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2006 Annual Comprehensive Financial Report( 06-002)boo a . o0a City of Federal Way, Washington COMPREHENSIVE ANNUAL FINANCIAL REPORT Year Ended December 31, 2006 Prepared by Finance Department PERMANENT RECORD DO NOT DESTROY GS50-03D-02, Rev. 1 (CAFR) City of Federal Way History The earliest recorded accounts of the Federal Way area tell of Native American families who resided in the area of the Muckleshoot Reservation on the east side of the Green River Valley and traveled west to the shores of Puget Sound for the plentiful fisheries resources. Generations of Muckleshoot Indians wore a westward trail across the heavily forested plateau to the area which is now Saltwater State Park. The arrival of the white man in the nineteenth century resulted in a steady decline in the Indian population and by 1890, nearly the entire population had disappeared from the area. Isolated on a triangular shaped plateau rising steeply from Puget Sound, the Federal Way area had little waterfront access or roadways and accordingly, was sparingly developed compared to Tacoma and Seattle. As late as the turn of the century, the original settlers at Dash Point and Dumas Bay had to row to Tacoma for supplies and mail. Old Military Road, constructed around 1856 and extending north from Fort Steilacoom, past Star Lake to Seattle and Fort Lawton, was the first road through the area. Over time, narrow dirt roads were added to provide east/west access and by 1900, a road was constructed between Star Lake and Redondo. The second crossroad, the "Seattle Road," connected old Military Road and Kent. The Seattle -Tacoma Interurban Line, completed in 1901, provided a fast and easy way to reach these urban cities. Improved access brought many visitors to the area and Star Lake became a popular summer recreation site. By the 1920s, Federal Highway 99, the interstate that linked the western states from north to south, was complete. At this time, Federal Way was still primarily forest and farmland. Fred Hoyt had a cabin on Dumas Bay and started a road to Tacoma (still called Hoyt Road). The timber companies, which had a major logging operation going, built an early railroad line and were instrumental in getting Marine View Highway (now Dash Point Road) built in the early 1920s. This roadway spurred development along the coastline. Soon thereafter, Peasley Canyon Road was built to connect Military Road with the Auburn Valley. This road later became known as South 320th Street. In these early days, roadways set the stage for development in the area and they still play an important role in the City today. By the start of World War II, a number of small, thriving communities made up the area that is now Federal Way. Some communities were clustered around lakes, such as Steel Lake, Star Lake, and Lake Geneva. Others were sited to take advantage of the view of Puget Sound, like Adelaide and Buenna. As each of these communities grew, residents built small schoolhouses for their children. By the late 1940s, King County consolidated the many individual red schoolhouses into the Federal Way School District, from which the City gets its name. During this same period, a library was built along the edge of Highway 99, and between 308`h Street and 320th Street, a small "downtown" developed with a general store, lumber yard, realty office, beauty parlor, feed store, and gas station. By the end of the 1950s, the ten blocks between 308th and 320th Streets became the first roadside commercial district. One of the more unique developments was Santa Faire, a family oriented theme park. New shopping areas were added around the park, helping to create a "community focus" for the residents of the area. As this commercial area developed, the rest of Federal Way was changing as well. The Boeing Company expanded their operations in Renton and the Kent Valley and began advertising nationally for engineers. Those engineers in turn began roaming the wooded acreage in Federal Way in search of housing. One of the earliest residential developments was Marine Hills, built in 1958 overlooking Puget Sound. Weyerhaeuser, one of the early timber companies, had large land holdings in the area and began to develop their land into high quality housing with amenities like golf courses. Weyerhaeuser's development company also began developing commercial property, creating the West Campus business park. The plan was to integrate offices and businesses with lush landscaping. Though initially the corporate office market was not strong, West Campus has grown almost to capacity, providing space for many civic buildings such as City Hall, the police station, the area's major health care centers, and higher density housing. Another major landmark in the area is SeaTac Mall, built in the mid-1970s on what was farmland south of 320th Street. The Mall is one of the largest in South King County and is the anchor for retail development in the area. The Mall was a result of population growth in the region and its location was determined by the 320th Street intersection with Interstate 5. The Interstate supplanted Highway 99 as the main artery for commuter traffic in the County. By the mid 1980s, South King County was growing quickly. Retail growth occurred along Highway 99, especially at the 320th Street intersection. Roads and office space were developed to accommodate the increased growth. Residential growth was also prominent, following plans developed by King County, with a large number of apartment homes. The changes to the community, with increased housing and traffic, created a movement for greater self-determination. In 1989, the citizens of this area voted for incorporation and the City of Federal Way was born, incorporating on February 28, 1990. COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Year Ended December 31, 2006 Table of Contents INTRODUCTORY SECTION Page Letterof Transmittal .................................................................................................................................. in City Officials and Administrative Officers ..._._..__.. ....... ........................................................................ 1 CityFunctional Organization Chart .................... ............ :........... .................. ........::....::.:.:...... ::.: ..:..:....... 2 GFOACertificate of Achievement ....... .................................................. :.....:...-................. ._....................... 3 FINANCIAL SECTION Independent Auditor's Report ................. ................................. .-------------••----- ._....--------------------------- Management's Discussion and Analysis .................. ......................... ... • . •. . -- ............................... Basic Financial Statements: Government -wide Financial Statements: Statementof Net Assets ........................ --- ............. ............................................................. 18 Statement of Activities .......................... ................. ............ .................................................... 19 Fund Financial Statements: Balance Sheet — Govemmental Funds.................................................................................... 20 Statement of Revenues, Expenditures, and Changes in Fund Balances — GovemmentalFunds .............. .............. ..................................._......................................... 22 Reconciliation of the Statement of Revenues, Expenditures, and Change In Fund Balances of Governmental Funds to the Statement of Activities ........................ 24 Statement of Revenues, Expenditures, and Changes in Fund Balances — Budget and Actual GeneralFund...................................................................................... 25 StreetFund...... ...... ...... ...... .......................... . .............. ........... ---- --- — ----------- 26 UtilityTax Fund.................................................................................. 27 Statement of Net Assets — Proprietary Funds ...................................... ..:_................................. .....-.. 28 Statement of Revenues, Expenses and Changes in Fund Net Assets — Proprietary Funds...... 29 Statement of Cash Flows — Proprietary Funds._..................................................................._. 30 Notes to the Financial Statements.................................................................................................... 31 Combining and Individual Fund Statements and Schedules — Nonmajor Governmental Funds: FundDescription....................................................... ......................................... ........ ................. ..-_. 59 CombiningBalance Sheet................................................................................................................ 61 Combining Statement of Revenues, Expenditures and Changes in Fund Balances ........................ 65 Statement of Revenues, Expenditures, and Changes in Fund Balances — Budget and Actual ArterialStreet Fund .......................................... ........................ ....... ........._........... ---- 69 Solid Waste & Recycling Fund ........................ :.-. Hotel/Motel Lodging Tax Fund .......................... .:.....,,...... ....... .......... ........... ................ .. 71 Federal Way Community Center Fund .................. .......... ..........._....................._.............. 72 Paths & Trails Fund_.. ................ .. 73 Budget and Actual Fund Statement — Debt Service Fund FundDescription................................................................._.,,..,...................................................... 75 Budgetand Actual ................................ . . . •..._._....................-_............................................ 76 Combining and Individual Fund Statements and Schedules — Internal Service Funds: FundDescription............................................................................................................................. 77 Combining Statement of Net Assets.................................................................................................. 78 Combining Statement of Revenues, Expenditures and Changes in Fund Net Assets.... ................... 79 Combining Statement of Cash Flows .......................... 80 Capital Assets Used in the Operation of Governmental Funds: Comparative Schedules by Source.................................................................................................. 82 Schedule by Function and Activity ............ :................................................................................ ..... 83 Schedule of Changes by Function and Activity ................ ....... ___ ..... ...... ............ ------- ............ ....... 84 STATISTICAL SECTION NetAssets by Component...................................................................................................................... 87 Changesin Net Assets........................................................................................................................... 88 Government -wide Revenues by Source and Expenditures by Function................... .................::.......... 89 Fund Balances, Governmental Funds ........................._. ....... ... 90 Changes in Fund Balances, Governmental Funds.................................................................................. 91 Assessed and Estimated Actual Value of Taxable Property .................................................................. 92 Property Rates and Levies, Direct and Overlapping Governments........................................................ 93 PrincipalTaxpayers .................................... ............ ................. ............................ ........................... ......... 94 Property Tax Levies and Collections..................................................................................................... 95 Ratio of Outstanding Debt by Type.... ......................................... __ .... __ ........................... 96 Ratio of General Obligation Bonded Debt to Assessed Value and Net General Obligation Bonded Debt Per Capita....,........................................................ 97 Computation of Direct and Overlapping Debt....................................................................................... 98 Computation of Limitation of Indebtedness........................................................................................... 99 Ratio of Annual Debt Service Expenditures for General Obligation Bonded Debt to Total General Governmental Expenditures Net of Debt Service Expense ...........:............ 100 DemographicStatistics.......................................................................................................................... 101 PrincipalEmployers.... .... ...... .................... . ........... .......................... :­ ........... ...................... ­­ ....... 102 Property Value, Construction and Bank Deposits................................................................................. 103 CapitalAssets by Function .......................................... ............... ............... ............................. :.............. 104 Operating Indicators by Function............................................•......... ......_......... ..... .......... ........... ..... 105 City Government Employees Full -Time Equivalent - History............................................................... 106 Salaries & Surety Bonds of Principal Officials...................................................................................... 107 Miscellaneous Statistical Information ....................................... ........ ................ :........................ ......... 108 ii CITY OF Federal Way June 26, 2007 People of the City of Federal Way Honorable Mayor and City Council THE COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY OF FEDERAL WAY The Comprehensive Annual Financial Report (CAFR) of the City of Federal Way for the year ended December 31, 2006 is hereby submitted. Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, including all disclosures, rests with the City. To the best of our knowledge and belief, the enclosed data are accurate in all material respects and are reported in a manner designed to present fairly the financial position and results of operations of the various funds of the City. All disclosures necessary to enable the reader to gain an understanding of the City's financial activities have been included. FINANCIAL REPORTING STANDARDS AND FORMAT The comprehensive annual financial report is presented in three sections: introductory, financial, and statistical. The introductory section includes this transmittal letter, the City's organizational chart and a list of officials. The financial section includes the basic financial statements, and the combining statements of nonmajor funds, internal service funds, and schedules of capital assets of governmental funds, as well as the State Auditor's report on the basic financial statements. The statistical section includes selected financial and demographic information, generally presented on a multi -year basis. As an aid to the reader, the major sections of this report have been segregated by divider pages which provide introductions to the sections. In the same manner, divider pages have been used to separate the various components of the financial section. Generally Accepted Accounting Principles (GAAP) require that management provide narrative introduction, overview, and analysis to accompany the basic financial statements in the form of MD&A. This transmittal letter is designed to compliment the MD&A and should be read in conjunction with it. The City's MD&A can be found immediately following the Independent Auditor's Report. REPORTING ENTITY The City is a noncharter Optional Code City with a Council -Manager form of government. It was incorporated on February 28, 1990, and is governed under the provisions of the Optional Municipal Code of the Revised Code of Washington. Optional Code City status increases the City's operating authority by extending it to the powers of all four city classifications which exist in Washington Law. The City Council consists of seven council members, all of whom are elected at large by citizens of Federal Way to serve four-year terms. The City Manager, who serves as the chief executive officer, is responsible for day-to-day administration of personnel, policies and programs. He is appointed by, reports directly to, and serves at the pleasure of the City Council. iil City services provided include: police protection, construction and maintenance of streets, building inspection, municipal court services, jail services, planning and zoning, park services, emergency management services, surface water management and general administration, including finance. Services for a land use hearing examiner are contracted. The City continues to have seven major departments consisting of City Manager; Law; Management Services; Parks, Recreation, and Cultural Services; Public Safety; Public Works; and Community Development. Fire protection and emergency medical services are provided by South King Fire & Rescue. The Lakehaven Utility District delivers water and sewer services. Metro provides public transportation services. Public housing services are the primary focus of the King County Housing Authority. The King County Library System engages City residents through its library and reference services. School District No. 210 offers educational programs for kindergarten through high school students, in addition to vocational training. FACTORS AFFECTING FINANCIAL, CONDITION Robust growth has finally erased a four-year economic slowdown in King County. While income and employment changes remain short of the four years of rapid growth in the late 1990s, the marked improvement in local conditions reflects a return to equilibrium. Since mid-2000, the region has weathered a series of setbacks, punctuated by the dramatic collapse in equity market valuations, the September 112001 terrorist attacks, myriad accounting scandals, and the buildup and continued aftermath of war in Afghanistan and Iraq. Halting recovery has now given way to unmistakable growth. For the second consecutive year the county is experiencing sustained unemployment of less than 5%, returning to pre- 2001 levels. After three years of fitful growth, local business activity has surged in the last nine months, and shown continued strength despite the absence of a strong expansion in the national markets. Having finally broken the cycle of improvement followed by stalled growth, the national economy as well as the County is now increasingly threatened by higher energy costs. Although the entire state has suffered during the downturn, the worst effects were focused on the Puget Sound region and King County in particular. For the last two years, however, non -farm employment growth in King County has actually outpaced the rest of the state, 4.8 percent to 3.6 percent. Growth in 2005 was fueled by a turnaround in aerospace and parts, up 7.0 percent. By far the largest payroll growth has occurred in construction up 7.9 percent since last July after growing 6.9 percent the year before. The remarkable strength in residential real estate appears to be finally running its course. Sales in August were at near record levels, but by virtually every other measure — time on market, inventory, and number of competing offers — the market is cooling. We expect a dramatic fall in sales over the next 18 months. Steady growth is anticipated in 2007, with business investment continuing to offset slackening consumer demand. Modest employment growth should continue, but at a slower pace that 2005 — 2006. Residential real estate and construction, carried four years by historically low long term interest rates, will return to more natural levels. After rising by over 3.6 percent in both 2000 and 2001, growth in the Puget Sound region Consumer Price Index was just 1.9% and 1.7% in 2002 and 2003, respectively, driven by unchanged housing costs. In 2005 the CPI was up to 2.4%, before rising another 2.6% in the third quarter alone due to the aftermath of Hurricanes Katrina and Rita. Obviously local prices remain dependent on global energy prices, as well as movement in agricultural goods, but core inflation — excluding energy and food — in the Puget Sound region should remain quite low for the next two or three years. ECONOMIC TRENDS Federal Way is the eighth largest city in Washington State with a population of 86,530 as of April 1, 2006. The City is located on a plateau adjacent to Puget Sound in King County, eight miles north of downtown Tacoma and 25 miles south of downtown Seattle. The City occupies approximately 22.5 square miles and is served by Interstate 5 and state highways 99 and 509. lv In 2006 there were 34,789 housing units in Federal Way, an increase of approximately 0.7% over 2005. Of these units, 55.7% were single family homes, 40.6% multi -family units, and 3.7% mobile homes and trailers . The community is residential and commercial, with the populace employed locally and in the neighboring cities such as SeaTac, Kent, Tacoma, Bellevue, and Seattle. Employment in Federal Way is highly concentrated in retail and services sectors which respond primarily to the needs of the local market area population. The employment figure for 2006 is estimated at 29,892. Major employers are; Weyerhaeuser, Federal Way School District, St. Francis Community Hospital, Enchanted Parks, U.S. Postal Bulk Mail Center and World Vision. Sales tax collected in 2006 total $12.40 million, and is above 2005 by $1.10 million. The retail sector of the local economy is anchored by two areas; the first is South 348" and Pacific Highway 99 including the newly finished Wal- Mart Super Center, Sportman's Warehouse, Costco, Lowe's Home Improvement Center, and Home Depot. The second is The Commons regional mall including Target, TJ Max, Best Buys, and many other small businesses adjacent to the area. According to a listing of businesses registered with the City of Federal Way and sorted by the Standard Industrial Classification, the business economy appears to be configured as follows: retail trade 50.9%; services 18.7%; construction 17.0%; wholesale trade 4.0%; transportation and public utilities 0.1%; information 4.3%, manufacturing 1.4%; government 0.3%, finance, insurance and real estate 2.9%, and other 0.4%. In 2006, new improvements to real estate totaled $23.3 million or approximately 0.3% of the City's 2006 assessed valuation. The total assessed value of taxable property in Federal Way was $8.0 billion, which is approximately 10.5% higher than the 2005 assessed valuation of $7.3 billion. Real Estate sales increased 5.2% to approximately $988 million in 2006 as compared to $939 million in 2005. A total of 787 building permits and 2,550 other building related permits were issued in 2006. Estimated valuation was $150.8 million and $4.2 million, respectively. Significant building permits include: Wal-Mart Super Center, Century Theaters, Lowes, Campus Point, East Campus Terrace Lot and Villa Esperanza. LONG-TERM PLANNING The City's fiscal policy requires the City to prepare long-range projections for six years beyond the current budget period. The projection extends current operations to the future to see if the services are sustainable and the magnitude of, if any, future financing gaps. This glimpse into the future allows the City to proactively plan and implement corrective measures over time to avoid sudden drastic changes in service levels or in revenue/tax policies. In addition, the City's fiscal policy requires the City to balance its ongoing services with ongoing revenues. MAJOR INITIATIVES AND ACCOMPLISHMENTS The Parks and Recreation department completed construction on three major projects in 2006. The largest is the first Community Center of its kind in the Puget Sound region and the first new construction of an indoor municipal recreation facility for the City of Federal Way. The Federal Way Community Center opened its doors on a new 72,000 square foot facility in late March, 2007. Residents and those from the surrounding areas will be able to job the indoor track, climb swim, take yoga, relax in the sauna, have a birthday party, and schedule a reception all in one location. Second, Cedar Grove Park which is located in a neighborhood between I-5 and Highway 99 that previously had no park facilities was completed. The new 3-acre park contains play equipment for toddlers and older children, a loop trail, a small Basketball court, and picnic benches. And finally, a much needed parking lot that will serve the West Hylebos Wetlands Park was developed, which now includes the historic cabins park on South 348'b Street. A number of Public Works capital improvement projects were added to our main streets and highways, making them a trove attractive place to do business. The most important projects completed in 2006 include: 21" Avenue South grid road from South 316`h to South 320ffi Street; South 336ffi Street at First Way South Intersection improvement project; Westway Street lighting project; Joe's Creek Habitat Restoration; Lakota Creek channel restoration; and, the South 333`d at I" Way South traffic signal. Public Works staff completed the design and right-of-way acquisition for Pacific Highway South HOV Lanes Phase III improvement project and worked to secure project funding to complete the environmental assessment for the Triangle Project; and established a City Pandemic Response Plan. [A The Community Development department has completed a Shoreline Inventory which will assist in updating the Shoreline Master Program. Plus, the department processed an impressive 3,341 building permits totaling $155 million in valuation for the community. City staff worked with King County personnel to reach a solution for subsidizing the cost of annexation to the City. The City received the National League of Cities Diversity Award for its Korean Liaison Program, and received an Association of Washington Cities' Award for consolidating the Fire District with the City's permit center. In addition, City staff worked with the Federal Way Crossings development which replaced the Flying "J" truck stop with new retail outlets and restaurants providing employment opportunities for the community. The Economic Development department has targeted key marketing areas in both local and national publications to attract interest in relocating or expanding businesses in our area. At the end of 2006 we marketed to the top 100 fastest - growing businesses in Washington State. The City has continued to support the Highline Community College Small Business Development Center and has been well received by the business community. It currently has 21 active clients at the end of December and the City anticipates the numbers to grnw dramatically during 2007. The City has hired a consulting firm to provide us with expert assistance in developing a targeted tourism -marketing campaign, as well as a new suite of professionally designed tourism -marketing materials. Plus, the City has continued to contribute to, and sponsorship for the Women's Triathlon presented by Subaru, and the Han Woo-Ri Festival. In addition we joined with SeaTac, Kent and Tukwila in hosting the Senior Softball World Championship that brought thousands of participants and spectators from across the country and several foreign countries. OUTLOOK FOR THE FUTURE At the January 2007 planning retreat, Council identified the following set of goals for the City. 1) Public Safety: Integrate the public safety strategy into all facets of City operations, building on a strong Community -based approach. 2) City Center: Create a multi -use urban city center that is pedestrian friendly, linked to neighborhoods and parks, and serves as the social and economic hub of the City. 3) Economic Development: Establish Federal Way as an economic leader and job center in South King County by attracting a regional market for high -quality office and retail businesses. 4) Capital Investment: Maintain the capital facilities plan and provide financing options for transportation and surface water improvements, parks, recreation, cultural arts and public facilities. 5) Service Culture: Ensure a responsive service culture within the City organization where employees listen carefully, treat citizens and each other respectfully and solve problems creatively, efficiently, and proactively. 