Management's Discussion and Analysis
As management of the City of Lawrence, Kansas, we offer readers of the financial statements an overview and analysis of the financial activities of the City of Lawrence for the fiscal year ended December 31, 2005. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal of this report.
Financial Highlights
The assets of the City of Lawrence exceeded it’s liabilities at the end of 2005 by $309,112,806. Of this amount, $105,944,142 may be used to meet the government’s ongoing obligations.
An event that helped increase net assets was an $11.7 million increase in governmental capital assets.
As of December 31, 2005, the City’s governmental funds reported combined ending fund balances of $28,758,229, a decrease of $10,262,847 in comparison with the prior year. Approximately 67% is available for spending at the City’s discretion. The decrease occurred due to the completion of a large amount of capital improvements in the Capital Projects Fund.
At the end of 2005, the City’s unreserved general fund balance was $14,472,880 or 30.6% of total general fund expenditures.
The City’s total debt increased 12.8% during the year. The debt was issued to fund various street and storm water improvements. The increase occurred largely because of the issuance of water and sewer revenue bonds to fund projects such as the expansion of the water treatment plant.
Overview of the Financial Statements
This discussion and analysis are intended to serve as an introduction to the City of Lawrence’s basic financial statements. The financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, 3) notes to the financial statements. The report also contains other supplementary information in addition to the basic financial statements.
Government-wide financial statements.
The government-wide financial statements are designed to provide readers with a broad overview of the City’s finances.
The statement of net assets presents information on all of the City’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether 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 year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Some revenues and expenses reported in the statements will result in cash flows in future fiscal periods.
Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues from other functions that are intended to recover all or a significant portion of their costs through user fees and charges. The governmental activities include general government, public safety, public works, and recreation. The business-type activities include the water and sanitary sewer, sanitation, storm sewer, and golf course operations.
The government-wide financial statements include not only the City of Lawrence, but also the Lawrence Public Library, the Lawrence Public Housing Authority and Lawrence Memorial Hospital. Financial information for these component units is reported separately from the financial information presented for the City.
Fund Financial Statements
A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities of objectives. The City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds can be divided into three categories: governmental, proprietary, and fiduciary.
Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, governmental fund financial statements focus on near-term inflows and outflows of spendable resources as well as on balances of spendable resources.
Because of the focus of governmental funds is different than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government’s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison.
The City of Lawrence maintains 32 individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the general fund and the debt service fund. Data from the other governmental funds are combined into a single, aggregated presentation. Individual fund data for these funds is provided in the form of combining statements in this report.
A budget is approved annually for the general fund. A budgetary comparison statement has been provided for the general fund to demonstrate compliance with this budget.
Proprietary funds. The City maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. Enterprise funds are used to account for the activities of the water and sewer, sanitation, public parking, storm water, and golf course operations. Internal service funds are an accounting device used to accumulate and allocate costs internally among functions. Internal service funds are used to account for fleet maintenance and office supplies. These activities have been included within the governmental activities in the government-wide financial statements.
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 water and sewer and sanitation operations. The other enterprise funds and the internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the non-major enterprise funds and the internal service funds is provided in the form of combining statements.
Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the City. Fiduciary funds are not reflected in the government-wide financial statement because the resources of those funds are not available to support the City’s programs. The accounting used for fiduciary funds is similar to that used for proprietary funds.
Notes to the financial statements
The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements.
Other information
In addition to the basic financial statements and accompanying notes, the report also presents certain required supplementary information concerning the City’s progress in funding its obligation to fund its outstanding debt.
The combining statements are presented immediately following the required supplementary information.
Government-wide Financial Analysis
By far the largest portion of the City of Lawrence’s net assets reflects its investment in capital assets. Capital assets are used to provide services and are not available for future spending. The resources needed to repay capital-related debt must be provided from other sources.
A portion of the net assets represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets may be used to meet ongoing obligations.
As of the end of 2005, the City is able to report positive balances in all three categories of net assets, both for the government as a whole, as well as for its separate governmental and business-type activities.
There was an increase in net assets for the governmental type funds due in large part to the construction of capital assets with temporary note and general obligation bond proceeds. Events increasing current and other assets included positive net changes in the General Fund balance of $1.5 million and in the combined Special Revenue Funds balances of $798,000. However, the balance in the Debt Service Fund decreased by over $522,000. An increase in special assessment receivables of over $2.1 million also accounted for some of the increase in current and other assets. Other liabilities and restricted net assets increased in 2005 primarily due to the issuance of $22 million in temporary notes.
