 5,940 - - 9,827 5,940 Public WO& 9,856 4,322 - - 9,856 4,322 Interest on L-T DdX 3,346 3,382 - - 3,346 3,382 Electric - - 105,216 96,635 105,216 96,635 Water - - 27,461 26,761 27,461 26,761 Sewer - - 17,248 17,767 17,2A8 17,767 Solid Waste - - 19,559 14,106 19,559 14,106 Stormwater - - 3,315 3,749 3,315 3,749 Transit - - 9,163 8,937 9,163 8,937 Airport - - 6,479 3,749 6,479 3,749 Golf - - 21 7,085 21 7,085 Total Expenses 122,591 123,318 188,462 178,789 311,053 302,107 Change m nt assets before special its & transfers (11,012) (20,750) 6,198 17,044 (4,814) (3,706) Special items - (687) - 34 - (653) Transfers 2,554 15,668 (2,554) (15,668) - - Cha w in net asses (8,458) (5,769) 3,644 1,410 (4,814) (4,359) Net assets - beg cfyear, as restated $ _ 110,142 115,911 444,100 442,690 554,242 558,601 Net asses - end cfyear $ 101,684 110,142 447,744 444,100 S 549,428 554,242 t� City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 Governmental activities. Governmental activities decreased the City's net assets by $8.5 million. Discussion of the key elements of the decrease follows: • Transfers to/from business type activities during the prior year increased governmental activities net assets by $15.7 million; during the current year these transfers increased governmental activities net assets by approximately $2.6 million. This is a net decrease of $13.1 million in resources to governmental activities, which is the primary contributing factor for the decrease in net assets entity wide. This decrease is the primary factor for the decrease in net assets. This decrease is mainly the result of the General Fund transfer of $9.3 million to the Electric Fund, and forgiveness of originally budgeted payments in lieu of taxes, franchise fees and indirect costs of approximately $4.8 million from the Electric Fund to the General Fund. • Total expenses decreased by $.7 million from the prior year due primarily to the one- time $10 million Tyco economic incentive payment made in the prior year. However, the governmental activities did increase public works spending $5.5 million for the City's share of the Marsha Sharp Freeway Project, which will be owned and maintained by the State of Texas and an increase in public safety spending, police and fire, $3.3 million. This was offset by increases in property taxes of $1.9 million due to the additional property being added to the tax rolls, increases in charges for services of $4.5 million due to changes in the fee structures and additional operating grants and contributions of $5.1 million for the libraries, bio-terrorism, weapons of mass destruction and emergency management. The following graph depicts the expenses and program revenues generated through the City's various governmental activities. $25,000 $20,000 $15,000 $10,000 $5,000 $0 Expenses and Program Revenues - Governmental Activities I A �Q *1 X NI& - 3� o� City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 The following graph reflects the source of the revenue and the percentage each source represents of the total. Revenues by Source - Governmental Activities Other Operating grants & 3% Contributions 13% Property Taxes 38% Operating grants & Contributions 4 y: Franchise Fees 6% Other Taxes 3% Sales Taxes 26% Business -type activities. Business -type activities increased the City's net assets by $3.6 million, which helped offset the $8.5 million decrease in the governmental activities. Key elements of this increase follows. A discussion of the Electric Fund follows this overall discussion of the business -type activities. • Charges for services for business -type activities decreased by $1.8 million due primarily to the $5.7 million decrease in the Electric Fund. e Operating grants and contributions totaled $5.2 million compared to $4.7 million in the prior year. e Capital grants and contributions emerged as a significant revenue source for the transit, airport, water, and sewer funds during the current fiscal year, producing nearly $7.9 million in revenue. This compares favorably to the prior fiscal year's support of $4.8 City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 million. These contributions primarily came from federal grants and from water and sewer lines and taps that are funded by property owners. • Expenses increased in total by $9.7 million over the prior fiscal year. This is due to a $5.5 million increase in the Solid Waste Fund, which represents a change in the accounting estimate for the landfills. And, there was a $15.4 million increase in the Electric Fund due to the steep increase in the cost of gas. The following graph reflects the revenue sources generated by the business -type activities. As noted earlier, these activities include electric, water, sewer, solid waste, transit, WTMPA, airport, golf and stormwater drainage. Revenues by Source — Businewtype Activities Grants $ Contributions 7% Charges for Services 92% Other 1% The City's electric utility, Lubbock Power & Light (LP&L) was created in 1916. The activities of LP&L are recorded in the Electric Fund which is an enterprise fund. A ten-year review of financial statements and comparisons to the previous fiscal year shows the following: Total fund equity has decreased from $91.8 million in 1993 to $88.5 million in 2003, with a peak of $103.6 million in 1996. Fund equity decreased by $3.9 million from the previous year. Total assets have increased from $132.5 million in 1993 to $155.8 million in 2003, decreasing by $3.5 million over the past