6) Regional Leadership: Position Federal Way as a regional leader by working collaboratively with other local and regional jurisdictions in order to leverage resources. FINANCIAL INFORMATION The City of Federal Way is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft, or misuse and to ensure that adequate accounting data are compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: 1) the cost of a control should not exceed the benefits likely to be derived, and 2) the evaluation of relative costs and benefits of the control system requires estimates and judgments by management. V1 Single Audit As a recipient of federal, state and county financial assistance, the City is responsible for maintaining an adequate internal control structure to ensure compliance with applicable laws and regulations related to those programs. This internal control structure is subject to periodic evaluation by management and the State Auditor's Office. As part of the City's single audit, tests are made to determine the adequacy of the internal control structure, including that portion related to federal financial assistance programs, as well as to determine that the government has complied with applicable laws and regulations. The results of the City's single audit for the year ended December 31, 2006 indicated that there were no material weaknesses in the internal control structure. Budgetary Control The City maintains budgetary controls in accordance with the Revised Code of Washington (RCW 35A.33). The objectives of these budgetary controls are to ensure compliance with legal provisions embodied in the annual appropriated budget approved by the City Council. Activities of the General Fund, some Special Revenue Funds, and Debt Service Fund are included in the annual appropriated budget. The level of budgetary control at which expenditures cannot legally exceed the appropriated amount is established at the individual fund level. The project - length based Special Revenue Funds, and the Capital Projects, Enterprise and Internal Service funds are management budgets only and therefore these budgets are not represented in the CAFR. The City also maintains an encumbrance accounting system as one technique of accomplishing budgetary control. All appropriations lapse at year-end. Basis of Accounting All governmental funds are accounted for using the modified accrual basis of accounting. Under the modified accrual basis, revenues are recorded when received in cash, except for revenues susceptible to accrual. Revenues considered susceptible to accrual are those that are measurable and available to finance the government operation during the current period. Expenditures, other than accrued interest on general long-term debt, are recorded at the time liabilities are incurred. All proprietary funds use the accrual basis of accounting. Under the accrual basis, revenues are recorded when they are earned and expenses are recorded as soon as they result in liabilities for benefits received. Cash Management The City began investing outside the State Investment Pool in November 1994. Based on an adopted investment policy the City operates a conservative cash management program, investing surplus cash as determined by anticipated cash flow needs. Investment decisions are based on established investment policies in compliance with Washington State statutes, with consideration given first to safety, secondly to liquidity, and lastly to yield. The City's portfolio at December 31, 2006 consisted of investments in U.S. Government Agency securities, Washington State Investment Pool, and Municipal Investment Account, with maturities ranging from one day to just under two years. The Washington State Treasurer manages a State Investment Pool for use by any city, county, town, municipal corporation, or special taxing district within the state. Municipalities determine the amount and length of investment in the pool based on individual cash flow needs. Interest is earned on the pool's actual experience for the month, less an administrative fee equivalent to 3'/z basis points (.035%). At December 31, 2006, the City had $34.3 million invested in the State Investment Pool. In 2006, the average monthly earnings rate for the entire portfolio was approximately 5.16% as compared to the average monthly earnings rate for the State Investment Pool of 5.21%. Risk Management The City maintains insurance against most normal hazards except for unemployment insurance, for which it has elected to become fully self -insured. Related premiums received by the Risk Management Fund are used to reimburse the State Employment Security Department for unemployment benefits paid to eligible individuals, and to establish reserves for the payment of estimated future unemployment claims liability. Vil Through its Risk Management Fund, the City is also recovering insurance premium costs for general liability coverage and building reserves for a future general liability self-insurance program. During 2006, the City purchased commercial insurance policies from commercial insurers. It is the opinion of the City's legal staff that at year-end there were no outstanding claims that met expenditure accrual or loss disclosure criteria. The City's industrial insurance is provided by Washington State and is administered by the Department of Labor and Industries. The following are benefits provided by industrial insurance: medical services, damaged clothing, travel expenses, time -loss payments, vocational rehabilitation, partial disability awards, pension awards, and survivor benefits. Independent Audit State law requires an annual audit of all City books of account, financial records, and transactions by the State Auditor, an independently elected state official. In addition to meeting the requirements set forth under state law, the audit was also designed to meet the requirements of the federal Single Audit Act of 1984 and related OMB Circular A-133. The 2006 audit of the City has been completed in conformance with generally accepted auditing standards. The financial statements of all City funds have been included in this audit. The City has been given an unqualified opinion for 2006. The State Auditor's report on the basic financial statements is included in the financial section of this report. AWARDS The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Federal Way for its comprehensive annual financial report (CAFR) for the year ended December 31, 2005. The City of Federal Way has received a Certificate of Achievement for the last sixteen years (fiscal years ended 1990 — 2005). In order to be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principals and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet Certificate of Achievement Program's requirements, and we are submitting it to the GFOA to determine its eligibility for another certificate. The City of Federal Way also received the Government Finance Officers Association Distinguished Budget Presentation Award for its biennial budget for the years beginning January 1, 2007 and 2008. In order to receive this award, a governmental unit must publish a budget document that meets program criteria as a policy document, a financial plan, an operations guide, and a communications medium. ACKNOWLEDGEMENTS The preparation of this report would not have been possible without the efficient and dedicated services of the entire staff of the finance division, in particular Mark Turley (Senior Financial Analyst), Thao Thai (Financial Analyst), and Julia Cheng (Financial Analyst). In addition, staff in all City departments should be recognized for responding so positively to the requests for detailed information which accompany each audit. The role of the State Auditor's Office should also be acknowledged as a significant contribution to a fine product. Finally, we wish to express our appreciation to the Mayor and City Council for their ongoing support and for providing the firm foundation for the pursuit of excellence in all realms of professional endeavors. Respectfully submitted, Tho Kraus Services ctor Finance Manager City of Federal Way / 1 MICHAEL PARK Mayor CITY OFFICIALS JIM FERRELL Deputy Mayor JACK DOVEY ERIC FAISON LINDA KOCHMAR Councilmember Councilmember Councilmember NEAL BEETS City Manager OTHER ADMINISTRATIVE OFFICERS JEANNE BURBIDGE Councilmember DEAN MCCOLGAN Councilmember CityAttorney.......:................._.......................................:............ ..........Patricia Richardson City Clerk ................., ...................Laura Hathaway Community Development Director................................................................................. .................... Kathy McClung Management Services Director ............................... Iwen Wang Parks, Recreation and Cultural Services Director............................_..................................................._......... Donna Hanson PublicSafety Director...................................................;.............;.............._........._.............. ••••.............:.........Brian Wilson Public Works Director..........................................................................................._._...... Cary Roe of Federal Way 12 Municipal Court Michael Morgan *Adjudicates Cases *Probation Services • Indigent Defense Screening Total FTE: 12.6 People of Federal Way Mayor and City Council Michael Park, Mayor Jim Ferrell, Deputy Mayor Jeanne Burbidge, Jack Dovey, Eric Faison, Linda Kochmar, Dean McColgan City Manager Neal Beets Total FTE: Community Development Kathy McClung Parks, Recreation & Cultural Services Donna Hanson *Current Planning *Recreation Programs •Land Use *Ground Maintenance •Building Permits/ *Park Operations Inspections •Community/Sr Center •Code Compliance •Facility Maintenance *Dumas Bay Centre •Civic Theatre Total FTE: 28.7 1 1 1 Total FTE: 31.2 City Attorney Patricia Richardson -Civil Legal Services/ Litigation *Prosecution -Advise Council Boards, Commissions & staff °Advice/Drafting Ordinances Total FTE: 10.6 5.0 Public Safety Brian Wilson *Drug Awareness Resistance Education *Crime Analysis/ Prevention •Traffic Enforcement •Investigation *Jail Services Boards and Commissions *Arts Commission •Diversity Commission *Ethics Board *Human Services Commission *Parks & Recreation Commission •Planning Commission *Youth Commission Boards and Commissions *Civil Service Commission Public Works CaTy Roe *Development Services °Street Maintenance •Traffic Operation *Surface Water Mgmt •Solid Waste/ Recycling *Neighborhood Safety *Emergency Mgmt °Transportation •System Planning Total FTE: 155.0 Total FTE: 42.5 Management Services Iwen Wang *City Clerk -Finance *Human Resources -Risk Management/ Purchasing/Fleet *Systems Total FTE: 22.0 City of Federal Way / 3 Certificate of Achievement for Excellence in Financial Reporting Presented to City of Federal Way Washington For its Comprehensive Annual Financial Report for the Fiscal Year Ended December 31, 2005 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards in government accounting and financial reporting. LF PfF1 President Gt64:u� fi Executive Director City of Federal Way / 4 CITY OF Federal Way Washington State Auditor Brian Sonntag INDEPENDENT AUDITOR'S REPORT June 26, 2007 Mayor and City Council City of Federal Way Federal Way, 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 Federal Way, King County, Washington, as of and for the years ended December 31, 2006 and 2005 which collectively comprise the City's basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 audits provide 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 Federal Way, King County, Washington, as of December 31, 2006 and 2005, and the respective changes in financial position and, where applicable, cash flows thereof, and the respective budgetary comparison for the General, Street, and Utility Tax funds for the years then ended in conformity with accounting principles generally accepted in the United States of America. The management's discussion and analysis on pages 7 through 15 is not a required part of the basic financial statements but is 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. A Insurance Building, PO Box 40021 • Olympia, Washington 98504-0021 • (360) 902-0370 • (866) 902-3900 • TDD Relay (800) 833-6388 is FAX (360) 753-0646 • http://www.sao.wa.gov Our audits were performed for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The accompanying information listed as combining financial statements and supplemental information on pages 59 through 84 is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to 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. The information identified in the table of contents as the Introductory and Statistical Sections is presented for purposes of additional analysis and is not a required part of the basic financial statements of the City. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on it. Sincerely, '49, BRIAN SONNTAG, CGFM STATE AUDITOR City of Federal Way / 7 MANAGEMENT'S DISCUSSION AND ANALYSIS This section of the City of Federal Way's annual financial report provides a narrative overview of the City's financial activities for the fiscal year ended December 31, 2006. This information should be read in conjunction with the preceding letter of transmittal and the financial statements and notes to the financial statements that follow. FINANCIAL HIGHLIGHTS • The total assets of the City of Federal Way exceeded its liabilities at December 31, 2006 by $198.4 million. Capital Assets (net of depreciation and related debt) account for 69% of this amount with a value of $137.5 million. Of the remaining net assets $22.5 million or 11% 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 $20.5 million, or 12% in 2006. Governmental activities provided $18.8 million or 92% with the remainder being provided by the business -type activities. ■ Governmental fund balances at year-end were $47.8 million, a 3% decrease over the prior year. Of this amount, a total of $41.1 million, or 86% of the governmental fund balance is unreserved and available to fund ongoing activities. The remaining $6.7 million is earmarked for debt service, paths & trails reserve, hotel/motel lodging tax, police special funds, petty cash/change funds, and advance travel. • Unreserved fund balance in the general fund was $6.5 million, an increase of $2.4 million or 58% from the prior year. 0 The City debt decreased by $2.4 million during the current fiscal year. General obligation debt decreased by $2.2 million while public works trust fund loan decreased by $183 thousand. The decreases reflect the annual debt service payments and exclude compensated absences. OVERVIEW OF FINANCIAL STATEMENTS This discussion and analysis are intended to serve as an introduction to the City of Federal Way'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. In addition to the required components, the City's annual report also includes other supplementary information. The first set of supplementary information is the Combining Statements. These provide Balance Sheets, Statement of Revenues, Expenditures, and Changes in Fund Balances with Budget to Actual Comparisons, Statement of Net Assets, and Cash Flows for all Non -Major Funds. The other set of supplementary information is the Statistical Section. This section provides a four to ten-year view of the City's revenues, expenditures, debt obligations and capacity, the City's largest taxpayers, and those entities with the largest employment within the City of Federal Way. This section provides a long-term perspective on the City's economy. Government -wide Financial Statements The government -wide financial statements are designed to provide readers with a broad overview of the City of Federal Way's finances, in a manner similar to a private -sector business. The statement of net assets presents information on all of the City of Federal Way's assets and liabilities, with the difference between the two reported as net assets. This statement serves a purpose similar to that City of Federal Way / 8 of a balance sheet in private business. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating The statement of activities presents information showing how the City's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the 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). Both of the government -wide financial statements distinguish functions of the City of Federal Way that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business -type activities). The governmental activities of the City of Federal Way include law enforcement and public safety, construction and maintenance of streets, building inspection, municipal court services, jail services, community planning and development services, parks and recreation facilities, other community services and general administration. The business -type activities of the City include surface water management and the control and operation of Dumas Bay Centre, a multi -use facility that offers business and retreat accommodations, recreation and cultural arts classes and a performing arts facility. The City has no separately identified component units included in the government -wide financial statements. The City has reported its investment in one governmental joint venture; Valley Communications Center. A description of this joint venture is found in note 14 of the notes to the financial statements. The government -wide financial statements can be found immediately following this MD&A Fund Financial Statements The annual financial report includes fund financial statements in addition to the government -wide financial statements. While the government -wide statements present the City's finances based on the type of activity, general government versus business -type, the fund financial statements are presented by fund type such as the general funds, special revenue funds, and proprietary funds. A fund is a specific fiscal and accounting entity with a self -balancing set of accounts used to account for specific activities or meet certain objectives. Funds are often set up in accordance with special regulations, restriction or limitations. The City of Federal Way uses funds accounting to ensure and show compliance with finance -related legal requirements. The City's funds are divided into two categories: governmental funds and proprietary funds. Governmental Funds Governmental funds are used to account for essentially the same functions as are reported in governmental activities in the government -wide financial statements. However, unlike the government -wide financial statements, governmental fund financial statements 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 government -wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for 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 expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City of Federal Way maintains fifteen individual governmental funds. The City's seven major governmental funds, the general fund, street fund, utility tax fund, debt service fund, downtown redevelopment fund, city facilities fund, and the transportation fund, are presented separately in the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and City of Federal Way / 9 changes in fund balances. The remaining governmental funds are combined into a single column labeled nonrajor governmental funds. Individual fund data for each of the nonmajor governmental funds can be found in combining statements later on in this report. The City maintains control over its operating funds through the adoption of the biennial budget. Budgets are adopted at the fund level and according to state law. A budgetary comparison statement is presented for the General, Street, and Utility Tax Fund as a basic financial statement. The basic governmental fund financial statements can be found on pages after the government -wide statements of this report. Proprietary Funds The City of Federal Way maintains two types of proprietary funds. Enterprise funds are used to report the same functions presented as business -type activities in the government -wide statements. The City uses enterprise funds to account for its surface water management and control and the Dumas Bay Centre. 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 risk management and self- insurance program, information systems, mail and duplication services, fleet of vehicles and motorized equipment, and facilities management. Proprietary funds provide the same type of information as the government -wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the Surface Water Management fund and for the Dumas Bay Centre. The internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data is provided in the form of combining statements elsewhere in this report. The basic proprietary fund financial statements can be found following the governmental fund statements of this report. Notes to the Financial Statements The notes provide additional information that is essential to the 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_ Other Information In addition to the basic financial statements and accompanying notes, this report also presents the combining statements for nonmajor governmental funds, internal service funds, and capital assets of governmental funds. GOVERNMENT -WIDE FINANCIAL ANALYSIS Statement of Net Assets The statement of net assets can serve as a useful indicator of the City's financial position. The City of Federal Way's net assets at December 31, 2006 total $198 million, excluding existing transportation infrastructure assets which are not reported in this financial report. The following is a condensed version of the government -wide statement of net assets. City of Federal Way / 10 Current and other assets Capital assets and CIP, net of accumulated depreciation Total assets Long-term liabilities Other liabilities Total liabilities Net assets: Invested in capital assets, net of related debt Restricted Unrestricted Total net assets CONDENSED STATEMENT OF NET ASSETS Governmental Activities Business -Type Activities 2006 2005 2006 2005 $ 66,490,833 $ 66,725,061 $ 8,035,523 $ 7,657,048 Total 2006 2005 $ 74,526,356 $ 74,382,109 117,562,248 95,939,154 45,637,105 44,416,572 163,199,353 140,355,726 184,053,081 162,664,215 53,672,628 52,073,620 237,725,709 214,737,835 30,828,814 28,868,396 1,990,628 2,167,175 32,819,442 31,035,571 5,977,684 5,346,890 490,511 386,017 6,468,195 5,732.907 36,806,498 34,215,286 2,481,139 2,553,192 39,287,637 36,768,478 93,835,163 70,138,350 43,697,633 42,294,741 137,532,796 112,433,091 38,359,454 45,017,742 26,439 18,880 38,385,893 45,036,622 15,051,966 13,292,837 7,467,417 7.206,807 22,519,383 VA99.644 $147,246,583 $128,448.929 S51,191,489 $49,520,428 5198,438,072 S177,969.357 The largest component of the City's net assets, 69% or $137.5 million, in its investment in capital assets net any related outstanding debt issued to acquire those assets. These capital assets such as streets, trails, parks, police vehicles, and parks equipment are used to provide services to the citizens. Consequently, these assets are not available to sell and convert to cash for future spending. The City has not elected the GASB 34 reporting option to include all general infrastructure of the City acquired or substantially renovated since 1990. Only general infrastructure acquired since 2003 is reported. An analysis and valuation of general infrastructure acquired or substantially renovated since 1990 is underway. Approximately 16% or $31.8 million of the total net assets of the city are earmarked for construction improvement projects, to I-5 City Center Access Study, South 356t' St SR99 to 1' Avenue, SR99 HOV Lane Improvement Phases III and IV, South 348`h Street at SR161, South 352nd Street Extension from SR99 to SR 161. Acquisition of additional city parks, renovation and improvements to, Camp Kilworth, neighborhood parks such as Hylebos boardwalk replacement, and Sacajawea Master plan, and Saghalie Park sportsfield. The City attempts to fund capital construction projects on a pay-as-you-go basis, aggressively pursuing transportation grant funding and cost sharing with developers wishing to construct large projects in the City that impact the transportation system. The remaining balance of restricted net assets is divided among restrictions for: debt service prefunding $6.2 million; $278 thousand for police special funds, petty cash/change funds and advance travel; $170 thousand hotel/motel lodging tax; $25.4 thousand for paths and trails; and $275 thousand for customer deposits. The business -type activities portion of $7.0 million may only be spent on surface water management activities and the remaining $428 thousand on improvements to Dumas Bay Centre and Knutzen Family Theatre. Maintenance of catch basins, pump stations, storm drain flushing, and other capital construction projects such as West Branch Lakota Creek Restoration are examples of utility activities. Other functions of the City may access the remaining $18.9 million to meet ongoing obligation to citizens and creditors. Examples of other City obligations which these net assets may be used for are public safety, parks maintenance, and ongoing street maintenance. At the end of the fiscal year, the City of Federal Way reported positive balances in all three categories of net assets, for the government as a whole, as well as for the separate governmental and business -type activities. Changes in Net Assets The changes in net assets table illustrates the increases or decreases in net assets of the City resulting from its operating activities. The City's net assets increased approximately $20.5 million in 2006. The increase was split between the governmental activities ($18.8 million or 92%) and business -type activities ($1.7 million or 8%). City of Federal Way / 11 The following is a condensed version of the City's changes in net assets. The table shows the revenues, expenses, and related changes in net assets in tabular form for the governmental activities separate from the business -type activities. The graphs that follow compare program revenues to program expenses and illustrate the revenues by source separately for the governmental and business -type activities. CHANGES IN NET ASSETS RESULTING FROM CHANGES IN REVENUES AND EXPENSES Governmental Activities Business -Type Activities Total 2006 2005 2006 ^ 2005 2006 2005 Revenues: Program revenues: Charges for services $ 9,446,764 $ 9,935,656 $ 4,130,179 $ 4,100,623 $ 13,576,943 $ 14,036,279 Operating grants & contributions 1,512,394 1,228,979 1,113,010 - 2,625,404 1,228,979 Capital grants and contributions 5,973,071 4,250,635 - - 5,973,071 4,250,635 General revenues: - Property tax 8,892,558 8,442,172 - - 8,892,558 8,442,172 Sales tax 12,409,719 11,305,537 - = 12,409,718 11,305,537 Utility tax 9,043,449 8,326,951 - - 9,043,449 8,326,951 Real estate excise tax 5,499,911 4,695,984 - = 5,499,911 4,695,984 Other taxes 4,059,732 3,527,596 - 4,059,732 3,527,596 Other 2,658,762 5,997,384 388,729 319,432 3,047,491 6,316,816 Total Revenue 59,496,359 57,710,894 5,631,918 4,420,055 65,128,277 62,130,949 Expenses: General government 4,364,710 5,539,682 - 4,364,710 5,539,682 Security of Persons & Property 19,906,722 16,825,123 - - 19,906,722 16,825,123 Transportation 5,628,100 5,451,324 - - 5,628,100 5,451,324 Physical environment 313,388 322,151 - = 313,388 322,151 Economic environment 3,162,089 3,095,391 - 3,162,089 3,095,391 Health and human services 622,761 631,133 - - 622,761 631,133 Culture and recreation 5,172,663 4,789,920 - - 5,172,663 4,799,920 Interest on long-term debt 1,420,691 1,541,930 - - 1,420,691 1,541,930 Surface Water Management - 3,142,613 2,995,074 3,142,613 2,995,074 Dumas Bay Center - - 925,825 819,515 925,825 819,515 Total Expenses 40,591,124 38,196,654 4,068,438 3,914,589 44,659,562 42,011,243 Increase in net assets before transfers 19,905,235 19,514,240 1,563,480 605,466 20,468,715 20,119,706 Transfers (107,581) (126,369) 107,581 126,369 - - Increase in net assets 18,797,654 19,387,871 1,671,061 731,835 20,468,715 20,119,706 Net assets - beginning 128,448,929 109,061,058 49,520,428 48,788,593 177,969,357 157,849,651 Net assets - ending $ 147,246,583 $ 128,448,929 $ 51,191,489 $ 49,520,428 $ 198,438,072 $ 177,969,357 Governmental activities contributed $18.8 million or 92% of the total change in net assets of $20.5 million. Key elements of this increase are as follows: • Decrease in fund balances of $1.5 million. • Excess of capital outlay net of depreciation expense of $23.4 million. • Decrease due to bond principal payment of $1.9 million. • Decrease in internal service fund net change of $1.1 million. • Net decrease in deferred revenue and compensated absences liability of $49 thousand. City of Federal Way / 12 Governmental Activities - Revenues Other, 5.9% Charges for Other ta=S. services, 9.0% 21.0% Operating grants & Sales tax. -~contributions, 27.6 % 3.4% Capital grants and Property tax, contributions, 19.8% 13.3% Governmental Activities - Expenditures Interest on General long-term debt - _------government = Culture and 35 10.8 % recreation Physical 12.7% envircran eqt 0.8 % Economic �I.vitCnnlCai 7.8% Security of Persons & Transportation Property 13.9% Health and 48.9% human services 1.5% Business -type activities of the City's surface water management system and Dumas Bay Centre increased the City's net assets by $1.7, accounting for 6% of the total growth in the government's net assets. Surface Water Management Fund increased by $1.8 million which was offset by a decrease in Dumas Bay Centre Fund net assets by $158 thousand. Key elements of the increase are as follows: Net operating income of $90 thousand and non -operating income of $1.45 million, (which includes an interlocal grant of $1.11 million) account for $1.55 million of the increase. Net transfers in of $108 thousand. Internal service funds consolidation make up the remaining $16 thousand increase. Business -Types Activities - Revenues Other, Charges for services, 91.3 % Business -Type Activities - Expenditures Dumas Bay Center _ 23 Surface Water Management 77% FINANCIAL ANALYSIS OF THE CITY'S FUNDS As noted earlier, the City of Federal Way uses fund accounting to ensure and demonstrate compliance with finance - related legal requirements. Governmental funds The focus of the City of Federal Way's governmental funds is to provide information on near -term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. As of the end of 2006, the City's governmental funds reported combined ending balances of $47.8 million, a decrease of $1.5 million in comparison to the prior year. Approximately 14% or $6.5 million of this amount constitutes unreserved general fund balance, which is available for spending at the City's discretion. The remainder of the fund balance is reserved to indicate that it is not available for new spending because it has already been committed for debt service payments, capital projects, police special funds and petty cash/change fund/advance travel. City of Federal Way / 13 The General Fund is the chief operating fund of the City. At the end of 2006 unreserved fund balance of the general fund was $6.5 million, while total fund balance was $6.7 million. General Fund unreserved fund balance represents 21 % of total general fund expenditures. The Debt Service Fund has a total fund balance of $6.2 million, all of which is reserved for the payment of debt service. Proprietary funds The City of Federal Way's proprietary funds provide the same type of information found in the government -wide, but in more detail. Unrestricted net assets of the Surface Water Management Fund at the end of the year amounted to $7.0 million, and those for Dumas Bay Centre amounted to $428 thousand. The total change in net assets for both funds was $1.8 million increase and $158 thousand decrease, respectively. Other factors concerning the finances of these two funds have already been addressed in the discussion of the City of Federal Way's business - type activities. BUDGETARY HIGHLIGHTS The City of Federal Way budgets on a biennial basis with each budget beginning in an odd numbered year. Appropriations for operating funds are authorized for two years, but must be reviewed and reauthorized by the City Council in the middle of the biennial period. The following discussion is reflective only of the current year of the biennium. The supplementary expenditure budget increase of $7.0 million between the original budget for the fiscal year 2006 and the final budget are explained as follows: Adjustments to expenditure and other uses budget include: 6 $249 thousand increase for Public Safety due to annexation, funded by increase in property tax. • $240 thousand decrease for probation