Tacoma Police Union City Budget Review

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Gerald W. BachcckiJa y D. CromKimberly J. Lam

BA CH EC KI, C ROM & CO., LLP

Consultants and Certified Public Accountants180 Montgomery Street, Suite 2340

San Francisco, CA 94104www.bachcrom.coDl

Tel. (415) 398·353Fax (415) 788-085

[email protected] A. Block (1944-1992)

December 23,2011

Mr. Terry Krause, President

Tacoma Police Union, Local 6

P.O. Box 11265

Tacoma, WA 98411-1265

Email:[email protected]

Re: Financial Analysis of City of Tacoma, Washington

Dear Terry:

Enclosed are Exhibits I through IX and related narratives, that were generated from the City of

Tacoma's (City) Comprehensive Annual Financial Reports, unaudited financial statements,

budgets and other financial information of the City for the fiscal years ending December 3 l ,

2005 through December 31, 2010. The purpose of th is report and the related exhibits is to

identify funds that have accumulated cash and fund balances that might be available for General

Fund purposes.

GOVERNMENTAL ACCOUNTmG

Governmental accounting and reporting principles differ significantly from private sector

accounting principles. These differences include:

• The use of mandatory budgets that become law,

• Two different measurement focuses.

• Two or possibly three different methods of accounting,

• Encumbrances,

• Management Discussion & Analysis (MDA),

• Government-wide financial statements,

• Fund accounting;

• Two different terminologies for equity - "Net Assets" for government-wide financial

statements and business-type funds, and "Fund Balances" for governmental funds.

The dissimilarities between governmental accounting and private sector accounting create

different techniques in analyzing the financial health of a government as opposed to a business.

These differences include:

• Variances, which we discuss in Exhibit III,

• Benchmarking the fund balance, and

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• Other post employment benefits (retiree health benefits).

USE OF MANDA TORY BUDGETS

A budget is a financial plan of operations that provides a basis for planning, controlling, and

evaluating the various governmental entities and activities. The budget process is a political

activity that begins with the executive branch of the government and is approved by the

legislative branch to reflect the spending priorities of the government for the fiscal year. The

Adopted (original) Budget is usually approved before the beginning of the fiscal year. Budgets

can be changed by legislative action through amendments during the year as economic

conditions and spending priorities change. The Final Budget is the Adopted Budget plus all

legislatively approved budget amendments during the fiscal year up to the date the financial

reports are issued.

Government financial reports are required to present a Statement of Revenues, Expenditures, andChanges in Fund Balances - Budget to Actual Comparison that includes both the adopted budget

and the final budget. The preferred method of presenting this statement is Required

Supplementary Information (RSI); however, it may also be presented as part of the basic

financial statements.

Upon adoption, the expenditure estimates in the annual budget,' as modified by the legislative

body, are enacted into law through the passage of appropriation act(s) or ordinance(s). The

appropriations constitute maximum expenditure authorization during the fiscal year, and cannot

be legally exceeded unless subsequently amended by the legislative body. Unexpended andlor

unencumbered appropriations may lapse at the end of the fiscal year or may continue as authority

for subsequent period expenditures, depending upon the applicable legal provisions per the

National Council on Governmental Accounting Statement No. I (NCGA~I), Paragraph 86.

Appropriations that lapse at the end of the fiscal year are known as lapsing appropriations andthose that do not lapse at the end of the year are known as continuing appropriations.

MEASUREMENT FOCUS AND METHODS OF ACCOUNTING

The nature ofgovernmental accounting requires different measurement focuses depending on the

type of fund and financial statement presented in the government's financial report. The term

"measurement focus" is defined as the object the financial statements measure. As such,

measurement focus determines the method of accounting used by the fund and how it is reported

in the financial report. The following table and discussion describes the various methods of

accounting and whether they are GeneraIly Accepted Accounting Principles (GAAP) or non-

GAAP.



--Analysis of Accounting Metbods

Modified

A c c r u a l Basis A c c r u a l Basis C ash B asis

GAAP INon-GAAP GAAP for Government- GAAP for Governmental Non-GAAP - Used onlywide Financial Funds for Budgetary

Statements and Accounting

proprietary funds

Revenue Recorded when earned Recorded when Recorded when received

measurable and available

(M ax 60 Days)

Expenses I Recognized when goods Recognized when goods Recorded when paid

Expenditures and services received and services received and

paid in a timely manner

from current resources

Equity Invested in capital assets Reserved and Unreserved Carry-over balance

net of depreciation, (record encumbrances at

restricted. an d end of year)

unrestricted

The "government-wide financial statements" and proprietary type fund's statements use

t h e j l o w o f e c o n o m tc r e s o u r c e s m ea s u r e m en t f o c u s in order to determine the change in net assets.

All assets. liabilities, revenues and expenses associated with the operation of the government as a

whole and in the separate proprietary funds are included in the statement of net assets and the

statement of activities under this measurement focus. Government-wide financial statements and

all proprietary funds use the Accrual Basis of accounting as their GAAP accounting basls.,

Under this method, revenues are recognized when earned and expenses are recorded at the

time the liabilities are incurred regardless of timing ofthe related cash flows.

It is imperative to note that the new model, promulgated by the Governmental Accounting

Standards Board (GASB) 34, emphasizes the accrual basis of accounting for government-wide

financial statements. On page two of the preface to GASB 34, the GASB states the importance

and reasons for using the accrual basis of accounting in the government-wide statements:

"Financial managers also will be in a better position to provide this analysis

because for the first time the annual report will also ' include new

government-wide financial statements, prepared using accrual accounting

for all of the government's activities. Most governmental utilities and

private-sector companies use accrual accounting. It measures not just

current assets and liabilities but also long-term assets and liabilities (such as

capital assets, including infrastructure, and general obligation debt). Italsoreports all revenues and all costs of providing services each year, not just

those received or paid in the current year or soon after year-end,'

The modified accrual basis of accounting and the budget (cash) basis of accounting, discussed

below, do not report all assets, liabilities, revenues and expenses. As such, accrual basis



accounting provides the most accurate portrayal of the government's financial position and

results of operations.

Governmental funds' financial statements use the current financial resources measurementfocus in order to determine the changes in financial position. With this measurement focus,

generally only current assets and current liabilities are included on the balance sheets. The

statement of revenues, expenditures, and changes in fund balances (deficit) of these funds

present increases and decreases in net current assets. All Governmental Funds use the Modified

Accrual Basis of accounting as their GAAP accounting basis. Under this basis of accounting,

revenues are recognized when they become both measurable and available, and

expenditures are recorded when the liability is incurred. Measurable means the amount of

the transaction can be determined. Available means collectible within the current period or soon

enough thereafter, usually sixty (60) days. to be used to pay liabilities of the current period.

The third method of accounting that may be presented in the government's financial report is

budgetary accounting. The financial statements of governmental funds are required to bereported using GAAP, which is the modified accrual basis of accounting discussed in the

previous paragraph. However, when preparing their budget many governments use another

method of accounting, budgetary accounting, also known as the Cash Basis of accounting.

'Under this method, revenues are recognized when collected and expenses are recognized

when paid. In the CAFRs budgetary accounting is only presented in the Statement of Revenues,

Expenditures, and Changes in Fund Balances - Budget to Actual comparison.

In situations where the governmental fund type's basis of accounting differs from the required

reporting modified accrual GAAP accounting basis, Section 2400.109 of the Codification of

Governmental Accounting and Financial Reporting Standards requires that the budgetary

comparison schedules should be accompanied by information (either in a separate schedule or in

notes to the financial statement) that reconciles budgetary information to GAAP information.

There are major differences between the budgetary accounting method used by the entity for

governmental-type funds and the GAAP method of accounting, which cause significant

differences in the results of operations and fund balance. The major differences between the two

accounting methods are as follows:

I. Basis Differences - Certain accruals are excluded from the budget basis financial

statement because such amounts are budgeted on a cash basis. Also, certain inventory

type assets are excluded from fund balances because such amounts are considered

expenditures in prior years.

2. Timing Difftrences - Encumbrances (discussed below) are included in budgetary

statements but excluded from GAAP statements until recorded as actual expenditures.

Also, revenues that were budgeted and recognized in prior years on budgetary basisstatements but which were not susceptible to accrual until the current year are recognized

by GAAP basis financial statements in the current year.



ENCUMBRANCES

Encumbrances represent commitments related to unperformed contracts for goods or services

. (executory contracts), and are used to control expenditures for the year and to enhance cashmanagement. Encumbrances only appear in Governmental Fund types, not in Proprietary Fund

types. Encumbrances do not represent expenditures for the period, only a commitment to expend

resources in the future. Likewise, the reserve for an encumbrance is not a liability since a

liability is only recognized when the goods are deJivered or the services are provided. Only

when the goods or services are provided is the expenditure or the liability recorded. As such,

purchase orders, contracts, and other future commitments that are uncompleted at year end are

recorded as a reserve in the applicable fund balance since they do not lapse at December 31.

Instead. the commitments are considered encumbered and do not need to be appropriated in the

succeeding year's budget. When a governmental unit allows an appropriation to lapse. the

encumbrance must be re-appropriated in the following year's budget.

MANAGEMENT'S DISCUSSION &ANALYSIS

Management's Discussion and Analysis (MDA) is Required Supplementary Information (RSI)

that precedes the Basic Financial Statements. It is to provide an Objective and easily readable

analysis of the government's financial activities based on currently known facts, decisions or

conditions. It is the financial manager's opportunity to provide both a short and long-termanalysis of the government's activities. Primarily MDA should:

1. Discuss the current year results in comparison to the prior year with emphasis on the

current year,

2. Focus on the primary government,

3. Have managers effectively report on the relevant information and avoid "boilerplate"

discussion.

GOVERNMENT-WIDE FINANCIAL STATEMENTS

Governmental financial reports are now required to present two government-wide financial

statements, the Statement of Net Assets and the Statement ofActivities. The purpose of thesestatements is to measure total government performance, present information on total program

cost and program revenues, and present the changes of the government's net assets from the prior

year.

The Statement of Net Assets and a Statement of Activities presents information about the

reporting government as a whole. The statements include the primary government and its

component units, except for fiduciary funds. Eliminations are made to minimize double

counting of internal activities. These statements distinguish between governmental activities and

business-type activities of the government as well as the government's discretely presentedcomponent unit, if any. Governmental activities generally are financed through taxes,

intergovernmental revenues, and other non-exchange revenues. These activities are reported in

governmental funds and internal service funds. Business-type activities are financed in whole or

in part by fees charged to external parties for goods and services. These activities are reported in



enterprise funds. The Statement of Net Assets and the Statement of Activities are prepared using

the economic measurement focus and the accrual basis of accounting.

Discretely presented component units are also separately presented on the government-wide

financial statement. A component unit is a legally separate entity in which the elected officials

of the primary government are "financially accountable" for the entity, or the nature and

significance of the relationship between the entity and the primary government are such that to

exclude the entity from the financial reporting of the primary government would render the

financial statements misleading or incomplete. The difference between a component unit and an

enterprise fund is that an enterprise fund is not a legally separate entity. Financial accountability

occurs when one of the following two conditions exists:

1. The primary government can impose its will on the other entity. or

2. The potential exists for the component unit to (1) provide specific financial benefits

or (2) impose specific financial burdens on the primary government.

The Statement of Net Assets is required to report both the historical cost and the accumulateddepreciation of all of the government's capital assets. Capital assets include infrastructure such

as streets, sewers, sidewalks, gutters, and government buildings as well as equipment. By

reporting infrastructure in this manner, the readers of the financial statements will be able

to determine the extent of deferred maintenance and its future cost. Besides reporting all

capital assets, the Statement of Net Assets also presents all of the Government's liabilities

including long-term debt. The difference between assets and liabilities is called net assets. We

will discuss the components of net assets later in our report.

The Statement of Activities presents a comparison. between direct expenses and program

revenues for each function of the governmental activities and for each segment of the business-

type activities of the government entity. Direct expenses are those that are specifically

associated with a program or function and. therefore, are clearly identifiable to a particular

function or program. Program revenues include:

I. Charges paid by the recipients of goods or services offered by program, and

2. Grants. and contributions from outside sources which are restricted to meeting the

operational or capital requirements ofa particular program.

Revenues that are not classified as program revenues, including all taxes for governmental type

funds and capital contributions for business type assets are presented instead as general revenues.

By reporting changes in net assets in this manner, the true cost to the taxpayer for services

can be determined by a reader of the government's financial report. Presenting multiple

years of comparative Government-wide Financial Statements should provide valuable

information concerning the financial health of tbe total government and not just the

individual funds.

FUND ACCOUNTING

In governmental accounting, because of Jegal restrictions imposed by various levels of

government, there is no single entity that contains all the activities of a single government.



,,-• Debt Service Funds are defined in Code Section 1300.107:

o "Debt service funds are used to account for and report financial resources that are

restricted. committed, or assigned to expenditure for principal and interest. Debt

service funds should be used to report resources if legally mandated. Financial

resources that are being accumulated for principal and interest maturing in future

years also should be reported in debt service funds. The debt service transactions

of a special assessment issue for which the government is not obligated in any

manner should be reported in an agency fund (see paragraph .1J4) rather than a

debt service fund to reflect the fact that the government's duties are limited to

acting as an agent for the assessed property owners and the bondholders. as

discussed in Section 540."

• Permanent Funds are defined in Code Section 1300.108:

o "Permanent fonds should be used to account for and report resources that arerestricted to the extent that only earnings, and not principal, may be used for

purposes that support the reporting government's programs-that is, for the benefit

of the government or its citizenry.4 Penn anent funds do not include private-

purpose trust funds (defined in paragraph. 113), which should be used to report

situations in which the government is required to use the principal or earnings for

the benefit of individuals, private organizations, or other governments."

Governmental Funds have two types of financial statements; the BaJance Sheet and the

Statement of Revenues, Expenditures, and Changes in Fund Balances (Deficit). Revenues

for governmental funds include taxes, licenses and permits. fines. and investment income.

Expenditures are grouped by function such as public safety. Other financing sources (uses)

include transfers, both in and out, loans, and proceeds from the sale of governmental assets.