There was an increase in net assets reported in connection with the business-type activities. The Water and Sewer Fund and Storm Water Fund had positive net income for the year, with over $6.0 million earned by the Water and Sewer Fund. The other business-type activities reported losses of less than $200,000 in each fund. Both current assets and long term liabilities increased with the issuance of $25 million in water and sewer revenue bonds for $16 million in future projects and to refund $9 million in previous revenue bond issues. In addition, $5 million in general obligation bonds will be paid with storm water revenue.
Overall, the City’s net assets increased by $14,018,720 during 2005 due to positive net income in most funds and the continued construction of capital assets. A part of the increase was the result of General Fund revenues exceeding expenditures by $1.5 million and water and sewer revenues exceeding expenses by over $6.0 million. The City is increasing its cash reserves to pay for future water and sewer capital projects. The Storm Water Utility experienced positive net income of $932,118. However, the Storm Water Utility will be responsible for retiring $5.0 million in general obligation debt that was issued in 2005. A more complete analysis of the changes in the City’s net assets is shown below.
Governmental activities
Governmental activities increased the City’s net assets by $6,808,122 during the year. Key elements of governmental activities during the year are as follows.
Charges for service increased because of fees paid for engineering services associated with the completion of benefit district capital projects. Property taxes revenue increased due to a 6.5% increase in assessed valuation and a slight reduction in the total levy. Capital grants decreased due to the completion of grant funded airport improvements. Sales tax revenue increased by 2.8%. Other revenue rose as the result of Interest earnings increasing by $868,000 from 2004 due to the Federal Reserve raising short term interest rates.
Expenses increased 7.9% because of general wage adjustments, the hiring of 2 planners, 2 engineers, and an attorney. A new pay plan was adopted that allowed additional employees to receive merit increases.
Business-type activities
Business-type activities increased the City’s net assets by $7,210,598. The Water and Sewer Fund and Storm Water Fund experienced positive net income with the Sanitation, Public Parking and Golf Course Funds showing small loses. The key elements of the increase in net assets are as follows:
-Positive net income in the Water and Sewer equaling $6.0 million. Water rates were increased 4.0% on average and sewer rates increased 9.0% on average in 2005.
-Positive net income in the Storm Water Fund equaling $932,918. Storm water fees were not changed in 2005.
-Continued build up of cash reserves in the Water and Sewer Fund to pay for future capital projects.
-Expansion of the storm water collection system.
Financial Analysis of the Government’s Funds
Governmental funds. The focus of the City’s governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is 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 in future years.
As of December 31, 2005, the City of Lawrence’s governmental funds reported combined ending fund balances of $28,758,229, a decrease of $10,262,847 from the prior year. Approximately 67% of the total is unreserved and thus available for spending in future years. The remaining amount has already been committed to liquidate contracts and purchase orders and pay debt service and legal claims.
The general fund is the primary operating fund of the City. At the end of 2005, unreserved general fund balance totaled $14,472,880, while total general fund balance was $15,327,743. Unreserved general fund balance represents 30.6% of total general fund expenditures, above the 25% of expenditures minimum established by the City Commission’s adopted fund balance policy.
Key factors affecting the general fund balance are as follows:
-An increase in both the assessed value with a small decrease in the General Fund levy
-An increase in interest earnings due to higher interest rates
-A significant increase in expenditures from the prior year
The debt service fund has a total fund balance of $7,774,005, all of which is reserved for debt service. The $522,382 decrease in fund balance during the year was not significant. A large transfer of unspent bond proceeds was received from the capital projects fund. The amount of debt payments are projected to increase in the near future.
Proprietary funds. The City’s proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail.
Unrestricted fund equity of the Water and Sewer Fund totaled $39,021,968 at the end of 2005. The unrestricted fund equity of the Sanitation Fund amounted to $4,039,760 at the end of 2005. The net income for the Water and Sewer Fund was $6,063,933. The Sanitation Fund had a net loss of $164,003. The continued population growth of Lawrence has had an impact on the funds. Increasing demands for water and sanitary sewer services will result in the need to expand existing facilities on the water side and in the construction of a second wastewater treatment plant by 2011. The Sanitation Fund must continue to add routes and equipment to service the growth areas of the City.
General Fund Budgetary Highlights
The City of Lawrence adopts its budget on a fund basis. The adopted budget was not amended by the City Commission during the year. On the revenue side, nearly every revenue category exceeded the budgeted amount. Expenditure adjustments between programs and line items were minimal since departments were directed to hold the line on spending. The more significant operational changes to the 2005 budget from prior year budgets are listed below:
-A new pay plan was adopted that provided higher pay ranges for most employees.