contract. • $440 thousand Public Safety Overhire Program. • $99 thousand total in Public Safety and Emergency Operations funded by grant and contributions. i $77 thousand for Federal Way Community Center startup/transition costs funded by transfer in from Community Center CIP. e $950 thousand total for traffic modeling and related general fund subsidy, dispatch services, temporary permit assistance, building repairs and maintenance, gas, insurance, and pension costs. o $1.5 million to restore City Manager's contingency fund and various ongoing programs. • $2.0 million in Utility Tax and Debt Service ending fund balance was used to provide transfers to various capital improvement projects. ■ The remaining $1.49 million increase in general governmental services was also funded by 2006 ending fund balance carry forward. Of this, only $148 thousand was for new programs. Adjustments to revenues and other sources budget include: increases in REET ($1.25 million), property tax ($250 thousand), sales tax ($110 thousand), state shared revenues ($318 thousand), increase building permits ($138 thousand), planning reviews ($53 thousand), interfund transfers ($481 thousand), grants and contributions ($276 thousand), miscellaneous revenue; federal seizure funds, interest ($75 thousand), utility tax ($771 thousand), City of Federal Way / 14 gambling tax ($150 thousand), franchise fees ($60 thousand), fines and forfeitures ($10 thousand); 2006 ending fund balance carryforward ($4.6 million), and a decrease in probation contract revenue.ge in accounting ($240 thousand). CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets The City of Federal Way's investment in capital assets for its governmental and business -type activities as of December 31, 2006 amounts to $163.2 million (net of accumulated depreciation). This investment in capital assets includes land, buildings, improvements, machinery and equipment, infrastructure, park facilities and construction in progress. The City has elected to exclude roads acquired or constructed prior to 2003. The City is currently inventorying and valuing these assets and will include them at a later date. CAPITAL ASSETS AT YEAR-END, NET OF DEPRECIATION Governmental Business -Type Total Activities Activities 2006 2M Land $ 41,290,118 $ 6,752,444 $; 48,042,562 $ 43,124,862 Building & Improvements 25,942,254 34,882,502 60,824,756 61,130,882 Machinery and equipment 4,125,290 32,954 4,158,244 3,847,067 Infrastructure 8,253,614 - 8,253,614 2,941,161 Construction in progress 37,950,972 3,969,164 41,920,136_ 29 311,754 Total Capital Assets $ 117,562,248 $ 454637,064 $ 163,199,312 $ 140,355,726 Major capital asset events during the current fiscal year included the following: substantially completing the Federal Way Community Center improvements of $15.5 million for a grand total of $20.2 million. Expanding the city streets and traffic corridors for a total of $4.0 million. General capital and various park improvements for $549 thousand. Additional information on the City of Federal Way's capital assets can be found in Note 8 of the Notes to the Financial Statements. Long-term debt At the end of 2006, the City of Federal Way had total bonded debt outstanding of $29.6 million which is backed by the full faith and credit of the government. The remainder of the City's debt represents Public Works Trust Fund Loans. LONG-TERM DEBT (FUTURE PRINCIPLE AND INTEREST PAYMENTS) Governmental Business -Type Activities Activities Total General obligation bonds $ 42,084,131 $ - $ 42,084,131 Public works trust fund loan - 2,057.986 2,057,986 Total $ 42,084,131 $ 2,057,986 5 44,142,117 The City's total debt decreased by $2.4 million during 2006. The decrease represents annual debt service payments. The City of Federal Way maintains an AA- rating from Fitch Investors for its general obligation bonds. Washington State statutes limit the amount of debt a government entity may issue to 7.5% of its total assessed valuation, subject to 60% majority vote of qualified electors. Of the 7.5% limit, 2.5% is for general purposes, 2.5% for open space/park facilities, and 2.5% for utilities. Non -voted general purpose indebtedness is limited to 1.5% of assessed valuation and combination of voted and non -voted general purpose indebtedness cannot exceed 2.5% of assessed valuation. The City's assessed valuation for 2006 was $7.25 billion and the total amount of debt the City may issue is $522.4 million. Remaining legal debt capacities as of December 31, 2006 are: City of Federal Way / 15 General Government (no vote requirement) $ 87,320,745 General Government (3/5 majority vote required) $ 72,519,927 Parks & Open Space (3/5 majority vote required) $181,299,818 Utilities (3/5 majority vote required) $181,299,818 Total Capacity $522.440 3.08 Additional information on the City of Federal Way's long-term debt can be found in Note 11 and in the Statistical Section of this report. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES The 2007/08 Biennial Budget was also developed under challenging economic conditions. Various tax -limiting initiatives continue to significantly impact the growth rates of City revenues while rapidly escalating operating costs, particularly in the areas of heath insurance, state pension increases, and energy costs, will exceed our limited revenue growth. The difference between the average growth rate of revenues and expenditures is approximately 2% per year. On a $34 million general fund budget, that would create a nearly $700 thousand budget deficit each year. When this structural problem is combined with the use of one-time money to fund ongoing expenses in the 2005/06 Biennial Budget, the City's would face a baseline budget gap of $1.2 million in 2007, $1.8 million in 2008. The potential deficit would grow to $3.2 million by 2010 and $4.8 million in 2012. To resolve this deficit, Council authorized cuts in non-public safety areas and allowed the transfer of a portion of the capital utility tax to balance City operations needs. This allows the City to continue current City operations at approximately the same level of service without any tax increase. With regard to public safety, a Police and Community Safety Enhancement proposal was prepared for voters to consider whether they were willing to pay higher utility taxes to fund an increased level of public safety. At the November 2006 election, voters approved a 1.75% utility tax increase to fund the higher level of service. While the transfer of utility tax allows the City to maintain current services in the next four years, and the voter package provides improved public safety services, unless the City's economy starts to grow at a much faster pace than the past, the City is expected to face budget gaps again after 2010. REQUEST FOR INFORMATION This financial report is designed to provide a general overview of the City of Federal Way's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to Tho Kraus, Finance Manager, City of Federal Way, P.O. Box 9718, Federal Way, WA 98063-9718, telephone 253-835-2520, or visit the City's website at www.citooffcderalway. cam. City of Federal Way / 16 CITY OF A' Federal Way City of Federal Way / 17 Basic Financial Statements City of Federal Way / 18 STATEMENT OF NET ASSETS December 31, 2006 ASSETS Cash & cash equivalents and investments Receivables (net) Due from other governments Prepaid items Restricted assets: Cash with escrow agent Customer deposits Investment in joint venture Capital Assets (net of accumulated depreciation) Land Depreciable assets Infrastructure Construction in progress Total Assets LIABILITIES Accounts payable and accruals Deferred/unearned revenue Retainage payable Retainage payable - with escrow agent Due to other governments Customer deposits Noncurrent Liabilities: Due within one year Due in more than one year Total Liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for: Customer deposit Debt service prefunding Capital projects Steel Lake Management District Other Unrestricted Total Net Assets Governmental Business -type Total Activities Activities 2006 2005 $ 59,232,501 $ 7,811,215 $ 67,043,716 $ 67,476,043 2,057,785 153,431 2,211,216 2,458,219 2,114,582 15,635 2,130,217 1,912,862 21,002 - 21,002 27,743 753,683 55,242 808,925 113,552 262,776 - 262,776 363,603 2,048,504 - 2,048,504 2,030,087 41,290,118 6,752,444 30,067,544 34,915,497 8,253,614 37,950,972 3,969,164 184,053,081 53,672,628 48,042,562 43,124,862 64, 983,041 64,977,949 8,253,614 2,941,161 41,920,136 29,311,754 237,725,709 214,737,835 2,372,032 210,391 2,582,423 2,692,176 357,915 207,984 565,899 523,108 777,945 5,145 783,090 161,279 - 55,242 55,242 - 264,052 - 264,052 242,394 2,205,740 11,749 2,217,489 2,113,950 8,190,690 182,359 8,373,049 2,469,918 22,638,124 1 808 269 24,446,393 28,565,653 36,806,498 2,481,139 39,287,637 36,768,478 93,835,163 43,697,633 137,532,796 112,433,091 262,776 11,749 274,525 363,603 6,217,346 - 6,217,346 3,195,705 31,863,330 - 31,863,330 39,805,812 - 14,690 14,690 18,880 16,002 - 16,002 1,652,622 15,051,966 7,467,417 22,519,383 20,499,644 $ 147,246,583 $ 51,191,489 $ 198,438,072 $ 177,969,357 The notes to the financial statements are an integral part of this statement. City of Federal Way/19 Functions/Programs Governmental Activities: General Government Security of Persons & Property Transportation Physical Environment Economic Environment Heal th Culture & Recreation Interest on long-term debt Total governmental activities Business -type Activities: Surface Water Management Dumas Bay Centre Total business -type activities Total STATEMENT OF ACTIVITIES For the Year ended December 31.2006 Program Revenues Net (Expense) Revenue & Changes in Net Assets Operating Capital Charges for Grants and Grants and Governmental Business -type Comparative Totals Expenses Services Contributions Contributions Activities Activities 2006 2005 $ 4,364,710 $ 1,052,641 $ 127,273 $ $ (3,184,796) $ - $ (3,184,796) $ (4,167,412) 19,906,722 4,800,920 1,385,121 (13,720,681) - (13,720,681) (10,816,062) 5,628,100 1,357,333 - 5,539,336 1,268,569 - 1,268,569 150,907 313,388 75,580 433,735 195,927 195,927 (233,929) 3,162,089 762,603 (2,399,486) - (2,399,486) (2,247,705) 622,761 150,192 - (472,569) - (472,569) (458,295) 5,172,663 1,247,495 - (3,925,168) - (3,925,168) (3,466,958) 1,420,691.. - - (1,420,691) (1,420,6911 (1-,54t,930) 40,591,124 9,446,764 1,512,394 5,973,071 (23,658,895) - (23,65&895) (22,781.394) 3,142,613 3,514,669 1,113,010 - - 1,485,066 1,495,066 595,046 925,825 615,510 - - - (310,315) _ (310t5) OK012) 4,068,439 4,130,179 1,113,010 - - 1,174,751 1,174,751 286,034 $ 44,659,562 $ 13,576,943 $ 2,625,404 5 5,973,071 (23,658,895) 1,174,751 (22,484,144) (22,495,350) General revenues: Property tax Sales tax Utility tax Real estate excise tax Other taxes Other revenue Unrestricted Grants & Contributions Investment Earnings Disposition of capital assets Transfers Total general revenues and transfers Change in net assets Net assets at beginning of year Net assets at end of year The notes to the financial statements are an integral part of this statement. 9,892,558 8,892,558 9,442,172 12,409,718 - 12,409,718 11,305,537 9,043,449 - 9,043,449 8,326,951 5,499,911 - 5,499,911 4,695,984 4,059,732 - 4,059,732 3,527,596 736,918 - 736,918 1,105,760 - - y 146,000 2,805,961 388,729 3,194,690 2,025,243 (884,117) -. (884,117) 3,039,813 (107,581) 107,581 - - 42,456,549 496,310 42,952,859 42,615,056 19,797,654 1,671,061 20,468,715 20,119,706 128,448,929 49,520,428 177,969,357 157,849,651 $ 147,246,583 $ 51,191,489 $ 198,439,072 $ 177,969,357 City of Federal Way / 20 BALANCESHEET GOVERNMENTALFUNDS DECEMBER 31.2006 Debt Downtown General Street Utili Tax Service Redevelopment ASSETS Equity in pooled cash and investments $ 6,107,196 $ 2,229,083 $ 910,283 $ 6,001,415 $ 9,314,648 Prepaid insurance/debt service 16,002 Retainage in escrow - - Receivables (net): Taxes 233,511 - - 215,660 Accounts and contracts 175,362 - 1,100,201 261,091 - Interest 11,499 2,207 2,152 2,700 6,028 Restricted cash 262,776 - - - _ Due from other governments 1,624,404 94,390 - Interfund loans receivable 20,000 - - _ TOTAL ASSETS 8,450,750 2,325,680 1,912,636 6,480,866 9,320,676 LIABILITIES AND FUND BALANCES Liabilities: Vouchers payable 652,588 237,471 - Accounts/payroll payable 65,043 7,212 - - Accrued interest payable - - Retainage payable - 3,737 _ Due to other governments 264,052 - - Due to other funds - Performance bonds - - Deposits payable 476,528 1,728,712 Interfund loans payable - _ _ Deferred/unearned revenue _ 221,704 30,431 - 263,520 -. TOTAL LIABILITIES 1,679,915 2.007,563 - 263,520 - Fund balance: Reserved: Debt service prefunding - - - 6,217,346 - Other 278,778 - - _ _ Unreserved: General fund 6,492,057 - - _ Special revenue funds - 318,117 1,912,636 - - Capital projects funds - - - - 9,320,676 TOTAL FUND BALANCES 6,770,835 318,117 1,912,636 6,217,346 9,320,676 TOTAL LIABILITIES AND FUND BALANCE $ 8,450,750 $ 2,325,680 $ 1,912,636 $ 6,480,866 $ 9,320,676 The notes to the financial statements are an integral part of this statement City of Federal Way / 21 BALANCESHEET GOVERNMENTALFUNDS DECEMBER 31, 2006 (continued) City Nonmajor Comparative Totals Facilities Transportation Governmental 2006 2005 ASSETS _ Equity in pooled cash and investments $ 6,260,220 $ 13,873,993 $ 4,059,259 $ 48,656,097 $ 49,979,198 Prepaid insurance/debt service - - - 16,002 22,743 Retainage in escrow 726,951 26,732 - 753,683 113,552 Receivables (net): - - Taxes - - - 449,171 592,182 Accounts and contracts - - 1,536,654 1,635,748 Interest 13,365 18,450 5,158 61,559 67,408 Restricted cash - - - 262,776 363,603 Due from other governments 28,155 367,633 2,114,582 1,865,736 Interfund loans receivable - - - 20,000 46,000 TOTAL ASSETS 7,000,536 13,947,330 4,432,050 53,870,524 54,686,170 LIABILITIES AND FUND BALANCES Liabilities: Vouchers payable 635,692 559,092 90,822 2,175,665 1,154,426 Accounts/payroll payable - - 72,255 1,143,389 Accrued interest payable - - - Retainage payable 726,951 26,732 20,525 777,945 153,763 Due to other governments - - - 264,052 242,394 Due to other funds - - - - Performance bonds - - - - - Deposits payable - - - 2,205,240 2,085,254 Interfund loans payable - - 20,000 20,000 46,000 Deferred/uneamed revenue - - 21,584 537,239 521,689 TOTAL LIABILITIES 1,362,643 595,824 152,931 6,052,396 5,346,915 Fund balance: Reserved: Debt service prefunding - - - 6,217,346 3,195,705 Other - - 194,463 473,241 572,014 Unreserved: General fund - - - 6,492,057 4,113,102 Special revenue funds - - 541,400 2,772,153 1,652,622 Capital projects funds 5,637,893 13,361,506 3,543,255 31,863,330 39,805,812 TOTAL FUND BALANCES 5,637.893 13,361,506 4,279,119 47,818,127 49,339,255 TOTAL LIABILITIES AND FUND BALANCE $ 7,000,536 $ 13,947,330 $ 4,432,050 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets are used in governmental activities are not financial resources and, therefore, are not reported in the funds. 98,459,786 90,489,542 Investment in joint venture is not a financial resource and, therefore, not reported in the funds 2,048,504 2,030,087 Other long-term assets are not available to pay for current -period expenditures and, therefore, are deferred in the funds 179,324 192,803 Internal service funds are used by management to charge the costs of insurance, information systems, mail and duplication, fleet, and building management to individual funds. The assets and liabilities of the internal service funds are included in the governmental activities in the statement of net assets. 29,523,026 15,245,133 Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported in the funds. (30,782,184) (28,847,891) Net assets of governmental activities $ 147,246,583 S 129,449,929 The notes to the financial statements are an integral part of this statement. City of Federal Way / 22 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended December 31, 2006 Debt Downtown General Street Utility Tax Service Redevelopment REVENUES Taxes $ 24,616,172 $ - $ 9,043,449 $ 5,499,911 $ Licenses and permits 1,985,887 103,957 - - _ Intergovernmental 1,385,121 1,191,882 _ Service charges and fees 4,041,579 442,629 - - Development fees - - Fines and forfeitures 805,598 - - _ _ Interest 484,129 77,319 50,885 83,917 220,646 Other 652,934 26,264 - - _ TOTAL REVENUES 33,971,420 1,842,051 9,094,334 5,583,829 220,646 EXPENDITURES Current: General government 3,628,179 - 55,237 - - Security of persons and property 19,909,858 Transportation - 3,801,931 Physical environment = - Economic environment 2,860,547 Health 613,800 Culture and recreation 3,924,653 - _ _ _ Debt service: Principal - - - 2,197,357 Interest/fiscal charges/admin fees - - - 1,420,691 Capital outlay 124,495 18,076 - - TOTAL EXPENDITURES 31,061,532 3,820,007 55,237 3,618,049 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 2,909,888 (1,977,956) 9,039,097 1-965.790 220,646 OTHER FINANCING SOURCES (USES) Bond proceeds - - - 4,100,000 Sale of capital assets - - - _ _ Transfers in 1,383,792 2,105,059 - 3,885,861 686,500 Transfers out 2,060,063 - (8,153,963) (2,830,000) - TOTAL OTHER FINANCING SOURCES (USES) (676,271) _ 2,105,058 (9,153,963) 1,055,861 4,786,500 NET CHANGE IN FUND BALANCES 2,233,617 127,102 885,134 3,021,641 5,007,146 FUND BALANCES - BEGINNING 4,537,218 191,015 1,027,502 3,195,705 4,313,530 FUND BALANCES - ENDING $ 6,770,835 $ 318,117 $ 1,912,636 $ 6,217,346 $ 9,320,676 The notes to the financial statements are an integral part ofthis statement. City of Federal Way / 23 REVENUES Taxes Licenses and permits Intergovernmental Service charges and fees Development fees Fines and forfeitures Interest Other TOTAL REVENUES EXPENDITURES Current: General government Security of persons and property Transportation Physical environment Economic environment Health Culture and recreation Debt service: Principal Interest/fiscal charges/admin fees Capital outlay TOTAL EXPENDITURES STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Year Ended December 31, 2006 (continued) City Nonmajor Comparative Totals Facilities Transportation Governmental 2006 2005 S 175,219 $ 39,334,751 $ 36,310,754 - - 2,089,844 2,247,651 4,347,454 1,122,786 8,047,243 5,479,614 1,325,794 545,260 6,355,262 4,927,163 - 196,060 196,060 2,040,378 - - - 805,598 720,464 658,447 688,932 183,721 2,447,996 1,557,935 28,065 10,659 - 717,922 1,065,664 686,512 6,372,839 2,223,046 59,994,676 54,349,623 - 260,872 3,944,288 5,462,633 - - 19,909,858 16,988,412 1,572,052 5,373,983 5,080,577 - - 313,389 313,388 322,151 - - 194,879 3,055,426 3,119,831 - - - 613,800 634,061 - 184,160 4,108,813 3,859,465 - - - 2,197,357 2,933,231 - - - 1,420,691 1,518,394 15,495,186 8,213,039 561,507 24,412,303 8,228,486 15,495,186 9,213,039 3,086,858 65,349,907 48,147,231 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (14,808,674) (1,840,200) (863,812) (5,355,231) 6,202,392 OTHER FINANCING SOURCES (USES) Bond proceeds - — - 4,100,000 - Sale of capital assets - — 20,000 20,000 3,618,512 Transfers in 100,000 1,790,625 3,289,949 13,231,785 15,650,064 Transfers out (76,500) (323,580) (73,575) (13,517,681) (16,266,811) TOTAL OTHER FINANCING SOURCES (USES) 23,500 1,457,045 3,236,374 3,834,104 3,001,765 NET CHANGE IN FUND BALANCES (14,785,174) (383,155) 2,372,562 (1,521,127) 9,204,157 FUND BALANCES - BEGINNING 20,423,067 13,744,661 1,906,557 49,339,255 40,135,098 FUND BALANCES - ENDING $ 5,637,993 $ 13,361,506 $ 4,279,119 $ 47,818,127 $ 49,339,255 The notes to the financial statements are an integral part of this statement. City of Federal Way / 24 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES For the Year Ended December 31, 2006 Amounts reported for governmental activities in the statement of activities (page 20) are 2006 2005 different because: Net change in fund balances --total governmental funds $ (1,521,127) $ 9,204,157 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. 23,390,575 5,526,012 Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 8,840 (12,514) The issuance of long-term debt 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. Also, governmental funds report the issuance proceeds of new debt as current financial resources and payment as the use of current resources, whereas these amounts reduce the net assets. (1,902,643) 2,933,231 Internal service funds are used by management to charge costs of risk management, information systems, mail & duplication, fleet, and building systems to the funds. (1,120,538) 1,809,661 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 the funds. (57,453) (72,676) Change in net assets of governmental activities $ 18,797,654 $ 19,387,871 The notes to the financial statements are an integral part of this statement. City of Federal Way / 25 GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 Variance with Budgeted Amounts Final Budget - Positive Original Final Actual Amounts (Negative) REVENUES Taxes $ 22,477,500 $ 23,106,674 $ 24,616,172 $ 1,509,498 Licenses and pemuts 1,046,017 1,184,517 1,985,887 801,370 Intergovernmental 1,218,000 1,324,900 1,385,121 60,221 Service charges and fees 3,551,475 3,423,975 4,041,579 617,604 Fines and forfeitures 923,000 933,000 805,598 (127,402) Interest 156,000 216,000 484,129 268,129 Other 679,650 694,650 652,934 (41,716) TOTAL REVENUES 30,051,642 30,883,716 33,971,420 3,087,704 EXPENDITURES Current: General government Security of persons and property Economic environment Health Culture and recreation Capital outlay TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Transfers in Transfers out 3,266,893 4,800,075 3,628,179 1,171,896 19,437,848 20,611,893 19,909,858 702,035 2,609,062 3,104,163 2,860,547 243,616 600,136 664,174 613,800 50,374 3,863,386 4,044,638 3,924,653 119,985 - - 124,495 (124,495) 29,777,325 33,224,943 31,061,532 2,163,411 274,317 (2,341,227) 2,909,888 5,251,115 1,283,712 1,389,162 1,383,792 (5,370) 1,917,462 2,665,082 2,060,063 605,019 TOTAL OTHER FINANCING SOURCES (USES) 633 750 (1.275,920) (676,271) 599,649 NET CHANGE IN FUND BALANCES (359,433) (3,617,147) 2,233,617 5,850,764 FUND BALANCES - BEGINNING 669,433 4,537,215 4,537,218 3 FUND BALANCES - ENDING $ 310,000 $ 920,068 $ 6,770,835 $ 5,850,767 The notes to the financial statements are an integral part of this statement. City of Federal Way / 26 STREET FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 Variance with Budgeted Amounts Final Budget - Positive Original Final Actual Amounts (Negative) REVENUES Licenses and permits $ 73,000 $ 73,000 $ 103,957 $ 30,957 Intcrgovcrnmental 1,203,000 1,220,461 1,191,882 (28,579) Service charges and fees 297,000 297,000 442,629 145,629 Interest 7,000 7,000 77,319 70,319 Other 5,000 47,000 26.264 20 736 TOTAL REVENUES 1,585,000 1,644.461 1,842,051 197,590 EXPENDITURES Current: Transportation 3,808,260 4,280,987 3,801,931 479,056 Capital outlay - 18,076 (18,076) TOTAL EXPENDITURES 3,808.260 4.280.987 3,820,007 460,980 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (2,223,260) (2.636.526) (1,977,956) 658,570 OTHER FINANCING SOURCES (USES) Transfers in 2,223,260 2,545,512 2,105,058 (440,454) TOTAL OTHER FINANCING SOURCES (USES) 2,223,260 2,545,512 2,105,058 (440,454) NET CHANGE IN FUND BALANCES - (91,014) 127,102 218,116 FUND BALANCES - BEGINNING 100,000 191,014 191,015 ] FUND BALANCES - ENDING $ 100,000 $ 100,000 $ 318,117 $ 218,117 The notes to the financial statements are an integral part of this statement. City of Federal Way / 27 UTILITY TAX FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 REVENUES Taxes Interest TOTAL REVENUES EXPENDITURES Current: General government TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Transfers out Variance with Budgeted Amounts Final Budget - Positive Original _ Final Actual Amounts (Negative) $ 7,602,498 $ 8,373,499 $ 9,043,449 $ 669,950 37,000 37,000 50,885 13,885 7,639,498 8,410,499 9,094,334 683,835. 55,237 55,237 55,237 - 55,237 55,237 55,237 - 7,584,261 8,355,262 9,039,097 683,835 (7,361,123) (8,153,963) (8,153,963) TOTAL OTHER FINANCING SOURCES (USES) (7,361,123) (8,153,963) (8,153,963) NET CHANGE IN FUND BALANCES 223,138 201,299 885,134 683,835 FUND BALANCES - BEGINNING 746,259 1,027,502 1,027,502 - FUND BALANCES - ENDING $ 969,397 $ 1,228,801 $ 1,912,636 $ 683,835 The notes to the financial statements are an integral part of this statement. City of Federal Way / 28 ASSETS Current Assets Equity in pooled cash and investments Cash with escrow agent Prepaid items Receivables (net): Taxes Accounts and contracts Interest Due from other governments TOTAL CURRENT ASSETS Property, plant and equipment: Land Building/structures Machinery/furniture/equipment Construction in progress Less accumulated depreciation TOTAL NONCURRENT ASSETS TOTAL ASSETS LIABILITIES AND FUND EQUITY Current liabilities: Vouchers/payroll payable Retainage payable Retainage payable - with escrow agent Deposits payable Deferred revenue Public works trust fund loan payable Compensated absences payable TOTAL CURRENT LIABILITIES Long-term liabilities: STATEMENT OF NET ASSETS PROPRIETARY FUNDS December 31, 2006 With Comparative Totals for December 31, 2005 Business -type Activities - Enterprise Funds Governmental Activities - Internal Service Funds Surface Water Dumas Bay Comparative Totals Management Centre 2006 2005 2006 2005 $ 7,223,774 $ 587,441 $ 7,811,215 $ 7,450,616 $ 10,576,404 $ 10,046,229 55,242 - 55,242 - - - - - - - 5,000 5,000 100,296 - 100,296 93,572 - - 43,463 43,463 43,667 - - 8,890 782 9,672 10,711 10,401 12,027 14,135 1,500 15,635 47,126 - - 7,402,337 633186 8,035,523 7,645,692 10,591,805 10,063,256 4,642,804 2,109,640 6,752,444 5,863,130 - - 43,042,121 3,576,592 46,618,713 44,528,808 15,995,476 - - 106,643 106,643 106,643 10,721,931 14,409,734 3,630,232 338,932 3,969,164 5,135,757 - - 10,020,225 1,789 634 11 809,859 I 1 217 766 (7,614,946) (81960,122) 41,294,932 4,342173 45,637,105 44416,572 19,102,461 5,449,612 48,697,269 4,975,359 53,672,628 52,062,264 29,694,266 15.512,868 204,485 33,143 237,628 177,983 139,991 216,378 3,857 1,288 5,145 7,516 - - 55,242 - 55,242 - - - - 11,749 11,749 14,121 500 500 72,647 135,337 207,984 186,397 - - 182,359 - 182,359 182,359 - - 294 - 294 305 1,941 1,764 518,884 181,517 700,401 568,681 142,432 218,642 Public works trust fund loan payable 1,757,113 - 1,757,113 1,939,472 - - Compensated absences payable 38,988 11,874 50,862 45,039 44,688 40,641 TOTAL LONG-TERM LIABILTIES 11796,101 11,874 1,807,975 1,984 511 44,688 40,641 TOTAL LIABILITIES 2,314,985 193,391 2,508,376 2,553,192 187,120 259,283 Invested in capital assets, net of related debt 39,355,460 4,342,173 43,697,633 42,258,570 19,102,461 5,449,612 Restricted for: Customer deposits - 11,749 11,749 14,121 - - Steel lake management district 14,690 - 14,690 18,880 - - Unrestricted 7,012,134 428,046 7,440,180 7.217501 10,404,685 9,803,973 TOTAL NET ASSETS S46,382,284 $4,791,969 51,164,252 49,509,072 $ 29,507,146. $ 15,253,585. Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds 27,237 11,356 NET ASSETS OF BUSINESS -TYPE ACTIVITIES $ 51,191,489 $ 49,520.,428 The notes to the financial statements are an integral part of this statement. CO, of Federal Way / 29 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS For the Year Ended December 31, 2006 With Comparative Totals for December 31, 2005 OPERATING REVENUES: Service charges and fees Miscellaneous TOTAL OPERATING REVENUES OPERATING EXPENSES: Personal services Materials and supplies Services and charges Intergovernmental Depreciation Interfund charges TOTAL OPERATING EXPENSES OPERATING INCOME (LOSS) NON -OPERATING REVENUES (EXPENSES) Subsidy from interlocal grants Gain (Loss) from disposal of capital assets Interest income Interest expense Business -type Activities - Enterprise Funds Governmental Activities - Internal Service Funds Surface Water Dumas Bay __ Comparative'rotals Management Centre 2006 2005 2006 2005 $ 3,490,851 $ 615,510 $ 4,106,361 $ 4,100,623 $ 4,034,227 $ 4,345,876 23,818 - 23,818 97,111 67,882 119,893 3,514,669 615,510 4,130,179 4,197,734 4,102,109 4,465,769 1,437,293 360,010 1,797,303 1,628,500 746,789 763,377 38,566 128,176 166,742 113,582 457,865 394,677 292,268 202,857 495,125 537,586 1,832,563 1,767,655 343,775 343,775 312,599 97,222 82,711 410,316 181,776 592,092 591,780 1,789,451 1,219,215 593,322 51,893 645,215 615,952 - 3,115,540 924,712 4,040,252 3,799,999 4,923,890 4,227,635 399,129 (309,202) 89,927 397,735 (821,781) 238,134 1,113,010 1,113,010 - - - - (904,117) (57,359) 336,930 28,950 365,880 222,321 380,814 244,987 (21,218) - (21,218) (23,042) - - TOTAL NON-OPER REVENUES (EXPENSES) 1,428,722 28,950 1,457,672 199,279 (523,303) 187,628 INCOME (LOSS) BEFORE OPERATING TRANSFER 1,827,851 (280,252) 1,547,599 597,014 (1,345,084) 425,762 Capital contributions Transfers in Transfers out CHANGE IN NET ASSETS 15,420,330 901,973 121,840 121,840 126,369 207,961 511,641 (14,259) - (14,259) - (29,646) (21,263) 1,813,592 (158,412) 1,655,180 723,383 14,253,561 1818,113 TOTAL NET ASSETS - BEGINNING 44,568,692 4,940,380 TOTAL NET ASSETS - ENDING $ 46,382,284 $ 4,781,968 Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds 15,881 8,452 CHANGE IN NET ASSETS OF BUSINESS -TYPE ACTIVITIES $ 1,671,061 $ 731,835 The notes to the financial statements are an integral part of this statement. 