Proprietary Funds are used to account for the City/County's ongoing organizations and

activities that are similar to those found in the private sector. Proprietary Funds are composed of

the following two fund groups:

• Enterprise Funds are defined in Code Section 1300.109:

o "Enterprise Funds may be used to report any activity for which a fee is charged to

external users for goods or services. Activities are required to be reported as

enterprise funds if anyone of the following criteria is met. Governments should

apply each of these criteria in the context of the activity's principal revenue

source.

• The activity is financed with debt that is secured solely by a pledge of the

net revenues from feesand charges of the activity. Debt that is secured bya pledge of net revenues from fees and charges and the full faith and credit

of a related primary government or component unit, even if that

government is not expected to make any payments, is not payable solely

from fees and charges of the activity. (Some debt may be secured. in part,



by a portion of its own proceeds but should be considered as payable

"solely" from the revenues of the activity.)

• Laws or regulations require that the activity's costs of providing services

including capital costs (such as depreciation or debt service), be recoveredwith fees and charges, rather than with taxes or similar revenues.

• The pricing policies of the activity establish fees and charges designed to

recover its costs, including capital costs (such as depreciation or debt

service)."

• Internal Service Funds are defined in Code Section 1300.110:o "Internal Service Funds may be used to report any activity that provides goods or

services to other funds, departments, or agencies of the primary government and

its component units, or to other governments, on a cost-reimbursement basis.

Internal service funds should be used only if the reporting government is the

predominant participant in the activity. Otherwise, the activity should be reported

as an enterprise fund,"

Besides the Statement of Net Assets discussed above, proprietary type funds are required to

present two other statements. The Statement of Revenues, Expenses and Changes in Net

Assets presents revenues and expenditures as either operating or non-operating. Non-operating

revenue and expenses include interest income, interest expense, transfer in and out, and capital

contributions from developers, other governments, and customers. The third statement is the

Statement of Cash Flows which shows how the fund spent its money.

• Fiduciary Funds are defined by Code Section 1300.102 (C)

o "Fiduciary Funds focuses on net assets and changes in net assets. Fiduciary funds

should be used to report assets held in a trustee or agency capacity for others and

therefore cannot be used to support the government's own programs

(emphasis added). The fiduciary fund category includes pension (and other

employee benefit) trust funds, investment trust funds, private-purpose trust fundsand agency funds. The three types of trust funds should be used to report

resources held and administered by the reporting government when it is acting in

a fiduciary capacity for individuals, private organizations or other

governments (emphasis added). These funds are distinguished from agency

funds generally by the existence of a trust agreement that affects the degree of

management involvement and the length of time the resources are held."

Fiduciary fund categories are defined as follows:

• Pension (and other employee benefit) Trust Funds are defined in Code Section

1300.111 :

o "Pension (and other employee benefit) Trust Funds should be used to reportresources that are required to be held in trust for the members and beneficiaries of

defined benefit pension plans, defined contribution plans, other post-employment

benefit plans, and other employee benefit plans."

• Investment Trust Funds are defined in Code Section 1300.112:



o "Investment Trust Funds should be used to report the external portion of

investment pools reported by the sponsoring government, as required by Section

150 "Investments," paragraph 116:'

• Private-purpose Trust Funds are defined in Code Section 1300.1] 3:

o "Private-purpose Trust Funds should be used to report all the other trust

arrangements under which principal and income benefit individuals, private

organizations, or other governments:'

• Agency Funds are defined in Code Section 1300.114:

o "Agency Funds should be used report resources held by the reporting government

in a purely custodial capacity (assets equal liabilities). Agency funds typically

involve only the receipt, temporary investment, and remittance of fiduciary

resources to Indlvlduals, private organizations, or other governments"

(emphasis added).

o When Agency Funds hold moneys that should be held by other funds, they are

considered clearing accounts as defined in Code Section 2200.179:

• "Sometimes an agency fund is used as a clearing account to distributefinancial resources to other funds of the government (emphasis added),

as well as other entities. For example, county property tax collectors

customarily collect and distribute property taxes to the county's funds as

well as other governments within the county. When this occurs, the

portion of the clearing account balance that pertains to other funds of

the county should not be reported in the agency funds. Rather, it

should be reported as assets in the appropriate funds (emphasis

added)."

TERMIN OLOGY FO R FINANCIAL STATEMENT EQUITY

The terminology used in the equity section of the financial statements in the governmentalfinancial report depends on the measurement focus of the statement. The equity section of the

new Government-wide financial statements, Proprietary funds and Component units is

titled Net Assets. The equity section of governmental funds is still titled Fund Balance. Theseequity sections of the Government-wide financial statements, the Proprietary Funds and the

Governmental Funds represent both the accumulation of excess revenues over expenses since the

inception of the government/fund, and difference between the government/fund's assets and

liabilities.

In the Government-wide financial statements, Proprietary funds and Component units, "Net

Assets" are defined as the difference be tween assets and liabilities and should be displayed using

the folJowing three components:

• Invested in Capital Assets, Net of Related Debt is defined in Code Section 2200.1 J 8.

o This component of net assets consists of capital assets, including"restricted capital assets,

net of accumulated depreciation and reduced by the outstanding balances of any bonds ,

mortgages.notes, o r other borrowings that are attributable to the acquisition, construction,

or improvement of those assets,

o Ifthere are significant unspent related debt proceeds at year-end, the portion of the debt

attributable to the unspent proceeds should not be included in the calculation of invested



i n c ap it a l a s se ts , n e t o f r el at e d debt .Rather, that portion ofthe debt should be included in

the same net assets component as the unspent proceeds-for example; restricted

for capi tal projects.

• Restricted Net Assets (distinguishing between major categories of restrictions) is defined in

Code Section 2 20 0.1 1 9.o Net assets should be reported as restricted when constraints placed on net asset

use are either:

• Externally imposed by creditors (such as through debt covenants),

grantors, contributors, or laws or regulations of other governments

• Imposed by law through constitutional provisions or enabling legislation.

o Enabling legislation, as the term is used in this section, authorizes the government

to assess, levy, charge. or otherwise mandate payment of resources (from external

resource providers) and includes a legally enforceable requirement that those

resources be used only for the specific purposes stipulated in the legislation, The

amount of the primary government's net assets at the end of the reporting period

that are restricted by enabling legislation should be disclosed in the notes to the

financial statements.o Legal Enforceability is defined in Code Section 2200.120 "means that a

government can be compelled by an external party-such as citizens, public

interest groups,or the judiciary-to use resources created by enabling legislation

only for the purposes specified by the legislation. Generally, the enforceability of

an enabling legislation restriction is determined by professional judgment, which

may be based on actions such as analyzing the legislation to determine if it meets

the qualifying criteria for enabling legislation, reviewing detenninations made for

similar legislation of the government or other governments, or obtaining the

opinion of legal counsel. However, enforceability cannot ultimately be proven

unless tested through the judicial process, which may never occur. The

determination of legal enforceability should be based on the underlying facts and

circumstances surrounding each individual restriction. The detennination that aparticular restriction is not legally enforceable may lead a government to

reevaluate the legal enforceability of similar enabling legislation restrictions, but

should not necessarily lead a government to conclude that all enabling legislation

restrictions are unenforceable."

• Unrestricted Net Assets is defined in Code Section 2200.124 "consist of net assets that do

not meet the definition of "Restricted" or "Invested in Capital Assets. Net of Related Debt",

o Any debts that cannot be attributed to acquisition or construction of the capital

assets are allocated to unrestricted net assets.

Until the effective date for the implementation of GASB 54, fiscal periods beginning after June

15, 2010, the fund balance is segregated into two categories as in defined in Code Section

1800.142 to show various legal or other restrictions on the use of fund "resources:• "In governmental fund accounting and reporting, use of the term reserve should be limited

" to indicating that a portion of the fund balance is not appropriable for expenditure or is

legally segregated for a specific future uses. ... Where part of the fund balance is reserved,

the remainder should be reported as Un re se rv ed F un d B ala nc e."



--he second category of the fund balance, Unreserved Fund Balances, represents the fund's

equity that is not legally restricted or has not been appropriated for future expenditures. This

section of the fund balance has two subcategories.

• Designated-Unreserved Fund Balances are defined in Code Section 1800.144. "may beestablished to indicate tentative plans for financial resource utilization in a future period,

such as for general contingencies or for equipment replacement. Such designations reflect

tentative managerial plans or intent and should be clearly distinguished from reserves. Such

plans or intent are subject to change and may never be legally authorized or result in

expenditures. Designated portions of the fund balance represent financial resources

available to finance expenditures other than those tentatively planned (emphasis

added)." .

o Per the AICPA's Audits of State and Local Governmental Units (March 1, 2008Edition). Paragraph 10.17. "designations should not result in negative

undesignated balances being reported on the financial statements at year end.

regardless of the undesignated fund balance at the time the designation was

made."• Undesignated-Unreserved portion of the fund balance represents that portion of the

unreserved fund balance for which there are no legal restrictions and which can be

appropriated for future expenditures.

For periods beginning after June 15, 2010, the terms reserved fund balance, unreserved-

designated fund balance, and unreserved-undesignated fund balance become obsolete and will be

replaced by new terminology. .

• Nonspendable Fund Balance is defined in paragraph 6 ofGASB 54.o "The nonspendable fund balance classification includes amounts that cannot be spent

because they are either (a) not in spendable form or (b) legally or contractually

required to be maintained intact. The "not in spendable form" criterion includes items

that are not expected to be converted to cash, for example, inventories and prepaid

amounts. It also includes the long-term amount of loans and notes receivable, as well

as property acquired for resale. However. if the use of the proceeds from the

collection of those receivables or from the sale of those properties is restricted,

committed, or assigned, then they should be included in the appropriate fund balance

classification (restricted, committed, or assigned), rather than nonspendable fund

balance."

• Restricted Fund Balance is defined in paragraphs 8 and 9 ofGASB 54.

a "Except as provided for in paragraph 7, amounts that are restricted to specific

purposes. pursuant to the definition of restricted in paragraph 34 of Statement 34, as

amended by Statement No. 46, Net Assets Restricted by Enabling Legislation, should

be reported as restricted fund balance. Fund balance should be reported as restricted

when constraints placed on the use of resources are either:

• Externally imposed by creditors (such as through debt covenants), grantors,

contributors, or laws or regulations of other governments; or

• Imposed by law through constitutional provisions or enabling legislation.

o Enabling legislation, as the term is used in this Statement, authorizes the government

to assess, levy. charge, or otherwise mandate payment of resources (from external

resource providers) and includes a legally enforceable requirement that those



resources be used only for the specific purposes stipulated in the legislation. Legal

enforceability means that a government can be compelled by an external party-such

as citizens, public interest groups, or the judiciary-to use resources created by

enabling legislation only for the purposes specified by the legislation."

• Committed Fund Balance is defined in paragraph 10 ofGASB 54.

o "Amounts that can only be used for specific purposes pursuant to constraints imposed

by formal action of the government's highest level of decision making authority

should be reported as committed fund balance. Those committed amounts cannot be

used for any other purpose unless the government removes or changes the specified

use by taking the same type of action (for example. legislation, resolution, ordinance)

it employed to previously commit those amounts. The authorization specifying the

purposes for which amounts can be used should have the consent of both the

legislative and executive branches of the government, if applicable. Committed fund

balance also should incorporate contractual obligations to the extent that existing

resources in the fund have been specifically committed for use in satisfying those

contractual requirements."

• Assigned Fund Balance is defined in paragraphs 13, 14 , 15 and 16 of GASB statement 54.o Amounts that are constrained by the gove rnment ' s intent to. be used for specific

purposes, but are neither restricted nor committed, should be reported as assigned

fund balance, except for stabilization arrangements, as discussed in paragraph 21.

Intent should be expressed by (a) the governing body itself or (b) a body (a budget or

finance' committee, for example) or official to which the governing body has

delegated the authority to assign amounts to be used for specific purposes.

o Both the committed and assigned fund balance classifications include amounts that

have been constrained to being used for specific purposes by actions taken by the

government itself. However, the authority for makin-gan assignment is not required to

be the government's highest level of decision making authority. Furthermore, the

nature of the actions necessary to remove or modify an assignment is not as

prescriptive as it is with regard to the committed fund balance classification.Constraints imposed on the use of assigned amounts are more easily removed or

modified than those imposed on amounts that are classified as committed. Some

governments may not have both committed and assigned fund balances. as not all

governments have multiple levels of decision-making authority.

o Assigned fund balance includes (a) all remaining amounts (except for negative

balances, as discussed in paragraph 19) that are reported in governmental funds, other

than the general fund, that are not classified as nonspendable and are neither restricted

nor committed and (b) amounts in the general fund that are intended to be used for a

specific purpose in accordance with the provisions in paragraph ]3. By reportingparticu lar amounts that are not restricted or committed in a special revenue, capital

projects, debt service, or permanent fund, the government has assigned those amounts

to the purposes of the respective funds. Assignment within the general fund conveysthat the intended use of those amounts is for a specific purpose that is narrower than

the general purposes of the government itself. However, 'governments should not

report an assignment for an amount to a specific purpose if the assignment would

result in a deficit in unassigned fund balance.



o An appropriation of existing fund balance to eliminate a projected budgetary deficit in

the subsequent year's budget in an amount no greater than the projected excess of

expected expenditures over expected revenues satisfies the criteria to be classified as

an assignment of fund balance. As discussed in paragraph IS, assignments should notcause a deficit in unassigned fund balance to occur.

• Unassigned Fund Balance is defined inparagraph 17 ofGASB statement 54.

o Unassigned fund balance is the residual classification for the General Fund. This

classification represents fund balance that has not been assigned to other funds and

that has not been restricted, committed, or assigned to specific purposes within the

general fund. The general fund should be the only fund that reports a positive

unassigned fund balance amount. In other governmental funds, jf expenditures

incurred for specific purposes exceeded the amounts restricted, committed, or

assigned to those purposes, it may be necessary to report a negative unassigned fund

balance.