year. Current assets were $12.8 million in 1993, peaked in 2002 at $21 million in 2002, and were $13.8 million at the end of 2003. The 2003 amount includes the $9.3 million transfer from the City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 General Fund. Current liabilities were $3 million in 1993, and have increased to $12 million at 2003, although the 2003 amount is a decrease of $9.6 million from the 2002 level. Long-term liabilities were $40.7 million in 1993, and have risen steadily over the period to $67.3 million at the end of 2003, with only a modest increase from 2002 of less than $400,000. Operating revenues for LP&L have risen to $91.7 million in 2003 from $52.9 million in 1993, peaking in 2001 at $112.1 million. The 2003 amount is down $5.7 million from the prior year. Operating expenses grew from $43 million in 1993 to $98.1 million in 2003, showing an increase of $9.8 million over the 2002 amount. In 2003 the Electric Fund showed a $9 million loss before operating transfers. This is the first loss in the 10-year period. Purchased fuel expenses have increased from $28.4 million in 1993 to $73.1 million in 2003. The highest total cost of fuel over the decade occurred in 2001, at an amount of $79.8 million (which was offset by the highest level of operating revenues over the decade). The average operating income over the prior nine years is $8 million. From 1993 through 2002, transfers were made from the Electric Fund to the General Fund for PILOT and costs of business. These averaged $8 million per year that is essentially the same as the average operating income over the same 9-year period. Briefly stated, when gas prices began increasing in 2002, LP&L's rates and working capital balances or reserves were insufficient to absorb the escalating costs of delivering power. City Council took immediate steps to resolve the financial stability and integrity of LP&L. Outlined next are the key changes made by them: • Rates were raised by 1 cent/kw hour in March of 2003. • Nearly 100 positions were eliminated, both in the General Fund and in LP&L. • All transfers from the Electric Fund to the General Fund were discontinued in mid 2003 • A retired director of LP&L was re -hired to oversee the operations and restructuring. • The. LP&L Board was vested additional powers by the City Council to be an operating and oversight board, rather than advisory in nature. • A November 2004 Charter election is scheduled to more permanently separate LP&L governance and to give the Board hiring authority for its own executive director. • The City Council negotiated with WTMPA and its three other member cities to swap $4 million in accumulated debt for their 15% equity interest in the gas turbine generator. • The City Council re -negotiated its contract with Xcel and is now a "full requirements customer," enabling the City to buy power at more favorable rates and allowing the City to sell power during peak periods to Xcel. • Through the new Xcel contract, the City's rate is tied to the competition's rate, providing some reduction in the overall energy cost risks. Financial Analysis of the City's Funds Governmental funds. The focus of the City's governmental funds is to provide information on near -term inflows, outflows, and balances of spendable resources. Such information is City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 useful in assessing the City's financing requirements. In particular, unreserved fund balance serves as a useful measure of a government's net resources available for spending at the end of the fiscal year. The City's governmental funds reported combined ending fund balances of $50.3 million. This compares to $53 million as of the end of the prior fiscal year. A significant portion of this decrease was a result of the City's support for the Electric Fund that included a $9.3 million transfer from the General Fund and the forgiveness of payments in lieu of taxes, franchise fees, and indirect costs of approximately $4.9 million due to the General Fund. Of the ending fund balance, $10.6 million, or 21.1%, constitutes unreserved jimd balance, which is available for spending at the government's discretion. This compares to $10.2 million, or 19%, as of the end of the prior fiscal year. The remainder of the fund balance is reserved and it is not available for new spending because it has already been committed 1) to pay debt service, 2) for use in construction of capital projects or 3) for a variety of other restricted purposes and is not otherwise available for appropriation. The General Fund is the chief operating fund of the City of Lubbock. The unreserved fund balance of the General Fund was approximately $9.4 million. This compares to $15.4 million from the previous year. Total fund balance was $9.4 million at the end of the current fiscal year compared to $16.6 million at the end of the prior year. As a measure of the General Fund's liquidity, it is useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represents 9.8% of total general fund expenditures. This compares unfavorably to the 18.1% level for the prior year. Total fund balance represents 11.0% of total general fund expenditures compared to 19.6% for the prior year. Proprietary funds. The City's proprietary funds provide essentially the same type of information found in the GWFS, but in more detail. Unrestricted net assets of the major proprietary funds at fiscal year end for 2003 and 2002 are shown next (amounts presented in 000s): 2003 