15,253,5 85 13,435,472 $ 29,507,146 $ 15,253,585 City of Federal Way / 30 STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Year Ended December 31, 2006 With Comparative Totals for December 31, 2005 Business -type Activities - Enterprise Funds Govemmental Activities - Intemal Service Funds Surface Water Dumas Bay Com arative Totals Management Centre 2006 2005 2006 2005 CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from users $ 3,490,851 $ 645,214 $ 4,136,065 $ 4,181,463 $ 4,034,227 $ 4,370,876 Cash payments to claimants - - (434,387) (369,701) Cash payments to suppliers for goods/services (285,500) (330,651) (616,151) (633,986) (1,932,338) (1,730,128) Cash payments to employees (1,434,182) (357,309) (1,791,491) (1,656,151) (742,655) (798,488) Cash payments to other funds for goods and services (593,322) (51,893) (645,215) (597,419) - - Cash payments for other services/charges - - - (111,064) - Cash payments to other governments for goods and services (343,775) - (343,775) (332,411) (97,222) (82,711) Cash payments for damage deposits - (2,372) (2,372) - - _ Other operating receipts 23,818 - 23,818 - 67,882 119,893 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIE 857,890 (97.011) 760,879 850.432 895.507 1,509,741 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Subsidy from interlocal grant 1,143,501 - 1,143,501 - - - Transfers in - 121,840 121,840 126,369 207,961 490,378 Transfers out (14,259) - (14,259) - (29,646) - NET CASH PROVIDED BY NONCAPITAL FINANCING 1,129,242 121,840 1,251.082 126 6969 178,315 490,378� CASH FLOWS FROM CAPITAL AND CAPITAL - RELATED FINANCING ACTIVITIES: Principal paid on debt service (182,359) (182,359) (182,359) - Interest paid on debt service (21,218) (21,218) (23,042) - - Acquisitionofcapitalasset/construction work in progress (1,806,404) (6,222) (1,812,626) (968,662) (926,088) (1,351,941) Proceeds from the sale of capital assets - - - 16,667 NET CASH USED FOR CAPITAL AND CAPITAL -RELATED FINANCING ACTIVITIES (2,009,981) (6,222) (2,016,203) (1,174,063) 926,088 1,335,274 CASH FLOWS FROM INVESTING ACTIVITIES: Receipts ofinterest 335,883 28,958 364.841 217,391 382,441 234,654 NET CASH PROVIDED BY INVESTING ACTIVITES 335,893 28.958 364,841 217 9191 382.441 234,654 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT 313,034 47,565 360,599 20,129 530,175 899,499 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,910,740 539,876 7,450,616 7,430 487 10,046,229 9,146,730 CASH AND CASH EQUIVALENTS AT END OF YEAR 7,223,774 587,441 7,811,215 7,450,616 10,576,404 10,046,229 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating income (loss) 399,129 (309,202) 89,927 397,735 (821,791) 238,134 Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation expense 410,316 181,776 592,092 591,780 1,789,451 1,219,215 (Increase)/decrease in accounts receivable - 204 204 (8,140) - 25,000 (Increase)/decrease in taxes receivable (8,432) - (8,432) (6,218) - - (Increase)/decrease in due from other governments - 1,000 1,000 14,388 _ Increase/(decrease)in vouchers/accounts payable 56,877 26,839 83,716 26,994 (76,297) 62,503 Increase/(decrease) in retainage payable - - (46,424) -. - Increase/(decrease) in deposits payable - 2,372 2,372 (111,064) - Increase/(decrease) in deferred revenue - - - 19,032 - _ Increase/(decrease) in accrued payroll/compensated absences payable - - - 27,651 4,134 (35,111) TOTAL ADJUSTMENTS 458,761 2I2,191 670.952 452,697 1,717 298 1,2715607 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 857,890 $ 97,011 $ 760,879 $ 850,432 5 895507 5 1,509,741 Non -cash investing, capital, and financing activities: Other contributions of capital assets $ 15,420,330 $ 901,973 The notes to the financial statements are an integral part of this statement City+ of Federal Wml / 31 NOTES TO THE BASIC FINANCIAL STATEMENTS December 31, 2006 INDEX Note Page 1 Summary of Significant Accounting Policies ...... ............................................ ............................... . 32 ReportingEntity............................................................. ............................................... Government -wide and Fund Financial Statements .......... ....... ............ ......... ......................... 32 Measurement Focus, Basis of Accounting, and Financial Statement Presentation ............... 33 BudgetaryInformation ......... ............... ............. ....... ............ ....................... ............. I............ 36 Assets, Liabilities and Equities.............................................................•............._................. 38 Cash and Investments.................................................................................................. 38 Receivables....._................._............_............................_...::..................::............:..._:..._. 38 Amounts Due to and from Other Funds; Interfund Loans ............................................ 38 Inventories................................................................................................................... 39 Capital Assets-•-----•..................•--•--•--..-....--•------••--•--•................ ......... ..... .................... 39 Compensated Absences Payable.............................................................. ... 39 Long -Term Debt ......................... ...........•----•..........---..........-•------•------•--.........-----.-..-.--- 40 DeferredRevenue........................................................................................................ 40 Fund Equity -Reserves and Designation ... ............................................................. ........ 40 Interfund Transactions................................................................................................. 40 2 Reconciliation of Government -wide & Fund Financial Statements ... .................................._..._.... 41 3 Stewardship, Compliance and Accountability......................................................:.......................... 41 4 Supplemental Appropriations...................................................:.................................................... 41 5 Deposits and Investments.............................................................................................................. 42 6 Receivables and Due from Other Governments ........:.......................... 44 7 Due To Other Governments.......................................................................................................... 45 8 Capital Assets ..... ..................................................... ........................... 6 9 Pension Plans ........ .................................................................................................... 10 Risk Management.......................................................................................................................... 51 11 Long -Term Debt ............. ....... ............ ___ ........ ...................... :.................. ................................... 52 12 Interfund Transactions.................................................................................................................• 55 13 Contingencies and Litigation......................................................................................................... 56 14 Joint Ventures .......... ............................ ...... ........... ............ ......................... City of Federal Way / 32 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Year Ended December 31, 2006 NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the City of Federal Way have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The significant accounting policies are described below. REPORTING ENTITIES The City's Comprehensive Annual Financial Report (CAFR) includes the funds, agencies and boards controlled by or dependent on the City. In conformance with Governmental Accounting Standards Board (GASB) Statement 14, "The Financial Reporting Entity", the primary basis of determining whether outside agencies and organizations should be considered component units of the City is Financial Accountability. Financial Accountability Financial accountability is defined as appointment of a voting majority of an agency's or organization's board, and either the City's ability to impose will on the agency or organization or the possibility that the agency or organization will provide a financial benefit to or impose a financial burden on the City. Joint Ventures A joint venture is a legal entity or organization which results from a contractual arrangement that is owned, operated, or governed by two or more participants as a separate activity subject to joint control, in which participants retain an ongoing financial interest or an ongoing financial responsibility. The City participates in one joint venture, Valley Communications Center. See Note 14, Joint Venture, which more fully describes this organization. ACCOUNTING STANDARDS The City implemented GASB Statement 34 ("Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments"), GASB 37 ("Basic Financial Statements — and Management's Discussion and Analysis- for State and Local Governments: Omnibus"), and GASB 38 ("Certain Financial Statement Note Disclosures"). These new standards substantially change the financial reporting basis and format. Some of these changes are: • Management's Discussion and Analysis (MD&A) section providing analysis of the City's overall position and results of operations • Financial statements prepared using full accrual accounting for all government -wide City activities, including current year infrastructure • Change in the individual fund financial statements focusing on the major funds GOVERNMENTAL -WIDE AND FUND FINANCIAL STATEMENTS The government -wide financial statements (i.e. the statement of net assets and the statement of activities) report information on all 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. Our policy is to allocate indirect costs to specific function or segment. 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, and 2) grant and contributions that are restricted to meeting the operational or capital requirements or a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. City of Federal Way / 33 Separate fund financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING The government -wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund statements. 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. Governmental Funds 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 of Federal Way considers revenues to be available if they are collected within 30 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 judgements, are recorded only when payment is due. Property taxes, licenses, and interest associated within the current period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of special assessment receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the City. The City reports the following major governmental funds: General Fund This is the City's general operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. Street Fund This fund accounts for receipt and disbursement of State -levied "unrestricted" motor vehicle fuel taxes which must be accounted for in a separate fund and expended for street -oriented engineering, construction and maintenance purposes only. Utility Tax Fund This fund was established to account for all utility tax receipts. These receipts will subsequently be distributed to various funds (Debt Service, Capital Improvement Projects, etc.) for project expenditure as determined by the City Council. Debt Service Fund This fund accounts for the accumulation of resources for the payment of general obligation and assessment bond principal, interest and related costs. Downtown Redevelopment CIP Fund This fund was established to accumulate resources to set aside for downtown projects City Facilities CIP Fund This fund accounts for receipts and disbursements related to acquisition, design, construction and any other related municipal facility and community/senior capital project expenditures. Transportation CIP Fund This fund accounts for receipts and disbursements related to acquisition, design, construction and any other related street project expenditures. City of Federal Way / 34 The City reports the following fund groups as non -major funds: Special Revenue Funds These funds are to be used to account for the proceeds of revenues and sources (other than special assessments, expendable trust or major capital projects) that are legally restricted to expenditures for specified purposes. Capital Project Funds These funds account for the acquisition or construction of major capital facilities with the exception of those facilities financed by the proprietary and trust funds. The major sources of revenues for this fund are general obligation bond proceeds, grants from other agencies, local taxes and contributions from other funds. Proprietary Funds Proprietary funds are used to account for activities similar to those found in the private sector where the intent of the governing body is to finance the fall cost of providing services, including depreciation, primarily through user charges. The measurement focus for these funds is based on the commercial model, which uses a flow of economic resources approach. Under this approach, the operating statements for the proprietary funds focus on a measurement of net income (revenues and expenses) and both current and non -current assets and liabilities are reported on the related balance sheets. 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 to not conflict with or contradict guidance of the Governmental Accounting Standards board. Governments also have the option of following subsequent private - sector guidance for their business -type activities and enterprise funds, subject to the same limitation. The City of Federal Way has elected not to follow subsequent private -sector guidance. As a general rule the effect of the interfund activity has been eliminated for the government -wide financial statements. Amounts reported as program revenue include 1) charges to customers, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than program revenues. General revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from non -operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the enterprise and internal service funds are primarily user charges, the cost of providing goods or services to the general public on a continuing basis. Operating expenses for enterprise funds and internal service funds includes the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non -operating revenues and expenses. The City reports the following major proprietary funds: Enterprise Funds The City uses enterprise funds to account for government activities that are financed and operated in a manner similar to private business. Costs of providing services to the general public are primarily financed by user fees. Surface Water Management Fund This fund was established to administer and account for all receipts and expenditures related to the City's surface and storm water management system. Dumas Bay Centre Find This fund was established to account for the revenues and expenses related to the acquisition, capital improvements maintenance and operations of the City -owned Dumas Bay Centre and Knutzen Family Theatre. City of Federal Way / 35 Internal Service Funds The City uses Internal Service Funds to account for the financing of goods or services provided by one department or agency to other departments or agencies of a government, or to other governments, on a cost -reimbursement basis. A description of each individual Internal Service Fund included in the Comprehensive Annual Financial Report is provided below: Risk Management Fund This fund accounts for the City's risk financing activities established to minimize adverse effects of losses associated with property and casualty, medical and dental, unemployment and worker's compensation claims. Both risk control (to minimize the losses that strike and organization) and risk financing (to obtain finances to provide for or restore the economic damages of those losses) are involved. The City is currently self -insuring only State Unemployment Compensation. Related premiums received by the fund are used to reimburse the unemployment benefits paid to eligible individuals and to establish reserves for the payment of estimated future unemployment claims liability. The City is also currently recovering costs and building reserves for general liability including property, casualty, errors and omissions and fidelity coverage. Information Systems Fund This fund was established to account for all costs associated with data processing, telecommunications and the Geographical Information System (GIS). This fund will own and depreciate all non-proprietary fund assets related to these functions, and will charge equipment/software users for both maintenance and operating costs and equipment replacement charges based on depreciation schedules. Support Services Fund This fund accounts for duplication, graphics and other general support services provided to departments and funds throughout the City. Fleet and Equipment Fund This fund accounts for the cost of maintaining City vehicles and other motorized equipment. Rates charged to user departments are based on the full cost of maintaining equipment items, including the recovery of related depreciation expense. Buildings and Furnishings Fund This fund accounts for all costs associated with the operation and maintenance of specified City buildings. City building facilities and furnishings will be owned by this Fund, and both maintenance/operating costs and depreciation recovery will be charged City departments and funds. Basis of Accounting Basis of accounting refers to when revenues and expenditures or expenses are recognized and reported in the financial statements The accrual basis of accounting is used by proprietary funds. Under this method, revenues are recognized when earned, and expenses are recognized when incurred. The modified accrual basis of accounting is used by governmental funds. Revenues and other financial resources are recognized when they become susceptible to accrual, i.e., when the related funds become both measurable and available to finance expenditures of the current period. To be considered "available", revenue must be collected during the current period or soon enough thereafter to pay current liabilities. The City uses thirty days when evaluating the available criteria. Expenditures are recognized when the related fund liability is incurred. Since the recognition of depreciation does not reduce net financial resources, it is not considered an expenditure. Other exceptions include (1) inventories of materials and prepaid items are reported as expenditures when purchased, (2) interest on long-term debt is not accrued but is recorded as an expenditure when due, (3) accumulated unpaid vacation and sick pay are considered expenditures when paid. Major revenues recorded on the modified accrual basis are: City of Federal Way / 36 Property Taxes - King County acts as the City's collection agent for these taxes. Each day, the County electronically transmits to the City the taxes which it has collected on the City's behalf in the prior day. On this basis, property taxes received in January are considered both measurable and available and are therefore recognized as revenue in the current year. Other Locally Levied Taxes - King County also acts as the City's collection agent for the '/4% and optional '/4% real estate excise taxes. Although a time lag occurs in payment of these taxes to the City, since the taxes are actually collected by King County in December and receipted to the City within 10 days after the end of the year, they are considered to be both measurable and available, and are, therefore, accrued as revenue at year end. The State of Washington acts as the City's collection agency for the locally levied sales tax. The sales tax is distributed monthly and remitted to the City in the following month. The Sales Tax remittance in January is considered both measurable and available and is therefore accrued as revenue at year-end. Grant Revenues - Under Section G60.109 of the Codification of Governmental Accounting and Financial Reporting Standards revenues for cost reimbursement grants are determined to be earned and, therefore, available at the time related expenditures are incurred. For this reason, grant revenues to be received as reimbursement for expenditures incurred in the current year are also recognized as revenue in that year. Shared Revenues - Revenues that have been collected, but not remitted by an intermediary collection agency to the City, are considered measurable and available. Other Revenue Sources - Other items recognized as revenue in the current year on the modified accrual basis include investment interest earned but not received at year end; interfund, and intergovernmental service billings related to services provided in the current year which are outstanding at year end; and any other material revenue amounts determined to be both measurable and available under current modified accrual accounting practices. Revenues not considered to meet the criteria for recognition on the modified accrual basis include licenses and permits, fines and forfeitures, and other miscellaneous revenues which are generally not measurable until received. BUDGETARY INFORMATION Scope of Budget Annual appropriated budgets are adopted for the general, some special revenue, and debt service funds on the modified accrual basis of accounting. For governmental funds, there are no differences between the budgetary basis and generally accepted accounting principles. Budgets for project and grant related special revenue funds and capital project funds are adopted at the level of the individual project and for fiscal periods that correspond to the lives of projects. Since these funds are not budgeted on an annual basis, budgetary comparisons are not presented. NCGA Statement 1 does not require, and the financial statements do not present, budgetary comparisons for proprietary fund types. Legal budgetary control is established at the fund level, i.e., expenditures for a fund may not exceed the total appropriation amount. Any unexpended appropriation balances for annually budgeted funds lapse at the end of the year. Appropriations for other special purpose funds that are non -operating in nature are adopted on a "project -length" basis and, therefore, are carried forward from year to year without reappropriation until authorized amounts are fully expended or the designated purpose of the fund has been accomplished. The individual funds within each fund type which are included in the City's annual operating budget (funds budgeted on an annual basis) are: General Fund Special Revenue Funds Street Fund Arterial Street Utility Tax Solid Waste & Recycling Federal Way Community Center Hotel/Motel Lodging Tax Paths & Trails Debt Service Fund City of Federal Way / 37 Procedures for Adopting the Annual Budget The City's budget process and the time limits under which the budget must be prepared are defined by the Revised Code of Washington (RCW) 35A.33. The procedures followed in establishing the annual budget are described below: By late May the official budget call is made by the Management Services Director for current level service budgets and a preliminary financial forecast. By late June, departments submit their preliminary expenditure estimates and the Management Services department updates the preliminary revenue estimates to define resources available to finance coming year expenditure programs. Prior to the first Tuesday in September, 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 made by the Management Services Director. City Council conducts workshops and public hearings on the proposed budget between mid -September and mid -December. No later than the third Monday in November, the City Council must adopt an ordinance to establish the amount of property taxes to be levied in the coming year. By October 31, the City Manager files a preliminary budget with the City Clerk. Copies of the preliminary budget are provided to staff and the City Council and made available to the public. During the first two weeks of November, the City Clerk publishes a notice of the filing of the preliminary budget and notices of public hearings to be held during preliminary budget deliberations. Two public hearings on the proposed budget are also held during November and December. Final hearings on the budget must begin on or before the first Monday of December, and may continue until the 25th day prior to beginning of the next fiscal year. By December 31, the City Council makes its adjustments to the proposed budget and adopts a final budget by ordinance. The final operating budget, as adopted, is published and distributed within the first three months of the following year. Copies of the adopted budget are made available to the public. Amending the Budget The City Manager is authorized to transfer budgeted amounts between departments within any fund; however, any revisions that alter the total expenditures of a fund must be approved by the City Council. 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 ordinance approved by a simple majority. During 2006, the budget was amended two times. The budget amounts shown in the financial statements are the final authorized amounts as revised during the year. The financial statements contain the original and final budget information. The original budget is the first complete appropriated budget. The final budget is the original budget adjusted by all reserves, transfers, allocations, supplemental appropriations, and other legally authorized changes applicable for the fiscal year. Encumbrances An encumbrance system is used for budgetary control purposes to record comrriitments resulting from approved purchase orders. During the year, encumbrances are recorded in the accounting system at the time purchase orders are issued for goods and services. Upon payment, the encumbrance is reversed and the actual cost of the related item is recorded as a fund expenditure. Outstanding encumbrances lapse at year end, are canceled and must be re-established in the following year upon approval of the City Council City of Federal Way-1 3 8 through a budget adjustment ordinance. Therefore, these amounts have not been recorded as current year expenditures unless considered to be susceptible to accrual at the end of the year. The total encumbrances at year-end for the City were $7,942,725. ASSETS, LIABILITIES, AND NET ASSETS OR EQUITY Cash and Investments The City follows the practice of pooling cash and investments of all funds for investment purposes, except for cash held in escrow, which is disclosed separately on the balance sheet. Each fund's portion of total cash and investments is summarized by fund type in the combined balance sheet as equity in pooled cash and investments. It is the City's policy to invest all cash not immediately required for disbursement. At December 31, 2006, the State Treasurer was holding $34,272,920 in the State Investment Pool and US Bank was holding $22,802,348 in a Municipal Investor Account (MIA) for short-term investments of cash. The State Investment Pool and the Municipal Investor Account is considered a cash equivalent. The interest earnings on these investments are allocated to all funds based on the average monthly balance for each fund. For purposes of the Statement of Cash Flows, the City considers all highly liquid investments with a maturity of three months or less when purchased, to be cash equivalents. At December 31, 2006, the total cash and cash equivalents were $55,418,185. The City's deposits are entirely covered by federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). The City is authorized by State law to purchase certificates of deposit issued by Washington State depositories that participate in a state insurance pool managed by the Washington Public Deposit Protection Commission; securities purchased by the Washington State Investment Pool; U.S. Treasury and Agency securities, banker's acceptances trading in the secondary market; and repurchase agreements with dealers that use authorized securities as collateral. In accordance with GASB 31, investments in money market investments and participating interest -earning investment contracts with a remaining maturity of one year or less at the time of purchase are stated at amortized cost. All other investments are stated at fair value. There was no material deviation from fair value quoted at year-end. Receivables Taxes receivable consists of property taxes and related interest and penalties (see Property Tax Note 6). Accrued interest receivable consists of amounts earned on investments, notes, and contracts at the end of the year. Due From Other Governments reflects measurable and available intergovernmental grants, entitlements, or State shared revenues (taxes/charges levied and collected by an intermediary collecting government and distributed on some basis); loans; and charges for services rendered by the City for another government unit. A separate schedule of Due From Other Governments is disclosed in Note 6. Amounts Due to and from Other Funds; Interfund Loans Activity between funds that are representative of lendingiborrowing arrangements outstanding at the end of the fiscal year are referred to as either "interfund loans receivable/payable" or "advances to/from other funds." All other outstanding balances between funds are reported as "due to/from other funds." Any residual balances outstanding between the governmental activities and business -type activities are reported in the government -wide financial statements as "internal balances." Loans between funds must be authorized by the City Manager. In the governmental funds, loans to other funds are offset by a corresponding reservation of fund balance to indicate that the outstanding loan amounts do not constitute "available spendable resources" and are, therefore, not available for appropriation. A separate schedule of interfund loans receivable and payable is furnished in Note 12. City of Federal Way / 39 Inventories Inventories in the governmental funds are recorded as expenditures at the time of purchase. Amounts remaining at year-end are immaterial and, therefore, are not reflected on the balance sheets of those funds. There were no material inventories at year-end in the Internal Service or Enterprise Funds. Capital Assets Capital assets, which include property, plant, equipment, and infrastructure (e.g. roads, bridges, sidewalks, lighting systems, etc), are reported in the applicable governmental or business -type activities columns in the government -wide financial statements. The City included governmental infrastructure constructed for years the 2003 - 2006. Under the requirements of GASB 34, the City has until 2007 to record the remainder of its infrastructure assets. Major expenditures for fixed assets, including capital leases and major repairs that increase useful lives are capitalized. Maintenance, repairs, and minor renewals are accounted for as expenditures or expenses when incurred. The City has adopted a general fixed asset capitalization policy where an item's cost must equal or exceed $1,000. All fixed assets are valued at historical cost (or estimated cost, where historical cost is not known/or estimated market value for donated assets). Depreciation on all capital assets is recorded as an allocated expense in the government -wide Statement of Activities and in the proprietary fund statements. Capital assets are reported net of depreciation. The City uses a combination of group depreciation and straight-line depreciation over the life of the assets. The following summarizes the average service lives used to calculate depreciation for specific categories of assets in the City's Proprietary Funds. Asset Class Life in Years Computers.......... ........ ...................................................................... ...4-5 Communications Equipment.................................................6.........10 Other Office Equipment...............................................................4-10 Office Furniture & Fixtures ............................................ :............... 10 Recreation Equipment ........................... ......:...... ......................... ._..10 Parks Equipment ...................... :.....:..:..::....::................... ,............ 5-12 Non -Police Vehicles .•••• ............. -............ ::.......... ............. :................7 PoliceVehicles........................::.......:...........................................4-6 Police Equipment ............... LightTrucks .............................. .................................................. ..... 7 HeavyTrucks............................._................................._..........._...8-10 Heavy Work Equipment.............................................................10-16 Shop/Miscellaneous Equipment ......... ............. ........... ............. ...10-12 Land Improvements .......... ...................... ........................ .......... ..------ 20 Buildings.......................... ........ ............................. ................... ....... 20 Storm Drainage Systems ........................... ...... .................. .,........... .100 Compensated Absences The City records a liability for all outstanding vacation pay and accrued compensatory time. In governmental funds, vacation pay and compensatory time is recorded as expenditures when paid which occurs when used or upon termination. In the entity -wide statements and the proprietary fund statements, vacation pay and compensatory time is recorded as a liability and expense in the year earned. Employee vacation leave is accumulated monthly at rates ranging from 12 to 18.5 days per year depending on term of employment. Employees may accumulate up to a maximum of 240 hours of vacation leave, except the Police Guild, who can accrue up to a maximum of 296 hours. All outstanding vacation leave is payable upon termination of employment. The differences between the governmental fund statements and the entity -wide statements represent reconciling items between the fund level and government -wide financial statements. The reconciliations are included as part of the financial statements. City of Federal Way / 40 A non-exempt employee may request compensatory time off in lieu of overtime payment. Compensatory time is accrued at a rate of one and one-half hours for each hour of overtime worked, to a maximum of eighty hours, or forty hours for Police Guild members. Sick leave may be accumulated up to a maximum of 720 hours for regular City employees per City policy and 1,040 hours for the Police Guild, per their contract. The monthly accrual rate for City employees is 8 hours per month. Accumulated sick leave is not payable upon termination of employment. Outstanding sick leave at year-end is not accrued due to the difficulty in estimating the portion of existing balances likely to result in expenditures in future periods. Long-term Debt In the government -wide financial statements and the proprietary fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business -type activities, or proprietary fund statement of net assets. Long-term debt outstanding at year-end is outlined in Note 11. Deferred Revenues The deferred revenue account is used to offset receivables established in the governmental funds for certain revenues that are measurable but not considered available to finance payment of current obligations and, therefore, are not susceptible to accrual on the modified accrual basis. When the receivable amounts are collected in future periods, this liability account is reduced and corresponding revenue is recorded. The portions of Property Taxes that do not meet the available criteria are recorded as deferred revenue. Fund Equity -Reserves and Designations Reserves represent portions of fund equity that are legally restricted for a specific future purpose or not available for appropriation because they do not represent a current expendable resource. Designations of fund balance identify amounts set aside by management for tentative future purposes or administrative convenience. In governmental funds, fund balance that is legally restricted for future purposes include reserves for: a) future employee retirement payments and b) future debt service. The City of Federal Way does not have fiduciary funds. Fund balance not available for expenditure in the governmental funds consists of the outstanding balances of current interfund loans. On December 31, 1991, $10,000 in a non -interest bearing loan from the General Fund to the City's CDBG grant fund was authorized by the City Manager as interim financing. On December 31, 2006, an additional $10,000 was added to the loan to increase the interim financing to the CDBG for a total of $20,000. In addition, the General Fund had reserves for Petty Cash, prepaid insurance, police special funds and Travel Advance purposes. The Special Revenue Path and Trails Reserve fund balance is legally restricted for construction and maintenance of paths and trails within City right-of-way. The Special Revenue Hotel/Motel Lodging Tax fund balance is also legally restricted for solely paying for tourism promotion and for the acquisition and/or operation of tourism -related facilities. Interfund Transactions There are four types of transactions between funds - interfund loans, interfund services provided and used, interfund reimbursements, and interfund transfers. Interfund loans are temporary borrowings of cash which do not affect operating statements, but which may incur interest expense or expenditure to the borrowing fund. Interfund services provided and used are equivalent to buying goods or services from an outside vendor, they are accounted for by the related funds as revenues, expenditures or expenses. Interfund reimbursements are repayments to a fund for expenditures or expenses that belong to another fund. They involve only expenditure or expense accounts. Operating transfers are the equivalent of operating subsidies. Except for the Enterprise Fund, operating transfers are accounted for as "other financing sources and uses" and are therefore included in the operating statements. City of Federal Way / 41 NOTE 2 — RECONCILIATION OF GOVERNMENT -WIDE & FUND FINANCIAL STATEMENTS Explanation of Certain Differences Between the Governmental Funds Balance Sheet and the Government -Wide Statement of Net Assets The governmental funds' balance sheet includes a reconciliation between fund balance — total governmental 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 $30,781,630 difference are as follows: Bonds Payable at beginning of year $27,701,761 Plus: New debt issued $4,100,000 Plus: Inclusion of compensated absences 1,200,100 Less: Current year reduction of principal portion of debt (2.219.676] Net adjustment to reduce fund balance -total governmental funds to arrive at net assets — governmental activities $30.782.184 Explanation of Certain Differences Between the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances and the Government -Wide Statement of Activities The governmental funds' statement of revenues, expenditure, and changes in fund balances includes a 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 $23,390,575 difference are as follows: Net Capital outlay $24,412,303 Governmental depreciation expense (1,021,728) Net adjustment to increase net changes in fund balances — Total governmental funds to arrive at changes in net assets ofgovernmental activities $23.390.575 Another element of the reconciliation states that "Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds." This item presents: Property taxes earned reported as deferred in the fund statements$ $4 Another element of the 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 the funds." This item represents: Compensated absences 57 453 NOTE 3 — STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY There have been no material violations of finance -related legal or contractual provisions, and there have been no expenditures exceeding legal appropriations in any of the funds of the City. NOTE 4 — SUPPLEMENTAL APPROPRIATIONS Operating Budget Funds Appropriations established during 2006 for the City's operating budget funds are provided below. As explained in Note 1, both original and supplemental appropriations are adopted by the City Council by ordinance. Both original and final budget appropriations are shown on the accompanying financial statements. The final budget values include all adopted adjustments to original budget amounts. City of Federal Way / 42 2006 ORIGINAL SUPPLEMENTAL FINAL FUND BUDGET APPROPRIATIONS BUDGET General Fund Special Revenue Funds: Street Fund Arterial Street Fund Utility Tax Fund Solid Waste/Recycling Fund Hotel/Motel Lodging Tax Federal Way Community Center Subtotal Special Revenue Funds $ 31,694,787 4,195,238 $ 35,890,025 3,808,260 472,727 4,280,987 1,502,520 97,272 1,599,792 7,416,360 792,840 8,209,200 349,314 (9,184) 340,130 150,000 132,627 282,627 - 76,500 76,500 13,226,454 1,562,782 14,789,236 Debt Service Fund 5,258,856 1,250,000 6,508,856 Total $ 50,180,097 $ 7,008,020 $ 57,188,117 NOTE 5 — DEPOSITS AND INVESTMENTS As required by state law, all deposits and investments of the City's funds are obligations of the U.S. Government, the State Treasurer's Investment Pool, bankers' acceptances, or deposits with Washington State banks and savings and loan institutions. In 2006 the City utilized all the above with the exception of bankers' acceptances as legal authorized investment instruments. The City's investment policies are described in Note 1. Cash and Deposits The City follows the practice of pooling cash and investments of all funds, except restricted funds and funds held with a trustee or in escrow, for investment purposes as disclosed in Note 1. At December 31, 2006, the equity in pooled cash and investments was $67,306,492. At year-end, the City had $55,418,185 in cash and cash equivalents which consisted of investments with the State Pool of $34,272,920; the Municipal Investor account with US Bank of $22,802,348; the City's checking account bank balance prior to outstanding checks was $257,375; and petty cash and change funds, advance travel fund and investigative fund totaling $40,610. No deposits were uninsured or uncollateralized. Insurance coverage up to $100,000 is through federal depository insurance and the Washington Public Deposit Protection Commission (WPDPC) for amounts over $100,000. Under State statute, members of WPDPC, a multiple -financial institution collateral pool, may be assessed on a prorated basis if the pool's collateral is insufficient to cover a loss. The Municipal Investor account with US Bank is protected under WPDPC. Investments are carried at cost or book value because the City holds all investments until maturity. The fair value of the positions in the State Investment Pool is the same as the value of the pool shares. The State Investment Pool is managed by the Treasurer of the Sate of Washington. As of December 31, 2006 the City had the following investments and maturities: Cih, of Federal Way / 43 SCHEDULE OF INVESTMENTS BY MATURITIES AS OF DECEMBER 31, 2006 Investment maturities Book Less than 1 to 2 Greater than Investment Type Value 1 year years 3 years State Investment Pool $ 34,272,920 $ 34,272,920 $ - $ - Municipal Investors Account 22,802,348 22,802,348 - - US Agencies 11,888,307 9,888,007 2,000,300 - $ 68,963,575 $ 66,963,275 $ 2,000,300 $ - Reconcillation to Governmental -Wide Statement of Net Assets: US Bank, checking account per books $ (1,697,693) Petty cash/change fund/Advance travel/Investigative fund 40,610 State Investment Pool 34,272,920 Municipal Investors Account 22,802,348 Subtotal Cash and Cash Equivalents 55,418,185 US Agencies 11,888,307 Cash with escrow agent 808,925 Total cash and investments, Governmental -Wide Statement of Net Assets $ 68,115,417 Investments Interest Rate Risk As a means of limiting its exposure to fair value losses arising from rising interest rate, the City's investments policy states that "no more than 20% of the portfolio may be invested beyond 12 months, and average maturity of the portfolio may not exceed 2 years." Credit Risk. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. State law and the City's investment policy limits the instruments in which the City may invest. The following are categories of investments authorized under the City's policy, in general order of safety and liquidity: State Investment Pool; repurchase agreements; U.S. treasury obligations; U.S. government agencies; U.S. government -sponsored corporationshnstrumentalities; bankers' acceptances (secondary market domestic and foreign); commercial paper (secondary market); insured certificates of deposit (banks and savings & loans); and uninsured/collateralized certificates of deposit (banks and savings & loans). The credit risk of the State Investment Pool is limited to obligations of the US Government, government sponsored enterprises, or insured demand deposit accounts and certificates of deposit. As of December 31, 2006, the City had investments in a limited number of investment instruments as follows: Federal National Mortgage Association Bonds; Federal Home Loan Bank bonds; Federal Farm Credit Bank Bonds; Federal Home Loan Mortgage Corporation Bonds; State Investment Pool; and the Municipal Investments Account (public funds savings account). With the exception of the State Local Government Investment Pool and the Municipal Investors Account, which are not rated, all of the investments listed above carried a rating of AAA by Standard & Poor's rating service at December 31, 2006. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of an investment in a single issuer. The City diversifies its investments by security type and institution. The investment policy states: "no more than 5% of the portfolio may be invested in the securities of a single issuer, except for the U.S. Treasury, to which no limits apply, and commercial paper, which is limited to 3% of the portfolio. No more than 30% of the portfolio may be invested in Bankers' Acceptances and Certificates of Deposit." City of Federal Way / 44 Other Information Below is a schedule of investments by fund type: SCHEDULE OF INVESTMENTS BY FUND CATEGORY AND INVESTMENT TYPE AS OF DECEMBER 31, 2006 State Municipal Investment Investors Fund Type Pool Account US Treasuries US Agencies Total General Fund $ 2,612,171 $ 1,737,921 $ - $ 906,088 $ 5,256,181 Special Revene Funds 2,673,847 1,778,955 - 927,482 5,380,285 Capital Projects Funds 20,144,242 13,402,302 - 6,987,468 40,534,011 Enterprise Funds 3,767,888 2,506,839 - 1,306,974 7,581,701 Internal Service Funds 5,074,771 3,376,330 - 1,760,295 10,211,397 Total $ 34,272,920 $ 22,802,348 $ - $ 11,888,307 $ 68,963,575 NOTE 6 — RECIEVABLES AND DUE FROM OTHER GOVERNMENTS Property Taxes The King County Treasurer is responsible for collecting property taxes levied in the County by all taxing districts. Amounts collected by the County on the City's behalf are remitted daily. As described in Note 1, taxes are levied and become an enforceable lien against properties as of January 1. Annual tax billings may be paid in two equal installments, due April 30 and October 31. At December 31, 2006, the total balance of property taxes receivable recorded by the City was $233,511. Of this, $201,643 is recorded as a deferred revenue, since it was not collected within the first 30 days of 2006. The property tax levy calendar in 2006 was: 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 established for next year's levy at 100% of market value. October 31 Second installment is due. Property taxes are recorded as a receivable when levied, offset by deferred revenue. During the year, property tax revenues are recognized when cash is collected. At year-end, property tax revenues are recognized for collections expected to occur within 30 days. No allowance for uncollectible taxes is established because delinquent taxes are considered fully collectible. Under State law, the maximum levy (for general governmental services) is up to $3.60 per $1,000 of assessed valuation, subject to two limitations, set forth below. Since the City of Federal Way is not a full service city, the City is only allowed $1.60. The remaining $2.00 is for the fire district ($1.50) and library district ($.50). Chapter 84.55 of the State RCW was amended most recently by Initiative No. 747 (which was passed by voters on November 6, 2001), limits the total dollar amount of regular property taxes levied by the City to the amount of such taxes levied in the three most recent years multiplied by a limit factor, plus an adjustment to account for taxes on new construction, improvements and state -assessed property at the previous year's rate. As amended by Initiative No. 747, the limit factor is the lesser of 101% or 100% plus the percent change in the Implicit Price Deflator, unless a greater amount is approved by a simple majority of the voters; and The Washington State Constitution limits the total regular property taxes to 1% of assessed valuation or $10 per $1,000 of value. If the taxes of all districts exceed this amount, each is proportionately reduced until the total is at or below the 1 % limit. City of Federal Way / 45 The City's regular levy for 2006 was $1.22 per $1,000 on an assessed valuation of $7,251,992,701 for a total regular levy of $8,800,989. Deferred Revenue Deferred revenue reported on the governmental funds balance sheet is in the schedule below. Grant reimbursements and refuse collection fees are receivable within one year of the end of the fiscal period. Property Tax Commute Trip Reduction Grant Refuse Collection Fees Federal Way Fire Department Buy -In of ValleyCom Recreation Programs/Facility Rentals Receivables & Due from Other Governments Solid Waste Debt General Street & Recycling Service Total 201,643 - - - 201,643 - 30,431 - - 30,431 - 21,584 - 21,584 - - - 263,520 263,520 20,061 - - - 20,061 $ 221,704 $ 30,431 $ 21,584 $ 263,520 $ 537,239 The receivables for the fiscal year ended December 31, 2006 on the government -wide statement of net assets are detailed in the following schedule. Debt City Trans- Downtown Nonmajor General Street Utility Tax_ Service Facilities portation Redevelop. Govt'l Proprietary Total Property Tax $ 233,511 $ $ - $ - $ $ - $ - $ $ $ 233,511 Real Estate _- Excise Tax - - 215,660 - - 215,660 Utility Tax - - 1,100,201 - 1,100,201 Gambling Tax 192,591 - - - _ - _ 192,591 Recreation Programs/ Facilities (17,229) - - - - 43,463 26,234 Grants & _ Contributions 279,779 - - - - 309,395 15,635 604,809 Construction Contract/ Reimburse - - - - - - - - - Deferred Maint - - - 261,091 - - 261,091 Investment interest 11,499 2,207 2,152 2,700 13,365 18,450 6,028 5,158 20,073: 81,632 State Shared Revenue 1,316,809 94,390 - - 28,155 - 58,238 - 1,497,592 WA State Criminal Justice Training Center 27,816 - - - - - - - - 27,816 Surface Water - Management Fees - - - - - - - 100,296 100,296 $ 2,044,776 $ 96,597 $ 1,102,353 $479,451 $ 13,365 $ 46,605 $ 6,028 $ 372,791 $ 179,467 $ 4,341,434 NOTE 7 - DUE TO OTHER GOVERNMENTS At December 31, 2006, the City recorded $264,042 as due to other governmental units as follows: General Fund City of Auburn - Jail Services $ 118 City of Fife - Jail Services 28,507 City of Yakima - Jail Services 111,494 King County - Jail Services 32,705 King County - Voter Registration & Election Costs 91,218 $ 264,042 City of Federal Way / 46 NOTE 8 — CAPITAL ASSETS Capital assets activity for the year ended December 31, 2006 was as follows: Beginning Balance Ending Balance Governmental Activity 1/1/2006 Additions Deletions 12/31/2006 Capital assets, not being depreciated: Land $ 37,261,732 $ 4,028,386 $ - $ 41,290,118 Construction in progress 24,175,997 20,027,922 i6,252,947) 37,950.972 Total capital assets, not being depreciated: 61,437,729 24,056,308 .(6,252,947) 79241,090 Capital assets, being depreciated Buildings 19,818,835 15,068,709 (18,387,233) 16,500,311 Improvements other than buildings 16,549,392 785,508 17,334,900 Infrastructure 3,012,313 5,463,069 8,475,382 Machinery and equipment 10,3.39,700 1,293,100 10,905,532 Total capital assets, being depreciated: 49,720,240 22,610,386 _�726;868) (19,114,101) 53,216,525 Less accumulated depreciation for: Buildings Improvements other than buildings Infrastructure Machinery and equipment Total accumulated depreciation: Total assets being depreciated, net Governmental activities capital assets, net (2,833,094) (905,486) 2,459,130 (1,279,450) (5,786,037) (827,470) (6,613,507) (71,152) (150,616) (221,768) (6,528,532) (927,607) 675,497 (6,780,642) (15,218,815) (2,811,179) 3,134,627 _ (14,895,367) 34,501,425 19 799,207 (15,979,474) 38,321,158 $ 95,939,154 $43,855,515 $ (22,232,421) $ 117,562,248 Beginning Balance Ending Balance Business -Type Activities 1/1/2006 Additions Deletions 12/31/2006 Capital assets, not being depreciated: _ Land $ 5,863,130 $ 889,314 $ - 6,752,444 Construction in progress 5,135,757 1,727,748 (2,594,341) 3,969,164 Total capital assets, not being depreciated: 10,998,887 2,617,062 (2,894,341) 10,721,608 Capital assets, being depreciated Buildings Improvements other than buildings Infrastructure Machinery and equipment Total capital assets, being depreciated: Less accumulated depreciation for : Buildings Improvements other than buildings Infrastructure Machinery and equipment Total accumulated depreciation: Total assets being depreciated, net Business Type activities capital assets, net 3,596,441 3,596,441 40,932,367 2,089,905 43,022,272 106,643 106,643 44,635,451 2,089,905 - 46,725,356 (1,540,377) (179,824) (1,720,201) (9,606,687) (409,323) (10,016,010) (70,744) (2,945) (73,689) (11,217,808) (592,092) - (11,809,900) 33,417,643 1,497,813 - 34,915,456 $ 44,416,530 $ 4,114,875 $ (2,894,341.) $ 45,637,064 Citv of Federal Wait/ 47 Depreciation expense was charged to functions/programs of the primary government as follows: Government Activities General Government $ 301,582 Security of Persons & Property $ 772,477 Transportation $ 422,639 Economic Environment $ 192,282 Health $ 9,741 Culture & Recreation $ 1,112,457 Total Depreciation - Governmental Activities 1 $ 2,811,179 Busines-Type Activites Utilities - Surface Water Management Culture & Recreation - Dumas Bay Centre $ 410,316 181,776 Total Depreciation - Business -Type Activities $ 592,092 NOTE 9 — PENSION PLANS Washington State Department of Retirement Systems 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 obtained 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. Public Employees' Retirement System (PERS) Plan I, 2 and 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 combination defined benefit/defined contribution plan. Membership is mandatory for all City employees working 70 hours per month for 5 months out of the twelve month period. Membership in the system includes elected officials; state employees; employees of the Supreme, Appeals, and Superior courts (other than judges in judicial retirement system); employees of legislative committees; community and technical colleges, college and university employees (not in national higher education retirement programs); judges of district and municipal courts; and employees of local government. The PERS system includes three plans. 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 option of choosing membership in either PERS Plan 2 or PERS Plan 3. The option must be exercised within 90 days of employment. An employee is reported in Plan 2 until a choice is made. Employees who fail to choose within 90 days default to PERS Plan 3. PERS 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. Plan 1 retirement benefits are vested after an employee completes five years of eligible service. Plan 1 members are eligible for retirement at any age after 30 years of service, or at age 60 with five years of service, or at age 55 with 25 years of service. The annual pension is 2 percent of the average final compensation per year of service, capped at 60 percent. The average final City of Federal Way / 48 compensation is based on the greatest compensation during any 24 eligible consecutive compensation months. If qualified, after reaching age 66 a cost -of -living allowance is granted based on years of service credit and is capped at three percent annually. Plan 2 retirement benefits are vested after an employee completes five years of eligible service. Plan 2 members may retire at age 65 with five years of service, or at age 55 with 20 years of service, with an allowance of 2 percent per year of service of the average final compensation per year of service. The average final compensation is based on the greatest compensation during any eligible consecutive 60-month period. Plan 2 retirements prior to 65 receive reduced benefits. If retirement is at age 55 or older with at least 30 years of service, a 3 percent per year reduction applies; otherwise an actuarial reduction will apply. There is no cap on years of service credit; and a cost -of -living allowance is granted (indexed to the Seattle Consumer Price Index), capped at 3 percent annually. 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 benefit calculated at 1 percent of the average final compensation per year of service. The average final compensation is based on the greatest compensation during any eligible consecutive 60-month period. Plan 3 members become eligible for retirement if they have: at least ten years of service; or five years including twelve months that were earned after age 54; or five service credit years earned in PERS Plan 2 prior to June 1, 2003. Plan 3 retirements prior to the age of 65 receive reduced benefits. If retirement is at age 55 or older with at least 30 years of service, a 3 percent per year reduction applies; otherwise an actuarial reduction will apply. There is no cap on years of service credit; and Plan 3 provides the same cost -of -living allowance as Plan 2. 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 Employee Retirement Benefits Board. There are 1,181 participating employers in PERS. Membership in PERS consisted of the following as of the latest actuarial valuation date for the plans of September 30, 2006: Retirees and Beneficiaries Receiving Benefits 68,609 Terminated Plan Members Entitled to But Not Yet Receiving Benefits 22 567 Active Plan Members Vest 104:574 Active Plan Members Nonvested 51,004 Total 246,754 Funding Policy Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates and Plan 2 employer and employee contribution rates and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at six percent and do not vary from year to year. 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. PERS Plan 3 defined contribution is a non- contributing plan for employers. Employees who participate in the defined contribution portion of PERS Plan 3 do not contribute to the defined benefit portion of PERS Plan 3. The Employee Retirement Benefits Board sets Plan 3 employee contribution rates. Six rate options are available ranging from 5 to 15 percent; two of the options are graduated rates dependent on the employee's age. 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, 2006, were: PERS Plan I PERS Plan 2 PERS Plan 3 Employer* 5.46%* 5.46% 5.46%** Employee 6.00% 3.50% *** * The employer rates include the employer administrative expense fee currently set at 0.19%. ** Plan 3 defined benefit portion only. *** Variable from 5.0% to 15.0% maximum based on rate selected by the PERS 3 member. City of Federal Way / 49 Both the City and employees made the required contributions. The City's required contributions for the years ended December 31 were: PERS Plan I PERS Plan II PERS Plan III 2006 $13,269 $295,665 $49,762 2005 $ 7,769 $166,061 $26,248 2004 $ 5,834 $120,335 $19,113 2003 $ 6,239 $118,973 $10,900 Law Enforcement Officers' and Fire Fighters' Retirement System (LEOFF) Plans 1 and 2 Plan Descd tion LEOFF is a cost -sharing multiple -employer retirement system comprised of two separate defined benefit plans. Membership in the system includes all full time, fully compensated, local law enforcement officers and fire fighters. LEOFF is comprised primarily of non -state employees, with the Department of Fish and Wildlife enforcement officers, who were first included prospectively effective July 27, 2003 being an exception. LEOFF participants 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. LEOFF retirement benefits are financed from a combination of investment earnings, employee and employer contributions, and a special funding situation in which the state pays the remainder through state legislative appropriations. LEOFF retirement benefit provisions are established in state statute and may be amended only by the State Legislature. Plan 1 retirement benefits are vested after an employee completes 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 is as follows: Term of Service Percent of Final Average 20 or more years 2.0% 10 but less than 20 years 1.5% 5 but less than 10 years 1.0% The final average salary 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. If membership was established in LEOFF after February 18, 1974, the service retirement benefit is capped at 60 percent of final average salary. A cost -of -living allowance is granted (indexed to the Seattle Consumer Price Index). Plan 2 retirement benefits are vested after an employee completes five years of eligible service. Plan 2 members may retire at age 50 with 20 years of service, or at age 53 with five years of service, with an allowance of 2 percent of the final average salary per year of service. The final average salary is based on the highest consecutive 60 months. Plan 2 retirements prior to the age of 53 are reduced 3 percent for each year that the benefit commences prior to age 53. The benefit is two percent of average salary per year of service. There is no cap on years of service credit and a cost -of -living allowance is granted (indexed to the Seattle Consumer Price Index), capped at three percent annually. There are 369 participating employers in LEOFF. Membership in LEOFF consisted of the following as of the latest actuarial valuation date for the plans of September 30, 2006: Retirees and Beneficiaries Receiving Benefits 8,723 Terminated Plan Members Entitled to But Not Yet Receiving Benefits 577 Active Plan Members Vest 12,348 Active Plan Members Nonvested 3,543 Total 25,191. Funding Policy Starting on July 1, 2000, Plan 1 employers and employees will 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. Plan 2 employers and employees are required to pay at the level adopted by the Department of Retirement Systems in accordance with 41.45 RCW. City of Federal Way / 50 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 Plan 1 in accordance with the requirements of the Pension Funding Council. 