BENCHMARKING THE FUND BALANCE

A «benchmark" is a standard that is used to measure performance and to compare an

organization to other similar organizations. A benchmark is used by rating agencies and other

stakeholders historically to compare the General Fund's fund balance to either its annual

revenues or expenditures. The ratios calculated are intended to serve as a measure of resources

available so they can be compared to a benchmark or standard to assist in determining the

financial health of the General Fund. The word "standard" should not be confused with the

reporting and accounting standards promulgated by the GASB. The GASB's standards govern

what the government is required to report and how it is to be reported in the government's

CAFRs. The use of the word "standard" is not used as an accounting standard; instead, it is

used as a benchmark measurement to analyze the financial information presented in the CAFR

to determine the financial health of the government, its ability to meet its current and future

obligations, and to compare its performance to other governmental entities. The benchmark used

in analyzing the health of a governmental fund is not an absolute. Different organizations have

determined their benchmark based on their experience and needs.

History of Benchmark

Historically, Standard & Poors (S&P) used as its benchmark the total fund balance equaling

5% of expenditures. The Government Finance Officers Association's CGFOA) November 1990

Research Bulletin entitled Unreserved Fund Balance and Local Government Finance, noted on

page 6 that S&P considers 5% of annual operating expenditures to be an adequate fund balance

level. In February 1999, S&P issued a report titled Research: Benchmark General Obligation

Ratios, which published the benchmark ratios S & P uses in analyzing governmental units.

These ratios, per page 1 of its February 1999 article, "represent benchmarks that S&P analysts

usually consider high, low or moderate, regardless of rating category or point in the national

economic cycle." S&P now bases its measurement benchmark as a percentage of operating

revenues, not expenditures. S&P considers 5% to 15% of operating revenues to be

"adequate" when benchmarking the General Fund's!!!!!! ending fund balance, and 2% to

8% of operating revenues to be "adequate" for benchmarking the unreserved fund



balance. In discussions with David Hitchcock, the author of the R es ea rc h: B e nc hma rk G en er al

Ob li ga ti on Ra ti os , in November 2002. he said that S&P still uses these ratios from this

article, and considers them adequate. Greater emphasis is placed on the cash flow needs of

the government in determining the adequacy of the fund balance.

Moody's Investor Services (Moody's) has used as its benchmark total fund balance equaling

5% of expenditures. On page 27 of Mo od y's o n M u nic ip als published in 1991, "[tjhe level of

fund balance is related to the likelihood of drawing upon these accumulations. Generally, 'a fund

balance of 5% of the budget is deemed prudent." Moody's still uses this total fund balance

criteria as shown in its February 2002 Special Comment, Your G eneral F und B alanc e - O ne Size

Does Not F it A ll! In this four page report, Moody's states on page 3, "[d]epending on which

vulnerabilities are more significant in each situation, should dictate whether to utilize a number

of days, of operating expenses or a flat percentage in formulating reserve levels. In the former

case 3minimum of one to two months of operating expenses is considered reasonable, while

in the latter instance a minimum level of between 5% and 10% should [be] targeted." The

term "reserves" as used in this standard is defined on page 1 the February 2002 special comment,

"[f]or the purpose of this comment; however we will focus on General Fund balance, orreserves." We discussed Moody's benchmark with two Moody's analysts in November 2002.

Per Dan Barzil, Moody's uses the total fund balance in it s analysis due to the varying nature of

reserved fund balances (viz. a reserve for encumbrances is different from a reserve for

contingencies). John Incorvaia, one of the writers of Your Fund Balance - One Size Does Not

Fit All. said the 5% to 10% really should be applied to the "undesignated" fund balance. He

defined "undesignated" fund balances as "free reserves", i.e., the portion of the fund balance that

does not have restrictions. Per Mr. Incorvaia, it starts with the "unreserved-undesignated" fund

balance, which is unrestricted and is then adjusted by analyzing the fund balance reserves and

designations to determine if these should be included in the undesignated fund balance. The

appropriate percentage would depend on the overall financial strength, volatility of

revenues and expenditures, and cash flow needs. He said that this report was meant to

encourage governments to establish a policy on the unreserved fund balance.

In past years, Fitch meA (Fitch) has used a 5% benchmark. In the GFOAs November 1990

research bulletin discussed above, the GFOA noted on page 6 that Fitch considers "3 fund

balance of 5% of revenues .... a reasonable benchmark." It is clear from the context in which

this quote was taken that "fund balance" refers to the unreserved fund balance. In May 2000

Fitch issued a special report titled L oc al G ove rn me nt G en era l O blig atio n R atin g G uid elin es in

which they discussed their guidelines in rating local governments. Page 6 of this report states:

"as a cushion against potential revenue and expenditure volatility, an unreserved fund balance

equal to 5% of expenditures and transfers or revenues and transfers is regarded as a sound

level." In a phone conversation in November 2002 with Richard P. Larkin, the author of the

May 2000 special report, Mr. Larkin said the 5% to 10% unreserved fund balance is a good

benchmark. However, of more importance is the volatility of the government's revenues,expenditures, cash flow, and working capital needs. A government with low volatility, with

consistent revenues, expenditures, and cash flows could have an adequate unreserved fund

balance of 3% to 5% percent of revenues. A government with large variability of revenues,

expenditures, cash flows, and requires short-term financing would require a higher fund

balance exceeding 10%. Mr. Larkin also wrote Fitch's November 2002 special report titled The



12Habits of Highly Successful Finance Officers. Page 3 of these report states, "[t]he appropriate, size of such a reserve depends on the potential variability of the entity's revenues and expenses,as well as its working cash needs to handle seasonality of revenues or expenditures." Fitch

affirmed its 5% benchmark on page six in its March 23, 2007 report titled Local GovernmentGeneral Obligation Rating Guidelines stated: "Because fund balance designations arediscretionary and will vary among entities, Fitch looks at unreserved fund balances for nationalcomparative purposes. Generally, as a cushion against potential revenue and expenditurevolatility, an unreserved fund balance equal to 5% of expenditures and other fund uses isregardedas a sound level."

Themost conservative benchmark is promulgatedby the GFOA. In February 2002, the GFOAissued its "Recommended Practice" on theAppropriate Level of Unreserved Fund Balance in the

General Fund. In this three-page statement the GFOA changed it s recommendation on theminimum level of the unreserved fund balance. This new minimum was incorporated in theGFOA's September 2002 update of its elected official guide on fund balances, now titled An

Elected Officials Guide to Fund Balance and Net Assets. The GFOA now recommends forthose governments that compare the unreserved fund balance to revenues, the minimumunreserved fund balance be no less than 5% to 15% of general fund revenues. For thosegovernments that compare the unreserved fund balance to expenditures, the minimumunreserved fund balance should be no less the 8% to 17% (i.e. one to two months) ofregular general fund operating expenditures.

These new minimum unreserved fund balance levels are 60% greater than the GFOA's oldbenchmark standard discussed in the GFOA's November 1990 Research Bulletin entitledUnreserved Fund Balance and Local Government Finance on page 6 which states "a commonstandard of measuring unreserved fund balance (or resources available for contingencies) holdsthat an amount equal to 5% of annual operating expenditures is sufficient to guard againstthe effects of most types of uncertainty." On page 7 of this bulletin, the GFOA is even moreemphaticwhen it states, "as a general rule, a local government should maintain an amount equalto 5% of annual operating expenditures. This should satisfy some of the credit rating agencies'concerns regarding the adequacy of resources available for contingencies. Those governmentsfacing greater uncertainty should maintain a higher level of unreserved fund balance. Thosegovernments that maintain an unreserved fund balance above 10% of annual operating expensesshould be able to provide appropriate justification for maintaining that level." This old standardwas supported in the now supersededAn Elected Officials Guide to Fund Balance, page J 7.

Government Financial Officers Association

In our opinion, the GFOA's new minimum unreserved fund balance levels reflect theconservative bias of government financial officers. This is especially true when compared

to the benchmarks used by all of the three ratings agencies, which is substantially lowerthan that of the GFOA. The new benchmarks issued by the GFOA are due to the uniquepolitical pressures government finance officers are under. Not only are they involved in thepreparation of the budget, the spending plan of the government, which is influenced by theeconomic and political views of the executive and legislative branch, but they are under otherpressures as well. The GFONs February 2002 recommended practice Appropriate Level of



Unreserved Fund Balance in the General Fund notes that "(T)hose interested in a government's

credit worthiness or economic condition (e.g. rating agencies) are likely to favor increased levels

of fund balance. Opposing pressures often come from unions, taxpayers and citizens'

groups, which may view high levels offund balance as excessive" (emphasis added).

Furthermore, in this recommended practice, the GFOA references these new minimum levels of

unreserved fund balance in ·arecommendation that "governments establish a formal policy on the

level of unreserved fund .balance that should be maintained in the general fund." This

. recommendation that governments adopt a formal policy on the level of unrese rved fund

balances is an outgrowth of the National Advisory Council on State and Local Budgeting

Practice report titled A Framework for Improved State and Local Government Budgeting and

Recommended Budget Practices. Per page 13 and 14 of this report states, "A government should

develop policies to guide the creation, maintenance, and use of resources for financial

stabilization purposes .... Governments should maintain a prudent level of financial resources to

protect against reducing service levels or raising taxes and fees because of temporary revenue

shortfalls or unpredicted one-time expenditures." The adoption of a policy based on the

GFOA's conservative minimum fund levels will provide support for large fund balances.

The GFOA's An Elected Officials Guide to Fund Balance and Net Assets, not only incorporates

its new recommendations of minimum fund balances, but also discusses the nature of the

General Fund's fund balance. In discussing the new minimum recommended levels for the

unreserved fund balance, the new elected officials guide on page 24 notes "acceptable levels

of unreserved fund balance (expressed as a percentage of revenues or expenditures)

typically are less for larger governments than for smaller governments. One reason for

this difference is simply the magnitude of the amounts involved in the case of larger

governments. Also, larger governments typically have more diversified revenues and

expenditures, thus requiring less unreserved fund balances to protect against volatility."

Furthermore since "It is expected that the level of unreserved fund balance will fluctuate

from period to period, the measures just described should be considered within the broadercontext of long-term forecasting to avoid the risk of too much emphasis upon the level of

unreserved fund balance in the general fund balance at anyone time." We accept the

GFOA's contention that the minimum unreserved fund balance should be viewed over a

period of years, as displayed in our exhibit, and not to one year. Major decreases or

increases in unreserved fund balance may be due to planned drawdowns, onetime projects, the

accumulation of resources for a large project, or the accumulation of resources for economic

downturns.

Unreserved Fund Balance Defined

The determination of substance over form should apply to the determination of the unreserved

fund balance. Some cities, counties, and states create reserved fund balances that do not meet

the two requirements discussed above. A reserve for uncertainties does not satisfy the two

requirements discussed above to qualify as a reserved fund balance. Specifically,

uncertainties are not legal covenants that require a portion of the fund balance to be segregated

such as encumbrances, nor do they identify the portion of the fund balance that is not

appropriate for future expenditures such as inventories. These types of "reserved" fund balances



are in essence designated unreserved balances. Therefore reserves for uncertainties, and other

reserves ofa similar nature, should be included in the unreserved fund balance in determining the

5% benchmark. This approach is reinforced by the GFOA in its 2002 "Recommended Practice"

on the Appropriate Level of Unreserved Fund Balance in the General Fund mentioned above on

the appropriate level of the unreserved fund balance by Footnote 2, which states, "Sometimes

reserved fund balance includes resources available to finance items that typically would require

the use of unreserved fund balance (e.g. a contingency reserve). In that case, such amounts

should be included as part of unreserved fund balance for purposes of analysis." (Emphasis

added.)

Determining Revenues and Expenditures

"Rules of Thumb" like the 5% benchmark of the fund balance to expenditures are used to

deterntine if the fund's revenues are sufficient to pay its ongoing operating expenditures and the

degree of the fund's health. In calculating the 5% level, determining the operating expenditures

and revenues is essential. For instance, should transfers out be treated as expenditures? Shouldtransfers in be treated as revenues? GAAP allows cities, counties, and states to choose between

GAAP methods in presenting their financial data to users of the financial statements. Whether to

include transfers as part of the fund's operating expenditures or revenues depends on the

"nature" of the transfers; one must determine the substance of the transaction over the

form in which it is presented: One determining factor is the regularity of the transfer.

Regular, annual transfers should probably be included either as an operating revenue or

expenditure. As an example, annual transfers out to subsidize an enterprise fund such as a

municipal bus system, should be considered part of the expenditures in determining the 5%

benchmark. If the transfers are not regular, but are sporadic one-time occurrences or rare events,

they should not be included in the expenditures or revenues used to determine the 5%

benchmark.

Another determin ing factor is the question of responsibility. Is the General Fund contractually

required to pay the obligation from its revenues? For instance, if the fund's revenues are required

to pay the debt service, the transfers out to the Debt Service Fund should be included in

operating expenditures. If the General Fund's revenues are not contractually obligated to pay the

debt service, but the fund is acting as a collection conduit for other funds, the

expenditures/transfers for the debt service being reimbursed and the reimbursement for debt

service are irrelevant to the health of the General Fund. The contractual obligation to pay the

debt rests with the fund reimbursing the General Fund from the transferring fund's revenues. As

such, neither the reimbursement nor the expenditure should be included in determining the 5%

benchmark level, because the transfers in to reimburse the debt service payments offset the

transfers out to the Debt Service Fund. In cases where the General Fund's transfers out for debt

service exceed the reimbursement for debt service from other funds, only the net debt service

transfers out should increase expenditures. We will include only those transfers that we canidentify as originating exclusively from the General Fund in expenditures.

It is our belief that when applying the unreserved fund balance benchmark, that 5% of

expenditures is the appropriate starting point for this benchmark. The expenditures

should represent the GAAP expenditures, plus or minus regular transfers for which the



--und has primary responsibility. The unreserved fund balance should include the

undesignated amount as well as the designated fund balances, Reserved fund balances that

do not meet the two criteria discussed earlier, such as reserved for emergencies or reserved

for contingencies should also be included in the unreserved fund balance. Other factors to, consider may include historical long-term view, entity size, other unreserved fund balances, and

volatility of revenues and expenditures.

Applying the Benchmark to the Government-wide Financial Statement

As the 5% benchmark traditionally determines the health of the General Fund, we believe

it can also be used to determine the health of the total governmental activities through tbe

government-wide financial statements. A benchmark of the unrestricted net assets equaling

5% of the governmental activities total revenues or expenses will provide insight into the

government's overall ability to provide services to its citizens that is funded by numerous

governmental type funds and not just the General Fund.