2002 Electric Fund $ 2,367 $ 2,743 Water Fund 15,551 11,991 Sewer Fund 4,286 6,140 Solid Waste Fund 4,992 14,326 WTMPA 2,155 (330) Stormwater 869 (751) $ 30,220 $ 34,119 The Water Fund reflected a current year increase in unrestricted net assets of $3.6 million compared to $4.3 million during the prior year. This is due to increases in consumption; City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 2003 was the second driest year on record. A 3% rate increase for water was also implemented. The Sewer Fund reflected a decrease in unrestricted net assets of $1.9 million; this compares to a $1.2 million increase during the prior year. New capital and operating expenditures related to the initiation of stream discharge of treated effluent and other effluent management system improvements explain this decrease. Annual operating expenditures increased when disposal of treated effluent was shifted from land application to stream discharge. Additionally, annual income was reduced when grazing operations were ceased at the Land Application Site. The Solid Waste Fund reflected a decrease in unrestricted net assets of $9.3 million during the year as compared to an increase in net assets of $1.2 million during the prior year. A $6 million interfund loan from Solid Waste Fund to the Community Investment Fund was written off with the closing of the Community Investment Fund. The change in accounting estimate for the landfills also contributed to the decrease. The WTMPA Fund reflects an increase in unrestricted net assets of $2.5 million, which is a function of increased sales for the operation of the electric co -generation facility. The Stormwater Fund experienced an increase in unrestricted net assets of $1.6 million during the current year compared to a $3.6 million increase in the prior year. This is due to the nearly 200% increase in stormwater rates. This increase provides long-term funding for major capital system improvements, in addition to ongoing maintenance scheduled in the City's Stormwater Master Plan. General Fund Budgetary Highlights With the financial operating results of the Electric Fund, a transfer from the General Fund fund balance amounting to $9.3 million was made to maintain financial stability in the Electric Fund. The PILOT payment and other budgeted transfers from the Electric Fund to the General Fund were also forgiven. General Fund expenditures were reduced by management initiative to lessen the financial impact on the General Fund. The General Fund ended the fiscal year with expenditures more than $2.5 million under budget. Capital Assets and Debt Administration The City's investment in capital assets for its governmental and business type activities as of September 30, 2003 amounts to $739 million (net of accumulated depreciation) which is a $18.6 million increase over the prior year's balance of $720 million. This investment in capital assets includes land, buildings and improvements, equipment, construction in progress, and infrastructure. Major capital asset investments during the current fiscal year included the following: City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 • Work continued on the outfall storm sewer from Clapp Park to Yellowhouse Canyon with capital additions of $14.5 million and total project expenditures to date of $37.4 million. • A large amount of work was completed on the installation of a sewer main to serve established subdivisions within the most recent annexation area. Capital assets added totaled $2.2 million with the total project expenditures to date of $5.3 million. • Scheduled improvements to the Electric Fund's distribution infrastructure totaled $3.9 million. • Work continues on the Hancock Land Application Site Transmission System with additions to capital assets of $1.7 million, and total project to date expenditures in excess of $3 mullion. • The airport continues their quest to improve their facilities with the construction of a high-speed taxiway, spending $1.7 million during this fiscal year. • The City spent in excess of $1 million on a flood relief project linking many of the playa lakes with an underground drainage system. At the end of the fiscal year the City has construction commitments of $110 million. City of Lubbock Capital Assets (Net of Accumulated Depreciation) September 30 (in ma's) Business - Governmental Type Activities Activities Totals 2003 2002 2003 2002 2003 2002 Land $ 7,996 $ 7,506 $ 31,676 $ 19,459 $ 39,672 $ 26,965 Buildings and system 25,602 24,359 71,525 70,963 97,127 95,322 Improvements other than buildings 37,100 36,640 329,618 324,898 366,718 361,538 Machinery and equipment 14,881 13,666 79,957 78,710 94,838 92,376 Construction in progress 36,156 35,114 104,689 109,249 140,845 144,363 Total $ 121.735 $ 117.285 $ 617,465 $ 603.279 $ 739.200 $ 720.564 Additional information about the City's capital assets can be found on pages 67-69 of this report. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 Long-term debt. At the end of the current fiscal year, the City's total bonded debt outstanding was as follows: General obligation bonds Revenue bonds Total City of Lubbock Outstanding Debt General Obligation and Revenue Bonds September 30 (in 000's) Buslness- Governmental Type Activities Activities Totals 2003 2002 2003 2002 2003 2002 S 69,808 S 58,505 $ 229,947 S 164,123 S 299,755 S 222,628 S 69.808 $ 58505 $ 325,925 S 274,658 $ 395-733 S 333.163 There is no direct debt limitation in the City Charter or under State law. The City operates under a Home Rule Charter that limits the maximum tax rate for all City purposes to $2.50 per $100 of assessed valuation. The Attorney General of the State of Texas permits allocation of $1.50 of the $2.50 maximum tax rate for general obligation debt service. The current tax rate per $100 of assessed valuation is $0.5457, which is significantly below the City's maximum allowable tax rate. At fiscal year end, the City's total bonded debt increased by $62.5 million, or 18.8%. This increase is attributed to the issuance of self-supporting debt to fund business -type activities and the issuance of general obligation bonds to fund the current capital improvement plan. During the fiscal year, the City issued $11.9 million of General Obligation Bonds, Series 2003. This issuance was the fourth and final installment of the capital improvement debt issuance approved by voters in 1999 to fund the current capital improvements plan. The City also issued $3.8 million of Tax and Tax Increment Revenue Certificates of Obligation, Series 2003. This issuance was the first installment of debt to be incurred for the construction of public works in the North Overton Tax Increment Financing Reinvestment Zone. The City also issued $71.2 million of Self -Supported Obligation Bonds. These issuances were used to improve the distribution and infrastructure of the Business -type activities. Also, $8.9 million of Refunding Bonds were issued to defease the $8.5 million Electric Light and Power System Revenue Bonds, Series 2002. All bonds issued during the fiscal year were insured to provide a lower cost of interest expense for the City's taxpayers. It is the City's policy to evaluate each bond issue to determine whether it is economically feasible to purchase bond insurance. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 The City, LP&L and WTMPA received several rating changes throughout the year from Moody's Investors Services, Standard & Poor's and Fitch Ratings, Inc. Following is a recap of those changes: , April 25, 2003: Moody's lowered the City's General Obligation bond rating from Aa2 to Aa3 and changed the Rating Outlook to negative from stable. Moody's maintained the A2 rating on LP&L debt, but placed a negative outlook on LP&L's and WTMPA outstanding revenue bonds. July 16, 2003: Fitch Ratings lowered the City's General Obligation bond rating from AA+ to AA-. August 22, 2003: Standard & Poor's lowered LP&L's and WTMPA's bond ratings from A+ to BBB- and revised the outlook to negative from stable. Standard & Poor's also lowered the City's General Obligation bond ratings from AA+ to AA and maintained a stable outlook FitchRatings lowered LP&L's and WTMPA's bond ratings from A+ to BBB+ and maintained their negative outlook. In summary, the City's General Obligation bonds maintain a "AA-" rating from Standard & Poor's and Fitch Ratings, Inc. and a "Aa3" rating from Moody's Investors Service. The revenue bonds of the LP&L and WTMPA have been rated `BBB-' by Standard & Poor's, "BBB+" by Fitch Ratings, Inc. and "A2" by Moody's Investors Service. The Electric Fund, Lubbock Power & Light (LP&L) did not generate sufficient income to meet rate covenants as required by the revenue bond covenants. Additional information about the City's long-term debt can be found on pages 76-81ofthis report. Economic Factors and Neat Year's Budget and Rates • At the end of the fiscal year the unemployment rate for the Lubbock area was 3.4%, which is an increase from a rate of 2.7% one year earlier. This compares favorably to the state's average unemployment rate of 6.6 percent and the national average of 5.8% on September 30, 2003. • Total retail sales reflect a 1.4% increase over the prior year. • Building permits for new construction decreased from 4,171 during 2002 to 3,125 in 2003, an approximate 25% decrease. This compares to a 43% decrease during the prior period. • Total occupancy in local hotels/motels remained constant and Occupancy Tax, nearly $2.9 million, was nearly equal to the amount received during the prior year. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2003 • City Council decided to continue to support operations of the Electric Fund by forgoing transfers for the PILOT and other transfers. • As a result of the City's decision to support the Electric Fund's operations through transfers and a concentrated effort to reduce expenses, the City eliminated ninety-two positions, reducing the cost of wages and salaries by approximately $6 million for FY 2003-04. • The Electric Fund increased rates in May 2003 by an average of 12.5% for both residential and commercial users. • Water and Sewer Funds rates were increased during FY 2002-03 with the full impact of rate increases recognized for FY 2003-04. Water rates were increased by an average of 3% and sewer rates were increased by an average of 5% for all customers. The City is currently conducting a rate study. It is anticipated that this study will impact future water and sewer rates, ensuring that rate increases cover rising operation costs and scheduled capital improvements. • An audit committee was formed during the FY 2003-04 fiscal year. Requests for Information This financial report is designed to provide a general overview of the City of Lubbock's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in the report or requests for additional financial information should be addressed to the Chief Financial Officer, P.O. Box 2000, 1625 13' Street, Lubbock, Texas, 79401.