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 methods used to determine the contribution rates are established under state statute in accordance with Chapters 41.26 and 41.45 RCW. The required contribution rates expressed as a percentage of current year covered payroll, as of December 31, 2006 were. LEOFF Plan I LEOFF Plan II Employer 0.19% * 4.90% ** Employee 0.00% 7.85% State N/A 3.11 % * The employer rates do not include the employer administrative expense fee currently set at 0.19%. ** The employer rate for ports and universities is 7.18%. Both the City and employees made the required contributions. The City's required contributions for the years ended December 31 were: LEOFF Plan I LEOFF Plan II 2006 $0 $417,371 2005 $0 $295,470 2004 $0 $256,308 2003 $0 $226,308 Other Local Government Pension Systems - City of Federal Way Employees' Retirement System Effective June 1, 1990, the Federal Way City Council established the Federal Way Employees' Retirement System, per City Ordinance 90-74 and as authorized by the Federal Social Security Act (42 USCA, Section 418 (g)). The Retirement System is a defined contribution pension plan established as an alternative to the Federal Social Security System. During 2006, there were a total of 382 individuals covered by this system. As of the end of the year, 314 remained as active employees of the City and two were drawing retirement benefits. The 68 inactive had left the City's employment and either had been reimbursed their contributions, or the reimbursement was pending, or they elected to have their contributions remain in the plan if the balance was $1,000 or greater. All regular employees of the City of Federal Way are required to participate in the system, with the City matching the employee's required contribution. The employee pays 6.2% and this is matched by the composite of a cash match (approximately 5.2%) and insurance payments (1%) for disability, survivor, accidental death and dismemberment, and lump sum death benefit coverage. Contributions into the plan are tax deferred. Employees are entitled to make voluntary contributions to the plan, assuming that highly compensated and non -highly compensated employees are treated equally. Each payroll period, employees may make a voluntary contribution equal to a minimum of 1% of the participant's compensation, not to exceed 10% of the participant's compensation. Covered payroll for 2006 was $16,924,239 and total City payroll was $21,725,181. Actual City contributions for the year were $1,039,329. Actual employee contributions were $1,264,330. All contributions were invested in instruments arranged through independent investment advisors selected by the Municipal Employers Benefit Trust (MEBT) comirlittee comprised of the cities of Bellevue, Kirkland, Redmond, Edmonds, Mill Creek, Woodinville, and Federal Way but administered by Trautmann Maher & Associates. Retirement System assets are not the property of the City and are not subject to the claims of the City's general creditors. The Federal Way Retirement System assets are with Security Trust Company, N.A. who invests Plan assets. In July 1995, the City implemented the hardship withdrawal and loan provision program. Loans receivable as of December 31, 2006 were $956,221. City of Federal Way / 51 The consulting actuary firm of Trautmann, Maher & Associates has been contracted to provide record keeping, administrative and consulting services related to the Plan. Actuarial determinations are not required because accidental death and dismemberment insurance, long-term disability, survivor income insurance and the lump sum death benefit are provided by a group insurance policy with Standard Insurance Company; and benefits paid to participants upon retirement are limited to: (a) a nonforfeitable, nontransferable annuity contract purchased by the plan's trustee, (b) retirement benefits payable from the employee's account to which no contributions by the City or the participant can be added after retirement, or a single lump -sum payment equal to the accumulated balance in the employee's account as of his retirement date. NOTE 10 —RISK MANAGEMENT The City uses the Risk Management Internal Service Fund to account for its risk financing activities. The City maintains insurance against most normal hazards except for unemployment insurance where it has elected to become fully self -insured. Related premiums received by the Risk Management Fund are used to reimburse the State Employment Security Department for unemployment benefits paid to eligible individuals, and to establish reserves for the payment of estimated future unemployment claims liability. Through its Risk Management Fund, the City is also recovering insurance premium costs for general liability coverage and building reserves for a future general liability self-insurance program. The City's insurance coverage in 2006 remained relatively similar to the coverage for 2005. There were no settlements in excess of insurance for commercially insured activities for 1996 through 2006. During 2006 the City purchased commercial insurance policies from commercial insurers. The following is a summary of coverage in force in 2006. NAME OF COMPANY DETAILS OF COVERAGE LIABILITY LIMITS St. Paul Fire and Marine Pubic Entity Management Liability Insurance Company Protection $10,000,000 Each Claim & Aggregate Annually. Deductible $25,000 St. Paul Fire and Marine Public Official Bond Management Service Included in Crime/Fidelity Coverage, N/A Employee Dishonesty, $100,000 Forgery/Alteration, Insurance Company Director Deductible $1,000 St. Paul Fire and Marine Public Official Bond City Included in Crime/Fidelity Coverage, N/A Employee Dishonesty, $100,000 Forgery/Alteration, Insurance Company Manager Deductible $1,000 General Liability, Auto Liability, $10,000,000 Occurrence, $20,000,000 Aggregate, N/A Underinsured Motorists Coverage, St. Paul Fire and Marine Underinsured Motorists Liability and Law $1,000,000 Garagekeepers Legal Liability. All Limits are Per Occurrence/Aggregate Annually. Insurance Company Enforcement Liability Coverage Deductible $25,000 Statement of Values Limit $50,000,000, Business Income / Extra Expense $1,000,000, Valuable St. Paul Fire and Marine Papers / Accounts Receivable $1,000,000, Rental Income $1,000,000, Electronic Data Insurance Company Property Coverage Processing $1,000,000, Fine Arts $1,000,000. Included in General Liability, Auto Liability and Law Enforcement Liability Above. Auto Physical St. Paul Fire and Marine Auto Liability and Physical Damage Damage -Deductible $1,000 Trucks / Fire Trucks / Ambulances, $250 Pickups / Vans, $250 Insurance Company Coverage Private Passenger Faithful Performance / St. Paul Fire and Marine Fidelity/Employee Dishonesty and ERISA Included in Crime/Fidelity Coverage, N/A Employee Dishonesty, $100,000 Forgery/Alteration, Insurance Company Coverage Deductible $1,000 St. Paul Fire and Marine Insurance Company Inland Marine Limit of $108,000. Deductible $5,000 St. Paul Mercury Ins. Co. Excess Liability Coverage Included In General Liability Premium $10,000,000 Per Accident, $50,000 Perishable Goods, $1,000,000 Hazardous Substances, St. Paul Fire and Marine $100,000 CFC Refrigerants, Deductible $2,500 Each Accident, Extended Business Income 30 Insurance Company Boiler & Machinery Coverage Days, Newly Acquired Locations 365 Days, Service Interrup St. Paul Fire and Marine Insurance Company Employer/Stop Gap Liability Coverage Included in General, Auto and Law Enforcement Liability Limits Referenced Above St. Paul Fire and Marine Included in Crime/Fidelity Coverage, N/A Employee Dishonesty, $100,000 Forgery/Alteration, Insurance Company Public Officials Bond - City Clerk Deductible $1,000 St. Paul Fire and Marine Included in Crime/Fidelity Coverage, N/A Employee Dishonesty, $100,000 Forgery/Alteration, Insurance Company Public Officials Bond - Chief of Police Deductible $1,000 St. Paul Fire and Marine Insurance Company Law Enforcement Liability Coverage Included in General, Auto and Law Enforcement Liability Limits Referenced Above St. Paul Fire and Marine Insurance Company Above Ground Pollution Coverage Included in General, Auto and Law Enforcement Liability Limits Referenced Above City of Federal Way / 52 The City's industrial insurance is provided by Washington State and is administered by the Department of Labor and Industries. Coverage is purchased by means of standard rates per working hour and is computed by the total number of hours worked by employees multiplied by the basic premium rate assigned to the business risk classification. The following are benefits provided by industrial insurance: medical services, damaged clothing, travel expenses, time -loss payments, vocational rehabilitation, partial disability awards, pension awards and survivor benefits. The City is self -insured for unemployment compensation. At December 31, 2006 the City had $879,447 in reserve. 2001 2002 2003 2004 2005 2006 Unemployment Reserve, Jan. lst $ 325,079 $ 454,823 $ 567,171 $ 496,306 $ 603,140 $ 733,297 Unemployment compensation benefits 154,354 166,983 69,871 182,422 183,913 204,396 Claim payments during the year 24,610) (54,635) (140,736) (75,588) (53,756) (58,247) Unemployment Reserve, Dec. 31st $ 454,823 $ 567,171 $ 496,306 $ 603,140 $ 733,297 $ 879,447 NOTE 11 — LONG-TERM DEBT The various categories of long-term debt reflected on the City's financial statements are briefly described in the following paragraphs. General obligation bonds are backed by the City's full faith and credit. Proceeds are typically used for the acquisition or construction of major capital facilities or equipment. "Councilmanic Bonds" are general obligation bonds issued by City Council without voter approval. Under State law, repayment of these bonds must be financed from general City revenues since no additional property taxes can be levied to support related debt service payments. General Obligation bonds approved by the voters are typically repaid through an annual "excess" property tax levy authorized for this purpose by State statute. At year-end 2006 the City had no voter -approved bonds outstanding. With the exception of the 2006 GO Bond, all principal and interest payments on general obligation debts are recorded as expenditures by the City's Debt Service Fund. The compensated absences liability will be liquidated approximately 90 percent by the General Fund, and 10 percent by the Street fund. New Debt Issued On December 28, 2006 the City borrowed $4,100,000 on a two-year tax exempt bond for the purchase of the AMC Theatre site. The interest rate on the bonds is 3.53% and maturity is December 28, 2008. Interest payments on the bond will be funded with interest earned on the $5 million Downtown Redevelopment set aside funds. Final payment will be made with proceeds from the sale of the AMC Theatre site to a buyer who will develop the property in accordance with the City's economic development plan. The following schedules detail the long-term debt activity and balances of the City. City of Federal Way / 53 OUTSTANDING GENERAL OBLIGATION DEBT - BY TYPE December 31, 2006 Amount Beginning Ending Bond Rating Issue Maturity Interest Originally Outstanding Amount Amount Outstanding Description at Issuance Date Date Rate Issued Debt Issued Redeemed Debt GgvcmmenW Activities: General Obligation Bonds: 1997Limited AAA -insured 22-Apr-97 1-Dec-12 5,00-5.30 16,150,000 5,345,000 - 1,685,000 3,660,000 2000 Limited Al 12-Sep-00 1-Dec-15 5.31 2,551,600 1,908,000 153,000 1,755,000 7003 Loan Assumption Nonrated 1-Jul-03 1-Nov-07 7.58 6,168,599 5,958,761 96,676 5,862,085 M03 Limited AAA -insured 15-Nov-03 1-Dec-33 4.676 15,000,000 14,490,000 285,000 14,205,000 2006 GO Bonds Nonrated 28-Dec-06 28-Dec-08 3.53 4.100,400 - 4,100,000 - 4.100.000 Subtotal GO Bonds 43,970,199 27,701,761 4,100,000 2,219,676 29,582,085 Compensated Absences 1,166,635 75,063 41,598 1,200,100 Subtotal GO Bonds plus Compensated Absences 43,970,199 28,868,396 4,175,063 2,261,274 30,782,185 Business -Type Activities: Public Works Trust Fund Loan: PWTL - Kitts Comer Drain Imp 31-Aug-94 l-Jul-14 1;00 233,316 105,183 - 12,936 92,247 PWTL - Kitts Comer Drain Imp 24-Jul-96 1-Jul-14 1.00 1,166,580 585,592 - 64,679 520,913 PWTL - Kitts Comer Drain Imp 4-Sep-97 1-Jul-14 1.00 155,544 85,381 - 8,624 76,757 PWTL - SeaTac Mall Drain Imp 31-May-00 1-Jul-19 1.00 412,500 224,280 - 16,020 208,260 PWTL- SeaTac Mall Drain Imp 14-Au -00 1-Jul-19 1-00 2,062,500 1,121,394 80,100 1,041,294 Subtotal PWTFL 4,030,440 2,121,830 - 182,359 1,939,471 Compensated Absences 45,344 6,106 294 51,156 Subtotal PWTFL plus Compensated Absences 4,030,440 2,167,174 6,106 182,653 1,990,627 Grand Total All Long -Term Debt $ 48,000,639 $ 31,035,570 $ 4,181,169 $ 2,443,927 $ 32,772,812 OUTSTANDING GENERAL OBLIGATION DEBT - BY FUND December 31, 2006 Amount Beginning Ending Originally Outstanding Amount Amount Oustanding Due within Description Issued Debt Issued Redeemed * Debt one year Governmental Long -Term Debt: 1997 Limited 16,150,000 5,345,000 1,685,000 3,660,000 1,770,000 2000 Limited 2,551,600 1,908,000 153,000 1,755,000 160,000 2003 Loan Assumption 6,168,599 5,958,761 - 96,676 5,862,085 5,869,128 2003 Limited 15,000,000 14,490,000 - 285,000 14,205,000 295,000 2006 G.O. Bonds 4,100,000 - 4,100,000 - 4,100,000 Sub -total Governmental Long -Term Debt 43,970,199 27,701,761 4,100,000 2,219,676 29,582,085 8,094,128 Compensated Absences 1,166,635 75,063 41,598 1,200,100 49,933 Total Gov Long -Term Debt plus Comp Abs 43,970,199 28,868,396 4,175,063 2,261,274 30,782,185 8,144,061 Business -Type Long -Term Debt: Enterprise Funds: Public Works Trust Fund Loan 4,030,440 2,121,830 - 182,359 1,939,471 182,359 Sub -total Bus -Type Long -Term Debt 4,030,440 2,121,830 - 182,359 1,939,471 182,359 Compensated Absences 45,344 6,106 294 51,156 960 Total Bus -Type plus Comp Abs LTD 4,030,440 2,167,174 6,106 182,653 1,990,627 183,319 Grand Total All Long -Term Debt $ 48,000,639 $ 31,035,570 $ 4,181,169 $ 2,443,927 $ 32,772,812 $ 8,327,380 *Debt service principal payments in Debt Service Fund include credits of $22,950 from Interlocal agreement with Federal Way Fire District to participate in capital cost obligations with Valley Communications joint venture with the City of Federal Way. City of Federal Way / 54 SCHEDULE OF CHANGES IN LONG-TERM DEBT Period Ended December 31, 2006 Beginning Ending Outstanding Debt Additions Reductions Oustanding Debt Governmental Activities: General Obligation Bonds $ 27,701,761 $ 4,100,000 $ (2,219,676) $ 29,582,085 Compensated Absences 1,1.66,635 75,063 (41,598) 1,200,100 Total Governmental Activities 28,868,396 4,175,063 2,261,274) 30,782 185 Business -Type Activities: Enterprise Funds Public Works Trust Fund Loan 2,121,830 - (182,359) 1,939,471 Com ensated Absences 45,344 6,106 294) 51,156 Tot] Business -Type Activities 2,167,174 6,106 182,653) 1,990,627 Total All Funds $ 31,035,570 $ 4,181,169 $ (2,443,927) $ 19 772,812 SCHEDULE OF DEBT SERVICE REQUIREMENTS TO MATURITY As of December 31, 2006 Governmental Activities Business -Type Activities G. O. Bonds PW Trust Fund Grand Total Year Principal Interest Principal Interest Principal Interest P&I 2007 8,087,085 1,377,072 182,359 19,395 8,269,444 1,396,466 9,665,911 2008 4,907,000 931,842 182,359 17,571 5,089,359 949,413 6,038,772 2009 845,000 751,888 182,359 15,748 1,027,359 767,635 1,794,994 2010 879,000 714,544 182,359 13,924 1,061,359 728,468 1,789,827 2011 918,000 675,211 182,359 12,100 1,100,359 687,312 1,787,671 2012 - 2016 3,151,000 2,872,793 739,317 34,010 3,890,317 2,906,803 6,797,120 2017 - 2021 2,305,000 2,320,989 288,359 5,767 2,593,359 2,326,756 4,920,115 2022 - 2026 2,930,000 1,748,740 2,930,000 1,748,740 4,678,740 2027 - 2031 3,765,000 980,638 - - 3,765,000 980,638 4,745,638 2032 - 2033 1,795,000 128,963 . - - 1,795,000 128,963 1,923,963 Total $ 29,582,085 $ 12,502,677 $ 1,939,471 $ 118,515 $ 31,521,556 $ 12,621,192 1 $ 44,142,749 Computation of Legal Debt Margin Under Washington State law (RCW 39.36.020), a City may incur general obligation debt for general city purposes in an amount not to exceed 2'/2 percent of the value of all taxable property within the City. State law requires all property to be assessed at 100 percent of its true and fair value. Unlimited tax general obligation debt requires an approving vote of the people, and any election to validate such general obligation debt must have a voter turnout of at least 40 percent of those who voted in the last State general election and of those voting, 60 percent must be in the affirmative. The City Council may, by ordinance, authorize the issuance of limited tax general obligation debt in an amount up to 1.5% of the valuation within the City without a vote of the people. No combination of limited or unlimited tax debt may exceed 7'/2 percent of the valuation. The debt service on unlimited tax debt is secured by excess property tax levies, whereas the debt service on limited tax debt is secured by property taxes collected with the City's councilmanic levy. The City's legally remaining debt capacities as of December 31, 2006 are: General Government (no vote required) $ 87,320,745 General Government (3/5 majority vote required) 72,519,927 Parks and Open space (3/5 majority vote required) 181,299,818 Utilities (3/5 majority vote required) 181,299,818 Total Capacity S 522,440,3 8 City of Federal Way / 55 Compensated Absences The City's liability for accrued vacation and compensatory time balances is recorded in the schedule below. Accrued compensated absences for proprietary fund employees are recorded as liabilities in those funds expected to incur the related future expense. Governmental Activities: Current portion $ 49,933 Noncurrent portion 1,150,167 B:tstr�ess- x en Activities . Current portion 930 Noncurrent portion 50,226 Total Compensated Absences 5 1,251,256 Estimated Arbitrage Rebate The Federal Tax Reform Act of 1986 requires issuers of tax-exempt debt of over $5 million to make payments to the United States Treasury of investment interest received at yields that exceed the issuer's tax-exempt borrowing rates. Payments of arbitrage rebate amounts due under these regulations must be made to the U.S. Treasury every five years. The City's estimated rebatable arbitrage amount as of December 31, 2006 is $-0- for its tax-exempt general obligation bond issues subject to the Tax Reform Act issued through that date. Leases The City of Federal Way leases office buildings and land which are accounted for as operating leases. Operating leases do not give rise to property rights or lease obligations, and therefore the results of the lease agreements are not reflected in the City's capital assets. Total Cost for the leases was $133,286 for the year ended December 31, 2006. During the current year lease payments have significantly increased because the City sold the Klahanee Community/Senior Center facility and is leasing it back until the new Community Center is constructed. The lease contract expires April 2007. The future minimum lease payments for these leases are as follows: 2007: $16,076 2008: 7,018 $ 23,094 NOTE 12 — INTERFUND TRANSACTIONS Interfund transfers for the year ended December 31, 2006 were as follows: Interfund Transfers In Out Governmental Funds: General Fund $ 1,383,792 $ 2,060,063 Street Fund 2,105,058 - Utility Tax Fund - 8,153,963 Debt Service 3,885,861 2,830,000 Downtown Redevelopment City Facilities Transportation Nonmajor Governmental Funds Proprietary Funds: Surface Water Management 686,500 - 100,000 76,500 1,780,625 323,580 3,289,949 73,575 14,259 Dumas Bay Centre 121,840 - Internal Service Funds 207,961 29,646 $ 13,561,586 $ 13,561,586 The following describes the amounts transferred out during 2006: General Fund: 0 $1,786,758 to Street Fund to subsidize street maintenance 0 $100,000 to City Facilities CIP (Community Center) for Project Management City of federal Way / 56 + $9,249 for Arts Commission ■ $164,056 to internal service funds for capital contributions Utility Tax Fund: ■ $2,971,861 to Debt Service Fund for prefunding debt service payments ■ $914,000 to Community Center Debt Service ■ $890,625 to Arterial Street Fund overlay program ■ $890,625 to Transportation CIP for various capital projects ■ $625,000 to General Fund for Public Safety Positions ■ $421,000 to Downtown Redevelopment CIP Fund ■ $319,000 to General Fund to subsidize Kenneth Jones Pool Operations ■ $300,000 to Parks CIP for Camp Kilworth Park • $245,962 to General Fund for Celebration Park maintenance & operations • $202,000 to Street Fund for maintenance on bond projects ■ $121,840 to Dumas Bay Centre Fund for Knutzen Family Theatre subsidy • $108,300 to Street Fund for new street lights ■ $70,200 to General Fund for Arts Commission ■ $50,000 to General Fund for Camp Kilworth Park maintenance & operations • $23,550 to General Fund for Red, Whites & Blues Festival Debt Service Fund: ■ $1,250,000 of excess Real Estate Excise Tax to Parks CIP for Camp Kilworth Acquisition • $890,000 of excess Real Estate Excise Tax to Transportation CIP Fund ■ $690,000 of excess Real Estate Excise Tax to Parks CIP Fund City Facilities CIP Fund: ■ $76,500 to Community Center Fund for Federal Way Community Center Transition Transportation CIP Fund: ■ $265,500 to Downtown Redevelopment CIP Fund ■ $50,080 to General Fund for Federal Lobbyist ■ 8,000 of mitigation fees to Street Fund Nonmajor Governmental Funds: ■ $73,575 from CDBG Fund to Transportation Capital Project Fund Internal Service Funds: • $29,646 insurance proceeds from Risk Management Fund to Fleet & Equipment Fund for vehicle replacement Interfund loans for the year ended December 31, 2006 were as follows: Interfund Loans Receivable Payable General Fund $ 20,000 $ - Special Revenue Funds: Community Development Block Grant - 20,000 Total Interfund Loans $ 20,000 $ 20,000 NOTE 13 — CONTINGENCIES AND LITIGATION As of December 31, 2006 there were a small number of claims for damages and lawsuits pending against the City. In the opinion of the City Attorney, however, neither the potential liability for any single claim or lawsuit, nor the aggregate potential liability City of Federal Way / 57 arising from all actions currently pending would materially affect the financial condition of the City. Due to both their uncertainty and immateriality, no liabilities or estimated liabilities have been included in the City's financial statements. NOTE 14 — JOINT VENTURE The "Valley Communications Center" was established August 20, 1976, when an Interlocal Agreement was entered into by the four original participating municipal corporations, including the cities of Renton, Kent, Auburn, and Tukwila, and Federal Way which was formally admitted during 2000. The agreement is sanctioned by the provisions and terms of the Interlocal Cooperation Act pursuant to RCW 39.34. The initial duration of the agreement was five years, and thereafter is automatically extended for consecutive five year -periods. The purpose of the joint operation, hereafter referred to as Valley Com, is to provide improved consolidated emergency communications (dispatch) services for police, fire, and medical aid, to the five participating cities and to several subscribing agencies, which include King County Fire Districts 2, 20, 26, 40, 43, 44, and 47; City of Pacific Police and Fire Departments, City of Algona Police Department, City of Des Moines Police Department, City of Black Diamond Police and Fire Department; SeaTac Fire Department; North Highline Fire Department; King County EMS Units; and Vashon Island Fire Department. Separate agreements between Valley Com and the subscribing agencies have been executed, which set forth conditions of services and rates charged. The allocation of prorated financial participation among the five member cities is the percentage of dispatched calls attributed to each jurisdiction compared to the total estimated dispatched calls, for the current twelve month period ending December 31. The percentages are applied to the current approved budget, less revenue from all other sources. Distribution of the current year net income is based on the same percentages. The 2006 cost distributions for the five member cities are as follows: Dispatchable Percent city Calls of Total Kent 92,808 27.50% Renton 66,415 19.68% Auburn 64,048 18.98% Tukwila 34,956 10.36% Federal Wa 79,286 23.49% Total 337,513 100.00% Valley Com is governed by an Administration Board, composed of the Mayors or designated representatives from the five participating cities of Renton, Kent, Auburn, Tukwila, and Federal Way. The Administration Board is authorized to establish bylaws that govern procedures of the Board and Valley Com's general operations for the following functions: 1) Budget review and recommendations to the legislative bodies of the member cities, and budget adoption after each legislative body has approved the required financial participation for the ensuing year; 2) Approve appointment and/or discharge of the Director; 3) Approve personnel policy and make final decisions on all major policy changes; and 4) Review and approves all contracts. In addition, an Operating Board was established and consists of two members of each participating City's Public Safety Departments, including the heads of such departments or their designees. The Operating Board performs the following functions: 1) Oversees the general operation of Valley Com, and advises and makes recommendations to the Administration Board; 2) Make recommendations on Director selection; 3) Presents proposed policies and budgets to the Administration Board; and 4) Reviews disbursements of funds by the Director. The Director presents a proposed budget to the Operating Board on or before August 15 of each year. Said budget is then presented to the Administrative Board by September 1 of each year. The Administration Board can make changes to the proposed Valley Com budget as it finds necessary, but final approval falls to the legislative body of each member city, in accordance with the provisions of the interlocal agreement. City of Federal Way / 58 In May 1993 Valley Com entered into an agreement with King County to provide joint project management for the acquisition and installation of 800-M11z emergency radio communications system approved by the voters of King County in conjunction with a $57 million levy. In August 1993 Valley Com also entered into an Interlocal Cooperation Agreement with the sub -regions of King County, Seattle, and Eastside Public Safety Communications, which governs the development and installation of the new 800-MHz emergency radio system. Valley Com now provides emergency communication dispatch services to a population of approximately 570,000. Valley Com operates as an enterprise fund and is totally self supporting through the implementation of user fees and the primary source of revenue is provided by charges for calls for service. The 800-MHz emergency radio communications system operated by the agreement with King County is operated as a separate enterprise fund, and the Member Cities have no equity interest in the contributed capital from this system. The share of equity belonging to the five participating cities is shown below. Liabilities are the responsibility of the five participating cities in direct proportion to their equity position. Kent Renton Auburn Tukwila Federal Way Total Equity @ January 1, 2006 $ 5,550,128 $ 3,974,434 $ 3,696,777 $ 2,398,847 $ 2,030,087 $ 17,650,273 Current Year Decrease 30,287 7,116 5,038 (20,504) 18.417 40.354 Equity @ December 31, 2006 S 5,580,415 $ 3,981,550 $ 3,701,815 $ 2,378,343 $ 2,048,504 5 17,690,627 Percent of Equity 31.54% 22.51% 20.93% 13.44% 11.58% 100.00% Percent of 2005 Distribution 27.82% 18.80% 20.01 % 10.88% 22.49% 100.00% During 2000, the Valley Communications Center Development Authority was created to issued $12,758,000 in General Obligation Bonds to finance construction, equipment, and land for a new facility completed in 2002. Each of the five participating cities is responsible for one -fifth of the debt obligation, which is $2,551,600. The basic agreement shall not be terminated until all bonds issued by Valley Communications Center Development Authority have been paid and retired. The City of Federal Way includes its one -fifth share of the bond issue with its general long-term debt. Valley Com is paying the debt service on behalf of the City for 2004 through 2006. The balance of the City of Federal Way's obligation was $2,048,504 at 12/31/2006. A complete set of financial statements is available from: Valley Communications Center, 27519 10e Avenue SE, Kent, WA 98030. City of Federal Way / 59 Combining Statement — Nonmajor Governmental Funds's Description For the Year Ended December 31, 2006 Special Revenue Funds Special Revenue funds are used to account for the proceeds of revenue sources (other than special assessments, expendable trusts or major capital projects) that are legally restricted to expenditures for specified purposes. The Arterial Street Fund accounts for the receipt and expenditure of the State -levied motor vehicle fuel tax distributed to the City in accordance with State R.C.W. 82.36.020. These revenues are to be used for the construction, improvement, chip sealing, seal - coating, and repair of arterial highways and city streets, or for the payment of related municipal indebtedness. The Solid WastelRecycling Fund was established to account for special refuse collection fees used to manage the Solid Waste and Recycling program. The Special Contracts/Studies Fund accounts for receipts and disbursements related to special contracts and special projects where completion will extend beyond the calendar year. The HotellMotel Lodging Tax Fund was established to account for all lodging tax receipts and disbursements related to tourism promotion and acquisition and/or operation of tourism -related facilities. The 2% Percent for Arts Fund was established for the purpose of providing funding for arts projects. The funds are to be used to create a variety of cultural opportunities for citizens and to enhance the cultural environment in the community by encouraging and promoting the creation and placement of art in public places and the incorporation of art into project design. The Federal Way Community Center Fund was established to account for the operation of the new community center. The fund is supported by user fees and designated utility tax transfers. The Community Development Block Grant Fund accounts for the receipt and disbursement of federal grant revenue received through the Department of Housing and Urban Development's Community Development Block Grant Program. Separate subsidiary records are maintained to administer the individual projects accounted for in this fund. The Path and Trails Reserve Fund was established in accordance with State law to accumulate unexpended proceeds of the City's '/2% motor vehicle fuel tax receipts which are restricted in use to the construction and maintenance of paths and trails within City right-of-way. Capital Projects Funds The Capital Project Funds account for the acquisition or construction of major capital facilities with the exception of those facilities financed by proprietary and trust funds. The major sources of revenue for this fund are general obligation bond proceeds, grants from other agencies, local taxes and contributions from other funds. The Parks CIP Fund was established to account for receipts and disbursements related to acquisition, design, construction and any other related parks capital project expenditures. City of Federal Way / 60 CIW OF Federal Way CIO.