The new reporting model requires that governmental long-term debt that cannot be allocated to

fixed assets be offset against unrestricted assets. This offset of long-term liabilities against

current unrestricted assets skews unrestricted net assets, and can give a false impression on

the true health of the governmental activities financial status. This debt will be paid out of

future revenues over the life of the bonds (up to 30 years), or in the case of the Redevelopment

Bonds. the sale of redevelopment property. In essence the current unrestricted net assets are not

the only source of paying these long-term general obligations. Future revenues of the

governmental activities will be the primary funding source for paying off these obligations under

the theory that those who receive the 'primary future benefit for the assets acquired or services

provided should pay for the their cost. Furthermore, the nature of the debt incurred may hide

future benefits to the governmental activities. For instance, pension obligation bonds issued to

reduce underfunded pension liabilities may in the long-term reduce future pension costs to the

governmental activities. The difference between the long-term growth rates that exceed theinterest rate on the bonds will substantially reduce future pension costs. As such, the negative

unrestricted net assets of the governmental activities in government wide Statement of Net

Assets is not indicative of the current unrestricted financial health of the governmental activities.

It is our belief that when determining ratio of unrestricted net assets to revenues or

expenses to the 5% benchmark, we should only use the current resources available to the

government. As such, we believe the ratio should use unrestricted net assets adjusted or

increased by any long-term debt not applied against the governmental activities net assets

invested capital assets net of related debt. .



EXHIBIT I

Exhibit Is an analysis of selected information from the City of Tacoma's Government-wide

Financial Statements for the years ended December 31, 2005 through December 31,2010. We

have only presented the governmental activities of the City as that is the funding source for the

Police Department. The governmental activities include not only the General Fund, but also the

Special Revenue Funds, the Capital Project Funds, the Debt Service Funds and the Internal

Service Funds. It does not include the Enterprise Funds, which are the business activities portion

of the government-wide financial statements. Not all Of. the resources' in this exhibit are

available for compensation purposes due to restriction of their use at the fund level,

The purpose of this exhibit is not to show all of the City's resources that are available for wage

and benefit increases. Instead the purpose of this exhibit is three fold:

• To determine the financial health of the government as a whole, and not the individual

funds,

• To determine if the government's financial health is growing stronger or is declining, and• How the government finances and acquires it infrastructure and capital assets.

Exhibit I-A summarizes the components of the governmental activities portion of the Statement

of Activities. which shows how the City's net assets changed during the fiscal year. The City's

net assets are $606.5 million higher as of December 31, 2010 than at January 1. 2005. growing

from $204.7 million to $811.2 million. However, most of the growth was due to the recording of

the City capital assets and infrastructure totaling $619.2 million in 2005 in order to conform to

GASB 34, and a $12.8 million change in accounting principle in 2010.

General

• The cumulative increase in net assets due to revenues and transfers in exceeding

expenditures and transfer out totaled $9.8 million during the past six years.o However the City. has restated the beginning fund balances to correct prior years'

errors in each year since 2005.

• The corrections of prior years' errors reduced net assets by $35.4 million

since 2005.

o The combined change in the Governmental-activities net assets to include the

cumulative annual changes in net assets and the corrections of prior years' error

was a decline of$25.6 million.

Expenses and Program Revenues

There are significant differences between expenses as reported in the government-wide financial

statements and expenditures as reported in the governmental fund statement. Expenditures

represent the expenditure of cash and include the acquisition cost of capital assets and debt

principle. Expenditures do not include depreciation expense. Expenses represent the use of an

asset and include depreciation and amortization expenses, but do not include the acquisition of

assets or the payment of principle on long-term debt.

In 2009 and 20] O . the City allocated its government-wide expenses between seven functions, six

of which receive program revenues. Prior to 2009, the City allocated its expenses between seven



functions. We have analyzed the four largest expense functions that are material, as each

historically exceeded 10% of total expenses. The three smallest expense functions, health and

human services, culture and recreation, and interest on long-term debt, are immaterial and their

related program revenues are insignificant. The City does not explain why large increasesocctired in expenses or revenues in its Management's Discussion and Analysis (MDA).

Revenues generated by a program or function are program revenues. Restrictions on the use of

these revenues vary between the three types of program revenues.

• Revenues from charges for services generally are not restricted to finance future program

services. There are exceptions.

o These revenues usually can be used to finance wages and benefits.

o Charges for services received by the General Fund usually can be used to finance

all General Fund programs .

.0 After declining in 2006, charges for services revenues increased from $24.1

million in 2006 to $38.6 million in 2009.

• In 2010, charges for services fell to $36.1 million.

• Operating grants and contributions ranged from a low of $12.5 million in 2008 to a high

of $35.1 million in 2006. ,

o Operating grants and contribution were $22.3 million in 2010.

o Operating grants and contributions for specific programs can only be spent for

those specific purposes and may be available to finance only those wages that

provide the specific services.

• Unspent operating grants for specific grants should be reported as

restricted net assets if unspent at year end .

• ' Capital grants and contributions either represent infrastructure contributed by developers

or moneys that can only be spent for specific capital projects.

o These moneys cannot be spent on wages and benefits.

o Unspent capital grants should be reported as restricted net assets ifunspent at year

end.

Total governmental expenses grew each year from $211.3 million in 2005 to $300 million in

2009 before declining to $267 million in 2010.

• General government expenses include the administrative, financial, human resources and

similar departments.

o After fa1ling from $21.1 million in 2005 to $20 million in 2007, general

government expenditures increased substantially the next three years to $28.8

million.

o As a percentage of total expenditures, general government ranged from "alow of

7.35% in 2006 to a high of 10.79% in 2010.

o As shown in the following table, the general government function received

significant program revenues, predominantly revenues from charges for services,which a covered substantial portion of the expenses.

• The most important program revenue, charges for services, increased

significantly, offsetting the impact of expense increases.



General Government

(In OOOs)

Fiscal Year Operating Capital GrantsEnded Charges fur Grants a n d and Total Program

June 30, Service's Contnbutions Contnbutions Revenues

2005 3,019 2,314 0 5,333

2006 5,651 10,280 0 15,931

2007 8,396 9,170 0 17,566

2008 12,482 1,273 0 13,755

2009 11,747 337 0 12,084

2010 14,050 3,400 0 17,450

• Public safety includes the police and fire departments, and is the City's largest expense

function.

a Public safety expenses fell $13.8 million from $129.4 million in 2005 to $115.6

million 2006. .

o From 2007 through 2009. public safety expenses grew to $168 million.

o In 2010, public safety expenses declined $10.6 million to $157.5 million.

o The percentage of public safety expenses to total expenses fluctuated between a

low of51.81% in 2007 to 61.25% in 2005.

a Despite the decline in public safety expenses in 2010, the percentage of public

safety expenses to total expenses increased to 58.99% from 2009's 56.02% due to

the 2010's decline in total expenses.

o As shown in the following table, public safety also received program revenues,

the most important being charges for services.

• Charges for services have fluctuated since 2005 from a low of$3.9 million

in 2007 to a high 0£$12.4 million in 2009.• In 2010 charges for service revenues were $8.9 million.

• We could not determine why these revenues fluctuated.

• Operating grants and contributions was this function's second most

important program revenue.

Public Safety

(In OOOs)

Fiscal Year Operating Capital Grants

Ended Charges fu r Grants and and Total Program

June 30, Services Contributions Contributions Revenues

2005 8,192 5,832 0 14,024

2006 5.331 5,043 0 10,374

2007 3,917 9,070 1,122 14,109

2008 8,202 ] ,291 2,047 11,540

2009 12,409 2,498 337 15,244

2010 8,943 3,295 231 12,469



• Transportation expenses grew from $] S.9 million in 2005 to $53 mil1ion in 200S, then

declined to $37.6 million in 2009 and $19.6 million in 2010.

o The increase in expenses from $18.9 million to $44.7 million in our opinion is

incorrect.• The government-wide financial statements are compiled from the various

fund financial statements.

• It appears that in compiling the Statement of Activities, the

finance department incorrectly included 2006's economic

environment expenses.

• Per the 2006 governmental fund statements, transportation

expenses totaled $18 million and economic environment expenses

totaled $22 million.

o As noted below, on the government wide financial

statements, environment expenses are $1.8 million.

o The percentage of transportation expenses to total expenditures rose and declined

in response to the rise and decline of transportation expenses.o This function's program revenues have fluctuated during the last seven years.

• In four of the six years presented, capital contributions and grants was the

largest or second largest program revenue.

• The rise and decline of capital grants was a precursor to changes in

transportation expenses.

• In 2006 and 2009 operating grants were the largest program revenue.

• The increase in operating grants and capital grants corresponded to the

increase in expenses.

• Capital grants and contributions and" operating grants andcontributions can only be spent for transportation purposes.

Tranportation

(In OOOs)

Fiscal Year Operating Capital Grants

Ended Charges for Grants and and Total Program

June 30, Services Contributions Contributions Revenues

2005 5,226 2,150 8,139 15,515

2006 4,036 12,303 11,368 27,707

2007 4,050 1,632 14,480 20,162

2008 9,426 1,713 5,554 16,693

2009 7,820 15,663 1,098 24,581

2010 9,263 4,674 13,195 27,132

• Economic environment expenditures fluctuated wildly during the period covered by our

report, from a lowof$I.8 million to $30.3 million in 2009.

o As noted above, the 2006 economic environment expenses of $1.8 million is

incorrect when compared to the governmental fund expenses of$22 million.

o This function's program revenues have financed a substantial portion of the City's

public works during the last six years.



• As shown in the following table, charges for services and operating grants

have been the two most important program revenues.

Economic Environment

(InOOO'a)

FiscalYear Operating Capital Grants

Ended Charges fur Grants an d and Total Program

June 30, Services Contnbufuns Contributions Revenues

2005 6,337 7,075 0 13,4]2

2006 7,729 4,330 0 12,059

2007 7,208 8,373 0 15.581

2008 5,899 4,712 0 10,61 ]

2009 5,372 5,069 929 1 J .370

2010 3,250 7,287 570 ] I.]07

General Revenues

General revenues and transfers to governmental activities grew from $187.2 million in 2005 to

$206.5 million in -2007, and then fell the next three years to its six year low of $184.2 million in

2010. $3 million below 2005's general revenues and transfers from business activities.

• As originally reported, the City's tax revenues exceeded the governmental activities'

expenses net of program revenues only in 2006.

o However, in 2010, the City changed it s reporting of the receipt of the gross

earnings taxes by governmental activities and the governmental funds from atransfer from the enterprise funds to other business tax revenues.

o If the gross earnings taxes had been reported as a tax, tax revenues would have

exceeded the governmental activities' expenses net of program revenues in 2005,

2006, and 2007.• We will discuss the growth of general revenues in greater detail in our Exhibit II.

Change in Net Assets

The City's governmental activities net assets increased each year covered by our report.

• Net assets grew from $204.7 million at January I.2005 to $811.2 million at December31,20]0:

o Most of the increase occurred in 2006 due the recording of $619.2 million of

capital assets as required by GASB 34.

o Also, beginning in 2005 through 2007, net assets increased due to revenues and

transfers exceeding expenses and prior years' corrections.

o In 2008, and 2009, net assets declined due to expenses, and prior year's

corrections exceeding revenues.o Tn 2010. net assets increased due to prior year's corrections, and a change in

accounting principle offsetting the decline in net assets due to expenses exceeding

revenues.,

• Depreciation expense, a non-cash expense, has had a significant impact on the annual

change in net assets.



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Exhibit I-B is an "analysis of the ending balances of the governmental activities assets, liabilitiesand net assets from the Statement of Net Assets.

The rise or decline in cash and investments is influenced by other factors besides the annualincreases to net assets. The collection of receivables, the payment of liabilities, the purchase of

inventory, and the acquisition of capital assets affect cash and investments ending balance.

• The City's unrestricted cash and investments have fluctuated from a low of $151.6

million at December 31, 2005 to a high of $208.2 million at December 31, 2007 before

declining to $186.3 million in 2009.

o In 2010, cash and investments recovered, growing to $203.2 million.

o The primary reason for the changes in cash and investments has been the annual

increase or decrease in net assets

• Depreciation expense is a non-cash expense and therefore. does not affect

cash.

o In 2009, and 2010, cash and investments remained strong, and increased due to

the receipt of the proceeds from the issuance of long-term debt.

• The City's governmental activities cash and investment balance is healthy

o However in the past two years, the proceeds of long-term debt helped maintain

the cash balance.

Current Asset to Current Liability RatioThe asset to liability ratio is used to predict the ability of an entity to pay its current liabilities

timely and is considered an indicator of financial health. Usually the higher the asset to liability

ratio is, the healthier the entity. While the change in net assets will have an effect on these ratios,the largest influence on the growth or decline in these ratios are changes in liabilities. To offset a

change in liabilities, the change in assets must be proportionately greater to maintain these ratios

Furthermore non-cash expenses such as depreciation, while it affects the change in netassets, has no effect on current assets and liabilities.

• City of Tacoma has maintained a healthy current asset to current liability ratio.

• The movement of this ratio, in most years, is due to the increase or decrease in current

liabilities.

o The increase in the City's current liabilities from 2007 through 2009 contributed

to the decrease in the ratio.

a The decrease of 201O's current liabilities was a contributing factor to the

increased ratio.

o The increase of the City's current assets was a positive factor.in the increased

ratio in 2006 and 2010. "

Net Assets Invested in Capital Assets, Net ofRelated DebtThe governmental activities' net assets invested in capital assets net of related debt reflects the

City's governmental activities investment in capital assets such as building and streets, and assuch is not available for future spending. Since December 31, 2005. this component of net assets

grew $624.9 million after depreciation.

• The recording of $619.2 million of infrastructure in 2006 in accordance with GASB 34

was a major factor to this growth.