-A 2% cost of living adjustment was included for all employees.
-Funding for curb maintenance was increased by $225,000 to address deferred maintenance of the City’s infrastructure.
-Capital outlay items budgeted in the Equipment Reserve Fund in 2004 were returned to the General Fund in 2005.
-The budget for transfers to other funds was increased by $400,000 to replenish the Equipment and Capital Improvement Reserve Funds.
-The budget for General Fund contingencies was returned to $200,000 after being reduced to $100,000 in 2004.
Kansas Statutes allow cities to amend budgets if there is an increase in non-property tax revenue sources. While the City of Lawrence experienced some revenue increases, it was not necessary to formally amend the general fund budget because expenditures were significantly below the adopted budget.
Capital Asset and Debt Administration
Capital assets.
The City’s investments in capital assets for its governmental and business type activities as of December 31, 2005, amounts to $335,219,869 (net of accumulated depreciation). This investment in capital assets includes land, buildings, improvements, equipment, roads and bridges. The increase in capital assets for the current year was 4.0%.Major capital asset additions during the year included the following:
- Completion of the 13th & Oregon Street storm water improvements
- Completion of the 21st - Kentucky to Barker Street storm water improvements
- Completion of the Overland - Congressional to Queens Road benefit district
- Completion of the O’Connell Road project
- Continued work on the expansion of the waste water treatment plant
- Painting of the water storage tank on Kasold Drive
For more detailed information on capital assets, see the notes to the basic financial statements.
Long-term debt
At the end of 2005, the City of Lawrence had total bonded debt outstanding of $102,990,000. Of this amount, $77,080,000 comprises debt backed by the full faith and credit of the government (general obligation debt). The remainder of the debt represents bonds secured solely by revenue generated by the Water and Sewer utility (revenue bonds). In addition, the City had $46,970,879 due in accordance with the State Revolving Loan Fund (SRF) program for water and wastewater projects.
The City’s total outstanding debt increased $17,009,179 during the year. The major component of this increase was the issuance of $25,910,000 in revenue debt for water and sewer improvements. The issue also refunded the $8,935,000 in outstanding revenue bonds. The continued growth of the City and the need for improving existing infrastructure resulted in the issuance of $11,095,000 in new general obligation debt. A total of $5.0 million of the new general obligation debt will be paid for with storm water revenue.
The City of Lawrence has been given a rating of Aa2 on its general obligation debt by Moody’s. The City’s revenue bonds have been rated Aa3 by Moody’s. The Aa3 rating on the outstanding revenue bonds represents an upgrade from the previous A1 rating.
Kansas statutes limit the amount of general obligation debt a city may issue to 30 percent of total assessed valuation. On December 31, 2005 the debt limitation for the City of Lawrence was $254,570,933, which is significantly in excess of the $77,080,000 in general obligation debt the City had outstanding as of December 31, 2005.
For more detailed information on debt, see the notes to the basic financial statements.
Economic Factors and 2006 Budget
The unemployment rate for the City of Lawrence was 3.3% as of December 31, 2005. This is below the State average of 4.3%. The City experienced an increase of 6.5% in its assessed valuation in 2005. Pearson Government Solutions planned to hire an additional 100 workers by the end of 2005. Protection One moved its corporate headquarters from Topeka to Lawrence.
During 2005, unreserved fund balance in the general fund increased by $1,549,956. Because of the enhanced economic growth during the time the 2006 budget was being developed, the 2006 budget incorporated an increase in the growth rates for the major revenue sources. In addition, because of the expiration of grants to fund police positions and the need for more infrastructure maintenance, budgeted expenditures were increased significantly. A total of eighteen new employees were added to the 2006 budget and a two percent general wage adjustment was provided. Nine of the new positions were firefighters to staff the new fire station.
The City Commission approved an increase in the rates charged for water service by an average of 4% and the rates for sanitary sewer service by an average of 9% effective in 2006. The increase in sanitation rates was 2% for 2005. The sewer rate increase was necessitated by the planned construction of a second wastewater treatment plant and other sanitary sewer related capital projects. The sanitation rate increase was implemented to cover increased operating expenses and to avoid a larger rate increase in the future.
Requests for Information
This financial report is designed to provide a general overview of the City of Lawrence’s finances for all those with an interest in the City’s finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to: City of Lawrence, Finance Director, P.O. Box 708, Lawrence, KS 66044. The City’s website can be found at www.lawrenceks.org.