- of'Federal Way / 61 COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS DECEMBER 31, 2006 ASSETS Equity in pooled cash and investments Retainage in escrow Receivables (net): Interest Due from other governments TOTAL ASSETS LIABILITIES AND FUND BALANCES Liabilities: Vouchers payable Accounts/payroll payable Retainage payable Deposits payable Interfund loans payable Unearned revenue TOTAL LIABILITIES Fund balance: Reserved: Hotel/motel lodging tax Paths & Trails Unreserved: Special revenue funds Capital projects funds TOTAL FUND BALANCES Special Capital Comparative Totals Revenue Projects 2006 2005 $ 649,097 $ 3,410,162 $ 4,059,259 $ 5,963,223 - - - 13,104 823 4,335 5,158 2,767 218,350 149,283 367,633 405,122 868,270 3,563,780 4,432,050 6,384,216 90,822 90,822 81,176 - - - 6,412 20,525 20,525 16,466 20,000 - 20,000 46,000 21,584 21,584 14,075 132,406 20,525 152,931 164,129 169,064 - 169,064 132,628 25,400 - 25,400 15,273 541,400 - 541,400 434,104 - 3,543,255 3,543,255 5,638,082 735,864 3,543,255 4,279,119 6,220,087 TOTAL LIABILITIES AND FUND BALANCE $ 868,270 $ 3,563,780 $ 4,432,050 $ 6,384,216 City of Federal Way / 62 COMBINING BALANCE SHEET NONMAJOR SPECIAL REVENUE FUNDS DECEMBER 31, 2006 Special Arterial Solid Waste Contracts/ Hotel/Motel 2% for the Street Recycling _ Studies Lodging Tax Arts ASSETS Equity in pooled cash & investments $ 14,699 $ 33,636 $ 302,620 $ 165,083 $ 47,135 Receivables (net): Interest 250 79 286 181 - Due from other governments 44,132 94,297 - 13,410 - TOTAL ASSETS 59,081 128,012 302,906 178,674 47,135 LIABILITIES AND FUND BALANCES Liabilities: Vouchers payable - 6,451 - 9,610 22,972 Accounts/payroll payable - _ _ _ Deposits payable Interfund loans payable Unearned revenue 21,584 - - TOTAL LIABILITIES - 28,035 - 9,610 22,972 Fund balance: Reserved: Hotel/motel lodging tax - - 169,064 - Paths & Trails - - _ _ - Unreserved: Special revenue funds 59,081 99,977 302,906 - 24,164 TOTAL FUND BALANCES 59,081 99,977 302,906 169,064 24,164 TOTAL LIABILITIES & FUND BALANCE $ 59,081 $ 128,012 $ 302,906 $ 178,674 $ 47,136 City of Federal Way / 63 COMBINING BALANCE SHEET NONMAJOR SPECIAL REVENUE FUNDS DECEMBER 31, 2006 (continued) Federal Way Community Paths and Community Development Trails Comparative Totals Center Block Grant Reserve 2006 2005 ASSETS Equity in pooled cash & investments $ 60,912 $ 336 $ 24,676 $ 649,097 $ 332,870 Receivables (net): - , Interest - - 27 823 463 Due from other governments - 65,814 697 218,350 383,112 TOTAL ASSETS LIABILITIES AND FUND BALANCES Liabilities: Vouchers payable Accounts/payroll payable Deposits payable Interf ind loans payable Unearned revenue TOTAL LIABILITIES Fund balance: Reserved: Hotel/motel lodging tax Paths & Trails Unreserved: Special revenue funds 60,912 66,150 25,400 868,270 716,445 5,639 46,150 - 90,822 67,953 - - - - 6,412 20,000 - 20,000 46,000 - - - 21,584 14,075 5,639 66,150 - 132,406 134,440 - 169,064 132,628 25,400 25,400 15,273 55,273 - - 541,400 434,104 TOTAL FUND BALANCES 55,273 - 25,400 735,864 582,005 TOTAL LIABILITIES & FUND BALANCE $ 60,912 $ 66,150 $ 25,400 $ 868,270 $ 716,445 City of Federal Way / 64 COMBINING BALANCE SHEET NONIAAJOR CAPITAL PROJECTS FUNDS DECEMBER 31, 2005 ASSETS Equity in pooled cash and investments Retainage in escrow Receivables (net): Interest Due from other governments TOTAL ASSETS LIABILITIES AND FUND BALANCES Liabilities: Vouchers payable Retainage payable TOTAL LIABILITIES Fund balance: Reserved: Capital projects TOTAL FUND BALANCES Comparative Totals Parks 2006 2005 $ 3,410,162 $ 3,410,162 $ 5,630,353 - - 13,104 4,335 4,335 2,304 149,283 149,283 22,010 3,563,780 3,563,780 5,667,771 - - 13,223 20,525 20,525 16,466 20,525 20,525 29,689 3,543,255 3,543,255 5,638,082 3,543,255 3,543,255 5,638,082 TOTAL LIABILITIES AND FUND BALANCE $ 3,563,780 $ 3,563,780 $ 5,667,771 City of Federal Way / 65 COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS For the Year Ended December 31, 2006 Special Capital Comparative Totals Revenue Projects 2006 2005 REVENUES Taxes $ 175,219 $ - $ 175,219 $ 219,042 Intergovernmental 995,513 127,273 1,122,786 1,234,729 Service charges and fees 545,260 545,260 265,191 Development fees - 196,060 196,060 27,438 Interest 30,223 153,498 183,721 67,142 Other - - - 199,173 TOTAL REVENUES 1,746,215 476,831 2,223,046 2,012,715 EXPENDITURES Current: General government Physical environment Transportation Economic environment Culture and recreation Capital outlay TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Bond proceeds Sale of capital assets Transfers in Transfers out 260,872 - 260,872 279,193 313,388 - 313,388 322,151 1,572,052 - 1,572,052 1,495,865 194,879 - 194,879 509,592 147,583 36,577 184,160 120,981 6,380 555,127 561,507 444,020 2,495,154 591,704 3,086,858 3,171,802 (748,939) �(114,873) (863,812) (1,159,087) - 20,000 20,000 - 976,374 2,313,575 3,289,949 5,678,155 (73,575) (73,575) (216,540) TOTAL OTHER FINANCING SOURCES (USESS 902,799 2,333,575 3,236,374 5,461,615 NET CHANGE IN FUND BALANCES 153,860 2,218,702 2,372,562 4,302,528 FUND BALANCES - BEGINNING 582,004 1,324,553 1,906,557 1,917,559 FUND BALANCES - ENDING $ 735,864 $ 3,543,255 $ 4,279,119 $ 6,220,087 City of Federal Way / 66 COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR SPECIAL REVENUE FUNDS For the Year Ended December 31, 2006 Solid Special Hotel/Motel Arterial Waste/ Contracts/ Lodging 2% for the Street Recycling Studies Tax Arts REVENUES Taxes $ - $ - $ - $ 175,219 $ - Intergovemmental 552,563 119,560 - 50,000 - Service charges and fees 76,251 168,905 300,000 4 - Miscellaneous: Interest 14,422 3,195 5,601 6,093 - Other _ _ TOTAL REVENUES 643,236 291,660 305,601 231,316 - EXPENDITURES Current: General government - - 472 _ _ Physical environment - 313,388 - - - Transportation 1,572,052 - - _ _ Economic environment - - - 194,879 - Culture and recreation - - - - 126,256 Capital outlay - - 6,380 - - TOTAL EXPENDITURES 1,572 052 313,388 6,852 294,879 126,256 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (928,816) 21,728) 298,749 36,437 (126,256) OTHER FINANCING SOURCES (USES) Transfers in 890,625 - - - 9,249 Transfers out - TOTAL OTHER FINANCING SOURCES (USES) NET CHANGE IN FUND BALANCES FUND BALANCES - BEGINNING FUND BALANCES - ENDING 890,625 - - - 9,249 (38,191) (21,728) 298,749 36,437 (117,007) 97,272 121,705 4,157 132.627 141,170 $ 59,081 $ 99,977 $ 302,906 $ 169,064 $ 24,163 City of Federal Way / 67 COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR SPECIAL REVENUE FUNDS For the Year Ended December 31, 2006 (continued) REVENUES Taxes Intergovernmental Service charges and fees Miscellaneous: Interest Other TOTAL REVENUES EXPENDITURES Current: General government Physical environment Transportation Economic environment Culture and recreation Capital outlay TOTAL EXPENDITURES Federal Way Community Paths and Community Development Trails Comparative Totals Center Block Grant Reserve 2006 2005 $ - $ - $ - $ 175,219 $ 167,339 264,175 9,215 995,513 1,234,729 100 - - 545,260 265,191 912 30,223 19,258 - - 198,709 100 264,175 10,127 1,746,215 1,885,226 - 260,400 - 260,872 279,193 - - - 313,388 322,151 - - - 1,572,052 1,495,865 - - - 194,879 509,592 21,327 - - 147,583 120,981 - - - 6,380 - 21,327 260,400 - 2,495,154 2,727,782 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (21,227) 3,775 10,127 748,939) (842,556) OTHER FINANCING SOURCES (USES) Transfers in 76,500 - - 976,374 915,625 Transfers out - (73,575) - (73,575 (216,540) TOTAL OTHER FINANCING SOURCES (USES) 76,500 (73,575) - 902,799 699,085 NET CHANGE IN FUND BALANCES 55,273 (69,800) 10,127 153,860 (143,471) FUND BALANCES - BEGINNING - 69,800 15,273 582,004 725,475 FUND BALANCES - ENDING $ 55,273 $ - $ 25,400 $ 735,864 $ 582,004 City of Federal Way / 68 COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES NONMAJOR CAPITAL PROJECTS FUNDS For the Year Ended December 31, 2006 REVENUES Intergovernmental Development Contribution/Donation Miscellaneous: Interest Other TOTAL REVENUES EXPENDITURES Current: Culture and recreation Capital Outlay TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Bond proceeds Sale of General Capital Assets Transfers in Comparative Totals Parks 2006 2005 127,273 $ 127,273 $ 51,703 196,060 196,060 27,438 153,498 153,498 47,884 - - 464 476,831 476,831 127,489 36,577 36,577 - 555,127 555127 444,020 591,704 591,704 444,020 (114,873) (114,873) (316,531) 20,000 20,000 - 2,313.575 2,313,575 4,762,530 TOTAL OTHER FINANCING SOURCES (USES 2,333,575 2,333,575 4,-762,530 NET CHANGE IN FUND BALANCES 2,218,702 2,218,702 4,445,999 FUND BALANCES - BEGINNING 1,324.553 1,324,553 1,192,084 FUND BALANCES - ENDING $ 3,543,255 $ 3,543,255 $ 5,638,083 City of Federal Way / 69 ARTERIAL STREET FUND SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 Variance with Budgeted Amounts Final Budget - Positive ` Original Final Actual Amounts (Negative) , REVENUES Intergovernmental $ 608,894 $ 608,895 $ 552,563 $ (56,332) Service charges and fees - - 76,251 76,251 Interest 3,000 3,000 14,422 11,422 TOTAL REVENUES 611,894 611,895 643,236 31,341 EXPENDITURES Capital outlay 1,502,520 1,599792 1,572,052 27,740 TOTAL EXPENDITURES 1,502,520 1,599,792 1,572,052 27,740 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (890,626) (987,897) (928,816) 59,081 OTHER FINANCING SOURCES (USES) Transfers in 890,625 890,625 890,625 - TOTAL OTHER FINANCING SOURCES (USES) 890.625 890.625 890,625 NET CHANGE IN FUND BALANCES (1) (97,272) (38,191) 59,081 FUND BALANCES - BEGINNING - 97,272 97,272 - FUND BALANCES -ENDING $ (1) $ - $ 59,081 $ 59,081 City of Federal Way / 70 SOLID WASTE AND RECYCLING FUND SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 REVENUES Intergovernmental Service charges and fees Interest TOTAL REVENUES EXPENDITURES Utilities and Environment TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES TOTAL OTHER FINANCING SOURCES (USES) Variance with Budgeted Amounts Final Budget - Positive Original Final Actual Amounts (Negative) $ 133,000 $ 123,280 $ 119,560 $ (3,720) 170,217 170,217 168,905 (1,312) - - 3,195 3,195 303,217 293,497 291.660 (1,837) 349.314 340,130 313.388 26,742 349,314 340,130 313,388 26,742 (46,097) (46.633) (21,728) 24,905 NET CHANGE IN FUND BALANCES (46,097) (46,633) (21,728) 24,905 FUND BALANCES - BEGINNING 50,100 121,705 121,705 FUND BALANCES - ENDING $ 4,003 $ 75,072 $ 99,977 $ 24,905 City of Federal Way / 71 HOTEL/MOTEL LODGING TAX FUND SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 Variance with Buffeted Amounts Final Budget - Positive Original Final Actual Amounts (Negative) REVENUES Taxes $ 150,000 $ 150,000 $ 175,219 $ 25,219 Intergovernmental - - 50,000 50,000 Service charges and fees - - 4 4 Interest - - 6,093 6,093 TOTAL REVENUES 150,000 150,000 231,316 81,316 EXPENDITURES Utilities and Environment TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Transfers in 150,000 282,627 194,879 87,748 150,000 282,627 194,879 87,748 - (132,627) 36,437 169,064 TOTAL OTHER FINANCING SOURCES (USES) - - - - NET CHANGE IN FUND BALANCES - (132,627) 36,437 169,064 FUND BALANCES - BEGINNING - 132,627 132,627 - FUND BALANCES - ENDING $ - $ - $ 169,064 $ 169,064 City of Federal Way / 72 FEDERAL WAY COMMUNITY CENTER SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 Variance with Budgeted Amounts Final Budget - Positive Original Final Actual Amounts (Negative) REVENUES Service charges and fees S. - $ $ 100 $ 100 TOTAL REVENUES - - 100 100 EXPENDITURES Culture and recreation TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) 76,500 21,327 55,173 76,500 21,327 55.173 - (76,500) (21,227) 55,273 Transfers in - 76,500 76,500 - TOTAL OTHER FINANCING SOURCES (USES) - 76,500 76,500 - NET CHANGE IN FUND BALANCES - - 55,273 55,273 FUND BALANCES - BEGINNING - - - - Residual equity transfers in Residual equity transfers in FUND BALANCES - ENDING $ - $ $ 55,273 $ 55.273 City of Federal Way / 73 PATHS AND TRAILS FUND SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 Variance with Budgeted Amounts Final Budget - Positive Original Final Actual Amounts (Negative) REVENUES Taxes $ 9,059 $ 9,059 $ 9,215 $ 156 Interest 500 500 912 412 TOTAL REVENUES 9,559 9,559 10,127 568 EXPENDITURES General government TOTAL EXPENDITURES - - EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 9,559 9.559 10,127 568 OTHER FINANCING SOURCES (USES) Transfers out - - - TOTAL OTHER FINANCING SOURCES (USES) - NET CHANGE IN FUND BALANCES 9,559 9,559 10,127 568 FUND BALANCES - BEGINNING 14,893 15.272 15,273 l FUND BALANCES - ENDING $ 24,452 $ 24,831 $ 25,400 $ 569 City of Federal Way /74 CITY OF Federal Way Federal Way /75 Budget and Actual — Debt Service Fund Description For the Year Ended December 31, 2006 The Debt .Service Fund accounts for the accumulation of resources for the payment of general obligation and special assessment bond principal, interest and related costs. Revenues for this fund consists of allocations of the City's general property tax levy, transfers from the Utility Tax Fund, and/or other revenues designated by the City Council. City of Federal Way / 76 DEBT SERVICE FUND SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES BUDGET AND ACTUAL For the Year Ended December 31, 2006 Variance with Bud eted Amounts Final Budget - Positive Original Final Actual Amounts (Negative) REVENUES Taxes $ 1,900,000 $ 3,150,000 $ 5,499,911 $ 2,349,911 Interest 180,000 180.000 83,917 (96,083) TOTAL REVENUES 2,080,000 3.330.000 5,583,828 2.253.828 EXPENDITURES Debt Service: Principal 2,954,765 2,196,945 2,197,357 (412) Interest 1,466,079 1,418,843 1,367,016 51,827 Other 62.284 63,068 53,675 9,393 TOTAL EXPENDITURES 4.483.128 3,678,856 3,618,048 60,808 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (2.403,128) (348,856) 1,965,780 2,314,636 OTHER FINANCING SOURCES (USES) Transfers in 4,242,273 3,885,861 3,885,861 - Transfers out (1.600,000) (2,830,000) 2,830,000) TOTAL OTHER FINANCING SOURCES (USES) 2,642,273 1,055,861 1,055,861 - NET CHANGE IN FUND BALANCES 239,145 707,005 3,021,641 2,314,636 FUND BALANCES - BEGINNING 2,897,555 3,195,705 3,195,705 - FUND BALANCES - ENDING $ 3,136,700 $ 3,902,710 $ 6,217,346 $ 2,314,636 City of Federal Way /77 Combining Statement — Internal Service Fund's Description For the Year Ended December 31, 2006 Internal Service Funds Internal Service Funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of a government, or to other governments, on a cost -reimbursement basis. The Risk Management Fund accounts for the City's risk financing activities established to minimize adverse effects of losses associated with property and casualty, medical and dental, unemployment and worker's compensation claims. Both risk control (to minimize the losses that strike and organization) and risk financing (to obtain finances to provide for or restore the economic damages of those losses) are involved. The City is currently self -insuring only State Unemployment Compensation. Related premiums received by the fund are used to reimburse the unemployment benefits paid to eligible individuals and to establish reserves for the payment of estimated future unemployment claims liability. The City is also currently recovering costs and building reserves for general liability including property, casualty, errors and omissions and fidelity coverage. The Information Systems Fund was established to account for all costs associated with data processing, telecommunications and the Geographical Information System (GIS). This fund will own and depreciate all non-proprietary fund assets related to these functions, and will charge equipment/software users for both maintenance/operating costs and equipment replacement charges based on depreciation schedules. The Support Services Fund will account for duplication, graphics and other general support services provided to departments and funds throughout the City. The Fleet and Equipment Fund accounts for the cost of maintaining City vehicles and other motorized equipment. Rates charged to user departments are based on the full cost of maintaining equipment items, including the recovery of related depreciation expense. The Buildings and Furnishings Fund accounts for all costs associated with the operation and maintenance of specified City buildings. City building facilities and furnishings will be owned by this Fund, and both maintenance/operating costs and depreciation recovery will be charged City departments and funds. City of Federal Way /78 INTERNAL SERVICE FUNDS COMBINING STATEMENT OF NET ASSETS December 31, 2006 Risk Information Support Fleet and Buildings and Comparative Totals Management Systems Services Equipment Furnishings 2006 2005 ASSETS _ Current assets: Equity in pooled cash & investments $ 4,891,644 $ 2,528,443 $ 188,938 $ 2,572,856 $ 394,523 $ 10,576,404 $ 10,046,229 Prepaid postage - 5,000 - - 5,000 5,000 Receivables (net): Accounts and contracts - - - - - - Interest 3,695 3,036 223 3,023 424 10,401 12,027 TOTAL CURRENT ASSETS 4,895,339 2,531,479 194,161 2,575,879 394,947 10,591,805 10,063,256 Noncurrent assets Capital assets: Buildings / Structures - - - - 15,905,607 15,905,607 4,060,510 Machinery/fumiture/equipment - 5,168,540 235,523 5,317,868 89,869 10,811,800 10,349,224 Less accumulated depreciation - (3,447,354) (137,000) (3,039,888) (990,704) (7,614,946) (8,960,122) TOTAL NONCURRENT ASSETS - 1,721,186 98,523 2,277,980 15,004,772 19,102,461 5,449,612 TOTAL ASSETS 4,895,339 4,252,665 292,684 4,853,859 15,399,719 29,694,266 15,512,868 LIABILITIES Current liabilities: Vouchers/payroll payable 18,879 30,609 17,794 37,819 34,890 139,991 216,378 Deposits payable - - - - 500 500 500 Compensated absences - 1,891 - 47 3 1,941 1,764 TOTAL CURRENT LIABILITIES 18,879 32,500 17,794 37,866 35,393 142,432 218,642 Long-term liabilities: Compensated absences payable - 43,554 1,076 58 44,688 40,641 TOTAL LONG TERM LIABILITIES - 43,554 - 1,076 58 44,688 40,641 TOTAL LIABILITIES 18,879 76,054 17,794 38,942 35,451 187,120 259,283 NET ASSETS Invested in capital assets 1,721,186 98,523 2,277,980 15,004,772 19,102,461 5,449,612 Unrestricted 4,876,460 2,455,425 176,367 2,536,937 359,496 10,404,685 9,803,973 TOTAL NET ASSETS $ 4,876,460 $ 4,176,611 $ 274,890 $ 4,814,917 $ 15,364,268 $ 29,507,146 $ 15,253,585 City of Federal Way / 79 INTERNAL SERVICE FUNDS COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS For the Year Ended December 31, 2006 Risk Information Support Fleet and Buildings and Comparative Totals Management Systems Services Equipment Furnishings 2006 2005 OPERATING REVENUES: Service charges and fees $ 587,682 $ 1,480,103 $ 162,593 $ 1,213,733 $ 590,116 $ 4,034,227 $ 4,345,876 Miscellaneous 51,302 13,492 3,088 67,882 119,893 TOTAL OPERATING REVENUES 638,984 1,493,595 165,681 1,213,733 590,116 4,102,109 4,465,769 OPERATING EXPENSES: Personal services 641,519 - 36,183 69,087 746,789 763,377 Materials and supplies 55,384 21,034 349,212 32,235 457,865 394,677 Services and charges 59,449 501,571 108,512 281,371 448,273 1,398,176 1,397,954 Intergovernmental , 96,469 -. 26 727 97,222 82,711 Insurance 352,189 -. - - - 352,189 256,411 Claims 82,198 - - - - 82,198 113,290 Depreciation - 407,286 29,310 472,611 880,244 1,789,451 1,219,215 TOTAL OPERATING EXPENSES 492,836 1,702,229 158,856 1,139,403 1,430,566 4,923,890 4,227,635 OPERATING INCOME (LOSS) 146,148 (208,634) 6,825 74,330 (840,450) (821,781) 238,134 NON -OPERATING REVENUES (EXPENSES) Interest income 134,410 112,207 9,038 110,756 15,403 380,814 244,987 Gains/losses from disposal of fixed assets (22,844) (161116) (1,391) _ _ (863,766) (904,117) (57,359) TOTAL NON -OPERATING REVENUES NET OF EXPENSES 134,410 89,363 (8,078) 109,365 (848,363) (523,303) 187,628 INCOME (LOSS) BEFORE CONTRIBUTIONS & TRANSFERS 280,558 (119,271) (1,253) 183,695 (1,688,813) (1,345,084) 425,762 Transfers in - 116,970 - 83,251 7,740 207,961 511,641 Transfers out (29,646) - - - - (29,646) (21,263) Capital contributions - 257,391 - 98,601 15,064,338 15,420,330 901,973 CHANGE IN NET ASSETS 250,912 255,090 (1,253) 365,547 13,383,265 14,253,561 1,818,113 TOTAL NET ASSETS, BEGINNING 4,625,548 3,921,521 276,143 4,449,370 1,981,003 15,253,585 13,435,472 TOTAL NET ASSETS, ENDING $ 4,876,460 $ 4,176,611 $ 274,890 $ 4,814,917 $ 15,364,268 $ 29,507,146 $ 15,253,585 City of Federal Way / 80 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from users Cash payments to suppliers for goods and services Cash payments to employees Cash payments to claimants and insurance Cash payments to other gvts for goods and services Other operating receipts NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers in Transfers out NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition ofcapital assets Proceeds from sale of fixed assets NET CASH PROVIDED (USED) FOR CAPITAL AND RELATED FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Receipts of interest NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES NET INCREASE (DECREASE) INCASH AND CASH EQUIVALENTS CASH & CASH EQUIVALENTS, JANUARY 1 CASH & CASH EQUIVALENTS, DECEMBER 31 INTERNAL SERVICE FUNDS COMBINING STATEMENT OF CASH FLOWS For the Year Ended December 31, 2006 Risk Information Support Fleet and Buildings and Comparative Totals Management Svstems Services Equipment Fumishinps 2006 2005 _ $ 587,682 $ 1,480,103 $ 162,593 $ 1,213,733 $ 590,116 $ 4,034,227 $ 4,370,876 (54,539) (663,746) (126,521) (609,735) (477,797) (1,932,338) (1,730,128) (636,782) - (36,721) (69,152) (742,655) (798,488) (434,387) - - - - (434,387) (369,701) - (96,469) (26) (727) (97.222) (92,711) 51,302 13,492 3,088 - - 67,882 119,993 150,058 96,598 39,160 567,251 42,440 895,507 1,509,741 - 116,970 83,251 7,740 207,961 490,378 (29,646) - - - - (29,646) - (29,646) 116,970 - 83,251 7,740 178,315 490,378 (249,434) (34,183) (653,491) - (937,108) (1,351,941) - - 11,020 - 11,020 16,667 - (249,434) (34,183) 642,471) - (926,088) (1,335,274) 135,308 112,736 8,073 111,151 15,173 382,441 234,654 135,308 112,736 8,073 111,151 15,173 382,441 234,654 255,720 76,870 13,050 119,182 65,353 530,175 899,499 4,635,924 2,451,573 175,888 2,453,674 329,170 10,046,229 9,146,730 4,891,644 2,528,443 188,938 2,572,856 394,523 10,576,404 10,046,229 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating income 146,148 Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation expense - (Increase)decreasein accounts receivable - Increase(decrease)in vouchers/accounts payable 3,910 Increase(decrease)in accrued payroll/ - Increase(decrease) compensated absences payable Increase(decrease)in deposits payable - Total Adjustments 3,910 305,232 32,335 492,921 882,890 1,717,288 1,271,607 (208,634) 6,825 74,330 (840,450) (821,781) 238,134 407,286 29,310 472,611 880,244 1,789,451 1,219,215 - - - - - 25,000 (106,791) 3,025 20,848 2,711 (76,297) 62,503 4,737 (538) (65) 4,134 1. (35,111) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 150,058 $ 95.593 $ 39,160 $ 567,2-51 $ 42,440 $ 895,507 $ 1.509,741 Noncash investing, capital, and financing activities: Other Contributions of capital assets $ - $ 257,391 $ - $ 98,601 $ 15,064,338 $ 15,420,330 $ 901,973 City of Federal Way / 81 Capital Assets Used in the Operation of Governmental funds City of Federal Way / 82 CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS COMPARATIVE SCHEDULE BY SOURCE December 31, 2006 and 2005 2006 2005 GOVERNMENTAL FUNDS CAPITAL ASSETS Land Buildings Improvements other than buildings Machinery and equipment Infrastructure Construction in progress TOTAL GOVERNMENTAL FUNDS CAPITAL ASSETS $ 41,290,118 $ 37,261,732 504,835 15,564,801 17,334,900 16,549,392 184,000 184,000 8,475,382 3,012,313 37,950,972 24,175,997 INVESTMENTS IN GOVERNMENTAL FUNDS CAPITAL ASSETS BY SOURCE: General Fund Special Revenue Funds Capital Project Funds Donations TOTAL GOVERNMENTAL FUNDS CAPITAL ASSETS 105,740,207 96,748,235 26,533,455 20,735,705 2,528,770 2,528,770 66,958,180 63,763,958 91719,802 9,719,802 $ 105.740.207 $ 96,748,235 This schedule presents only the historical cost of capital asset balances (no depreciation expenses) related to governmental funds. Accordingly, the capital assets reported in internal service funds are excluded from the above amounts. Generally, the capital assets of the internal service funds are included as governmental activities in the statement of net assets. City of Federal Way / 83 CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS SCHEDULE BY FUNCTION AND ACTIVITY December 31, 2006 Function and Activity Land Improvements Other than Buildings Buildings Machinery and Equipment Infrastructure Construction in Progress Comparative Totals 2006 2005 GENERAL GOVERNMENT Miscellaneous general government $ 10,578,435 $ - $ 19,973 $ 184,000 $ - $ 10,782,408 $ 21,813,988 TOTAL GENERAL GOVERNMEI 10,578,435 19,973 184,000 10,782,408 21,813,988 CULTURE AND RECREATION 30,711,683 $504,835 17,314,927 24,135,367 72,666,812 55,837,482 TOTAL CULTURE & RECREATION 30,711,683 504,835 17,314,927 24,135,367 72,666,812 55,837,482 TRANSPORTATION Streets and traffic $ 8,475,382 13,815,605 22,290,987 19,096,765 TOTAL TRANSPORTATION 8,475,382 13,815,605 22,290,987 19,096,765 TOTAL GENERAL FIXED ASSETS BY FUNCTION $ 41,290,118 $504,835 $ 17,334,900 $ 184,000 $ 8,475,382 $ 37,950,972 $ 105,740,207 $ 96,748,235 This schedule presents only the historical cost of capital asset balances (no depreciation expenses) related to govemmental funds. Accordingly, the capital assets reported in internal service funds are excluded from the above amounts. Generally, the capital assets of the internal service funds are included as governmental activities in the statement of net assets. City of Federal Way / 84 CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS SCHEDULE OF CHANGES BY FUNCTION AND ACTIVITTY For the Year Ended December 31, 2006 GENERAL GOVERNMENT Miscellaneous general government TOTAL GENERAL GOVERNMENT CULTURE AND RECREATION TOTAL CULTURE AND RECREATION TRANSPORTATION Streets and traffic TOTAL TRANSPORTATION Governmental Governmental Funds Funds Capital Assets Capital Assets 1/1/2006 Additions Deductions 12/31/2006 $ 21,813,988 $ 4,028,386 $ 15,059,966 $ 10,782,408 21,813,988 4,028,386 15,059,966 10,782,408 55,837,482 16,829,330 72,666,812 55,837,482 16,829,330 - 72,666,812 19,096,765 5,463,069 2,268,847 22,290,987 19,096,765 5,463,069 2,268,847 22,290,987 TOTAL GENERAL FIXED ASSETS $ 96,748,235 $ 26,320,785 $ 17,328,813 $ 105,740,207 This schedule presents only the historical cost of capital asset balances (no depreciation expenses) related to governmental funds. Accordingly, the capital assets reported in internal service funds are excluded from the above amounts. Generally, the capital assets of the internal service funds are included as governmental activities in the statement of net assets. Croy oj'Federal Wai• / 85 Statistical Section The statistical section presents detailed information as a context for understanding what the information in the financial statements and note disclosures say about the City's overall financial health. The following are the five categories of information presented in this section. Financial Trends — These schedules contain trend information to help the reader understand how the City's financial performance and well-being have changed over time. Revenue Capacity — These schedules contain information to help the reader assess the City's most significant local revenue sources, property tax and sales tax. Debt Capacity — These schedules present information to help the reader assess the affordability of the City's current levels of outstanding debt and the City's ability to issue additional debt in the future. Demographic and Economic Information — These schedules offer demographic and economic indicators to help the reader understand the environment within which the City's financial activities take place. Operating Information — These schedules contain service and infrastructure data to help the reader understand how the information in the City's financial report relates to the services the city provides and the activities it performs. City of Federal Way / 86 CITY OF Federal Way Federal Way / 87 Governmental activities Invested in capital assets, net of related debt Restricted Unrestricted Total governmental activities net assets Business -type activities Invested in capital assets, net of related debt Restricted Unrestricted Total business -type activities net assets Primary government Invested in capital assets, net of related debt Restricted Unrestricted Total primary government net assets Source: City of Federal Way Finance NET ASSETS BY COMPONENT Last Four Fiscal Years 2003 2004 2005 2006 $ 43,162,298 $ 60,746,134 $ 70,138,350 $ 93,835,163 37,806,176 37,262,541 45,017,742 38,359,454 15,686,213 11,052,383 13,292,837 15,051,966 96,654,687 109,061,058 128,449,929 147,246,583 39,559,494 41,735,500 42,294,741 43,697,633 14,148 20,289 18,880 26,439 7,794,729 7,032,804 7,206,807 7,467,417 47,368,371 48,788,593 49,520,428 51,191,489 82,721,792 102,481,634 112,433,091 137,532,796 37,820,324 37,282,830 45,036,622 38,385,893 23,480,942 18,085,187 20,499,644 22,519,383 $ 144,023,058 $ 157,849,651 $ 177,969,357 $ 198,438,072 Note: All amounts are reported on the accrual basis. Amounts presented from year of implementation of GASB-34 (2003) forward. City of Federal Way / 88 CHANGES IN NET ASSETS Last Four Fiscal Years Fiscal Year 2003 2004 2005 2006 Expenses Governmental activities: General government $ 5,601,311 $ 6,304,256 $ 5,539,682 $ 4,364,710 Security ofpersons and property 15,597,612 17,374,845 16,825,123 19,906,722 Transportation 5,389,975 4,098,790 5,451,324 5,628,100 Physical environment 351,023 295,537 322,151 313,388 Economic environment 2,923,756 2,953,073 3,095,391 3,162,089 Health and human svcs 607,199 693,804 631,133 622,761 Culture and recreation 4,455,865 4,914,349 4,789,920 5,172,663 