P ag e 2 7



• In 2009, both capital assets and net asset invested in capital assets net of related debt

decreased substantially due to the transfer of capital assets in the Fleet Services Fund

from governmental activities to business activities.

o The Fleet Services Fund, an internal service fund, supports only enterprise funds

and its revenues are derived only from charges for services to enterprise funds.

o Since the Fleet Services Fund it only supports enterprise fund, the City decided to

include it as part of its business activities in the government-wide financial

statements.

• Net asset invested in capital assets net of related debt grew approximately $32 milliondue to the construction and acquisition of capital assets that was partially financed by

debt.

Restricted Net Assets

The governmental activities' restricted net assets reflect those resources whose uses are

restricted by external agencies or by enabling legislation. Again, these assets are not available

for general day to day use.

Unrestricted Net Assets

The third component of net 'assets is the unrestricted portion that can be used for any

purpose. The only restriction is at the fund level.

• As shown. throughout the period, the City's governmental activities had positive

unrestricted net assets.

o After growing from $98.6 million in 2005 to $148.2 million in 2006, unrestricted

net assets began a moderate decline through 2008 as non-current liabilities grew.

• These liabilities were not related to the acquisition of capital assets.

• In 2009. the issuance of long-term debt that has not yet been spent to

acquire capital assets substantially reduced unrestricted net assets.

• As the proceeds from the long-term debt is spent to acquire newassets, the related debt is applied against net assets invested in

capital assets net of related debt, increasing net assets.

• In 2010, unrestricted net assets increased to $44.7 million due to several

factors.

• The prior period adjustments and the change in accounting

principles reduced claims against the City

• Capital assets increased $48.2 million while net assets invested in

capital assets net of related debt increased only $31.9 million,

indicating that $16.3 million of bond proceeds was used to acquire

capital assets.

• Long-term debt unrelated to the acquisition of capital assets has a negative

effect on the unrestricted net assets.

Exhibit I-C shows how the City's long-term debt affects the governmental activities unrestricted

net assets. Long-term liabilities that are not related to the acquisition or construction of the

City's capital assets are allocated to unrestricted net assets, hiding resources that are available to

finance current operations. This exhibit calculates the non-current long-term debt that was not



allocated to the capital assets and instead applied to the unrestricted net assets in order to

determine the unrestricted net resources.

• Besides the General Obligation (GO) debt discussed above, we include other long-term

liabilities such as insurance claims, OPEB, and compensated absences. We do not includethe current portion of long-term debt as that must be paid from current resources or

current revenues.

• In order to determine the current resources available to finance governmental activities

expenses, we have to remove non-current/non-monetary assets. .

• As shown in this exhibit, the City had a larger positive current unrestricted net resources

than unrestricted net assets in all years covered by our report.

o However, the large increase in net resources in 2009, and 2010 was due to the

issuance of long-term debt in those two years that more than doubled the City's

long-term liabilities.

• The 2009 $52.4 million increase in GO debt will be used to renovate

Cheney Stadium, and other capital projects.

• In 2010. GO Bonds increased by $71.2 million, of which $30.2 millionwill be used to fund capital assets, and $41.6 million to defease existing

debt.

• Much of the unspent proceeds is for capital construction and acquisition,

and should have been restricted.

• As such, the unrestricted resources as computed in this exhibit is

overstated, but is still larger than unrestricted net assets.

The City's financial health is reflected in the positive ratios of the governmental activities of

unrestricted resources to revenues and unrestricted resources to expenses.

• The unrestricted resources to revenue ratio ranged from a healthy 40.81% in 2009 to

69.74% in 2006.

• The expense ratio has ranged from a low of30.17% in 2009 to a high of73.35% in 2006.

• Even though both ratios improved in 20 1o and exceed 57%, they are overstated by the

amount of unspent moneys that will be used to acquire and construct capital assets,

• These are strong ratios.

Exhibit I-D is a graphic representation of Exhibit I-B.

P age 29



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Findings:

• The City's governmental activities financial health, as presented in the government-wide

financial statements, declined. but is still healthy.

• If not for a $619.2 million adjustment to record the City's capital assets and a $12.8million increase due to a change in accounting principle. the City's governmental

activities net assets would have declined by $25.8 million since January 1, 2004 due to

expenses exceedirig revenues.



EXHIBIT II

The amounts for Exhibit II were obtained from the statistical section of the 2009 and the 2010

CAFRs. This exhibit is an analysis of all the revenues for the City's governmental type funds,which includes the General Fund. Special Revenue Funds, Capital Project Funds and the Debt

Service Funds from 2000 through 2010. The various revenues are shown as they were originally

reported in the governmental fund financial statements in the year they occurred. As such, these

revenues are reported using the modified accrual method of accounting. Since the

government-wide financial statements use the accrual method of accounting, there will be

differences between the revenues as shown in Exhibit I and the revenues shown in thisexhibit. .

Also, there are important differences in the classification of revenues between the government-

wide Statement of Activities and governmental funds' Statement of Revenues. Expenditures and

Changes in Fund Balance. It appears that many revenues classified as intergovernmental

revenues on the governmental funds' financial statements are classified as charges for serviceson the government-wide financial statements.

We have calculated both the annual increase from the prior year, and the internal rate of return

(IRR) for both the ten year period since 2000 and the five year period since 2005. The IR R is the

implied annual rate of change for an amount to increase/decrease from the beginning of a period

to the end of a period.

As noted above, in 2010, the City changed its reporting of the gross earnings taxes governmental

activities and the governmental fund received a transfer from the enterprise funds to other

business tax revenues. This change will have a profound effect on the City's reported tax

revenues. For 2010, transfers to the General Fund from the Enterprise Funds declined more than

$38.3 million dollars, and other business tax revenues increased over $41 million. We will

discuss this tax revenue in more detail below.

Exhibit IT-A is analysis of the City's governmental type funds revenues. As shown in this

Exhibit, the total revenues for governmental type funds have experienced strong growth with all

ten years since 1999 showing increased revenues over the prior year.

The City does not prepare a separate ten-year schedule analyzing the various governmental funds

tax revenues in the CAFRs' statistical section, but instead consolidates tax revenues into one

column.

• The City's total revenues experienced two large declines, $29.3 million in 2004. and $27

million in 2008, and 2009.

o The decline in 2004 was due to large revenue declines in taxes, and charges for

services.

o The two year decline that began in 2008 was caused by declines in taxes, licenses

and permits, and intergovernmental revenues.

o In 2010. total revenues increased $49.5 million due to the reclassification of the

gross earning taxes, and an increase in intergovernmental revenues.



• The IRRs for total revenues has been skewed due to the reclassification of

the gross earnings ta x that artificially increased 2010's total taxes by at

least $40 million.

• Tax revenues increased $45 million from $142.9 million in 2000 to $187.9 million in2010, an IRR of2.78% since 2000 and a stronger 4.56% since 2005.

o However, as with total revenue- IRR's, both of the tax IRR's are illusory.

• 111e reclassification of the gross earnings taxes as a tax receipt from a

transfer skewed the increase in tax revenues in 2010 by at least $38.3

million and dramatically inflated the computed of the IRRs.

o We will discuss tax revenues in greater detail in Exhibit II-C.

• The second most important revenue source is intergovernmental revenues.

o From 2000 to 2005, this revenue source ranged between $25.3 million in.2001,

and 28.9 million in 2002.

• Intergovernmental revenues grew dramatically in 2006 to $46.5 million

from $28.3 million in 2005.

• Since 2006, intergovernmental revenues have experienced large

fluctuation, from a low of $31.5 million in 2008 to a high of $48.3 million

in 2010.

o Intergovernmental -revenues are volatile and unreliable revenue as they are

dependent on the financial health of other governments.

• The remaining four revenue sources are not material, each less than 5% of the

governmental funds total revenues.

Exhibit ll-B is a graphic representation of Exhibit II-A.



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We created Exhibit II-C from the City's CAFRS for the year December 31,2010. While the

City does not prepare a separate table for governmental fund ta x revenues in its statistical

section, it does prepare a table showing the tax revenues for governmental activities in the

government-wide financial statements. As we noted above, the government-wide financial

statements and the governmental fund financial statements are based on different methods

accounting and, as such, there will be differences. The purpose cfthis exhibit is to analyze why

the City's tax revenues changed. As shown in this exhibit, the City has three ta x revenue

categories; property taxes, sales taxes and the catchall business taxes.

Property taxes are the City's most important tax revenue source.

• State law allows the City to levy a regular property tax rate of up to $3.60 per $1,000 of

assessed property value annually.

o No matter what the assessed value is, however, the growth rate of property tax

collections is limited to I% per year, plus growth.

o In no event may the annual levy exceed the $3.60 per $1,000 of assessed value

rate limit.o The City levied at the statutory limitation of$2.23 per $1,000 of assessed value in

2008. $2.35 per $1.000 of assessed value in 2009, and $2.36 per $1,000 of

assessed value in 20 IO.

• Property taxes grew in six of the eight years from 2002 through 2010, from $46.3 million

to $61.9 million.

o Property tax revenues fell in 2006 from $54.6 million to $53.2 million, and in

2010 from $62.6 million to $61.9 million.

• Since 2002, property tax revenues experienced an IRR of3.69%.

• The City's property tax revenues are relatively stable as the City can to adjust its property

tax rates in response to the growth or decline of the City's assessed values. The

following table presents the annual changes in the City's assessed values, and the City's

direct rate through 20] 0 as presented in the 2009 and 2010 CAFRs.o Under State of Washington laws, real property is assessed at market value on

January 1 of each year for the following year.

o From 2000 through 2008, the City's assessed values annual growth rate exceeded

5% in seven of the eight years. 10% in three years, and 19% in two years.

• Assessed values grew from $10.7 billion to $21.6 billion.

o Beginning in 2009, assessed values began to decline, and continued to decline at

an accelerating rate in 2010.

o To offset extreme changes in the City's assessed values; the City changed the

total direct tax rate it applied to the assessed values.

• In the eight years from 2000 through 2008, the total direct tax rate

declined in seven of the eight years from $4.26 to $2.81.

• The only increase in this period was in 2002, when the total direct

tax rate grew from $4.06 to $4.40.

• Beginning in 2009, the City increased it s total direct tax rate to $2.99, and

to $3.24 in 20 10 to offset the City's faIling assessed values.

o We were not able to obtain the assessed values for 2011, and 2012.



Analysis of Assessed Values and Direct Tax Rate

F isca l Yea r Net % Change

Ended Asses sed Va lue From Total D i re c t

J l U 1 e 30, (rnOOO's) Prior Year Tax Rate

2000 10,671,429 N/A $4.26

2001 11,587,717 8.59% $4.06

2002 11,824,449 2.04% $4.40

2003 12,455,913 5.34% $4.28

2004 13,081,797 5.02% $4.14

2005 15,582,802 19.12% $3.38

2006 18,556,278 19.08% $3.08

2007 20,590,388 10.96% $2.84

2008 21,625,087 5.03% $2.81

2009 20,717,201 (4.20%) $2.99

2010 19,033,503 (8.13%) $3.24

IRR s in ce 2000 5.96%

IR R since 2005 4.08%

The following chart is a g ra ph ic ex am ple o fth e a sse ssed v alu es in th e ab ov e ta ble.

25,000,000

20,000,000

15,000,000~~=0 10,000,000~

5,000,000

Analysis of Assessed Values

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W e dow nloaded the inform ation in the follow ing table and Exhibit I l-D from ZiIlow .com on

December 16, 2011, in order to analy ze the effects of the decline in m arket value of residential

real estate and com pare to the C ounty 's assessed values. Z ilIow .com obtains its inform ation

fro m v arious so urces including m arket sales repo rts and C ounty assesso rs' o ffices. T he v aluessho wn in these exhibits are the m edian prices in a giv en area.

City of Tacoma Median Housing Va lu e Ch an ge s

Med ia n Va lu e Ap ri l 1996 $ 84,100

Med ia n Va lu e J un e 2007 $ 238,400

Med ian Va lue J anua ry 20 10 $ 194,100

Med ia n Va lu e J an ua ry 20 I s 173,000

Med ia n Va lu e Oc tob er 201 1 s 154.300

%Month to M o nth C ha ng e (1.30%)

% Qua rte r to Q ua rt er C ha ng e (2.80%)

% Y ea r to Y ea r C han ge (12.30%)

$ Change from April 1996 to June 2007 $ 154,300

% Change f rom Ap ril 1996 t o J un e 2007 183.47%

$ Change f rom Jun e 2007 t o Oc tob er 20 11 s (84,100)

% Cha ng e f rom J un e 2007 t o Oc tob er 2011 (35.28%)

$ Change f rom J an ua ry 2010 t o J anuar y 2011 s (21,100)

% Change f rom Januar y 20 I t o J anuar y 201 1 (10.87%)

$ Change f rom Janua ry 2011 t o Oc tob er 20 II $ (18,700)

% Change f rom Januar y 2011 t o Oc tob er 2011 (10.81%)

A s show n in the above table, m edian housing m arket values declined by 12.3% in one y ear from

October 2010 to O cto ber 2011, and have had an even .greater decline since housing valuespeaked in June 2007. Based on the median market price show n at the height of the market ofapproximately $238,400, the m edian ho using price has declined b y 35.28%.

Exhibit II-D is a graphic representation of the m onthly change for the C ity 's m edian housing

p ric e c om pu ted b y Z illo w .com sin ce A pril 1996.

• W hile the m edian housing price dram atically declined since the housing bubble burst inJune 2007; it also e xp erie nc ed stro ng g row th prio r to th e b ursting o f th e b ub ble.

o F rom Dec emb er 2003, a sse ss ed v alu es g rew from $154,600 to $238,400 in J un e.2007.

o It has since declined to $154,300, the appro xim ate residential ho using value atJanuary 2004.

o The decline in housing values has been constant and has not slow ed dow n, losing

be tween $20,000 and $24,000 p er y ea r s in ce 2008.

o S ince J anua ry 20 II, h ou sin g v alu es h av e c on tin ue d to d ec lin e, f allin g $18,700.

P ag e 4 0



• This portends continued declines in assessed values in 2011, 2012, and

2013.

Sales TaXes are an important indicator of the local economy's health.• As shown in Exhibit II-C, Sales Taxes grew from $33.9 million in 2002 to $54.5 million

in 2007 due to strong annual growth rates in 2003, 2005, and 2006.

• In 2008, sales tax revenues began a three year decline. falling to $41.9 million in 2010.

• This three year decline indicates a weak 10ea1 economy.

We prepared Exhibit II-E and Exhibit ll-F (a graphic representation of Exhibit II-E) to providea more detailed analysis of the City's sales taxes. We obtained the monthly sales and use tax

payments to City. of Tacoma from January 2008 through October 2011 from the State of

Washington's Department of Revenue.

• These monthly payments are based on the local share of retail sales and use taxes

collected two months prior to the distribution by the Department of Revenue which is

responsible for the correct allocation of the funds.o The different months have different sales patterns.

o For instance, January and February of each year contain the Christmas season,

when retail sales are greatest. As such, sales tax revenues should be much higher

than other months.

• Monthly sales tax payments from the State were below the comparable prior year's

monthly collections from January 2009 through April 2010. reflecting November 2008

through February 2010 sales.

o As a percentage of200S's monthly state tax. payments, 2009's comparable month

collections monthly declines ranged from 10.18% to 15.33%.

o From January 2010 through April 2010, the rate the monthly year over year sales

tax receipts declines fell substantially.

• In May 2010, reflecting March sales, sales tax receipts increased over May

2009.

• From March 2010 through July 2011 sales tax payment from the State

exceeded the prior year's comparable month, a period offifteen months.

• Beginning in August 2011, monthly sales tax receipts began to decline from the prior

year's sales tax receipts. and have continued to fall below the prior year's collections

through November 2011.

o Even though the State payments fell below the prior year's comparable months,

the rate of decline has been considerably smaller than in 2009, and the first three

months of2010.

• Furthermore, the year to year monthly decline that began in August 2011

peaked in September 2011 at 4.063% and the rate of decline fell to 2.02%

in November 20 11 .

The City's remaining tax revenues as shown in Exhibit II-C is business taxes. a compilation of

several tax revenues. '

• Business taxes have fluctuated during the period covered by our report.



o These revenues declined from $74.7 million in 2002 to $43.6 million in 2004,

then grew to $49 million in 2008. In 2009 revenues fell $6 million to $43 million,

and then skyrocketed to $84.1 million in 2010. .

• The decline in 2003 was due to the lingering effects of the New York City

terror attacks.

o The decline from $70.2 million in 2003 to $43.6 million in 2004 was due to the

reclassification of the receipt by the governmental activities of the gross earnings

tax on the City's utilities from a business tax to a transfer from business activities

to government activities.

• In 2010, the City reversed this policy, recording the gross earnings tax as a

business tax. and not a transfer, resulting in at least a $39 million increase

in tax revenues as we noted above.

• Business tax revenues grew in three of the next four years to $49 million

in 2008, and then fell to $43 million in 2009.

e This decline is due to the recession.

• Due to the City changing its classification of the. gross earnings tax in2010 as a tax revenue, and not a transfer, ¥(e could not determine whether

business tax revenues grew or declined in 2010.

• However, based on the reduction in transfers from the enterprise

funds to the General Fund of approximately $39 million, any

change in tax revenues was negligible.

o In our opinion, the City should report the various business tax revenues separately

instead of combining them under a single business taxes column.



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Findings:

• The City's governmental revenues experienced moderate growth over the ten year period,

but the rate growth declined in 2007 before actually declining in 2008 and 2009.

o The City's total revenues increased in 2010, due to a reclassification of the grossearnings tax, and an increase in intergovernmental revenues.

• The City's two major tax revenues are under increasing strain. -

o The City's assessed values declined in 2009 and 2010 and, based on current

residential market value continuing decline, will probably continue to decline in

2011, and 2012.

• The City's ability to potentially increase property tax rates could blunt

assessed value declines and, as such, moderate property tax revenue

declines.

o The recession had a negative impact on sales tax revenues as they have declined

the last three years beginning in 2008 and ending in 2010.

• Current year monthly sales tax receipts are mixed. as sales tax payments

from the state began to experience year over year declines beginning inAugust 20 11. and continuing through November 201 I.

• This decline was a reversal of the monthly growth in sales tax

revenues for the prior fifteen months.

• However, the rate of monthly year over year declines from August

through November 2011 has been substantially below the monthly

year over year declines from January 2009 through April 2010.

• As such. sales taxes revenues may recover much sooner than the

2008-2010 period.

• The City's other business taxes have experienced fluctuations.

o We could not determine if the 2009 decline in this revenue continued in 2010 due

to the reclassification of gross earning tax in 2010.

o However. based on the decline in transfers, if any increase in business tax

revenues occurred, it would have been negligible.

• The City's governmental funds' largest non-tax revenue, intergovernmental revenues,

experienced strong but erratic overall growth since 2000.

o The lRRs for this revenue were strong for both the 10 years since 2000. and five

years since 2005 of 5.78%. and 11.28% respectively.

• However. during the ten years covered in this exhibit. intergovernmental

revenues experienced large declines and large increases.

o Intergovernmental revenues are not a dependable revenue source as they are

dependent on the financial health of the state and the federal governments.



EXHIBIT III

The budget is an economic and political document that prioritizes a government's spending. Asthe year progresses, budgets are amended due to changing economic conditions, new Information

or shifting priorities. Amendments can occur up to the date the financial statements are issued.

Exhibit ill demonstrates the transitory and conservative manner in which General Fund

budgets are made and amended versus what actually happens. A variance is the difference

between the budget amounts and the actual amounts. A "favorable" revenue variance occurs.

when actual revenues exceed budgeted revenues and a "favorable" expenditure variance occurs

when budgeted expenditures exceed actual expenditures. "Unfavorable" variances are the

opposite offavorable variances.

The City prepares biennial budget covering an odd then an even year. In the City's budget to

actual financial statements at the end of the first year of the biennial budget, the odd year, the

City compares the one year actual results to the total biennial budget. In the second year o f thebiennial budget, the City compares the entire biennial budget to combined two year actual. Webelieve this presentation is unusual. In preparing over 400 analyses for 148 governments, this is

the first time we have seen the budget to actual statements prepared this way.

The purpose of the Statement of Revenues, Expenditures, and Changes to Fund Balance -

Budget to Actual is to determine how a government has managed its resources during the fiscal

year in relation to the spending plan for that fiscal year. Using the City of Tacoma's budget to

actual format, an individual cannot determine how the government has managed its resources in

any fiscal year. Except for one other city, cities with a biennial budget. have presented annual

budget and actual financial information in the Statement of Revenues, Expenditures. and

Changes to Fund Balance - Budget to Actual, not biennial data.

We have not presented budget to actual information for the odd years in this Exhibit sincecomparing a two year budget to one year of actual does not provide any useful information since

we are comparing apples to oranges. We have presented the budget to actual information for the

even years as we are comparing a two year budget to two actual years. While it does not provide

information on the management of the City's resources during the year, it does provide insight

into the City's budgeting process.

Revenues

• The General Fund's actual revenues exceeded the adopted budget revenues in the

biennial periods ending on December 2006 by $22.8 million and December 2008 by

$20.1 million. but were below the biennial period ended December 2010 by $43.9

million.

o Actual revenues increased $25.9 million from the biennial period ended

December 2006 to the biennial period ended December 2008.

o The difference between actual revenues for the biennial period ended December

2008. and the biennial period ended December 2010 of $51.6 million is inflated

due to the change in reporting the gross revenue tax from a transfer to a ta x

revenue.



• Based on 2009 transfers from the enterprise funds of $38.5 million (see

Exhibit IV). the two year gross earning tax was at least $76 mi1lion.

• lfthe gross earnings tax was not reclassified and not included in revenues

for the 2009-2010 biennial period, actual revenues would have declined by. ..$24.4 million ($76 million - $51.6 million).

• The City amended the adopted budgeted revenues in each biennial budget, increasing

budgeted revenues.

• The General Fund's final budgeted revenues had two unfavorable variances and one

favorable variance instead of two favorable variances and one unfavorable variance.

Expenditures

• For the three biennial periods covered by our report, the General Fund's adopted

budgeted expenditures experienced favorable variances in two of the three biennial

periods.

o The favorable adopted budget variances were $1.8 million in the biennial period

ended December 2006, and $42.4 million in the period ended December 2010.c The $7.6 million unfavorable variance occurred in the biennial period

ended December 2008. .

o Actual expenditures increased $45.5 million from the biennial period ended

December 31,2006 to the biennial period ended December 31,2008, but declined

$833,000 in the biennial period ended December 31, 2008 to the biennial period

ended December 31,2010.

• The City amended the budgeted expenditures upward in all years presented.

• The final expenditure budget experienced favorable variances all years presented ranging

from a low of $12.6 million for the biennial period ended December 2008 to a high of

$44.2 million for the biennial period ended December 2010.

Other Financing Sources (Uses)• For the City, actual other financing sources (uses) are a combination of transfers in and

out of the General Fund, and the proceeds from the sale of capital assets. During the

period covered by our report, transfers to the General Fund substantially exceeded

transfers from the General Fund.

o Net transfers in were substantially greater in the biennial periods ending

December 2006, and December 2008 due to treating the gross earnings tax as a

transfer than in the biennial period ending December 20 I0, when the tax was

treated as a revenue.

o As shown, the City also amended other financing sources (uses) each year to

decreasing net transfers in.

• These amendments were immaterial.

• We discuss transfers in greater detail in Exhibit IV.

General Fund Surplus (Deficit)

• The General Fund experienced large total adopted budget favorable variances of $30

million and $13.1 million in the biennial periods ended December 2006. and December

2008 respectively.



o As a result of these favorable variances, instead of two large biennial budget

deficits, the City experienced a large biennial surplus for the period ended

December 2006, and a small biennial deficit in the period ended December 2008.

• The General Fund experienced an unfavorable adopted budget variance of $4.7 million

for the biennial period ended December 2010 .

.0 This represented the difference between a two year adopted budget deficit of

$13.9 million, and an actual deficit of$18.6 million.

• The amendments increased the final budget favorable in the biennial periods ended

December i006, and December 2008, and reduced the unfavorable variance in the year

ended December 2010.

The third page of Exhibit III-A reconciles the beginning General Fund's fund balance to the

ending General Fund's fund balance on an annual basis, not a biannual basis.

• We noted that the City uses the GAAP basis of accounting when preparing its biennial

budget.

o The biennial budget surplus/deficit equals the combined annual surplus/deficit of

the covered period.

• The 2006 biennial actual surplus equals the combined annual GAAP

surpluses for 2005 and 2006.

• The 2008 biennial actual deficit equals the combined annual GAAP

surplus for 2007 and deficit for 2006.

• The 2010 biennial actual deficit equals the combined annual GAAP

deficits for 2009 and 2010.

• As shown in this exhibit, the General Fund experienced surpluses from 2005 through

2007, and deficits from 2007 through 2010.

o For the six years presented, the combined surplus was approximately $622,000.

o The annual changes to the General Fund's fund balance are primarily due to the

annual surpluses or deficits. r

o The fund balance was affected by prior period adjustments in four of the six years

presented.

• Corrections of errors resulted in a $3.5 million decrease in the fund

balance.

• The correction of an error in a prior period is a correction of a prior

year's or years' actual surplus or deficit. .

• As such, the actual change to the fund balance due to combination

of revenues, expenditures, other financing sources, plus the

correction of errors is a negative $2.9 million.

o This decline in the fund balance was offset by a change in accounting of $6.4

million in 2010.

o Since January I,2005, the fund balance increased $3.5 million from $36.5 millionto $40 million.

• The $3.5 million increase in the total fund balance since 2005, and 2010's

$1.7 million increase was due to the change in an accounting principle that

increased th e fund balance by $6.4 million.



• Without the change in accounting principle, the ending fund

balance at December 2010 would have been $33.6 million, $2.9

million below the January 1,2005 balance.

Exhibit Ilf-B is a graphic representation of the information in Exhibit III.-A.

Findings:

• The City's budget process is mostly conservative as the City has consistently budgeted

large deficits in its adopted budget.

o In two of the three biennial budgets we analyzed. the General Fund had two large

favorable variances, and one unfavorable variance of$4.7 million.

• The City's final budget, due to amendments, projected even larger deficits than the

adopted budget.

• The two biennial adopted budget favorable variances represented the difference between

two large biennial budgeted deficits, each exceeding $8 million, and a large surplus of

$21 million, and a small actual deficit of $1.9 million.o 2010'5 unfavorable biennial budget variance of $4.7 represented the difference

between a $13.9 million two year budget deficit, and an $18.6 million two year

actual deficit.

• The General Fund's fund balance increased $3.5 million from $36.5 million to $40

million in six years due to a $6.4 million change in accounting principle offsetting a $2.9

million cumulative deficit.



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EXillBITN

Exhibit IV is an analysis of transfers to and from the General Fund.

Other funds transferred moneys to the General fund over the period covered by our report. In

2010, due to a change of reporting gross earnings taxes as a direct revenue, transfers from the

enterprise funds declined sharply from $38.5 million in 2009 to $161,000 in 2010. These

transfers from the enterprise funds should have been treated as revenues in all years covered by

our report. Also. the general fund has received moneys from the non-major governmental funds

each year that should also be treated as revenues when computing the unreserved fund balance to

revenues. The transfers from the internal service funds have been inconsistent, and appear to be

the transfer of excess moneys back to the General Fund.

The General Fund transferred moneys to other funds over the period covered by our report.

Except for transfer to the Internal Service Fund Group, it appears that all the transfers from the

General Fund either finance the expenditures that are the responsibility of the General Fund, orare required to maintain the financial health of the receiving fund.

Findings:

• We have identified certain transfers to the General Fund that should be considered asrevenues when computing the unreserved fund balance to revenue ratio.

• We have identified certain transfers from the General Fund that should be considered as

expenditures when computing the unreserved fund balance to expenditure ratio.



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• This fund's revenues should be enough to repay the advance over

time.

o The amount of$I.42 million was advanced to the Facilities Management Fund, an

Internal Service Fund, pay for the cost of rehabilitation and acquisition of theTacoma Municipal Building, and to finance the acqulsltion of business 'systems

improvements.

• This fund had a cash and investment balance over $3 milliono Except for the 2002 Police Facilities Fund, (see below), the funds that received

the advances have the resources and the revenues to repay the loans.