Interest on long-term debt 1,683,028 1,764,077 1,541,930 1,420 691 Total governmental activities expenses 36,609,769 38,388,730 38.196,654 40,591,124 Business -type activities: Surface Water Mgmt 3,380,690 3,282,427 2,995,074 3,142,613 Dumas Bay Center 935,422 879,870 819.515 925,825 Total business -type activities expenses 4,316.1 12 4.162,297 3,814,589 4,068,438 Total primary government expenses 5 40,925.881 5 42,55I,027 5 42,0I I,?43 S 44.659,562 Program Revenues Governmental activities: Charges for services $ 6,746,303 $ 9,413,965 $ 9,935,656 $ 9,446,764 Operating grants and contributions 360,000 32,415 1,228,979 1,512,394 Capital grants and contributions _ 10,069,756 _ 7,214,776 4,250,635 5,973,071 Total governmental activities program revenues 17,176,059 16,661,156 15,415,270 16,932,229 Business -type activities: Charges for services $ 4,041,063 $ 4,249,020 $ 4,100,623 4,130,179 Operating grants and contributions 168,555 535,645 - 1,113,010 Capital grants and contributions 757,578 478,030 Total business -type activities program revenues 4,967, 196 5,262,695 4,100,623 5,243,189 5 22,143,25E $ 21,923,851 S IMIS,693 S 22,175,418 Net (Expense)/Revenue Governmental activities 19,433,710 21,727,574 22,781,384 23,658,895 Business -type activities (651,084) (1,100,398) (286,034) (1,174,751) General Revenues and Other Changes in Net Assets Governmental activities: Taxes Property tax 8,200,955 8,121,088 8,442,172 8,892,558 Sales tax 10,547,534 10,546,218 11,305,537 12,409,718 Utility tax 7,072,757 7,554,580 8,326,951 9,043,449 Real estate excise tax 2,851,866 3,078,898 4,695,984 5,499,911 Other taxes 3,598,213 3,208,844 3,527,596 4,059,732 Other 3,791,345 1,761,036 5,997,384 2,658,762 Transfers (116,813) (203,190) (126,369) (107,581) Total governmental activities 35,945,857 34,067,474 42,169,255 42,456,549 Business -type actitivies: Other 141,980 116,634 319,432 388,729 Transfers 116,813 203,190 126,369 107,581 Total business -type actitivies 258,793 319,8?4 445,901 496.310 Total primary government 5 36.204,650 $ 34,387,298 S 42415,056 5 42,952.859 Change in Net Assets Governmental activities $ 16,512,147 $ 12,339,900 $ 19,387,871 $ 18,797,654 Business -type activities $ 909,877 $ 1,420,222 $ 731,835 $ 1,671,061 Total primary government $ 17,422,024 $ 13,760,122 $ 20,119,706 $ 20,468,715 Source: City of Federal Way Finance City of Federal Way / 89 GOVERNMENT -!FIDE REVENUES BY SOURCE AND EXPENDITURES BY FUNCTION Last Four Fiscal Years 2003 2004 2005 2006 Program Revenues Charges for Services $ 12,459,591 $ 13,662,985 $ 14,036,279 $ 13,576,943 Operating Grants and Contributions 528,555 568,060 1,228,979 2,625,404 Capital Grants and Contributions 10,827,334 7,692,806 4,250,635 5,973,071 General revenues Property tax 8,200,955 8,121,088 8,442,172 8,892,558 Sales tax 10,547,534 10,546,218 11,305,537 12,409,718 Utility tax 7,072,757 7,554,580 8,326,951 9,043,449 Real estate excise tax 2,851,866 3,078,898 4,695,984 5,499,911 Other taxes 3,598,213 3,208,844 3,527,596 4,059,732 Other revenue 1,077,039 751,020 1,105,760 736,918 Unrestricted Grants & Contributions 212,576 176,928 146,000 - Investment Earnings 937,225 954,366 2,025,243 3,194,690 Disposition of capital assets 34,260 (4,644) 3,039,813 (884,117) Total Revenues $ 58,347,905 $ 56,311,149 $ 62,130,949 $ 65,128,277 Expenses/Expenditures General Government $ 5,601,311 $ 6,304,256 $ 5,539,682 $ 4,364,710 Security of Persons & Property 15,597,612 17,374,845 16,825,123 19,906,722 Transportation 5,389,975 4,098,790 5,451,324 5,628,100 Physical Environment 351,023 295,537 322,151 313,388 Economic Environment 2,923,756 2,953,073 3,095,391 3,162,089 Health 607,199 683,804 631,133 622,761 Culture & Recreation 4,455,865 4,914,348 4,789,920 5,172,663 Interest on long-term debt 1,683,028 1,764,077 1,541,930 1,420,691 Surface Water Management 3,380,690 3,282,428 2,995,074 3,142,613 Dumas Bay Centre 935,422 879,870 819,515 925,825 Total Expenses/Expenditures $ 40,925,881 $ 42,551,028 $ 42,011,243 $ 44,659,562 Source: City of Federal Way Finance City of Federal Way / 90 General fund Reserved Unreserved Total general fund All Other Governmental Funds Reserved Unreserved, reported in: Special revenue funds Capital projects funds Debt service funds Total all other governmental funds FUND BALANCES OF GOVERNMENTAL FUNDS Last Four Fiscal Years 2003 2004 2005 2006 $ 430,890 $ 187,011 $ 14,510 $ 278,778 7,578,723 2,658,031 4,522,705 6,492,057 $ 8,009,613 $ 2,845,042 $ 4,537,215 $ 6,770,835 $ 278,130 $ 180,825 $ 147,901 $ 194,463 1,578,817 1,740,228 1,652,622 2,772,153 33,324,511 32,542,775 39,805,812 31,863,330 2,599,653 2,826 228 3,195,705 6,217,346 5 37,781,111 $ 37,290,056 $ 44,802,040 $ 41,047,292 Source: City of Federal Way Finance Note: Amounts presented from year of implementation of GASB-34 (2003) forward. City of Federal Way / 91 CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS Last Four Fiscal Years 2003 2004 2005 2006 Revenues Taxes $ 32,022,334 $ 32,553,302 $ 36,310,754 $ 39,334,751 Licenses, fees and permits 1,000,250 1,235,039 2,247,651 2,089,844 Intergovernmental 12,313,459 10,111,537 5,479,614 8,047,243 Charges for services 3,965,992 4,200,528 4,927,163 6,355,262 Development Fees 2,565,215 3,167,605 2,040,378 196,060 Fines and Forfeitures 887,071 810,793 720,464 805,598 Investment earnings 701,311 744,435 1,557,935 2,447,996 Other revenues 1,093,109 751,025 1,065,664 717,922 Total revenues 54,548,741 53,574,264 54,349,623 59,994,676 Expenditures General government 5,492,123 6,107,564 5,462,633 3,944,288 Security of persons and property 15,463,833 16,982,135 16,988,412 19,909,858 Transportation 5,358,543 4,788,954 5,080,577 5,373,983 Physical Environment 351,456 289,921 322,151 313,388 Economic Environment 2,883,079 2,944,584 3,119,831 3,055,426 Health 603,184 679,655 634,061 613,800 Culture and Recreation 3,507,392 3,927,933 3,859,465 4,108,813 Debt Service Principal 14,159,881 3,768,044 2,933,231 2,197,357 Interest/fiscal charges/admin fees 1,703,165 1,764,077 1,518,384 1,420,691 Capital Outlay 22,779,620 17,609,080 8,228,486 24,412,303 Total expenditures 72,302,276 58,861,947 48,147,231 65,349,907 Excess of revenues over (under) expenditures (17,753,535) (5,287,683) 6,202,392 (5,355,231) Other Financing Sources (Uses) GO bond proceeds 21,168,599 - 4,100,000 Sale of capital assets 209,527 3,618,512 20,000 Transfers in 21,037,023 15,615,639 15,650,064 13,231,785 Transfers out (20,390,141) (15,983,582) (16,266,811) (13,517,681) Total other financing sources (uses) 22,025,008 (367,943) 3,001,765 3,834,104 Net change in fund balances $ 4,271,473 $ (5,655,626) $ 9,204,157 $ (1,521,127) Debt service as a percentage of noncapital expenditures 47.1% 15.5% 12.6% 9.7% Source: City of Federal Way Finance Note: Amounts presented from year of implementation of GASB-34 (2003) forward. City of Federal Way / 92 ASSESSED AND ESTIMATED ACTUAL VALUE OF TAXABLE PROPERTY* Last Ten Fiscal Years Total City Percent Fiscal Personal State Public Direct Increase Year Real PropertX Property Service Property Total Tax Rate (Decrease) 1997 3,961,545,010 155,884,327 79,303,838 4,196,733,175 1.56 5.5% 1998 4,152,466,303 158,019,169 76,348,173 4,386,833,645 1.55 4.5% 1999 4,490,661,284 171,187,056 90,322,059 4,752,170,399 1.53 8.3% 2000 4,932,362,526 187,812,046 93,021,743 5,213,196,315 1.49 9.7% 2001 5,322,237,420 226,854,474 101,339,376 5,650,431,270 1.41 8.4% 2002 51604,164,978 227,961,155 107,761,209 5,939,887,342 1.38 5.1% 2003 5,992,899,727 193,519,890 105,924,009 6,292,343,626 1.34 5.9% 2004 6,218,643,830 181,366,723 102,350,559 6,502,361,112 1.30 3.3% 2005 6,937,653,592 225,118,781 89,220,328 7,251,992,701 1.27 11.5% 2006 7,689,395,358 235,157,554 87,062,687 8,011,615,599 1.22 10.5% * Real, personal, and state public service property has been assessed at 100% of the estimated value. Source: King County Assessor's Office. Note: These figures includes all final tax adjustments, omits and senior citizen exempted property. This total assessed value was reduced by senior citizen exemptions (no tax amounts) of $29,883,105 and prior year omits of $920,289 yielding a regular levy value of $6,471,557,718. These assessed valuations are the basis for the following year's tax levy. City of Federal Way / 93 PROPERTY TAX RATES AND LEVIES, DIRECT AND OVERLAPPING GOVERNMENTS For the Last Ten Fiscal Years City Direct Rates Overlapping Rates City of Federal Way Emergency Fiscal Federal School King Washington Green River Port of Fire District Medical Year Way District #210 County State Flood Zone Seattle #39 Library Services Total TAX RATES PER $1,000 OF ASSESSED VALUATION 1997 1.56 5.06 2.13 3.52 0.05 0.28 1.58 0-62 0.25 15.05 1998 1.55 4.65 1.85 3.51 0.05 0.26 1.50 0.60 - 13.97 1999 1.53 4.56 1.77 3.36 0.05 0.24 1.50 0.59 0.29 13.89 2000 1.49 4.42 1.69 3.30 0.05 0.22 1.50 0.59 0.27 13.53 2001 1.41 4.44 1.55 3.15 0.05 0.19 1.45 0.56 0.25 13.04 2002 1.38 4.16 1.45 2.99 0.05 0.19 1.50 0.53 0.25 12.50 2003 1.34 4.28 1.35 2.90 0.05 0.26 1.50 0.54 0.24 12.46 2004 1.30 4.20 1.43 2.76 0.05 025 1.50 0.53 0.24 12.26 2005 1.27 4.30 1.38 2.69 0.05 0.25 1.50 0.53 0.23 12.21 2006 1.22 4.26 1.33 2.50 0.04 0.23 1.50 0.53 0.22 11.84 DETAIL OF TAX RATES FOR 2006 Basic Rate 1.22 - 1.06 2.50 0.04 0.23 1.50 0.46 - 7.01 Voted Rate - 4.26 0.27 - - - 0.09 0.22 4.83 TAX LEVIES 1997 6,180,735 28,476,471 268,141,201 444,672,037 599,125 35,647,528 8,843,258 43,661,239 31,533,777 867,755,371 1998 6,474,762 27,530,445 248,678,961 472,459,927 635,052 35,646,835 8,378,714 46,603,642 26,137,500 872,545,838 1999 6,667,028 28,468,974 264,133,712 500,994,725 714,606 35,647,362 8,596,565 51,173,675 43,212,202 939,608,849 2000 7,030,723 29,878,996 278,515,900 545,390,795 748,642 35,647,430 8,596,565 54,618,346 45,070,501 1,005,497,898 2001 7,305,894 32,859,841 290,369,516 589,103,721 786,904 35,646,678 9,906,591 59,634,503 46,122,721 1,071,736,369 2002 7,764,913 33,552,460 304,062,327 627,772,703 799,554 39,806,235 11,061,131 64,373,926 52,497,313 1,141,690,562 2003 7,941,900 36,639,879 302,100,182 648,995,138 849,988 58,003,521 11,774,814 72,580,170 54,088,854 1,192,974,445 2004 8,117,874 38,051,680 335,853,716 647,490,235 873,826 59,657,092 12,467,237 74,860,405 55,704,127 1,233,076,192 2005 8,248,919 40,744,820 342,395,871 666,827,056 901,356 62,779,505 13,062,586 78,374,467 57,476,670 1,270,811,250 2006 8,800,989 43,672,564 357,240,140 672,185,668 922,666 62,785,749 14,108,124 85,715,008 59,154,623 1,304,585,531 Source: King County Assessor's Office and King County Department of Finance City of Federal Way / 94 PRINCIPAL TAXPAYERS Current Year and Ten Years Ago 2006 % of Total Assessed Assessed Tax ayer Type of Business Valuation Rank Valuation (A) Weyerhaeuser Real Estate Co. Real Estate $ 167,414,932 1 2.09% Harsch Investment Properties (Ross Plaza) Shopping Center 49,261,700 2 0.61 % Puget Sound Energy Electric/Gas 48,104,743 3 0.60% Steadfast Commons Mall Shopping Center 47,456,212 4 059% Qwest Corporation Inc. Communications/Telephone 27,144,640 5 0.34% Red Mortgage Capital Inc Finance 24,067,000 6 0.30% BRE Properties Real Estate Management 21,470,823 7 0.27% Fred Meyer Retailer / Wholesaler 21,203,901 8 0.26% Virginia Mason Clinic Medical Services 17,430,692 9 0.22% Campus Business Parks LLC Real Estate Invest/Holding 17,415,900 10 0.22% Costco Retailer / Wholesaler 15,284,689 11 0.19% Wells Fargo Finance 13,319,700 12 0.17% Apple Hospitality Five Inc Hospitality 13,342,900 13 0.17% Quadrant Corporation Real Estate Management 6,565,600 14 0.08% $ 489,483,432 Source: City of Federal Way Business License & Community Development Department 1997 % of Total Assessed Assessed Valuation hank Valuation A) $ 129,666,252 1 3.26% 12,992,000 5 0.33% 12,932,115 6 0.33% 51,503,700 2 1.29% 32,253,639 3 0.81% 10,070,252 8 0.25% 10,756,078 7 0.27% 9,515,843 10 0.24% 6.11% $ 269,689,879 6.78% City of Federal Way / 95 PROPERTY TAX LEVIES AND COLLECTIONS For the Last Ten Fiscal Years Ratio of Total Ratio of Percent of Delinquent Total Tax Outstanding Delinquent Fiscal Total Current Tax Current Tax Tax Total Tax Collections to Delinquent Taxes to Year Tax Levy Collections Collected Collections Collections Total Tax Lea Taxes Total Tax Lev 1997 6,180,735 6,041,927 97.8% 125,222 6,167,149 99.8% 198,240 3.2% 1998 6,474,762 6,339,081 97.9% 138,180 6,477,261 100.0% 187,806 2.9% 1999 6,667,028 6,510,516 97.7% 135,953 6,646,469 99.7% 197,059 3.0% 2000 7,030,723 6,858,636 97.6% 131,554 6,990,190 99.4% 249,607 3.6% 2001 7,305,894 7,107,918 97.3% 145,498 7,253,416 99.3% 302,374 4.1% 2002 7,700,412 7,471,822 97.0% 163,181 7,635,003 99.2% 342,855 4.5% 2003 7,912,598 7,740,741 97.8% 243,165 7,983,906 100.9% 269,323 3.4% 2004 8,119,460 7,945,659 97.9% 184,756 8,130,415 100.1% 225,762 2.8% 2005 8,248,919 8,082,340 98.0% 160,685 8,243,025 99.9% 230,838 2.8% 2006 8,933,515 8,584,565 96.1% 345,379 8,929,944 100.0% 231,743 2.6% Source: Most of data has been derived from the "Annual Tax Receivable Summary" prepared by the King County Finance. of Federal Way / 96 RATIO OF OUTSTANDING DEBT BY TYPE For the Last Ten Fiscal Years Governmental Activities Business Type Activities Percentage Fiscal General Obligation Certificates of Public Works Total Primary of Personal Year Bonds Participation Trust Fund Loan Government Income b Per Capita b 1997 37,665,000 2,315,000 1,466,063 41,446,063 0.062% 546 1998 35,465,000 1,990,000 1,379,824 38,834,824 0.059% 506 1999 33,110,000 981,898 1,293,585 35,385,483 0.081% 460 2000 33,196,600 688,046 3,682,352 37,566,998 0.078% 451 2001 30,515,000 382,423 3,465,849 34,363,272 0.065% 410 2002 27,682,000 59,936 2,668,907 30,410,843 0.074% 363 2003 34,710,026 20,490 2,486,548 37,217,064 0.060% 446 2004 30,802,892 - 21304,189 33,107,081 0.068% 386 2005 27,701,761 2,121,830 29,823,591 0.075% 348 2006 29,581,454 - 1,939,471 31,520,925 0.071% 364 Source: City of Federal Way Finance Division Note: Details regarding the city's outstanding debt can be found in the notes to the financial statements. See Demographic Statistics schedule for personal income and population data. These ratios are calculated using personal income for the prior calendar year. (b) Per capita income information for the years 2001 to 2006 are based on 2000 U.S. Census report since these infomation is available for individual cities only every ten years when the census is done. City of Federal Way / 97 RATIO OF NET GENERAL OBLIGATION BONDED DEBT TO ASSESSED VALUE AND NET GENERAL OBLIGATION BONDED DEBT PER CAPITA For the Last Ten Fiscal Years Fiscal Year (A) Population (B) Assessed Value (C) Gross Bonded Debt Less Debt Service Fund Net Bonded Debt Ratio of Bonded Debt To Assessed Value Net Bonded Debt Per Capita 1997 75,960 4,177,359,264 41,446,063 5,047,726 36,398,337 0.0087 479.18 1998 76,820 4,348,600,049 38,834,824 5,528,984 33,305,840 0.0077 433.56 1999 76,910 4,717,399,199 35,385,483 6,052,008 29,333,475 0.0062 381.40 2000 83,259 5,178,119,377 37,566,992 6,172,926 31,394,066 0.0061 377.07 2001 83,890 5,620,635,267 34,363,272 6,808,657 27,554,615 0.0049 328.46 2002 83,850 5,912,362,755 30,410,844 5,579,129 24,831,715 0.0042 296.14 2003 83,500 6,292,343,626 31,520,925 2,599,653 28,921,272 0.0046 346.36 2004 86,320 6,418,941,601 33,113,539 2,880,857 30,232,682 0.0047 350.24 2005 85,800 7,251,992,701 29,823,591 2,886,785 26,936,806 0.0037 313.95 2006 86,530 8,011,615,599 31,520,925 6,001,415 25,519,510 0.0032 294.92 (A) Sources: U.S. Census Bureau; State of Washington Office of Program Planning and Fiscal Management, Population Study Division; and the City of Federal Way Community Development Department. (B) The final certified Regular Levy assessed value of taxable property which was used by the King County Assessor's Office for use in calculating levy rates for the following year's tax roll. The total assessed valuation of $7,962,160,910 has been reduced by senior citizen exemptions of $60,449,330 and prior year omits of $916,197 to arrive at taxable assessed valuation. (C) Includes Public Works Trust Fund Loans issued in 1994, 1996, 1997, and 2000; general obligation bonds issued in 1997, 2000 and 2003; and loan assumption in 2003. City of Federal Way / 98 COMPUTATION OF DIRECT AND OVERLAPPING DEBT December 31, 2006 Jurisdiction King County Port of Seattle Federal Way School District #210 Library Total Overlapping Debt CITY OF FEDERAL WAY Total Direct and Overlapping Debt (A) Gross General Obligation Debt Outstanding 862,566,000 416,645,000 113,208,660 80,429,703 1,472,849,363 31,520,925 (C) $ 1,504,370,288 (13) Percentage Applicable to Federal Way 2.68% 2.68% 69.69% 4.37% (A) Total general obligation bonds outstanding at the year end, exclusive of refunded bonds. Source is King County Department of Finance. 100.00% (B) Determined by ratio of assessed valuation of property subject to taxation in overlapping unit to valuation of property subject to taxation in reporting unit. (C) Includes Public Works Trust Fund Loans issued in 1994, 1996, 1997, and 2000; general obligation bonds issued in 1997, 2000 and 2003; and loan assumption in 2003. Source is City of Federal Way Finance Amount Applicable to Federal Way $ 23,118,961 11,167,145 78,892,948 3,514,585 116,693,638 31,520,925 $ 148,214,563 City of Federal Way / 99 COMPUTATION OF LIMITATION OF INDEBTEDNESS December 31, 2006 General Debt Capacity Excess Levy Excess Levy (Limited) (Unlimited) Open Space Utility Total Debt DESCRIPTION Councilmanic Excess Levy and Park Purposes Capacity_ Statutory debt limit: (2005 AV=$7,251,992,701) (A) 1.50% AV @ 100% $ 108,779,891 $ (108,779,891) 2.50%AV @ 100% 191,299,818 181,299,818 181,299,818 543,899,454 Add: Cash on hand for debt redemption (B) Less: Bonds and COPS outstanding Remaining Debt Capacity Total Remaining "General" Capacity 8,129,983 - 8,129,983 (29,589,128) - - - 2( 9,589,128) 87,320,746 $ 72,519,927 $ 181,299,818 $ 181,299,818 $ 522,440,309 5159,840,673 (A) This figure represents the City's final total taxable assessed valuation (AV) for 2005 which was used to determine the 2006 property tax levy. (B) Reflects ending fund balance in the Debt Service Fund and Utility Tax Fund as of December 31, 2006. (C) Combined total for Councilmanic, Financing Lease, and Excess Levy capacities. Total net debt Total net debt applicable to applicable Legal debt the limit as a Fiscal Year Debt limit to limit margin % of debt limit 1997 313,308,019 (35,036,073) 278,271,946 11.18% 1999 326,145,004 (31,970,807) 294,174,197 9.80% 1999 353,852,494 (28,124,453) 325,728,041 7.95% 2000 421,547,646 (17,918,011) 403,629,635 4.25% 2001 353,852,494 (28,124,453) 325,728,041 7.95% 2002 443,427,207 (14,289,859) 429,137,348 3.22% 2003 469,715,580 (31,327,803) 438,387,777 6.67% 2004 471,925,773 (26,881,086) 445,044,687 5.70% 2005 487,677,084 (23,478,555) 464,198,529 4.81% 2006 543,899,454 (21,459,145) 522,440,309 4.32% Source: City of Federal Way Finance (A) King County Department of Finance Note: Under state finance law, the city's outstanding general obligation debt should not exceed 15 percent of total assessor's property value. By law, the general obligation debt subject to the limitation may be offset by amounts set aside for repaying general obligation bonds. City of Federal Way / 100 RATIO OF ANNUAL DEBT SERVICE EXPENDITURES FOR GENERAL OBLIGATION BONDED DEBT TO TOTAL GENERAL GOVERNMENTAL EXPENDITURES NET OF DEBT SERVICE EXPENSE Ratio of Debt Service Total General to General Fiscal Total Debt Governmental Governmental Year Principal _ Interest * Service Expenditures Expenditures 1997 1,222,090 1,755,354 2,977,444 28,906,345 10.3% 1998 2,376,239 2,037,798 4,414,037 32,480,856 13.6% 1999 3,302,102 1,907,445 5,209,547 34,343,976 15.2% 2000 2,498,853 1,729,858 4,228,711 34,217,716 12.4% 2001 2,700,478 1,797,614 4,498,092 34,761,823 12.9% 2002 2,834,084 1,651,197 4,485,281 36,819,618 12.2% 2003 14,159,881 1,703,165 15,863,046 50,550,741 31.4% 2004 3,080,677 1,796,791 4,877,468 40,610,863 12.0% 2005 3,100,546 1,531,364 4,631,910 40,108,790 11.5% 2006 2,219,676 1,418,843 3,638,519 43,970,199 8.3% Source: City of Federal Way Finance Note: * Interest excludes bond issuance and debt registration costs. City of Federal Way 1101 DEMOGRAPHIC STATISTICS Education Level in Years Fiscal Per Capita Median of Formal School Unemployment Year Population Income [C] Age [C] Schooling Enrollment (A) Rate (B) 1997 75,960 25,569 32.5 13.0 21,478 3.1% 1998 76,820 22,874 33.3 13.0 21,865 2.9% 1999 76,910 28,494 33.4 13.0 22,407 3.0% 2000 83,259 29,210 32.5 13.0 22,289 3.1% 2001 83,890 22,451 32.5 13.0 21,916 5.2% 2002 83,850 22,451 32.5 13.0 22,194 6.6% 2003 83,500 22,451 32.5 13.0 22,265 6.7% 2004 85,800 22,451 32.5 13.0 22,395 6.5% 2005 85,800 22,451 32.5 13.0 22,383 4.2% 2006 86,530 22,451 32.5 13.0 22,184 4.2% (A) Includes public school enrollment. Kindergarten is included though not State mandated. (B) The unemployment rates for 1994 through 1998 reflect the annual average for the City of Federal Way, which is based on census share methodology. The rates for the years 2002 and 2003 are the annual average for Seattle -Tacoma -Bellevue. The 2005-2006 rates came from the State of Washington Employment Security Department for King County. (C) Per capita income and Median age information for the years 2001 to 2006 are based on 2000 U.S. Census report since these infomation is available for individual cities only every ten years when the census is done. Sources: Data was obtained from U. S. Census Bureau City of Federal Way / 102 PRICIPAL EMPLOYERS Current Year and Ten Years Ago 2006 Number of % of Total City Taxpayer Type of Business Employees Rank Employment Weyerhaeuser Company Lumber Products 3,418 1 11.43% Federal Way School Dist #210 Education 3,048 2 10.20% St Francis Hospital Medical Services 744 3 2.49% Enchanted Parks Inc Amusement Center 639 4 2.14% Us Postal Service - Bulk Mail Postal Service 626 5 2.09% World Vision Inc Christian Relief Agency -Nonprofit 596 6 1.99% City Of Federal Way Government Services 440 7 1.47% Costco Wholesale Corporation Wholesale 283 8 0.95% Virginia Mason Federal Way Medical Services 235 9 0.79% Wal-Mart Store #2571 Retail 225 10 0.75% Fred Meyer Retail 206 11 0.69% Sears Roebuck & Company Retail 205 12 0.69% Prudential Nw Realty Assoc. Inc. Real Estate 200 13 0.67% Home Depot Retail 180 14 0.60% Winco Foods Retail 178 15 0.60% Source: City of Federal Way Business License Note: Principal Employers -includes both full-time and part-time employees. 1997 Number of % of Total City Employees Rank Employment 1,275 2 4.84% 2,132 1 8.09% 440 5 1.67% - - 0.00% 550 3 2.09% 500 4 1.90% 303 6 1.15% 230 8 0.87% 186 10 0.71% - - 0.00% 279 7 1.06% 200 9 0.76% 200 9 0.76% 128 21 0.49% - - 0.00% City of Federal Way / 103 Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 PROPERTY VALUE AND CONTSTRUCTION Commercial Construction I A) Value Permits (In Thousands) 169 9,704 188 50,863 180 43,359 250 38,554 291 59,384 393 59,075 240 25,695 335 64,522 289 124,985 332 78,194 Residential Construction (A) Value Permits (In Thousands) 367 27,952 364 23,301 374 26,229 185 11,462 166 7,914 318 38,176 290 37,775 289 82,658 591 111,504 455 70,862 Multi -Family Construction (A) Value Permits (In Thousands) 10 12,749 11 7,594 5 16,167 12 3,816 6 1 1,790 1 - 1,042 0 - 0 - 1 2,027 Sources & Notes: (A) Federal Way Community Development Department. Commercial construction includes alterations. Other building -related permits (plumbing, mechanical, fire alarm, etc.) numbering 2,550 and valued at $4,234,701 have been excluded. City of Federal Way / 104 CAPITAL ASSETS BY FUNCTION Last Ten Fiscal Years 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Transportation Street (Center Line Miles) 223.10 223.10 224.48 224.48 224.48 224.48 224.48 224.48 230.84 233.84 Signals WSDOT-owned and maintained - - - - 4 4 4 4 4 5 Signals City -owned & County -maintained 47 49 55 58 65 67 70 71 71 74 Street lights City -owned and maintained 262 204 224 260 668 810 1,038 1,050 1,050 1,214 Street lights City -owned and PSE-maintained - - - - 644 644 644 644 Street lights PSE-owned and maintained 589 629 635 648 2,835 2,850 1,975 1,975 1,975 1,975 Culture & Recreation Developed Parks - Acreage 390.12 458.27 471 471 493.5 493.5 500.25 500.25 522.9 522.9 Developed Parks - # of Parks 23 26 26 26 28 28 31 32 32 32 Undeveloped Parks - Acreage 426.47 360.27 355 355 352 352 356.24 356.24 5435 543.5 Undeveloped Parks - # of Parks 23 20 20 20 20 20 21 21 21 21 Tennis Courts City -Owned 5 5 5 5 9 9 9 9 11 11 Tennis Courts - Public 20 20 20 20 10 10 10 16 22 22 Swimming Pools City -Owned 0 0 0 0 0 0 1 1 1 1 Swimming Pools County -Owned 2 2 2 2 2 2 1 1 1 1 Trails - Miles 3 3 3 3 4 4 4 4 6 6 Trails -# of Trails 2 2 2 2 2 2 2 2 2 2 Community Centers/Recreation Facilities 2 2 2 2 2 2 2 2 2 2 City of Federal Way / 105 SECURITY OF PERSONS & PROPERTY Police Information Offenses: Forcible Rape (including attempts) Robbery Criminal Homicide Aggravated Assault Vehicle Theft Burglary (commercial & residential) Larceny Arson Citations: Traffic ECONOMIC ENVIRONMENT Building Related Permits & Values Building Permits Estimated Value (In Millions $) Other Building Related Permits Estimated Value (In Millions $) OPERATING INDICATORS BY FUNCTION Last Ten Fiscal Years 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 37 58 53 43 49 34 50 154 153 115 128 124 108 125 2 2 4 7 4 4 2 121 159 167 158 141 120 120 746 761 808 849 1,179 1,206 1,204 643 648 573 533 521 677 672 3,901 3,393 3,097 3,072 3,516 3,347 3,145 24 39 38 36 17 29 14 11,196 13,382 10,890 13,340 12,767 13,439 18,411 50 55 64 121 153 146 7 1 109 101 120 1,118 1,573 1,199 759 800 753 3,257 3,786 3,230 23 25 26 13,219 11,402 11,931 576 582 573 447 463 712 531 624 880 788 $53.3 $81.9 $85.8 $53.8 $69.1 $94.8 $64.5 105.4 236.5 151.1 864 821 1007 1546 1693 2024 1779 1958 2705 2550 $18.5 $27.0 $11.0 $1.5 $2.3 $2.5 $2.4 $ 2.5 $ 3.9 $ 4.2 City of Federal Way / 106 CITY GOVERNMENT EMPLOYEES FULL-TIME EQUIVALENT - HISTORY Department 1997 1998 19992000 2001 2002 2003 2004 2005 2006 City Manager 4.0 6.0 6.0 6.0 5.0 6.0 6.0 6.0 5.0 5.0 Administration 4.0 6.0 6.0 6.0 5.0 5.0 5.0 5.0 4.0 4.0 Economic Development - - - - 1.0 1.0 1.0 1.0 1.0 Municipal Court - - 4.0 11.6 13.6 13.6 13.6 12.6 12.6 12.6 Management Services 22.0 25.5 26.0 26.0 24.0 24.5 25.0 25.0 22.0 22.0 Administration 2.5 2.5 2.0 2.0 1.5 1.5 1.5 1.5 1.5 1.5 Finance 8.0 8.5 9.0 8.0 7.0 7.0 8.0 8.0 7.0 7.0 City Clerk 3.0 2.5 2.5 2.5 2.5 2.5 2.0 2.0 1.5 1.5 Human Resources 2.5 4.0 4.0 5.0 4.0 4.5 4.5 4.5 3.5 3.5 Information System 6.0 8.0 8.5 8.5 9.0 9.0 9.0 9.0 8.5 8.5 Law 7.0 9.0 9.0 10.0 11.0 11.0 10.4 10.6 10.6 10.6 Civil Legal Services 3.8 4.3 4.3 4.1 5.1 5.1 5.8 5.8 5.8 5.8 Criminal Prosecution Services 3.2 4.7 4.7 6.0 6.0 6.0 4.6 4.8 4.8 4.8 Community Development 31.0 27.0 28.0 30.1 29.1 28.6 29.6 29.6 28.7 28.7 Administration 6.0 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 Planning 13.0 8.2 8.2 8.8 8.8 8.8 8.8 8.8 8.8 8.8 Building 8.5 10.8 11.8 13.3 12.3 11.3 12.3 12.3 12.3 12.3 Human Services 2.5 2.5 2.5 2.5 2.5 3.0 3.0 3.0 2.5 2.5 Neighborhood Development 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.7 0.7 Police - 127.0 134.0 138.5 141.5 151.0 155.0 155.0 152.0 155.0 Administration - 2.0 2.0 2.0 2.0 2.0 2.0 3.0 3.0 3.0 Support Services - 49.0 52.0 56.5 58.5 59.0 55.0 54.0 53.0 55.0 Field Operations - 76.0 80.0 80.0 81.0 90.0 98.0 98.0 96.0 97.0 Parks, Ree. & Cultural Svcs. 24.5 23.5 25.7 26.9 27.0 27.0 30.4 30.4 30.2 31.2 Administration 2.0 2.0 2.0 2.0 2.0 2.0 1.8 1.8 1.8 1.8 Planning 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Kenneth Jones Pool - - - - 3.0 3.0 3.0 3.0 General Recreation 7.5 7.5 7.5 7.5 6.5 6.5 6.6 6.6 6.6 6.6 Community Center - - - - _ - _ - - Dumas Bay Centre 4.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 3.0 Knutzen Family Theatre - - 1.0 1.0 1.0 1.0 1.5 1.5 1.5 1.5 Parks Maintenance 10.0 11.0 11.8 13.0 14.0 14.0 14.0 14.0 13.8 13.8 Building - - 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 Public Works 29.5 29.5 36.5 37.5 38.5 38.5 41.5 41.5 41.5 42.5 Administration 1.5 1.5 2.5 2.5 2.1 2.1 2.1 2.1 2.1 1.9 Development Services 5.5 5.5 5.5 6.5 6.5 6.5 6.5 5.8 5.8 6.5 Traffic Services 4.0 4.0 4.0 4.0 4.1 4.1 5.1 5.1 5.1 5.1 Street Services 5.7 5.7 9.7 9.7 10.0 10.0 11.0 117 11.7 11.0 Emergency Management - - - - - - - - - 1.0 Solid Waste & Recycling 1.1 1.1 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.7 Surface Water Management 11.8 11.8 13.3 13.3 14.3 14.3 15.3 15.3 15.3 15.4 Total 117.9 247.5 269.2 286.5 289.6 300.1 311.4 310.7 302.6 307.6 Source: City of Federal Way Finance Division City of Federal P,av / 107 SALARIES AND SURETY BONDS OF PRINCIPAL OFFICIALS DECEMBER 31, 2006 POSITION MAYOR COUNCILMEMBERS LEGISLATIVE BODY EMPLOYEE ANNUALSALARY MICHAEL PARK $17,700 JEANNE BURBIDGE $13,500 JACK DOVEY $13,500 ERIC FAISON $13,500 JIM FERRELL $13,500 LINDA KOCHMAR $13,500 DEAN MCCOLGAN $13,500 ADMINISTRATIVE STAFF POSITION EMPLOYEE ANNUAL SALARY CITY MANAGER DIRECTOR - CITY ATTORNEY CITY CLERK COMMUNITY DEVELOPMENT DIRECTOR MANAGEMENT SERVICES DIRECTOR PARKS, RECREATION AND CULTURAL SERVICES DIRECTOR PUBLIC SAFETY DIRECTOR PUBLIC WORKS DIRECTOR NEAL BEETS $135,000 PAT RICHARDSON $117,180 LAURA HATHAWAY $74,364 KATHY MCCLUNG $110,364 IWEN WANG $117,252 DONNA HANSON $119,976 BRIAN WILSON $120,216 CARY ROE $121,632 City of Federal Way / 108 MISCELLANEOUS STATISTICAL INFORMATION LOCAL TAXES ON BUSINESSES Franchise Tax - Cable TV .................. 5.00% Gambling Taxes: Bingo/Raffles... .................... .. _.. 5.00% Am usement/Games ................. .... 2.00 % Punchboard/Pull Tabs .............. ....... 5.00% Cardrooms ....... I ..................... 20.00% Local Sales Tax (Collected by the State).._ 8.80% FIRE AND EMERGENCY MEDICAL RESPONSE INFORMATION Fire and Emergency Medical Response information reflects the greater Federal Way area, which is served by South King Fire & Rescue. 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fire and Other Responses 1,985 2,357 2,009 2,278 1,920 3,055 3,117 2,896 3,210 865 Emergency Medical 5,853 6,589 6,870 7,193 7,240 7,422 8,042 8,263 8,636 11,164 PUBLIC EDUCATION ENROLLMENT COUNT 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 23 Elementary Schools 11,930 12,248 12,258 12,242 11,498 11,990 9,854 9,916 9,806 9,733 7 Middle Schools (incl. Public Academy) 4,979 4,956 4,994 5,013 5,331 5,509 5,458 5,476 5,271 5,183 5 High Schools 4,103 4,116 4,529 4,557 4,415 4,316 6,625 6,650 7,004 6,954 1 Internet Academy (K-12) 466 545 626 477 672 379 328 353 302 314 21,475 21,865 22,407 22299 21.916 22,194 27,265 22,395 22,393 22,184 3,087 Staffinembers TAXABLE SALES (in millions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Retail Sales $978.9 $1,049.3 $1,137.0 $1,212.1 $1,220 $1,298 $1,237 $1,239 $1,331 $1,471 Real Estate Sales $375.4 $438.8 $487.6 $429.9 $400 $503 $570 $616 $939 $988