Asset to Liability RatioAs a rule, financial health would dictate that both total assets and this ratio increase or maintain

over time. If the ratio is already healthy, it should remain relatively constant. Though this ratio

can vary widely due to the timing of tax, grant collections or the payment of bills, any large drop,

should be explained. A ratio barely over 1 leaves very little fund balances, and a ratio below 1 is

a serious problem.

• The City of Tacoma's General Fund's asset to liability ratio after falling to 4.81 in 2006

grew to 7.64 in 2007. .

o Itthen fell over the next two years to it s low of 3.21 at December 31, 2009

• At December 31,2010 the ratio recovered slightly to 3.74, meaning that for every $1 of

liability; the General Fund has $3.74 of assets.

• The most important factor in the movement of this ratio is the rise or decline in the

liabilities ..

o In 2010, this ratio increased due to the $2.7 million decrease in liabilities which

was proportionally greater than the $1 million decline in assets.

Fund BalanceWhile the rise and decline of cash and investments are affected by several factors, as shown in

Exhibit III, the change in the total fund balance is primarily due to the fund's actual surpluses or

.deficits. Other important highlights:

• Both the reserved fund balance and the unreserved fund balance have been affected by

the actual GAAP surpluses and deficits.

• The reserved fund balance increased $14.1 million from December 2005 to December

2010. due to increases in the reserve for advances to other funds and an increase for the

reserve for other purposes.

o We could not identify the "other purposes".

• The deficits had their greatest impact on the unreserved fund balance.

o From its high of$47 million, at December 31, 2006, the unreserved fund balance

declined to $19 million at December 31, 20 I 0, mainly is due to the deficits since

2007.

• Even more important, the unreserved fund balance at December 31,2010

is $17.5 million below the December 31. 2005 fund balance.

• $14.1 million of the decrease is due to the growth of the reserved

fund balance. and the remaining balance due to the cumulative

deficit.



o In 2010, the unreserved fund balance increased $5.3 million, primarily due to the

decrease in the reserved fund balance.

• The General Fund's unreserved fund balance in the GAAP financial statements represent

moneys that can be spent for any purpose.

o In essence, the General Fund's unreserved fund balance represents the City's

reserves.

Exhibit V-B is a graphic representation of the General Fund's cash and investments and fund

balances.

Findings: .• The City's General Fund cash and investment balance and fund balances have declined

below their December 31, 2005 balances.

• A n important factor in the decline in cash and investments is the increase in advances to

other fund.

o Except for the Facilities Management Fund. a review of the 2010 financialstatement of the funds receiving the advances has negligible resources available to

repay the loans.

• If not for a change in accounting principle, the General Fund's total fund balance would

have been $2.9 million below the January 1, 2005 balance. and its unreserved fund

balance would have been lower.



EXHIBIT VI

Exhibit VI calculates two ratios, the General Fund's unreserved fund balance to its annual

revenues and General Fund's unreserved fund balance to its annual expenditures, andcompares them to historical benchmarks. The ratios calculated in this exhibit are intended to

serve as a measure of resources available so they can be compared to a benchmark or standard in

determining the fmancial health of the General Fund. Historically, a 5% ratio of the unreserved

fund balance to either its annual revenues or expenditures has been considered the minimum

ratio in determining a healthy fund balance.

Transfers to or from the General Fund should be analyzed to determine if they are regular.

continuing, and whether they are a funding responsibility of the General Fund. Transfers to the

General Fund that meet these criteria should be included in revenues, and transfers from the

General Fund should be included in expenditures.

In our review of transfers from the General Fund in Exhibit IV, we have determined that the

transfers to the General Fund from the enterprise fund, and the non-major governmental funds

should be included in revenues when computing the unreserved fund balance to revenue ratio to

compare to the historic 5% benchmark. The following table shows our calculati~n of adjusted

revenues.

Computation of Adjusted Revenues

Fiscal Year

Ended

June 30, Revenues

Transfers From

ExlnbitN

Adjusted

Revenues

20052006

2007

2008

2009

2010

143,387,000158,657,000

164,088,000

163,849,000

149,195,000

191,829,000

35,777,00039,773,000

41,746,000

41,978,000

41,852,000

696,000

179,164,000198,430,000

205,834,000

205,827,000

191,047.000

192,525,000

We have also determined that transfers from the General Fund to the non-major governmental

funds, and the non-major enterprise funds should also be included in expenditures in order to

compute the unreserved fund balance to expenditure ratio to compare to the historic 5%

benchmark. The following table shows our calculation of the adjusted expenditures.



Computation of Adjmted Expenditures

Fiscal YearEnded

June 30, Expenditures Transfers

Adjusted

Expend itures

2005

2006

2007

2008

2009

2010

172,612,000

]79,461,000

188,363,000

209,242,000

204,783,000

] 91,989,000

1.129,000

2,876,000

7,842,000

7,282,000

5,715,000

4,977,000

]73,741,000

182,337,000

196,205,000

216,524,000

210,498.000

196,966,000

, Exhibit VI-A computes the ratio of the unreserved fund balance to adjusted revenues and the

unreserved balance to the adjusted expenditures ratio, and compares them to the ~%benchmarkfor both revenues and expenditures for each year presented in our report.

• The revenue ratio improved in 2006 to its highest ratio of 23.66% before declining the

next three years to 7.19% at December 31, 2009

o In 2010, the ratio improved to 9.89%.

• The annual changes to the expenditure ratios mirrored the revenue ratio, growing to its

.strongest balance in 2006 of 25.75% before declining to 6.53% in 2009. and its lowest

balance.

D I~ 2010, the expenditure ratio improved 9.67%.

• The improvement in the 2010 ratio is due to the change in accounting principle, and the

decrease in the reserved fund balance. principally the reserve for advances to other funds.

o The payoff of the long-term loans to other funds substantially improved the

General Fund's financial health.

D As discussed above, most of the funds that received the transfers have little or no

resources available to repay the loans.

• However, even though both ratios are healthy, they are trending downward. and near the

5% benchmarks that represent then minimum unreserved fund balance that indicates

financial health.

Exbibit VI-B and Exbibit VI-C are graphic representations of Exhibit VI-A data.

Findings:

• Both ratios, even though they are marginally healthy, have declined and show signs of

continued weakness.

P age 6 4



EXH IB IT V I-A

C ITY O F TA COMA

% OF UNRESERVED FUND BA LA NCE TO GA AP REVENUES A ND EXPENDITURES

G EN ERAL FU ND

Un re s e rv e d Fu nd B a la nc e toGAAP R ev en ue s

Unreserved

Balance as a Fund Balance

% of Adnusted in Excess of 5%

Year Ended Unreserved Adjusted GAAP GAAP 5% of Adjusted of Adjusted

December 31. Fund Balanoe Revenues Revenues Revenues Revenues

2005 36,572,000 179,164,000 20.41% 8.958,200 27,613,800

2006 46,955,000 198,430,000 23.66% - 9 .9 21 ,5 00 37,033,500

2007 46,308,000 205,834,000 22.50% 10,291,700 36,016,300

2008 27,534,000 205,827,000 13.38% 10,29],350 17,242,650

2009 ]3,744,000 191,047,000 7.19% 9,552,350 4,191,650

2010 19,048,000 192,525,000 9.89010 9,626,250 9,421,750

Un re se rv e d Fu nd B a la n ce toGAAP Expend it u re s

Unreserved

Balance as a Fund Balance

Adjusted " of Adjusted 5% of ill Excess of5%

Year Ended Unreserved GAAP GAAP Adjusted of Adjusted

December 31, Fund Balance Expenditures Exp(!Ilditures Expenditures Expenditures

2005 36,572,000 173,741,000 21.05% 8,687.050 27,884,950

2006 46,955,000 182,337,000 25.75% 9,1 ]6,850 37,838,]50

2007 46,308,000 1% ,205,000 2 3 . 6 0 0 1 0 9,810,250 36,497,750

2008 27,534,000 216,524,000 12.72% 10,826,200 16,707,800

2009 13,744,000 210,498,000 6.53% 10,524,900 3.219,100

2010 19,048,000 196,966,000 9 . 6 7 " A . 9,848,300 9,199,700



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EXHIBIT VII

Exhibit VII is an analysis of the City's other governmental funds. The City has no major fund

other than the General Fund, and 20 non-major special revenue funds, 7 non-major debt service

funds, and 7 non-major capital projects funds.

As described on pages 7 and 8 above, Special Revenue Funds, Capital Project Funds and Debt

Service Funds are established from specific revenue or funding sources to finance specific

programs, projects or pay debt. In most cases the resources in these funds are restricted and

cannot be used to finance other spending. Even if these funds are restricted and are not available

to the General Fund for general governmental purposes, the financial health of these funds

should be examined to determine their potential impact on the General Fund, The General Fund

not only accounts for the day-to-day operations of the City, but is also the fund of last resort

should any other fund become unable to meet its obligations. Furthermore, even though these

funds may not transfer moneys to the General Fund to finance genera] government functions,many special revenue funds, and their revenues partially fund General Fund programs.

A major fund is defined as a fund whose total assets, liabilities, revenues, expenditures/expenses

are at least 10% of the corresponding total assets, liabilities, revenues, expenditures/expenses of

that category or type (governmental funds or enterprise funds); and 5% of the corresponding total

for all governmental and enterprise funds combined. Funds that do not meet these criteria are

non-major funds.

As shown in Exhibit VII-A, as a group, the City's Non-Major Funds' cash and investments,

and fund balances have experienced significant growth.

• Cash and investments grew each year since 2005 from $66.5 million to $]41.7 million in

2010.• Other assets, mostly receivables. also grew each year, from $19 million to $27.5 million.

• The asset to liability ratio has remained strong, ranging from a low of 5.01 in 2010 to a

high of 10.64 in 2006. These are strong rations

• The fund balance increased in five of the six years since 2005, increasing $65.4 million

from $75 million to $135.4 million.

o $19.6 million of the increase occurred in the reserved fund balance, due to

increases in encumbrances in 2009. and 2010.

• Most of the increase occurred in the Capital Project Funds established to

account for the capital projects to be financed by the 2009, and 20] 0 GO

.Bond proceeds.

o The unreserved fund balance increased from $45.9 million in 2005 to $86.8

million in 2010.• Most of the growth occurred in 2009 and 20 10. and is due to the receipt of

GO Bonds proceeds and the establishment of two Capital Project Funds

mentioned above.

• As a group, the non-major funds are healthy.

P ag e 6 8



·Wehave prepared Exhibit VII-B to analyze the City's Special Revenue Funds as of December

31.2010.

• Our analysis of the 2010 CAFR shows that the Special Revenue Funds are based on

intergovernmental revenues (grants) or specific taxes.o As such, the resources and revenues can only be spent on the specific purposes

established by the grant and the tax.

o Two special revenue funds have negative unreserved fund balances.

• The Streets Fund negative unreserved fund balance is negative due to the

large reserve for encumbrances.

• The Fire Department Fund is negative due to a $1.5 million advance from

another fund.

• However, both have sufficient revenues from grants and taxes to finance

ongoing expenses and eliminate the negative unreserved fund balance.

• Several special revenue funds are related to public safety. These funds are healthy.

We have prepared Exhibit VII-C to analyze the City's Capital Project Funds as of December 31,2010.

• Except for the Capital Projects Fund, the capital project funds were established to account

for capital projects fund by the proceeds of bonds.

o As such, the revenues of capital project fund established to account for bond

proceeds will be interest income only.o Also, these funds will have large annual expenditures during the 'constructlon

period of the capital projects,

• These funds will have a negative effect on the General Fund only if the proceeds of the

bonds do not cover the construction costs of the project, and the General Fund has to

make up for the cost overrides. .

o As we discussed above, the 2002 Police Facilities Fund received a long-term

advance from the General Fund to complete the construction of the police

headquarters, and four police substations.

• As we noted on page 58, and shown in this exhibit, currently this fund

does not have sufficient resources or revenues to repay this fund.

We have not prepared an Exhibit on the City's debt service funds as there are insignificant

resources in the funds.

Findings:

• The Public Health Fund, though healthy, will continue to rely on transfers from the

General Fund for support.

• As a group, the City's Non-Major Funds' cash and investments. and fund balances have

experienced significant growth over the period covered by our report.

o Most of the non-major funds are healthy.o Seven non-major funds have negative fund balances. The City plans to eliminate

the negative fund balances through expenditure reductions or, in the case of

capital project funds, through the issuance of General Obligation Funds.

• These seven funds will not have a negative effect on the City's General

Fund.



• Two of the non-major funds, the Automated Fingerprint Identification System Fund

and the Enhanced 911 Emergency Telephone System Fund are related to law

enforcement, and are responsible to finance the salaries employed by those funds.



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EXH IB IT V III

Exhibit vm is an analysis of the City's Enterprise Fund Group, the business-type activities

on the Government-wide financial statements. These funds cannot be used to finance

governmental activities, and can only be used to finance the individual fund's activities. We are

analyzing these funds to determine their financial health. and whether they will have a negative

effect on the General Fund.

At December 31,2010 the City has 3 major enterprise funds and 12 non-major funds. As shown

in Exhibit VIll-A, as a group, the City's enterprise funds' assets, liabilities. and net assets

experienced strong growth over the six year period.

• The enterprise funds have maintained large unrestricted cash and investment balances

throughout the period covered by our report.

o From 2005, unrestricted cash and investments grew from $265.2 million to $401.5

million in 2008. then declined to $361.8 million in 2010.

• The restricted cash and investments represent the unspent proceeds of long-term debt andgrants to construct infrastructure, mostly wastewater. water, and power funds ..

• Since 2004, capital assets increased from $1.747 billion to $2.28 billion.

o Most ofthe increase is due to debt financing.

• The enterprise fund groups long-term debt increased $277 million.

• The enterprise fund group's net assets increased all the five years since December 31,

2005.

o Net assets increased from $1.] 63 billion to $1.65 billion, an increase of $487

million.

o The net asset growth occurred in net assets invested in capital assets net of related

debt and unrestricted net assets.

o Net assets invested in capital assets net of related debt increased from $924.1

million to $1.336 billion.o Restricted assets decreased $15.5 million primarily due to declines in net assets

restricted for the construction of capital assets and the debt service.

o Unrestricted net assets, after increasing from $I56.9 million in 2005 to $276.9

million in 2009, and then decreased to $247.4 million.

• The decrease in unrestricted net assets in 20 lOis not due to financial

weakness, but to the large increase in long-term debt that is not offset by

capital assets, or is restricted.

Exhibit VJIT-B is our analysis of the individual funds as of December 31,2010.

• The three major enterprise funds are the Wastewater Fund, the Water Fund, and the

Power Fund.

o These funds are very healthy with large cash and investment balances, andunrestricted net assets ,

• A review of the non-major enterprise funds shows that most are healthy, but several have

negative unrestricted net assets.

o The Permit Fund has a negative unreserved fund balance. small cash and

investment balance, and its revenues did not cover its expenses.



• This fund was created in 2010, and per page 3-31 in the Notes, the City

expects this fund will be self supporting in the future.

o The Tacoma Rail Mountain Division Fund's negative unrestricted net assets are

due to the $6.2 million advance from the General Fund.• Even though it has a negative cash and investment balance, its revenues

appear to be sufficient to reduce the both the negative cash and investment

balance, and the advance from the General Fund. .

• This fund should not have a negative effect on the General Fund.

o The Tacoma Dome Fund has a small negative unrestricted net assets balance.

• The negative unrestricted fund balance is due to a $1.5 million loss on the

sale of assets.

• This fund should not have a negative effect on the General Fund.

o The Performing Arts Fund also has a negative fund balance.

• This fund does not have any revenues, and its expenses are financed by

transfers from other funds.

o The Solid Waste Fund has negative unrestricted net assets due to the large non-current bonded debt.

• A substantial portion of this debt has not been spent on the construction of

capital assets.

• This fund is healthy.

o The Power Conservation Fund large negative unrestricted fund balance is due to

bonded debt the City incurred to continue the City's conservation efforts.

• Per page 3-31 in the Notes. the Bonneville Power Administration (BPA)

has an agreement with the City to provide the resources to liquidate this

debt.

• This fund will not have a negative effect on the General Fund.

Findings:

• As a group the City's Enterprise Funds are healthy.

o Most individual enterprise funds are healthy.

o Only one fund. the Performing Arts Fund, might have a small negative effect on

the General Fund.



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EXHIBIT IX

The purpose of this exhibit is to show in greater detail the financial health of the Internal

Service Fund Group and determine if there are excess moneys that could be returned to theGeneral Fund. The City of Tacoma has sixteen Internal Service Funds.

Internal Service Funds are created to provide services to other departments or funds of the

government. The creation of an Internal Service Fund is not mandatory, but is a voluntary

decision on the part of management in order to match the Jiability to the period it arose and to

accumulate resources to fund ongoing operations. Furthermore, the government itself controls

the size of the fund's annual revenues and the fund's net assets as the government sets the rate

structure charged to the various departments and manage the collection of revenues. As such,

tbe size of an internal service fund's net assets is not indicative of financial health. These

funds should maintain its unrestricted net assets at a minimum positive balance. Internal Service

Funds that contain both large cash balances and large unrestricted net assets may have

excess resources that could be returned to the General Fund.

Exhibit IX-A is an analysis the City's internal service fund group. The purpose of this exhibit is

to show in greater detail the continuing growth of cash and investments, and net assets balances

in the Internal Service Fund Group.

• Since 2004, the internal service fund group's unrestricted cash and investments grew

each year from $55.4 million at December 3], 2005 to $78.5 million at December 31,2010. .

• The internal service fund's group has maintained strong asset to liability ratios.

• The group's net assets have increased from $65 million at December 31,2005 to $84.7

million at December 31, 2010.

o Most of the growth is due to increases in net assets invested in capital assets net of

related debt, which grew from $41.4 million to $56.5 million.

o Restricted net assets experienced small fluctuations but grew from $24 million to

$26.6 million, an increase of$2.6 million.

o Unrestricted net assets experienced large fluctuations. growing from a negative

$443,000 in 2005 to a positive $15.1 million in 2006. Unrestricted net assets then

fell to a negative $12.4 million in 2009, but grew to a positive $1.6 million in

2010.

• The increase in 2006's net assets was due to a $14.1 million increase in

net assets.

• The decrease in net assets in 2007, and 2009, and the increase in net assets

in 20 I, is due to the rise and decline of the accrued insurance claims in

the City's Third Party Liability Claims Fund.

• When comparing cash and investments to the annual expenses, the ratio has ranged from

a low of54.23% to 76.52%.• At December 31, 20 I 0 the ratio was 55.51 %. meaning that the internal service fund

group's cash and investment at December 31, 2010 ca n pay more than six months of

2010's annual expenses.

• As a group, the internal service funds are healthy.



Exhibit IX-B is an analysis of four internal service funds. We have prepared exhibits on four of

the six internal service funds. These funds were chosen because of their large cash balances and

net assets.

The Fleet Services Fund only supports the City's enterprise funds and its revenues come solely

from the enterprise fund.

• As shown in this exhibit, this fund's cash and investments grew in four of the five years

since 2005. increasing to $24.8 million from $17.3 million.

• The fund's net assets grew each year since 2005 from $33.7 million to $42:5 million. .

o The largest component of the fund's net asset has been restricted net assets which

grew from $21.4 million to $24 million.

• Normally , internal service funds do not have restricted net assets.

• However, since this fund resources come from charges for services

supplied only to the enterprise funds. moneys from this fund cannot he

transferred to the General Fund.

• The large restricted net asset balance is the reason for the negative unrestricted net asset

balances over the last six years.

• This fund is healthy.

The Third Party Liability Claims Fund accounts the self-insurance liabilities to third parties.

• This fund has maintained large cashand investment balances between a $3.5 million and$6.7 million.

• This fund has reported large liability balances each year presented, ranging from $14.7

million to $47.7 million.

o Most of the fund's current liabilities have been current year claim liabilities.

o However. as shown in the following table on information obtained from the

CAFRs' notes on risk management, the City has overstated both the current

portion of claims. and total claims liability.

General Liability Insurance Liability

Fiscal CummtYear Claim

Year Liability at Claims and Payments as

Ended Beginning of Changes In Claim Liability at a%of

June 30, Year Estimates Payments End of Year Liabilities

2004 ' 9,033 23,292 (1,871) 30,454 6.14%

2005 30,454 (13,065) (3,403) 13.986 24.33%

2006 13.986 2.655 (1,021) 15,620 6.54%

2007 15.620 30,461, (1.238) 44,843 2.76%

2008 44,843 4,117 (5,293) 43,667 12.12%

2009 43,667 4.684 (920) 47,431, 1.94%

2010 47,431 (19,113) (1,317) 27,001 4.88%

33,031 (15,063)

'0 Current year claim payments have never exceeded $5.3 million.



o Actual claims payment beginning in 2004 totaled $15.1 million.

o Based on 2010's claim payments, current year claim liability could be overstated

by $15 million.

o The City has had to adjust claims liability downward twice: in 2005 theadjustment to claims liability exceeded current year claims by $13.1 million and

in 2010, the adjustment to claims liability exceeded current year claims by $19.1

million.

• This fund is healthy and may have excess moneys that can be transferred to the

General Fund.

The Facilities Management Fund, for its size, has maintained large cash and investment

balances.

• From a negative unrestricted fund balance of $1.6 million, the unrestricted fund balance

grew to $2.6 million before declining to $2.2 million.

• As we discussed on page 59 above, this fund.received a $1.42 million advance from the

General Fund.• This fund's cash and investment balance and unrestricted net asset balance make it

possible for this fund to pay down the General Fund's advance.

The Health Benefits Fund accounts for the activities of employee medical, denial. vision, life,

accidental death and dismemberment, long-term disability benefit programs and future

modifications to existing benefits or additions of new employee benefits.

• Cash and investments increased in four of the five years since 2005, growing from $7.7

million at December 31. 2005 to $23.7 million at December 31,2010.

• Liabilities, all current, grew from $10.3 million to $14.7 miUion.

• Annual expenses grew from $46.8 million in 2005 to $63.8 million in 2010.

o As a percentage of expenses. cash and expense grew from 16.49% to 43.83% in

2009.• It fell to 37.24% in 2010, meaning this fund has enough cash and

investments to finance over three months of2010 annual expenses.

o This fund may have excess moneys.

Besides the funds above, other funds may have excess moneys. These funds include the

following:

• The Equipment Rental Fund, and

• The Radio Communication Fund,

• Both of these funds, though small. have cash and investment balances that exceed six

months 0[2010's expenses.

Findings:

• All of the internal service funds have large cash and investments in relation to their

annual expenses,

• Due to the nature of internal service funds, the funds' net assets are not indicative of

financial health.

• Several of the internal service funds may have excess moneys that could be transferred to

the General Fund. These fund include:

Page 8]



o The Equipment Rental,

o The Radio Communication Fund,

o The Third Party Liability Claims Fund.o The Facilities Management Fund, and

o The Health Benefits Fund.



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OTHER

The Finance Director prepares and publishes a monthly finance report showing the monthly and

cumulative revenues over the projected biennial period (not on an annual basis). For instance,

the finance report for the month of October 2009 would present the cumulative revenues and

expenditures for the ten month period beginning January 1,2009 through October 2009, and the

finance report for the month of October 2010 would present the cumulative revenues and

expenditures for the twenty-two month period beginning January 1,2009 through October 2010.

Unfortunately, this presentation does not allow the ability to compare cumulative actual revenues

and expenditures on a year to year basis. We can only compare the ten month periods at the

beginning ofthe biennial period.

The following table presents the first ten month of the last two biennial budgets for the General

Fund ended October 31, 2009, and October 3I, 2011.

• As shown as of October 31,2009, the General Fund had a $25.4 million operating deficit,

but by December 31,2009. the operating deficit declined to $11.2 million (per page 54above).

o As shown in the second table. when comparing budget to actual as of October 3I,

2009, the General Fund had an unfavorable variance of$15:4 million.

• As of October 31, 20] 1, the General Fund had an operating deficit of$16.1 million, $9.3

million below the comparable period in 2009.

o Furthermore, as shown in the third table. the General Fund had an unfavorable

variance of $1.8 million.

City of Tacoma

Comparison of Finance Director's Monthly Finance Report

Actual to Actual

Ten Months Ended October 31,

2009 2011 Drrrerence

149,8]0 ]45,511 (4,299)

(]75,196) (J 61,562) 13,634

Revenues

Expenditures

Surplus (Deficit) (25,386) (16,051) 9,335

City of Tacoma

Comparison of Finance Director's Monthly Finance Report

Budget to Actual

Ten Months Ended October 3 I, 2009Budget Actual Diffurence

167,54] 149,810 (17,731)

(177.547) (175.196) 2,35]

Revenues

Expenditures

Surplus (Deficit) (10,006) (25,386) (15,380)



City of Tacoma,

Comparison of Finance Director's MonthJy Finance Report

Budget to Actual

Ten Months Ended October 31, 2011

Budget Actual Diffurence

146,109 145,5n (598)

(160,336) (161,562) (1,226)

Revenues

Expenditures

Surplus (Def icit ) (14,227) (16,051) (1,824)

Based on the above information, the General Fund probably w in have a deficit for th e current

fiscal year ended December 31, 2011. The size of the deficit is undeterminable. As stated

above, in 2009 the deficit at October 31 w as $25.4 million, but it declined to $11.2 million by

December 31,2009.



CONCLUSION

Our findings include the following:• The City's governmental activities financial health, as presented in the government-wide

financial statements, declined, but is still healthy.

o If not for a $619.2 million adjustment to record the City's capital assets and a

$12.8 million increase due to a change in accounting principle, the City's

governmental activities net assets would have declined by $25.8 million since

January I, 2004 due to expenses exceeding revenues.

• The City's governmental revenues experienced moderate growth over the ten year period,

but in 2008 and 2009 revenues declined.

o Total revenues grew in 2010 due to an increase ofintergovernmentai revenues.

o The increase in tax revenues was due to a reclassification of gross earnings tax

from a transfer to a tax receipt.

a The City's two most important tax revenues, property taxes and sales taxes, are

under intense pressure due to the collapse of the housing bubble, and the

recession, and are declining.

• Assessed property values declined in 20 I0, and are projected to decline

through 2012.

• Sales tax revenues after declining through April 2010, began a fifteen

month year over year increase that ceased in August 20 II.

• The monthly sales tax declines that began in August 2011 has not

been as great as the period from January 2009 to April 2010.

• The General Fund, after experiencing three surpluses, had three consecutive deficits from

2008 through 2010.

• If not for a change in accounting principle that resulted in a $6.4 million increase in the

fund balance, the General Fund's fund balance would have decreased $2.9 million from

$36.5 million to $33.5 million in six years.• The General Fund's cash and investment balance declined from its high in 2006 of $46.6

million to $12.1 million in 2010.

• The deficits had their greatest affect on the unreserved fund balance, which declined from

$47 million since December 31,2006 to $19 million at December 31. 2010.

• The ratios of the General Fund's unreserved fund balance to revenues and expenditures

have declined but are still above the 5% benchmark for a minimum healthy fund balance.

• . The General Fund's financial health has declined.

• As a group, the City'S Non-Major Funds' cash and investments. and fund balances have

remained strong over the period covered by our report.

o Most of the non-major funds are healthy.

o Only one fund may have a negative effect on the General Fund.

• The Enterprise Funds are healthy, and will not have a negative effect on the GeneralFund.

• The Internal Service Funds may have excess moneys that could be transferred to the

General Fund.

• Based on the monthly financial reports through October 31, 2011, the General Fund has

an operating deficit of $16.1 million.

P age 9 2



o However in 2009, the General Fund had alOmonth deficit of $25.4 million, but

by December of2009, the deficit declined to $11.2 million.

o In our opinion, the General Fund will have a deficit in 2011, but we are unable to

determine the amount.

In our opinion. City of Tacoma's financial position has weakened. The General Fund and its

major tax revenues are in decline, but several internal service funds may have excess moneys

that can be transferred back to the General Fund.

Sincerely,

LLr'

BACHECKI, CROM &CO., LLP



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Tacoma Police Union City Budget Review

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